Levi Strauss & Co (LEVI) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. fourth-quarter 2006 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 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 & Co.'s worldwide communications department.

Good morning and welcome to our conference call. I'm pleased to introduce the Levi Strauss & Co. management team. With us here today are Phil Marineau, our President and CEO; Hans Ploos van Amstel, our Chief Financial Officer; Robert Hanson, President of the U.S. Levi's brand; John Goodman, President of the U.S. Dockers brand; Scott LaPorta, President of the U.S. Levi Strauss Signature brand; Paul Mason, President of Levi Strauss Europe; and John Anderson, President of our Asia-Pacific Business.

This call is being recorded and a telephone replay will be available through February 28, 2006, 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 4610214 followed by the pound sign. This conference call also is being broadcast over the Internet and a replay of the webcast will be accessible for one month on our website at www.levistrauss.com.

Before we begin, let me briefly remind you of three items. Our CFO will speak to several slides posted in the financial news section of our website, levistrauss.com, as he goes through the Company's results this morning. We encourage you to review them.

Also available at that website is information about how we compile and use retail sell-through information, data that relates to our over-the-counter dollars sales of our nonlicensed products. You will hear us talking this morning about sell-through results and trends.

Finally, we today filed our Annual Report on Form 10-K with the SEC. The 10-K contains detailed information about our business, including risks and uncertainties that could cause our actual results to differ from our expectations. You can link to our SEC filings from our website.

Now I would like to turn the call over to Phil Marineau.

Thank you, Jeff. Good morning, everyone. Thanks for joining us today. 2005 was a good year for us. Today, I will review our performance for 2005 within the context of the five key priorities that we've highlighted across the conference calls this year.

Priority number one was to deliver the 2005 financial plan. Our full-year highlights of our results include full-year net sales increase of $53 million, ending our eight-year sales decline. Operating income improved by $228 million and net income increased by $126 million or 413%. We set out to improve profitability, and that's exactly what we did.

Our second priority was to grow the Levi's business around the world. The brand did grow in 2005 on a global basis. We experienced strong Levi's growth in Asia-Pacific, with many key markets registering double-digit increases.

In the United States, the Levi's brand delivered stable sales for the first time in nine years, benefiting from innovative new products and strong marketing.

The Levi's brand sales performance in Europe was weaker than we had hoped. However, profits in Europe were up substantially, reflecting the benefit of the shift to a more premium positioning in the region. We remain confident that we are on the right strategic course to turn around the business in Europe.

At the end of last year, we made management and organizational changes designed to enhance our execution of the strategies that we are employing in Europe, which are very similar to what we've used to grow the business in APD and stabilize the business in the United States.

Those changes are consistently important for us to focus on as we move forward. We expect that our performance in Europe will improve this year, with better performance in the second half.

Priority number three was to grow the Levi Strauss Signature brand's presence in the mass channel around the world. Levi Strauss Signature net sales grew 7% in the United States in 2005. Since its launch in 2003, the brand has expanded to 12 countries worldwide. Although the U.S. Levi's signature sales growth slowed at the end of the year, largely as a result of high energy prices, which eroded the discretionary income of valued consumers, the U.S. mass channel still continues to grow. The Levi Strauss Signature brand has become an important part of our Company's total business.

Priority number four was to revitalize our Dockers business. We put new brand leadership in place in the United States, Europe and Asia-Pacific. We also implemented more efficient operating models in Europe and Asia designed to leverage the brand's substantial U.S. product development and marketing capabilities across the globe.

This past fall, the Dockers brand worldwide united behind a new marketing and branding platform called Dockers San Francisco. The campaign links the brand to its hometown roots and positions its marketing programs under one umbrella for both men and women. We are seeing excellent traction from these efforts.

The U.S. men's Dockers business, our largest Dockers segment in the world, returned to growth in 2005. The U.S. Dockers business did finish strong at the end of the year with sales up more than 8% in the fourth quarter.

We still have more work to do to stabilize our U.S. women's business and build momentum for the entire brand outside the United States. Still, I am confident that the brand is now on its way towards growth in the United States and laying a foundation for future growth in Europe and Asia.

Our fifth priority was to focus on cost structure and operational efficiency. After experiencing supply chain problems that resulted in underserving consumer demand in 2004, we improved our supply chain planning and operational effectiveness.

We created a global sourcing organization based in our Asia-Pacific headquarters in Singapore. The result has been improved retail customer fulfillment rates.

Our continued focus on cost of goods savings and tightly controlling the sales allowances and incentives that dilute margins helped to deliver a very strong 46% gross margin in 2005.

I am pleased with our 2005 performance, especially in light of the tough retail environments we faced during the second half of the year in many key countries.

As we go into 2006, we expect the first half of the year will be challenging for a number of reasons. Number one, we don't expect to reverse the trends in Europe during the first half of the year. Secondly, the currencies will be weaker than we experienced in the first half of the year last year. And in the United States, we are facing the impact of retail mergers and consolidation, which will result in the first half of the year in significant door or store closures.

Now we've planned for these challenges in the first half of the year, and we have strategies in place to address them throughout the entire year. We expect sales and profits in the second half of the year will be stronger than they are in the first half. I remain encouraged by the performance we've delivered in 2005 and the prospects for improved innovative products in our pipeline. I believe these products will enable us to be highly competitive in 2006.

Now I will turn the call over to Hans, who will take you through the financial results for Q4 and for the full year.

Thanks, Phil, and good morning, everyone. I would like to remind you that we are continuing the format that we began last quarter, which includes a slide presentation that accompanies my comments. You can find the slides posted on our corporate website. Now let's go through the result slide by slide.

On slide one, we completed another strong fiscal year, delivering top-line stability with a robust improvement in bottom-line performance. Fiscal year 2005's net income of 156 million is almost 26 million above 2004. Our successful strategy of shifting to a more premium product positioning combined with ongoing cost discipline continued to deliver positive results. In addition, we closed 14 open tax years in 2005 and refinanced essentially all of our near-term debt maturities.

Fourth-quarter net sales also were stable, and we delivered 44 million net income versus a 19 million loss in the fourth quarter of 2004. Going into 2006, we will continue to focus on profitability and cash flow and we believe that this will continue to deliver solid results. In doing so, we are realistic about our sales outlook, as Phil mentioned, and recognize that we are facing several challenges that may impact the top line during 2006, such as stabilizing our European business, U.S. retailer consolidation and unfavorable foreign exchange rates.

I'm turning to slide two, net sales. As I mentioned, our consolidated net sales were stable in the fourth quarter, consistent with our full-year performance. In North America, fourth-quarter net sales increased 5%. In our international business, Europe's net sales were down in the fourth quarter and for the fiscal. As we said before, we have the right strategic plan to stabilize that business, but it will take more time. The region, however, delivered a strong profit improvement in 2005. Net sales in Asia continued to grow in the quarter and for the fiscal year.

Now let's look at earnings and margin performance. Fourth-quarter operating income was 30% or 28 million above last year. This was driven by stronger gross profit and lower restructuring charges. This brought our full-year 2005 operating income to 589 million, or 228 million or 63% above 2004. We delivered a 44% gross margin for the fourth quarter, in line with expectations.

Selling, general and administrative expenses decreased 2% in the fourth quarter compared to prior year. For the fiscal year, SG&A as a percent of sales was consistent with 2004 at around 32%. 2005 SG&A reflects continued cost discipline, while also investing in advertising, our SOX compliance project and solidifying our controls and Company-owned retail expansion.

Looking at tax expenses, our effective tax rate for 2005 reduced to 44.8% from 68.2 in 2004. The decreased rate is due primarily to a reversal of valuation allowance against foreign net operating losses and a reduction in tax reserves. The change in tax reserves reflects the settlements we reached during the year with the U.S. Internal Revenue Service and a positive tax court ruling in the Netherlands.

Moving to slide 3, cash flow, cash flow reflects our operating, investing and financing activities. Strong operating income enabled us to invest in critical projects, such as closing the open tax years, refinancing essentially all of our near-term debt maturities, upgrading IT systems and rebuilding inventory.

As we said before, we invested in inventory to improve our service to our retail customers. This was a key priority. We also said that once we had improved our service level, we would begin to optimize our inventories while continuing to deliver against our service level objectives. We made progress on this objective at the end of the year. In Q4, our inventories came down versus the third quarter, reflecting the seasonality of our business, as well as our inventory optimization efforts.

Slide four. Now let's look at the business unit performance. In North America, fourth-quarter net sales were up 5% to give us 1% growth for the fiscal year. The improvement in Q4 was driven by growth across all three businesses -- Levi's, Dockers and Levi Strauss Signature.

As I said, Europe's net sales were down for the quarter and the full year. Europe's operating income for the year increased 32%, a strong improvement that reflects our strategy to shift to a more premium positioning and strong cost-saving efforts. We are working aggressively to turn the Europe business around.

Asia continues to grow. The region's net sales in Q4 were up 7% and 14% for the full year. Asia's operating profit was down slightly in the fourth quarter as we invested more aggressively in advertising and other organizational costs to build momentum for 2006. The operating income for the year improved 20%. Asia is an increasingly important contributor to our success, and we expect it to continue to deliver healthy growth in 2006.

Turning to the last slide, number five, to summarize, we feel very good about our strong financial performance in 2005. We saw improvements across the range of key operating performance measures, from net sales down to net income and the balance sheet.

In 2005, we stabilized sales, produced a strong improvement in operating income and delivered competitive margins across the business units around the world. We delivered solid net income, closed the open tax years, and successfully completed two bond offerings that extend the majority of our unsecured debt maturities to 2012 and beyond with more favorable borrowing terms. We also further strengthened and solidified our controls.

Going into 2006, we will continue to focus on profit and cash flow. We are cautious about 2006, especially in the first half, because of unfavorable exchange rates, U.S. retail consolidation, retailers driving their inventory productivity and the challenge we face in Europe.

Now I will turn the call over to Robert Hanson, who will discuss the results for the U.S. Levi's business.

Thanks, Hans. Good morning. Amid a challenging retail environment, the U.S. Levi's brand finished the year with stable sales and earnings and delivered sales of 381 million for the fourth quarter. This is a 2% increase compared to the prior year.

As we explained in the 10-K, excluding the product categories we licensed and discontinued last year, our year-to-date sales were up 3%. This year's results reflect commitment to our core strategies in driving increased consumer demand in the face of a volatile marketplace and positioning the brand for growth. We will now review how our five core strategies are driving this performance.

As you know, our first strategy is to remain sharply focused on increasing sales and profits in our core jeans business. Retail sell-through on a comparable basis was up 4% for the year in the jeans business. This is a continuation of a positive trend started in 2004.

By segment, now, although the total men's business for the year shows a slight sell-through decline at 0.5%, our continued focus on growing and innovating in the young men's under 25-year-old segment drove a 6% increase. For this segment, the 514 slim, straight, the 527 low boot cut, and the 569 loose straight fits are performing very well.

In the men's 25-year-old-plus segment, performance is mixed. Our flagship original 501 fit continues to perform well. Our new 559 relaxed straight is off to a good start, although we do see declines continuing in our older core fits, such as the 550 relaxed tapered and the 560 loose tapered fits. As with current market trends, destructed styles have been selling well, though we do see cleaner finishes coming on.

Our women's products delivered an 11% sell-through increase for the year. This increase was fueled by the continued success of mid- to low boot cuts, new straight and slim fits and destructed and customizes finishing. Our misses 515 boot cut and our junior super-low 518 boot cut continue to be our highest-volume products in the range, but we do see a market shift to slim and straight fits. And we are among the first brands to commercially offer these fits in the marketplace. Our 550 relaxed tapered and our basic washes in core have been slower than [technical difficulty] in the women's segment.

Boys finished the year with a 20% retail sales increase for the year, reflecting a solid performance across the business in core, trend core and fashion. Destructed finishes and fits such as our 569 loose straight and 527 low boot are strong performers.

Against our second strategy, we continued to deliver improved customer profits compared to prior year through a more strategic retail promotional program, aligning our brand initiatives and in-store marketing programs with our top customers.

Third, our improved go-to-market process and supply model have given us greater market responsiveness. We continue to reduce our leadtime and improve inventory management and turns.

Fourth, we remain focused on driving demand. We are growing equity versus the prior year based on the success of our Style for Every Story advertising campaign. The campaign continues to work well for us, contributing to our sales growth in the back half of the year.

We aired three new TV commercials in the fall holiday season. Additionally, we continued to increase our visibility and demand beyond advertising, including being featured on Oprah and What Not to Wear this past quarter.

We have experienced our highest advertising awareness among both men and women in six years. We're pleased to see growth in relevance measures such as cool, new and interesting clothing, styles for me and sexy, as well as maintaining differentiation measures that are unique to the Levi's brand such as original, authentic and high-quality jeans.

Fifth, we're making it easier to find and buy Levi's jeans at retail. We continue to implement customer strategies that are based on the successful strategies implemented in our owned and operated Levi's stores.

Using this merchandising model, our stores have achieved comp store sales increases for three consecutive years by implementing a strategy of innovative product assortments, more premium price point product and rigorous operating controls.

We continued to grow our store network and opened five new stores in 2005, including our Las Vegas store in December and our online store in September. Despite not being promoted, the opening of the online store -- this store has quickly become one of our top one or two stores among our total store network.

We remain committed to our core strategies and believe that they will deliver to our objectives. Despite a very challenging market, we have delivered growth in the back half of the year compared to the prior year. We do remain cautious, given the unpredictable retail environment driven by a few factors, recent retail company mergers and acquisitions, a tough competitive marketplace, and especially our retailers' continued focus on lowering their inventories to improve their turns and their gross margin return on investment.

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

Thanks, Robert. Good morning. 2005 was a much better year for the U.S. Dockers business. We ended the year on a high note, driven by strong fourth-quarter momentum in the men's business. Net sales for the Dockers brand overall increased by 9% in Q4, a significant improvement over prior quarters, resulting in net sales for fiscal year 2005 coming in essentially flat or down 0.4%. I am pleased with our 2005 results and believe that we now have the right strategies in place to deliver the true growth potential of the brand.

The Q4 headline is the increasing momentum of our men's business. We delivered a 10% increase in net sales in men's, which accounts for more than 80% of our total sales. Sell-in and sell-through at retail were both up versus Q4 last year. Additionally, we drove higher margins through strong first-quality sales and a higher mix of premium pants.

Looking specifically at our men's premium business, sell-in was up 150% versus Q4 last year. The men's strategies that we have put in place are starting to deliver the results we expected, and we're confident that we have the business back on track.

To help us fully capitalize on our potential and ensure that we maintain the momentum we have built in men's, we recently hired a news Senior Vice President of Customer and Development to manage both our men's and women's sales teams.

Shifting the focus now to the women's business, in Q4, as expected, we saw net sales decline by 5%. The softness in the market caused by continuing consumer shift away from basic core khaki products towards more stylish, integrated looks drove this decline. We are aggressively addressing the marketplace trends and have taken several steps within the women's business to drive future performance. Given the changes we have made, we expect to see significant improvements in the performance of the women's segment beginning fall '06.

Looking forward, the Dockers brand has three strategic priorities in place to drive profitable growth. They have not changed since the last time we spoke, and we still believe that they are key to driving future performance. Our strategic priorities are strengthen our position in the men's business, reinvent the women's business and relaunch the brand with consumers. Let's focus on each of these priorities in turn, and I will provide you with an update on our progress against them.

First, strengthen our position in the men's business. The men's Dockers business is outperforming the category by delivering more value-added style and performance versus our competitors. Within our Classics line, we have introduced more stylish, focused products. Consumers are responding positively to the newness in the line.

The men's Dockers Premium business continues to deliver strong performance due to the success of our revitalized assortment, which is focused on more stylish and premium products. Key contributors to our success in the category include our exclusive never-iron cotton khaki and the premium essential dress pant.

Finally, turning to our men's tops business, the positive trend we saw in Q3 versus the same quarter last year carried over into Q4, with men's tops sales at retail up slightly. We saw improvements in both the knit and woven categories, and we expect this trend to continue into 2006.

Our second priority is to reinvent the women's business. Retail sell-through for our women's business declined 17% in the fourth quarter. This was not unexpected. As we said last spring, we expected 2005 to be challenging for our women's business, and that proved to be the case. We believe that the actions we have taken will yield improved results during the second half of '06.

The women's business represents a significant growth opportunity for the Dockers brand. Success in this business means delivering a compelling, stylish, integrated wardrobe solution that fits Dockers women's active lifestyle at the right economics.

To help ensure that we can deliver against this vision, we took steps to build our women's business and capabilities in 2005. Specifically, we brought in new women's talent and our licensed tops business came back in house to enable seamless integration across the entire women's line. We're serious about rebuilding our women's business and believe we now have the right foundation in place to make that happen.

Our third strategic priority is to relaunch the brand with consumers. As Phil mentioned, in September, we launched new TV ads under our new marketing and branding umbrella, Dockers San Francisco. The new spots bring the brand back to its hometown of San Francisco in vignettes that feature both our men's and women's ranges together. The campaign positions the Dockers brand as a head-to-toe lifestyle brand for men and women, and we anticipate this will drive positive brand momentum in 2006.

In conclusion, 2005 saw the U.S. Dockers brand make significant strides forward, with Q4 delivering a 10% increase in net sales for the men's business and a 9% increase for the brand overall. This demonstrates, in my view, that although we face challenging market conditions, we are on the right track to grow the business. At the same time, we will remain focused on our longer-term initiative to revitalize and grow the women's business.

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

Good morning. The Levi Strauss Signature brand had a successful fourth quarter, driving growth and gaining additional market share in the value channel as the premium apparel brand. We also made significant gains in brand awareness, operational efficiency and product assortment versus 2004.

During the fourth quarter, Levi Strauss Signature generated net sales of $95 million, compared to 88 million in 2004, a 7% increase. The increased sales were driven primarily by comparable sales growth at our target account, combined with sales from our new customers.

For the fiscal year 2005, our net sales grew by 7% over the prior year, from 336 million to 361 million. First-quality sales increased by 9%, driven by strong growth in our misses, young men's and girls segments, net of a 12% reduction in closeout sales.

Despite high gas prices, which reduced the discretionary income of the valued consumer, our business at retail was strong across all consumer segments and generally outperformed the category. The strategies that have allowed us to drive consistent growth over the last two years can be summed up as -- a focus on offering our consumers more fit, finish and style choices in the channel; number two, working with our retailers to improve the in-store experience for shoppers; and third, supporting our products with compelling advertising and promotions.

Now on to the product. In the fourth quarter, our product initiatives included the introduction of new fits for men and women, which drove year-over-year growth in all segments. Strong performers included our new straight fit for men and the mid-rise boot cut for women.

Secondly, we grew our kids business by offering new styles and fits. Kids now make up a significant portion of our overall sales and round out the portfolio of products for the entire family. The Wheeler Carpenter in boys and the Flare in girls continue to drive growth in the category.

And third, our new Authentics line drove incremental unit sales for our retailers, allowing us to test higher price points in the value channel. Levi Strauss Signature Authentics is a premium five-pocket denim proposition that brings channel-leading fabric and finishing to our retail partners. We continue to be enthusiastic about driving premiumization in the category.

Fourth-quarter retail and consumer marketing initiatives included in-store promotions, the launch of the Levi Strauss Signature brand store on walmart.com, public relations efforts that generated over 125 million consumer impressions, and the Levi Strauss Signature Fit Pit. These marketing efforts, combined with our product strategies, have led to a 10% increase in our brand awareness in 2005 and have been successful in driving our brand equity scores with the consumer. Our brand equity measures of authenticity, quality, trusted, and very importantly, are worth paying extra for, are category-leading in the channel.

In conclusion, the Levi Strauss Signature business continues to deliver incremental revenues and profits for the Company without any material consumer cannibalization of our Red Tab business.

And now over to Paul in Europe.

Thanks, Scott. During 2005 in Europe, we focused on executing our turnaround strategies and improving profitability. We delivered on our profit targets. However, we did not meet our top-line expectations. Fourth-quarter sales were down 17% year on year on a reported basis and 14% in constant currency.

As a result, full-year sales were down 6% on a reported basis and 8% in constant currency. The sales decline is largely driven by the weak economies and tough retail environment across Europe that we have been experiencing since the second quarter, but it also reflects the difficulties of executing our strategies in every country, given the structural changes that were required in certain markets.

Improving our sales performance is our top priority now. In November, we realigned our European management structure and implemented process changes to focus our leadership on correcting the execution issues I referred to above. Both Phil and I have every confidence that we have the right management team now in Europe to turn around our business on the top line.

Our operating income improved substantially in quarter four, moving our operating margin for the fourth quarter from 10.9% to 16.3%. The improvement was driven by strong gross margin levels combined with lower SG&A expenses.

This increase continues to reflect the impact of higher selling prices resulting from the Levi's brand's shift to a more premium price position, as well as the impact of savings from more cost-effective product sourcing, lower advertising expenditure and reduced overheads.

For the full year, operating income was 32% higher in 2004 with an improvement in operating margin from 16.5% to 23.1% on the lower net sales base.

Priority two was to deliver operational effectiveness. Our key focus was to improve our service levels to customers. Throughout quarter four, we've maintained our improved service levels for both the Levi's and the Levi Strauss Signature brands and also further improved service levels for our Dockers deliveries.

We have also attained the appropriate actions to manage our inventory levels in view of the sales decline in the last periods and feel that we have appropriate inventory levels to cost-effectively service our customers going forward in 2006.

Our third priority was to continue to build the Levi's brand. As mentioned, consumer demand has been very soft for most of 2005, and this has forced retailers across Europe to be extremely cautious of investing in new product on top of existing high inventory levels. On a full-year basis, the Levi's brand sales were down in constant currency, with positive sales growth in Italy, the Nordic countries and Greece not sufficient to offset declines in major markets like the UK, Germany and France.

Research at the pan-European level continues to indicate that the total men's jeans segment shows no growth. As we said last quarter, the total women's jeans segment continues to grow, although this growth is primarily in distribution channels not available to us, namely the vertically integrated specialty stores.

Our research continues to show growth in sales of jeans priced at EUR85 and above in the distribution channels where Levi's are sold, demonstrating that our strategy to reposition the brand in the premium segment of the market continues to be the right one.

Priority four was to expand Levi Strauss Signature distribution. Fourth-quarter sales were flat in constant currency as the LSS brand was also impacted by the soft consumer environment. For the full year, the brand's net sales were down, given it has been more challenging than expected to roll out the brand to new accounts. In response, we have refined our brand proposition before rolling it out to new countries in 2006.

And finally, priority five was to fix the Dockers business in Europe. Both for quarter four and the full year, we delivered against our plans in line with the new strategy and business model that we announced last year, as well as preparing ground for repositioning the brand with consumers in 2006.

Net sales in the fourth quarter and the full year were down versus last year, but slightly ahead of our original expectations. Moreover, we feel positive about the profit contribution of the brand, which has been substantially better than expected, chiefly due to a smoother transition to the new business model.

So to summarize, we feel positive about the profit improvement that Europe achieved in both the fourth quarter and the full year of 2005. We're confident that our strategies are the right ones, and through organizational realignments, we continue to strengthen our execution against these strategies.

And now I'll turn the call over to John.

2005 marked the fifth consecutive year of revenue growth and the sixth consecutive year of profit growth for the Asia-Pacific division. The Asia-Pacific region for us includes countries in Asia-Pacific, the Middle East, Africa and Latin America, 53 countries in all at this point.

In 2005, we grew the business in a majority of these countries. In the region, the Levi's brand represents the vast majority of our sales. Our net sales have grown from $431 million in 2003 to more than 688 million in 2005, and our operating income from $77 million in 2003 to $145 million in 2005.

Japan remains our largest business with 41% of our 2005 net sales, although Japan's percentage of our total sales has declined in recent years even as sales in the country have continued to grow, reflecting the growing reach and diversity of the region.

During the past few years, we have launched our products in fast-growing developing countries such as India and China, which continue to offer the biggest opportunities for profitable growth.

Looking at the region's full-year net sales and profit, revenue grew by plus 14% and operating income by plus 21% over 2004. The results reflect a solid performance in a challenging marketplace. Each of the three brands -- the Levi's brand, Dockers brand and Levi Strauss Signature brand -- contributed to the results, with the Levi's brand being the key contributor. Levi's brand is the market leader in the premium/superpremium segment for both men's and women's across the Asia-Pacific region.

Now let's review our progress against each of our key strategies for the region. Strategy number one was to grow the Levi's brand equity and drive category demand through a continuous rhythm of product innovation, in-house retail presentation and effective consumer communications.

Amongst the major initiatives that drove the growth of the Levi's brand were the successful launch in our square cut concept for both men's and women's; the continued growth of our flagship 501 jeans with new finish introduction supported by strong television campaigns; a continued focus on retail execution with a strong sell-through performance in our original Levi's stores; and the rollout of our successful Lady Levi's program across the region, all supported by best-in-class advertising.

We also experienced Levi's brand growth in both our men's and women's segments. We also launched into two new markets in 2005. We launched into Egypt and Vietnam with the Levi's brand. Early sales indications are very positive.

Our second strategy was a rigorous pursuit of all profitable growth opportunities. Our Dockers brand continues to grow, with strong performance in Turkey, Malaysia and Argentina. The key drivers to this growth were the launch of a never-iron concept leveraged from the U.S.; the introduction of a new retail concept focusing on the luxury format as a component of the Dockers San Francisco positioning, which we have leveraged from the global brand positioning; and customer confidence being rebuilt since the [sale exploration].

The rollover of Levi Strauss Signature brand continued with the brand now available in Australia, New Zealand, Japan, India and Taiwan. Significant events in 2005 for the Levi Strauss Signature brand included a launch in India and the introduction of stand-alone Levi Strauss Signature retail stores and the launch into Taiwan.

Our third strategy of installation of an enterprise resource planning system across Asia-Pacific marked the commencement of implementation of the SAP solution across the division. First, implementation took place in Australia/New Zealand and was completed as planned. The rollout will continue across the division through 2007.

Our fourth strategy was to continue to develop a demand-driven supply chain to optimize wholesale/retail inventory levels and improve customer service while reducing costs. We created a dedicated sourcing and development organization within the global sourcing organization to increasingly understand and respond to the unique Asia-Pacific division requirements.

We established multiple strategic supplier relationships to provide improved design development and source capability. We continued to improve our go-to-market processed to increase speed to market and reliability in execution. We also implemented sales and operation planning processes in key markets.

In summary, the focus on premiumization of the Levi's brand, rebuilding the Dockers brand and the continued rollout of our Levi Strauss Signature brand all played key roles in driving growth in 2005. Our strategies and our ability to execute them were highly effective in 2005.

Over to Phil.

Thank you, John. So to recap, we have accomplished our objectives. We've delivered a second consecutive year of very strong financial results. We have ended our eight-year sales declines. We also recognize we have more work to be done. And we expect, particularly in the first half of next year, a very challenging year. We will remain keenly focused on our key priorities to be highly competitive and to be highly profitable in 2006.

We will be happy to take questions now.

(OPERATOR INSTRUCTIONS). Alexis Gold.

It is Alexis Gold from UBS. Just a few questions. Just looking at your results, I'm trying to get a better sense -- your inventories look like they were down pretty substantially on a sequential basis, and they were also down, I guess, slightly year on year. Trying to get a sense for just your working capital. It looks to me like your working capital was still use of cash and I'm trying to get a better sense for what we should look at going forward. Do you expect your working capital to be neutral next year?

First, this year, as we said, the inventory we will be building for the service level, which has been consistent. If you look in quarter four, we're doing better on inventory management. As I said, we are now optimizing that while we have the service level. Obviously going forward, we will continue to optimize like working capital, but we are not giving any specific guidance to what the goal would be.

But is that right, so your working capital as a whole -- and again, I do realize the inventory was down sequentially pretty substantially, but it was a use of cash. So I'm just trying to figure out if there was something else in there that was driving that use?

There's also -- the use of cash on the working capital is the change in the table terms by moving to control ready to wear, which is also a kind of one-time investment into 2005. There are two things -- sorry. It's about the payables side and the inventory.

Next year -- I know you guys aren't giving formal guidance, but I know you talked about the first half being difficult. Can we expect your revenue to at least be flat as a whole year on year and kind of gross margins to hold in about where they are?

We do not provide specific guidance about the quarterly performance.

Is it fair, though, forget the first half, just on a full-year basis, to kind of expect you guys to be able to perform in line with this year's results?

Again, we are not providing specific guidance about the year. We are very pleased with the progress we made in 2005. We will continue to drive against our two most important things, which is profitability and cash flow. Those are very critical, given the leverage of this Company. We are very aware of that, and we will continue to work against those two critical objectives.

Fair enough. One of the things you said in your comments was you are making it easier to find and buy Levi jeans at retail. I was just trying to get a better sense for what you're doing specifically -- is its signage? Is it just location?

It is a combination of leveraging the merchandising strategy that we have implemented in the Levi's stores, which as I had mentioned, have driven comparable sales increases for three consecutive years. And essentially, it is making sure that the Levi's brand executes its fit strategy very clearly in the market.

We are known for being famous for our fits across consumer segments, and it is a matter of just displaying them very clearly and compellingly in our own stores and leveraging that strategy through the product presentation itself -- how we sign at retail and make sure the consumer understands the range of products that we make among our wholesale customer base, and then really put an emphasis on presenting the innovative product concepts, as well as the more premium price point concepts at retail. So essentially, it is leveraging that same strategy from our retail store straight through to our wholesale customers.

And I would just add, on a worldwide basis, the strategies are exactly the same. The first is to -- one of the things that we've developed a capacity to that we haven't had historically is to be able to provide a different assortment, depending on the store or the door that we're selling at so that we put the right assortment for who shops in that store, from a JCPenney to a Barneys to a Bloomingdales to an independent retailer in Europe or a major department store.

The second is to use controlled distribution, and controlled distribution meaning store and store concepts, particularly outside the United States, where we run vendor-managed inventory in those things, and our employees actually run the department or work in the department. And then secondly, our own franchised or owned and operated Levi's stores, which continue to grow. And if you read the 10-K, you can see the growth in the number of Levi's stores that we have had around the world.

And then, as Robert says, the presentation -- improving the presentation, so that given a complex product line that we have to offer for men and women that it's easily understandable in terms of fit, style and finish.

Just lastly, I guess from a balance sheet and capital market standpoint, I think there's been a lot of noise surrounding your potential upgrade this year, refinancing -- we know that your bank debt is likely to be refinanced later this year. You have to repay the [sub-piece of the seven].

Can you give us a sense as to -- I know the rating agencies put out comments earlier, I guess it was last month -- your results look in line. I know that's one of the things that they have been focused on as well. Can you give us a sense for whether or not you think these results actually give you the criteria that they were looking for for that upgrade?

Hans will be shortly on the road to visit the rating agencies again, which he does after every one of our quarterly results. And we certainly have developed a close working relationship with the rating agencies. And I think it is up to them to answer that question to Hans and to you.

The second thing is that as we move forward, we certainly will consider and are considering the refinancing options that are available to us. And as we have done in the past, when we make a choice and believe it is the right thing to do for the Company, we will certainly let the market know.

And just lastly, I guess, there's been a lot of changes in the Board recently. I know we've seen speculation, potential IPO -- I know it's something you guys have commented briefly in the past, but any thoughts there? Any kind of color you can give us surrounding that kind of transaction?

Well, we have had two changes in the Board. We've had one Board member leave, and Peter Haas Sr. passed away. But his wife had already replaced him as a Board member. The first thing I would say to you is that there's no -- with Peter's death and as we look forward into the future, there's no real cash call that is going to be required of any magnitude on the part of shareholders from an estate purpose standpoint. So just for whatever rumors that exist out there, I don't think anybody has to worry that there is going to be something that is going to change from an estate standpoint among the shareholders or the owners of Levi Strauss & Co.

The second thing is that we have said in the past that an IPO is certainly an alternative that we have considered and continue to examine. But at this point, we have no plans to announce doing an IPO or seeing forward far enough that we could even tell you that we have plans to do an IPO.

I think as we also said throughout 2005, our primary objective continues to deliver strong cash profitability to help pay down debt. So we will continue to focus on cash flow, and that is the key thing.

[Reed Kim], Banc of America.

Just a couple questions to follow up. I noticed you didn't break it out in the K this time. I was wondering if you could provide us with fourth-quarter Dockers and Signature sales in Europe and Asia?

We are not disclosing that.

Can you perhaps comment on how they performed directionally year over year?

If you look at -- I think John spoke about Dockers in Asia. And I don't think we talked about it much in the European comments. So we will step back a little. Remember, we had Dockers for sale as a way of dealing with our debt and deleveraging the Company. We didn't get the price that we were looking for relative to what we thought the value of the business was to us and took the Dockers brand off the market. Our goal then was to revitalize the brand, and I think John has gave you a good explanation of the progress we have made in the United States.

In Europe, we went about restructuring the organization and the cost structure of the Dockers business in Europe. They had a separate headquarters in Amsterdam, which we closed down and we moved to Brussels. What that has allowed us to do is substantially improve the economics of the Dockers business in Europe. We hit all the targets that we set for ourselves last year to improve those economics. And they contributed to that substantial increase in profitability out of the European business.

We still -- but, as we've gone through a transition of putting the brand up for sale and going through this, you can imagine it had a negative effect on the top line in the business. So the overall Dockers business in Europe declined last year. It was consistent with the plans that we had for the business.

But where it is in distribution, the major department stores in France, in Spain, and to some degree The Netherlands and the UK, the business is performing well. The product assortment parallels the sort of dress casual or good casual clothing for the everyday guy. And the business is performing well at retail. The goal now for us at Dockers Europe is to begin to rebuild that distribution again, which we will start to do next year.

In Dockers Asia, the same thing happened to us. As we tried to sell the business, we saw many of our retail partners, either licensees or just people who were department stores or independent retailers who were selling the brand, walk away from it. And we have had to rebuild that distribution.

Again, as John said in his comments, in places like India, we have seen that work begin to have benefit, and we see at retail the brand growing again. But on an overall basis, it, again, because of the loss distribution, declined. We expect that opportunity on the Dockers business as we rebuild this distribution to be a modest growth opportunity for the Company in APD.

Levi Strauss Signature in Europe grew at retail, where it was in distribution. The problem that we've had in Europe is expanding the distribution. So we continue to work on that. There is a huge emphasis as you go into value retailers on driving their own private label business. And as we've tried to sell this business in on LSS in Europe had some resistance to adding a national brand or any kind of brand into their mix.

And it's a very small business in Asia-Pacific. We have actually discontinued the brand in some retailers in Australia because we did not think that we had found that right partnership between the retailer and ourselves. We don't need to go into who that is. But we have tried in Taiwan and in India a couple of different approaches on LSS. One is a store of our own, as John mentioned. That seems to be off to a good start. And in India, we have used a licensing arrangement on the Levi Strauss Signature business. And that seems to be going well as we have launched into India.

So both -- in APD, LSS is really a nascent business. And we continue to experiment with further value shop -- where's the right place to sell it in? How is the right place to deliver it to the consumer? We know when we get it out there, given the quality of the product that we have and the price point that we sell it at, that it sells reasonably well. I hope that gives you at least some color commentary.

Yes, those comments are helpful. Appreciate it. On another note, I was curious -- in terms of the North American business in the quarter, for the fourth quarter specifically, if you could approximate how much you benefited from sell-in of product to fill new doors versus kind of your organic sales, if you could do that?

Actually, we flew in the face of retailers. We don't have substantial new doors in the fourth quarter of last year other than -- even our Las Vegas store on Levi's opened in December, which would not be in that quarter.

But I think what we are facing in North America often is financial buyers buying retailers who are trying to manage their inventory and working capital down. Our actual sell-through trends on the Levi's brand, meaning the retail sell-through trends, for the year, are stronger than the overall sell-in trends that we have because of that phenomenon.

And then actually related on the sell-through at retail, I don't know if you want to go there, but if you could comment on what kind of sell-through you've been seeing, point-of-sale type data through the holidays?

I will let Robert and John each answer for their brand. And Scott, I would say that our holiday experience really paralleled the overall retail market. If you remember, from July on, we saw sort of a little wind come out of retail sales, particularly in core categories like men's and women's jeans, and it didn't pick up until basically the third week of December.

We saw the first two weeks of sell-through being pretty weak and then we had a phenomenal fourth week of December and then a good fifth week. And that has continued into January in terms of the sell-through on the brands. But it pretty much paralleled what we saw at retail -- the overall retail trends in the United States.

Robert or John, do you want to add something?

Hans talking here. As we said, and Phil certainly endorses that we summarize this. Our North America sales for the fourth quarter were up 5% and that was sales growth across the three brands. As Phil highlighted, that was supported by robust sell-through performance across those brands. And I think that's how much we normally disclose on the details of our sell-through versus selling data. What is important to know is that that sales growth was indeed supported by robust sell-through performance across the brands.

Just two more and I'll go. Hans, I was curious on the IT spend. You've started that. I was wondering how much you have spent on that program in the fourth quarter? I noticed the K indicated you were going to spend about 60 million in CapEx. About how much of that is IT-related? And do you think most of the IT program will be done in fiscal '06? Or will that carry over into '07?

We will continue to drive against the SAP investment. And if you look at the 60 million, that splits from a major part into the IT investment. But it also includes our retail expense in owned and operated. So those are the key two reconciling items, why that is growing for next year -- it is a continuation on SAP and a continuation on owned and operated retail expansion.

And I would only add I don't think there's any reason -- this SAP installation will go over a number of years. As John said, we're doing the Asia-Pacific business. We're doing it affiliate by affiliate. We've done subsequent to the year, South Africa. We are in Japan now working on it. And we will roll it out across Asia-Pacific. Our next step in SAP will be to do the global supply chain and then probably the U.S. financial systems after that. And then we have to decide above and beyond that what will be the next steps in SAP. We will be at this for a number of years.

Would you expect to see any working capital improvement behind that? And if so, roughly which quarter in the future? Just generally speaking.

I think you're on the right thing -- obviously, better systems will drive working capital. And obviously, we have working capital and cash flow improvements as a key goal. We obviously cannot comment on specific guidance for '06 and the quarters. But when we roll out SAP, as Phil said, this is a multi-year program. So we are still into the initial rollout in a few countries in Asia. So a lot more work before we can really get the benefit of a global SAP solution because if you've done that before, that is normally a three-, four-year project.

Our model for shareholder value is to continue to grow our net income and net income margins. The second is to improve our asset utilization and turns. And then the third is to look for modest growth in the future.

And the key from both a net income -- one of the keys from a net income margins and an asset turn is better use of your -- is greater productivity through systems that allow you to get that done and work on those margins and work on those asset turns. So that's the focus of this SAP installation. But because we are a global business in 110 countries, it is a multi-year installation and predicting by quarter would be a false promise at this point.

Carla Casella, JPMorgan.

The Dockers collection that you are rolling out this fall, can you just give us an idea of how many doors, who's taking it, what type of retailers that will be in?

We are introducing Dockers collection this fall. It will be exclusively at Macy's. We are looking at working with Macy's for men's and women's for Dockers collections. So we anticipate a good number of doors for the fall season.

Can it go beyond Macy's? Or is it an exclusive for life?

Dockers collection is exclusive for Macy's.

And then the CapEx -- looks like your 2006 forecast went up by about 15 million. Is that just the IT systems? Or does it have anything to do with the 20 U.S. stores you're opening? And I'm wondering if those stores will be Company-owned?

The capital expenditure includes what you just said. It's a combination of the SAP, IT investment and an expansion of retail.

And given what you said before about the SAP, that should remain at that higher level, then, probably for the next several years as well, correct?

Yes, that is a good assumption to make.

On the gross margin side, I'm wondering what your outlook is for any of your significant raw material costs, and if you could break out what percentage of your raw materials are fuel-related?

That is an excellent question. If you look at our gross margin, we will continue to working against the mid-40s, as we always said. If you look toward this fiscal year, we have met again that expectation, and looking at our gross margins, the mid-40s continues to be doable, and obviously, with our cost control programs, we feel we're comfortable in that mid-40s.

Now, don't ask me where the mid-40s is -- 44%, 45% or 46%. It is mid-40s. And fuel for us is obviously a very small thing. The key thing will be, and that is going to be very important, is in that gross margin is get Europe back to stability and growth because Europe and our international business is very healthy. Gross margin in the European components is key to that.

And then on the long-term incentive program, I just noticed you have 38 million that you have to spend in '06. What is the timing of that? And then on the short-term side, how much will you have to spend and when will that be spent in '06?

I think you talk now from a cash flow point of view.

Exactly.

We are going to do a payout for last year's program in February '06. And that's I think also disclosed in the K. That's normally when our program falls from a cash point of view. That will be in February.

That's for the short-term one. Then the long-term -- the 38 million -- is that first or second quarter?

That will be -- it is first quarter.

It occurs at the same time.

Yes, the same time -- it is February every time.

And how much -- given that you've got a new plan in place versus a couple years ago, how much can the figures that you have been reporting fluctuate? If you have a very strong or a very weak year, I get a sense there's probably a tighter band of how much we could see the long-term, short-term incentive fluctuate. Is that true?

What is important for you to know that all our incentive programs are self-funding. So they wouldn't create a major fluctuation on our profitability or our cash flow because of the matrix we're using. So it's hard to comment on the specific elements of these programs. But they would not influence the bottom line because they are self-funding programs.

And then just one last operational question -- Signature margin in the U.S. was down significantly. Can you just -- I don't know if you covered it; if you did, I missed it -- why it was down so much in the U.S.?

This is Scott. So on a comparable basis, it is very similar to the previous year. The variance that you're seeing is the result of writing down some excess inventory at the end of the year. As we went into the fourth quarter, if you extrapolated the trends we saw in the first three quarters, our sales growth would have been significantly higher than what we accomplished.

I said we accomplished a 12% first-quality growth. But then what happened to us right at the beginning of the quarter was the gasoline prices spiked, reducing the discretionary income, as well as the three hurricanes. And that disrupted our business as well. And so we ended up with some excess inventory that we took the write-down at the end of the fourth quarter to make sure that we had that properly taking care of.

Did you disclose the amount of that?

No.

Roy Ophir, [Roundstone].

I had a couple of questions I wanted to asked about -- number one, when you record net sales, what dilution figure do you use? And when I say dilution, I mean for estimated returns, discounts and retailer promotions and incentives.

We're not disclosing that. Net sales is net of all these things.

Would you repeat that, sir?

The net sales is obviously net after all these things. But we are not disclosing specifically on that.

The matter that was picked up last year by the auditors for material weakness in controls as far as allowances -- does that relate to that net sales number?

We had last year, that's right, there were three significant deficiencies reported. And one was on the U.S. allowances. We are happy to report that through the whole of this year that we have eliminated all the significant deficiencies. So this year, we have no significant deficiency to report and that comes back to the comment we made in the script, is that we have continued to strengthen and solidify our control processes also around dilution.

So while we're not disclosing that number, that does not mean we have no tight control around it. We are reviewing that obviously very vigorously with all the business units. And as I said, we have no significant deficiencies anymore.

Okay, so you feel like you have tightened up that control?

Yes.

The other question was I'd like to know how some of the things that are kind of restructuring reserve, your reduction in payables -- how do these things flow through your income statement as far as how do they hit earnings and cash flow?

That's a separate line item.

You have a $21 million change based in future claims payments as a result of more favorable projected actual claims for workers' comp, right?

Yes.

How does that flow through your income statement?

That goes through the SG&A line.

So that $21 million is a positive hitting your SG&A line in the fourth quarter, or for the year?

Over the whole year. I could comment a little bit on SG&A if you want me to.

Yes, please.

For the fourth quarter and for the fiscal year, as we continue to drive the cost discipline, which is a key conclusion, if you look at our SG&A and you exclude the impact from strengthening advertising and promotion expenses, which are 10% up for the fiscal, and you exclude the impact from exchange rates, our SG&A expenses are down.

While we have done that we continue to invest the overall number is down in the SOX compliance project, owned and operated retail expansion, and in Asia, we obviously have built the organization infrastructure to support the growth.

Even if you take out that one-time benefit, if you would call it, from the workers' comps are what I would call real core, and core is the wrong word, organization expenses are down, offsetting investments, as I said. Sarbanes-Oxley compliance, control processes, SAP rollouts and building up the infrastructure to support the growth in Asia. So we'll continue with the cost discipline throughout the fiscal and quarter four also is a reflection of that.

So if I understand correctly, the $21 million change was a net positive to SG&A -- that's one-time. But you expect to get a similar kind of cost reductions because of some of the other initiatives that you just mentioned? Is that what I'm understanding that you said?

Yes.

I'm trying to figure out if the $21 million is a one-time thing or if that's something that we are going to see on a going-forward basis.

You don't know these things because these things get revalued on a yearly basis. These are actuarial reflections. And this year, we got a one-time benefit out of that.

Got you. So we have no reason to believe that that one-time benefit is going to be repeated.

No.

You have $14.5 million left in the restructuring reserve. Do we expect that to be charged off in the coming quarter or in the first half of '06?

It is spread over the year. It's the tail end of our restructuring program.

Over the balance of the year. And last accounting question -- I see a $44 million reduction in payables. But you also mentioned that payables was a use of cash. And in the cash flow statement, the net change in payables was less than 44 million -- the 44 million I'm taking off the balance sheet.

Could you just explain -- you also mentioned in the answer to one of your questions on payables that part of that had to do with a different program that you were shipping. Could you explain that a little bit?

Yes, we had new payment terms behind the control ready to wear program. And those are shorter than the previous payment terms.

So your customers are paying faster?

Control ready to wear.

Control ready to wear means we basically moved from -- we have outsourced our production to Asia and we're moving basically -- that we are buying the end products directly from the suppliers. That comes with different payment terms. But at the same time, that also benefits by going through that model. If you just zoom in on the payable sides, you see shorter payment terms if you move through that model where you basically buy straight the end product, which is that control ready to wear model.

So your payment terms are shorter, but you're actually holding the inventory for less time?

Yes. That is right.

Is that accurate?

Yes. You could say it like that because the inventory moves later into our books.

And do you have any financial metric for how that shorter time period is impacting you?

Yes. We obviously, when we go through these changes, are going through all the P&L and cash flow changes so that on a total -- if you take the total basis, that is helping our cost structure and is helping our cash flow.

Got you. So I am calculating your inventory turns out to about four times based on these numbers. Is that part of what is driving that?

I don't think you can do it as simple as that because there are so many moving elements underneath there, including this year the rebuilding of the inventory. You are trying to isolate something which is hard to isolate by just looking at the year-end numbers.

I agree that it's hard to do. That's why I'm asking for a little clarification on that, please.

So the clarification is that if you go through our cash flow model, we have gone through the right due diligence that moves to the shorter payment terms from a total cash conversion cycle is the right thing for the Company and the right thing for the shareholders in this Company. So that is all confirmed. And now what you see in the numbers is all the elements and it's hard, given all the things which are moving into the numbers, just to try to isolate that number, which is what you're trying to do.

So the goal is that the cash conversion cycle is going to be decreased based on some of these changes?

Yes.

And we should see that play out let's say over the next quarter or half?

Again, you are isolating one element. There are other elements as well into the mix, including building inventory for service levels, plus the cost of goods sold savings we got. So you need to be careful by just doing it from one isolated impact -- how that will impact our overall numbers.

Well, on the subject of inventory, the finished good inventory was up $20 million at year end. Is that consistent with where you want it to be to support the service levels?

Yes.

Susan Jansen, Lehman Brothers.

This is actually Emily Shanks in Susan's stead. Just a quick question around the U.S. retail consolidation comment that you made looking out into fiscal year '06. Could you please just go into a bit more detail about how you are defining that?

Well, we just deal with two major customers that are major customers of both Levi's and Dockers, which is Macy's/May Company, and they have a substantial number of door closings, and Mervyns, which is now owned by private equity people who are also closing their doors. And that is occurring in the first half of the calendar year, primarily in the end of this quarter that we are in, our first quarter and our second quarter.

So those door closings in the short term will affect both the Levi's and the Dockers business because we used to sell there and we won't be selling there anymore. And the consumer, we are convinced, will find ways to buy their Levi's and Dockers, but in the short term it is a bump in the road that we have to deal with.

And are you tagging on any type of revenue valuation to that?

Not that we are going to state publicly. Of course, we have our own internal estimates about what impact that will have on us.

And so no consolidation or closing of your own stores, just the --

No.

Jeff Kobylarz, Citigroup.

I just want to ask a couple of questions about gross margin. It seems like from the press release that your U.S. jeans gross margin was down. And was that all attributable to the Signature write-off that occurred in the fourth quarter?

That is indeed a fair statement to make. If you look at our gross margins on the business unit level, they continue to perform in line with expectations. If you look at the core gross margin excluding the write-down, all our business units were performing ahead of year-ago gross margin. So we delivered that 44% while we made that adjustment in the inventory on Signature, and while we have a smaller mix of Europe than a year ago.

Can you say what the foreign exchange impact was on gross margin for the year?

We're not disclosing that. We are not breaking down our gross margin into the key components. But I made a statement I think before that we believe that the mid-40s is still a good number to work against.

The European revenue decline -- it was more severe in this fourth quarter. You were up against a more positive sales change in the fourth quarter last year. Do you have any general comments about the rate of decline in the fourth quarter, and any general outlook for the near term in Europe?

Well, I don't think there's much more that we can say. I don't know if Paul wants to add anything to this than what we have said. This was a combination of not a robust retail market in Europe in many countries and issues of execution on our part, which we acknowledge and we've taken steps to correct.

And the guidance that we are giving is that in the short term, meaning the first quarter and to some degree the second quarter, we don't expect the first half of the year to have those trends have a dramatic reversal. We are dealing with them and we have strategies to deal with them. And we will do that over the course of the first half of 2006.

Amil Schiaffino, Harris Nesbitt.

Most of my questions have been asked. But I do have a follow-on, I think. The 14 million benefit that impacted SG&A, workers' comp -- which quarter did that occur in?

That is all throughout the fiscal.

Scattered throughout the four quarters?

Yes. So it doesn't have a big impact in Q4. That is probably to answer your question. My comment on SG&A is correct for both the fiscal and the quarter. So quarter four was not helped by one-time items. So beyond what you're seeing in the fiscal -- it's representative.

And you discussed in your comment that advertising and promotion were about 10% of revenue. Is that correct?

10% up, 8% of net sales.

John Sullivan, Cognos Capital.

A couple of quick questions. If you haven't already mentioned it, can you give us a sense of what your financial policy targets are, if at all? What I'm looking at here is really to know if there is a level of overall leverage as a business that you're targeting to achieve this year or in the short to medium term?

Also, can you make a comment about the remaining contingent cash flows? And the final point was regarding SG&A. Is it sensible for us to continue to model out the business with an SG&A as a percentage of sales? What's your sort of run for 2005?

You have a few levels of questions. First, I think, is on the leverage. We are clear, and I think we said that before, that we have deleveraged the Company from around 6 times EBITDA to around 3 times now. But we're still aware that we have too much debt. And that obviously is a competitive disadvantage because our interest expenses are above the vehicle. We will continue to deleverage the Company. And cash flow is a key priority for us to deleverage the Company. So we will continue to work against deleveraging the business and delivering solid cash flow is a key part of that.

As the Board of Directors, what are your financial policy targets?

We're not disclosing those.

Why?

We are not.

Why not? I mean, we are all big boy investors here. We're --

Well, I think the guidance that I would give you is go -- if our debt to EBITDA is about 3, if you look at our competitors, they range in the neighborhood of 1 to 2. We intend to be sometime in the future competitive. How is that?

Right. Very good. Thank you for just sort of clarifying it. It's always nice to know where you're just sort of heading in general.

No, if you look obviously long term, we want to be competitive on the interest expense. You can compare [for vehicles] if you know what (indiscernible) we carry, is around 5 margin points extra.

Yes. We have to get this debt down. And I think one of the great accomplishments this year was resolving the issue with the IRS and paying all these tax years down. And if you look at it, that was quite a use of cash for us. And now we're current in our taxes, and so we can continue to focus on cash flow and the kind of profitability that we have been working on. We can really begin to start lowering those debt levels and working on that -- getting to the right ratios.

Very good. Just -- and I know that you had commented from time to time about these contingent cash flows or what we call residual cash flows. Can you just give us a sense now how much we actually sort of have left for this year and next year?

What are you talking about? Are you talking about our cash for next year?

Yes, what I'm talking about is those residuals -- I mean, you've been paying off sort of the whole range of contingent cash flows or residual cash flows, one of the most significant ones is being tax. Now what you're saying is that has pretty much gone from the business. Are there any residual extraordinary cash flows remaining that we have to adjust for in our cash flow analysis?

No. If you look through the last three years, and sorry, we call those the trailing liabilities -- we have done a few things. We have closed the open tax years. That is behind us. And if you [state] into our cash uses, there is a remaining $70 million to be paid of that in 2006, which is the state part of closing the open taxes. So that's 70 million and then the open tax years are done and dealt with.

Okay, that's the tax?

Yes. Medical, retiree benefits and the pension funds this year are where we moved from a defined benefit program to a defined contribution 401(k) plan. So that's pretty much behind us. We are disclosing what we are going to pay on the pension plan next year -- 47 million versus 32. So those are all ongoing levels. So to answer your question, we believe we have dealt with, call it, the old or residual liabilities, as you call them.

So it's just the last piece of the 70 million on the tax and just the ongoing retirement benefits there.

And in the K, we specify for 2006 what those elements are.

Very good. Fabulous. Thank you so much.

Carla Casella, JPMorgan.

Just a follow-up. Any idea you can give us as to the terms of your timing of advertising spending? Should last year be a good benchmark for this year going forward?

Yes, we spend more in the second half of the year than we do in the first half of the year, primarily driven by the natural seasonality of the jeans and men's pants business.

And then overall, should it stay about the same ratio to sales or dollar amount?

We would expect both ratio to sales and the dollar amount to be pretty consistent.

And then it looks like you stopped breaking out Signature, Dockers and Levi's sales for Europe and Asia. Can you give us those numbers? Or is that something you are not going to disclose going forward?

We are not going to disclose them going forward. We have given you a pretty good indication both in Europe and Asia that Levi's business dominates those trends. And I did provide some color commentary on a previous question relative to what our strategies and what our approach is on both those businesses.

Okay, great. Yes, I heard that. Thank you.

Clark Orsky, KDP Investment Advisors.

I just wanted to circle back to Europe. You said that the revenue trends are still going to be negative. I guess that's not that surprising. This year, though, you've kind of turned the profitability around. And I'm just wondering if you are going to be able to kind of hold onto the next year despite the tough top-line trend?

The restructuring that we have gone through in Europe, we enjoyed both -- we've done two things in Europe to enhance profitability. One is the premiumization strategy that we followed everywhere in the world. Our goal is to continue to get the out-the-door retail prices of our brands up versus where they have been, whether you're talking about Levi's in the U.S., Levi's in Europe, Levi's in APD. That premiumization strategy along with the global sourcing organization designed to continue to lower our cost of goods allows us to work on the gross margin and hit the gross margin targets that Hans has pointed out to you. That is certainly the case in Europe.

And then the second thing is we did go through the restructuring in Europe. Much of the benefit that was enjoyed last year was the full -- not full realization -- the realization of that, and that will continue next year.

So while we are struggling at the top line in sales in the European business, we are committed to maintain and sustain the level of profitability that we have on that business. It isn't one at the expense of the other.

There are no further questions at this time. I would like to turn the floor back over to the presenters for any closing remarks.

Well, thank you very much. We are pleased with the year. We are out to have another good one. Again, I would only reinforce that our first commitment is to continue to improve and work on the profitability of this Company, to drive cash flow, to pay down debt, to deleverage the Company. And you can rely on us to continue to do that in 2006. And our first quarter ends in a couple of weeks, so we will be back soon with the first-quarter results. Thank you.

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