Levi Strauss & Co (LEVI) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. first quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded and may not be reproduced in whole or in part without written permission from the Company. I would now like to turn the call over to Jeff Beckman with Levi Strauss & 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, and John Anderson, President of our Asia-Pacific business.

This call is being recorded and a telephone replay will be available through April 18, 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 7382205, followed by the #. 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 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 on 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 sellthrough information, data that relates to retail over-the-counter dollar sales of our non-licensed products. You will hear us talking this morning about sellthrough results and trends. Finally, today we filed our quarterly report on Form 10-Q with the SEC. 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. I'm calling in from our European headquarters in Brussels.

Our first-quarter results are right in line with what we expected in the face of the challenges that we've been dealing with in Europe and the United States. Our revenues are down, but our net income improved 14% for the quarter. We've said during our conference call in February that we did expect the first part of 2006 to be challenging, and that certainly has proven to be the case in the first quarter. We are aggressively addressing the issues that are impacting our revenues. That includes improving the product assortments and distribution network in Europe, dealing with Wal-Mart's increased emphasis on private-label products, and also dealing with the retailers, mergers and consolidation that we face in the department stores and chains in the United States.

Today I would like to talk about our Q1 performance within the context of the key priorities that our teams around the world are focused on in 2006. Priority number one is to sustain the profitability of the business through improved net income and to generate cash flow to pay down debt. Despite lower revenues this quarter, our teams delivered a strong bottom line. We are now generating significant free cash flow, so our net debt is down in Q1. We will continue to focus on improved cash flow in order to reduce this debt.

Our second priority is to focus in Europe on fully executing our strategies market by market, with the goal of sustaining profitability and improving our sales trends. If we remember, over the last two years we have dramatically improved the profitability of our European business, and believe that we have the right economic structure going forward.

Now, our priority this year is really to focus on fixing our topline trends. Since mid February I've been overseeing the turnaround efforts in Europe and leading the search at the same time for a new president of the region.

As I said during the last call, we made management and organizational changes at the end of last year that were designed to enhance the execution of our strategies. We are making great strides in improving our go-to-market process and execution in each market, and we do have a much better assortment throughout the region this year, particularly as we go into the back half of the year. But there's still a lot of work ahead through the balance of the year. I've seen the firsthand progress that we've made in Europe, and I remain confident that we have the right strategies. These are the strategies that have turned our business around in North America and the Asia-Pacific region. I'll talk a little bit more about these strategies and the timetable that we are implementing when I talk about the European section later.

Our third priority is to build on Asia-Pacific's growth momentum. Once again, Asia-Pacific posted a strong revenue increase in Q1. APD, as we call it, has become a significant part of our total business and continues to provide the Company with a steady source of revenue growth and profitability. We are investing in this region to ensure that we continue the positive momentum we've seen over the last six years.

Priority number four is to address the consolidating U.S. retail environment in ways that help maintain stable U.S. Levi's brand revenues. U.S. Levi's brand net revenue declined modestly during Q1. I think that's a good performance, considering we shifted a significant amount of our spring product shipments from Q1 to Q2 this year to better meet the seasonal needs of our customers. The impact was tempered by stronger sales of our boys', misses' and special sizes product lines in this quarter.

Priority number five is to grow the Dockers brand in the United States and Levi Strauss Signature worldwide. U.S. Dockers net revenue grew for the second consecutive quarter. We continue to restore the strength of the men's business, which represents about 80% of the U.S. brand's net revenues. The U.S. women's business grew as well this quarter, a sign that the ongoing efforts to revitalize the Dockers for women's business are really starting to take hold.

We are also working to build momentum for the Dockers brand in Europe and Asia. We've introduced new products across both regions and opened new retail stores in several countries in Asia-Pacific. The Dockers San Francisco positioning, which is working so well in the United States, really has resonance when we take it to both Europe and the Asia-Pacific region as well.

In the United States, the Levi Strauss Signature brand hit some choppy waters in Q1 with Wal-Mart's move to devote more fixtures to its private labels influencing our business. In addition to that, we've seen a change in timing of some seasonal items from Q1 to Q2. Nevertheless, we continue to see strong sellthrough at retail of the Levi Strauss Signature brand in all customers. And for the fourth quarter, which is the last piece of data that we've had, we grew share and continue to grow share in the mass channel with the Levi Strauss Signature brand. We are now working closely with Wal-Mart to ensure that we have a strong and balanced presence on the floor as their premium jeanswear brand. Wal-Mart does continue to believe that strong national brands are essential and are an essential element of their success in apparel.

Our sixth priority is to continue to control costs tightly, and to seek opportunities for greater productivity improvements. We really delivered an improved bottom line in Q1. Gross margin remains healthy at 47.7% of net revenues, we kept our SG&A expenses down in the first quarter, and cost of goods and interest expenses were also down. We will continue to look for opportunities to increase productivity and reduce costs as the year progresses.

Now let me turn the call over to Hans Ploos van Amstel, our CFO, who will take you through the financial results for the first quarter.

Thanks, Phil, and good morning, everyone. I'd like to remind you that the slide presentation that accompanies my comments are available on our corporate Website. Now let me turn to the first slide.

Beginning this year we are reporting net revenues which combines our net sales and licensing income. This approach reflects the increased importance of licensing income for our total revenue picture and is a best practice for financial reporting. Our consolidated net revenue for the first quarter was down 6%. This was consistent with what we expected. The key reasons for the drop in revenues are Europe, the United States, and unfavorable exchange rates.

Even with the decline in net revenues, we delivered a strong net income for the first quarter, up 14% to 54 million, compared to 47 million in 2005. Operating margin remains strong at 18%. We improved working capital, which helped drive strong free cash flow. We remain focused on this year's profitability driving free cash flow in order to reduce debt.

Turning to the second slide, net revenue. As I mentioned, our consolidated net revenue was down. I'll talk about the impact of exchange rates first.

Unfavorable exchange rates were responsible for approximately half of the 6% revenue decline. Revenue was also impacted by lower sales, which were primarily driven by our results in Europe and the U.S. Levi Strauss Signature brand.

Now let's look at earnings and margin performance. Gross profit in dollars was down 9% due to lower sales. However, we delivered a strong 48% gross margin for the first quarter. We also delivered a healthy operating margin of 18%, consistent with our margin for the first quarter of 2005. First-quarter operating income was 7% below last year, driven primarily by lower sales and the impact of exchange rates, partly offset by lower SG&A.

First-quarter SG&A expenses were down [30] million, due primarily to lower advertising expense. We have continued our cost discipline while also investing in opening more company-operated retail stores in our Asia-Pacific business.

Turning to the third slide, let's have a look at the business unit performance. In North America, first-quarter revenues and operating income was down 3%, mostly as the result of revenues declined in the U.S. Levi Strauss Signature brand. Levi Strauss Signature revenues were down primarily because of Wal-Mart's move to allocate more (indiscernible) space to its private label. We're still seeing sellthrough growth at retail for the Levi Strauss Signature brand, and are working to improve revenue trends.

U.S. Levi's brand revenues were [off] modestly, a good performance considering the impact of shifting a significant amount of our spring product shipments from the first quarter to the second quarter. The brand continues to perform well with consumers.

The U.S. Dockers brand grew in both men's and women's this quarter, delivering a 5% increase in revenue, indicating that the Dockers brand revitalization strategies are working.

In our international business, Europe's net revenue declined as a result of soft demand for our core Levi's and seasonal products, and the impact of shifting our retail network to more high-end stores, consistent with our premium positioning in the region. We are opening new higher-end retail accounts across the region going forward.

Europe's operating income declined during this quarter as a result of lower sales, as well as unfavorable currency translation. As Phil said, we are working aggressively to turn the Europe business around. In addition to revamping our retail store network, we are rolling out new products in the second half of 2006.

Asia. Asia continues to grow. The region's net revenues in the first quarter were up 9% this quarter. Asia's sales have been growing for the past five years. Asia's operating profit was down 4%, partly due to investments to further drive growth momentum, as well as the impact of foreign exchange rate translations. Asia remains a key contributor to our success, and we expect it to continue to grow sales and profit this year.

Turning to slide four, cash flow. Compared to the first quarter last year, we have stronger cash flow because working capital, restructuring, interest expenses and taxes are all lower this year. Operating activities in the first quarter produced a positive cash flow, even as we invested in IT systems and new company-operated retail stores.

In Q1 we continued to reduce our inventory levels, reflecting our efforts to deliver strong service with lower inventories. I am pleased to report that we continue to meet our on-time delivery targets in the first quarter, while reducing inventory. Our recent bond issue and repayment of the secured term loan will save approximately $10 million in interest expenses annually.

To summarize, our first-quarter financial results were consistent with our expectations. Looking at our performance for the quarter, we delivered a healthy operating margin with net income up 14%, our working capital is down, as well as we lowered our interest expenses by reducing debt. We remain cautious about 2006 sales in view of the issues we're facing in Europe and the United States.

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, everybody. The U.S. Levi's brand delivered net revenues of 277 million in the first quarter, a 2% decrease compared to the same period in 2005. This was in line with -- actually, slightly better than our expectations. The decrease in revenue, as Hans and Phil pointed out, is primarily attributable to the deferral of short shipments to our second quarter, lower volume in both Silver Tab and Juniors, as well as door closures in two of our top retailers. These were partially offset by volume increases in boys', misses' and special sizes, with men's Red Tab, which is our largest business segment, stable.

Let me talk about sellthrough results for Q1. Retail sellthrough was up 4% for the quarter. Our total men's sellthrough increased 1%. This was driven by the young men's under 25-year-old age segment, which increased 41% through new innovative fits such as straights and skinnies and market-leading vintage and custom finishing.

In women's, retail sellthrough was up 4%, reflecting the strength in both our misses' and special sizes businesses and the success of our slim and skinny fits.

In boys', we continued to deliver strong performance with a 32% sellthrough increase for the quarter. We've now positioned the Levi's brand as the market innovation leader in fit, with fits such as our straight and lowrise bootcuts, and finishing such as vintage and custom finishing for boys.

Looking at retail stores, we continued to invest in our retail network, opening a new store in Las Vegas during the quarter. The store has exceeded our expectations, with the balance of the network performing with the market. We're also continuing to leverage the success of our own stores to upgrade our on-floor execution with key customers. Through collaborative planning, we've initiated this work most recently with Macy's and with JC Penney, where on-floor execution is expected in the back-to-school timeframe.

The U.S. retail environment, however, will remain challenging over the next few quarters as we work to balance the short-term impact of additional door closures. We're working with all of our customers to ensure that they have the right assortments and sufficient inventories to handle the demand for Levi's products during the heavier fall and back-to-school selling period and beyond.

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

Thanks, Robert. Good morning. 2006 got off to a good start for the U.S. Dockers business. Net revenues, including licensing income, increased by 5% versus the prior period. Both the men's and women's segments grew. This quarter I'm going to start talking with the women's business.

In Q1, although volume was stable, net sales increased 6% as a result of lower dilution funding. With the exit of our basic core khaki program, we began last year largely completed. our broader and more stylish offering is now performing well. Building on this success, we believe the women's business will be enhanced by offering a completely integrated wardrobe assortment that incorporates tops, bottoms and licensed accessories.

The men's business continued the steady progress from recent quarters. Men's tops sales increased by 21% compared to Q1 2005, driven by additional fixtures and the fact there were supply issues in 2005 which were not repeated. Despite retailer consolidation and store closures, men's bottoms sales showed only a slight decline of 2%. Declines in long bottoms were partially offset by higher sales of shorts in the quarter. The premium pant business continued to grow, delivering strong margin performance as well. Sellthrough at retail was up 8% versus Q1 last year for the total men's business. [Although] some of this was driven by discounts a closing stores, the underlying trend remains positive. The licensing business continued to show steady performance during the quarter.

So, in conclusion, Q1 2006 saw the Dockers brand continue to move forward, delivering a 5% increase in total net revenues. This demonstrates that although we face challenging market conditions, we are on the right track.

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

While Levi Strauss Signature brand's net revenues declined in the first quarter of 2006 due to Wal-Mart's decision to allocate more fixtures to its private-label programs, the brand's average weekly rate of sale performance at retail remains strong across all consumer segments. We also continue to grow brand equity, drive operational efficiencies and deliver higher first quality margins.

The financial performance highlights for Q1 are as follows. Net revenues decreased $18 million, from 88 million in the first quarter of 2005 to 70 million in the first quarter of 2006. This 20% decline was driven primarily by a fixture reduction in our women's business at Wal-Mart in favor of their private-label brands, and secondly, a shift in timing of our men's short shipments from Q1 to Q2.

Operating income declined $2 million compared to the prior year period, as these lower gross profits were partially offset by reduced SG&A spending. From a brand management standpoint, we believe our core strategies will continue driving success as we move into the second half of the year. These include expanding the fit portfolio in each segment, offering category-leading finishing and styling in the channel; third, premiumizing the assortment; fourth, working with our retail partners to improve the in-store experience; and fifth, driving brand awareness. While we're disappointed in the new fixture strategy at Wal-Mart, we continue to gain share and see growth with our other customers.

In conclusion, the Levi Strauss Signature business is delivering incremental revenues and profits for the Company by offering distinct premium products to value-seeking consumers. (inaudible) second half we will roll out new programs that will continue to provide distinctive market-right products for these consumers. And now over to Phil and Europe.

Thank you, Scott. In Europe, our first-quarter financial results were certainly below 2005 levels, but they were consistent with our expectations for the quarter. Our goal in Europe for '06 is to sustain a high level of profitability while stemming the declining revenue trends by the end of this year and the beginning of next year.

The key is to turn around Levi's revenue trends, which represents 90% of the business in Europe. This means continuing to improve our men's and women's product assortments. We're seeing progress here with our new products performing well during the first four months of the year. We need to continue to expand and improve this assortment, plus grow in critical premium retail locations, in retailers that sell premium jeans, as well as to open more Levi's stores across Europe.

As I said, we don't expect to improve the topline trends until the second half of the year. There is a pre-booking nature in the European business, which limits our ability to affect the topline in the first half of the year. That, combined with the fact that we don't expect to open the new doors or new stores in retailers in our own Levi's stores until the second half, really limits our ability to affect this topline in the first half of the year. But we do expect to continue to see it improve in the second half and going into next year.

Our Dockers business declined by single digits in quarter one. Again, this was expected. To remind you, we intentionally shrunk the European Dockers business during the past year, exiting some countries and closing our European headquarters in Amsterdam. The aim was to make Dockers profitable, and we've done that. The first-quarter topline results reflect the continuing impact of this strategy in terms of the country closures.

On the other hand, in countries where the Dockers brand remains in distribution -- Spain, France, Belgium and the Netherlands -- we are seeing strong sellthrough on Dockers. We believe that over time, from a core position of profitability, we will be able to grow Dockers using the San Francisco positioning that is working well in the U.S. and beginning to work in APD.

Levi Strauss Signature net sales in Europe were down slightly more than we expected. The problem there is similar to the U.S. Sellthrough trends are good where we are in distribution, but holding distribution and gaining new distribution in the face of retailers' preference for private-label brands is the dilemma that we have to solve. We are confident over time that we can stem the revenue declines in Europe while sustaining the high level of profitability that we've achieved over the last two years. The strategies that we are executing are the right ones. We have employed them, as I said, both in the U.S. and APD successfully; we just have to continue to sustain the execution of these strategies in Europe.

John Anderson will give you an update now on APD.

In the Asia-Pacific division, the results for the first quarter of 2006 reflect continued positive momentum from 2005, with revenue growing at plus 12% in constant currency, and profit in line with expectations. Our net revenue increase was partially offset by a 5% constant currency decrease for our business in Japan. This was primarily because of lower volume and an increase in sales returns by one of our key customers in Japan as the customer worked to reduce inventory levels at the end of their financial year. We don't expect this to be an issue with the customer going forward.

The Asia-Pacific region for us includes countries in Asia-Pacific, the Middle East, Africa and Latin America. We market in approximately 62 countries using a combination of (indiscernible) [owned and operated] distributors and licensees. The vast majority of our business is our fully owned and operated affiliates.

We're executing against three key strategies in Asia-Pacific. I will review our key initiatives against each of these strategies.

Strategy number one, grow the Levi's brand equity and drive category demand through a continuous [rhythm] of product innovation, enhanced retail presentation, and effective consumer communications. During the first quarter, the major product initiatives that drove growth for the Levi's brand were the launch of a new Levi's engineer jean television campaign in Korea, and the launch of 501 stay through television campaign in Japan.

These were supported by major retail initiatives with the opening of four new Levi's flagship stores -- two in Taiwan, and one each in India and Hong Kong. The average size of each of these stores is 4000 square feet.

The second strategy is the rigorous pursuit of all profitable growth opportunities, primarily driving this [through] the repositioning of the Dockers San Francisco branding. We opened six new retail formats for the Dockers brand, reflecting the Dockers San Francisco positioning, two stores in India, two stores in Turkey, and one each in Malaysia and the Philippines. We also experienced strong sellthrough performance from the key growth markets of India and China/Hong Kong, driven predominantly by the Levi's brand.

The third key strategy is the ongoing installation of the enterprise resource planning system across Asia-Pacific, which is SAP. We successfully installed SAP in South Africa, and we are now focused on implementing SAP in Japan and our global sourcing organization.

In summary, the continued growth continues from the Asia-Pacific division, with all three brands contributing. The implementation of the SAP enterprise solution is underway and on schedule. Our strategies continue to remain relevant and effective. Back to you, Phil.

Sorry, John. A little technical difficulty here; I apologize. So, just to recap our first quarter, our results were consistent with our expectations and our plans. We are working to address the challenges that we face in the marketplace, as well as to continue to improve our operational performance.

We will be happy to take any of your questions now.

(OPERATOR INSTRUCTIONS). Alexis Gold, UBS.

I wanted to start off by asking about gross margin, and I guess SG&A at the same time. Your results were actually probably better than the pre-release numbers that you had put out last month. Just trying to get a sense for your gross margin. I think you've talked about gross margin really returning to those kind of mid 40% range, kind of (indiscernible) 45% or so. And then you continue to push gross margin somewhat ahead of that. Do you think this is a sustainable run rate? Should we be looking for gross margins to return really to that 44, 45% area later in the year? Or should we assume that you're going to continue to perform above that level?

We have been consistently, indeed, saying that we expect our gross margin in the mid 40s. We would want to continue to work our business model around that mid 40 gross margin. It's right to conclude that so far we have been on the right side, if you would call it like that, of that mid-40s. And the first quarter got some extra benefit versus last year, because we're shipping some spring seasonal goods in the second quarter instead of the first quarter. So, that has an impact, because specifically shorts have a lower gross margin. So, that's an extra help in the first quarter. But we continue to expect on that mid 40s.

[If we] look at your SG&A, it looks like your advertisement expense was about $20 million lower year-on-year, and it sounds like it was primarily -- I believe you said the Dockers and Levi's businesses. Is that something that we should expect to run kind of at that 8% of sales area as it did last year. Or should we expect that to ramp up in the second half of this year for back-to-school and ahead of the holidays? Or is that going to be lower on both a dollar and a percentage of sales basis this year?

We're not giving specific guidance whether it's exactly 8%. You will see that indeed in the first quarter, we had and extra benefit. There has been some reduction and some [re-phasing] aligned with our business planning into the. So, the re-phasing is part of the thing, as you talked about. Going forward, you might see -- without giving any specific guidance this year, because we're investing more in retail -- that you will (indiscernible) balance your investment more and more between retail and classical advertising as part of our marketing mix, but not to the extent you have seen, obviously, in the first quarter. There was quite some -- also some re-phasing (inaudible). Is that answering your question?

That's helpful. John, you talked about Signature and declines at Wal-Mart. Just trying to get a sense for -- it sounds like you're seeing that across the board. Can you give us a sense for where you might be replacing that business, and for how long you expect that to continue? Should we expect that to reverse itself, or is that a trend that we should expect to (inaudible) at Wal-Mart?

The shift in the Wal-Mart business that we're speaking of is primarily in their women's business, where they're investing in their Metro Seven and No Boundaries and George brands. So, it's fairly isolated to that consumer segment, and so we'll keep growing our brand with our other retail customers in that segment, as well as focus on the strength of our brand at Wal-Mart and other consumer segments.

As you start to generate free cash flow, what are your plans for your free cash flow, given that there's really not any bank debt for a huge repay at this point? Is it (indiscernible) reinvest in the business for the growth of the retail stores. Can you give us a sense for what your plans are?

We will focus this year, as we said, to deliver free cash flow out of our business. We have had quite some big uses of cash over the last years, restructuring (indiscernible), closing the (indiscernible). It's fair -- we're investing in retail, but you have seen in the K that our capital expenditure aren't like that material (indiscernible) million dollars. So we will build up free cash flow. How we will deal with that to reduce debt is a separate question. When we would do some activities we would let you know. But we're clearly focused on building up free cash flow to reduce our net debt, which is a key measure for us.

Lastly, and then I will pass it along. The shift in sales that you talked about -- is this something that you view as onetime? Is this really related to weather patterns this year? Or has there been any change in terms from your retailers or you're seeing most retailers manage their inventory levels more aggressively. Is this something that we should expect to continue over the next year or so?

It was primarily referring to the deferral of short shipments from the first to the second quarter in the Levi's brand in the U.S. And we don't see this as a continuing strategy. We have been working with our customers for two years now, given the unpredictability of the shorts business, to make sure that we're taking the inventories into the stores much closer to the actual consumption that the market tends to generate, which is definitely in the second quarter.

What we found in the past is that when we brought seasonal inventory in in a traditional way, January and February timeframe, that the inventory would sit there for a couple of months, retailers would start to get antsy about it, mark it down, and then we'd be in a position of selling the goods at lower margins for both us and for the customer base. So, our goal is to ship those goods moving forward in the second quarter. Obviously, weather patterns can have an impact. If for any reason we face better weather in the first quarter then, obviously, there would be more at-once demand. But our focus is to ship the inventory closer to true consumer demand. We continue -- on your second question, we continued to face a retailer focused on GM ROI, and as a result continued to look to work with our customers to plan inventories more effectively to increase both their margin and turn as we attempt to do so inside the Company as well.

Clark Orsky, KDP Investment Advisers.

I had a couple of questions. Can you quantify what the shift in shipments was in terms of revenues?

We can quantify that, but I will not disclose in the breakdowns what is important to know on the U.S. Levi's brand is that the brand continues to perform well with the consumer. And that is a key message, one (indiscernible) which I said in the script. It's a key fact that (indiscernible) facing of the shorts business. If you take that away, U.S. Levi's brand continues to perform well with the consumer. That's the key message.

Can you quantify what the retail consolidation hit was in the first quarter?

We, obviously, closed that very closely. We expect that will be more in the second and the third quarter. The impact of the door closures was relatively low in the first quarter. There's more to come on that in the U.S., and you will hear the same probably when you talk to our peer group. That will be second quarter and beyond.

Okay. As far as the shift to private label, I think there was some commentary in the Q about Silver Tab was down. What can you really do about that? What kind of strategy do you have to kind of attack that problem?

The primary focus that we've been driving has been to improve the appeal and the innovation within our Levi's Red Tab jeans business; it's the core of the business; it's our largest single business segment, and that's the business segment that we have been wanting to really focus on growing. And as the sellthrough results have indicated, the total men's business was up 1% for the quarter, with our young men's business up 41% in Red Tab. If you look at the Silver Tab business, what we have been facing there really is a repositioning of that business back to its core focus, which is more of a fashion-driven jeanswear business segment, distributed more narrowly than it had been distributed in the past, more in keeping it consistent with its original positioning when it was launched successfully about 10 years ago. So, we expect that strategy to continue, with our primary focus on growing the Red Tab business, and having that business growth offset any of the declines we would face in Silver Tab.

Thanks. And I guess just lastly on Dockers, you had good results in the quarter. Do you see that kind of trend as sustainable?

We are working very hard to continue this trend. We are seeing some good highlights in both men's as well as women's, and we look to that to continue during the course of the year.

Jeff (indiscernible), Salomon Asset Management.

Just curious about the Signature revenue decline. Did that decline -- did it -- as far as losing that space at Wal-Mart, did it begin at the start of the quarter, or was it the middle, or at the end?

It was at the beginning of the quarter. So, for the entire quarter we experienced the impact.

So, is it reasonable to assume that going forward that you're going to see that recurring again in this second quarter, third quarter, that similar type of decline due to the women's (multiple speakers)

Our women's business will see that. Now, what I said earlier in response to one of the other questions is that you have the opportunity to invest in other parts of your business with Wal-Mart, as well in other parts -- with your other customers to offset that.

Phil, can you explain in Europe just how the ordering pattern works?

The ordering pattern works in that you sell -- we have almost a 12 to 16-week cycle before the two seasons here to sell in, and our major retail customers all preorder against an assortment plan. And about 40-plus% of the business is preordered. And that can influence demand, because if you don't get a good pre-booking or a preorder, either in terms of the number of doors that order or the amount of product that they take in, it can affect what we call your at-once or replenishment business; there's not as much to replenish against. So, it's a real influence in terms of how much business is done and how quickly -- when you are on the downside of the curve, how quickly you can fix it.

And these preorders; do these occur -- is it twice a year, just the two seasons, or (multiple speakers)

We changed our go-to-market process to be honest now so that when we pre-book once, and we give ourselves the opportunity if we see us either missing a customer in this, or missing some parts of the assortment that we think we ought to be selling, we go back in on what we call a flash program and sell twice now in a pre-book season. And we're just starting to do that for the first time. Like everything else here, we've changed the go-to-market to be much more responsive.

So, one of the opportunities that we have going forward is not -- to sell the pre-booking twice rather than once during that period, that six-month season. And then we've installed a cap capacity to be able to drop monthly when we see opportunities on product assortments that are either missing in the marketplace or something that if we agree with a customer that they need, that we can go back in and produce. So, it's going to give us, as we go forward, a much more responsive ability to deal with the marketplace here. So we'll have the pre-booking, but we'll be able to sell it in twice. And in between we will be able to sell monthly for holes in the market. And we have really never had that before.

Can you comment about new products you're introducing for the second half of the year, as far as whatever you can disclose about that?

We have a relaunch, or a new and improved version of our engineered jeans going out into the market, a revolution concept. So, it's in addition to what we call the iconic version that is out there now. And that will be a big focal point. I think you'll see in the marketplace around the world, as Robert talked about, the skinny or the slim fits being really big. And we have -- we introduced that this season. It's doing well. We'll have more finishes on that that will go out in the second half of the year.

And then the third thing, we introduced a new series of women's jeans, the 570 series, that have really done well. And frankly, we are underbooked in the first half of the year, and we're working hard, given the sellthrough we've had on that 570 series, to expand the distribution and the assortment out there on the 570s. And those are really extraordinarily well-fitting women's jeans, basically by virtue of the construction, how they are made.

Can you take a stab, Phil, at just saying when you think revenues will flatten in Europe?

I've given you the best guidance that I could, which is we're working hard to improve the trends into the back half of the year and the first part of next year. And if I tried to give you an exact date, I'd -- the likelihood of me being wrong is great. So, that's the best guidance I can give you at this point.

I understand that. And overall, company-wide, you did talk for your year-end call about a down first half and up second half. Can you reiterate anything along those lines?

We're not giving any more guidance than that at that particular point in time. I think the uncertainty of the marketplace, both in terms of how quickly we can reverse these trends in Europe, dealing with Wal-Mart's moving to private-label, and then the door closures and the merger of Macy's and May Company, it makes it a very uncertain environment. So, we continue to focus on strong profitability, while making sure that we have strong sellthrough on our brands at retail. And we believe over time that will take care of itself.

Did you say that you aren't reiterating an up second half to offset the down first half?

No, I didn't say that.

Roy Ophir, Brownstone Asset Management.

First thing I wanted to ask about, you said on the call for the new bond issuance that once that was done you would consider a new revolver deal. Is that something that you guys have thought about, and can you give us some forecast on that?

We're not making any announcements on refinancing until we basically are ready to announce a specific refinancing. Obviously, we continue to explore how we can optimize our debt and the cost of our debt, and obviously that is a continuous process, like finding savings, like finding sales. So, that revolver, obviously, is under constant review. But there's nothing concrete we have to announce today.

Could you talk a little bit more about the shift of shipments from Q1 to Q2, as far as which retailers and what types of retailers, and kind of what dollar quantity goods?

What we said -- I think if you look and take a step back on our first, because I think we're talking [a lot to the] sales line. If you take a step back where our sales is in the first quarter, it's 6% down. About half is exchange rates. So, that gets it to minus 4. If you then know that -- Phil talked about Europe, where we have a double-digit decline. And if you just do the math on page 25 of our Q, what is the percentage of the European business, then the balance of our business is around a level of stability. So, the level of stability, while we re-phased the shorts into the second quarter. So, that's how I look at our sales line. It's half as exchange rates, and the balance mostly has been our European business (indiscernible) that stability, what we ended with in 2005. [We had that] stability [while] we re-phased the shorts business, the Spring deliveries into the second quarter, because that's more profitable for us and more profitable for the retailer. Again, Levi Strauss in the U.S. has continued to perform very well with the consumer. Dockers is doing very well. And the only thing we have on Signature, which we're working on, is that women's business and Wal-Mart. That's how you look at the sales.

So, the portion of the sales miss due to the shift -- that's the only portion that I'm focused on right now -- you don't expect that you're going to lose any of that in the second quarter; it was strictly a shift? So (indiscernible) is similar as it was last year.

Yes.

Okay. That helps out a lot. Thank you. The other question is on the rollback of Wal-Mart, as far as dedicating more of their own space and fixtures to private-label. Have you seen that happen with any of the other Signature customers, or is it a Wal-Mart-only phenomenon?

It's a Wal-Mart-only phenomenon. Our other customers continue to invest in our business, particularly in those segments where Wal-Mart has de-invested.

(inaudible) continued growth with your other customers in Signature?

Yes.

Do you have any indications from Wal-Mart about what going forward is going to be their investment, vis-a-vis Signature versus private-label?

Sure. We have conversations with them all the time. And it's interesting to note that our kids' business at Wal-Mart is on a nice growth trajectory. Our men's business, our young men's business is on a nice growth trajectory with Wal-Mart. It's our women's business where they've decided again -- and I'm sure you've read a lot about it in the press if you follow Wal-Mart, where they decided, for instance, in juniors, where the only brand they carry is No Boundaries now, their own private-label brand. And in women's, they're highly emphasizing their Metro Seven brand and their George brand.

And they did this -- our business had -- through last year in women's was performing well in Wal-Mart. This is a strategic choice that Wal-Mart is making. And we hope over time to have conversations with Wal-Mart about the value of our brand in the women's category. But we respect their decision to at this point really emphasize these private-label brands.

So their decision was not driven in any way because of the disappointment in the sellthrough or in the profitability of the lines that you're selling through them, but more of a strategic change?

I'll let Scott answer that, but my answer would be yes.

It is our understanding, especially -- and the way I think you can help think that through is if you have other retailers in those segments of the business continue to invest in our women's product.

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

Thanks for attending our call today. We look forward to talking to you again after the end of the second quarter. Good day.

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