Levi Strauss & Co (LEVI) 2006 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.

[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 afternoon, and welcome to our conference call.

I'm pleased to introduce the Levi Strauss & Co. management team. With us here today are John Anderson, our President and CEO, Hans Ploos van Amstel, our Chief Financial Officer, and Robert Hanson, President of North America.

This call is being recorded, and a telephone replay will be available through February 20, 2007, 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 8121313 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 a few 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--this afternoon. We encourage you to review them.

Also available at our website is information about how we compile various measures we use to describe our business performance such as net debt and working capital. Finally, today, we filed our annual report on Form 10-K with the SEC, you can link to our SEC filings from our website.

Now, I'd like to turn the call over to John Anderson.

Good afternoon, and thanks for joining us today.

Before we start, I want to mention some changes we've made to our quarterly conference call. First, we've moved our conference call to the afternoon. Based on feedback from the market, we decided to hold the call later in the day, after bond trading quietens down so analysts and investors can better focus on the information.

We've also changed the lineup of speakers to reflect our new regional structure. As the new president for North America, Robert Hanson will report the results for the region, including overviews for the U.S., Levi's Dockers, and Levi Strauss Signature brands.

As you may know we've recently hired Armin Broger to head our European region. Armin will start in a couple of weeks so I'll cover the Europe report today. Alan Hed, our new president of the Asia-Pacific division is not available today so I'll also cover the Asia-Pacific division report. Armin and Alan will join us during future calls.

Now, onto our results. 2006 was a good year for us. We finished the year with net revenue growth in each of our regions in the fourth quarter, and improved our performance across the key operating measures in the quarter. These results are encouraging. Our ongoing focus on making all of our product lines more premium continues to prove successful and drive revenues.

The U.S. Levi's and Dockers business both posted revenue growth in the fourth quarter resulting in growth for the North American region. Asia-Pacific revenues are up in the fourth quarter and Europe's revenue trends improved substantially in the period following double digit declines in the first two quarters of 2006.

Now I'll cover some of the significant highlights of the fiscal year. Profitability and cash flow improved in 2006. This was our primary goal. We increased our profits while maintaining stable net revenues for the year. Our improved operating cash flow enabled us to reduce our debt which remains a priority for the Company.

Looking back, you may recall we began the year facing a substantial headwind. Our business in Europe was struggling, and we anticipated a significant impact from retail consolidation in the United States. Our business units took quick actions to address these issues.

As a result, the impact of U.S. retail consolidation was less than we originally anticipated although the issue remains a concern moving forward. And Europe improved its revenue trends through the the year, giving the region good momentum heading into 2007. The Dockers brand was a real success story around the world in 2006, growing in the United States and Asia-Pacific and delivering substantially improved profitability in Europe.

The U.S. Levi's brand, our largest business unit, built on its stability in 2005 with net revenue growth in 2006. I believe this is an important indicator of the growing strength of the Company.

The Asia-Pacific business is back to growth after challenges in the third quarter in Japan that created inventory issues. We made progress in Japan in the fourth quarter which is reflected in our proved Q4 results and we expect the Asia-Pacific Region to continue to give us solid revenue and profits for the Company going forward.

Levi Strauss Signature business also faced substantial challenges that affected net revenues in 2006, though the brand delivered substantially improved operating income in the United States. We are absolutely committed to the future of this brand. It is an important business for us, and a key part of our three-brand strategy to provide consumers with quality casual apparel across multiple retail channels.

Looking ahead at teams around the world, we'll focus on priorities that will build on our 2006 momentum and further strengthen the business. We will focus on new opportunities to capitalize on our global scale, adopting, adapting and sharing the best products, programs, and operational practices across the Company. We market our brands in more than 110 countries worldwide and we believe this gives us a unique competitive advantage.

Improving our productivity is a priority for 2007. We will continue to take advantage of our global sourcing organization as a means to reduce total costs. We plan to invest these savings back into the business to build our brands as well as use them to pay down debt. We will also continue to implement new systems to be more efficient globally and improve productivity.

We've successfully introduced SAP in Asia in 2006 and will begin to implement SAP in the United States this year. In 2007 we'll continue to grow our dedicated retail network around the world. These dedicated retail stores fill white space in the marketplace and make our product ranges accessible to more consumers.

The stores also allow us to explore more effective ways to merchandise and assort our product ranges which we share with our wholesale customers to help improve their presentations. Growing our wholesale business which represents the vast majority of our total sales remains a focus area for our teams around the world.

I'm encouraged about our prospects for 2007. We have plenty of work to do, including improving performance in Japan and the U.S. Levi Strauss Signature business, staying on track in Europe, and addressing the shifting retail dynamics in the United States.

However, we're starting the year with good momentum across our key businesses. We've proven we can drive cash flow and our new leadership team is committed to plans and actions that I believe will grow and strengthen our business in 2007 and beyond.

Now, Hans Ploos van Amstel will take you through the numbers for Q4 and the full year.

Thanks , John, and good afternoon, everyone.

The slide presentation that accompanies my comments is posted on our website. We made strong financial progress in 2006, delivering another solid year. We ended the year growing with a 4% net revenue increase in the fourth quarter, giving us stability for the fiscal year.

Our North America business is growing, Asia-Pacific is back to growth and Europe is stabilizing. We also continue to deliver strong operating margins which are now among the best in the apparel industry. Our margins around the world confirm that we have a well diversified portfolio of products. I am confident that we'll continue to have healthy margins going into 2007.

We improved our working capital performance in 2006 which helped drive strong cash flow and enabled us to reduce our net debt. Our debt reduction included buying back bonds, driving strong cash flow to reduce debt remains a top priority for the Company.

At the bottom line, net income for the fourth quarter was up strongly, contributing to $239 million in net income for the full year. We delivered these solid financial results while continuing to invest in our business around the world, including the retail stores and SAP. For 2007, we're looking forward to another good year with at minimum net revenue stability.

Turning to our income statement on the next slide, net revenue grew in the fourth quarter and was stable for the year. Gross margins remain strong in the fourth quarter at 48%, 240 basis points above the fourth quarter of last year. Our margin strength reflects an improved product mix and higher sales in company operated retail stores which generate higher margins.

Selling, general and administrative expenses increased 1% for the quarter and were down 2% for the fiscal year. 2006 SG&A reflects lower advertising and promotion cost in Europe with our shift to a new marketing model that [inaudible-heavy accent] advertising and promotion cost in line with the Company average. The new marketing model lowered cost at the same time that the sales [stand] improved in Europe.

Lower SG&A also reflects the favorable impact of a benefit plan fulfillment gain. Operating income for the fourth quarter was up 40% and up 4% for the fiscal year. The improvement for the fiscal year was mostly driven by the benefit plan A. Fourth quarter results showed continued strong operating margin at 14%, 360 basis points above last year and in line with our margin for the fiscal year.

Net income is up for the quarter and fiscal year, reflecting the operating income improvements and lower taxes. The full year net income was also helped by lower refinancing cost, as well as reduced interest expenses in 2006 as a result of lower debt and lower interest rates.

Turning to our regional highlights, in North America, net revenue grew 4% in the fourth quarter and 1% for the year. The improvement in the fourth quarter was driven by strong U.S. Levi's and Dockers growth. The U.S. Levi Strauss Signature business has not yet turned the corner and we are looking at initiatives to improve the performance of this business. Fiscal year 2006, North America operating income grew in line with revenue with continued strong operating margins.

Europe's revenue trends improved substantially in the fourth quarter in line with our recovery plans put in place at the beginning of the year. Europe maintained its operating margin at 21% in 2006 despite lower net revenue. Europe's fourth quarter operating income was up 20%.

Asia-Pacific grew in the fourth quarter and ended the year with annual growth. Net revenues were up 6% in the fourth quarter and 4% for the full year. Asia's operating profit was down slightly for the year, mainly due to Japan. Japan is transitioning to a new management team and working to respond faster to changes in the marketplace but faces a challenging environment into 2007.

Turning to our cash flow in the fourth slide, we have substantially stronger cash flow from operations compared to 2005 because of lower tax payments, improved working capital and lower restructuring and interest payments in 2006. Strong operating income in '06 and the lower payments enabled us to make strategic investments to build our business for the future, including upgrading our systems and expanding our company-operated retail network. We reduced our average inventory investment by $65 million versus 2005, all while continuing to deliver high service levels for retail customers.

To summarize, we feel very good about 2006 and believe we are well positioned going into 2007. We expect our momentum in the second half of 2006 to continue in 2007, including continued strong operating margins while investing in the business. In 2007, we will remain focused on continued strong profitability and cash flow to further reduce our debt.

Now, Robert Hanson will discuss our performance in North America.

Thanks, Hans, good afternoon.

As a reminder, our North American region is comprised of the three commercial business units in the U.S., our U.S. Levi's Dockers and Levi Strauss Signature brands and our Mexican and Canadian businesses. Our results reflect solid growth in the fourth quarter and stability for the region on a full-year basis. We ended the year with fourth quarter net revenue up 4% to $771 million, and delivered $2.5 billion in net revenues for the full year. This is a 1% increase.

We are pleased with these results as this is the second consecutive year of revenue growth in a period of substantial retail consolidation. On the earnings side, we delivered operating income growth of 15% in the fourth quarter and 2% on a full-year basis. We wanted to briefly now focus on our three U.S. brands.

The U.S. Levi's brand, which is the Company's largest business at $1.3 billion in net revenue, affirmed its leadership position in men's, boys and misses jeans wear. We achieved these results with a focus on four strategies. The first, jeans wear innovation leadership such as our focus on slim and straight-fits, cleaner finishing and upgraded styling and sundries.

Second, our focus on driving growth in premium price segments, which in addition to our super premium Levi's capital E-Range, also included efforts to elevate our red tab product range between $35 and $85. Third, the penetration of new customers in the better department and specialty store channel, and fourth, the continued expansion of our dedicated store network.

Regarding the dedicated store network, in Q4, we opened 9 company-operated Levi stores and one outlet. Our retail stores delivered comp store sales increases in Q4 and for the full year, reflecting a better assortment, as well as our investments in retail talent. We saw the results of these actions in the numbers for the U.S. Levi's brand both net revenues and operating income were up for the full year.

Our U.S. Dockers brand finished the year with its fifth consecutive quarter of year-over-year net revenue growth. The turnaround is a result of John Goodman and his team delivering great products with styles that are right for our consumers and achieving win-win economics for our retailers and for the Company.

In 2006, we reposition the brand for men around a new wearing occasion strategy, work, weekend, dress and golf, giving men a reason to buy four pairs of pants instead of one. We also overhauled the entire Dockers women's range making products more stylish, modern and feminine and we brought in new talent to complement our veterans in designer merchandising. These actions drove a substantial revenue increase in the women's business. Again, the results are in the numbers. The Dockers brand delivered a 6% net revenue increase for the year at $716 million on the top line.

Our Levi Strauss Signature brand felt the impact of Wal-Mart's allocation of more retail space to its women's private label programs. Despite the 13% net revenue decline the brand delivered a solid improvement in operating income through tight management of product cost, as well as SG&A. As John and Hans have said, the Levi Strauss Signature brand is a key element of our multichannel strategy and our senior management team is sharply focused on recharging that business.

By deploying upgraded and focused store level assortments, a more competitive pricing strategy, improving our on-floor execution in particular, collaborating with our customers to drive awareness traffic and conversion and building a collaborative account plan to achieve targeted profitability. To wrap up, we had a good year across the region. I believe our momentum in the fourth quarter positions us to drive for growth in the North American region in 2007.

Now let me turn it back over to John, for a review of Europe's performance.

Net revenue in Europe was up 3% on a reported basis in the fourth quarter, and down 9% for the full year. Improved sales trend in the second half of the year were driven by the impact of opening additional Levi's franchise stores, company operated stores and factory outlets, a successful fall/winter collection and more stable wholesale distribution resulting from our continued work to strengthen the position of the Levi's and Dockers brands in a more premium segment of the apparel market.

As the year progressed, we rolled out more innovative and premium products across Europe, that were well received in the marketplace. This was aided by a streamlined go to market processes which allow for more frequent and consistent infusions of new products into the market throughout the year. Our new affiliate business model which puts more merchandising and marketing control in the hands of the local country leadership also had a positive impact on performance.

The region's 20% increase in operating income for the quarter over the prior year was mostly attributable to lower advertising and promotion expenses. 10% decrease in operating income over the full year reflects lower net sales, higher selling expense related to retail expansion and the impact of currency translation. The operating margin for 2006 was in line with prior year at 21% of net revenues. 65 new Levi stores were open in Europe in 2006, including franchise stores, company operated retail and outlet stores. About two-thirds of these stores were opened in the second half of the year.

We continue to focus on the product assortments and inventory levels in franchise stores to ensure we're providing innovative products on a regular basis and early availability of seasonal products on the retail floor. These efforts, along with successful new men's and women's products had a positive impact on comparable store sales results in the second half of the year.

In summary, we're pleased with the improved sales trends in Europe. We're confident we have the right strategy in place and will continue to execute against these strategies. Early retail sales of the new spring/summer collection are encouraging, giving us confidence we'll continue the positive momentum in Europe heading into 2007.

And now I'll quickly cover the highlights of our results in the Asia-Pacific division. The Asia-Pacific division delivered revenue and operating income growth in the last quarter of 2006 and net revenue growth for the full year. While Japan, which accounts for about 30% of the region's net revenues, continued to address the inventory buildup resulting from changes in fashion trends and a soft apparel retail market, the rest of the Asia-Pacific division again registered double-digit growth.

Most Asia-Pacific markets are growing. Growth is accelerating in key emerging markets, particularly China, India, Turkey, and South Africa. Australia and New Zealand have shown signs of finally turning around with nearly double-digit growth in the fourth quarter. The first quarter on quarter increase after two years.

Contributing to the overall Asia-Pacific growth for the fiscal year, were higher volumes in sales of premium and super premium Levi's products, strong economic growth in India and China, and the continued expanse of our retail presence through store openings and store upgrades. Operating income in Asia-Pacific division grew 2% in the fourth quarter. Growth was led by Australia and New Zealand, India and China.

Lower 2006 operating income largely reflects the net revenue decline in Japan. Strong product innovation, particularly in the superpremium, premium ranges, drove improved margins. We continue to develop dedicated retail environments in Asia-Pacific to help drive greater brand equity.

Levi's flagship store network grew during 2006, ending the year with 17 flagship stores in eight countries across the region. The last store opening being in Beijing.

The Dockers brand is also--has also opened more retail stores with the premium Dockers San Francisco global concept. Thanks largely to this effective positioning in store expansion, the brand recorded double-digit growth in revenue over prior year. Growth was particularly strong in Turkey and India.

Levi Strauss Signature brand continues to be a small but growing business in APD with sales in Japan, Korea, Taiwan, and India. We also continue to be on track with our SAP implementation across the region. In Q4 we launched SAP in China and Hong Kong.

In summary, APD ended 2006 with an improved fourth quarter and solid revenue performance for the year. We expect APD to continue to deliver revenue and profit growth for the Company in 2007.

So, let's recap. For the Company, we had a good year, ending with an encouraging fourth quarter. We reduced our debt and continue to focus on debt reduction. We believe we have the right strategic plan and our teams around the world are focused on priorities and drivers that we believe will continue to strengthen the Company in 2007 and beyond.

Now, we'll take questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from Carla Casella of JPMorgan.

Hi.

Carla, your line is open.

Are you there, Carla?

There is no response. Question has been withdrawn.

Your next question comes from the line of Alexis Gold of UBS.

Hey, guys, good afternoon.

Good afternoon.

I think you talked a little bit--you talked a lot about a lot of things, but I few questions, first off, given your cap structure right now, I know you've made some changes this year, it looks like you've repurchased some bonds in the open market, any thoughts on refinancing your floaters, your 12.25's later this year and any other capital market transactions you might be thinking about?

As you rightly have seen this year we have been focusing on reducing our debt including buying back the bonds. We also repaid that remainder of that $80 million. So we focused free cash flow only using that. Going forward, that will continue to be our strategy we're not commenting on specific refinance activities once we're ready to discuss those, we'll announce those.

Okay. Can you disclose whether or not you've repurchase any bonds subsequent to the end of the quarter?

We haven't bought back any more bonds versus what we disclosed in the 10-K.

Okay. Could you comment just on the auditor, the change in auditors that we saw? Is that just a function of the changes in management and maybe existing relationships? Is it--I know that it's just given changes in--some people do change auditors more often than they used to. But can you just clarify any changes there for us?

Sure. We believe, and I think more companies do that, it's good to review those relationships on a regular basis and it's good governance to also include a bidding process of all the key--all the firms. We have gone through that process. We've had an outstanding relationship with KPMG who's very helpful to always help us. We have just seen going forward with our strategic probabilities that the move to PWC is a better fit for this company and it was now the right time because we had to make some changes anyway.

That's helpful. Just looking at your business lines, obviously you saw some pretty significant stabilization in the U.S., I guess one of the things, historically we've certainly seen a pretty significant portion of your revenues come from men and I think you talked about the consolidation impacting less than you'd expected.

One of the things we'd always thought is maybe there was an opportunity from the retail consolidation, especially on the women's side. Is that something that you guys are focused on as you look out to '07 and are there any other things that you're really focused on as we look out to next year?

In the U.S., you're absolutely correct in saying that our business is dominated by our men's businesses in all three brands, Levi's, Dockers and Levi Strauss Signature. We have stated before and continue to be focused on expanding our presence in the women's business segments as well as looking at additional opportunities for retail expansion which I commented on.

On the women's side of the business, we've had some really good success in the misses segments in both the Levi's brand as well as the Dockers brand. We did face some hiccups as I mentioned given Wal-Mart's focus on private label in the women's segment within Levi Strauss Signature. But it certainly is an opportunity for us.

We'll focus on achieving success in our core businesses first, which are obviously jeans and casual wear bottoms and then extending it into additional product categories, but we we hope to moving forward see an increased penetration--profitable penetration of our women's business across the North American region.

[Inaudible], and pass it along, but you did comment I believe on revenues flat and margins flat to next year, clearly gross margins were pretty strong and I think ahead of what you guys had really spoken about for the year, and that's a pretty significant year on year--I guess, pretty significant number to maintain. It's something you're comfortable with and I guess just on the revenue line, you're starting to see turns in most of the business lines, why would you expect revenues to be flat this year?

I think you have two questions. One is can we sustain our margins and, two, can we sustain that revenue? And sustaining the margins, the health of this business is as such that we'll continue to perform into those healthy margins and our retail expansion is helping all that.

We also continue to optimize our sourcing base, which will help and our premiumization around the world. So we're comfortable with both a combination of our business strategies, our continued productivity savings and the supply chain. We will be able to sustain our growth margins. Sustaining on that revenue line, I think you see around the world that our business strengthens.

You have seen how the U.S. Levi's business and the U.S. Dockers businesses are performing which giving us some robust growth this year into the second half of the U.S. business. Europe is recovering and the impact on the recovery plan, we're close to stable there.

That if you look at our own retail network in Europe, our own stores, it's good to know that we see solid growth in our own network. So we're confident that when we have the product in front of the consumer, that things are working well. Asia continues to perform outstanding, we've had that hiccup in Japan, we're addressing that. So if you hear through all of that you see that the diversified portfolio we have is stability are growing.

And we are encouraged by what happened in the fourth quarter, clearly. But we've still got plenty of work on our plate for 2007. But fourth quarter was the first time we had all three triads growing at the same time, so we would say encouraged but still plenty of challenges out there.

But we're confident saying that we will be at minimum--

Absolutely, very comfortable with that.

Great, and I'm sorry, if I could sneak one more in. We're still going through the K, but it looks like other corporate staff costs and expenses were down about 21% during the fourth quarter or maybe around $18 million. Is that mostly related to any changes maybe you've made in the European business to pair back costs, what's that change there?

Yes, mainly I think you'll find it was our advertising expenses were down in the fourth quarter.

And that's in the other corporate staff costs? Okay. I'll go back and look at that again.

If your question is on A&P the line is a little bad, so I apologize if I didn't go the question right. Is your question on advertising?

It was actually on the other corporate staff costs.

So if you look basically at our fixed cost structure and total and take a step back, what you see in the quarter fiscal year. The increases in SG&A are solely driven behind the retail expenses that were having company owned and operated stores.

Then there is some noise like the curtailment gain and we had some [inaudible-heavy accent] cost of [inaudible-heavy accent]. If you exclude that, our fixed cost structures remain stable, we're offsetting inflation through productivity. And that's our strategy.

It looked like it was down and it seemed like it was down pretty good.

It was, because of, for the year because we had some of those noise in there as I said. There is some noise. But if you strip the noise away, it will basically holding our cost structures flat.

Okay. Great. Thank you very much.

Yes, that's noise.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Carla Casella with JPMorgan.

Hi, I'm sorry about that, can you hear me now?

Yes, we can

Okay. The pension benefit from the curtailment gain, was that all in the fourth quarter and is that included in the SG&A?

Yes, it's in SG&A in the third quarter and there is one more benefit coming as we disclose in the 10-K in the first quarter. So there's another $25 million coming.

Okay, and then, how much do you expect to pay out in cash for the employee benefit plans in first quarter and second quarter?

That is in line with last year, I think that will be about in line with last year. So if you look at that total annual plans--

Okay, great.

We don't disclose it, but you don't see major movements in that.

Okay.

If you look for 2007 on our cash flow, that's on the line the question. If you want to have a look at our cash flow. We will continue to be committed to delivering free cash flow in '07 as we did in '06.

We're not giving specific guidance, but while we're strengthening our investments, which you will see on page 46 of the capital investment, and as APN retail, we'll do that while continuing to drive free cash flow. So you will see us committed in '07 to further reduce that.

Okay, great, and then also, can you discuss the tax changes you made and if we should continue to see about a 30% tax rate going forward?

That's a good question. If you look at our tax rate, we had two discrete elements in 2006. One in the second quarter, we restructured our European operation, and that gave us a $30 million advantage in tax, and in the fourth quarter there's around $30 million coming back from valuation allowances right back.

That gets the tax rate to that 30%. If you exclude that, our tax rate is at around 38%. Our cash tax rate is significantly below that, at around 23%. So from a cash and then we think we were able to sustain that.

Looking at the P&L tax rate, the complexity for us is you know we have a lot of valuation allowances and some of the tax [inaudible-heavy accent], when will our business be, and this is obviously an accounting question, could you potentially one day write those back is the question? But we have no definitive answer on that today, because today we can't do that. That's what would help drive the tax rate down. The [inaudible-heavy accent] on our taxes is, we'll have continued opportunity on both the P&L rate, but our tax cash rate, more importantly, is significantly below that at that 22%, 23%.

Okay, great, and then just one last question. Dockers seems to be continuing to do well. Are you getting more placements in your existing retailers, do you find you're getting new shelf space for your Dockers?

We're primarily seeing on the men's side of the business, is we're seeing greater productivity within the existing doors and within the existing assortments. We have seen an expanded fixture allocation from our existing customer base to support the innovation platform that the Dockers team has put in place. Again, the wearing occasion strategy of work, weekend, dress, and golf has led to our customers presenting that strategy with an additional fixture allocation.

On the women's side of the business, it's basically customer expansion. That business performed extremely well this year, and we had several of our largest customers get aggressively behind that business to leverage the sales momentum generated by the team.

And on a global basis, we think we've still got opportunities to roll Dockers out into more countries, particularly in the Asian region.

Okay, and is Dockers San Francisco all region at this point?

Yes, it is. It's a consistent positioning around the world.

Okay, great. Thanks a lot.

Your next question comes from Jeff Kobylarz of Stone Harbor Investments.

Hi. Very good, impressive numbers. Can you tell me about the gross margin and how much of the gross margin improvement is due to just mix? And if you just took consistent product from year to year, is there an improvement in gross margin or just a consistent product year-over-year?

You ask the fiscal year or the quarter?

Well, both if you have that detail.

If you look first the quarter, last year, our margins were a little bit lower in the fourth quarter, and this year in the fourth quarter we have sustained that 48% gross margin because we have a better sales mix this year than we had last year, and last year as we said, we had to write down some inventory from Signature. So the Signature running rate of margin is better.

So what we're confirming is that we continue to sustain the 48% margin and that if you look by triad is about stable within the triad as well. Europe continues to perform strongly on the margin line, Asia, as well as our U.S. business, and we are confident we will be able to sustain that level of gross margin, to continue product premiumization, driving savings and upgrading our product lines. I think that's the combination.

Also I think as our European business starts to stabilize, we're getting the benefits from the gross margins out of that business, which tends to have a slightly higher gross margin than our North American business.

Okay, and yes, for the year? That was for the quarter, right?

Same for the year. Basically what we're saying for the quarter, we have a better ending this year than we had last year, confirming that we're sustaining our margins.

Okay, fine. And then can you talk in general about retailers and how much inventory they're holding this year versus last year? What you see as a general outlook for demand from retailers, as far out as you could see, a season or whatever? How much they--they're seeking to hold of your product versus comparing it to last year's level of inventory that they would hold?

I can certainly give you comments for the North American business on our inventories with customers through the fourth quarter and obviously we're not going to provide guidance moving forward.

But what I can say is one of the reasons that I think both our margins and our customers' margins showed improvements coming into the end of the year is that we've implemented across most customers a much more effective and well implemented collaborative planning process which ensured that our-- we had the right inventory at retail, that we entered the holiday selling season with the right balance between inventory and our sales plan, and although the season was a bit up and down, we did in fact come out of the holiday season with really balanced inventory.

That's boding well for what we expect to deliver coming into 2007. But what we expect to do is to manage through these collaborative planning processes with our customers, our inventory to sales ratios in a highly balanced way. That's what led us to stabilizing the business and preparing us to grow in North America.

Okay, any general comment about Europe?

I would say it's much the same is what we're finding in the U.S. We're doing a better job of sorting our product to door level, inventories are pretty much in line the way we want them to be. So we just feel comfortable that we've got that balance correct at the moment.

Okay, and then lastly, about SAP, can you say how SAP has helped your results in '06 or was there really any material demonstration of improvement to your results or will it all occur in '07?

Remember, in '06 we've been focusing on the Asia-Pacific division and that's been rolling it out and quite frankly, that's proving up our ability to do that. We've been successful on time, on budget. The big test was getting through Japan, and now as we start to look at both our global sourcing organization and our U.S. organization, that's when we start to--we'll see more efficiency because they're much bigger businesses.

But for us, it's all about just getting the controls, the processes in place. We'll start to drive some productivity benefits out of SAP, '08 going forward is when we suspect we'll start to see the benefits from that.

Good, thank you.

The key investment will be actually in '07 for the U.S. implementation. So that's --

But '08 is when we'll start to focus on the productivity benefits out of our U.S. and sourcing organization.

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

Well, once again, we're pleased. It was a good year for us, 2006, we are very confident the momentum that we've got in 2000--in the fourth quarter positions us well into 2007 and we're committed to keep focusing on sustainable, profitable growth. Thank you, everyone.

Thank you so much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time.