Levi Strauss & Co (LEVI) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Levi Strauss & Company's first-quarter 2007 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. I would now like to turn the call over to Jeff Beckman with Levi Strauss & Company's Worldwide Communications department.

Good afternoon and welcome to our conference call. I'm pleased to introduce the Levi Strauss & Company 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 April 17th, 2007 by calling 800-642-1687 in the United States and Canada, or outside of these countries, call 706-645-9291. For either number, please input the ID code of 4529229, followed by the pound sign.

This conference call also is being broadcast over the Internet and a replay of the web cast will be accessible for one month on our web site at LeviStrauss.com.

Before we begin, let me briefly remind you of a few items remind you of a few items. Our CFO will speak to several slides posted on the financial news section of our web site, LeviStrauss.com, as he goes through the Company's results. We encourage you to review them. Also available on our web site 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 quarterly report on Form 10-Q with the SEC. You can link to our SEC filings from our web site.

Now I would like to turn the call over to John Anderson.

Good afternoon and thank you for joining us. Today, we will review our Company's first quarter results and report on our three regional businesses. Hans will review the numbers and I will cover Europe and the Asia-Pacific region. Robert Hanson, President of North America, is here to talk about his region. Although he isn't joining us today, I'm pleased to report that Armin Broger is now in place as the leader of our European business. Armin is a talented apparel executive with extensive industry experience at Seven For All Mankind, Tommy Hilfiger and Diesel. He is quickly getting up to speed to continue building on the region's positive momentum. Now to our first quarter results.

We're off to a good start for 2007 with a positive first quarter performance. We continued to improve our profitability and our net income was up substantially. Our net revenues were up across all three regions for the second consecutive quarter and our operating margins remained strong. Our revenue strength reflects the success of our improved product lines with new fits, fabrics and finishes. The investments we made in upgrading our product lines worldwide are paying off with improved performance.

Worldwide, we're also doing a better job collaborating with our wholesale customers. The presentation of our products at our wholesale accounts is improving in every region. Our expansion of company-operated retail stores, while still a very small part of our business, is providing incremental growth to the Company.

I'm pleased with our progress in Europe. The region drove the Company's improved regional operating income this quarter. We also continue to focus on profitability this year. In the first quarter, we dropped of our operating profit to the bottom-line, reflecting in part our lower interest expense. At the same time, we had more work to do in Japan where our results are lagging an otherwise strong performance across the Asia-Pacific region. In the United States, the economy is in flux as the housing market, stock market volatility and gas prices weigh on consumers. We're also continuing to absorb the impact of U.S. retail consolidation. Additionally, the work to refine our U.S. Levi Strauss Signature strategies is still ongoing.

Overall, I'm pleased with our first quarter results. We continue to perform well at retail, in line with our expectations. Now Hans Ploos van Amstel will take you through the Company's first quarter numbers.

Thanks, John, and good afternoon, everyone. As a reminder, the slide presentation that accompanies my comments is available on our corporate Website.

Our financial progress continued in the first quarter. Our business is growing, our margins remained strong and our debt is down, including our recent refinancing. We continue to invest in the business. Net revenue grew 7% and net income was at 61% giving us a solid start to the new year. We made progress in all three regions. North America and Asia-Pacific both grew net revenue. Europe achieved revenue stability from a constant currency basis and was up 10%, including the impact of more favorable currency rates.

We sustained our gross margin at 48% over the first quarter, leaving us on track for our goals of a gross margin in the mid 40s for the fiscal year. SG&A increased slightly. This reflects higher selling expense from retail expansion and higher distribution costs in line with the revenue growth. This was largely offset by a $25 million benefit blend curtailment gain. As a percent of net revenue, SG&A was down slightly.

Operating income was up 11% reflecting a continued healthy margin of 18%. Operating income benefited from the curtailment gain partially offset by $30 million in restructuring recharges for the plant closure of a distribution center in Europe. The net income improvement was driven by the higher operating income, lower debt and lower interest and tax rates.

Turning to the regional highlights. In North America, the 7% net revenue growth was driven by improved sales of men's Levi's products. Operating margin in the region remained strong. However, the clearance of seasonal inventory had an unfavorable impact on our margins. U.S. Levi Strauss Signature was down, but in line with our expectations. The Dockers business was stable. Europe's revenue continued to improve in the first quarter and operating profit improved substantially helped by more favorable exchange rates. Without the help of these favorable exchange rates, Europe's net revenue was stable.

Asia-Pacific continues to show strong growth in the emerging markets providing region-wide revenue growth and offsetting in Japan. The recovery there will take us more time. The decrease in corporate cost reflect the curtailment gain partially offset by the restructuring charges and the number of fourth quarter items that are detailed in the 10-K, including lower workers compensation liability reversals and lower benefit plan income. Our cost discipline offset inflation in the corporate departments.

Turning to cash flow. Overall, we're reporting a $43 million net use of cash this quarter. The key driver of increased cash used for operating activities was higher working capital. Cash used for investment and financing activities reflects continued investment in [retail] and SAP and repayment of short-term borrowings. We ended the quarter with an increased investment in working capital, driven by the timings of sales and an earlier receipt of inventory compared to prior year. For 2007, we expect to deliver a modest improvement in working capital versus last year and positive cash flow. Our debt balance at the end of the quarter is [almost] $25 million below this time last year, mostly driven by our debt refinancing and reduction actions last year. That will be further reduced in Q2 due to the refinancing we just completed which allows us lower interest expenses going forward.

To summarize, it was a solid quarter, in line with our expectations. We delivered revenue growth with improved net income, margins remained slow while we continued to invest in the business. We're on track to deliver another good year. Now Robert Hanson will discuss our performance in North America.

Thanks, Hans. I will review the business results for the North American region, which as a reminder, is comprised of our U.S., Mexican and Canadian businesses.

Our Q1 results reflect continued growth for North America. Net revenue was up 7% to $584 million, which is a $38 million improvement, and we are pleased that we've been able to build on the growth momentum of the last quarter in 2006, especially given the continued impact of retail consolidation on our key distribution channels.

On the earnings side, operating income grew 1% in the quarter, reflecting the increase in revenues, but this was somewhat offset by investments in the business and the impact of clearing out seasonal products. North America's net revenue improvement was due in large part to a 12% increase in the U.S. Levi's brand. We had strong sales of men's and young men's core products, as well as growth in our more leading-edge slim and skinny fits for men. The Levi's men's business is also growing at higher retail price points in both chains and department stores, which is contributing to our profitability. It is particularly encouraging to note that the Levi's brand sales are improving with younger male consumers, both the 15 to 24 year old age group and the boys segment.

We also continued to expand our retail presence in the quarter, opening five new Levi's retail stores in selected urban locations in the U.S. While still a pretty small percentage of our overall business, these stores are contributing incremental revenue for the region.

Turning to Dockers, our U.S. Dockers business grew slightly in Q1. On the men's side, the brand worked through some excess holiday inventory during the period and concentrated using its (indiscernible) strategy on continuing to differentiate its products for department and chain store customers in a highly competitive environment marked by private label and exclusive brands.

Our Dockers women's business is growing. Women's shorts and tops delivered double-digit revenue increases, representing a substantial growth opportunity for both us and for our customers.

Net revenue for the U.S. Levi Strauss Signature brand decreased slightly compared to last year. This was driven by a decrease in kids fixtures at Wal-Mart and Target and to a smaller degree the continued impact of Wal-Mart's decision last year to reduce our women's fixtures. This was mostly offset by fixture fill for new men's fixtures at Wal-Mart. The business continued to be challenging. We're evaluating and refining our strategies to properly position brand within our portfolio. The mass channel remains important to us.

Our quarterly performance was good in the balance of the region. The Canadian and Mexican businesses delivered double-digit net revenue increases respectively.

To summarize, it was a good quarter for North America and a good start to the new year. Now back to John to cover Europe's performance.

Thanks, Robert. The European business had a strong first quarter and delivered solid profitability during the period. As Hans noted, net revenue was up 10% on a reported basis. Excluding the effect of currencies, revenues were up 1%. The improved revenue results reflect the continuation of the positive sales trends that started to emerge in Europe during the second half of 2006.

There were four key drivers behind the improvement. Number one, our men's Levi's Red Tab products are performing well; two, new Levi's stores are providing incremental revenues; three, the repositioning of the Levi's brand in the more premium segment of the apparel market is producing positive results; and fourth, Levi's Red Tab spring-summer collection is off to a good start. Ten new Levi's stores were opened in the region in the first quarter of 2007, most of which were franchise stores. The number of Levi's stores in Europe will continue to grow during 2007. The region also benefited in the first quarter from its streamlined go-to-market processes which helped us give new products to the retail floor earlier in the season.

Europe's solid increase in quarterly operating income over the prior year reflects the higher net revenues and very strong growth margin performance. Europe's operating profit, which was also helped by a favorable currency transaction, was a key driver for the Company's regional operating income results for Q1.

In summary, we're very pleased with the progress in Europe. The region's solid start in 2007 gives us confidence that our strategies are working. And now I will quickly cover the highlights of our results in the Asia-Pacific division.

Our Asia-Pacific division also continued to grow in the first quarter. Net revenue increased 4% above the same period last year, driven by strong performance in the emerging markets, which include India, China and the Middle East. Our operating income was 7% below prior year, reflecting issues in Japan. Operating income was up across the rest of the division reflecting the strong net revenue growth. Key revenue drivers included higher volumes at premium price Levi's products for both men and women in line with our premium positioning in the region; continued [expense] of our retail presence through new stores and upgrading existing stores and improved economic conditions in many markets and the strong consumer spending tied to economic growth in India, China and Hong Kong.

Excluding Japan, the division showed strong growth with many affiliates operating at double-digit rates. This was led by India and China, which were both up by over 60% in the first quarter. We're very pleased with our results in those countries and our future prospects there.

However, Japan continues to be challenging. It's now going through a business process and management transition. We're also working through inventory and dilution issues as a result of product and marketing issues into misses in 2006. Our division president, Alan Hed, is in Japan and running the affiliate. We're focusing our resources on turning that business around, but as Hans said, it will take time.

To wrap up, it was a solid quarter for Asia-Pacific. We're pleased that the region's geographical diversity enable it to deliver another quarter of revenue growth for the Company.

So, overall to recap, we had another good quarter for the Company and we're off to a strong start for 2007. All three regions are growing, we're delivering against our profitability objectives. However, we still had some underperforming businesses and we're working to correct those issues. Now we will take your questions.

(OPERATOR INSTRUCTIONS). Barclays Capital.

This is [Matt Vittorioso] from Barclays Capital. I was just hoping to get a little bit more color on the working capital use in the first quarter. It seems like a big change from the previous year's first quarter. Could you just give us a little more color on that?

Yes. First and foremost, we're growing our business, and that comes with an investment in working capital. So that is a key thing you see into the first quarter. This is driven behind our revenue growth, which obviously has an impact on receivables inventory. So it is in line with our revenue (indiscernible).

I also want to remind is that last year we took a substantial reduction in our working capital. We took around 12 days out, and we are maintaining that lower level. So the key thing, it's driven with our revenue growth in this first quarter and that puts us in a cash stake position in the first quarter. If you look for the fiscal year, we are working to get working capital down and we will end the year with fiscal average cash flow to reduce our debt.

So you still expect to be strongly free cash flow positive then?

Yes.

And just another quick question. Regarding the seasonal clear out of inventory hurting margins, is that a typical first-quarter occurrence, or is that something that was unique to this first quarter?

It was a little bit more maybe, but we still -- it is a first quarter thing, as you said, and we sustained our strong margins while we did.

Thank you very much.

Carla Casella.

One question is related to Europe. Is any of the margin expansion related to currency?

Some of it is, but the majority of it is driven by stronger business performance in Europe and our [premium] (indiscernible) strategies to continue to help provide a very strong gross margin in Europe.

I think the key is, we're selling better products at higher prices.

Okay. And then on the storefront, it looks like you increased the CapEx budget somewhat. Is that all new store related?

The CapEx budget this year is higher than last year, but in line with the expectation we created when we issued the 10-K at year-end. The key drivers are continued retail expansion, but that is about in line with last year. The key difference versus last year is the U.S. SAP implementation and our SAP strategies around the world. So SAP is a key driver behind the capital in 2007. And what you have seen from our cash outflow, we're doing better than interest expenses for the year and there is a lower cash tax rate. So actually on the cash outlay, we're a little better for the fiscal year than we laid out in the 10-K, around $20 million actually.

And then on the storefront, can you just talk about the ramp-up you're seeing? How long is it taking stores to mature, and at what point will we won't see as much of a drain on SG&A overhead? When will we be offsetting I guess the SG&A overhead?

Let me talk about kind of overall performance. We've been pleased with the performance of the stores. They still represent a very small percentage of our overall sales; it's important to keep that in mind. But we saw really nice comp performance in the stores network in the first quarter. And at this point in time, the majority of the stores are meeting our expectations in terms of ramp up. It is actually a relatively typical ramp-up for a new store opening. It's taking us typically anywhere between three and four quarters to hit the kind of run rate performance that we're looking for. Nut we're on track with our plans in most cases.

And we're sustaining our margins while we are in an investment mode on retail and SAP, so if you're coming out of that investment mode, so I think it's key that while we are doing that, we're sustaining our margins.

And then one just technical question. In the 10-Q, you mentioned that there was an increase in payment terms taken by significant customer in the current period. Can you explain that a little that further?

Yes, this is a typical thing that sometimes happen at year end that one customer for their year end which falls in our Q1 is paying the bills a little bit later. They are back to the normal payment terms that had an impact on our first quarter receivables, but that customer is back to the normal payment terms. It's just at year end, they choose their year-end to pay a little late, [but] they are back to the normal practice.

And then just one clarification on the CapEx. It says that $127 million in your target for 2007, but $142 million for the forward 12 months. Does that mean it should accelerate beyond '07?

Yes. What you will see still, it's in that [book] -- it's about the same number, but it's a little higher. We will see more SAP investment over the next three years. That's the key driver. [Detail] will be -- you split that $127 million, [we always said] it was around one-third/one-third/one-third; one-third in business maintenance, one-third SAP and one-third retail. You will see that the SAP component will get a little bit above that in the next one to two years. But we'll continue to deliver cash flow while we invest in our business, so we remain committed to reducing our debt and delivering cash flow.

Great, thanks a lot.

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

Once again, we're pleased with the momentum through the first quarter. We do recognize we still have work to do, but all in all, a good start for the year. Thank you.

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