Levi Strauss & Co (LEVI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Levi Strauss & Co.'s second-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 conference over to Jeff Beckman with Levi Strauss & Co.'s Worldwide Communications Department.

Good afternoon and welcome to our conference call. I am 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 July 17, 2007 by calling 800-642-1687 in the United States or Canada, and from outside these countries you can call 706-645-9291. For either number, please input the ID code of 5250449 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. We encourage you to review them. Also available on our website is the 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 website.

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

Thanks for joining us this afternoon. Today we will review our second quarter results and discuss the performance of our three regional businesses. Hans will go through the numbers, Robert Hanson will cover North America, and I will comment on Europe and Asia Pacific.

Now our second-quarter results. Our revenue growth momentum continues. Each of our three regions grew again in the second quarter. Net income also grew. We're sustaining our growth trend while continuing to deliver strong cash flow in margins. At the same time, we're also investing in our products retail operations and systems to fuel future growth. We are pleased with these results. Our topline improvement reflects upgrades in our product assortments. Consumers around the world are responding to our new products.

The Dockers brand had a particularly good second quarter, which I believe reflects the brand's potential when we consistently execute our Dockers San Francisco brand position. Our global network of brand-dedicated retail stores, both franchised and company-operated, also continued to perform well, contributing to revenue growth. Stores have shown us a positive impact of getting the products right and merchandising them in a compelling way.

We continue to be pleased with Europe's performance. With net revenue up again this quarter, the region is delivering consistent profitable growth. Asia-Pacific's revenue also grew in the quarter. It continues to be challenged by high inventory at retail in Japan and Korea, which has slowed the performance in these mature markets.

The emerging markets, such as India and China, remain strong sources of growth for the region. The revenue growth in North America was driven by the strong performance of the US, Levi's and Dockers brands and our Mexico and Canada businesses. Our US Levi Strauss Signature business is performing below expectations. We're working closely with our key mass channel customers as they refine their apparel strategies. Our goal is to make sure that the Levi Strauss Signature brand plays a key role as they address the apparel opportunity.

Overall, I am pleased with the second quarter results. We are performing well and sustaining growth and strong cash flow while investing in the future of the business. Now Hans Ploos van Amstel, our Chief Financial Officer, will talk about the second quarter financial results.

Thanks John. Good afternoon. As a reminder, the slide presentation that accompanies my comments is available from our corporate website, LeviStrauss.com.

Our revenue momentum continued and net income was up in the second quarter. The business is growing, we continue to deliver strong gross margins and we have further reduced our debt while investing in the business. Net revenue grew 6% for the quarter and 7% year-to-date with growth in all three regions. Net income was up 14% for the quarter and 41% for the first six months, giving us a solid start.

The net income improvement was driven by higher operating income, lower interest expense and lower refinancing costs. This more than offset the impact with this key tax benefit recorded in Q2 of last year.

Our gross margin was 46% for the quarter. This is slightly below the level we had in Q2 of last year due to strengthening our customer economics and efforts to move slow-moving products more quickly. We expect gross margins to continue to be in our targeted mid 40 range.

SG&A increased 7% due to retail expansion and higher distribution in marketing costs in line with the revenue growth. As a percent of net revenues, SG&A remained flat. Operating income was 3% up as a result of lower restructuring costs in Q2 2007 versus 2006. In 2006, we announced the closure of our Little Rock distribution center. Interest expense was down 10% for the quarter, reflecting lower debt balances and lower interest rates after our refinancings in 2006 and earlier this year.

Turning to the regional highlights. In North America, net revenue was up 5% and operating income is down 5% for the quarter. The net revenue growth was driven by the strong performance of the Levi's and Dockers brand. US Levi Strauss Signature sales were down and we expect them to be down for the fiscal year. Robert Hanson will cover the work we are doing in this business. North American operating margins remain strong, but operating income was down due to the efforts to strengthen our customer economics and move our slower selling products faster. The region continues to deliver healthy margins along with its revenue growth.

Europe's net revenue was up 3% excluding currency and 12% up on a reported basis for the quarter. Operating income also grew in the second quarter. The European business is performing well and we're pleased with its positive momentum. Asia-Pacific's net revenue grew 3%, driven by strong growth in emerging markets and incremental sales from new [and] dedicated stores. Operating income was down 7%, reflecting lower sales and margins in our mature markets such as Japan and Korea. We are addressing the inventory and assortment issues in those markets. Our corporate staff costs were flat for the quarter.

Turning to cash flow, strong cash flow from operations allowed us to further reduce debt 50 million while continuing to invest in (inaudible) expansions and systems. Our working capital was [above] year end, mainly driven by our growth and the seasonality of our business. CapEx for the year will be over 22 million with investments in retail expansion and SAP.

To summarize, we delivered another solid quarter. We are pleased with the first half of the year. We delivered net revenue growth around the world, margins are strong and we continue to invest in the business. Looking ahead for the full year, we expect to end the year with modest revenue growth, net income up and debt reduced.

Now Robert Hanson will discuss our performance in North America.

Thanks Hans. Hello, everyone. Our Q2 and year-to-date results reflect continued topline growth momentum for North America. Net revenue in Q2 was up 5% to $579 million. This is a $25 million improvement against last year. Year-to-date net revenue was up $63 million or about 6% against last year.

Operating income was down 5% in the second quarter and less than 2% year-to-date, reflecting efforts to remove excess seasonal product as well as to support our customers in strategies to support their business overall. We're managing our business in real-time, optimizing our winners and getting rid of slower moving inventory faster to ensure we can maximize our future retail open to buy.

North America's Q2 net revenue increase was driven primarily by growth in the US Levi's and Dockers businesses. Consumers continue to respond positively to our better style than more premium products. Focusing on the Levi's brand, increased men's revenues reflected continued success in longbottoms along with the strong shorts business this spring. We've led the market in our price segments in fit with fits such as our vintage straight, slim and skinny fits and finished with cleaned up darks and lights, and in styling, adding a 34.99 to 39.99 suggested retail style jeans collection for department stores and chains. Our shorts selling has also been quite strong. This is driven by the success of our Tab Twills non-denim collection.

Levi's boys revenue improvement from the prior year also was driven by strong shorts sales. The brand's improved revenue was partially offset by the support of our retail customers, including, as I mentioned, on customer marketing and promotional programs and especially in clearing seasonal inventories to prepare for fall floor sets. Levi's revenues also benefited from expanded distribution in specialty stores such as Tilly's, [Axxon] and Urban Outfitters and the expansion of our own retail network.

Turning to Dockers. This business delivered strong revenue performance in both men's and women's during Q2. Increased men's revenue was driven by strong spring shorts and top sales. Our Iconic, Cargo and Flat brand shorts produced double-digit sales increases versus Q2 of last year. Golf tops were also particularly strong in the quarter. The women's increase was due to double-digit growth of shorts and alternative length bottoms. The performance improvement reflects growing retailer confidence in our fashion right products as well as in the Dockers San Francisco positioning.

The strong revenue performance for both the US Levi's and Dockers businesses was mostly offset by disappointing performance of the US Levi Strauss Signature business. The decrease reflects lower selling at our two largest customers in the mass channel. We are continuing to review our strategies to properly position the brand within our portfolio and the channel, and are having productive discussions with our customers to determine how to best support their merchandising strategies. We expect, however, that the Levi Strauss Signature performance will continue to be challenging through the remainder of the year.

The balance of the North American business is doing well. Canada delivered to expectations in the quarter and was up year-to-date. Mexico delivered strong revenue growth in Q2 and is up double digits year-to-date.

In summary, it was a solid revenue quarter for North American region. Our better in premium products and pricing strategies and strong on-floor and operational execution are driving our growth. We remain focused on improving operating income performance while continuing to drive revenue growth.

Now I will turn it over to John to review Europe's results.

The European business had a solid second quarter, posting its third consecutive quarter of net revenue and operating income growth. Increased revenues and continued strong gross margins have increased the region's operating profit year-to-date. Europe is building momentum in its turnaround, which began in the second half of last year. The key drivers of these improvements include solid performance of men's Levi's Red Tab products and positive consumer response to the Levi's Red Tab Spring/Summer collection, incremental revenues from new Levi's stores, and the positive results from the more premium positioning of the Levi's brand.

The Levi's store network, which is mostly franchise stores in Europe, continues to expand and generate good results for the region. The number of dedicated stores will continue to increase during the balance of 2007. The region's more efficient go to market process help flow new products more frequently to the retail floor throughout the Spring/Summer season.

In summary, we're pleased with Europe's solid performance for the first half of 2007. Our premium position in retail strategies are working and we're focused on continuing these positive trends.

Now I'll briefly review the highlights for Asia-Pacific. Our Asia-Pacific division continued to grow, but at a slower pace in the second quarter. The region's year-to-date revenue growth is 4% compared to last year. Operating income was down, largely due to lower revenues and margins in our mature markets. The increased net revenue in the second quarter was driven by growth of our Dockers and Levi Strauss Signature brands across the region, and a positive performance of our emerging markets led by the strong double-digit growth in India and China. These markets remain the growth engines for the region and helped to cushion the weaker performance of our more mature markets, predominantly Japan and Korea.

Japan continues to be impacted by the high retail inventories that built up through last year. Korea, the region's second-largest business, is experiencing a slowdown of Levi's Engineer jeans, and is also working through high inventory levels. We expect that Japan and Korea will remain challenging for the balance of the year. We continue to deliver product innovation and improve our premium positioning across the region. We've launched a new superpremium product range called Levi's Copper in the second quarter in most of the Asia-Pacific division markets with strong initial consumer response. [Drayer] will launch Levi's Copper in the fall holiday season to expand this superpremium assortment.

To summarize, the Asia-Pacific division continues to grow thanks to the strong performance of emerging markets that offset challenges in the mature markets. The region's broad geographical diversity is enabling it to deliver growth for the Company.

So, summary up where we are -- another solid quarter, giving us a good first half. All three regions continue to grow and we are taking actions to address our underperforming businesses.

Now we'll take your questions.

(OPERATOR INSTRUCTIONS) Carla Casella, JPMorgan.

Hi, you mentioned the inventory issues in Japan and Korea. How long do you think it should take to get back to a more normal inventory level in this market?

I think as we mentioned, Carla, we anticipate by the end of the year we should be in much better shape than we are at the moment.

And does that mean you should generate some additional cash from working capital by reducing inventories?

Well, what we're focusing on is a combination of both; reducing inventories at retail, which is clearly impacting our sell-in because we don't want to build those inventories any further, and making progress with our retail -- with our inventories in-house. So it's a double prong approach we're using at this stage.

Is it a little too early to say any signs from the early back to school season in the US?

Yes, it's a bit too early to call sales, but I would say for both the Levi's and the Dockers brands in the United States is that our performance from a net revenue standpoint, both for ourselves and for our customers, in the first half of the year has been strong. Our customers are showing confidence in the brands as we go into the back half of the year. We have executed our strategies in terms of floor sets effectively in June, preparing for July selling forward. So, you know, we're executing to our plan and feel confident that we can continue to execute to that goal.

So would you say you have more greater or equal or lesser floor sets versus a year ago?

Well, I think consistent with the direction that we have been communicating over the past number of quarters is that our number one priority for the Company is to grow the Levi's and the Dockers businesses, that we are clearly focused on expanding our real estate, securing additional product segments and driving growth on our two flagship brands. So we have secured additional programs, a few of which I mentioned in my comments. Now the question is really executing and securing the sellthrough to the consumer, which is our focus for the balance of the year.

And would you say that the programs that you have set, are they -- are you targeting similar margins to last year? Or are you targeting more in-season promotions?

We expect that in the second half of the year our margins will be a little -- better than in the first half of the year because the Fall mix is better than the Spring mix. And we obviously our focusing (inaudible) business of where our business is on first quality sales.

Okay, great. And then just one last question on Signature. It sounds like we still have some more declines there. Any idea of the magnitude just based on the amount of floor sets you've put in for back to school, what -- how great Signature could be down?

We gave forward-looking guidance on the total Company sales but we expect the year to end with some modest growth. We're not giving any individual business units performance but obviously, as we said, Signature will [still planning] down into the year. We're just not disclosing how much. But we'll deliver overall growth this year while Signature will be down.

And then just one last question. On the balance sheet, the 12 1/4 notes are callable in the later part of this year. I know you called the floaters in the earlier part of the year. Have you started considering your options with those notes?

You know our answer to that. We're constantly exploring obviously, refinancing our debts. The 12 and 1/4 becomes callable and we are exploring that but we have no specific refinancing action to announce at this stage.

Okay, but you do --

(multiple speakers) [But we remain] focused on our two priorities, which is drive free cash flow. And we confirmed in the first half that we delivered strong free cash flow, reduced that and that remains our focus for the second half of the year as well.

And you do have additional bank availability as well that you could do additional bank debt, given your current -- the covenants in your existing bonds?

Yes, we have that but we're not using that at the moment.

Right, thank you very much.

We have a healthy cash balance.

Karen Miller, Bear Stearns.

Hi, good morning. I'm wondering if you could talk a little bit about the pressure on gross margins largely related to higher returns and allowances? Was this mostly Asia or did you have it from the US as well?

It's true that our margin in the quarter was slightly below last year, but I just want to confirm that still is a very strong 46% gross margin. So we continue to run our business at very healthy gross margins. Why was it slightly down? It slipped a little bit between the US business and what we thought in the mature markets and Asia. Stronger retail economics. Slightly less profitable business mix the last year but, as I said, slightly because it's still up 46% gross margin, and then we're clearing slow movers faster so that every quarter we always have what I call fresh products on the floor so that we are well positioned into the quarter to deliver quality sales.

So what really I'm trying to get at is that in view of the pressure on retailers that's been talked about recently, are you seeing any change in pressure from your customers in terms of looking for more favorable returns and allowances or marketing assistance or margin assistance?

Karen, the way we run the business is we plan with our customers on both a strategic and an annual level. We agreed to product assortments, overall suggested pricing strategies, promotional approach in presentation strategies that would deliver to their expected or targeted, I should say, margins, turns and gross margin return on investment. Clearly, we're all in the business to improve financial performance. So all of our customers continue to put pressure on us to continue to show improvements in financial performance.

I think the key to that, though, is driving and delivering against our key objective of driving profitable growth for the Levi's and the Dockers brands on a worldwide basis. But in the US our customers have gotten significantly more focused on improving the same performance metrics that we're focused on. So, we are working with them. Is there anything particularly challenging that we're facing right now? No. The market has been volatile throughout the majority of this year. We are addressing it in real-time (inaudible) responding aggressively to both fast and slower sellers and making sure that our open to buy is really productive for ourselves and for our customers.

Because I think in general what we're seeing is a more promotional environment so I was just wondering if you are seeing a difference in this year versus last in terms of the help that your customers are requesting from you. But I guess you answered my question.

Not with our brands. What I would actually say to you that we're seeing is an increase in the average selling price that the Levi's and the Dockers brand have been able to command in the marketplace over the last several quarters. So we are seeing something different with our brands than you're assessing for the total market.

That's because you guys have done such a good job in refreshing your designs.

Thank you, we appreciate the comment.

And then just turning to SG&A, you mentioned in your discussion that part of the increase is impacted by new retail stores. Could you talk a little bit about the retail store economics? I mean, how many you have added this year? It looks like just based on the pace of your cap expenditure budget, you've only spent one-third of your CapEx budget and we're already into the first half of the year. Can I assume that you plan to add more stores in the second half of the year? And then if you could also tell us a lot of your stores are new and so they're not really pulling their weight. What is the store economics? And when do you see a payback on them or what is your payback target?

Our payback target on the stores is five years and that is like our internal commitment and we're measuring progress on a quarterly basis for the business units. So we have stringent net present value at a rate of return criteria on our store openings. We have externally benchmarked the economic model and we know how to get through very competitive margins in our stores.

If you look at our current results, what's very encouraging is that the sales in the stores is performing very well around the world and that gives us very much encouragement that the growth in there, which is obviously a key driver behind any economic model is that it's growing in the right direction. So we feel very good from where we're at on our retail expansion, the revenue we're getting and we have obviously the cost discipline which will complement to get to our model and our economic value creation behind that.

I will remind you, most of the stores outside of the US are franchise models. It's the US where we focus more on the owned and operated. So, the outside doesn't involve as much capital investment for us clearly through the franchise model.

That's a good complement.

How many stores to you have now in the US owned and operated?

We have almost 70 around the world. We added six in APD, three in North America, two in [Alessas] and we have around 40 in the US.

And what are your plans for the rest of the year in terms of owned stores?

We continue to open stores but we're not driven by a number, we're driven by our locations so to make sure that our discipline is getting into the right locations. We're not just going to open 10 stores to open 10 stores. So, our capital budget allows for sufficient store openings but we're very disciplined that if there is the right opportunity we go for it; if it's not the right -- so we're not really holding ourselves to opening X number of stores per year.

It's about location and it's about meeting the proper criteria we set.

Okay, thank you. That's helpful. That's it for me.

(OPERATOR INSTRUCTIONS) Clark Orsky, KDP Investment Advisers.

I just wanted to follow-up on the returns and allowances issue. And have you seen any sort of acceleration of that as you moved into the current quarter?

We have been focusing on the first two quarters and this is referring to the North American business. We have been focusing on the first two quarters and moving any of the excess seasonal merchandise that we had on the books, both with our customers and ourselves. As we discussed last quarter, the holiday business was somewhat unpredictable and came late. So we did enter the first quarter with excess seasonal inventory in the Dockers brand and on the Levi's women's side as well as a little bit on our Mexican and Canadian businesses.

We feel that we have worked through a good deal of that and most importantly, the business model that we're operating now enables us to see both our and our customers' retail inventory positions daily and to respond throughout the supply chain to whatever we need to, to optimize winters and to get rid of slow-moving inventory pretty quickly. We don't see a shift in the pace of sell-through on our brands, as I mentioned earlier, and feel like we can execute against the plans that we have on the books for the balance of the year.

I guess a related question just, we keep hearing about the collapse of the housing market and how it's going to impact the consumer. What in general is your kind of view of what's happening at retail?

I would say at this stage we're not being impacted directly by that. We believe that the products we're bringing out are performing well. As Robert mentioned earlier on, we re-balance our inventories regularly, we're moving much quicker to do that. So we have more confidence in the type of new products we're bringing to market. So at this stage, our business results do not reflect any negative impact from what may be happening in the housing market.

I think that's confirmed by that we deliver very focused growth both in wholesale and in retail. The margin is slightly below a year ago but it's still a very strong 46% gross margin.

[Phyllis Kammera, Pacs World Funds].

I just was wondering if you could talk a little bit more about the Signature brands and what's going on, because it seems to me they're in the mass merchants which may be getting hit the most because of a slowing economy and things like the housing -- there's a slowdown in housing. What are you doing to kind of change the styles or to bring new sales in or to refresh? What's going on in that market, if you could talk about that a little?

Sure, as I mentioned in my comments, our US Levi Strauss Signature business performance has been disappointing for us. The lower net revenues reflected lower selling at both our two largest mass channel customers. I think you know, as we look at it, the business' decline, we have seen an erosion in our total square footage. More critically and I think some of the points that you brought up -- we feel that there's been two things going on. We have needed to align with our customers around the key strategy for the Levi Strauss Signature business within the mass channel. We have been in discussions, very productive discussions with our top two customers to get aligned with them and determine how to best support their merchandising strategies. And we will continue to focus on improving the overall performance.

While we have been going through that process obviously, we have not been executing the overall strategy on the brand to our expectations. At the same time, our customer strategies have shifted a bit from a merchandising standpoint over the past number of quarters and we are just getting into alignment with them on how to build this business. It's an important part of our overall portfolio. Our customers have communicated to us it's an important part of their portfolio. And we are committed to figuring out the right strategy moving forward.

Is the Signature brand within those stores, is it more just the Levi's or more just the denim or do you do the Cargo pants and that type of thing as well?

We have a -- it's primarily a bottoms business at this point in time but we have an appropriate mix of both denim and non-denim and seasonal products similar to the mix that we run on the Levi's brand. But it is more denim bottoms-focused if you look at the actual percent mix.

And then what's the price point compare -- I mean, it sounds like your premium product, especially in the United States, is doing extremely well. What's the price point difference? Is there an average that you could give me? Or the premium versus the Signature?

What I can talk to you about is the average selling prices that the Levi's brand and the Signature brands sell for in the United States. There's typically around a $10 price difference in the product. The average selling price for the Levi's brand is in the high 20s to low 30s and the average selling price for the Signature brand is in the kind of high teens to around 20.

Carla Casella, JPMorgan.

Hi, I just had one follow-up on the retail store expansion. What's your annual rent expense at this point? And did you give a number -- I may have missed it -- for the number of stores you wanted to add this year?

We're not disclosing the annual rent expense. As we said, we will continue to open stores but we are not like having a specific target on that, because we follow that through finding the right location and the economic model. What you have seen in SG&A, just to answer your question a little bit further, retail expansion is adding SG&A into the year. That's a combination, obviously, of brands the stores offer totality. But that hasn't impacted our operating margins until the first quarter related to the second quarter.

Okay, great. Thanks.

I just want to repeat that we are very disciplined with that expansion, following an economic model with clear net present value criteria so that we have a return on our investment and we followed our quarterly and the revenue momentum we're having in our stores is very good.

Karru Martinson, Deutsche Bank.

In terms of the Levi's Signature in US mass channels, is there an inventory overhang when we talk about the business remaining challenged or is just sell through going forward and working with those guys?

What I would say is this. It's essentially -- it was a need on our part and on our customers' parts to get aligned on the strategy for the business moving forward. We did have an inventory overhang that we have been working through for the first half of the year, to set our strategy more rooted in our leadership competency in Five Pocket jeans across all the consumer segments. We've gotten clear with our customers on the overall assortment approach what we believe collectively we can price the product at to effectively compete in the market, how to display it and how to effectively promote it.

So we continue to be in the process of just executing a comprehensive business plan with both of our largest customers in the mass channel. And as we have said, though, we expect the results for the balance of the year to continue to be challenging. As you know, it takes some time to get a business reset against a more comprehensive strategy.

And from a broader view here there's been a lot of chatter that there's a denim glut, there's particularly pressure on the high end. Are you seeing that across your product categories here in the US?

In terms of the actual market performance, it's probably not effective to talk about 2007, but if you look at 2006 compared to '05, the men's business in the United States grew 6%, the women's business declined -- and this is on a dollar basis -- about 1% and that's the total market. We did see a decline in the premium market in the United States. You saw it the women's segment more aggressively than the men's segment. So we did see a slowdown there. What we're finding though with Levi's brand is, as I mentioned in terms of results that we are delivering, is that we're driving revenue growth, not only for ourselves but more importantly for our customers. So the sell through is there.

We're seeing it come in better styled and more premium priced products. Our Levi's Capital E business is performing fairly strongly at the very, very premium end of the market but we see a nice price opportunity in the kind of 35 to $85 price segments within the United States. And that's really where our focus is.

We also have a tendency to see our customers tend to consolidate resources and a lot of them have been talking about this publicly. As the market dynamics shift, they consolidate their resources to the most valued denim players and obviously the Levi's brand being the leader in the market is one of those brands.

I guess in that vein, is there a potential for a positive upside of some of the private brands that the retailers have launched and you don't get the traction, and for you guys to be that partner for them, are you seeing any of that?

I think it's too early to make a call on what's happening there yet. We are just staying focused on making sure we've got the best products. We believe the momentum in our business is sustainable and we'll let our own customers make their decision where they go. But we feel very well where we are positioned today.

Just lastly, I know you guys have gotten this question in the past but the long-term future of the Company in terms of the continuing to operate as a private entity or coming to the public markets, if you just wanted to clarify your thoughts on that?

I think nothing's changed. As Hans said, we are focused on cash flow, paying down debt, continuing to maintain the momentum we have in the business and we have no news to make in that arena.

Jeff Kobylarz, Stone Harbor Investments.

Yes, a question about the Signature situation. With the Signature revenues declining, do you see more opportunity to have an increased Levi's presence in the department stores that discontinued having Levi product in those stores, when you did roll out the Signature product?

We've been working with our department store customers pretty aggressively over the past number of years and particularly gaining some stronger momentum in late 2006 and into 2007. What I would say is that we are largely past any of the strategic questions that the department store channel and Levi Strauss & Co. had about the role of the Levi's brand in their mix. And importantly, the results that I spoke of earlier are a reflection of consistent performance in the department store channel as well as in the midtier and chain channel of distribution.

So, I don't expect that there will be incremental opportunity because we are already executing our four peas plans on a strategic and annual basis with the department store customers to date.

I guess about the inventory levels at your retail customers, that you did say that there was a bit of an overhang. And outside of Asia, it sounds like you said that there was some overhang in women's and then I forget what the other products were. So are the inventory levels of retailers, are they in line where with you want them to be now or is there still a little bit of overhang going into the third quarter?

We worked very hard in the first and the second quarter of this year to address any of the slower moving or excess seasonal inventory that we have, to move it faster, as I mentioned. We feel good that we have executed against our operating plans for setting up the back half of the year. And we are on target, but most importantly we track it daily and we respond both to fast-moving sellers as well as slower moving sellers to make sure inventories are balanced.

Can you say how much of your sales increase came from the increase from the number of retail stores?

That will be a very small percentage because we opened around the world less than 10 stores. Our owned and operated retailers less than 6% of our revenue. So our revenue growth is driven by solid momentum and our wholesale customers we talked about the performance of the Levi's brand and the Dockers brand. Europe also is strong wholesale momentum. That growth complemented with growth at retail. So we are growing at both sides.

Reade Kem, Merrill Lynch.

Yes, I was wondering on the cost of goods, how much certain raw material prices factor into your cost of acquiring those goods? Namely cotton, which seems to be heading a new high. So I was wondering if you could explain to us how you incorporate that into your cost?

I do agree with you that we're seeing the price of cotton move up at the moment but this is having no impact on us. Our products have all been bought, sourced, so it may well be the situation that's emerging. But at this stage, cotton is not having any impact on our business.

Okay good. I was wondering if you could elaborate a little bit more on the SAP transition, just which parts of the Company that's complete and the states of progress in other parts of the Company?

Well, we continue to rollout on the Asia-Pacific division. As you remember, that has been our focus. That is on plan, on schedule. Our next piece of work, and we're right in the midst of that now, is preparing for our US implementation focusing on our financial suite of models. That is proceeding on plan and we still believe we'll be going live in the US next year. So, we're on plan. Asia-Pacific hitting all its milestones and we continue to do the blueprinting work and the scoping work for the US for all that. We will be committed to SAP basically through the next four years as we roll it out right across the world.

Okay, I think you had some extra costs related to Sarbanes? What should we look for there?

Would you repeat for --?

Sarbanes.

Sarbanes Oxley. No, that was more last -- we're -- that's just in (inaudible), that's just a very -- we're running the business as if we have all those (inaudible) that was a reconciliation item last [year].

I think the way you presented the numbers in the queue, I don't think you broke out licensing revenue by geographic segment. Could you give us a little bit of color on how that may have contributed to the revenue recognized in the North American segment?

It's a relatively small part of our business. So the global trends you saw, the net revenue really grew by revenue growth of products in wholesale and retail Levi's Dockers, and that's around the world.

Then last one, I was just curious on the advertising spend that was flat. Did the mix or the composition of what you spend that on change much year to year?

No, it's been consistent year to year.

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

In summary, as I mentioned, we are off to a solid start to the year, [eight to six] months, which we are pleased with. And we're going to keep focus on continuing with the momentum we have in the business today. Thank you for your time.

Thank you.

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