Levi Strauss & Co (LEVI) 2007 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Levi Strauss & Co. third-quarter results conference call. (OPERATOR INSTRUCTIONS). Mr. Beckman, you may begin your conference.

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 October 17, 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 19440043 followed by #. This conference call also is being broadcast over the Internet and a replay of the Webcast will be accessible for one month on our Web site at Levi Strauss.com.

Before we begin, let me briefly remind you of a few items. Our CFO will speak to several slides posted in the financial section of our Web site, Levi Strauss.com, as he goes through the Company's results. We encourage you to review them. Also available at our Web site is information about how we compile various measures we use to describe our business performance. 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.

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

The top and bottom line continue to grow. Net revenue and net income both improved again. We're delivering solid operating cash flow while making investments that will give us a platform for future growth. These investments include product innovation, retail operations and systems such as SAP.

We continue to focus on product. We've made our product ranges around the world more premium by upgrading fabrics, fits, finishes and styling. Our sales performance this year shows this strategy is working.

We've also expanded our global network of brand-dedicated retail stores, both franchised and company operated. These stores are contributing to our revenue momentum around the world. The stores also give us a compelling venue to merchandise our improved products direct to consumers and build equity and demand for our brands. We believe this helps drive sales at our wholesale customers as well.

North America was down this quarter, due primarily to the decline in the US Levi Strauss Signature brand, which we expected. As we mentioned before, we're working with our top niche channel customers on a strategic realignment of the brand, and we feel good about the plans we're developing with them for next year.

The US Dockers brand was also down for the quarter, but the brand has grown year-to-date and we expect growth on a full-year basis.

I am pleased with the continued growth of the US Levi's brand, which delivered increased revenues again in Q3 as a result of significantly improved products, from core through premium.

Europe delivered a strong net revenue performance again also. We've seen a solid turnaround of that business in the past 12 months and the momentum continues to build.

Asia-Pacific grew its net revenues as well. Japan had a modest revenue improvements after several quarters of sales decline, but we have much work to do. The emerging markets in Asia-Pacific continue to expand rapidly, with China and India producing double-digit revenue increases again.

In summary, we face challenges with several of our businesses through the balance of the year. We have more work to do in our mature markets in Asia-Pacific. US Levi Strauss Signature business will continue to be down going into next year. That said, the Levi's brand is growing around the world. We are on track to deliver revenue and net income growth for the fiscal year while investing in the future of the business. Now Hans Ploos van Amstel, our Chief Financial Officer, will talk about the Q3 financial results.

Thanks, John. As a reminder, the slide presentation that accompanies my comments is available on our Web site, LeviStrauss.com.

Net revenue and net income were both up in Q3. Net revenues grew 2% for the quarter on a reported basis with stability in constant currency. Year-to-date revenues are up 5%, or 3% in constant currency. Net income was up 24% for the quarter and 35% through the first nine months, putting us on track for solid increases for the fiscal year. Much of the gain in Q3 reflects lower interest and lower tax expenses.

In Q3, the Levi's brand grew in all regions. Europe delivered a strong quarter and Asia-Pacific continued to grow. The US Levi Strauss Signature business remained down, as expected, and the US Dockers business saw a drop in the quarter due to the impact of retail consolidation and a change in the timing of shipments between Q2 and Q3 this year compared to last year. Dockers is growing year-to-date, and we expect it to finish up for the fiscal year.

Our gross margins remained healthy at 46%. We achieved this margin despite higher sales allowances in North America and a slightly less profitable product mix this quarter in North America and Asia.

SG&A grew 10%. This reflects the higher selling costs due to retail expansion, a lower benefit plan curtailment gain in Q3 this year versus last year, and the impact of currencies.

Total operating income was down 9%, due mostly to North America's lower operating income, which was driven by higher sales allowances, retail expansion and SAP. Operating income also reflects the impact of the lower curtailment gain.

We have reduced our debt and interest expenses this year. Our position will be further improved in Q4 when we complete our tender of our 12.25 [notes], financed by amending our senior secured (inaudible) and using cash on hand. We expect this action to reduce our annual interest expense by around $26 million.

Year-to-date, we're delivering strong margins, and our cash flow allows us to continue to invest in the business. We are on track for revenue growth for the fiscal and strong operating margins while we continue to invest in our brands, retail expansion and SAP.

Turning to the regional highlights. In North America, net revenue was down 4% and operating income was down 18% for the quarter. We had strong Levi's brand momentum in North America. The net revenue decrease mostly reflects the weak performance of the US Levi Strauss Signature brand. We expect the brand to be down for the remainder of the fiscal year.

Although the US Dockers brand was impacted by a shift in the timing of men's shipments this quarter, men's product continued to perform well at retail, and the women's business is growing at a strong pace. North America operating margins remained solid, but were lower in Q3 because of the effort to clear slow-selling product, product mix and investments in retail expansion and SAP.

Europe is delivering revenue and operating income improvements across all key markets. We are pleased with its performance this year. The region's net revenue was up 6% excluding currencies, and 14% on a reported basis for the quarter. Europe's operating margins were strong at 21%, and they included an increase in advertising to support the region's positive sales momentum.

Asia-Pacific. Net revenue grew 11% excluding currencies, and 14% on a reported basis. The increase was driven by the growth of the Levi's brand across the region, especially in emerging markets. Brand-dedicated stores are a key driver of the improvement. Japan, our largest market in the region, is beginning to show signs of stabilization. Korea continues to work through high retail inventory and rebalancing its product assortment. Our corporate costs were down for the quarter, reflecting lower staff costs, partially offset by the lower benefit plan curtailment gain in Q3 of this year.

Turning to cash flow. Solid cash flow from operations this year has allowed us to reduce debt while we invest strongly in the business. We are sustaining the significant reductions in average inventory we achieved last year.

To summarize, we expect to finish the fiscal year with modest revenue growth and net income up. We continue to deliver healthy operating margins, strong cash flow, and expect to reduce our debt by more than 200 million, while continuing to invest in retail, our brands and systems.

Now Robert Hanson will discuss our performance in North America.

Thanks, Hans. Results in North America for Q3 were mixed. Although revenue was down in the quarter, we have driven year-to-date revenue growth. In Q3 our Levi's brand Canada and Mexico businesses all delivered solid revenue performances, while the region's revenue decline, as you've heard, was driven by slower performance in our Levi Strauss Signature and, to a much lesser extent, the Dockers businesses.

Q3 net revenue for North America was $633 million. This is down 4% versus last year. Year-to-date net revenue is up $35 million, or about 2% against last year. The decrease in Q3 reflects the expected lower sales performance of the Signature brand, and, as you heard from Hans, the impact of department store consolidation and the shift in shipment timing on our Dockers performance.

Operating income was down 18% in the third quarter and is down 8% year-to-date. The drop this quarter primarily reflects our lower Signature sales performance. Also, we have been working aggressively to clean up and rebalance our inventories internally and with our customers as we prepare for holiday. This resulted in unplanned discounts and allowances.

Let's look at each one of the business' results.

First let me discuss the Signature brand. The revenue decline this quarter was expected. As we've told you since Q1, we're realigning our strategies for the business and working closely with our customers, and expect the business to continue to be challenging. We're making progress, but we still have much work to do.

Dockers business was impacted by retail consolidation and the shift in timing of men's Father's Day shipments between Q2 and Q3 this year compared to last year. However, the Dockers women's business continued to grow strongly due to the continued favorable consumer response to our improved products, as well as our Dockers San Francisco lifestyle positioning.

Now let's turn to our largest business, the US Levi's brand. We have consistently stated that our number one goal is to grow the Levi's brand worldwide. And in North America, Levi's continued its revenue growth in Q3, as consumers responded to our better styled and more premium products.

The men's segment was strong, particularly the guy's Red Tab segment. Our men's business is successfully growing at higher price points -- price points above $35 at retail, for example -- in both chains and department stores. And the Levi's boy's business continues to outperform the category, driven by new five-pocket jeans fits and finishes.

Company operated stores contributed incremental revenue in the third quarter as we continued to expand our branded retail presence in the United States. We opened additional stores during the third quarter, including a flagship Dockers store in San Francisco, representing the quintessential expression of our Dockers San Francisco lifestyle positioning.

In summary, we're encouraged by the continued growth of the US Levi's business and the success of our Canada and Mexico businesses, despite a very challenging quarter for Signature and a slower quarter for Dockers.

Looking ahead to Q4, we recognize the retail environment in the United States is fairly uncertain at the moment with weakening consumer confidence. We're proactively investing in new products, better merchandising, and keeping our inventory fresh to drive better overall operational performance.

Now over to John for a view of Europe's results.

The European business posted another strong quarter in Q3. Net revenue and operating income improved in nearly every country across the region. The improvements were seen in both the wholesale business as well as the branded retail store network. Europe's improved operating income reflects the double-digit net revenue increase and a higher gross margin helped by currency.

Europe has become a steady contributor to the Company's goal of delivering sustained profitable growth. The key drivers of the third quarter improvements were consistent with the improvements we've seen throughout the year. These include strong men's Levi's Red Tab performance across the region, led by successful new fits such as the 504 Straight, 506 Standard, and 511 Skinny; a solid improvement in women's Levi's Red Tab products, driven by the new square and round top (inaudible); incremental revenues from new Levi's stores; and the impact of re-positioning of the Levi's brand in the more premium segment of the market.

The Levi's store network in Europe, which consists mainly of franchise stores, continues to grow and contribute to Europe's improved results. We expect additional franchise stores to open through the balance of the year. These branded stores have been important to our growth, and [have] also helped us strengthen and better position the Levi's brand in Europe.

In summary, we continue to be very pleased with the performance of Europe. We remain focused on strengthening our premium positioning in the region with outstanding new products. We also continue to expand the dedicated retail network to build on this positive momentum.

Now I will highlight Asia-Pacific results. The Asia-Pacific division also continued to grow in Q3, with double-digit increase in net revenue driven by strong growth in the emerging markets.

The region's operating income was down slightly. This reflects lower sales and margins in Korea, which continues to work through high retail inventory and realign its product assortment to address changing trends. The net revenue improvement resulted from higher sales of premium price Levi's products as we continue to strengthen our premium positioning in the region.

The Dockers San Francisco business also delivered solid growth again, supported by its new lifestyle positioning, (inaudible) the growth was off a much smaller base than the Levi's brand. Additional brand-dedicated retail stores across the region contributed to the sales growth during the quarter. In the third quarter we opened Levi's flagship stores in Brazil, South Africa and Taiwan.

The emerging markets in Asia-Pacific continue to lead the region's revenue growth. Once again, China and India had very strong growth rates. Japan, our largest market, had modest revenue growth during this quarter, despite the country's continued sluggish retail market. This improvement is encouraging. We continue to work to revitalize that business and recently appointed a new general manager and filled several key leadership positions.

Looking ahead, our focus remains on delivering great premium and superpremium products across the region. We've recently introduced new Levi's Red Loop and Levi's Lady style collections for fall holiday. Korea just rolled out Levi's Premium Echo jeans made with 100% organic cotton, and launched the Levi's Copper Premium range for fall holiday.

To summarize, we're making progress in Asia-Pacific, we're encouraged by the trends in Japan, and most of the remaining markets are performing very well.

So, to recap, the Levi's brand is growing around the world. North America was down this quarter, but we saw growth in Europe and Asia. We're taking actions to address under-performing businesses, and we expect to grow for the year, deliver a solid net income improvement, and reduce debt.

Now we'll take your questions.

(OPERATOR INSTRUCTIONS). Carla Casella, JPMorgan.

A couple questions. We're starting to hear about retailer holiday orders -- retailers stocking their shelves more conservatively for the holiday. Would those -- are you seeing that in any of your orders for the holiday, or that would have been -- when would you have taken most of your holiday orders?

In the States here, we actually have a way of planning with our customers that's quite collaborative. And in terms of the plans that we have in place for the balance of fall and into holiday, we have agreed our plans. We essentially have been able to deliver against the order position in those plans that we expected with our customers, and have -- especially through working through our inventories over the past couple of quarters, feel that we're in a pretty good inventory position going into holiday.

That said, I think, most of our customers are taking a more conservative approach to holiday given the uncertainty that's in the environment right now. But we're on track against what our current plans are, and now we're just executing to ensure that we can realize the sell-through [as the] sell-through comes to support the inventories we have at retail.

Would you say you shipped in less, or is there some risk that if holiday is weaker, that you may have to take greater markdowns in the fourth quarter as you did this quarter?

We've shipped to our plan objectives, and we watch sell-through results on a daily basis, and make the appropriate adjustments customer by customer to our inventory positions to make sure we can deliver against our plans. We are focused on executing to our plan objectives by customer for the balance of the season. It's -- it would be unwise for me try to call how the holiday season is going to perform.

But these are plans that would have been [set] relatively recently, or would these be plans that you put in place six to nine months ago?

We plan on an annual basis, and then we, obviously, manage the business seasonally and quarterly with our customers. So we're always making rolling adjustments to our plans based on the conditions of the business that we're moving into. So we have, obviously, made adjustments all along this year with our customers to optimize opportunities as well as to address new challenges we see in the business. And we've done that going into holiday. But again, I feel like we're aligned with our customers and are clear on how the brands are currently performing, and are really, again, just focused on executing our plans for the balance of the year.

That's very helpful. And then, can you just update what percentage of your products are you currently getting from China? And are you seeing any inflation from that market in terms of the cost inflation in your products?

China is one of many countries we source from. It's not a country that we have a predominance of sourcing occurring from. So, yes; while it remains important, certainly not our most important sourcing area. No more than 20% of our sourcing comes from any one country. We are not seeing any inflation process at this stage coming through on our sourcing costs.

And you said no more than 20% comes from any one country?

That is correct.

Great. And then I noticed you took some more layoffs; it looked like distribution-type layoffs this quarter causing that curtailment. Are there more to come, or do you have the savings number that you expect to save on your ongoing SG&A from the layoffs?

There were some [voluntary] movements. But, what you're right to conclude is we [continue] to devise productivity. And in the distribution center you saw us at the beginning of the year working the European distribution center optimization; we optimized the call center base in North America (inaudible) and we will continue, obviously, to look for productivity. And when we have products to announce, we'll announce those. But that's a continuous theme (inaudible) driving productivity.

One last question. Hans, I'm not sure, but would you have with you the current restricted payment basket under the remaining bonds after the 12.25's are taken out?

I don't have that with me. The key thing was we refinanced the 12.25, plus to obviously significantly reduce our interest expenses by around 26 million. And with that refinancing, debt will go to below $2 billion this year. So the key reason for the refinancing was to, obviously, reduce our debt, which we always said was one of our key commitments this year, and reduce net interest expenses. And with the refinancing, we have created the flexibility to reduce that without paying penalties for that.

[Kevin Sykes], Goldman Sachs.

Question on cotton, and what you're seeing in terms of the cost there, sort of related to Carla's question. Just wanted to know if you're seeing that impact and how you're offsetting that going forward.

I think the first thing is we don't buy cotton. So, we're not an expert in that field. We buy finished product. And we've got our production loaded for the first half of next year, we've got our costs finalized, and at this stage we are seeing no impact of cotton on those costs.

So year-over-year basically flat, then, into (multiple speakers). How far out are those contracts?

We tend to look six months out.

Okay. And are they cost plus on certain raw materials?

We are not seeing any impact on our costs going into next year.

Also, just wanted to get an update on SAP and how that's rolling out, and if you're seeing benefits from that where it has already been in place.

Remember, we started this about two years ago in Asia-Pacific. We've now rolled it out across approximately 11 countries, and we are meeting our internal expectations. We're currently underway (inaudible) also doing the work in the US, and we plan to go live with the US next year. So we are on track with our plan, and we do believe that there will be opportunities. But it's early days yet as we start to move into the US business.

With respect to the strategic realignment that you talked about on the Signature brand, I was wondering if you could elaborate on that further, or at least talk about when you might expect to see that business -- the new plan sort of roll out, and when that would hit your numbers.

As we've been talking about since Q1, we have been in discussions with all of our customers, but in particular with our largest customers on the Signature side of the business, to more deeply understand their strategies moving forward, and then to make sure between the Signature brand's position, the consumer opportunity that we have identified and our customer strategies, that we can build collaborative plans for that business moving forward that will begin to address the performance of the business.

As I said, we're making great progress in those conversations, but it is early days. We have a lot of work to do. And the expectation would be that we will build those collaborative plans moving into 2008 and be in a position to implement them in 2008. But it would be too early to call when we would see any change in business performance. We continue to expect the business to be challenging for the balance of this year, for sure.

So, maybe the second half of 2008 (multiple speakers)

Again, we're in discussions with our customers (multiple speakers) depending on the outcome of those discussions, as soon as we have achieved complete alignment, we'll move through to execution. And when that occurs, we'll certainly update you, and we'll give you the results of the execution at that stage.

In terms of the unplanned discounts that you took in the quarter in the US, could you talk about which brands and maybe which channels that was affecting?

Again, we've been talking about this also for a couple of quarters now. The holiday season that we experienced last year was up and down, and in the end came late. So we did enter the first quarter with excess inventory. We worked through those inventories coming into the second quarter. But then we experienced the same sort of somewhat more unpredictable performance coming into Father's Day. So what we have been experiencing is the need to address in real-time the inventory positions we have on the floor with our customers as well as in our own stock, make those adjustments in real time so we can keep our inventories fresh, focus on new products, and execute against our plans.

So, across the board, we've had to make adjustments. So, across Levi's, Dockers and Signature we've had to make adjustments, but that's the way we run the business now. We don't wait until our customers call us and say they're overstocked. We just look at the business in real time and we take proactive measures to balance our inventories. Obviously, we're focused on making sure we've got the fresh stock coming into whatever selling season we're moving into.

So that's the approach we've taken. They were unplanned because, obviously, the results materialized across the quarter. They were somewhat variant to plan, the plans we had created, and we wanted to make sure that we were in a good inventory position going into holiday.

So would you say they hit sort of along the lines of your sales strength, your net sales strength?

(multiple speakers)

They were mixed across the board. But the Levi's brand, as we talked, had a good quarter. And we had some inventory issues, as well as the timing adjustment that I spoke about on the Dockers business. And the Signature business continues to be challenging. So, clearly, there were more adjustments to be made on that business. So I think they were in line with the overall performance as we have defined it.

[Jeff Covelars], [Ben Harbor Investment].

Good afternoon. Curious if you could comment about the inventory levels at your retail customers at quarter-end, I guess, mostly in North America. But if you could address Europe and Asia, too, that would be good.

I'll start with our Europe. Our inventories in Europe are in alignment with our sales expectations going forward, so we feel comfortable where that is. In Asia we've talked about for the last two quarters as we adjust our inventories, primarily in the markets of Japan and Korea. We started to see some slight improvement in Japan, so we feel comfortable with the progress there. And as I mentioned earlier on, we've still got to do some work in Korea through the balance of the year. So, we are comfortable where we are in our international businesses.

As it applies to the US, I think, as Robert said in the previous question, we'll be constantly looking real time to adjust our inventory levels, and we're comfortable they're aligned with our sales expectations for the quarter. But, it is something we measure month by month.

I think that's the key message. We're very proactive around the world in managing our retail inventory and our own inventory. That has some implications to our gross margin. (inaudible) at least still a very healthy 46% gross margin, which is healthy from both sides. It's a healthy gross margin, 46%, but it's also healthy because we're proactively on a quarterly basis [managing] that rebuild inventory, so that we always know there is fresh product on the floor. And to John's point, in Asia, we have made some additions on (inaudible) that is in the gross margin. But we believe that's a good approach, and we would [like to be there going forward].

Thank you for the additional color there. Can you comment about your holiday sales? If you could say how much of your holiday sales are, say, shipped to a preorder versus how much are shipped to a replenishment of a sell-through.

As I think I mentioned in one of the previous questions, we plan with our customers on an annual seasonal, quarterly, and then monthly basis. And we have -- on our core replenishment businesses, we have a replenishment plan that we build with our customers, but we're responding to that daily (inaudible) real-time selling. So none of that is pre-shipped. We own the inventory based on the plans, and we're constantly making adjustments to our own inventory as well as to our customers' inventories to keep our inventory coverage balanced.

Relative to our fashion and seasonal merchandise, that is all preorder. We tend to produce to order, and we make rolling adjustments to our production plans based on the changes that we're seeing in the environment. So, given the large portion of the business that is replenishment, meaning our long -- our (inaudible) jeans businesses and our casual pants businesses -- a smaller portion of our business is in preorder.

Can you say roughly what percentage of your revenues are fashion and seasonal?

We don't provide that level of specificity in terms of our mix.

I just thought I'd ask. You had 183 owned and operated stores at the end of the quarter. Can you say how many franchise stores you presently have?

Yes. We have around 1200 franchisee stores around the world. It's predominantly in the international business. (multiple speakers) a few licensing stores in the US (inaudible) factory outlets.

How much has the franchisee store growth been over the last 12 months?

If you look at what we opened in the first (inaudible) quarters of this, we opened around 100 franchisee stores ex that.

Can you comment on your owned and operated store performance? Is it -- it seems like it's a little bit more of a detriment in this third quarter, just by trying to eyeball just the selling expenses and what looks like the incremental sales from (multiple speakers)

(inaudible) it's good. If you look at the sell-through performance of our owned and operated stores, and also our franchisees around the world, we're seeing good performance from our stores, which we're very encouraged with, which confirms that our brands and our products are doing very well with the consumer and in that retail network, given their strong performance.

If you look at the profitability, you need to be careful singling one quarter, because if you open a few more stores in the quarter versus the quarter last year, that obviously has some implications. So we said we are very keenly focused on the profitabilities of our owned and operated network. We do a four-year (inaudible). We're tracking that monthly (inaudible) while we're rolling out our stores on the economic model, and the location drives our rollout schedule.

About your SAP implementation, can you comment how far you are implementing that in the US right now? How far along are you?

We are probably in the early stages of implementation in the US, focusing at this stage on our financial systems. But I think you've got to look at this on a total journey, and we started two years ago. We really won't be finished rolling this out until the end of 2010 (inaudible).

Okay. And the SAP implementation costs -- are they at a peak, would you say, now, or are they still going up with the implementation that's beginning now in the US?

That capital expenditure, that 120 million of CapEx we're spending, you see us going doing around going forward, and you see that in the rolling 12 months. From an operating expense, you will see next year that within the US, we are planning some extra expenses because we're bringing the SAP implementation (inaudible) and we're getting some of the expenses (inaudible) the US. So, see some more expenses coming into the future in the US. (inaudible), I think, it will be a relatively stable (multiple speakers)

Then we'll start focusing on Europe 2009 onwards.

Is there any way you -- or do you intend any time in the future to break out what those SAP implementation costs are?

We will not do that because we're focusing on the total bottom-line of the Company and sustaining our margins. You have seen us building margins at the net income line this year (inaudible) before tax. Our operating margin remains (inaudible) investing healthy at around 14.5% of net revenues. So we are focused as a management team to strengthen the investment in our business and get to the next level of systems (inaudible) while we deliver a healthy margin. So we're looking for the offsets within our business model. So we don't see a need to (multiple speakers)

And then after the SAP is fully implemented, then will we see the benefit as far as just lower operating costs?

We, obviously, always want to have a payout from all the investments we're making, and we're also, obviously, looking for a payout from the SAP investments through higher organization productivity. As John pointed out, we're going to be in the midst of this in 2008 in the US. So that would be a 2009, 2010 event. But we, yes, want to get the payback on all our investments.

(inaudible), (inaudible) Advisers.

I was wondering if you can quantify the Signature brand deterioration. I'm trying to judge how the Levi brand did for the Q. You said that sales grew for the Q and year-to-date, but that was largely offset, or more than offset by the weakness in the Signature brand. So if you would exclude that, is there a way for you to say how much the sales grew for the Levi brand itself, in the US, that is?

(inaudible) we're not disclosing more than what we actually disclosed in the earnings call, is that we're very pleased with the growth in the US Levi's brand. We have strong performance both year-to-date and in the quarter on the US Levi's brand. We're pleased that Dockers this year will be growing as well. The reconciling item is Signature. And that, obviously, is declining. And Signature, you know, is less than 10% of our business in the US.

On the SG&A front, is there a way that you can talk about the margins on a normalized basis excluding the FX and the post-retirement benefit curtailment? Can you say exact -- actually, there is information on the post-retirement curtailment in the 10-Q. But in terms of FX, can you tell me how much of that is in the SG&A?

If you look at our SG&A expenses, as you rightly pointed out, there are, obviously, some items which are a little bit (inaudible). One is the curtailment gain. The other one is the cost related to our voluntary separation of the distribution (inaudible) and the re-negotiation on the (inaudible).

If you (inaudible) strip that away, our core organization spending remains basically stable, except for that we're opening stores, which is the retail expenses. So we have strong cost control in the business of our organization budgets. The increase nets down to the retail store opening, and in Asia some extra expense in line with (inaudible). So you don't see further increases apart from that. That is the key story on SG&A.

Now, on advertising and promotion, we continue to invest strongly on advertising and promotion in line with last year. And if you compare that to (technical difficulty) we're spending a little bit more (inaudible). But you don't see any cost increases outside opening stores, basically.

So on a normalized margin basis, was the margin then flat year-over-year?

I would say -- well, I think if you just (inaudible) to yourself, if you look year-to-date, our margin is 14.5%, the operating margin, which is a very healthy operating margin. That is about [0.5]% below last year, and that is driven behind taking that proactive approach on clearing our retail inventory, and we have had some corrections in Japan and Korea. So I don't like to normalize, actually. Our margins are (technical difficulty) all-inclusive with all these things in (technical difficulty) healthy operating margin. And that's within 0.5% below last year while we're investing in retail and while we have made those adjustments on the retailing (technical difficulty) more proactive every quarter on clearing seasonal inventory.

If you look below the operating margin, our earnings before tax are close -- are above 9% of revenue, which is a very healthy earnings before tax margin. And that is 22% above last year. So if you look at (technical difficulty) structure of the Company, that continues to strengthen. Plus (inaudible) operating margin. But if you look at the earnings before tax margin, that performance there, a significant improvement. And you see that flowing through in our cash flow [while] we invest it in the business.

Great. And then finally, the gross profit is up by 30 basis points year-over-year. Is that pretty much the FX gain from Europe? You mentioned margin deterioration in Asia, and then, obviously, in US.

The gross margin isn't as influenced by the euro, because that goes in the net revenue and the cost of goods sold line. The key reason why our gross margins are increasing is because with the retail expansion we're selling directly to the consumer, which is helping our gross margins.

There are no further questions at this time. Gentlemen, are there any closing remarks?

We remain positive with the business (inaudible) quarter continue the momentum growth we've experienced throughout the year. We're getting good top-line growth and we're getting very good bottom-line growth. So I'm pleased where we are, and we're focused on delivering the balance of the year. Thank you, everyone.

That concludes the Levi Strauss & Co. third-quarter results conference call. You may now disconnect.