Levi Strauss & Co (LEVI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Levi Strauss & Company's first quarter 2008 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. A telephone replay will be available through April 15th, 2008 by calling 800-642-1687 in the United States or Canada. From outside these countries, you may call 706-645-9291. For either number, please input the ID code of 41092229 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, LeviStrauss.com. I would now like to turn the call over to Mr. Roger Fleischman, Vice President and Treasurer with Levi Strauss & Company. Please go ahead, sir.

Good afternoon and welcome to our conference call. I'm pleased to introduce to the Levi Strauss & Company management team. With us today are John Anderson, our President and CEO, Hans Ploos van Amstel, our Chief Financial Officer, and Robert Hanson, President of the Americas region.

Before we begin, let me briefly remind you of a few items. Our Chief Financial Officer will speak to several slides posted in the financial section on our website, www.LeviStrauss.com, as he goes through the company's results. We encourage you to review this presentation. Also available at our website is information about how we compile various measures we use to describe our business performance. Finally, today we filed our first quarter 2008 financial results 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.

Good afternoon and thank you for joining us. Before I summarize our first quarter results, I want to point out that we realigned our regional structure, placing our Central and South American markets within the newly-formed American region and the Turkey, Middle East and North Africa markets moved to our Europe region. Previously, these regions were part of our Asia-Pacific region.

Now, to our first quarter. Overall, we're pleased with our first quarter results, particularly in the light of the challenging retail environment here in the United States, which impacted our overall performance in the Americas. Net revenues are up for the quarter, but flat excluding currency gains. During the quarter, our Levi's brand performed well worldwide. Europe posted solid growth and we continued to see double-digit sales growth in our emerging markets and Asia. While Asia-Pacific has performed well overall, we have more work to do in our mature markets.

We made progress on our retail expansion, and rolled out SAP in the United States early in the second quarter. I want to mention that we briefly shut down our SAP system and stopped shipping to our U.S. customers due to some issues we encountered during the SAP stabilization period. SAP is up again. We're ramping up our shipments and we're working with our customers to meet their needs. We'll have more details on our SAP implementation next quarter.

Our first quarter results also reflect our careful management of inventory worldwide. You probably saw in the announcement today that our Board of Directors recently declared a $50 million cash dividend to our shareholders. We anticipate paying this out to shareholders this month. We are pleased to be in a position to pay this dividend. Looking ahead, we expect the operating environment to remain tough. We believe we have the right strategies and the financial discipline and strength to manage through challenging times and position the company for the future. Now, Robert Hanson will discuss our performance in the Americas.

Thanks, John. Good afternoon everybody. Our results in the Americas region continued to be affected by the difficult economic and retail environment in the United States. Net revenues in the region were down, primarily reflecting the expected declines in our U.S. Signature brands, and to a much smaller decline in our U.S. Dockers business. We're pleased with the performance of our Levi's and Dockers brands, particularly in light of the U.S. retail environment.

Before I get into the details of the performance of our brands and operations, let me point out that we shipped some orders in February that we ordinarily would have shipped in the second quarter. These were high margin replenishment products, and we shipped them in order to avoid possible customer delays as we implemented an SAP conversion. These sales amounted to about $18 million, and helped improve our operating income by about $9 million. Since they were included in the first quarter results, we expect a negative impact on net sales and operating income in the second quarter, compounded by the SAP issue John previously mentioned.

Turning to our brands, the U.S. Levi's brand is well-positioned in the men's category, particularly with our Red Tab jeans and 501 jeans lines. We did see a decline in the women's wholesale category in the first quarter of '08. Our U.S. Dockers brand was more impacted by the U.S. retail environment. Sales declined slightly in the first quarter. We sold less discounted Dockers volume in Q1, compared to the same period last year. In the meantime, we are pleased with the continued growth of our Dockers women's business.

As you may be aware, John Goodman, the President of the U.S. Dockers business has been named CEO of Mervyn's. While we'll miss John's leadership and presence, we recognize that this is a great opportunity and are happy for him. We look forward to continuing our relationship with John in his new role. Until a successor is named, our very deep and seasoned Dockers leadership team will report to me.

Our U.S. Signature brand continues its decline. As we expected, this was driven mostly by large customers shifting apparel strategies. As we discussed on previous calls, we've been working with our customers to realign the U.S. Signature brand and product. We have made good progress and will implement changes for the fall season. And I do want to remind you that this business is a small part of our total sales.

We continued to expand our retail presence during the quarter. We saw strong growth as we added new stores. We also saw increases in same store sales. Our retail network remains a small contributor to our overall results, but we continue to see these stores as an important part of our growth strategy. Not only do they generate additional revenues, they also give us more ways to reach and stay connected with our consumers. We will continue this retail expansion in 2008. For example, we're opening a new Levi's store in Manhattan's Times Square in May.

Operating income in the Americas region was down slightly for the quarter. This reflected lower revenues in the region, higher selling costs related to retail expansion, and increased advertising investment to support our brands. Looking ahead, we expect the slowing U.S. economy will put pressure on our business for the remainder of 2008. As we navigate this environment, we will continue to focus on collaborating closely with our customers to optimize our assortments at retail, tightly manage our inventory and work across our retail network to remain focused on ways to generate revenue growth and margin improvement. Finally, we will work to position ourselves to respond aggressively to any changes that we encounter in the marketplace. Now back to John to cover Europe and Asia-Pacific.

The European business turned in solid first quarter results, even with signs of weaker market conditions throughout the region. Net revenue gains primarily reflect the benefit of currency, complemented by modest growth in constant currency. There were several key drivers behind the growth in Europe. The Levi's brand performed particularly well during the quarter with strong performance on our Red Tab premium men's offering.

Our retail network continues to be a contributor, including franchise stores as well as company operated retail stores. We benefit both from growth in same store sales in this retail network and the addition of new stores. The solid performance at our retail network was partially offset by weaker performance at wholesale, where our customers have become more reluctant to build inventories in the face of uncertain economic climate. Operating income in the region increased in line with our revenue growth. On the whole, we are pleased with our performance in Europe. As we move through 2008, we remain focused on the actions that have helped fuel our growth so far, including introduction of new products and the further expansion of our retail network.

Now we'll discuss the results of our Asia-Pacific division, where we also grew. We continue to post net revenue growth across most of the Asia-Pacific region. Revenues increased over last year's first quarter, with modest growth in constant currency. The Levi's brand, which represents most of the Asia-Pacific revenues, continues to grow. Our performance in the region continues to be led by emerging markets and these markets we're seeing healthy market conditions and steady consumer spending trends. Additional brand dedicated stores, many in India and China and an improved product mix for the Levi's brand also contribute to our growth in our emerging markets.

Japan, our largest market in Asia-Pacific, continues to experience weak retail conditions. Our new management team in Japan is making steady progress and we saw operational improvements in the quarter but we expect this to remain a challenging market going forward. Operating income in Asia-Pacific was up reflecting higher revenue and gross margin. We have made progress throughout Asia-Pacific. We are especially encouraged by continued growth in our emerging markets, but we remain focused on improving performance in our mature markets. In particular, we continue to carefully manage our expenses, and upgrade our product lines.

Now, Hans will go through the first quarter numbers.

Thanks John and good afternoon, everyone. In the first quarter, our net revenues were up 4% on a reported basis. Excluding the impact of currencies, net revenues were flat quarter-over-quarter. The Levis brand around the world remains strong. We achieved these results in the face of a slowing retail environment, especially in the United States. Revenues included the effect of the early shipment in the United States that Robert mentioned. These shipments amounted to about 2% of reported net revenue. Net income was up 12%. Our operating margin was a solid 17%.

Once again, we delivered strong cash flow while investing in our brands. Our cash flow enabled us to call the remaining 12.25% bonds in the last week of March. Looking at the retain details, consolidated net revenues are stable in constant currency, reflecting continued growth momentum in Asia and Europe. Operating income for the quarter was down 1%, due to a $21 million lower fulfillment gain versus Q1 of last year. This more than offset the increase in our regional operating income, which resulted from our higher revenues in Europe and Asia. Gross margin was 50%, reflecting a higher margin mix, improved sourcing cost, retail expansion and lower sales allowances. SG&A for the quarter increased to $356 million, from $296 million in the same period of 2007, reflecting the lower benefit line fulfillment gain and our retail expansion. Net income was up 12% for the quarter, to $97 million. The main drivers were lower interest expense due to our debt refinancing last year and a lower tax rate.

Now I'll review some highlights from the regions. In our American region, revenues were down 2%, mostly reflecting the expected weak Signature brand performance. Operating income in the region was down slightly, in line with our lower revenues. Turning to Europe, the region continued to deliver solid revenue and margin performance. Net revenues in the first quarter were up 15% on a reported basis, and 3% excluding the positive currency impact. Europe's operating income improved 15% for the quarter. In Asia-Pacific, net revenues were up 8% on a reported basis and 3% on a constant currency basis. Operating income in Asia-Pacific was up 12%, reflecting the region's net sales increase during the quarter. Corporate costs were up $6 million, excluding the the fulfillment gain and restructuring. Most of this reflected higher staff cost related to the global IT and other company initiatives.

Turning to cash flow, in the first quarter, we delivered solid operating cash flow of $107 million, due to our continued focus on working capital management, having effectively managed our inventories during the quarter. Strong cash flow from operations allowed us to further pay down an additional $18 million of debt during the quarter. We have reduced interest expense by 30%, driven by lower debt levels and lower average interest rates due to the efforts we have made to pay down debt over the past two years.

To summarize, the first quarter results were solid, in light of the challenging retail environment. Our cash flow allowed us to continue paying down debt and investing in our business. Actions we have taken to restructure and reduce our debt over the past few years gives the company a strong balance sheet, which, combined with our global footprint, position us to weather the balance of the year, given the uncertainties ahead. Our Board's confidence in our cash flows is reflected in its decision to declare a $50 million cash dividend to our shareholders. We expect the remainder of 2008 to be challenging, given the increasing economic uncertainty. Against this back drop, we will remain focused on continuing to deliver strong operating margins and cash flow and to continue to invest in the business and the strength of our brands.

So, to sum up, overall we're pleased with our results. The first quarter reflected solid performance of the Levi's brand around the world and continued growth in Europe and in our emerging markets and Asia. We experienced a challenging retail environment in the U.S., and we expect a difficult environment in many markets around the world, going forward. This highlights the strategic advantage of our broad global footprint. We remain focused on our cost strategies to further strengthen our business and our brands this year, while continuing to focus on cash flow and paying down debt. Now we'll take your questions.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Your first question comes from the line of Bill Reuter with Banc of America Securities.

Hi, Bill.

I think you guys commented that you guys had positive same store sales in your retail stores, is there any more color you could give us there in terms of quantifying this at all?

We actually don't call out the -- we don't actually call out the same store sales, we don't actually report them and we don't provide any guidance in terms of how our stores performed, but we did see positive comps and that's essentially all that we're reporting at this point in time.

Okay. In terms of the RP basket on your 9.75 notes and your 8.875 notes, after the dividend do you have a sense of where this (inaudible) basket is?

This is Roger. We've got a fairly healthy cushion.

Okay. I was wondering if you guys could give me any color in what might be happening in terms of you -- you guys commented that Japan has continued to be challenging there. I'm wondering if this could be some sort of a trend or any more color around that market would be useful.

Yes, Bill. This is John Anderson. We've mentioned in our last couple of calls that we've been paying a lot of attention to the Japan market. We put a new management team in there last year. We are really focusing on getting the bottom line back under control and we're making good progress in that area. We think revenue will be challenging through the balance of this year, because I'm sure you're aware that Japan's proving to be quite challenging for many businesses at this stage. New management team in place. We're feeling good about the progress we're making up from the bottom line point of view, and that will be our focus for the balance of the year.

Thanks for taking the questions.

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

Hi, Carla.

Hi. I have a couple questions on the --

We can't hear you.

Oh. Can you hear me now?

Your line is open.

Hello? Can you hear me now? Hello.

Carla?

Hi. Can you hear me now?

We'll take the next question.

Can you hear me now.

Your next question comes from the line of Mary Gilbert with Imperial Capital.

How are you?

Good, how are you doing?

Doing good.

Good! I wonder if you could give us an idea of the order flow trends that you're seeing in the current quarter and then also kind of going back to Japan, you said that it's challenging there for everybody. Is it due to fashion trends and are you trying to sort of affect the product to be able to be more responsive to those trends or can you give us a little bit more color on some of the initiatives there?

Yes, it's John Anderson here. We did miss a couple of trends last year. We stayed too long on a 501 trend. We would say for us now we believe we're back on trend. Just as you know, the Japan overall economy is being quite challenging. So the short term focus from us is let's consolidate the bottom line. So a new management team in place. We think our product is more relevant. We don't think we're missing out on any fashion trends. We're just dealing with a tough economy at this stage.

And that's why you saw the operating income improvement there.

That's right.

Due to some of the impact that you're making on the cost side.

Not just the cost side. Better products so we have less dilution going forward. We're anticipating less dilution and we've seen that at this stage.

Okay. That's very helpful. And then also, what about order flows that you're seeing, domestically and also in Europe in terms of the trends there? And how would you characterize the economic conditions that you're experiencing in Europe?

We obviously see economic point of view that the U.S. has an impact. We also to a certain extent see that on our international basis. We are not giving any guidance on quarterly flow of our revenue. What we can say is that we continue to drive against the strength of our brands around the world and invest in those while we deliver strong cash flow. But we're not able to give specific guidance. There's only one thing, we had a small issue with SAP which will impact Q2 results. But again, we're not disclosing more than that. But it's important that I reiterate we said that we started SAP in the second quarter and we lost a few days of shipments, which will probably have an impact on the second quarter.

Okay. And that's over and above the impact of some of the orders that got pushed into the first quarter; right?

That is correct.

Okay. That's helpful. One last question. This is just an item on the statement of cash flows. But this employee benefit plans amortization, did that flow through SG&A?

Yes.

Okay. The $9 million. Okay. So of the $9 million, plus the $4 million from the curtailment gain; right?

Yeah, the curtailment gain is separately -- which is a non-cash item, spelled out in the SG&A section, but we basically, versus last year, last year we had a $25 million curtailment gain in the first quarter. We don't have that benefit this year.

Right.

And that flows through the SG&A line line.

Thank you so much.

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

Hi, there.

Hi. Just a few questions. Can you say how many retail stores you added in the first quarter?

Yes, Jeff, we added approximately 10 stores in the first quarter.

All right. And it was mentioned that the stores were comping positive in both the Americas and also in Europe and you've had retail stores now for over three years, I guess, and can you say anything at all about the general trend of how stores mature?

Well, we've had stores for longer than that. I think you have to be careful, you don't mix up our U.S. business with our international business. Franchise stores play a big role in our international business. Most of the stores we opened up in the first quarter were in our international businesses. We tend to look at stores, a good three to four years before we ramp them up to full productivity.

Okay. So as they're young, they should be comping positive, you're saying?

Well, they'll be comping positive, that's right. But they won't be operating full effect for a couple of years.

Can you make any general comment about when they're profitable? When they're break-even?

We're not disclosing details on our retail profitability, but just to give you some color comment, we're very pleased with where we are on our retail expansion around the world. It's really helping us to build the brand equity and revenue. On the profit model, we have a very good model around that. We disclosed that before that we have a four year payback on the stores. We have a competitive margin structure, economic model. We know where we are in that learning curve. Takes a few years to start them up. We have comp stores where we know our profitability. We review that on a monthly basis. As you've seen our overall results, we continue to deliver at a very high operating margin while we continue to build our retail network.

Okay. Can you say how many retail stores you plan to open this year?

We're not disclosing how many stores we're opening and the reason why that is, is we don't have a specific plan as we're not married to opening stores, we're looking for the right locations and the profit model to work and that decides how many stores we will open. If you look at the capital expense section, we have allocated sufficient capital for the year to open a fair amount of stores. Depending on the profitability of the stores and the location.

Okay. Fine. And then in the Americas, if I back out the $18 million of revenues that were shipped in the first quarter from the second quarter, if I back that $18 million out of the $580 million of revenues in the first quarter and back out the foreign currency too, then America's revenues are down about 6% or so. Is that how much the market was down, do you think, or was there anything else going on with your revenues in the Americas that you can identify and isolate?

Sure. I mean, we did, as we've been saying, we expected to see and it materialized pretty tough economic environment in the states. If you look at both the jeans and the casual pants market, both were specifically down versus the same period in the prior years. So we did see a relatively tough marketplace. That said, we also had suggested in the last call that we would see our customers come out of the holiday season with a relatively conservative view on open to buy. We had suggested that last time that they were going to be planning their open to buy flat to down, trying to increase sales off of increases in productivity and we saw that materializing. There was nothing broader in the U.S. performance beyond the continued challenges that we talked about in the past few calls on the Signature business, that continued. But we did see the Levi's brand perform to expectation and we were pleased with its performance, as I said. Dockers continues to remain the leader in its category and we were pleased with its performance, although the casual sportswear category was more -- has been more impacted by the economic slowdown more quickly than the jeans business was.

Okay. Thank you. And then Robert, in the year-end conference call in mid-February it was mentioned how you expected you were going to have some product inflation but you had lower sourcing costs, I guess that was mostly in Europe, but your product costs were positive to gross margin in the first quarter. Is that just a timing issue, when the product flows through inventory and your product costs will be -- will not be a benefit to gross margins for the rest of the year?

Yes, I think we talked about the fact that we were seeing inflationary pricing pressure but that in terms of our overall cost of goods we had had planned for the business pretty effectively outward throughout all of 2008, and didn't actually expect to see any significant impact to cost of goods until we started to source Spring, Summer 2009. At the same time, we have decided to take some pricing action which we've been talking about. We have been elevating our product offer across the board in all of our brands and we have been working collaboratively with our customers to look at whether there were opportunities to get pricing leverage so we have been seeing an increase, particularly on the Levi's brand in average unit retails which has had a positive impact on margin, both internally and externally.

Okay. All right. And then also about the SAP issue, Hans, I think you said you lost a few days of shipments in the second quarter. And is that -- are you already behind? Is that weeks ago? Can you comment about the timing of when those lost days of shipments were?

Yeah, it's John here. It was a couple weeks ago. It's behind us now. And we're back shipping again.

All right. So you didn't lose any shelf space then with this SAP issue?

It's unlikely because it was such a short period. We still haven't worked through the full impact of that.

Okay. All right. And then now that SAP's been in Asia for a while now. Can you say how it's helped the Asian operations?

I think one of the quick ones we got up, we're able to close our books much quicker at the end of each month and we have much more transparency in real time in what's happening with our businesses. The SAP has met all our expectations across the Asian region.

Thanks for your help.

Your next question comes from the line of Reade Kem with Merrill Lynch.

Thanks for taking my question.

Sure.

John, just to follow up on that comment you made about SAP, just so we're clear, the actual kinks you had on taking the program out, are those gone now? Is it up and running and smooth?

It is up and running. With SAP there's always a stabilization period which traditionally takes 60 to 90 days and we're going through that. But the main thing is we're shipping. We're taking orders. We're invoicing. We're shipping. That really is the fundamental focus on us. But it does take a good couple months to settle it down. So we're on track with what progress we expected for where we are.

Okay. Great. Maybe this was partly masked because of the sales you pulled forward from second quarter. I was just curious, given how weak retail was in the U.S., it looked like if there was an impact in terms of markdowns it was pretty minimal for you given how strong gross margin was. If you could just maybe go into that a little more?

That is rough. We pulled forward some good first quality product which certainly helped our gross margin and our markdowns were in line with expectations. So yes, we ended up with a good margin in the first quarter.

We have that both in our -- we have tight working capital on inventory in our own warehouse and we're very close to the retail inventory to make sure we know what's out there, so that we optimize our gross margin structure.

And Reade, it's Robert. We said during the last call and it continues to be true that in this uncertain environment, particularly in the United States, we're managing our working capital very tightly and we came out of the holiday season with our customers in a pretty good inventory position. We knew exactly where we stood by brand and by consumer segment, and as Hans mentioned, we were in a really nice position to remain so in terms of where our inventories are internally, so that's really our focus is to manage the business and react to the market in these uncertain times and we'll keep a tight control over working capital.

Okay. Robert, while I have you, I was curious in your own stores, particularly in the U.S. where you're trying to increase your average retail price, what is the average cost per pant in your U.S. stores and how is that kind of helping the mix overall?

We haven't actually provided kind of pricing guidance in terms of the stores. What I can tell you, though, is that we have positioned our own stores as premium jeanswear boutiques on the Levi's side and as a premium expression as Dockers San Francisco positioning on the Dockers side. We are clearly running a more premium assortment of products so if you look at what we run through our own stores, we carry products like the Levi's capital E range, which runs in the $120 to $250 range. We have a very premium range of 501 finishes on the Levi's side that range between 65 and $85. We are carrying the broad assortment of our Levi's eco range, which is a premium priced product as well. Our focus on those stores is to a different target consumer. We're targeting a sort of progressive, urban minded specialty store shopper who doesn't typically shop in our wholesale channels of distribution. It is an exclusive, mostly exclusive product offer and a more premium assortment of products so you would expect the average unit retails to be hire. That strategy is also true on the Dockers brand as we expand the store network on Dockers as well.

Got you. And then just one last one. I was curious, following up on the dividend. Is the size tied to anything? I mean, the amount you chose to dividend out and why now? Is it a request by some of your shareholders or -- and should we look at this as maybe a quarterly event going forward? Any help you could provide would be great.

Well, our Board of Directors felt it was appropriate to reward our shareholders and the Board also felt that the company was well-positioned to do this now, based on our continued progress in paying down debt to through our cash flow generation. We have no plans for any additional dividends at this time.

Thank you.

Your next question comes from the line of Clark Orsky from KDP Investment.

One more quick one on the gross margin improvement, what was the biggest contributor?

It's a combination of factors, Hans talking here. The first is we continue to improve our product mix. The second part is our retail expansion and then we benefit from lower sourcing cost as well. It's a combination of improving the mix of products, a little bit more retail in the mix and our sourcing cost. We don't break it out in that detail. But it's a combination of good factors.

Okay. Thanks.

Your next question comes from the line of Andrew Ebersole from Sentinel Asset Management.

Thanks. Looks like you guys reduced your working capital requirements.

Are you there?

I'm here. Can you hear me.

I think this is the second instance where we haven't been able to hear the question.

Hello.

I'll move on to the next question. Your next question comes from the line of [Kevin Mall from Nationwide Insurance].

Hi. Good afternoon.

Hi, Kevin.

Hi. I wondered if you could comment on what markets you are going to go to? Are you increasing competition, specifically for example, CK were talking about expanding in emerging markets. So I'm just curious in terms of what market you feel there will be more competition coming?

Well, I think we probably expected in most markets. We are in 110 countries around the world and we are number one in both men's and women's in every one of those markets so we don't find there's any one global competitor. There tends to be competition that comes at us on a market by market basis. That's a part of normal business. We aren't anticipating any particular person being more aggressive than what we've seen in the past, frankly.

Okay. Thank you.

Your next question comes from the line of Jeff Matthews with Ram Partners.

Hi, can you hear me?

Yeah, we can.

Good.

Good, thanks. Just wanted to know in terms of sourcing and inflation and sourced goods, what you're seeing around the world and how you're working to reduce those cost increases?

Well, as we mentioned to you last time and we mentioned earlier on here, we really got our costs lined up for 2008. So we've got through sourcing mix and negotiations through the balance of the year, we feel pretty comfortable with where we are with our sourcing costs. We'll wait and see what happens for 2009. We aren't anticipating any issues for us for 2008.

Would you think you would see a greater rate of increase for next year or not?

There's so many variables at the moment. What's going to happen with the U.S. dollar. What's happening with the price of cotton. I don't want to predict anything out that far because we're really just focused on this year at this stage.

Okay. Thank you.

Your next question comes from the line of [AJ Gito] from GoldenTree.

Hi. Just one quick question. Can you comment on how the Damien Hirst line is going?

Sure, this is Robert. Hi, AJ. We have just recently gotten the product into stores but similar to most of our premium products, they are limited distribution, and they're limited production, and most of the products that we had available for sale online sold out in a very short period of time and the sell-throughs have been very strong. It's targeted to a very specific opinion leading, style conscious and more of a collector consumer base because of Damien Hirst's reputation among people in the entertainment and art and culture world. It's been a nice extension of the Levi's Factory X collection and we look forward to continuing to do these kinds of collaborations in the future.

What kind of stores are they in? Barney's and things like that?

Yeah, and our premium multi brand specialty distribution.

Thank you.

Thanks.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Carla Casella from JPMorgan.

Hi, Carla.

Are you there? We can't hear her, operator.

Ms. Casella, your line is open. Your next question comes from the line of Andrew Ebersole.

Andrew, are you there?

I'm here. Can you hear me.

Yes, we can.

Good. Second time works. I guess it looks like you guys reduced your working capital requirement by about $90 million or so this quarter versus a year ago. I just wanted to know to what extent this level of improvement is sustainable as you guys progress through the year.

Yes. We obviously -- there's always a seasonality into our inventory, quarter-to-quarter and the way we're building it up. We do continue to make good progress on reducing inventory. If you take a step back, we made a significant reduction from 2005 to 2006 and we took around 14 days out of working capital to improve inventory. In 2007, we made good progress in the second half, not as much in the first half, and we're holding onto those improvements. So you will continue to see us focused on managing our working capital in view of our cash flow.

Are you guys willing to provide a target cash flow improvement number over the course of the year, just a range?

No, unfortunately we're not giving guidance but we are committed and you have seen us doing that in the past, to deliver solid cash flow and reduce the debt and obviously that remains our key objectives, while we continue to strongly invest behind our brands and our business and the system outright.

Is it safe to say -- I know you guys instituted that dividend, but any free cash flow beyond that? You're still going to be targeting a debt reduction?

Yeah.

All right. Thank you.

Your next question from Carla Casella from JPMorgan Morgan.

Hello, is it working this time?

There you go.

Oh, my gosh.

Long-anticipated question.

Everybody could hear me. I was getting a ton of messages from people saying I can hear you, I can hear you.

We were too.

Okay. So my question is on your debt, couple questions, on the debt. How much of your floating rate debt has been fixed and at what rate?

We have not at this point fixed any of our floating rate debt.

Good for you. And then the amortization of employee benefit, I know that's in SG&A but is that in admin or other?

I think it's in admin. But can I come back to you on that?

That's fine.

It's in admin.

Would it be in corporate in the segment breakout or would it be in the U.S.?

That would be in corporate. That's why you see our regional operating performance in the first quarter was up 7%, very strong regional performance at that quarter level. We had partly that loss of that gain of last year that impact the company numbers.

Okay. Looked like on the cash flow there was much more paid out last year than this year for the accrued salaries, wages, benefits. Is that just a timing issue? Should we expect a bigger second quarter payment?

We got paid less this year than we got last year, and that's due to last year we had the MIP program paying out. We have lower incentive comp payout this year.

There's a long tax discussion in your 10-Q. I'm wondering if you can clarify any timing that you expect resolution on all of your open tax years?

Yes. Just some color comment is we implemented FIN 48 into the quarter and that had a small impact on the accounting that goes through the equity line of $5 million. And we had a good implementation program on that. We also closed the tax years up to 2002. There was a settlement with the IRS on that so we continue to make good progress and we have a balanced in the open years and we don't expect any open issues. What you saw us doing at the end of the last year is writing back some of the written off assets. So we can make good utilization of our tax assets and in the first quarter you could have seen that our cash tax rate was 10%, so we continue to have a good cash tax rate like we had last year.

And as you continue on through the rest of the year?

I cannot give any guidance on the cash tax rate because the cash taxes are disclosed obviously in the 10-Q, if I would disclose the cash tax rate you would know where our earnings would land, I guess.

Okay. Fair enough. I think that's all I had. Thank you.

Thank you.

Thank you.

Your next question comes from the line of Andrew Berg from Post Advisory Group.

Regarding SAP, do you have any other regions where that's going to be implemented or are we done with that at this point?

Not at all. Once we finish with the U.S. we then will move on to do Europe. We're about two-thirds of the way through the journey.

What do you do as you implement it in Europe, to make sure you don't have some of the same timing issues you had in the U.S., or should we expect to see a similar occurrence when that goes live?

We're getting better at this as we implement it more. We'll learn from the lessons in the U.S. and we'll apply that as we move on to Europe.

The timing for the European?

Yet to be determined. We're just going to wait until we settle down the U.S. before we move on to Europe.

Definitely not in 2008.

Pardon? Okay. And then just two maintenance questions. Going back to an earlier question, can you quantify how much is available under your restricted payment baskets under your notes?

No, we're not going to quantify that. You can do a rough estimate, calculating 50% of net income since 2005, I believe.

Okay. And revolver availability at the end of the quarter was what?

Aside from the letters of credit, quantified in the Q which we posted today, that was the only utilization.

Okay. I haven't seen the Q yet. Thanks.

Your next question comes from the line of AJ Gito from GoldenTree.

Just a quick follow-up. Regarding your cash balance, I assume that you don't but is there anything invested in auction rate preferred or anything like that?

No, there is not.

Okay. Thanks.

At this time, there are no further questions. I would like to turn the floor back over of the presenters for closing remarks.

Well, thank you. As I mentioned earlier on, we've had a solid start the year. We remain committed to focusing on cash flow and paying down debt. And we look forward to talking to you again in three months' time.

Thanks very much, everyone.

Thank you. This does conclude today's teleconference. You may disconnect your lines.