Good day, ladies and gentlemen, and welcome to Levi Strauss & Company First Quarter Earnings Conference Call for the period ending February 24, 2019. All parties will be in a listen-only mode into 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 two hours after the completion of this call through April 15, 2019. Please use conference ID 8997045.

This conference call also is being broadcast over the Internet and a replay of the webcast will be accessible for one quarter on the company's Web site, levistrauss.com. I will like to turn the call over to Aida Orphan, Senior Director, Investor Relations and Risk Management at Levi Strauss & Company..

Good afternoon, and welcome to our first quarter 2019 earnings conference call. I'm pleased to introduce members of the Levi Strauss & Company management team, Chip Bergh, President and CEO; and Harmit Singh, Executive Vice President and CFO. Before we begin, let me briefly remind you of a few items.

First, our discussion today may include forward-looking statements, including statements regarding our strategies and expected financial and operating performance.

Although these statements reflect the best judgments of our senior management, they involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the statements.

Additional information about the factors that could cause actual results to differ is included in today's earnings press release and in our filings with the SEC, including our quarterly report on Form 10-Q, which was filed today.

Undue reliance should not be placed on these forward-looking statements which are based on information available as of today's date. We disclaim any responsibility to update these forward-looking statements other than as required by law. Our discussion today will also include certain non-GAAP financial measures.

Descriptions of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are available on the Investors section of our Web site as well as in today's earnings press release.

Finally, this call is in audio webcast in its entirety on the Investors section of our Web site, where a replay of this call will be available later today. Now I'll turn over the call to Chip..

Good afternoon everyone, and thank you for joining us today for our first quarter 2019 earnings conference call and our first earnings call after last month's IPO.

I want to pause for a moment to thank everyone who helped us get to this point, particularly our employees around the world, our Board of Directors, family shareholders, and other stakeholders for their support throughout the process, and importantly, I want to welcome our new shareholders to their first call with us.

We're entering this new chapter with a business that is stronger and more diversified than it's been in decades, as a result of our iconic brands, our people, great execution, and commitment to our longstanding approach to profits through principles.

The strong results we delivered this quarter demonstrate that the strategic choices that we put in place seven years ago to drive the profitable core expand for more, become a world-class omni-channel retailer, and achieve operational excellence continue to pay off with broad-based growth balanced across a more diversified portfolio.

We had a great first quarter of 2019 with revenues of $1.4 billion, which were up 7% on a reported basis, and 11% in constant currency. This was our sixth consecutive quarter of double-digit constant currency revenue growth beyond even our expectations. Adjusted EBIT growth was also very strong at 14% on a reported basis, and 21% in constant currency.

Momentum continued across nearly every part of the business. The way we diversified our portfolio across geographies, customers, brands, genders, and products has become a major growth driver and differentiator for us. Here are a few highlights all in constant currency and versus prior year unless stated otherwise.

Each of our three geographic regions grew revenues and profits double-digits, and within each region, every channel and nearly every market grew. All four of our brands grew. Our men's business grew 8%. Our women's business grew 18%. Bottoms were up 8%. Tops were up 28%.

And global wholesale was up 8% while our global direct-to-consumer channel was up 14%. The Levi's brand had another strong quarter with 10% revenue growth, particularly impressive given we were comping 17% growth in the first quarter of 2018. Growth this quarter was primarily driven by women's and tops.

We're also excited about new products including the re-launch of Levi's engineered jeans, a cult item that we've brought back from the 1990s in both the denim and non-denim, and it's flying off the shelves especially internationally. Additionally, collaboration like Peanuts continued to drive positive buzz and energy.

Strategic collaborations expand the universe of opportunities that keep us at the center of culture and relevance.

Turning to our first quarter results in the context of our three where-to-play strategic choices; first, on a profitable core business which as a reminder is comprised of men's bottoms, our top wholesale customers, and our top five developed markets. Our total men's bottoms business, our biggest business was up 6% for the quarter.

In the Levi's brand, we saw a strong growth in more tapered silhouettes and styles like the 512 swim taper jean and the 502 taper that features fabrics with higher stretch content. Wholesale, as I mentioned, was up 8%. Despite continued door closures, wholesale grew in every region and our top 10 wholesale customers collectively grew 3%.

Our top five mature markets collectively grew 10%, inclusive of our largest market in the U.S., which was up 9%. Second, our strategy to diversify the business by expanding for more into tops, women's under-penetrated markets and with our value brands continue to deliver strong results.

Our total women's business grew 18%, which was the 15th consecutive quarter of growth in women's with the last nine quarters being double-digit. Skinny jeans and high rise styles like our 711 skinny high-rise and Mile High continue to popularity among women.

We've launched our highest rise yet, the rib cage, and are really excited about the strong consumer response thus far. Our total tops business, which generates more than $1 billion annually, grew 28% in the first quarter, driven by strong performance in sweatshirts and trucker jackets.

Expanding our tops business is a key to becoming a lifestyle brand, and the momentum we've been driving over the last few years demonstrates that we are making good progress. In our Signature and Denizen brands, which are targeted to the value conscious consumer collectively delivered 22% growth in Q1.

We still have a small share of the value market globally, and we continue to grow these brands without cannibalizing other parts of our business. Our third strategy is to become a leading world-class omni-channel retailer.

Direct-to-consumer, which for us, includes the brick-and-mortar stores and e-commerce sites that we operate, grew 14% for the quarter in total, and has now grown double-digits for 12 consecutive quarters.

Revenue growth from our brick-and-mortar stores was 11%, reflecting positive comp performance of existing stores as well as ongoing expansion of our store network internationally, while e-commerce grew 24%. We're expanding our omni-channel execution having now rolled out RFID throughout the U.S. and U.K.

and we'll begin to roll out shop online, pick-up-in-store later in 2019. We continue to make progress in key focus areas, including China and Dockers. China continues to be a huge long-term opportunity for us.

In fact, it was the first market I visited after the IPO, and having just returned, I'm very encouraged that we're headed in the right direction. Part of the challenge has been setting the team, and we're making good progress building the broader team after hiring Managing Director, Amy Yang, late last year.

In the first quarter of 2019, revenues grew 5% in China helped by growth in our company-operated e-commerce in mainline stores, but there's still more work to do on the franchise business and this will take some time.

We feel we barely scratched the surface in China, and we'll continue to focus on strengthening and growing our brands and business in this important market.

The Dockers brand started the year with 13% growth recognizing that's off a low base, driven by setting floors in the Americas for spring, and strong growth in Europe in response to our new products and marketing.

We know that a sustainable turnaround will take time, but as one of the original purveyors for casual Fridays, it's our objective to revise the brand for the modern workplace. So overall, it was another great quarter, one that sets the tone for the remainder of the year and challenges us to keep the momentum going.

The underlying health of our business remains strong, but as a reminder, we're still facing some headwinds, including anticipated door closures at traditional wholesale customers, unrest in Europe, as well as Brexit, continued uncertainty around China tariffs, and declines in U.S.

retail traffic as we exited the quarter, but we run this company for the long-term and we're focused on controlling what's within our control. Now, over to Harmit to review our first quarter performance in greater detail.

Harmit?.

Thank you, Chip, and welcome to everyone joining our call. My comments today will reference first quarter comparisons on a year-over-year basis in U.S. dollars unless I indicate otherwise. First quarter revenue of $1.4 billion grew 7% on reported basis and 11% in constant currency.

Our growth was broad-based, and the sources of growth by region, channel, and category contributing to the 11 points of constant currency growth were as follows. By region, five points of growth came from the Americas, three points from Europe, and three from Asia.

By channel, five points came from wholesale growth, four points from our company-operated stores, and two from e-commerce. By category, three points came from growth in men's bottoms with the remaining eight points from women's and tops.

First quarter gross profit of $783 million, increased $45 million inclusive of $26 million of unfavorable currency translation. Gross profit dollars for the quarter grew 6%, slightly lagging revenue growth as first quarter gross margin of 54.6% declined 30 basis points.

The margin decline was driven by 90 basis points of unfavorable transactional currency impact, which was partially offset by the margin benefit from our direct-to-consumer growth.

First quarter SG&A expense of $582 million was up 3% over prior year, primarily reflecting the growth and expansion of the company's direct-to-consumer business partially offset by $16 million of favorable currency impact, but despite the dollar increase SG&A as a percentage of revenues declined 130 basis points compared to prior year, as leverage on base cost outpaced the higher direct-to-consumer investments.

Additionally, advertising spend was low in the first quarter, because 2018 advertising campaign came earlier. This will reverse in the second quarter as we ramp up for our 2019 campaign. Net-net, we expect advertising as a percentage of revenue for the first half of 2019 to be in line with prior year.

As a result of the strong revenue growth and leverage on SG&A, first quarter adjusted EBIT grew 14% on a reported basis and 21% on a constant currency basis, and first quarter constant currency adjusted EBIT margin of 14.4% improved 130 basis points, about half of which reflected the advertising timing.

Adjusted net income of $151 million was up 81% from last year's $83 million, reflecting the $26 million adjusted EBIT increase as well as the fact the last year we recorded $37 million tax charge on undistributed forging earnings in connection with the tax law change.

Diluted EPS for the first quarter of 2019 was $0.37 as compared with a $0.05 loss per share for the first quarter of 2018. Now I will share more detail on the first quarter results of our three regions, each of whose revenues and profits grew double-digits on a constant currency basis.

In the Americas, net revenues grew 9% on a reported basis and 10% on a constant currency basis. Wholesale growth of 9% in constant currency was driven by the strong performance of Levi's women's products across major accounts and premium customers as well as higher signature revenues.

Direct-to-consumer growth of 13% in constant currency was driven by the expansion and the performance of our company-operated retail network and higher e-commerce revenue. Our largest market, the U.S.

was up 9% on a constant currency basis, where at wholesale up high single digits driven by Levi's women's and Signature and direct-to-consumer of low-double digits on a combination of new doors, higher traffic for the quarter, and better execution.

Mexico and Canada continue to perform with constant currency revenue in each of double-digit this quarter, driven by growth in all channels.

The full region's operating income grew 11% on a reported basis and 12% on a constant currency basis, as higher net revenues and lower advertising costs were partially offset by higher direct-to-consumer caused and increased distribution cost to support higher volume.

Europe posted net revenue growth of 3% on reported basis and 10% in constant currency; still strong, but clearly a lower growth rate than the 30% constant currency growth we saw a year-ago. Revenue growth this quarter was again broad based across channels, markets, and product categories.

Wholesale grew 4% in constant currency and direct-to-consumer was up 18%. The strong direct-to-consumer growth was driven by higher traffic and conversion rates in existing stores, in addition to new company operated stores and e-commerce growth in the mid-double digits.

The region's operating income grew 6% on reported bases and 13% in constant currency reflecting the net revenue growth and a higher gross margin from a shift towards the direct-to-consumer channel partially offset by higher direct-to-consumer and distribution costs. In Asia, net revenues were up 8% on a reported basis and 14% in constant currency.

Our franchise, traditional wholesale and e-commerce channels each grew double-digits in constant currency while our company operated brick-and-mortar stores were up high single-digits fueled by the performance and expansion of us store base. Most markets in the region grew double-digits with the biggest dollar contribution coming from India.

In China, revenues grew 5% in constant currency from company operated mainline franchise and e-commerce channels. Having reset the foundation of our strategy there, we are mindful of the tremendous opportunity that remains for growth in China over the long-term.

Operating income for the full Asia region grew 6% on a reported basis and 13% in constant currency as higher revenues were partially offset by a slight decline in gross margin from product, cost investments. Let's talk balance sheet and cash flows. In dollar terms, inventory was up 11% compared to a year ago.

Three points of the increase is reflected earlier timing of recedes in Americas region with the remainder of the increase in line with the first quarter revenue growth. Year-over-year inventory growth has come down from quarter four 2018 and our inventory is healthy headed into the second quarter.

Total available liquidity at quarter end was approximately $1.5 billion comprised of cash of $622 million short-term investments of $100 million, and $806 million available under our credit facility. Net debt at the end of the first quarter was $319 million, down from $497 million last year. And our leverage declined to 1.4 compared to 1.6 a year ago.

Cash from operations for the first three months of 2019 of $56 million, was $10 million lower than the first three months of 2018. The decrease primarily reflects higher payments in February for 2018 incentive compensation as well as our inventory bill at the end of 2018.

These were partially offset by lower contributions to our pension plan which we funded last year before the new tax law went into effect. Adjusted free cash flow of $17 million for the first three months of 2019 represent a $52 million increase compared to a $35 million outflow during the first three months of 2018.

The increase was due to the timing of settling of our hedging contracts this year. As proceeds were received at the end of the first quarter, but payments were made at the beginning of the second quarter.

Beyond the hedge settlement timing, CapEx for the first quarter increased to $36 million from $31 million a year ago, and our first quarter dividend payment of $55 million was $10 million higher than last year's $45 million.

Given our recent IPO, I would now like to take a moment to make some general comments on how we planned to provide guidance on our earnings calls. As Chip explained, we've run this company for the long term.

So we'll generally provide annual guidance on certain metrics at the beginning of the year and then provide updates to our annual guidance as appropriate on our quarterly earnings calls as we move through the year.

While it is not our practice to provide specific quarterly guidance we may occasionally provide color on any significant or unusual items we anticipate for the upcoming quarter. With respect to 2019, our expectations for the full year are as follows. We expect constant currency net revenue growth of mid-single digits.

Given our strong start in the first quarter we recognize this may sound conservative but it is still early in the year and we continue to face uncertainty from the potential industry and macroeconomic headwinds that Chip referenced earlier.

We anticipate gross margin and SG&A as a percentage of revenue to both be slightly up on a constant currency basis primarily reflecting continued growth and investments in the direct-to-consumer channel with advertising as a percentage of revenue in line with 2018.

We expect constant currency adjusted EBIT margin to be flat to slightly up to prior year. We expect CapEx to increase to a range of $190 million to $200 million reflecting the upgrade of our global ERP platform, our omni-channel investments, and increased distribution capacity.

And on a gross basis we expect to open about a 100 company operated stores this year including the 16, we opened in the first quarter.

As a reminder, due to the timing of our year-end on the final Sunday of November fiscal 2019 will not contain the benefit of a Black Friday which normally represents about half a point of annual net revenues and then an additional 25 basis points of adjusted EBIT margin.

Additionally, primarily given the ongoing weakening of the euro, we expect that currencies will unfavorably impact full-year reported revenues and adjusted EBIT growth rates by roughly 200 basis points for revenue and 400 basis points for adjusted EBIT with the impact in the second quarter of similar magnitude to the first quarter.

At today's rates currency comparisons get much easier in the second half of the year. A word on diluted share count, in our 10-Q filed today, we disclosed a weighted average diluted share count of 393 million shares as of the end of the first quarter.

With respect to the full-year, we currently anticipate that the weighted average diluted share count for fiscal 2019 will fall in the range of 410 million shares to 415 million shares. The substantial drivers of the increase are as follows.

The primary shares issued in last month's IPO, the conversion of our previously cash-settled stock-based compensation awards to stock-settled RSUs and the incremental dilutive effect of today's higher stock price compared to the stock price using the calculation at the end of quarter one.

Finally with respect to the second quarter specifically I want to share the following color. Due to the timing of campaigns I described earlier the deferred advertising spend from the first quarter will fall in the second quarter slowing the pace of adjusted EBIT growth in the quarter.

Our estimate for the impact of changes in fair value on cash-settled stock-based compensation is in the range of $10 million to $12 million representing the increased value of our previously cash-settled stock-based compensation awards which converted to stock-settled RSUs at the IPO.

And we will record costs of going public in the range of $25 million to $30 million predominantly related to the underwriter's fee we picked up on behalf of the selling shareholders.

Please note that consistent with the treatment of these costs in our first quarter non-GAAP reconciliation the stock-based comp charge and the going public costs will be excluded from second quarter adjusted EBIT and adjusted net income. With that, we'll take your questions..

Thank you. The floor is now open for questions. [Operator Instructions].

Operator, if we have no questions….

[Operator Instructions].

Well, it's not totally unexpected, because we know a number of the analysts are following us right now can't ask questions and can't write still. So it's not a huge surprise. If there are no questions, operator, I will check one more time, but if there are no questions we'll wrap the call..

[Operator Instructions].

Okay. Showing none, I want to thank everybody for dialing in and joining us today, and we'll look forward to talking with you again next quarter. Thank you very much..

At this time, I'd like -- thank you, this concludes today's conference call. Please disconnect your lines at this time..