Good day, ladies and gentlemen, and welcome to the Levi Strauss & Company Third Quarter Earnings Conference Call for this period ending August 29, 2021. 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 two hours after the completion of this call through October 13, 2021. Please use Conference ID 1570959. This conference call also is being broadcast over the Internet, and a replay of this webcast will be accessible for one quarter on the company's website at levistrauss.com. I would now like to turn the call over to Aida Orphan, Senior Director Shareholder Relations and Risk Management at Levi Strauss & Company.

Thank you for joining us on the call today to discuss the results for our third fiscal quarter of 2021. Joining me on today's call are Chip Bergh, President and CEO of Levi Strauss, and Harmit Singh, our CFO. We have posted complete Q3 financial results in our earnings release on our IR Section of our website investors.levistrauss.com. The link to the webcast of today's conference call can also be found on our site. We'd like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Please review our filings with the SEC, in particular the Risk Factors section of the quarterly report on Form 10-Q that we filed today, for the factors that could cause our results to differ. Also note that the forward-looking statements on this call are based on information available to us as of today, and we assume no obligation to update any of these statements. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in today's earnings release on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our IR website and a replay of this call will be available on our website shortly. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now, I'd like to turn the call over to Chip.

Good afternoon, everyone, and thanks for joining us today. We delivered another strong quarter. Revenues were $1.5 billion, up 41% versus Q3 2020, and up 3% versus pre-pandemic levels of Q3 2019, with profitability at a multi-decade high, well exceeding our expectations. Our results, the continued acceleration over the past few quarters and our improved structural economics, clearly underscore that the Levi brand continues to be hot, our strategies are working and we’re emerging from the pandemic stronger than ever. And all of this is despite the ongoing impacts of COVID, supply chain constraints and other macro issues including inflationary pressures. The casualization trends that have been accelerated by the pandemic globally are here to stay, and the denim cycle we started pre-pandemic is continuing to drive growth. In the U.S., both the apparel segment and the denim category are now larger than pre-pandemic, with denim growth outpacing total apparel for the second quarter in a row. We expect these drivers will provide our business with a multi-year tailwind. The impressive bounce back we saw in our U.S. business in the second quarter accelerated into Q3, up 8% to 2019 on a reported basis. And consumer demand in Europe remains strong with the region inflecting to growth, up 7% versus 2019 as stores reopened. This, despite tourism being down markedly in both the U.S. and Europe. We're excited to see consumers returning to our stores as markets reopen with company operated brick-and-mortar revenue returning to pre-pandemic levels. Impressive results, given traffic remains down versus 2019 and 10% of our doors were closed in the quarter. Importantly, despite stores reopening, revenues through digital channels were up 10% versus prior year, and represented approximately 20% of total third quarter revenues. This follows 60% growth last year. Our team is doing an outstanding…

Thanks, Chip. Good afternoon, everyone. We delivered solid results against a continued challenging macro backdrop. For the third quarter, both revenue and adjusted EBIT margin exceeded our expectations, demonstrating the strength of our brands, and outstanding execution against our strategic initiatives. These results were strong relative to last year's COVID impacted quarter, but more importantly were above Q3 of 2019. The structural economics of our business continue to get stronger, driven by our largest share of digital business, sustainable gross margin accretion across all channels and disciplined cost management. Sequentially, relative to 2019, both revenue growth and profitability have improved over the last three quarters. And we believe that this momentum will continue into quarter four, as reflected in revised guidance that I will share shortly. The strength of our performance this year and the confidence in the long-term health of the business have enabled us to allocate capital across all areas of our strategy, as we invest in growing our business, paying down debt, closing our inorganic acquisition, and returning incremental cash to shareholders. As I walk you through our third quarter results, my commentary will reference constant currency comparisons, unless I indicate otherwise. Compared to third quarter of 2019, constant currency revenues were up 2%. Notably, currency only held revenues by roughly one point, half of what we expected. And thanks to the strength of our supply chain as Chip just described, we were able to limit the revenue impact of the supply chain disruption to less than $10 million in the quarter. Adjusted diluted EPS in the third quarter was up $0.17, or 55% ahead of 2019, driven by the improved structural economics of the business and continued momentum in the Levi's brand. Let me share some color on the details. Key performance metrics in our direct-to-consumer…

Certainly. [Operator Instructions] Our first question comes from the line of Matthew Boss from JPMorgan. Your question please?

Great. Thanks, and congrats on the nice quarter.

Thanks.

So Chip, in a world with COVID, your brand and category are doing well, particularly on a relative basis. I guess, how much of this do you think is company specific versus expanding category TAM may be tied to casualization? And then just on the other side of the crisis, how do you feel about market share opportunity? I know you've cited competitor consolidation, you guys have changed your wholesale distribution. I think you've outlined a pretty robust retail door expansion. And from a pricing power perspective, do you believe you have the opportunity to continue to take price from here?

Yeah. Good question, Matt. First of all, I would say, clearly, we are benefiting and our peers are benefiting from some of the tailwinds, which we talked about in the prepared remarks. The casualization trends, the new denim cycle, which I think I was the first to declare a couple of quarters ago. And I think we could say now quite confidently that these new looser fits, new silhouettes are definitely driving a new denim cycle. In fact, I just got some data, the total jeans category in the past nine-month basis is up to $11.2 billion here in the U.S., that's higher than it was pre-pandemic. During the same nine-month period, it was $10.6 billion and way higher than it was during the pandemic at $8.5 billion. So clearly, category is bouncing as people need to refill their wardrobes and that's helping everybody. But I think the vast majority of our results are driven by the strategic choices that we've made, and the quality of execution that we've driven over the past couple of quarters, and I think that's going to be true going forward. The majority of our gains are being driven by the fact that the brand is really, really strong, that's probably best demonstrated by our ability to take and secure price increases with the AUR growth that we referred to. But we are also highly focused on premiumizing the brand, particularly here in the U.S. still our largest market by far. We have really focused on our wholesale distribution footprint, which you alluded to, which is much healthier today and more premium with a negligible amount of off price, certainly helped by a low promotion environment today as well. These next gen stores, which we're launching, are working. And we're committed, as we said in…

That's great color. Best of luck.

Thanks, Matt.

Thanks.

Thank you. Our next question comes from the line of Laurent Vasilescu from Exane BNP. Your question, please?

Oh, good afternoon, Chip. Good afternoon, Harmit. Thank you very much for taking my question. Chip, I think you've mentioned in your prepared remarks in the hot topic du jour is obviously cotton. I think you called out cotton for 1H ‘22 is anticipated low single digits and I anticipated up mid-single digits for the back-half for ‘22. Can you talk about your business and your pricing power relative to the last cotton bubble seen in 2011? I think you're in a much stronger position today. What percentage of your COGS actually come from cotton? And I know Harmit, can you provide explicit FY any guidance really on FY ’22? But should we think there is still further runway on the gross margin into here?

Yeah. Let me…

Chip, you want to go first? Okay.

Yeah, let me start on - it's a great question, Laurent. Thank you for asking, because I think we are in a very, very different place than we were in 2011. In fact, I joined the company in September of 2011, in the midst of the cotton run up at that point in time. But let me just kind of paint a picture of how different we are, which gives me a great deal of confidence in our ability to work our way through the cotton - this increased cotton market. And by the way, the low single-digit that we referred to in the prepared remarks was total COGS, not cotton, so it was total cost of goods. But, in 2011, when I joined the company, 48% of our business was U.S. wholesale. Our U.S. business, our total U.S. business was almost 60% of the total company. Today, that's a very, very different picture. We were 20% DTC back then. We're now - I think this last quarter, we were 35%, 36% DTC. So we've got a very different looking distribution footprint. Much more of our business is overseas now, International, which skews higher gross margin, more retail, stronger brand, particularly in Europe. So that is a big, big difference. And then I think the second thing that is just night and day difference is the strength of the brand. I mean, back in 2011, when we were still a wholesale dominant business, it was a turnaround situation, when I joined. The brand was weak. We hadn't really grown revenues and profits at the same time in over a decade. And we worked in the early days, very, very hard on getting this brand back into the center of culture and resonating again with the consumer. In 2011, we didn't…

Yeah, sure. Thanks, Chip. Just two things. I'll answer the question on gross margin in a second, but just on cotton, as Chip said, it's not a one to one ratio. We use 2 pounds of cotton in every pant, so think about cotton driving 20% of the cost of our wonderful denim bottoms. And we do buy in two halves to two seasons, we have locked in prices for the first-half of ‘22, at about 1% inflation to ‘21 numbers. The second-half, we're in the process of negotiating as we speak. We think we can land at about mid-single-digit inflation. And we think, between the pricing actions we have taken that Chip referenced and the ones that we, if we have to take, given the strength of the brand, we'll be able to mitigate the impact on COGS. To your question about gross margins, first, isn't it beautiful to have gross margins of 57.5%, and sustaining record gross margins. And if you go back the last couple of quarters sequentially, it's only improved. As I said, in my script, it's difficult because the environment is less promotional, everybody's running with leaner inventories. My view of the world is that strong brands like ours, as Matt, you asked, will come out this lot stronger. I mean, that's what -- between Chip and I and the team we have an experience of five recession that's probably what's happened if you go back in the couple of economic hardships, strong banks really come well, if they do the right thing. So as you think about our margin accretion, gross margin accretion, I'd say, about three-fourth of it is structural and here to stay. And that's all driven by the diversification, the use of AI, more international, premiumizing our product, price increases, et cetera. About a fourth 100 basis points, potentially, if the environment becomes more promotional, et cetera. We'll all have to figure out. I think to your question about what is the appropriate guidance for 2022 on gross margin, I think history is a good predictor of the future. I mean, we have successfully grown gross margin over the years. And I'd say, I intend to continue grow gross margin. And we have put some takes in gross margin. I mean, right now the headwind is air freight. It's about 70 basis points, reflected in Q3, is reflected in our guidance for Q4. Our view is that, our intent is to meet consumer demand. And economically if we have to air freight, we will air freight to meet that. But I think, gross margin has a few things working against us and a lot of things working for us. So I'd say we’d probably give a better perspective on 2022 when we come out with earnings for the year in Q4, sometime late January, early February.

Thank you very much for all the color.

Thank you. Our next question comes from the line of Omar Saad from Evercore. Your question, please?

Good afternoon, and thanks for taking my question. Great job on the quarter. And I wanted to ask you about Beyond Yoga, it's kind of the first chance we get to ask you about it in public on a conference call. It's obviously a small transaction, it's relative to the core Levi's brand. But maybe you could talk a little bit about how your experience and the platform you've built to kind of turn around and rejuvenate Levi's, which was already large and widely recognized as a brand, albeit under monetized. But how you bring that to bear in this more early stage hypergrowth situation you have with Beyond Yoga? What are the key elements from Levi that you’re going to apply? Is it marketing? Is it international? And I have one small follow-up if that’s okay.

Okay. Yeah, we touched on this a little bit in the prepared remarks, but maybe I'll just elaborate on it. I mean, I guess the first thing I would say and I think most of you know this, at the end of the day, I'm a brand guy. I spent 28 years at P&G, building brands, launching new brands, creating brands, turnaround brands. And when I joined Levi's, I mean, part of the reason I joined was there was a turnaround opportunity. And my thesis coming in was Levi’s was 85% of the company and if I could turn the brand around, we could turn the company around. And that fundamentally at the end of the day is kind of what we've done over the last – and it's not about me, this is about the whole team that did it. That's pretty much what we've done. And, so when we were kind of looking at acquisitions, I mean, one of the things that really impressed us about Beyond Yoga is, it has legs. I mean, this is a brand that is built on a deep consumer insight around body positivity, and the fact that any woman can be an athlete, and can work out and should feel good about working out and her body, regardless of her body shape. And that is part of the insight, and it celebrates that inclusion and that diversity. And when you look at the website, you'll see it and it resonates with consumers. But it is a real fundamental consumer insight. And we think that what they bring to the party is this deep consumer understanding and insight, they built a community of users, they know their consumer really well, combined with a deep understanding of the category and amazing product and great…

Got it. That’s great color, Chip.

Omar, the only thing I’d add, if you look at the history since we’ve got here in last decade, we've not only increased capital, but we also increased returns. And so I think, as we scale this with disciplined capital allocators, and if you think about the three filters, based on our board approved this acquisition or any acquisition, the financial filter is as important as a cultural filter and the strategic filter. So, we are on the hook to scale and grow and we think this can be really big.

Got it. And then just to clarify, when you said Harmit, accretive to margins, you mean accretive to the current LS&Co margin, which I think you said is going to be over 12%? You guys already above that?

Yes.

Great. Thanks, guys, for all the color. Good luck.

Thanks, Omar.

Thank you. Our next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your question, please?

Great. Thank you so much. I'm noticing very nice growth obviously compared to 2019 in the Americas and Europe, where you talked about that high single-digit growth rate. Asia, I think is suffering from some store closures. I was just wondering if you could talk about the path to recovery in that geography. And I am assuming that the first step is let's get all the stores open and operational and sort of life back to normal as maybe a first step. But what are the key things that you think need to come together to sort of to get that business back to where it ought to be? And then, separately on supply chain and inventory. It's very evident that you've managed through the supply chain challenges very, very well, I suspect the inventory, which I think if I'm looking at the right numbers here is down around 4% from 2019. I suspect that's going to be one of the best numbers that we're going to see through this earnings season. So you're in what looks like, quite good shape. But I know you have aspirations to get that inventory number into the positive territory. Do you have sort of line of sight as to when you think you'll be able to get that inventory back into positive territory? And do you see any -- are you experiencing delays because it just looks like you're sort of sailing through all of the supply chain challenges in a way that is better than what we're hearing from others? So any color there would be helpful? Thanks so much.

Sure, Kimberly. Thank you for your question. Asia’s performance in the quarter is largely driven by the fact that there were lockdowns, and continue to be lockdowns in different forms, in different countries around Asia. So if you think about our store base during the quarter, as we had 20% of our store base closed during the quarter. And I think if you look at the revenues we were down 23%, so a little bit of traffic softness, but it's essentially driven by lockdowns. And, as you think about the world, I'd say, the western part of the world, higher vaccination rates, the eastern part of the world, scaling up over time. So that's what's really driving the softer numbers in Q. In Q2, it was largely India that went through a tough resurgence of COVID that dragged the numbers. As we think about Q4, our view is Q4 will be less down than Q3. And, we haven't talked September, because we're just closing – September it was the first month of the quarter, but what we're seeing is, definitely the business is bouncing back, is probably still, and flat to slightly down, but nowhere near the 23% that you saw. Now, so that's just a little bit of color on Asia, Asia, as you know represents a much smaller piece of our business is 15%, 16%, but it's probably a largest opportunity. And just given the number of consumers in Asia and the strength of the brand, so it's clearly an opportunity we are pursuing starting with China. China was down in the quarter, essentially driven by the lockdowns. And, we do think China bounces back in quarter four, and then we continue the momentum that we've seen just before the recent round of lockdowns. So that's our perspective…

Terrific color. Thanks so much.

Thanks, Kimberly.

Thank you. Our next question comes from the line of Bob Drbul from Guggenheim Securities. Your question, please?

Good afternoon, guys. Two questions actually, if I could. The first one is on the -- I guess we go back to cotton for a second. What you have locked in? I guess my question is, like, how much wiggle room do your suppliers have like, how tight are your contracts? Have there been any discussions about given the move that we've seen recently? Their ability to sort of break the contracts or anything along those lines. That would be helpful. And then the second one is just when you think about the gross margin on the price increases that you've had, you've talked a little bit before about sort of the benefits to the top-line, but also the benefits to the margin. Just wondering if you could maybe share a little bit more in terms of the price increases that you have taken, the expectation, like the buckets for the gross margin with pricing, but also how much that does really help you on the top-line? Thanks.

Yeah. So Bob, I think the contracts we have with us suppliers or manufacturer, or partners are pretty tight. And when things are tough, things are tough. FX, for example, can work against us, and we just honor our benefit when things are tough. They own a bit of it. But they're wonderful in a relationship that have been cultivated for years. The thing that really helps us is a couple of things. One, the fact that we have a large core, and core is going to be here for a very, very long time. So you can start thinking about placing those orders longer-term. And our manufacturers or vendors can think about this demand being there for a long, long time. I think that helps both sides, as well as the volume of what we can bring to the table. And so I would say, that would be the answer to your first question about. The second, which is, how are we taking pricing and what are we doing about it? I think, our teams on the ground do a phenomenal job, thinking through this. They obviously benchmark our competitors. And because we are in market leadership position in a lot of areas, we can flex a muscle to ensure that we don't hurt consumer demand. The other thing that we're beginning to unlock, and it's a huge opportunity for as long-term is the use of AI and machine learning. And given that we do have stores, you can always test pricing. And I think Chip referenced the fact that we've been proactive on pricing. I like to say you take pricing – it is important to take pricing when you don't need it, and then when you need it, and because we've been doing it on the back of a strong brand and styles and silhouettes resonating with the consumers we feel good with. And pricing is different in different parts of the world for a whole bunch of reasons. So it's difficult to say with precision, whether it's 4% here and 5% there, or 3%. But we have taken pricing during the pandemic, in the U.S., for example, on our women style that was sold into wholesale in quarter three of last year, we took it up 10 bucks. And that generally stuck. And so there's a bit of odd and a bit of science, but I think what is going to really help us longer-term is the use of AI and machine learning, build a lot more discipline in the process.

Thank you.

Thank you. Our next question comes from the line of Ike Boruchow from Wells Fargo. Your question, please?

Hey, good afternoon, everyone. So, Chip or Harmit, I’m not sure who's best to answer this question. So the elevated freight and distribution pressure that you're seeing today for Q4, are you trying to pass any of that pressure onto your retail partners at wholesale? Or are you just kind of taking the hit yourself and trying to price it out? And then the second follow-up, when you say you're confident you can offset next year's low single-digit mid-single-digit inflation in 1H and 2H, is that from initiatives in AUR you've already implemented? Or, is that also predicated on future strategies that you plan to kind of implement early next year? Thanks.

Yeah. Thank you for asking the question. We haven't passed the air freight costs on to our retailers, because it's happening and we are reacting to it. It's more important to meet our consumer demands. And, as we think about our relationship with our wonderful retailers, I mean, there's a whole profit pool, air freight and other things are just part of it. So that's how we're thinking about it, at least for now. The, the answer to your second question is, we feel good about -- so we've taken pricing actions, and the pricing actions were taken six to 12-months ago. We feel good about offsetting the inflation in the first-half and inflation up to, I would say mid-single digits in the second-half. That's what we are contemplating right now. If things get tougher, then obviously, we'll sharpen the pencil on two things. One is obviously pricing. And the second is cost initiatives. I mean, our job is to balance consumer demand and profitability, and ensure that we go off to the wonderful, growing addressable market that Chip and Matt referred to, as well as ensuring that we drive profitability to our shareholders and other stakeholders.

Thank you.

Thank you. Our next question comes from the line of Paul Lejuez from Citi. Your question, please?

Hey, guys, thanks. In an environment where we're talking so much about prices going up, you guys taking price. Curious how you're thinking about units? How are your wholesale partners ordering units? If there's any color you can provide on order books for first-half from a unit perspective that could be helpful? And then just second, do you expect supply chain delays to have more of an impact, than the $10 million you called out in 3Q as we think about 4Q? Thanks.

I could take the second piece and Chip feel free to jump on. So, I think I referenced it, but I may not have been as clear. We do expect the $10 million that we probably were not able to service in quarter three, to increase in quarter four. So the good news is, there is demand. The better news is our growth accelerates. But if we had more inventory and faster more product, we could probably sell more. I think it's a key balance between building a lot of inventory, ensuring that we're able to manage all the constraints that I think Chip referred to in supply chain and meet demand. So I think we're managing through that as best as we can. But there is demand out there, and we're doing our best to address it. I think your second question, Paul was about demand book and our book and volumes. Volumes are down, if you look at year-over-year, we mentioned, sales was up 3%. But I think volumes are slightly down relative to ‘19. As we think about the order books, we haven't publicly talked about volume. But I can say that the P book, as we think about the first-half, and the area where we really have P book is really Europe. P book is up, but we haven't publicly talked about what the difference in volume. I think it follows the similar trends that we've seen so far. I think over time, because the addressable market has increased I think over time, volume will tend to also accelerate and grow relative to ’19. Difficult to predict when, but that's what I'd say, at this time.

Okay. Thank you. Good luck.

Thanks.

Thank you. Our next question is our final question for today, comes from the line of Jay Sole from UBS. Your question, please?

Great. Thank you so much. Chip, I'm going to ask you a Beyond Yoga question. This is sort of the opposite of the earlier question is that, is it possible that Beyond Yoga can help the Levi's brand with its women's assortment outside of the core bottoms business when it comes to tops and some of the outerwear potential that it can possibly do? You talked about potential acquisition in the past, being something that could bring skills into the company that can help you grow your business. Is there an aspect of Beyond Yoga that maybe will give some insights into how you grow that lifestyle components of the of the women's business?

Yeah, in fact, I mean, thank you for kind of piling on. One of the reasons we did this strategically is, one of our key strategic pillars is to continue to diversify the company. And we said, our ambition is to get our women's business to 50% of our total business. This is clearly going to help there. But they do bring capabilities and skills that I think will help us beyond just Beyond Yoga, if you will. I mean, one of the things that we are trying to really protect is this very scrappy team, if you will, that has demonstrated an ability to just build this business organically, again, by focusing on really satisfying and meeting the consumer and delivering great product. And I think a lot of what they're doing, we're going to be able to take some of those learnings back to our core business. And I think it will help us over time. But, one of the big strategic reasons for doing this is to further diversify the company. I mean, it puts us into a market size that's bigger than total denim by a lot. And it's a tiny little brand, that I think has so much potential long-term. So on its own, it should be very accreted, but beyond that the skills that they bring some of the capabilities that I think we will learn about fabrics and fabrication in this more performance-oriented business can help us on the rest of our business, and could really halo over the rest of the company. And that's my hope over time that we see it do that.

Got it. Thank you so much.

Yeah. Thanks a lot, guys. I know that there are still a couple of calls, a couple of questions left on the call and we do have to wrap up here. But I want to thank everybody. We just have to be punchier I guess, in answering our questions so that we can get through all of the questions on the line. But I know that we've got follow-up calls with everybody. And we'll get to everybody in the follow-up calls. And, if you didn't get a question answered, that's burning, send it to Aida, and we'll make sure that we get it turned around real quickly. But, thank you all for joining us. Our next call isn't until the end of January, when we'll have our Q4 and full year announcement. And at that point in time, we'll also provide guidance for fiscal ‘22. But, thank you all for joining us. And since we won't be talking to you in a big way, I hope everybody has a really safe and happy holiday ahead of them, and go out and buy lots of Levi's and put them under the tree. Thank you all very much, and we'll talk to you again soon.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.