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Here’s the entire text of the Q&A from Nike’s (ticker: NKE) fiscal Q2 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Presenatation

Question-and-Answer Session

Operator

Thank you everyone. If you would like signal for a question it is “*” “1” on your touchtone phone. And if you are on a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and will take as many questions as time permits. Once again it is “*” “1” to ask a question. We’ll pause for just a moment to give everyone a chance to signal. We’ll go first to Robert Drbul with Lehman Brothers.

Q - Robert Drbul

Couple of questions, first one is on the footwear product margins, can you talk a little bit more about your expectations of what happened this quarter, elaborate a little bit more in terms of the lower product margins in every region. And I guess as you look into the back half of the year with some of the comments you made around gross margins, what are the risks that you still see on the gross margin side around footwear product.

A - Charlie Denson

First of all, a lot of the factors we’ve already talked about so just to reiterate what the major drivers have been, we are seeing higher commodity costs primarily oil, there have been some changes in minimum wage loss, in Asia we’ve seen some impact from that as well, so that is one of the prime drivers in footwear. Second key element has been that our unit demand has been tremendous. You noted with our results for this quarter, the US posted over 20% growth in unit sales in footwear. So as we built our capacity for servicing all unit demand, that has increased our cost somewhat. That is related to things like adding additional tooling sets and moving to additional factories to produce products. So it is a bit of a good news bad news in the sense that we’ve got such great unit demand. Sometimes our margins are a little bit lower. We’ve also seen that, we’ve had to move the product over here, we’ve had some higher air freight numbers, so those are all product cost drivers. We see those basically being somewhat consistent with the back half of this year but easing as go on into ’07 as long as commodity prices stay above where they are. Second major driver this quarter was the mix of products. We did see some shift in mix to the US which has slightly lower footwear margins than say Europe, and we did see a little bit of mix shift into some product types like sport culture that tend to have slightly lower margins. So on that front, that is very hard to predict. At this point we think as we said in our guidance, the third and the fourth quarters are going to look somewhat like the second. And the last item that we talked about is the investments for making product value in Japan and Europe and we were largely anniversary those come Fall of 2007 but obliviously the decisions we make around pricing are very dynamic and we look at each market individually.

Q - Robert Drbul

Okay. Great. And just a question on the Futures, when you look throughout the period that you have, did it significantly change from the first half of the period to the second half of the period?

A - Charlie Denson

The Futures are stronger in the front half of this window that we are reporting today, we do have some timing as Mark mentioned we do have some phasing of our World Cup product introductions and we do believe that we are going to see some acceleration as we go into the fourth quarter, particularly in Europe. But the Futures we reported today are definitely stronger in the front half of the window.

Operator

We’ll go next to Virginia Genereux with Merrill Lynch.

Q - Virginia Genereux

Thank you. May be two questions. On the SG&A side Don, you and Bill talked about several initiatives, should we think about as we look out further, should we think about you guys sort of getting back to this objective of other overhead growing at half rate of revenue growth and demand creation growing at the rate of revenue or could really be the other overhead I guess, be even better than that, that is one.

A - Donald Blair

Well, I think directionally the comment that we want to focus our investment in SG&A on demand creation that directly drives revenue as well as operating overhead that directly drives revenue that is definitely true. I will suggest that the absolute percentage is not something that you might want to model out exactly like that but definitely we expect to see a lot more leverage on the operating overhead side than we would on the demand creation side and overall we are committed to delivering SG&A leverage over the long-term.

Q - Virginia Genereux

Secondly on the balance sheet capital structure, you guys are just generating so much cash even as you buyback a ton of stock. Any, should we just think about you guys doing more about it, I know you raised the dividend substantially as well, but the priorities levers are again are still dividend and share repurchasing and then last acquisitions, any sort of changing in that thinking too, thank you.

A – Bill Perez

Virginia, this is Bill here. We are obviously very targeted into I think it is $2.1 billion of cash sitting on the balance sheet today and we discussed with the finance committee of the Board, and I hope some of the things we’ve done haven’t gone unnoticed. We did increase the dividend by 24%, I think we repurchased close to quarter of a billion of the stock during the past quarter. In 18 months into a 4-year buyback plan, we’ve already repurchased about a $1 billion, just under a $1 billion of a $1.5 billion target. So our forward thinking why it be based on generating a highest return for our shareholders whether that be increase in dividend repurchasing stock or investing in higher return opportunities and with regards to your specific questions about acquisitions, as we indicated in June, we have ample opportunity to grow with our current portfolio, we are not actively pursuing acquisitions, if the right opportunity presents itself, we will take a look at it. But that is not a priority.

Operator

We’ll go next to Lizabeth Dunn with Prudential.

Q - Lizabeth Dunn

Hi, good evening I guess. My first question relates to, it sounds like you were saying that you have a bit more spending discipline and reality monitor that in within a quarter to determine how much you can spend, I mean, it sounds to me like this quarter for instance your gross margin was a little bit wide of expectation, so you turned off the spicket a little bit in terms of demand creation spending, is that the right way to think about yet, and then how do you manage with adverse sales growth, if you do, realize the demand creation ultimately drives sales growth. That is my first question and then my second question is, why are gross margins in the back half expected to be similar to Q2 if you had benefit of 150 basis points from currency in Q2 and will have that benefit in the back half, thanks.

A - Donald Blair

Okay. With respect to your first question Liz, we definitely do not manage the business on a quarter to quarter basis, and what we are really aiming for here is managing the portfolio over a period of time to deliver great results for our shareholders and build the business for the future. So it is I really a questions of balance of profitability today and long-term investment going forward. What I did want to communicate is that I think what you saw in the second quarter was our ability to pull the levers the demand creations spend is not a tool that we use to manage the P&L it is really a phasing based on what we think makes the most sense for driving the business and the impact you saw in SG&A is really a longer term initiative to bring some more productivity out of our operating overhead spending and you started to see that in the second quarter and we are committed to continuing to deliver that over time. So you should definitely not think about this as a quarter-to-quarter exercise.

Q - Lizabeth Dunn

Okay. But I have in model that you had Q2 SG&A up 15%, was that - ?

A - Donald Blair

Yes. We did perform better than our guidance on SG&A in the second quarter and that does reflect that we’ve double our efforts around productivity and operating overhead. But we are not doing this in terms of turning the spicket on or off for any given quarter. We just don’t manage the business that way. And your second question was around gross margins?

Q - Lizabeth Dunn

Yeah. Just currency benefit, will be there for the back half or atleast that is the guidance you’ve given us in the past so, why is gross margin expected to down only similar to Q2 when you did have a currency benefit in Q2?

A - Donald Blair

A lot of it has to do with the mix of products we expect to sell, for example in many of our markets as we sell, World Cup replicas apparel that tends to be a higher margin than some of our inline products same thing for some of the footwear, so there is a large number of moving parts in the gross margin equation, at this point, with a neutral currency environment, we do expect to see roughly the same year-over-year change in margin, but is really related to more to product mix and geographic mix.

Q - Lizabeth Dunn

Okay. Thanks and congratulations on a great quarter.

Operator

We’ll go next to Omar Saad with Credit Suisse First Boston.

Q - Omar Saad

I wanted to ask a little bit more detail on some of the comments Bill made up front around the retail strategy, I know you had mentioned that distribution is still going to be anchored to the retail partners, I wanted to get a better flavor for what some of the strategies will be there on a global basis, especially any plans to move outside the outlook format to create retail environments appropriate to the brand?

A - Mark Parker

Omar, as I had mentioned before, we are in the process of setting a strategy for our direct-to-consumer business and I see opportunity to significantly increase our online business, I think we have created retail concepts that elevate our brand, and close distribution gaps in a number of markets. But as I said earlier in our preference designed to partner with retailers who do a good presenting footwear and Charlie do you want to add to?

A - Charlie Denson

Yeah. I will jump in on this a little bit Omar, I think, one other things that we’ve talked over the last several years is our ability to partner with some of the key retailers around the world and that strategy doesn’t change and we continue to emphasize that as I think that Bill made reference to that in his comments that will be the cornerstone to our retail strategies. I think while we do have the ability to do is take on and look at ways to change the landscape of the retail marketplace with very specific and strategic executions of opportunities that we may have come available to us whether it is real escape play or something like that. I think a great example of that is the Champs Elysee store that we’ve opened up on a very key and significant street in a very important marketplace worldwide, where we can control the entire brand presentation and focus on some of the pieces there. So those are some of the key points that we want to make sure that everybody understands on the retail front. We will continue to look at opportunities as we’ve discussed in the past but we are still anchoring most of our retail distribution strategies with our partners around the world.

A - Mark Parker

Yeah. I just want to add, this is mark speaking, I just want to add to that, we are going to continue to invest in our, as Charlie said our key retail partners, a great example in this past quarter is some of the work we did around Pro, and the Pro revolution doors we opened up with some better sporting goods partners, we found that, that not only helped the tremendous sell-throughs on the Pro product but actually helped lift our entire apparel business in just about every category. Such a great example of key invest in important retail partners against the big initiative for the company.

Q - Omar Saad

Great thanks. I appreciate that.

Operator

We’ll go next to John Shanley with Susquehanna Financial.

Q - John Shanley

Charlie, I wonder if you could give us a little bit more a time horizons on the challenging markets that you did a nice job in highlighting for us the markets like Japan, France and the UK. Those are major markets for Nike in terms of it’s international presence. And I am assuming that you’ve already pre-aligned most of those markets for the Fall ’06 selling season. Can you give us an idea of if the market environment from your conversations with retailers are starting to turn, and whether are not you see some opportunity as we get further into Calendar ‘06 in terms of the business opportunities particularly as we get into the important Fall selling season in those markets.

A - Charlie Denson

We have done some pre-aligning John, we are not quite that far into, although we’ve, most of the accounts have seen, the product lines, I think the two big pieces of areas that I highlighted in the prepared comments are areas that we are really excited about. And that is getting after this sport culture consumer piece which is becoming a much more dominant piece of the puzzle in the European market and then I think also the overall perspective on distribution and making sure that we continue to build a premium brand position over the long term, and in some cases, this has a little bit of familiarity with the conversations we had around the US marketplace, 3 – 4 years ago. So we are still very optimistic about growth potential coming out of the European marketplace, when that is going to turn around, I am not quite ready to predict some of the economic challenges that that overall marketplace faces. We are seeing some very strong results coming out of some very specific parts of that market. Specifically in Italy and to some degree in Liberia, I think the other think that we feel great about is the Fall product line and again moving through World Cup and into the Fall season when the football product is really the most relevant and part of the product launches we’ve staged will, put us in a great position to take advantage of that. So it is not, I am not ready to say we are completely around the bend, but I really like what we are doing in Europe right now, very confident and comfortable with the strategy and plans we have in place. With respect to Japan, I think it is a little bit different, the marketplace is a little bit healthier and as I said again in the remarks, we are going to make sure we manage inventories there, we are not going to put ourselves in a position where we chase bad business, we think we have a great opportunity to introduce more energy to that marketplace through products and innovation, Mark referenced the Max 360 product which we are very excited about this next spring. And we got a couple of more things in the half up our sleeves, that quite frankly we are not ready to talk about but think they will be very exciting pieces of the product distortment going forward and Japan will be a fantastic market for some of these products.

Q - John Shanley

That was very helpful. And the last question I had, really directed at you Bill, we’ve heard from a number of the retailers that we follow whether it is athletic specialty chains or sporting goods or even family footwear retailers the Nike has been reaching out more and particularly you, yourself has reached out more to a lot of the retailers to better partner with up with them, is this a change in terms of the approach that company’s relationship with it’s retail partners and is this something that is being motivated by basically the organic growth of the US market versus may be some of the market conditions in the other areas, or just that you see an opportunity to just continue to ramp up your market share positions in this country?

A – Bill Perez

I think John is pretty consistent with what we talked about before in terms of retail, we always start with retailers who can help us elevate the brand and on the brand properly and we always attempt to work with them in the first place, I go on out to meet people to understand our customers understand their needs, trying to understand how we can fit out plans in what their and create a synergistic situations we are also working with number of retailers to access their data because I believe if we have access to their data and we have a growing number of retailers who are in our database now with online point of sale information, I think it can be one, one, we can increase consumption for them and we can increase consumption of Nike product as well, but it is not change in strategy, I think it is a long standing strategy, it is just an opportunity for me to know people better.

Q - John Shanley

Do you think Nike can grow with market share position you have, by far the dominant factor in the market, can you continue to grow eventhough you basically have a large position already.

A – Bill Perez

John, we only have a 25 share market in the US, we can double it, we have ample opportunity to grow in the US in footwear and in apparel.

Q - John Shanley

Okay. Fair enough, thanks.

Operator

We’ll go next to Margaret Mager with Goldman Sachs.

Q - Margaret Mager

Hi, I have a couple of questions, I am, a little bit of clarification I guess, are you expecting SG&A leverage in the second half of this year. And how do you go from a 2% to 3% Futures order to a mid single digit sales growth in the second half of the year, and why is that the Futures order slowed into the forth fiscal quarter, what caused that?

A - Donald Blair

Okay. First question was SG&A leverage over the back half of the year?

Q - Margaret Mager

Yes.

A - Donald Blair

I do not expect SG&A leverage on the back half of the year, I do expect SG&A leverage for the full year, we are currently 110 basis points, I believe levered through the first half of the year, and as we said before some of the demand creation is more back loaded so on the full year we do expect to get leverage, we are committed to that, I don’t necessarily expect that in the second half.

Your second question is how do you get from current Futures to mid single digit? One of the things to bear in mind is that the Future window does not include the entire forth quarter, so we do expect to see some good numbers coming out of our Fall booking that fall into May and some of our May numbers, we have some early indications, so we think that we are going to see some acceleration there related to the World Cup and some other product initiatives that we have in the pipe. We also have a quite a bit of Atonce and replenishment business, have done very well for us so far this year, that will also improve our revenue growth over the back half of the year.

And your third question I believe was why the deceleration in Futures, and the first point I’d make is that a lot of it foreign exchange. When we reported it at the first quarter, our expectations around the year on Yen were much stronger than where they are today, and if you take that out, our Futures numbers for the five months window is actually up 7% which is pretty consistent with our long-term growth model. We have seen a little bit lower number in the US, the US was a +12 last time we reported. We think +9 is very very good for that market. And as I said earlier some of the phasing of some of the World Cup product means that we expect to see some of those sales come in the back half of the quarter.

Lastly thing I say, if you think about the fundamental business health here, I want to highlight again the strength of our unit demand curves. We are seeing enormous growth in units which says, we are really doing well, in terms of share fete, I think that our profitability picture across the portfolio is pretty good. We are very confident on hitting our goals for the year.

Q - Margaret Mager

Okay. Did you say that European apparel was an area of opportunity as you look forward, what was the challenges in European apparel, specially with the World Cup, I would think European will be one of your strongest businesses and how does this make you pro factor in there?

A - Charlie Denson

Hi Margaret, this is Charlie. What I said was that our apparel business is accelerating in Europe so as you talk, as you know we’ve talked about some of our apparel inventory issues over the last couple of seasons, and we feel pretty good about the progress we’ve made in getting the inventories back inline and then as you mentioned, accelerating in to the World cup, we are very excited about both the product that has been laid out for the World Cup tournament itself and we’ve had pretty strong response going into Fall. I think the other thing that is adding a lot of energy into the European apparel market is the Nike Pro equation. And we’ve had great response to Nike Pro over there, I don’t know you have been over there recently but that team has done a fantastic job of placing that product and the consumer has responded very well to it. So it is an accelerating environment for our European apparel picture.

A - Bill Perez

A couple of other areas I’d add to that would be the women’s fitness, we just had a great round of sell-throughs on our women’s fitness and fitness dance products over this past quarter and we expect that to continue through the spring, tennis is up quite a bit and sport culture remains a big opportunity for us over there as well.

Q - Margaret Mager

Okay. That is very helpful, thanks and have a great holiday to you all as well.

Pamela Catlett

Operator we will have time for one more question.

Operator

Thank you very much, we’ll take our final question from Robert Ohmes of Banc of America Securities.

Q - Robert Ohmes

Thanks guys. Actually just one question, I was hoping since the 360 Air launches coming up in January, can you just walk us through the rollout process for Calendar ’06, regionally and also which channel partners we should be looking at as having more of a position with this product and also can you give us some info on advertising and also sort of global launch versus what is going in the US, it would be great as well, thanks.

A – Mark Parker

Yeah. This is Mark. Let me hit that, the 360 launches you mentioned hits in later in January, as I said we are really excited about that, not just from the excitement around that single model, that product, but the plan that we have around reenergizing our whole Nike Air collection. And that is really the Van Der Aar product, the spotlight product that we are going to rally behind for Nike Air as a total collection of performance products. You will see that expanding as we move into spring into fall into other product categories, 360 that is, the next category would be basketball and we expect to actually have a full product offering both on the sport performance side of the business and the sports culture side of the business. You will see some pretty exciting things happen at retail on the sport culture side starting as early as January of this year. The primary initial introduction, the thrust will be in the USA and Asia-Pacific, and then you will see Europe picking that up into late spring into the fall season as well, so Europe will sort of follow that wave a bit as we head beyond World Cup, you will see how much bigger emphasis on that from Europe in that fall season. Although they are trying to see what we can do in Europe in leading upto the World Cup effort as well.

A - Charlie Denson

This is Charlie. Just as far as channels, I am not get into specific’s but to Mark’s point I think you will see the product globally in all the major key retailers around the world, the high-end product will be on limited basis availability which is traditionally the way we’ve launched most product innovations and then Mark relayed and talked about, it is not just about single shoe, it is entire concept, and you will see products throughout the product line.

A - Mark Parker

Yeah. On the advertising as well I didn’t mentioned that, we kickoff with a new advertisements with a national TV campaign, later in January we will carry that through this spring season. We will have energy account based products exclusivities and some energy type events happening, digital online activity, it is really total of what we call 360 marketing campaign around the shoe and the broader Nike Air line.

Q - Robert Ohmes

And from a Futures perspective is this something that sort of, you are going to limit allocations in the spring but it could have a meaningful impact to your Futures as you move toward back to school ’06 or is this we got to wait till ’07 it is really meaningful to Futures?

A - Charlie Denson

Well, I think I mean, we will limit it at the top end as we always do, but we will see that positive and part of driving into whole demand creation around the concept. I think as we move into the first half of ’07 it is going to become very significant part of the product offering and we are excited about some of the new products that we’ve started to pre-align on the some of the accounts worldwide.

A – Mark Parker

I think the thing you have remember is that isn’t a single shoe launch, this is effort around Nike Air at large. So you will see some broader distribution of products within Nike Air, beyond or relative to the 360 product itself. So you will see some impact on this initiative this spring and it will certainly build through next fall.

A - Donald Blair

Yeah. Just to clarify Robert, fiscal ’07 is what Charlie was talking about, so we do expect to see some impact for Fall.

Q - Robert Ohmes

Terrific guys, thank you very much.

Pamela Catlett, Vice President, Investor Relations

Thank you Robi and thank you everyone for participating, we wish you all a very safe and happy holiday season, talk to you soon.

Operator

This does concludes today’s conference call, we thank you for your participation and you may disconnect at this time.

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