Regis Corp (RGS) 2004 Q3 法說會逐字稿

Good morning. My name is Tiffany and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regis Corporation third-quarter 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. If anyone has not received a copy of this morning's press release, please call Regis Corporation at 952-947-7798 and a copy will be faxed to you immediately. Before management begins their formal remarks, I'd like to remind you that to the extent the company statements are comments this morning, represents forward-looking statements. I refer you to the risk factors and other cautionary factors in today's news release, as well as the company's SEC filings. Reconciliation to non-GAAP financial measures mentioned in the following presentation can be found on their web site at www.RegisCorp.com.

In addition, this call is being recorded on behalf of Regis Corporation and is copyrighted material. It cannot be recorded or rebroadcast without the company's expressed permission and your participation implies consent to our taping. If you wish to access a replay for this call you may do so by dialing 800-428-6051, access code 349099.

With us this morning are Paul Finkelstein, President and Chief Executive Officer, and Randy Pearce, Chief Financial Officer and Executive Vice President. After the management has completed its review of the quarter, we will open the call for questions. (OPERATOR INSTRUCTIONS) And now I would like to turn the call over to Paul Finkelstein for his comments. Paul, you may begin.

Thank you and good morning everyone. We had an excellent quarter. Third-quarter revenues increased 14 percent to $481 million, with same-store sales increasing 2.8 percent. Retail accounts were particularly strong especially in our Trade Secret and SmartStyle divisions. We also experienced moderate strength in our same-store service sales with third-quarter comps increasing 1 percent, which is the highest level in six quarters.

Operating income increased 14 percent and net income for the period increased $25.6 million. Earnings per share increased 20 percent at 55 cents a share, exceeding the upper end of our guidance by 4 cents per share. Most of the improvement in earnings is attributed to stronger than expected same-store sales increases, which added 3 cents a share above our guidance. Earnings were also aided by a reduction in our effective income tax rate and the weakening of the U.S. dollar.

Third-quarter EBITDA increased over 13 percent to $63 million. We ended the quarter with 9886 salons, we built 129 corporate salons and our franchisees built 55 salons. We also acquired 115 salons including 86 franchised buybacks. Net of closers, relocations and franchised buybacks we added 111 salons during the third quarter. For the first nine months of fiscal 2004 we completed 33 deals, adding 244 salons including 199 franchised buybacks.

Total debt at the end of the quarter was 286 million and our debt to cap ratio was 30 percent. We are projecting our debt at the end of the fiscal year to approximately 320 million with our debt to cap ratio being in the range of 30 to 32 percent.

I'll now focus on third-quarter highlights. First, current sales trends. Obviously we are pleased with our current sales trends. While service sales are showing a certain amount of vitality, they still remain sluggish by historical standards. Longer hair continues to be in style, however, we are starting to see shorter hair come back but until we see several months in a row of adequate service comps we are reticent to adjust our near-term consolidated same-store sales projections.

Retail product sales continue to be quite strong with SmartStyle and Trade Secret leading the pack. In December 2002, we introduced Matrix which is the largest professional product hair care line in the world to Trade Secret. Trade Secret obviously continues to benefit from the introduction of Matrix, however even without Matrix, Trade Secret business would be more than satisfactory. Trade Secret has become a nationally recognized brand for its retailing of professional salon products.

We are starting to expand Trade Secret outside of the mall and initial results have been quite promising. We are also continuing to differentiate our product offerings in the Regis Salons by offering slightly higher end price points that compliment the Regis division top-selling lines. We were not able to have this flexibility in MasterCuts, thus the introduction of Matrix to Trade Secret has had a negative impact on the retail sales in MasterCuts. We are in a process of refining the product selection of MasterCuts and look forward to a return to positive product comps in the MasterCuts division.

We have recently increased our dividend; on January 28, 2004, we announced that the Regis Board of Directors approved a 33 percent increase to the quarterly dividend paid on February 26, 2004. We obviously desire to maintain the 4 cent per share dividend in future quarters. Fiscal year-to-date, we have also repurchased over 8 million or 214,000 shares of Regis stock. We are also gratified that the shares of Regis stock increased 12 percent during the quarter, compared to a one percent increase in the S&P 500 index.

I'd like to comment on other current events. On April 5th, Fortune magazine ranked Regis the 790th largest public corporation in the United States, climbing 46 stocks compared to last year's ranking. We are particularly pleased to report that Regis' ten year compounded EPS growth of 27 percent puts the Company in sixth place, out of the 63 specialty retailers found in the Fortune 1000.

Further, Regis' 24 percent total return to investors over the same ten year period put the Company in sixth place out of 63 specialty retailers. Last week we announced the acquisition of 153 Holiday Hair Salons. This acquisition is expected to add $45 million in annualized revenue; furthermore, we anticipate the acquisition to add least 5 cents a share to fiscal 2005 earnings. I have long admired Holiday Hair's operation in Pennsylvania; it is the dominant brand in the state, and is always been extremely well-run. It should be one of our crown jewels.

Year-to-date we have spent nearly $80 million to purchase 397 salons, all of which were immediately accretive to our earnings. We may very well end the year surpassing our fiscal budget for acquisitions. We opened our 10,000nd salon during the fourth quarter. This is a significant milestone for us. We continue to project that the Company will double its size within the next five to seven years.

I would like to talk about our future outlook. First, the fiscal 2004 fourth-quarter revenue is expected to increase 13 percent to approximately $505 million. Earnings are expected to be in the range of 57 to 59 cents per diluted share, based on same-store sales increases of approximately 1.5 percent. For the full fiscal year we are expecting consolidated revenue to increase 14 percent to about $1.9 billion, earnings are expected to increase 18 to 19 percent to a range of $2.27 to $2.29 per diluted share.

Let's turn to fiscal 2005. Similar to last year our initial guidance for the coming year is conservative. As you know we do not include acquisitions in our annual guidance as the timing of potential deals is difficult to predict. As the year unfolds, and as we acquire salons, we will update and likely increase our guidance. We forecast fiscal year 2005 revenue to grow approximately 9 percent to $2.1 billion, based on same-store sales increases in the 1.5 percent range. Excluding future acquisitions, we forecast earnings per share to increase 6 to 9 percent to a range of $2.43 to $2.47, assuming a fully diluted share count of 46.6 million shares. This forecast includes the anticipated accretion from the recently acquired Holiday Hair.

Our capital expenditure budget is $100 to $115 million, approximately 40 million of which is maintenance CAPEX, $15 million has been allocated to corporate initiatives, the remainder will go towards construction of 550 to 600 corporate salons. We plan to spend up to $900 million in acquisitions, we anticipate that our franchisees will build over 300 salons, net of closes, relocations and franchised buybacks, we anticipate adding over 1000 salons in fiscal 2005.

I'd like to now focus on some other short-term events. During the last conference call we talked about the possibility of expanding into the beauty school market. As you know its part of the Vidal Sassoon acquisition; we acquired four Vidal Sassoon beauty academies. These are extremely profitable and mostly appeal to graduate type education programs. We plan to announce the acquisition of one of the premier private occupational cosmetology school chains in the United States. We do have a signed contract. However, there are some governmental approvals necessary relating to title four funding issues and those approvals will hopefully be granted within the next six weeks.

As we stated in the last conference call we feel that unemployment will continue to be relatively high for many years to come. And that the business of education will be extremely profitable. Operating income percentage in the school business should be significantly higher than our basic core business. Also as stated in our last conference call we feel we can add a tremendous amount of value in that we can place many of our graduates into our salons, which will result in even lower student default rates. With our advanced education programs being virtually state-of-the-art we think we can enhance curriculums.

An excellent management team comes along with this acquisition and we feel this team can be leveraged to enable us to make a significant number of acquisitions during the next four to five years. It is important to note that we would not go into any business unless we feel we can generate an excess of $100 million in revenues. While we feel the beauty school business will be highly profitable, one must temper this with the fact that our overall company revenues within the next five years should exceed $3 billion, thus the benefits of the beauty school expansion will be largely incremental. However, as you all know, we are conservative and we do relish the thought of beating our forecast.

It's too early to determine how much expansion we will have in the beauty school arena but obviously we are extremely bullish about its potential profitability. During our last conference call we also talked about entering Asia. Randy Pearce and I visited Japan in February and while we continue to believe that this market is very attractive, we do not anticipate any deal to be consummated within the next year. The beauty business in Japan is highly organized and potentially quite profitable, however, we will not enter Japan unless we have enough critical mass to support the infrastructure necessary to build the business of which we can be proud. I will be returning to Japan in late August and will keep you informed.

Randy and I are scheduled to present at three investor conferences this SPRING. Tomorrow we will present at the Sidoti conference in New York City. On June 9th we will present at the Piper Jaffray consumer conference in New York City, and on June 23rd we will present at the William Blair conference in Chicago. It is heartening to see our results and we continue to be bullish about our future prospects. The economy does seem to be getting somewhat better, retailing is also somewhat stronger, and if shorter and shaped hair becomes more fashionable once again, and we believe current trends are quite positive, then fiscal years 2005 and 2006 should be record-breaking ones for us.

Randy Pearce will now continue with our presentation.

Thanks, Paul and good morning everyone. We are very pleased today to report record performance both in terms of third-quarter revenues as well as earnings. To reiterate our revenues increased 14 percent during the quarter and our earnings grew 20 percent to a record 55 cents per share up from 46 cents per share that we reported in the same quarter a year ago. Our third-quarter performance of 55 cents exceeded the upper end of our guidance by 4 cents per share. I will first provide you with some additional details on our third-quarter results; after doing so, I'll then discuss our updated guidance for the balance of our current 2004 fiscal year. I will then close with a few comments regarding our initial guidance for our upcoming 2005 fiscal year.

I will now give you more detail behind our third-quarter results starting first with a discussion of our revenues. Our consolidated revenues in the third quarter of fiscal 2004 were above our expectations, growing by 14 percent to a record $481.4 million. Each of our operating concepts reported an overall sales increase for the quarter. As you know, our long-term growth expectations include both organic and acquisition growth, with each representing roughly half of our total revenue growth.

This past quarter organic growth including foreign exchange rates represented 59 percent of total revenue growth, while acquisitions accounted for the remaining 41 percent. We are pleased with the execution of both strategies during the quarter, obviously these percentages will vary on a quarter-by-quarter basis due to the timing of new store openings and acquisitions. However, over a longer period of time, the mixture of organic and acquisition growth should be very consistent with our long-term expectations.

Service sales grew exactly 13 percent in the third quarter and our higher margin retail product sales increased 18.6 percent. Our product sales mix increased to 30 percent of total company-owned sales in the third quarter and that was up 100 basis points from the sales mix we reported in the same period last year. The improvement in our product sales mix can be largely attributed to the strong retail product comps we reported this past quarter of 7 percent.

In addition, total franchise revenues grew over 4 percent in the third quarter to $26.4 million. Breaking this out into its various components our franchise royalties and fees increased over 7 percent in the third quarter while franchise product sales declined by nearly 2 percent. The decrease in franchise product sales can be primarily attributed to the 199 franchise salons that we bought back as company-owned stores through the first nine months of our current 2004 fiscal year.

Our franchise business remains quite healthy as evidenced by the 55 franchise salons we added during the third quarter. We anticipate our franchisees adding about 300 salons during this entire fiscal year. You will find a table in our press release today that breaks out our third-quarter revenues for each of our salon concepts. As we reported to you in our press release on April 7, our consolidated same-store sales in the third quarter came in at 2.8 percent, and that was more than a full percentage point higher than our expectations.

Our service comps increased 1 percent in the quarter which marked the first time in six quarters that we have posted a service comp of at least 1 percent. In the months of February and March we enjoyed back-to-back positive service comps. However, while we are cautiously optimistic about the recent trends in service comps, we believe that our service business continues to be impacted by the economy, by modest foot traffic and by a lengthening of hairstyles. Long-term we anticipate that our service same-store sales will return to the range of 2 to 4 percent.

Switching to our retail product comps, they grew exactly 7 percent in the quarter. Our retail product business continues to benefit from very good merchandising execution. This execution has allowed us to annually expand our market share in the professional hair care product market while establishing Trade Secret as the only nationally recognized retail product salon. Today we estimate that Regis Corporation has a 12 to 15 percent share of the entire professional hair care market in North America.

Due to stronger than anticipated retail product sales through the first nine months of our current fiscal year, our consolidated same-store sales have increased 2.7 percent, or 120 basis points higher than the top end of our guidance. However, to reiterate, until we see a sustained improvement in our service business we are reluctant to increase our near-term comp outlook of 1 to 1.5 percent.

I will now talk a bit about our third quarter gross margin rates. Our third-quarter consolidated gross margin of 44.8 percent was in line with our expectations. As we had expected, however, our third quarter gross margin rate of 44.8 percent was a bit lower than the third quarter last year. Largely due to a favorable inventory adjustment included in last years' results which we discussed with you a year ago. Let's first discuss our service margins. Our fiscal third-quarter service margin rate net plan coming in at 42.8 percent. However, our third-quarter rate of 32.8 percent was 70 basis points lower than the same period a year ago due to a favorable book to physical inventory adjustment that we recorded in third quarter last year.

As you recall we discussed this with you a year ago at this time. Our current year third-quarter service margins benefited from higher-than-expected comps. However, this improvement was offset by higher credit card processing fees and increased state unemployment taxes. While we had anticipated increases in both of these categories, the actual effective rates came in higher than what we had forecasted. For all of fiscal 2004 we anticipate that our service margin rate should be in the mid 43 percent range. Let me now switch to our retail product margin.

Our third-quarter product margin came in on plan at 49.5 percent, but was down 50 basis points from the 50 percent margin rate we reported in our third quarter last year. Once again, last year's third-quarter results benefited from a favorable book to physical adjustment. I will now address the other line items impacting our third-quarter operating results starting first with our rent expense. Our consolidated rent expense in the third quarter of fiscal 2004 came in better than planned, at 14.6 percent of company-owned revenue. That was an improvement of 30 basis points over the same period a year ago. This improvement in our rent expense rate was primarily due to strong same-store sales results, particularly at our Regis Trade Secret and SmartStyle salon concepts. We expect our rent expense for all of fiscal 2004 to come in at the mid to high 14 percent range of sales.

I'll now address the direct salon expense category which includes costs directly incurred by the salon, such as salon advertising, workers compensation insurance, utilities, and janitorial costs. The direct salon expense category in the third quarter came in at 9.2 percent of company-owned revenue, which was 20 basis points higher than the rate we reported in the same period last year. This increase primarily related to a higher advertising expense during the quarter, therefore this was simply a timing issue between the two comparable quarters.

Looking ahead to the balance of our current 2004 fiscal year, we continue to expect the direct salon expense category to be approximately flat with the 9 percent rate we recorded for all of fiscal 2003. I will now address the line item titled franchise direct cost. As you recall this line item includes the cost of product that we sell to our franchisees, as well as the direct costs we incur at our corporate offices to support our worldwide franchising activities.

Our third-quarter franchise direct cost represented 56.8 percent of franchise revenues, and this was identical to the percentage we reported in the third quarter last year. Looking forward we anticipate that our franchise direct cost should come in around 55 percent for all of fiscal 2004.

I'll now address our corporate overhead expense which is labeled on the P&L as corporate and franchise support costs. All of the expenses within this category relate to costs associated with our field supervision, our salon training and promotions, our corporate office and our two distribution centers. This expense category for the third quarter of our 2004 fiscal year represented 9.2 percent of total revenues, an improvement of 50 basis points from the rate of 9.7 percent we reported in the same period last year. We had budgeted for much of this improvement, primarily due to reduced expenditures on salon marketing collateral material.

In addition, our third-quarter corporate and franchise support costs improved as a percentage of sales due to sales leverage. Looking ahead, we continue to expect our corporate and franchise support costs for the entire 2004 fiscal year to come in 10 to 30 basis points better than the 9.7 percent rate we reported last year. Le me now switch to our two depreciation and amortization expense categories, and once again it's not a lot to talk about here as both categories came in essentially on plan for the quarter and as a percentage of sales, our third-quarter rates were virtually identical to the same period a year ago.

During the third quarter of our current year the salon portion of this expense was 3.4 percent of company-owned sales, compared to a rate of 3.5 percent last year in our third quarter. The corporate portion of our D&A also improved slightly coming in at 60 basis points of third-quarter sales. The slight rate improvements in these two fixed cost categories were due to the strength in our same-store sales results during the quarter.

The combined effect of all of the revenue and all of the expense items I just discussed caused our four (ph) wall salon contribution rate, before any corporate overhead allocation, to come in at 17.6 percent of third-quarter company-owned sales. A quarterly salon contribution rate in the upper teens reflects the health and the profitability of our company salon operations. So we are very pleased with this performance.

After we factor in corporate overhead, our overall operating income increased 14 percent in the third quarter to nearly $44 million. This was a 9.1 percent rate as a percentage of sales which was in line with the comparable period a year ago. Let me now speak to our interest expense and to our debt levels. Interest expense in the third quarter came in at $4.8 million or about 1 percent of total sales. This represented a 23 basis point improvement over the third quarter a year ago. Our total debt at the end of March stood at $286 million down approximately $16 million from our previous June 30th fiscal year end.

The reduction in our debt can be attributed to the strength of our cash flow and as we discussed with you last quarter, to the timing of our acquisition activity which will be more back end loaded this fiscal year. Our debt to capitalization ratio continues to remain solidly investment-grade standing at 30 percent as of the end of March which is nearly a 500 basis point improvement from our prior June 30th rate of 34.9 percent. We continue to feel that our internal cash flow and our available debt capacity will be sufficient to cover our salon expansion costs as well as our scheduled debt retirements and dividend payments.

This current fiscal year we expect our EBITDA to increase to over $255 million, and our after-tax cash flow to grow to nearly $180 million. In terms of how we plan to spend our cash, we continue to budget spending 75 to $80 million this year on salon and corporate capital expenditures. As we have said in the past, acquisitions are always a bit harder to predict due to the timing of when opportunities present themselves to us. We budget spending at least $80 million this fiscal year on acquisitions.

Based on these assumptions we expect our overall level of debt at the end of our fiscal 2004 to be in the range of 300 to $320 million. However, we are expecting that our debt to capitalization ratio will remain in the low 30 percent range. Let's now talk about income taxes.

Our consolidated effective income tax rate continues to improve, coming in at 35.5 percent in the third quarter of our current fiscal year. This was a full percentage point lower than our initial plan. The improvement in rate was due to two reasons, the first relates to our UK salon operations. These salons are performing above plan and are taxed at a lower effective rate than operations here in the United States.

The second factor favorably impacting our rate was due to the closure of a prior income tax year. More importantly, however, we are expecting our fourth-quarter rate to be comparable to our third-quarter rate of 35.5 percent and as a result our effective tax rate for our entire current fiscal year of 2004 should come in about 36 percent. Looking ahead to next year, we anticipate that our consolidated effective tax rate in fiscal 2005 should also approximate the same 36 percent rate.

Let's now move on to net income. The third-quarter earnings that we are reporting today increased to a record $25.6 million or 55 cents a share up from 46 cents per share that we reported in the same period last year. I will now provide you some information regarding our salon counts. At the end of our third fiscal quarter, the end of March, we had a total of 9886 salons which was a net increase of 533 units over the number of salons we had at the end of the comparable period a year ago.

In today's press release you will find a table that breaks out our salon counts for each salon concept. For our entire 2004 fiscal year, we are on plan to build 450 to 475 new company-owned salons, and we are budgeting our franchisees will open around 300 new divested international franchise units. In addition, our salon base continues to grow through our salon real estate acquisition strategy, we continue to forecast the acquisition of 4 to 500 corporate salons during fiscal 2004.

I will now update you on our outlook for our fourth quarter and for our entire 2004 fiscal year. In our monthly revenue press release that we issued on April 7, we provided fourth-quarter earnings and revenue guidance. However, based on our recent acquisition of the 153 Holiday Hair salons, we are increasing our revenue guidance at this time. We now anticipate revenue to grow about 13 percent in the fourth quarter of fiscal 2004 to a range of $500 to $505 million. Based on the late timing of the Holiday Hair acquisition we expect minimal earnings accretion during the fourth quarter of our 2004 fiscal year. As a result we continue to project fourth-quarter earnings to be in the range of 57 to 59 cents per share.

As you recall last year our fourth-quarter results were reduced by a 4 and 1/2 cent per share charge related to settlement of an EEOC claim. Some of you may be tempted to add that back and reach a conclusion that our current year fourth-quarter earnings guidance only equates to high single-digit growth rate. However, let me point out that last year's fourth-quarter comps came in above plan at 2.4 percent which contributed about 2.5 cents of incremental earnings. This year our expectation for the quarter is for comps to increase in the range of 1.5 percent. Therefore, on an apples-to-apples basis the upper end of our current year fourth-quarter earnings guidance represents an earnings growth rate of 13 percent.

In addition, our projected fourth-quarter earnings this year are being impacted by the timing of additional advertising initiatives, as well as increased credit card processing charges and higher state unemployment taxes. Keep in mind that we manage our business to achieve our annual growth targets; as such we will experience quarterly results that will fluctuate above or below our long-term goals. So when you combine our fourth-quarter results with our third-quarter performance, we now project fiscal year 2004 revenue to grow approximately 14 percent to $1.92 billion and earnings are now anticipated to grow 18 to 19 percent to a range of $2.27 to $2.29 per share.

I will now switch gears entirely and provide you a few thoughts pertaining to our financial expectations for next fiscal year, our fiscal 2005. Before I begin we'd like to remind investors that our long-term goals are for annual revenue growth of 10 to 14 percent and annual earnings growth of low to mid-teens. With these growth targets in mind, our forecast for fiscal 2005 does not include revenue or earnings accretion from future acquisitions. While accretive acquisitions are an integral component of our overall growth strategy their timing is always difficult to predict. Our preliminary outlook also does not include the potential upside from stronger than expected same-store sales increases.

We currently anticipate same-store sales to grow 1 to 2 percent during fiscal 2005. Recall that an annual same-store sales increase of one full percentage point above our expectations can increase our earnings by approximately 10 cents per share. As a result our guidance for fiscal 2005 may appear conservative relative to our stated long-term goals and the current consensus Street earnings estimate, both of which include anticipated growth from fiscal 2005 acquisitions. As we've done for some time we will provide updated guidance as the year unfolds and as acquisitions are completed through the year.

With that said we remain poised to once again achieve our long-term growth goals in the coming fiscal year. Paul provided you some comments regarding our revenue assumptions as well as our salon growth and related capital expenditures. I'll focus my remarks primarily on a few key line items as well as our fiscal 2005 cash flow and expected debt levels. Please refer to today's press release or our website for our complete fiscal 2005 guidance.

Looking at our various salon and corporate expense line items as a percentage of sales we are really not anticipating significant fluctuations from our fiscal 2004 results. For that reason I'll focus my comments on only a few areas where we are expecting modest change. I'll start first with our consolidated gross margin which consistent with our long-term expectations we are budgeting to improve modestly in fiscal 2005. We anticipate our consolidated gross margin to improve 10 to 20 basis points and to be in the range of 45 percent.

Much of this improvement is expected to be on the product margin side. Our fastest-growing salon divisions are also our highest product margin concepts. Product margins are expected to improve to the mid 49 percent range. With the lower same-store sale expectations our service margins are expected to be in the 43 percent range consistent with our fiscal 2004. We are anticipating rent expense to come in a bit higher than fiscal than our current 2004 fiscal year due to lease renewals and accelerated store openings combined with modest same-store sales expectations. Rent expense is expected to be in the range of 15 percent of company-owned revenue. Should we experienced stronger than projected same-store sales growth, our fiscal 2005 rent expense as a percentage of sales could be consistent with fiscal 2004.

Franchise direct costs are forecasted to improve to a range of 53 to 55 percent of franchise revenues. Keep in mind this percentage will fluctuate based on the mix of franchise royalty and fees compared to franchise product sales. Margins associated with franchise product sales are lower than the operating margins we realized with franchise royalties and fees.

One last point related to fiscal 2005. As you know stock options have typically been granted each year here at Regis to several hundred home office and field employees. You will note that in today's press release we state that we are seriously considering a decision to begin expensing stock options on a going forward basis. A final decision will be made by our Board of Directors at their meeting on May 4th. What this decision would mean is that all stock options, or for that matter any other type of equity based compensation that is granted in the future would be expensed over the vesting period.

Annual option grants have typically been made in the fourth quarter of our current, of each fiscal year. Assuming the same thing occurs this year we would begin expensing these grants. This decision would have a negligible effect on our current year fourth-quarter results but would reduce fiscal 2005 earnings by about 3 cents per share, which we have factored into our guidance. This future cost would be included in the line item of our P&L titled "Corporate and Franchise Support Cost."

The last item I have relating to the P&L deals with our earnings forecast for fiscal 2005. As Paul mentioned, we are budgeting earnings from organic growth to increase 6 to 9 percent next year to a range of $2.43 to $2.47 per diluted share. This EPS computation is based on a weighted average fully diluted share count of 46.6 million shares. Consistent with past years, our initial earnings guidance has always excluded earnings accretion from future acquisitions. However, rest assured that we plan to make accretive acquisitions in fiscal 2005 and as we've stated in the past our long-term growth objective is to achieve a low to mid teen earnings growth rate.

Let me now touch on our fiscal 2005 budget assumptions regarding cash flow and our debt levels and this is my final point. We expect our EBITDA to increase next year to at least $275 million, and our after-tax cash flow to grow to at least $193 million. Most of our cash will continue to be reinvested back into the business by building and acquiring salons. Therefore, we are forecasting our debt levels over the course of fiscal 2005 to be in the range of $330 to $340 million. We do expect continued improvement in our leverage with debt to capitalization ratio being approximately 30 percent by the end of next fiscal year.

So that said, with that Paul and I would be happy to answer any questions you may have. So Tiffany, if you could please step in and provide some instructions on how people can ask their questions, we would appreciate that.

Thank you, Paul and Randy. (OPERATOR INSTRUCTIONS) Jeff Stein with McDonald Investments.

I've got two questions, first of all I'm wondering if you could comment on the success of expanding Trade Secret outside of the mall, how many locations do you have currently, how many are you planning to open and how do store economics compare with inside the malls?

(technical difficulty) with the mall based stores. The occupancy costs are less, marketing costs are higher. We acquired several in Kansas city a couple of years ago and they are performing according to plan. They are doing just fine. We'll have by the end of next year at least seven in the greater Minneapolis area, and they've opened extremely well. Trade Secret, the brand has more legs than we even (technical difficulty) imagined, and we will see continued outside of mall expansion.

And could you comment on the benefit that currency adds to the top line and bottom-line in the latest quarter and year to date?

The favorable currency because there was a weakening of the dollar impacted revenue by about two full percentage points. So in other words, if revenue grew 14 percent in the quarter it would have been 12 percent without the benefit of foreign currency. And in terms of earnings per share it impacted the quarter favorably by about a penny, and over the first nine months about 3 cents per share.

Thank you.

Mark Chekanow with Sidoti.

Look at the franchise buybacks seems to be a little accelerated than it has been in the past, is there a difference between these salons that you buying back from within your system versus those that you are seeing outside your system? Are they performing better, worse, profit margin, et cetera?

They are pretty consistent. Generally speaking these are fully matured stores, whether they are franchised or whether they are Holiday Hair. The returns are very predictable and very high, frankly. We don't see any significant difference at all whether we buy back the franchise system or a Holiday Hair type business.

With all the free cash you are generating when can we expect net reductions in your total debt levels?

Hopefully we will remain in the $300 million range for quite a while. With our returns on capital there is no compelling reason to go down to 200 or $250 million, but we don't feel that's an appropriate use of our management team or our balance sheet, frankly.

Thank you.

Kevin Fall (ph) with Next Generation Equity.

Great quarter. Just wanted to ask a question on the beauty schools. I know you guys talked operating margins are typically higher than the average salons. What type of revenue, annualized revenue would (technical difficulty) about to 300,000 a salon?

It's a hard question to answer. But the chain we are looking at will generate revenues of approximately $15 million. It's (inaudible) about five or six schools, so the revenue per a school are quite high.

Great, thanks. One follow-up. In terms of your operating margin for '05 it shows a slight deleveraging in the operating margin rate, just wondering is that (technical difficulty) majority of that I assume is based on the lower comp assumption that you (technical difficulty) in '05 versus what you achieved in '04. Longer-term what is your strategy for operating margins, do you see continued expansion?

Yeah, Kevin, you are exactly correct. The reason why the apparent deleveraging in '05 is solely related to the difference in comp expectations between the two fiscal years. We've stated that longer term we do generally expect to see gross margin rate enhancement, primarily because of a mixed plate, where our fastest-growing growing concepts are our highest service margin concepts and we continue to see that even assuming no increase in gross margin rate per product, that if product sales mix continues to increase like it did this past quarter, that also has a favorable effect on the overall gross margin because product margins are 4 or 500 basis points stronger than service.

So we continue to expect that long-term coupled with the fact that as we grow we do not have to leverage -- we are able to leverage our corporate infrastructure as well. So, net net, Kevin, I would say it 10, 20 basis points improvement in operating margin rate on a normal basis in the future.

Great, appreciate it.

(OPERATOR INSTRUCTIONS) If there are no further questions, I will turn the conference back to Paul.

Thank you all for joining us. Have a good day.

Ladies and gentlemen, if you wish you access the replay for this call you may do so by dialing 1-800-428-6051 with an ID number of 349099. This concludes our conference for today, thank you all for all participating and have a nice day. All parties may now disconnect.