Sally Beauty Holdings Inc (SBH) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Sally Beauty Holdings fiscal 2011 fourth-quarter and full-year financial results. At this time all participants are in a listen-only mode. Later we will commence a question-and-answer session. Instructions will be given to you at that time. (Operator instructions). As reminder, today's conference call is being recorded.

I would now like to turn the conference over to Karen Fugate. Please go ahead.

Thank you. Before we begin, I would like to remind you that certain comments, including matters such as forecasted financial information, contracts or business and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934. Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, anticipate, estimate, assume, containing, project, plan, believe and similar words or phrases.

These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in the Sally Beauty Holdings SEC filings, including its most recent annual or on Form 10-K being filed today. The Company does not undertake any obligation to publicly update or revise its forward-looking statements. The Company has provided a detailed explanation and reconciliation of its adjusting items and non-GAAP financial measures in its earnings press release and on its website.

With me on the call today are Gary Winterhalter, President and Chief Executive Officer; and Mark Flaherty, Senior Vice President and Chief Financial Officer. Now I would like to turn the call over to Gary.

Thank you, Karen, and good morning, everyone. Thank you for joining us for our fiscal 2011 fourth-quarter and full-year earnings call. I will begin today's discussion with a high-level review of our full-year financial results, and Mark will then take you through the fourth quarter in more detail.

Our strong fourth-quarter performance topped off another superb year for Sally Beauty Holdings. Consolidated sales in fiscal 2011 were over $3 billion and adjusted EBITDA grew 24% to $503 million. We applied our cash flow to reduce long-term debt by $147 million and increased our store base by 6.2%, including acquisitions.

Fiscal 2011 ended with consolidated net sales of $3.3 billion, strong growth of 12.1%. This performance was primarily the result of same-store sales growth of 6.1%, acquisition-related growth of 4.2%, growth from new store openings of 1.8% and the favorable impact of foreign currency exchange.

Gross profit ended the year at $1.6 billion, growth of 13.5%. Gross profit margin expanded 60 basis points to 48.8%. Operating margin in fiscal 2011 improved by 200 basis points to 13.7%. This increase was the result of gross profit margin expansion in both business segments and a favorable impact of $21.3 million from a litigation settlement including nonrecurring charges.

GAAP net earnings were $213.7 million, up 48.6% over last year with earnings per share of $1.14. Adjusted earnings per share excluding the impact of litigation settlement were $1.07.

Fiscal 2011 adjusted EBITDA ended the year at $503 million, an increase of $98 million or growth of 24% over fiscal 2010. In just five years since we became a public Company, we have added over $200 million in adjusted EBITDA to our annual results.

We ended the fiscal year with a total store count of 4309, an increase of 6.2% or 250 net new stores. Organic store openings contributed 4.1% to our store count and acquisitions added another 2.1%. We generated $292 million in net operating cash, which funded our investments in Company growth and a reduction in long-term debt of $147 million.

Recently we completed a successful equity roadshow on behalf of private equity shareholder CD&R. We are very pleased with the response from the new and existing shareholders and look forward to meeting with you in the coming year.

On the debt side, we also launched a very successful offering of senior notes. The proceeds from this offering will be used to redeem our high-yield notes, which will result in a lower cost of capital.

Turning to segment performance in fiscal 2011, starting with Sally Beauty Supply, same-store sales for Sally Beauty grew 6.3% versus 4.1% in the prior year. Net sales reached $2 billion for strong growth of 9.7%, driven primarily by higher transactions and average ticket in Sally North America as well as double-digit growth in the international businesses. Gross profit margin at Sally Beauty expanded 80 basis points for the year and reflects the continued shift in product and customer mix.

In support of our strategy to extend our presence in Europe, we recently acquired the Netherlands-based Floral Group with revenues of EUR23 million in 23 million. Floral is the largest professional beauty supply group in the Netherlands and operates three businesses that serve the professional and retail consumer through 19 stores and 33 direct sales consultants.

On the marketing side for Sally Beauty US, we continued to realize positive trends from our customer acquisition strategy. Our targeted marketing efforts this year reached just over 21 million perspective customers. As a result, Beauty Club memberships are up and now represent over 44% of our retail sales, growth of 300 basis points from a year ago. The average sale for a Beauty Club Card customer remains consistently higher than the average for a non-card customer. We believe our targeted marketing initiatives and BCC customer conversion efforts will continue to lead to growth in store traffic and higher average ticket in fiscal 2012.

Our BSG segment had same-store sales growth of 5.5% with net sales growth of 16.2%. This strong performance was primarily driven by growth in same-store sales, acquisitions and net new stores. BSG's gross profit margin was up 70 basis points to 40.3%. Gross profit margin performance was due to favorable customer and product mix.

Operating margin at BSG improved by 270 basis points to reach 13.1% for the year. This strong performance was primarily due to gross margin expansion, favorable impact from a litigation settlement and continued acquisition synergies. Our BSG strategy remains the same -- to continue store expansion both organically and through acquisitions, to increase our footprint and existing geographies and new territories.

In summary, fiscal 2011 was a year of outstanding performance, a year in which we continued to strengthen the Company's financial position, invest in growth and delever the balance sheet. Looking ahead to fiscal 2012, we anticipate another year of growth and strong performance.

Now Mark will provide you with more financial detail for the fourth quarter. Mark?

Thanks, Gary. Consolidated net sales for the fourth quarter increased 12% to $837.2 million. This increase was principally driven by same-store sales growth of 5.6%, acquisitions, new store openings and the favorable impact of foreign exchange rates of $8.5 million. Gross margins in the fourth quarter improved 40 basis points to 49.3% over the fiscal 2010 fourth quarter.

Both operating margin segments drove gross margin improvement through for favorable product and customer mix. Fourth-quarter SG&A expenses were $283.1 million, or 33.8% of sales, an 80-basis-point decrease from the year-ago quarter.

Unallocated corporate expenses, including share-based compensation, were $25.3 million, a $3.2 million increase over the prior year, primarily due to higher professional fees and corporate expenses.

Consolidated SG&A as a percentage of sales in fiscal 2012 is estimated to be higher than fiscal 2011, primarily due to the $21.3 million credit from a litigation settlement net of nonrecurring charges that we record in the fiscal 2011 third quarter. Excluding this credit, the fiscal 2012 SG&A as a percentage of sales is expected to be favorable over the prior year.

Consolidated operating earnings in the fourth quarter increased 22.2% to reach $114.2 million. Operating margin was up 110 basis points, 13.6%. Fourth-quarter performance was primarily driven by strong sales and gross margin expansion in both business segments.

Interest expense net of interest income for the fourth quarter was $27.5 million. Interest expense declined $400,000 over last year's fourth quarter, primarily due to lower debt levels. For the fiscal year 2011 our effective tax rate was 36.4% versus 36.9% in the prior year. For the fiscal year 2012, we estimate our annual effective tax rate to be in the range of 37% to 38%.

Our net earnings in the fiscal 2011 fourth quarter were $54 million, a 29.3% increase from net earnings in the year-ago quarter. Earnings per share was $0.29 compared to the fiscal 2010 fourth quarter earnings per share of $0.23.

Adjusted EBITDA for the fourth quarter was $132.6 million, a 20% increase compared to $110.5 million in the prior year's quarter. This increase was primarily due to strong sales and higher gross margin.

Turning to the balance sheet at September 30, inventories increased $60.9 million or 10% compared to the ending inventory on September 30, 2010. This year-over-year increase was primarily due to sales growth in existing stores and additional inventory from new store openings and acquisitions. Capital expenditures finished the year at $60 million, above the high end of our estimate of $55 million, primarily driven by investments in international infrastructure and additional store openings. For the fiscal year 2012, we expect capital expenditures excluding acquisitions to be in the range of $65 million to $70 million.

As of September 30, 2011 our debt excluding capital leases totaled approximately $1.4 billion. During the fiscal year 2011, we paid down $147 million of long-term debt, including $70 million -- a $70 million reduction of our Term B loans in the fourth quarter. Our consolidated leverage ratio is down one full turn from a year ago to 2.7 times.

In early November, we took the additional measures to reduce our cost of capital and lost a $450 million offering of our senior notes due 2019. The overwhelming response and favorable pricing of 6.875% led us to upsize the offering to $750 million. The net proceeds from the offering will be used to redeem the $430 million of our 9.25% senior notes due 2014 and our $275 million of the outstanding 10.5% senior subordinated notes due 2016 as well as pay fees and expenses incurred with the offering and the redemptions.

Our refinancing efforts should result in approximately $17 million of interest expense savings over each of the next two fiscal years. We expect to expense approximately $10.6 million of on amortized issuance cost and $24 million of call premiums in the fiscal 2012 first quarter.

On the day of our debt offering, the credit rating agencies Moody's and S&P upgraded our corporate family ratings to BA3 and BB-plus, respectively. We are pleased with this recent development and believe that new debt ratings, combined with the extent of maturity in our high-yield debt will benefit our capital structure in the long term.

Let me finish by summarizing our thoughts for fiscal year 2012. Historically, key drivers in our business have been very consistent and, accordingly, we do not anticipate business trends in fiscal 2012 to be out of the ordinary. We expect consolidated same-store sales growth of 4% to 5%, to grow our store basis 4% to 5% and, when appropriate, make strategic and synergistic acquisitions both domestically and internationally. Consolidated margin expansion is expected to be in the historical range of 40 to 50 basis points. Consolidated SG&A, including the unallocated corporate expenses as a percentage of sales, should be slightly higher than fiscal 2011 as we anniversary the favorable litigation settlement. Unallocated corporate expense, including $18 million of share-based compensation, is expected to be in the range of $105 million to $110 million. Our tax rate is expected to be in the range of 37% to 38%. And finally, capital expenditures excluding acquisitions are expected to be in the range of $65 million to $70 million. Gary?

Thank you, Mark. We are pleased with our 2011 performance and anticipate that the drivers our business will continue to generate strong operational and financial performance in fiscal 2012. As always, thank you for your interest in Sally Beauty Holdings.

And now we will turn it back to the operator to take your questions.

(Operator instructions) Gary Balter, Credit Suisse.

Good morning, it's Simeon, congratulations. Big picture about capital allocation -- first, is the CapEx guidance consistent with what you were thinking the entire year? Did that go up a little bit now that you've got some of the interest cost, more than you expected, refinanced? And then a second part of that is any thoughts about uses of free cash flow going forward.

Sure. First of all, the CapEx were up a little bit because we took advantage of some store opportunities in certain geographic areas where we had increased some CapEx as far as stores are concerned. We also accelerated a little bit of some of our costs for some international infrastructure efforts that we are doing on the IT side. So we took advantage of some opportunities with our free cash flow generation at the tail end of the year. So we migrated up a little bit towards the upper end of our guidance because of that.

As far as the uses of cash are concerned, over the next year's operating cycle, they're going to be very consistent with what you have seen from us in the past. However, as we start to get into what we have kind of talked about a little bit publicly as far as our level of leverage being somewhere in that 2% to 2.5% range, once we get into that range, certainly the thoughts or the conversations around what else do we do with the cash besides the organic growth, the growth through acquisitions and certainly the servicing of our CapEx needs, whether that is in the form of rewarding shareholders through the form of a dividend or share repurchases at this time -- there is no mandate right now by the Board. So I would say over the current operating cycle, you would see as being very consistent with what we have done in the last several years. But, certainly, those decisions will be something that we will have to consider over the course of this fiscal year.

Okay. And then the store opportunities that you referenced in terms of taking advantage of some opportunities -- is that more domestic, or is that more international?

It was a combination of both. We did a few things on the BSG side in connection with the Aerial acquisition as well as some store opportunities that we took advantage of in Mexico.

Okay. And then one last one -- on BSG, the 3, 5 comp is solid, really, in any sense. It's just I think we have been used to seeing 4s and 5s, and there was a tougher compare. Just curious what you are seeing in that business. Anything change at the margin?

We are not really seeing changes, Simeon, but let me clarify a couple of things on BSG. First of all, BSG is not a retail business. So trying to follow store comps the way you would Sally or a retail business can be difficult. And in our investor presentation on the page that shows BSG's comps over the last 10 years, that's real evident.

And let me point out that for the year BSG comps were 5.5. Let me also point out that last year in Q4, BSG comps were 6.9. So if you look at this on a two-year comp, it still 5.5%. It's nothing out of the ordinary. And with BSG, comps are heavily influenced by acquisitions. Now, the Aerial stores, which was close to 10% of BSG's store base, don't kick into comps until the month of November. So even the first quarter will look a little choppy. We bought them in October of last year. And when you start intermixing brands and you have stores that overlap each other in certain geographies, you can be actually moving stores out of the existing -- or sales out of the existing store base and into the Aerial stores, who had a bigger, better market share in those particular markets.

So you have to be careful with BSG, and you also have the sales consultant component. And when they have a particularly strong quarter or there's certain promotions going on there that make it easier to sell that promotions via the sales consultant in the store, that can have an effect on comps.

So I really think we all need to look at BSG comps on a longer term and not read too much into any particular quarter.

Okay, that makes sense, thanks.

William Reuter, Bank of America Merrill Lynch.

The improvement in gross margins on the BSG side that you noted was due to favorable customer and product mix. I was wondering if you could talk a little more about that -- it was a little bit surprising to me -- and whether you expect that these trends will continue into next year and whether this could help your margins.

Well, the customer mix all has to do with the store business outperforming the sales consultant business. As I believe you know, our store sale on the BSG side is a significantly higher margin than a sales consultant sale. So as the store business, again, primarily due to the booth runner, increases faster than the overall, you are going to get some upward movement on gross margin.

Number two is, as we continue to diversify our sales among the brands that we carry, we obviously are trying to trend them toward our higher-margin brands. So that's the product mix portion of it. I do expect that to continue, particularly the shift towards the stores. The product mix -- that's kind of dependent on the brands that we bring in and the gross profits within those brands. But I would expect it to continue, although possibly not at the rate that it did this year.

That's useful. And then on the Sally side, can you tell us what percentage of your sales were on the private exclusive control bucket in the quarter and where you think that that might be going this year, whether this should be one of the larger growth years or smaller growth?

Actually, I don't have the quarter in front of me. But the year was 44, and that's up about -- I think it's up from about 42.5 in fiscal 2010. I don't expect it to increase at that rate every year. We saw some exceptional growth in our ion Color brand during fiscal 2011. Obviously, I hope that continues, but I think the past we have stated that we look for a 1% increase. This year, we got about a 1.5 percentage point increase. So if I were giving you guidance, which I'm not, I would say that 1% is probably a pretty good number.

Lastly, can you remind us what your target is in terms of leverage? That's all for me, thank you.

Well, as Mark said, our target in the past originally was to get below 4, and then after the credit crisis, we were, I guess, mandated by all of you that we need to get below 3. We are below 3 now, rapidly approaching 2.5.

I would say we have a target. I think that we are in the range where we certainly are comfortable with that. And if we can find other things to do with the cash flow, i.e., acquisitions on a larger scale, if that happens to be the case, we would probably do that if we should decide in the future, as Mark stated, to do something in the way of a dividend or share buyback. That's a possibility. If none of those seem to make sense, then obviously we will pay down some more debt.

Thank you.

Meredith Adler, Barclays Capital.

Congratulations. So maybe since my questions about BSG were asked, maybe talk a little bit about the acquisition opportunities, specifically in Europe and whether you are seeing anything more interesting in Latin America.

In Europe, as we announced, we made acquisition in the Netherlands. I think there are a fair amount of acquisitions of that size in Europe. That's not huge. It's not going to add anywhere near 1% to our revenues at this point. But we will continue to make those acquisitions in either countries we are already doing business in or as a way of entering a new country in Europe.

South America, as I've said to you in the past -- we really want to be in South America in a larger way, Central America as well. It's a bit -- they are a bit difficult to do in South America. These are all privately-held family businesses, and getting accurate financial information and getting some of these sellers to agree to the warranties and indemnifications that we would require as a public company is a lot more challenging than in the US and in the northern European countries.

So we still very much want to be there. We are still actively pursuing acquisitions in Central and South America. But it's not moving as fast as I would like it to.

Okay, great. And then maybe you could just talk a little bit about -- you did a lot of remodels in the UK. And I think over time the goal in Europe is to shift the mix, if you can, to more retail customers. Is there anything new that's going on to make that happen, or is that just really a long-term opportunity?

Actually, there's a couple of things going on. We will be basically finished with our remodel program at the end of 2012 in the UK. We also have been collecting data similar to our Beauty Club Card customer here in the UK, for about two years. We are going to be moving into a program similar to our program that we operate here for CRM and Beauty Club Card, both on the BSG and the Sally side. We will be moving forward with that in the UK, I hope by the end of fiscal 2012.

Now keep in mind, as I've said many times, it was a very long call to get the Sally US shift to be as much retail as it is today. This will not happen quickly in the UK or anyplace else. It's a long-term investment. But if we can get the business shifting 1 or 2 points a year in that direction, which simply means the retail business grows faster than the professional, not that the professional is declining, that will be our objective. We wanted to get the stores remodeled basically and in much better visual condition than they were in the past, before we embarked upon that.

And the customer response to the remodels?

The customer response has been fantastic. I just actually, Sunday night, returned from a week in the UK and was in six of the remodel stores. And it's pretty incredible. One of the things that I will tell you is the UK basically has had no new store openings in several years now. We have actually closed a few stores two or three years ago, and the UK -- and I don't report this on a regular basis and I don't intend to, so don't ask going forward -- but the UK comps for the year exceeded either Sally or BSG.

Great, okay, thank you very much.

Erika Maschmeyer, RWB.

Another great quarter, guys. Just a follow-up on acquisitions -- you mentioned the potential for acquisitions on a larger scale. I know you just addressed market in Europe and South America. I guess, how many of those exist out there? And where exactly are you seeing them? I know you said before that a lot of the really big ones, like Schoeneman weren't out there anymore.

That's correct; they are not out there. And I think what I said was, if we had an opportunity with our cash situation and our debt situation where it is, we certainly could handle a larger opportunity. I am not aware of any that are even of the size of Schoeneman or Aerial that would be available to us. So I wouldn't be expecting that. I would be expecting a lot of acquisitions that are the type that BSG normally makes, not the large ones, and of the type that we just made in the Netherlands. There are quite a few of that size in Europe. And, hopefully, we will find some like that in Central and South America.

Great, and then can you talk a little bit on the Floral acquisitions in the Netherlands? I know it's not huge, but those kind of strategic benefits and amount of future leverage for thinking of it as a growth platform.

Yes, we definitely are. One of the things I liked about Floral is 10 of the 19 stores are more Sally-type stores. They are retail town center stores. We see a tremendous opportunity with those from a merchandising standpoint. They really -- the former runners of the company, who -- the primary owner is staying on with us -- really wasn't in the retail business, and this was kind of a sideline. And the merchandising of those show it. So we will be going in there and experimenting with some significantly different merchandising in the retail stores in hopes that we can expand that from 10 stores to significantly more.

And on the professional side, just to give you a comparison, we have 38 or 39 professional-only stores in Belgium. There are 9 in -- of the 19 stores we acquired in the Netherlands, and Belgium is approximately twice the size, population wise, as the Netherlands. So we see a lot of expansion opportunity there on the professional side as well as getting something going that would be under another name, which they actually are now. They are called Hair Zone, not Floral.

And then from a synergy standpoint, if you look at a map, obviously the Netherlands is very, very close to Belgium. And once we get our international ERP system in order and all these businesses are operating on the same system, we believe we can get some significant back-office and distribution synergies.

That is fantastic. And then can you just remind us of the number of customers that you reached out to for the first time in Q4 with your CRM program and the total number of customers that you have touched with your CRM that you have in your CRM system today?

Erika, I don't have the quarter number in front of me, but the annual number for Sally on the customer acquisition was $21 million. And -- I'm sorry, what was the second part of the question?

Oh -- well, 44% of our retail sales now in Sally are coming from Beauty Club Card holders, and the number of folders is a little over 6 million at this point.

Great, thanks so much, best of luck.

Emily Shanks, Barclays Capital.

This is John Connor in for Emily. Regarding the gross margin expansion, can you talk a little bit more about what you are seeing when you look out in future? Do you see any further upside from low-cost sourcing?

Yes, I do, but that will be the smallest factor in our margin increase. And it actually has been, all along. The drivers of our margin have been and will continue to be, on the Sally side, the customer mix more toward retail and the private label mix. On the BSG side, it will also be customer mix, meaning more customer shopping the stores as opposed to ordering through sales consultants, and also on the BSG side, the product mix, where we obviously are going to be pushing and promoting brands that have better margins for us.

Got it. And can you also update us on your views on the competitive environment, specifically for Sally?

Well, Sally, as has always been the case, is really difficult to identify a direct competitor, for a couple of reasons. There really isn't anyone doing what we are doing. And, secondly, with 44% of our sales in brands that we own, we obviously don't have direct competition on those brands. So I -- and everybody and their brother is in the health and beauty aids space today because it is a good margin space. And I think, with the aging of America and the baby boomers and everything else, it's a good space to be in.

And I think all of us that operate in this space that should be in it -- I question sometimes whether gas stations should be shelling shampoo, but you see some strange things out there. I think there's plenty of room and plenty of growth for all of us who understand what this market is, whether it be consumer goods or professional goods.

Okay, thanks very much.

Kevin Coyne, Goldman Sachs.

This is Celeste Everett on for Kevin. First, now that you have refinanced the senior and the senior subordinated notes, what are your plans for the term loan B? We're assuming that you would probably like to address that before it comes current in November of next year. So would it likely be a first half of '12 event?

It's very likely that we could be looking at it, at that point. Certainly, we would like to wait until the interest rate swap expires. And also, with the rating agency upgrades that we got, we certainly put ourselves in a better position to refinance it at much more favorable rates as we move forward here. So certainly you would like to be on the outer bound of that window of that 12-month period to certainly refinance. So that's a very likely scenario right now.

Okay, great. And then a follow-up to Bill's question. How high are you willing to move leverage if a larger acquisition opportunity would present itself, or as you begin to examine capital returns to shareholders, if there is some sort of range there?

I think an acquisition of anywhere near the sizes that would require us to even think about that question is probably not in line with our strategy. I can't say that at some point, some other -- well, to give you an example, when we were looking at merging with Regis. That would have been getting into a completely new business. It would have been a major acquisition. And those kind of things are always possible out there, although I want to be clear that we're not looking at doing anything with Regis or we are not looking at any other acquisition of that size.

To more directly answer your question as far as leverage, if we ever found an opportunity like that, we were not uncomfortable with the characteristics of our cash flow when we were six times levered. I personally don't really have any interest in being that highly levered again. But I -- certainly, if the right opportunity came along, I certainly would not be uncomfortable levering up again into the 5 or 5.5 range. And that would have to be a pretty extraordinary opportunity.

Okay, great. Finally, just any changes to your traffic and average ticket? Any sort of notable momentum that you are seeing from the loyalty club?

It continues to follow the same trends. I think, in our prepared remarks we commented that what was driving Sally traffic was the increase in average ticket and in customer account. They are actually increasing at very similar rates, which I think is good. Average ticket is increasing slightly better than customer traffic, and that simply is due to the fact that the Beauty Club Card customer, once they get in the club, is spending a little more money. So that all makes rational sense when you look at it.

Okay, great, thank you so much.

Karru Martinson, Deutsche Bank.

When we look back, kind of when you guys spun out, and I'm looking back, talking about private-label back then, I kind of remember that you had put out a bogey of somewhere around 50% is kind of where you think you could grow that business to. At that point, some of your branded players might start taking exception. Is that still the mindset here, or has that dynamic changed?

No, it really hasn't changed. That's where I think the business will naturally grow over the next 5, 6, 7 years. But what you have to keep in mind is most of these brands we have acquired from in the professional industry. So I always say to people when they ask about how much private-label can you have, let's say, for example, a brand that represented 2% of Sally's revenues came up for sale and we bought it. Does that make it a private label because we now own it? Or it was a private yesterday and we own it today. So how do you look at that? And we represent a significant amount of the purchases of a lot of our smaller vendors on the Sally side. And we have done that in the past. We will do it in the future if it makes sense for us to do it.

So I think we have to be a little careful when we approach 50, saying that the other 50 being all branded vendors is never going to change because we could very well buy a few of those vendors. And then it ends up sliding over to what you would call the private-label side of the ledger, but I'm not sure I would agree with looking at it that way.

Understood, absolutely. When we look at the store growth there, kind of the 4 to 5 and certainly a little bit higher this year, how do you look at your distribution network here in the US and internationally to handle that growth? Are we going to need to add some capacity there?

No, I don't believe we will need to add capacity in the US either for BSG or for Sally. I think we are good in Mexico. In Europe, as I said a few minutes ago, once we get our ERP system in order and everybody is operating on the same system, I actually see some nice distribution synergies in Europe. And I believe we're fine in the UK.

Most everyone else has talked about or consumer product company guys have been talking about gross margin pressure, whether it's on resins, it's on packaging, cardboard. Where you guys seeing on that front?

Not a lot, right now. But keep in mind, again, the products we sell, packaging and components, is a lot less of the cost or the selling price, I should say, than it is for most of the CPG people that would be making those comments. And I recall from the days of being part of Alberto Culver, when they were selling VO5, selling it through Wal-Mart or Walgreens for $0.77 a pint, the cost could have been $0.45, $0.50, $0.60. But when they saw an increase of $0.01 on a cap or $0.015 on a bottle, it was significant.

When we are selling a bottle of shampoo for $3 or $4 and the cost of that product, although it's more than the VO5 would be, the impact of raw materials or packaging is significantly less. So we and our suppliers of those products, I think, are in a much better position to eat it if we have to or pass it on. But it ends up being passed on in a very, very minor price increase.

Lastly, when we look at your product mix, where do you see the growth categories going forward to help continue to drive that comp sale growth?

Well, one of our largest categories, which we continue to see excellent growth in and just the demographics, say, that will continue is hair color. That's kind of a no-brainer. I also believe that the nail categories are just on fire right now, and I believe that will continue just because there's a lot of really innovative products that have been coming out in the last year or two, and I see that continuing.

I'd also -- we have made some nice strides in skin care, which you have heard about from most retailers for years as being a great category. It never was, for us. We made some personnel changes in that area, and we are doing much better there. It's still a very small percentage of our business, but I know the category is growing rapidly and it's kind of like hair color; the demographics say that it will continue. So I look forward to seeing some nice growth there.

We're kind of -- the electrical appliances category, which is a big category for us, has been relatively flat the last year or so. We are starting to see curl come back, and I'm not sure whether that means perms will come back. But I do believe that electrical appliances such as curling irons, which are gaining rapidly, could drive a whole other wave or several-year increase in the appliance category.

Thank you very much, guys, I appreciate it.

Jill Caruthers, Johnson Rice.

Two questions -- just kind of sticking on the Sally question, how are you preparing headed into the key holiday season? Are you looking at more gift-giving packaging or pretty much just continuing to execute as you've done in the past?

We will continue to execute as we have done in the past, but I think our product selection and our promotional selection this year is the best that it's ever been. Some of the changes we've made in our merchandising organization in Sally under Mike Spinozzi -- we have brought in some people that have a stronger retailer background. And all through the year they have been doing some great Easter-type promotions, back-to-school-type promotions. And from what I've seen just starting to go into the stores now for holiday or actually the last couple weeks that have been, looks really great to me.

Okay, and then a question on the international business. You have definitely seen some improvement there, though I know that segment operates at a lower margin versus the domestic Sally. But is it a fair, safe assumption to say that international is now a solid positive EBIT contributor?

EBIT contributor? Do you mean is it accretive to our EBIT?

Yes.

You mean we're losing money?

Right, right.

No, we are not losing money. No, no, no. It's not operating at the EBIT or EBITDA percentage that our US businesses are, either Sally North America or BSG. But I don't expect it to. We are growing these businesses, particularly Europe, Mexico and South America, very rapidly. So when you are adding 25%, 30%, 40% to your store base every year, you are not going to have growing EBITDA.

But as long as the stores, once they start to mature, are contributing in the way that we expect them to, we will eventually get to the point where we will have the leverage and they will contribute nicely, which was very much the case for 20 years with BSG.

Understood, thank you very much.

[Christina Metcalf], Oppenheimer.

I was just wondering if you could tell me if your exclusive label brands -- are they still growing faster than third-party brands?

Yes ma'am.

Okay, great. And then your acquisition multiples -- have you seen those going up or going down? Where do you see them going in the future as well?

They're all over the board. And a lot of that simply has to do with what we believe we can do with the Company going forward. On the acquisition we made in the Netherlands, it was the largest player in the Netherlands, we thought the best player in the Netherlands. We believe that it had some opportunities like I mentioned a minute ago for us to expand on the retail stores that they have called Hair Zone as well as add a significant amount of their professional-only stores. So those kind of acquisitions, when it's going to position you in a completely new market or country, we are going to pay a little more for. And the seller obviously is going to know that you are willing to pay more for that. But I think when you look at what we spend on acquisitions, what we pay is not nearly as important as what we do with those acquisitions longer-term.

So, having said that, we still continue to make a lot of acquisitions that are extremely synergistic to us, particularly in the US with BSG in geographies where we already operate. And some of those can be picked up at a relatively inexpensive multiple. But then again, we look at it as, are we really fixated on a multiple of what the business is doing today or what it will do next year after we own it?

And then how many Sally stores do you see in the US?

We haven't changed that guidance. We believe that we can put 3000 to 3100 in the US. We believe we can put 250 in Canada and Mexico, respectively. And in Canada we are only at about 60. And Mexico we are about 140-ish.

Okay, that's all I have, thank you so much.

Jason Gere, RBC Capital Markets.

I just have to kind of quick housekeeping questions and just one bigger picture question. So in interest expense I think you were saying that with the refinancing and obviously factoring in all the amortization it's a $17 million savings over the next two years. So just for I guess being a little bit more clear on that, should we be thinking about interest expense this year in that $24 million a quarter and then probably down a little bit more next year before you do anything about the term B for next year, for 2013?

I think that factoring in what we told you in terms of the overall decrease is appropriate over the next two years. I wouldn't factor, certainly, anything in yet for anything we do with the term B. I expect the spreads to be, once fully realized, somewhere from where we were to where we are -- or where we're going, to be about 150 basis points better, overall.

Okay, no, that's great. The second thing, and I apologize if you mentioned this. Did you say the Netherlands acquisition -- how much in terms of sales of this will that contribute to sales growth next year?

It's about EUR23 million.

Okay. And then I guess just the bigger questions, I know you were talking about the remodeling that you've done in the UK and the big lift you've got there. How do you assess where you are in the US, looking at some of the stores, A locations or B locations, where is it opportunistic to do a remodel, what type of ROI you would require to get an incremental comp lift off of that?

Talking about the US stores, being that most of them on the Sally side are stores that we organically opened, we don't have a store base that's anywhere near the condition that the UK store base was.

Secondly, on the Sally stores, when we renew a lease, which is typically every five years, we do go in and do a light freshen-up, which would be paint, window graphics and whatever else the interior needs. That's a very inexpensive freshen-up. However, having said that, we do have some stores that Sally got through acquisition 15-20 years ago and some stores that we have opened over the 20-25 years ago that need some remodeling. But that's an ongoing situation. We do that every year.

When we are finished with the UK, we will probably turn that up a bit in the US. I don't want our stores to get in the situation where they just look like they need a lot of remodel.

Now, having said that, you have to keep in mind that one of the reasons the retail customer shops with us is they know it's where their hairdresser shops and they know that Sally is a wholesaler as well as a retailer. So we don't want our stores to look too [tata] and pretty and boutique-ish because you lose that wholesale kind of environment, which we believe is very important to our image to the retail customer.

Now, that might sound like a copout on spending a lot of CapEx in US stores, but we have tried different models several years ago of really spiffing up the Sally store. And you walk and the first impression that you get is that the store is priced high. And when you don't know that these are professional brands or you're not familiar with the brands, you have to be careful of the presentation that you make, particularly to the retail consumer. So I'm not sure if that all makes sense to you, but it's part of our strategy not to look too high end.

No, it does. Thank you.

(Operator instructions) Meredith Adler, Barclays Capital.

This is just sort of a minor question, but I was traveling with you guys and you talked about the shortage of real hair and that that might be hurting the extensions business, which is a profitable business. Can you comment all about where that stands now and the extension business in general?

Sure, I'd be happy to. There still is a shortage of it. It is human hair, and there's only so much of it available. That is one category where we've seen some fairly healthy price increases. It is a very high-margin category, so we are able to absorb some of those, and it's a category were especially human hair you can push along price increases because everybody is feeling the same pinch that we are.

The category -- the second part of that question is, again, I just spent a week in the UK and three weeks ago I was in Western Europe for a week. The category is slowing in Europe and in the UK. We have not seen that yet here in the US, but we are certainly keeping an eye on it because when a category like that slows, it's not a category you want to have a lot of excess inventory in.

Now, I'm not projecting that it's going to have anything significant in the next year. The slowing in the UK and Western Europe I would call more of a flattening than a decline, but it is something we are keeping a close eye on.

And is there any product at you see or any trends you see that might be able to make up for it, like nail care or skincare?

Well, Meredith, as I said before, nail care is on fire. It's more than making up for anything right now that could happen in hair extensions because the nail category is a much larger category. So when you've got nails growing 20% or 25%, it offsets -- and it's a significantly large category -- it's going to offset a lot of what's happening in hair. Skin, on the other hand, as I mentioned, is a very small business for us. So the percentage growth looks wonderful, but that isn't significant either.

But another thing that's happening right now that I will have a much better flavor on after the current quarter and probably into the spring is feathers. Feathers were difficult to get a hold of when the trend took off last summer. We are in stock on them. Our European and UK business just got in stock of them. I do think we will see a nice blip on feathers for the holidays, and we have to be careful that we don't read that as an explosion in feathers. It could just be a holiday phenomenon. But you wouldn't believe the price we're getting for rooster feathers.

On the margin in nail care, how does that compare to feathers or hair extensions?

Margins are similar, and part of the reason is both those businesses are heavily retail for us, hair extensions, feathers and nail care. We have some significant private-label offerings in nail care and in hair extensions, for that matter. So the margins are excellent in both the categories.

Great, thank you very much.

With that, Mr. Winterhalter, I would like to turn it back over to you.

Thanks, operator. In summary, we had terrific year, ending with strong financial results and executing on key initiatives, positioning us well as we head into fiscal 2012. Thanks again for your interest in Sally Beauty Holdings and we look forward to seeing you in the new year.

Ladies and gentlemen, today's conference call will be available for replay after 12 PM today until midnight, November 23. You may access the AT&T teleconference replay system by dialing 800-475-6701 and entering the access code of 221583. International participants dial 320-365-3844. (Operator instructions)

That does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.