Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sally Beauty Holdings, Inc. (NYSE:SBH)

F4Q2011 Earnings Conference Call

November 16, 2011 11:00 AM ET

Executives

Karen Fugate – Vice President, Investor Relations

Gary Winterhalter – President & Chief Executive Officer

Mark Flaherty – Senior Vice President & Chief Financial Officer

Analysts

Simeon Gutman – Credit Suisse

William Reuter – Bank of America/Merrill Lynch

Meredith Adler – Barclays Capital

Erika Maschmeyer – RBW

John Connor – Barclays Capital

Celeste Everett – Goldman Sachs

Karru Martinson – Deutsche Bank

Jill Caruthers – Johnson Rice

Christina Metcalf [ph] – Oppenheimer

Jason Gere – RBC Capital Markets

Operator

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 conduct a question-and-answer session. Instructions will be given to you at that time. (Operator instructions) I would now like to turn the conference over to Karen Fugate. Please go ahead.

Karen Fugate

Thank you. Before we begin, I would like to remind you that certain comments including matters such as forecasted financial information, contract 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, continue, 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 Report 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 reconciliations 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.

Gary Winterhalter

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 the favorable impact of $21.3 million from a litigation settlement, including non-recurring 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 4,309, 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 the reduction in long-term debt of $147 million. Recently, we completed a successful equity road show 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 23 million Euros. 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 U.S., we continue to realize positive trends from our customer acquisition strategy. Our targeted marketing efforts this year reached just over 21 million prospective 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 initiative 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 the 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 in existing geographies and new territories.

In summary, fiscal 2011 was a year of outstanding performance, a year in which we continue to strengthen the company’s financial position, invest in growth and deliver 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 details for the fourth quarter. Mark?

Mark Flaherty

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 a 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 favorable product and customer mix.

Fourth quarter SG&A expenses were $283.1 million or 33.8% of sales, an 80 basis points 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 $21.3 million credit from a litigation settlement net of non-recurring charges that we recorded in fiscal 2011 third quarter. Excluding this credit, 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, or 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 30th, inventories increased $60.9 million or 10% compared to the ending inventory on September 30th, 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 30th, 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 a $70 million reduction of our Term B loans in the fourth quarter. Our consolidated leverage ratio is down one full term from a year ago to 2.7 times.

In early November, we took the additional measures to reduce our cost of capital and launched 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 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 unamortized issuance costs 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 extended maturity on 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 base 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?

Gary Winterhalter

Thank you, Mark. We are pleased with our 2011 performance and anticipate that the drivers of 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.

Question-and-Answer Session

Operator

(Operator instructions) Our first question will come from the line of Gary Balter with Credit Suisse. Please go ahead.

Simeon Gutman – Credit Suisse

Hi, good morning, it’s Simeon. Congratulations.

Gary Winterhalter

Thanks Simeon, good morning.

Simeon Gutman – Credit Suisse

Good morning. 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 have got some of the interest costs more than you expected refinanced? And then, the second part of that is, any thoughts about the uses of free cash flow going forward?

Gary Winterhalter

Sure. First of all, CapEx were up a little bit because we took advantage of some store opportunities and certain geographic areas where we had increased 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 are 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 for acquisitions and certainly the servicing of our CapEx needs, whether that is 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 us 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.

Simeon Gutman – Credit Suisse

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?

Gary Winterhalter

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.

Simeon Gutman – Credit Suisse

Okay. And then, one last one, on BSG, the 3.5% [ph] 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. Thanks.

Gary Winterhalter

We are not really seeing any 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, as you look at this on a two-year comp, it’s 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 in to 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, a 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 is certain promotions going on there that make it easier to sell that promotion 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.

Simeon Gutman – Credit Suisse

That makes sense. Thanks.

Operator

Thank you. Our next question comes from the line of William Reuter with Bank of America/Merrill Lynch. Your line is open.

William Reuter – Bank of America/Merrill Lynch

Good morning.

Gary Winterhalter

Good morning, Bill.

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?

Gary Winterhalter

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’s 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.

William Reuter – Bank of America/Merrill Lynch

Okay. And that’s useful. And then, on the salary side, can you tell us what percentage of your sales were kind of 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?

Gary Winterhalter

Actually, I don’t have the quarter currently, but the year was 44. And that’s up – 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 in the past, we have kind of stated that we look for a 1% increase. This year, we got about 1.5 percentage point increase. So, I would – if I were getting you guidance, which I would not, I would say to you that the 1% is probably a pretty good number.

William Reuter – Bank of America/Merrill Lynch

Okay. And then lastly, can you remind us what your target is in terms of leverage? That’s all from me. Thank you.

Gary Winterhalter

As Mark said, our target in the past originally was to get below 4, and then after the credit crisis, we kind of we are I guess mandated by all of you that we needed to get below 3. We are below 3 now, rapidly approaching 2.5. I would say we had 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 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.

William Reuter – Bank of America/Merrill Lynch

Thank you.

Operator

Thank you. Our next question comes from the line of Meredith Adler with Barclays Capital. Please go ahead.

Meredith Adler – Barclays Capital

Good morning guys. Congratulations.

Gary Winterhalter

Hi Meredith, how are you?

Meredith Adler – Barclays Capital

Good. So, maybe since my question is 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?

Gary Winterhalter

In Europe, as we announced we made the 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 new Europe.

South America, as I have said to you in the past, we really want to be in South America in a larger way, Central America as well. 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 U.S. 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.

Meredith Adler – Barclays Capital

Okay, great. And then, maybe you could just talk a little bit about, you did lot of remodels in the UK and I think overtime 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?

Gary Winterhalter

No, actually there is 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 have said many times, it was a very long haul to get the Sally U.S. shift to be as much retail as it is today. This will not happen quickly in the UK or any place else. It’s a long-term investment, but if we can get the business shifting one or two 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.

Meredith Adler – Barclays Capital

And the customer response to the remodels?

Gary Winterhalter

The customer response has been fantastic. I just actually Sunday night returned from a week in the UK and was in six of the remodeled 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 tend to, so don’t ask going forward, but the UK comps for the year exceeded even Sally or BSG.

Meredith Adler – Barclays Capital

Great. Okay, thank you very much.

Operator

Thank you. Our next question comes from the line of Erika Maschmeyer with RBW. Your line is open.

Erika Maschmeyer – RBW

Hi, thanks. Another great quarter, guys.

Gary Winterhalter

Thanks Erika.

Erika Maschmeyer – RBW

Just a follow-up on acquisitions, you mentioned the potential for acquisitions on a larger scale. I know you just addressed the 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 were not there anymore?

Gary Winterhalter

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 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 larger 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 something like that in Central and South America.

Erika Maschmeyer – RBW

Great. And then, could you talk a little bit on the Floral acquisition in the Netherlands, just I mean, it’s not huge, but the kind of strategic benefits, amount of future leverage, if you are thinking of it as a growth platform?

Gary Winterhalter

Yes, we definitely are. One of the things I liked about Floral is 10 of the 19 stores are more of Sally type stores, they are retail town center stores. We see a tremendous opportunity with those from a merchandising standpoint. They really – the frontrunners of the company who the primary owner is staying along 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 nine 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 the map, obviously the Netherlands is very, very close to Belgium and once we get our international ERP system in order and all of the businesses are operating on the same system, we believe we can get some significant back office and distribution synergies.

Erika Maschmeyer – RBW

That is fantastic. And then, could 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, plus with your CRM that you have in your CRM system today?

Gary Winterhalter

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. Sorry, what was the second part of the question? Well, 44% of our retail sales now is Sally are coming from Beauty Club Card holders and the number of holders is a little over 6 million at this point.

Erika Maschmeyer – RBW

Great, thanks so much. Best of luck.

Gary Winterhalter

Thank you.

Operator

Thank you. Our next question comes from the line of Emily Shanks from Barclays Capital. Your line is open.

John Connor – Barclays Capital

Hi, this is John Connor in for Emily. Thanks for taking the question.

Gary Winterhalter

Hi, John.

John Connor – Barclays Capital

Hi, how are you? Regarding the gross margin expansion, can you talk a little bit more about what you are seeing when you look out in the future? You seem further up that you will put low-cost sourcing.

Gary Winterhalter

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 towards retail and the private label mix. On the BSG side, it will also be customer mix, meaning more customers 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.

John Connor – Barclays Capital

Got it. And can you also update us on your views on the competitor environment with Sally?

Gary Winterhalter

Well, you know, Sally, as has always been the case, it’s 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, 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 ageing 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 the space that should be in it, I question sometimes whether gas stations should be selling shampoo, but you see some strange things out there. I think there is 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.

John Connor – Barclays Capital

Okay, thanks very much.

Gary Winterhalter

You are welcome.

Operator

Thank you. Our next question comes from the line of Kevin Coyne with Goldman Sachs. Your line is open.

Celeste Everett – Goldman Sachs

Hi, this is Celeste Everett for Kevin. How are you?

Gary Winterhalter

Good, good.

Mark Flaherty

Hi, how are you.

Celeste Everett – Goldman Sachs

Doing well, thanks. First, now that you have refinanced the Senior and the Senior Subordinated Notes, what are your plans for the Term Loan Billion, or assuming that you probably like to just not before it concurrent in November of next year, so would it likely be the first half of ’12, then?

Gary Winterhalter

It’s very likely that we could be looking at it at that point. Certainly, we would like to wait till the interest swap expires. And also, with the rating agency upgrades that we got, we certainly put ourselves in a better position to refinance 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.

Celeste Everett – Goldman Sachs

Okay, great. And then, kind of 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?

Gary Winterhalter

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. 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 with, would have been a major acquisition.

Those kinds of things are always possible out there although I want to be clear that we are 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.

Celeste Everett – Goldman Sachs

Okay, great. And then, finally just any changes to your traffic in average ticket, any sort of notable momentum that you are seeing from the loyalty club?

Gary Winterhalter

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 count, and 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, they are spending a little more money. So, that all makes rationale sense when you look at it.

Celeste Everett – Goldman Sachs

Okay, great. Thank you so much.

Gary Winterhalter

You are welcome.

Operator

Thank you. Next, we will go to the line of Karru Martinson with Deutsche Bank. Your line is open.

Karru Martinson – Deutsche Bank

Good morning.

Gary Winterhalter

Hi Karru, how are you?

Karru Martinson – Deutsche Bank

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

Gary Winterhalter

No, it really hasn’t changed. That’s where I think the business will naturally grow over the next five, six, seven years. So, 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. Does that make it a private label because we now own it or it was a brand yesterday and we own it today. So, how do you look at that? And we represent a significant amount of the purchase 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 the, what you would call, the private label side of the ledger, but I am not sure I would agree with looking at it that way.

Karru Martinson – Deutsche Bank

Understood absolutely. When we look at the store growth here, 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 U.S. and internationally to handle that growth, are we going to need to add some capacity there?

Gary Winterhalter

No, I don’t believe we will need to add capacity in the U.S. 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 are fine in the UK.

Karru Martinson – Deutsche Bank

All right. And then of course everyone else has talked about, consumer product company guys have been talking about gross margin pressure, whether it’s on resins, it’s on packaging, cardboard, what are you guys seeing on that front?

Gary Winterhalter

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 clocks could have been $0.45, $0.50, $0.60, but when they saw an increase of $0.01 on a cap or a $0.015 on a bottle, it was significant.

When we are selling a bottle of shampoo for $3 or $4, and the cost of those 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 at 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.

Karru Martinson – Deutsche Bank

And then just lastly, when we look at your product mix, where do you see the kind of growth categories going forward to help kind of continue to drive that comp sale growth?

Gary Winterhalter

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

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 with demographic state that it will continue. So, I look forward as to seeing some nice growth there.

We are kind of – the electrical appliances category which is a big category for us has been relatively flat the last year. So, we are starting to see curl come back, and I am not sure whether that means perms will come back, but I do believe that electrical appliances such as curling iron, which are gaining rapidly could drive a whole another way or several year increase in the appliance category.

Karru Martinson – Deutsche Bank

Thank you very much guys. Appreciate it.

Gary Winterhalter

You are welcome.

Operator

Thank you. Next, we will go to the line –

Gary Winterhalter

Hello?

Operator

Yes, next we will go to the line of Jill Caruthers with Johnson Rice. Your line is open.

Jill Caruthers – Johnson Rice

Good morning.

Gary Winterhalter

Hi, Jill.

Jill Caruthers – Johnson Rice

Hi, two questions. Just kind of sticking on the Sally question, kind of how are you preparing heading in to the key Holiday season, are you looking at kind of more gift-giving, packaging or pretty much just continuing to execute as you have done in the past?

Gary Winterhalter

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 have made in our merchandising organization in Sally under Mike Spinozzi, we have brought in some people that have stronger retail background and all through the year, they have been doing some great Easter-type promotions, back-to-school type promotions, and from what I have seen just starting to go into the stores now for Holiday or actually the last couple of weeks they have been, looks really great to me.

Jill Caruthers – Johnson Rice

Okay. And then, a question on the international business. You have definitely seen some improvement there, though I know that segment operates 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?

Gary Winterhalter

EBIT contributor? Do you mean is it accretive to our EBIT? You mean, are we losing money?

Jill Caruthers – Johnson Rice

Right, right.

Gary Winterhalter

No, we are not losing money. No, it’s not operating, it’s EBIT or EBITDA percentage that our U.S. businesses, 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.

Jill Caruthers – Johnson Rice

Understood, thank you very much.

Gary Winterhalter

You are welcome.

Operator

Thank you. Next, we will go to the line of Christina Metcalf [ph] with Oppenheimer. Your line is open.

Christina Metcalf – Oppenheimer

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

Gary Winterhalter

Yes ma’am.

Christina Metcalf – Oppenheimer

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?

Gary Winterhalter

They are all over board. And a lot of it 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 you are going to or 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 spent 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 U.S. 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 kind of 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.

Christina Metcalf – Oppenheimer

Okay. And then, how many Sally stores do you see in the U.S.?

Gary Winterhalter

I really haven’t – we haven’t changed that guidance. We believe that we can put 3,000 to 3,100 in the U.S. We believe we can put 250 in Canada and Mexico, respectively. And in Canada, we are only at about 60, in Mexico we are about 140ish.

Christina Metcalf – Oppenheimer

Okay. That’s all I have. Thank you so much.

Gary Winterhalter

Thank you.

Operator

Thank you. Our next question comes from the line of Jason Gere with RBC Capital Markets. Your line is open.

Jason Gere – RBC Capital Markets

Okay, thanks. Good morning.

Gary Winterhalter

Hi Jason.

Jason Gere – RBC Capital Markets

Just I guess two kind of quick housekeeping questions and just one bigger picture question. So, on the interest expense, I think you were saying that with the refinancing and obviously factoring in on 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 kind of 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?

Mark Flaherty

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

Jason Gere – RBC Capital Markets

Okay. That’s great. And the second thing and I apologize if you mentioned it, did you say that the Netherlands acquisition, how much in terms of sales of this would that contribute to sales growth next year?

Gary Winterhalter

It’s about 23 million Euros.

Jason Gere – RBC Capital Markets

Okay. And then I guess just the bigger question. And then you are talking about the remodeling that you have done in the UK and the big lift you have got there, how do you kind of assess where you are in the U.S. 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? Thanks guys.

Gary Winterhalter

Thank you. Talking about the U.S. 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 acquisitions 15, 20 years ago and some stores that we have opened over 20, 25 years ago that needs 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 U.S. I don’t want our stores to get into 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 [ph], and pretty and boutique-ish because you lose that wholesale kind of an environment which we believe is very important to our image to the retail customer. Now, that might sound like a cop’s out on spending a lot of CapEx in U.S. stores, but we have tried different models several years ago of really spiffing up the Sally store, and you walk in, and the first impression you get is that the store is priced high. And when you don’t know that these are professional brands or you are not familiar with the brands, you have to be careful of the presentation that you make particularly to the retail consumer.

So, I am not sure if that all makes sense to you, but it’s part of our strategy not to look too high-end.

Jason Gere – RBC Capital Markets

No, it does. Thank you.

Operator

(Operator instructions) And we will go to a follow-up from Meredith Adler from Barclays Capital. Please go ahead.

Meredith Adler – Barclays Capital

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

Gary Winterhalter

Sure, I would be happy to. There still is a shortage of it. It is human hair, and there is only so much of it available. That is one category where we have 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 where especially human air, you can push along price increases because everybody is feeling the same pinch that we are.

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 U.S., 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 am 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.

Meredith Adler – Barclays Capital

And is there any products that you see or any trends you see that might be able to make up, like nail care or skin care?

Gary Winterhalter

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 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 one other 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, we are 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 there is, you wouldn't believe the price we are getting for rooster feathers.

Meredith Adler – Barclays Capital

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

Gary Winterhalter

Margins are similar, and part of the reason is both of those businesses are heavily retail for us, hair extensions, feathers and nail care. But 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.

Meredith Adler – Barclays Capital

Great. Thank you very much.

Gary Winterhalter

Thank you, Meredith.

Operator

Thank you. And with that, Mr. Winterhalter, I would like to turn it back over to you.

Gary Winterhalter

Thanks operator. In summary, we had a 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.

Operator

Thank you. And ladies and gentlemen, today’s conference call will be available for replay after 12 P.M. today until midnight November 23rd. 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. Those numbers once again, 800-475-6701 or 320-365-3844 and enter the access code of 221583. 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sally Beauty CEO Discusses F4Q2011 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts