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Alberto Culver Co. (ACV)

F4Q07 Earnings Call

October 29, 2007, 11:00 AM ET

Executives

V. James Marino - President, CEO and Director

Ralph J. Nicoletti - Sr. VP, CFO

Analysts

Amy Low Chasen - Goldman Sachs

Linda Bolton Weiser - Oppenheimer

Jason Gere - Wachovia Capital Markets

Christopher Ferrara - Merrill Lynch

William Schmitz - Deutsche Bank

Justin Hott - Bear Stearns

Connie Maneaty - BMO Capital Markets

Jason Rogers - Great Lakes Review

Jon Andersen - William Blair & Company, L.L.C.

Presentation

Operator

Good day everyone and welcome to the Alberto-Culver Conference Call. Today's call is being recorded. A replay of this call will be available for 30 days beginning this afternoon. The calling numbers are 888-203-1112 or 719-457-0820, please enter pincode 4372072. All lines will be muted during today's broadcast. After the presentation there will be an opportunity to ask questions. [Operator Instructions].

Before we begin, the Company has asked me to remind you that the actual results with respect to any forward-looking statements that are made today might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ are spelled out in Alberto-Culver's annual 10-Q and 10-K reports, which the Company invites you to access.

In addition, due to the disclosure of organic sales growth and financial results excluding restructuring expenses, this call may include mention of certain non-GAAP financial measures. Reconciliations of these financial measures to the most directly comparable GAAP measures are provided on the Company's website in the Investing section and are attached to the earnings release issued this morning and filed on Form 8-K... Securities and Exchange Commission.

And now, at this time I would like to introduce the host of today's call, Mr. Jim Marino, President and CEO of Alberto-Culver Company. Mr. Marino, please go ahead sir.

V. James Marino - President, Chief Executive Officer and Director

Good morning and thank you Justin. I would like to welcome all of you this morning to our fourth quarter and fiscal year 2007 conference call. I am joined today by Ralph Nicoletti, our Chief Financial Officer and Doug Craney, our Head of Investor Relations.

Now, before beginning I would like to remind all of you that prior year and current year numbers have been adjusted to report Sally in discontinued operations. Discontinued operations include Sally's earnings as well as fees and expenses associated with the separation net of tax.

Well it's a beautiful day in Chicago and it's a beautiful day at Alberto-Culver and I am very pleased to report a record fourth quarter, which completes a terrific year for Alberto-Culver and its shareholders. During the quarter, our sales grew 14.5%, and pre-tax earnings from continuing operations, excluding restructuring, increased 11%. For the year, sales increased 10.2%, while pre-tax earnings from continuing operations, excluding restructuring, increased more than 35%.

TRESemmé continued its growth trajectory and delivered another outstanding quarter and year both in the U.S. and internationally. TRESemmé's sales this year were just over $400 million, an increase of more than 30% over fiscal year 2006. TRESemmé remains the number two styling brand in the most recent 12-week and 52-week IRI data, but captured the number one styling brand ranking in the U.S. for the latest 4-week period. Only five years ago TRESemmé held the number seven position in styling, so we're very, very pleased with this accomplishment.

Nexxus had an exceptional year, especially considering the top comparisons from last year, as a result of its initial retail launch and the heavy marketing activity associated with it. Despite this, Nexxus sales and pre-tax earnings increased double digits for the year. Nexxus has been a great acquisition for us and has allowed us and our retail trade partners to participate in the fastest growing sub-category within haircut.

Alberto VO5 sales decreased low single digits for the year, mainly due to three factors. First; softness in Latin America. Second; comparisons from the prior year includes certain discontinued items. And also, as we discussed in our last call, we walked away from some unprofitable business. Consumer consumption, an opening price point Alberto VO5 in the U.S. is up 7.5% in the last 12-week period. We're particularly pleased with that since that sub-segment is showing a decline.

The important point here is that Alberto VO5 is better positioned today than it has been in a long time. This year we made a number of changes for St. Ives in our efforts to elevate the brand. We changed the packaging, the formulations and we changed the advertising. The results to-date have been mixed, but overall we did finish the year showing slight growth in St. Ives. We are committed to the skin care category and have planned some new initiatives for St. Ives in 2008.

The overall sales growth rate in the fourth quarter and for the year was aided by favorable foreign exchange rates, which accounted for approximately 4% and 3% respectively of our growth. In addition, as in previous quarters this year, the sales we made to Sally also favorably impacted the quarter as these sales are currently reported as external sales whereas prior to our separation from Sally, they were classified as inter company sales. Gross profit margin in the fourth quarter increased 120 basis points, compared to last year. The improvement was mainly due to favorable sales mix.

Now, as we discussed in our last call, we made a significant increase to advertising and marketing investments this quarter. Increasing 45% from the prior year fourth quarter, mainly due to higher investments behind Alberto VO5, TRESemmé and Nexxus.

For fiscal year 2007, our advertising and our other marketing investments increased nearly 11% from fiscal year 2006, despite significant prior year advertising investments associated with the Nexxus retail launch. These marketing investments are critical to keeping our brands relevant in today's competitive environment and certainly contributed to our strong fourth quarter and fiscal year '07 sales growth.

As a percentage of net sales selling and administrative expenses, excluding advertising and marketing improved approximately 170 basis points from the prior year fourth quarter as cost increases including expenses related to the beginning to step our new Jonesboro, Arkansas manufacturing facility were largely offset by restructuring savings and lower stock option expense in the current year.

The tax rate this year and the prior year included certain tax benefits. The benefit in the current year was $0.05 per diluted share, while the prior year benefit was $0.06 per diluted share.

Looking at our sales results by segment, our consumer packaged goods business posted approximately 12% sales growth in the fourth quarter including a 3% benefit from foreign exchange. Our Cederroth business posted sales growth of about 8% this quarter, including a 9% benefit from foreign exchange. As we discussed in the last few conference calls, Cederroth sales growth this year is being impacted by several factors including softness in Sweden and decisions to terminate a distribution relationship and discontinue the contract manufacturing of private label adhesives for certain customers due to low margins.

In a transformational year for the Company, I am exceptionally pleased and extremely proud of our accomplishments. As we move into 2008, we see future growth opportunities for all of our brands and markets. We expect to continue to drive top line growth through advertising investments at or near 2007 percentage of sales rates. In addition, we would expect to see margin expansion through enhanced mix, restructuring savings and other cost efficiencies.

Now, before opening up the call for questions, there is one additional item I would like to bring to your attention. Earlier this morning, we filed an 8-K outlining our intentions to close our manufacturing facility in Toronto, Canada by the end of our second quarter of March 2008. The majority of the current production in Canada will be shifted to our other Company facilities. We estimate that we will incur approximately $8 million in restructuring costs related to the closure in fiscal year 2008, of which approximately $6 million will occur in the first quarter.

Canada has and will continue to be an important market for Alberto-Culver. Our position there continues to increase. We intend to maintain an office in the Toronto area for our Canadian commercial team. This move will also really allow us to leverage our new manufacturing facility in Jonesboro, Arkansas and result in cost savings benefits to our North American manufacturing operation.

To summarize our results, strong sales growth, improving gross margins, strong pre-tax growth, strong earnings per share growth while significantly investing behind our brands.

And now, I would like to open it up for questions.

Question And Answer

Operator

Thank you sir. [Operator Instructions]. We will go first to Amy Chasen with Goldman Sachs.

Amy Low Chasen - Goldman Sachs

Can you give us an update on TRESemmé and maybe break out for us U.S. International and how each of those businesses is doing?

V. James Marino - President, Chief Executive Officer and Director

Well quite frankly, Amy we are doing well both here in the U.S. and abroad. We experienced double digit growth on both sides of the business. Here in the U.S. strong double digit growth. Our styling business has really outperformed in the past year. As I mentioned, we've been the number two store... we grew to the number two styling brand here in the U.S., and if you look at just four weeks obviously our four weeks consumer consumption does not make a year, but over the last four weeks we are excited to be the number one styling brand in the U.S. category.

Amy Low Chasen - Goldman Sachs

Okay. And can you give us an update on any plans to enter new markets in fiscal '08?

V. James Marino - President, Chief Executive Officer and Director

We are looking at a variety of different opportunities right now Amy. We don't have specific plans for TRESemmé market expansion in '08. But certainly are considering several markets that we feel could play very well for TRESemmé and we are in the middle of doing a lot of testing and trying to understand the best way to go about it.

Amy Low Chasen - Goldman Sachs

Okay. And then can you also just shifting gears to Nexxus give up a sense of how that business is doing given that you are lapping the roll out and any sense of repeat purchases?

V. James Marino - President, Chief Executive Officer and Director

I got to tell you Amy, I am really pleased with how Nexxus performed this past year. As you know, we had some question marks going into the year because we had such a strong launch here in the U.S. and we are wondering how we would fare anniversary in that strong launch and the heavy investments that we had to place behind it. The fact is we ended the year up double digits. We are very pleased with all aspects of it. As we look at our real estate and retail it all looks good. It will continue to look good in '08. So we feel very bullish at Nexxus right now.

Amy Low Chasen - Goldman Sachs

Great. Thanks a lot.

V. James Marino - President, Chief Executive Officer and Director

Anytime Amy. Take care.

Operator

And we will go next to Linda Bolton Weiser with Oppenheimer.

V. James Marino - President, Chief Executive Officer and Director

Hi Linda.

Linda Bolton Weiser - Oppenheimer

Hello, how are you?

V. James Marino - President, Chief Executive Officer and Director

Very good, yourself?

Linda Bolton Weiser - Oppenheimer

Good.

V. James Marino - President, Chief Executive Officer and Director

Good.

Linda Bolton Weiser - Oppenheimer

So in terms of this facility closure that you are just announcing, are there any immediate cost saves to accrue from that in FY08 apart from the benefits of shifting it to Jonesboro?

V. James Marino - President, Chief Executive Officer and Director

There will be... there will be a bit. I'll let Ralph comment on that. Go ahead Ralph.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

We'll probably finish closing the facility at the middle of the year. We should expect to save about a penny a share. So in fiscal '08 and substantially more than that thereafter.

Linda Bolton Weiser - Oppenheimer

Okay. And just on the cost front, can you just kind of remind us in terms of the headcount reductions at headquarters and those programs? How much did you achieve in cost savings in FY07 and then what's the carryover into '08?

V. James Marino - President, Chief Executive Officer and Director

I'll let Ralph handle that one also Linda.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Sure. This year we are saving about $12 million from the restructuring and as we look into next year, on a full year basis we would expect to increase to about $20 million on a full year basis. We had a run rate of about $5 million this fourth quarter here.

And in terms of the reductions, they were all essentially completed except for the finalization of the closure of our Dallas facility, which will happen in the early part of next year. So thus far there's been about a little less than a 100 people from the organization. And then we still have the Dallas facility in early '08... calendar '08.

Linda Bolton Weiser - Oppenheimer

Okay. And I think you said something, I just want to make sure I caught this correctly, in terms of your advertising and promotion spending ratio going forward, did you say it would be at least kind of flattish going forward or do you expect more of increases?

V. James Marino - President, Chief Executive Officer and Director

I think, plus or minus we are going to be at around the same rate, as we have been the last year or two, so that's our position going into the year. I don't think you are going to see a huge deviation, one way or another.

Linda Bolton Weiser - Oppenheimer

Okay and just one final question on, you know, we noticed in our store tax some bundling activity with TRESemmé in Walgreen, it was really almost like thick bottles or something bundled together for certain price or something. It just seemed like they had type of promotional activity would encourage pantry loading by the consumer and shampoos and I was just wondering, can you control that a little better in terms of what Walgreen does or and also why was accounts receivable up 18% year-over-year?

V. James Marino - President, Chief Executive Officer and Director

Well let's handle the Walgreens one; you stumped me on that one Linda. I don't know if any bundling of six products at Walgreen. So maybe what you saw was an aberration. I really can't comment any further on that one because you are absolutely right. We are not in... we try to stay away from pantry loading and in fact if anything.

If you look at our promotional programs, over the past year and really the past couple of years in comparison to maybe what some of the marketing tactics that we had prior to that we shied away from that rather significantly. So, I can't comment on what you observed at Walgreens, but now you kicked my curiosity, so at lunch time we are going to run over there.

I'll let Ralph talk about the receivables.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Linda on receivables, they are up 18%. Most of that is just related to the sales in the fourth quarter, which were up over 14%, including currency effects. The balance of the difference is really just the timing and the way the shipments occurred during the quarter. So, a little bit more remained uncollected as we exited the quarter. So in terms of days we are up about three days year-on-year from this year to the end of last year.

Linda Bolton Weiser - Oppenheimer

Okay. Thank you.

V. James Marino - President, Chief Executive Officer and Director

No problem.

Operator

And we will go next to Jason Gere with Wachovia Capital Markets.

Jason Gere - Wachovia Capital Markets

Good morning.

V. James Marino - President, Chief Executive Officer and Director

Hey Jason. How you are doing?

Jason Gere - Wachovia Capital Markets

Good.

V. James Marino - President, Chief Executive Officer and Director

How is the new organization?

Jason Gere - Wachovia Capital Markets

Oh, it's treating me well so far.

V. James Marino - President, Chief Executive Officer and Director

Good.

Jason Gere - Wachovia Capital Markets

Thank you. Two questions; one I'll go with the housekeeping. Can you just talk about the cash flow for the year in EBITDA with the unincident [ph] release and let's say really went past that?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Cash flow wasn't in the release. It's a $103.5 million.

Jason Gere - Wachovia Capital Markets

Okay and what is that compared to?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Well, depending in your benchmark at the end of third quarter we had said it was $51 million.

Jason Gere - Wachovia Capital Markets

Okay. And then how about versus last year?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

And versus last year, it was $90 million last year. So its up $13 million versus last year.

Jason Gere - Wachovia Capital Markets

Okay. And then in terms of the EBITDA?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

EBITDA... bear with me one second.

Jason Gere - Wachovia Capital Markets

Okay. So I'll ask you other question while you are looking or --?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Sure, go ahead.

Jason Gere - Wachovia Capital Markets

Okay. And then I guess when you are talking... going back to Linda's question about the advertising, you were mentioning about three of the four brands where there is going to spending, but you left St. Ives out there and that's the one, I guess, where there are some new products coming out, but that's a one we are still probably a little bit more challenged than the other businesses. Can you just talk about; A, can you talk about the new product pipeline coming out for the St. Ives; and B, whether or not... why I guess say St. Ives wasn't mentioned in terms of spending more on marketing?

V. James Marino - President, Chief Executive Officer and Director

Well, the real key, Jason, on St. Ives, was that, part of that business is a bit seasonal. The hand and body lotion business turns to skew upwards, as you get into late fall and winter. So, our fourth quarter being July-August-September is probably not the most opportune time to be increasing advertising for that particular brand. As we move into fiscal year '08, we do in fact have plans to support our new launches within St. Ives. So that's the only reason I did mention it. So I hope that helps.

Jason Gere - Wachovia Capital Markets

Okay, no, I thought when you were talking about the plan for '08 in terms of spending, I thought you mentioned those three and you excluded St. Ives so --

V. James Marino - President, Chief Executive Officer and Director

No actually... actually what I think I said was what was driving the advertising increase in Q4 versus Q4 of last year.

Jason Gere - Wachovia Capital Markets

Okay fair enough. And then can you talk a little bit about Nexxus and Costco and how that's going with into the club stores?

V. James Marino - President, Chief Executive Officer and Director

Actually Nexxus and Costco is doing quite well, if you were in a Costco store earlier this month you would have seen in CAPS on Nexxus. So we're very, very pleased with the performance to-date and as is Costco. So it's been a good addition to the Nexxus business.

Jason Gere - Wachovia Capital Markets

And then just on that same question and then I'll let Ralph come up with the EBITDA number. As you look at the mass channels versus maybe now the alternative channels, can you kind of separate the growth that you saw in Nexxus this year between the two and obviously you're going to be looking towards this alternative growth channels to push it further?

V. James Marino - President, Chief Executive Officer and Director

Yes and I think your observations are correct. It's a little bit of a mix bag, but obviously, the Costco consumer matches up real well with the Nexxus consumer. So we would anticipate that to continue to perform very well. And drug seems to match up a little better than food overall on Nexxus and the mass business is a little bit of mix bag. But certainly on a case by case basis, some stores are going to be more predisposed to attract a shopper that is going be a salon hair care shopper and those are the places where we continue to perform exceedingly well with the Nexxus brand.

Jason Gere - Wachovia Capital Markets

Okay great. And I'll let Ralph... EBITDA.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Jason D&A is $31.6 million. So if you look at our EBITDA on a continuing operations basis it's a $175 million versus last year on a continuing basis would have been $142 million.

Jason Gere - Wachovia Capital Markets

Terrific. Okay. Thanks a lot, guys.

V. James Marino - President, Chief Executive Officer and Director

No problem Jason. Good luck with your new gig.

Jason Gere - Wachovia Capital Markets

Thank you.

Operator

And we'll go next to Chris Ferrara with Merrill Lynch.

Christopher Ferrara - Merrill Lynch

Hey guys. I was wondering if you could talk about for the quarter what you were looking for, for advertising and I thought you had said ay that ads would be up a little bit as a percentage of sales in this quarter, but you know coming in as high as they did it was a bit of a surprise to me; was it a surprise to you and I'm sure what was the source of it?

V. James Marino - President, Chief Executive Officer and Director

It really... it really wasn't a surprise, as I mentioned at the last call. We had such a strong performance in Q3, it really gave us the opportunity to take another look at Q4 in terms of our what investments we had planned and to supplement those investments in places where we thought it made sense, not just here in the U.S. but in other markets. We increased our spending in Latin America behind the TRESemmé launch. We increased our spending in Australia, behind VO5. We increased our spending here in the U.S. behind the TRESemmé restage. We increased our spending in the UK behind VO5 restage.

So it really was just taking a look at all of those initiatives that we had planned and to optimize the support that we already had. In addition to that, we were offered a couple of opportunities. I don't know if you would have noticed, but we were on the Emmys during the quarter with TRESemmé. I mean that was a program that matched very well with our TRESemmé target and that was an opportunistic thing that came about for us as we moved into the quarter.

So we decided to take some incremental dollars in place of behind that and certainly the performance on TRESemmé appears to indicate that it was the right thing to do. So those are the kinds of the things that we looked at, and again, coming out of Q3 we felt strongly that we needed to bump up some support behind our brands and quite honestly in that only generated results in Q4, but I think it put us in a good position moving in the first quarter of this year.

Christopher Ferrara - Merrill Lynch

Great, and just as a follow up, I used the word supplemented, can you give us an idea of what portion of the advertising that hit this quarter you'd consider sort of supplemented versus what might core ongoing?

V. James Marino - President, Chief Executive Officer and Director

Yes, that's a difficult one to really answer Jason. I think suffice it to say occurs rather. Suffice it to say that that we did bump up our advertising a bit over plan. But our plan all along, quite frankly, was to invest significantly more than we invested in Q4 of last year.

Christopher Ferrara - Merrill Lynch

Got it. And then just on the acceleration of the gross margin in the quarter, because obviously you got a lot better year-over-year than had been mix you guys out of these one of the bigger drivers, but was there something different about mix this quarter than it was versus last quarter or the quarter before, and if not then what was really the driver of that acceleration?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Well I think there is a couple of pieces. Clearly mix was a significant portion and Nexxus and TRESemmé has been a critical driver of that. I think we also benefited in the quarter though is some of the improved profitability of VO5 as Jim has talked about earlier on just improving its overall margin profile. So that helped as well.

And also when you look at the balance sheet side, we've said we're going to focus very hard on our inventory days and as the means also not just manage working capital, but improve gross margins. And we were able to lower our inventories throughout the quarter from the first half of the year. So that was the benefit as well in terms of warehousing distribution, freight and obsolescence costs.

Christopher Ferrara - Merrill Lynch

Great. Thanks a lot. And then just other quick ones Jim. Reuters' headlines coming across saying you guys would be hoping to close the deal before the year end. And I guess there was not a lot of detail. Can you just talk a little bit more about that, I guess, you did an interview today?

V. James Marino - President, Chief Executive Officer and Director

Yes. Well I think what I said was that we are anxious to make an acquisition. We love to make one before the end of the year. We certainly continue to look at the opportunities as we have been looking at opportunities. It is very difficult to make a prediction in that sense. So please view it in that context.

Christopher Ferrara - Merrill Lynch

Thanks a lot guys.

V. James Marino - President, Chief Executive Officer and Director

All right Chris.

Operator

We'll take our next question from Bill Schmitz with Deutsche Bank.

William Schmitz - Deutsche Bank

Hey guys good morning.

V. James Marino - President, Chief Executive Officer and Director

Hey Bill, how are you?

William Schmitz - Deutsche Bank

Great Thanks.

V. James Marino - President, Chief Executive Officer and Director

What happened to our cubs?

William Schmitz - Deutsche Bank

Not a lot unfortunately.

V. James Marino - President, Chief Executive Officer and Director

Oh gosh, I am sick.

William Schmitz - Deutsche Bank

Me too. Just a follow-on, on Chris's question. Can you just talk about for the sales composition this quarter? I mean was there a pullback in promotional spending? Are you kind of working on the marketing mix kind of over the volumes versus price mix promotional activity?

V. James Marino - President, Chief Executive Officer and Director

No, I would say that the promotional activity was similar to what it had been in previous quarters. I don't think there was a lot of variance there. Certainly as Ralph just mentioned, with respect to VO5, we changed our promotional strategy on that brand moving in to the year, but if you'll compare fourth quarter to the previous three, I don't think there has been a great shift in our promotional activity.

William Schmitz - Deutsche Bank

Okay, good. And then you're certainly like looking longer term. If my numbers are right, it looks like 90% of your growth this year has come from TRESemmé and Nexxus. Are you okay with that?

V. James Marino - President, Chief Executive Officer and Director

Well, I haven't looked at that specific number, so I can't comment on that. But, I will tell you that we are very pleased with the performance of both TRESemmé and Nexxus. We are pleased with what we put in place for VO5 this past year and where we netted out the year.

And St. Ives has been a mixed bag as we have talked about in previous calls. I think we did some things that were very helpful with St. Ives during the year, but quite frankly there were some things that we did that didn't work as well as we would have expected, and we are trying to revamp that and continue to look at that brand and try to better understand how we can get that message across to the consumer in a powerful and meaningful way. So it is a bit of a mixed bag on those brands.

You take the beauty care brands aside, the Cederroth business had a difficult year, and so when you compare that with the beauty care business, it certainly makes the total growth of that business or the piece of a growth of that business represents to be quite stronger.

William Schmitz - Deutsche Bank

Okay great, and then just a follow-up on inventory questions, that's pretty remarkable. There is only a 2% year-over-year given currency and then also the fact that you are building Jonesboro. So I imagine there is public and have to be some safety start as that comes online. So what's changed on inventory management right now?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Well, a couple of thing. First just on Jonesboro, we are not at a point in the process where we needing to do any inventory builds for the transition that the construction is still well on track, but still we have ways to go there. A lot of it... it's been really just focus looking at forecast accuracy, the organization has really made it a priority and we had a lot of room to improve in this area and we continue to think we have even more to improve. So, that's really the essence of that. It's nothing further behind it in terms of big changes in systems or things like that. Those are things we think will provide us future upside, but this is a little bit more just the fundamentals.

William Schmitz - Deutsche Bank

Okay, great. Then just a follow on, a final housekeeping if I could, you are simply handlings in your gross margin of cost of goods line, correct?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Distribution is, freight is not.

William Schmitz - Deutsche Bank

Okay. And what is that as a percentage of sales?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Freight? Hold on a second.

V. James Marino - President, Chief Executive Officer and Director

4%.

William Schmitz - Deutsche Bank

Okay. That's low, that's great and then what's the tax rate guidance for next year?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

About 33%.

William Schmitz - Deutsche Bank

Okay. And is that just the rate going forward probably?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Right.

William Schmitz - Deutsche Bank

Okay. Thanks so much.

V. James Marino - President, Chief Executive Officer and Director

Okay Bill. Take care.

William Schmitz - Deutsche Bank

Have a good one.

V. James Marino - President, Chief Executive Officer and Director

Lets fit in the bleachers once next year.

William Schmitz - Deutsche Bank

I want you, for sure.

V. James Marino - President, Chief Executive Officer and Director

Okay.

Operator

We'll go next to Justin Hott with Bear Stearns.

Justin Hott - Bear Stearns

Hello.

V. James Marino - President, Chief Executive Officer and Director

Hey Justin.

Justin Hott - Bear Stearns

Can you hear me?

V. James Marino - President, Chief Executive Officer and Director

Yes, we can here you fine.

Justin Hott - Bear Stearns

Okay. I have got 5 questions hopefully no follow-ups.

V. James Marino - President, Chief Executive Officer and Director

Okay.

Justin Hott - Bear Stearns

Assumptions for cost inflation for '08.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

I think you should just use in the CPI, Justin. We are not going to give a direct forecast on the COGS, on the cost of goods sold number, but rest assured we are going to continue to make good growth in gross margins. We have said at around of 50 basis point clip, until we get Jonesboro and some of our systems initiatives online, which will step that up. So I think you could think of it that way. So there is inflation and then cost management all within that and we would expect to see about 50 basis point improvement.

Justin Hott - Bear Stearns

And that 50 basis point improvement that excluded all the COG, potential cost savings from Toronto maybe something additional or not?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

I would say probably not if we execute on the timetable, we would like, there might be a little upside to that. But in a sense it includes those kinds of things.

V. James Marino - President, Chief Executive Officer and Director

Yes. There was always in the plans Justin so its not like that's anything there.

Justin Hott - Bear Stearns

Okay. Jim question sort of falls up on what Bill was asking; when you think about the growth of TRESemmé and you keep mentioning how great styling is going. The opportunity to styling versus the other areas of hair care, how much do you think you can grow styling? Is this just some enormous opportunity or do you really need to see the growth in the other areas as well?

V. James Marino - President, Chief Executive Officer and Director

Well, we think we can grow both quite frankly and we have been growing both and we have been capturing higher share in both. So I don't want you to think that anyone is more important than the other. We happen to do very well inspiring around the world, not just with TRESemmé, but with VO5 quite frankly. We are the number one styling brand in the UK. We are the number one styling brand in Australia, New Zealand, number one styling brand in Chile. We have performed very, very well in the styling category, with both TRESemmé and VO5. Having said that, we think there is a huge opportunity and continues to be a huge opportunity in traditional hair care shampoo conditioner. And again, with TRESemmé, we continue to take shares on that side of the business too.

Justin Hott - Bear Stearns

Okay. If you would have breakdown the growth in TRESemmé, styling versus shampoo conditioners would it be about even or is styling growing at a much faster pace?

V. James Marino - President, Chief Executive Officer and Director

Right now styling is growing at a bit of a faster pace than shampoo conditioner.

Justin Hott - Bear Stearns

Okay. In terms of I guess the interview you gave about acquisitions; obviously the cash continues to grow. If you don't make an acquisition, is there a some sort of point or some sort of threshold or this cash just becomes too much and you have to do something with it. Are you reaching?

V. James Marino - President, Chief Executive Officer and Director

Probably there is point where that will happen. I hope we don't see that point quite frankly. But at some point, well, we'll have to make a call.

Justin Hott - Bear Stearns

Anything you can tell us on how you think about where that point would be?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

It really depends on how our outlook on the future acquisition opportunities look in the magnitude of it.

Justin Hott - Bear Stearns

Okay. And one last question. The Latin American soft to something V05 that was a little bit of a surprise to me, can you tell what's going on?

V. James Marino - President, Chief Executive Officer and Director

Wellin most of the Latin American markets VO5 is neither the opening price point brand nor a mid-tier brand. It's a value brand, but if you go through Latin America, Justin, you will find brands that can be bought for $1 a litre. So, it suffers from that perspective down there. This is, isn't really a new thing, but certainly it's begun to escalate a bit this past year and in Q4. So we are going to execute similar programs in Latin America and VO5 that we launched here in the U.S. So, we are hoping that ongoing we'll be able to try to stem some of that decline. Time will tell, but we think some of the activity we had in the U.S. which was quite successful for us may play... will also play well in Latin America.

Justin Hott - Bear Stearns

And last one Jim. When you think about the future of Nexxus in the U.S. and one of that I guess and you are learning so far about how the professional hair care category at mass or professional style brands has helped the brand. The sense I have got in the last years is that year two would be the tough year. How do you think about the competitiveness of the category and how do you think about where you should be maybe a year or two from now with Nexxus with what you have learned?

V. James Marino - President, Chief Executive Officer and Director

Well I think every year is going to be a tough year. And you know we are now... we are going to anniversary a very strong double digit growth year for Nexxus that included some incremental distribution. So it will be also year three in the Nexxus lifecycle at retail will be tough, just as we said year two will be tough.

Now I am bullish on the brand because consumer consumption remains very strong and I think there is some things we could do to optimize the efficiency of the brand in terms of marketing and in terms of the way we market the brand. And we have certainly learnt a lot about how to get at this target consumer, since we launched the brand. So I feel real good about it here in the U.S. and we continue to feel that it has potential outside the U.S. and we just need to sort that through.

Justin Hott - Bear Stearns

Jim, haven't you said in the past that one there is a professional category or professional style brands of Nexxus does better. Does that give you more confidence in the brand?

V. James Marino - President, Chief Executive Officer and Director

I think generally that's true. I have to go back and so take that as a general statement because it may not be true in every single customer. But certainly, it seems to perform... its one of those things, what came first the chicken or the egg? Those outlets that attract saline [ph] customers tend to have more saline merchandise. So is it because of the merchandise or is it because of the stores, or because of the location, is it because of the imagery that the store represents. It's difficult to sort through all that but suffice it to say that we perform very well with other professional brands or retail.

Justin Hott - Bear Stearns

Okay. Thanks a lot.

V. James Marino - President, Chief Executive Officer and Director

All right. Take care Justin.

Operator

[Operator Instructions]. We'll go next to Connie Maneaty with BMO Capital Markets.

Connie Maneaty - BMO Capital Markets

Good morning.

V. James Marino - President, Chief Executive Officer and Director

Hi Connie. How are you?

Connie Maneaty - BMO Capital Markets

I am fine, thanks. It was good to see that selling and administrative expenses declined as a percentage of sales but the growth rate of that line item accelerated during the year. So, was it zero, there was no growth in Q1, but there was 6.5% growth in Q4, what was that about?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Yes Connie a couple things there are going on why we did get the benefit of some restructuring savings during the quarter. We did because of the strong sales growth, have higher selling costs. We also had higher costs related to foreign exchange, and then we continued to invest in Jonesboro and in some new systems activities that ramped up a little bit more in the fourth quarter than we were earlier as we approach getting closer to the start up of our Jonesboro facility. So, those were some extra plus when you look year-on-year as it didn't exist in '06.

Connie Maneaty - BMO Capital Markets

So yougave advertising and marketing. I think you said it will remain about the same as the percentage of sales in 2008. What about this S&A lines?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

You should expect it to go down as a percent of sales since we move into next year.

Connie Maneaty - BMO Capital Markets

A down through the full year?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Yes.

Connie Maneaty - BMO Capital Markets

Okay.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

As a percent of sale.

Connie Maneaty - BMO Capital Markets

And you also gave the cost of closing Toronto, what would the benefit be?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Next year around a penny a share, that's what we expect to see, and then significantly more than that thereafter and our timing is roughly middle of the year, we have that completed.

Connie Maneaty - BMO Capital Markets

So a penny in savings in the back half then in fiscal '08?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Yes, that's about right.

Connie Maneaty - BMO Capital Markets

And so, should we look for something like... can it have $0.05 impact in '09, or is that too much?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

No,if you just want to extrapolate it, that's probably safe.

Connie Maneaty - BMO Capital Markets

Okay. When do you start to lap the tough times in Cederroth?

V. James Marino - President, Chief Executive Officer and Director

Yes I think after this first quarter Connie.

Connie Maneaty - BMO Capital Markets

Okay. And just sort of mass question, I mean now as we look at the way your earnings developed this year your toughest comp in fiscal '08 is the first quarter, I mean you are comparing against 37% or so percent increase. Have you budgeted for an increase in Q1?

V. James Marino - President, Chief Executive Officer and Director

Well I guess what I would just say is we are hoping to improve upon that fantastic performance that we had in Q1 of '07. I think your insight is correct. That's a difficult one to anniversary, but we are hopeful that we are off to a good start.

Connie Maneaty - BMO Capital Markets

So if I were... my model is saying something flattish you wouldn't be does that kind of match with what you are looking at?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Connie, frankly, we would rather not comment specifically on the first quarter and give guidance that way. We'll --

V. James Marino - President, Chief Executive Officer and Director

And we are just not looking at this quarter, to quarter-to-quarter to be perfectly frank about it. If we were, we wouldn't have invested behind our business the way we did in Q4. So you know, we are really looking at it over the long haul and we feel very confident that we'll continue to show the kinds of increases that will make us stand off in the crowd.

Connie Maneaty - BMO Capital Markets

Okay.Can you give us the growth rate in the fourth quarter for the big brands, the sales growth rate?

V. James Marino - President, Chief Executive Officer and Director

In the fourth quarter?

Connie Maneaty - BMO Capital Markets

Yes.

V. James Marino - President, Chief Executive Officer and Director

TRESemmé and Nexxus were both up double digits. St. Ives was up low single digits. VO5 was down low single digits.

Connie Maneaty - BMO Capital Markets

Okay great. That it's for me. Thanks a lot.

V. James Marino - President, Chief Executive Officer and Director

All right, Connie take care.

Operator

And we'll go next to Jason Rogers with Great Lakes Review.

Jason Rogers - Great Lakes Review

Hi.

V. James Marino - President, Chief Executive Officer and Director

Hi Jason.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Hi Jason.

Jason Rogers - Great Lakes Review

The Sally Beauty holding contribution, do you know what that was for the quarter to sale?

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

The point where last year it was with inter company, it had about a 2.5 point impact on the growth rate in the fourth quarter and about 2 points on the year.

Jason Rogers - Great Lakes Review

Okay. And there were no share repurchases in the quarter right.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

No.

Jason Rogers - Great Lakes Review

And where are you now in the... I don't know if you addressed this or not the restaging of the VO5 styling line?

V. James Marino - President, Chief Executive Officer and Director

That has gone into retail and we just started our marketing behind it.

Jason Rogers - Great Lakes Review

Okay. And are there any plans to launch Nexxus internationally in '08 or even '09?

V. James Marino - President, Chief Executive Officer and Director

We'd love to launch Nexxus in other markets, as I have mentioned before, we haven't quite figured that out yet. I would suspect that that won't happen until '09.

Jason Rogers - Great Lakes Review

Okay, and do you sell to Alta [ph]?

V. James Marino - President, Chief Executive Officer and Director

Yes we do.

Jason Rogers - Great Lakes Review

Okay, thank you.

V. James Marino - President, Chief Executive Officer and Director

Are ready, anytime.

Operator

And we'll go with a follow up from Linda Bolton Weiser with Oppenheimer.

Linda Bolton Weiser - Oppenheimer

I was just wondering if you had within cash and short-term investments, do you have the break out between cash and short-term investment sales, please give?

V. James Marino - President, Chief Executive Officer and Director

Hold on. I'll pull that for you here.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Yes, cash is $93 million, short-term investments $256 million.

Linda Bolton Weiser - Oppenheimer

Thank you very much.

Ralph J. Nicoletti - Senior Vice President, Chief Financial Officer

Okay.

V. James Marino - President, Chief Executive Officer and Director

No problem.

Operator

And we have a question from Jon Andersen with William Blair.

Jon Andersen - William Blair & Company, L.L.C.

Good morning.

V. James Marino - President, Chief Executive Officer and Director

Hi Jon.

Jon Andersen - William Blair & Company, L.L.C.

I was just wondering on Jonesboro, number one, is the production plan tracking for sort of a production early next year, number one. And number two, I know you've talked about some near-term duplicate cost associated with the facility. At what point would you foresee that shifting from some incremental cost to more of ongoing cost savings?

V. James Marino - President, Chief Executive Officer and Director

We are very much on track on our Jonesboro facility. We would expect to begin production probably some time toward the end of our second quarter moving in to Q3. When we... my sense is when we finally shutdown our Dallas facility and our Toronto facility, we'll probably be in a place where we won't have any duplications.

Jon Andersen - William Blair & Company, L.L.C.

Okay. And then just one additional question, it looks like you have made some nice progress in terms of inventory management, better forecasting etcetera. How comfortable are you or what level of visibility do you have in to your inventory levels at retail and do you feel like you are at good levels there if they kind of maintain or there's an opportunity for some drawdown potentially there during coming quarters?

V. James Marino - President, Chief Executive Officer and Director

We feel pretty good about our inventories in retail. Quite frankly, retailers are not holding a lot of inventory on any of our items. We manage inventory for a fairly large percentage of our retail customers ourselves, so we know that we're held to a standard and therefore we try to optimize what they have in the pipeline to a great extent. And so I don't think there's anything vastly different today than there would have been 12 months ago.

Jon Andersen - William Blair & Company, L.L.C.

Great. Thanks a lot guys. Great quarter and I'll join you in the bleachers when you get a chance.

V. James Marino - President, Chief Executive Officer and Director

Hey. Lets all do it, Jon.

Jon Andersen - William Blair & Company, L.L.C.

Yes.

V. James Marino - President, Chief Executive Officer and Director

All right.

Operator

And there appear to be no further questions at this time. I'd like to turn the conference back to Mr. Marino for any additional or closing comments.

V. James Marino - President, Chief Executive Officer and Director

Well. Thank you to all for your time this morning. I think you've probably sensed that we're very excited for 2008 and we look forward to sharing our continued success throughout the year. If any of you have any additional questions please feel free to give us a call, we're more than happy to talk to you. Otherwise have a great day and a great week and we'll talk to you all again soon.

Operator

Thank you Mr. Marino. I'd like to again remind everyone that a replay of this call will be available for 30 days beginning this afternoon. The calling numbers are 888-203-1112 or 719-457-0820, enter pincode 4372072. This does conclude today's conference call. Thank you and have great day.

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