Good morning, ladies and gentlemen, andwelcome to the Sally Beauty Holdings Conference Call to discuss the company’sfourth quarter and fiscal year 2007 financial results. (Operator Instructions) NowI would like to turn the call over to Sandy Martin, Vice President of InvestorRelations for the company.

Thank you. Before we begin I would like toremind you that certain comments including comments including on matters suchas forecasted financial information, contracts or business and trendinformation made during this call may contain forward-looking statements withinthe meaning of Section 21E of the Securities Exchange Act of 1934. Many ofthere forward looking statements can be identified by the use of words such asmay, will, should expect, anticipate, estimate, assume, continue, project, planand similar words or phrases. These matters are subject to a number offactors that could cause actual results to differ materially from expectations.Those factors are described in Sally Beauty Holdings SEC Filings including its2007 Annual Report on forms intake [ph 00:06:40]. The Company does notundertake any obligation to publicly update or revise these forward-lookingstatements. The Company has provided a detailed explanation and reconciliationfor these adjusting items and non-GAAP financial measures in its earnings pressrelease and on its website. With me on the call today are GaryWinterhalter, President and Chief Executive Officer, David Rea, Senior VicePresident and Chief Financial Officer, Greg Coffey, Vice President andTreasurer, and Mark Flaherty, our new Chief Accounting Officer and VPController. Now I would like to turn the call over to Gary.

Thank you, Sandy, and good morning, everyone. Thank youfor joining us for your fourth quarter and fiscal year 2007 earnings call. Today we reported consolidated net salesfor fiscal year 2007 of 2.5 billion, an increase of 5.9% from last year, andconstore [ph 00:07:34] sales gains of 4.5 %. Our net earnings for fiscal ‘07were 44 million or 24 cents per diluted share. The last 12 months have beenboth exciting and challenging. A year ago we successfully completed thetransaction that separated our company from Alberto-Culver. And we beganoperating as an independent public company. During this first year, our Sally BeautySupply business continued its history of strong performance. We also added toour international business with an exciting acquisition. Fiscal ’07 was nothowever without its share of challenges. In addition to the efforts needed totransition to an independent public company, Beauty Systems Group facedsignificant challenges in its supplier base. I’m happy to say that in our first year asa public company, I believe we demonstrated the ability to shift initiatives,right-size the business and retain key employees in BSG. I’m extremely proud ofthe dedication and hard work of our employees. And despite the difficult year,our team stepped up and delivered solid financial results in fiscal 2007. For the fourth quarter, ended September 30,consolidated revenues were 640 million, an increase of 5.5% fro the year agoperiod. And constore sales increased 4.3%. Turning to the segments, SallyBeauty Supplies fourth quarter sales were 411 million, an increase of 14.3%versus the year ago period. And constore sales increased 2.4%. Sally’s strong top-line performance wasprimarily attributable to 9.6% of acquisition related revenue, a continuationof new unit expansion and constore sales increases of 2.4%. Sally Beauty Supplyachieved strong fourth quarter segment operating margins of 17.4% compared to15.5 in the year ago quarter. We continue to improve the Sally Beauty Segmentprofitability…

Thanks, Gary. Before I begin, I want to welcome MarkFlaherty, our newest of the finance team. Mark is our Vice President, ChiefAccounting Officer and Comptroller. He brings over 20 years experience to thecompany where his prior responsibilities included senior management positionswith two public companies. Welcome, Mark. Our total net sales for the fourth quarterwere 639.7 million an increase of 33.6 million or 5.5 percent over the prioryear ago period. FY ’07 consolidated sales were 2.5 billion and increase of5.9% over fiscal year ’06. In comparative store sales increased 4.5%. As Garymentioned our top-line growth for the year was primarily a result of thepositive impact of our acquisitions, top-store sales gains and continued unitexpansion with a net total of 183 Sally stores, which includes the acquiredstores, as well as .6 net stores added for BSG. Fourth quarter’s consolidated gross profits was 295 million of 46.2% of salesan improvement of 110 basis points form last years 45.1% of sales. For thefiscal year our gross profit totaled approximately 1.2 million and the grossmargin and the percent of sales were 45.9% up slightly from 45.8% in fiscal2006. Those margins in the Sally segment were positively impacted by acontinuation of higher sales and exclusive label products which expanded to 40%in US sales in FY ’07. Also for Sally we experienced markedincreases on certain products as well as a continuation of a favorable trendand sales mix. For the fourth quarter, Sally general administrative expenseswere 32.9% of sales, an improvement from 33.5% of sales from the year agoperiod. Last years fourth quarter SG&A included a direct allocated overheadcharge of 2.8 million representing expenses from Alberto-Culver after theseparation transaction. SG&A expenses for this year’s fourthquarter included 3 million of share-based compensation compared to 1.1 millionin last year’s fourth quarter. In October the company issued new equity awardsto employees.…

As we look into fiscal 2008, I’m optimisticand excited about the overall momentum in our business. On the BSG side as wementioned earlier, we will be working on our distribution project. We expect toincur some cost associated with this facilities restructuring this year. But Ibelieve this project could save us $10 million beginning next fiscal year. Wewill provide you with updates on our progress during the coming quarters. Onthe working capitals front, I was pleased with the progress we made with ourinventory management in 2007. I recognize however that this same type ofworking capital improvement will be much harder to achieve in 2008 in light ofthe number of product introductions at BSG, as well as the anticipated seatingof the new or expended distribution centers. Having said that, once we are through thisprocess I would expect to see further improvements in this area as we bringmore efficiencies to the BSG distribution network. Overall our focus at BSGremains on improving operating margins. Although we expect BSG’s constore salesgains to moderate as we enter strong comps, we also expect segment operatingmargins for BSG to return toward historical levels during the second half offiscal ’08 setting aside the cost from the BSG warehouse project. In addition we plan to continue growing BSGrevenues through unit expansions, both stores and BSG’s, brand additions andthrough potential acquisitions that can provide a revenue stream through addeddistribution while adding little associated infrastructure costs. On the Sally side of our business, we areexcited about our international expansion opportunities. As a specialtyretailer and distributor of professional beauty products, we see tremendousgrowth opportunities throughout Western Europe.Longer term, we also plan to investigate expansion into several countriesthroughout South America. During fiscal year ’08 we will continueintegrating our acquisition and seeking to achieve the benefits of combiningthese businesses. Our goal is to have this business unit perform atapproximately a 10% operating margin for 2008. Here in the US where wemake the majority of our profits, we believe the Sally Beauty retail conceptcurrently has potential for 3,000 stores. Additionally we continue to roll outstores in Canada and Mexico where webelieve there is potential for 250 stores in each of those countries. In fiscal’08 our store growth plans for Sally Beauty Holding are an increase of 4% to5%, which we equate to approximately 140 to 180 net new stores, excludingacquisitions. We ended 2007 with solid performance andare committed to creating shareholder value through increased sales andprofitability each year. With that I would like to open the call for questions.

Your first question comes from GreerMartinson of Georgia Bank.

Good Morning. In terms of the retail spaceeveryone has talked about and consumer pressure, higher energy costs, I waswondering what you’re seeing there for the impact on your target consumers andthe outlook going forward?

Greer, this is Gary. Historically we have not followedretail patterns very closely, we’ve said that many times. Having said that, inour first quarter, which is the holiday season, we do see some seasonality inthe electrical category, which is hair dryers and curlers and things like thatthat are used for gifts. We expect that if overall retail gets very soft thisholiday season we could see a little pressure on that particular category. But our experience and as you see here inour fourth quarter, our comps were pretty good even in a quarter where generalretail was starting a down trend. We did see some choppiness in the quarter. Wesee that often times. We have to keep in mind too, that we’re not on a retailcalendar. When we have for example five Sundays in a month, it affects us in anegative way in comps. It’s a little confusing because we generally bounce backthe next month, just because the calendar works in our favor. We haven’t yet seen any significant impact,but as I said, our first quarter, as we’ve said many times in the past, the holidayselling season is the only part of our year that you can say is a little bitseasonal, and it’s primarily driven by that one category.

Okay. In terms of gross margin’s verystrong numbers this quarter, is that kind of the run rate that we should bethinking of? Or was there something else that contributed to that upside?

As we mentioned here in the script, that wedid see a continued slight shift in our customer mix. We saw some nice increasein particular categories that in this particular quarter were hair extensionswhich are a very strong category for us right now, with very strong margins. Wealso saw an increase in our control-label brands, which David mentioned, whichalso helps our margins. It’s kind of across the board, and I think that’s whatI’ve been saying all along is that we kind of have three or four things goingfor us that have a natural enhancement to our margins just because of thenature of the growth of our business.

Just to add to that, if you look over theentire fiscal year there’s a couple of different things going in here. One isthe rebound at BSG from Q2 to Q3 to Q4 and some improvements that have occurredthere and recovering from the L’Oreal announcement adding in new brandadditional revenue. That obviously has a nice impact as that process goes alongin the overall segment operating earning margin. The other thing that Gary mentioned, thecontinuation of the general trend that has been in place at Sally for the shifttoward the retail customer, the additional sales within the control label areaand that type of thing. Then as Garymentioned are our efforts to integrate the Sally International side of thebusiness there. In the fourth quarter as I mentioned there were some additionalsales within that particular business segment which helped with the overallmargin, about $8 million of revenue there, which is really a once-a-year typeof event. But overall those are the types of thingsthat we would anticipate going into ’08 to see those similar types of trendscontinuing. Improvements at BSG, improvements at Sally International as weintegrate that and the Sally North America side expansion and leveraging ourbusiness there.

Just lastly, if we could quantify some ofthe brands that you’ve picked up, from Maly’s and the Goldwell KMS, are wetalking about $10 million type brands or are we looking above and beyond that?

Some of them are above that. A lot of themare below that. The important thing ion a lot of these brands that we’repicking up is we don’t really have an acquisition cost to them and when you’rejust pumping more volume through an existing infrastructure a lot of that fallsthrough.

Your next question comes from Fran Jordan ofWachovia.

Great, thanks for taking the questions. Youtalked about seeing the BSG margin improve as the anniversary of the lastL’Oreal contract – should we see that happen in the June quarter, when we startto see that margin come back?

As we said what we expect to see is the BSGsegment margin work towards the historical levels we’ve had in the past. If youlook at ’06, the segment margin for BSG was about 9%. Obviously we were not atthat level for this year. But we improved quarter to quarter to quarter duringthe year. We would hope to see that trend continue and during the second halfof fiscal ’08 we hope to see that that would be at those types of levels. That’swhat we’re aiming for.

Okay, and then you answered some of myquestion about why we saw a nice improvement in margins, part of it was due tomix in products and a little bit due to acquired international. We heard allthat all year, but it seems like it all hit in one quarter. Is there somethingabout this specific quarter that made that all come together for you?

As I said the international thing was aonce-a-year event, so that helped on the international. Now understand the factthat we look year over year, having the additional international business ingeneral this year, particularly in Q3 as an example tended to bring the Sallyand the Wal-Mart down, the reverse of that is true Q4 with the additionalrevenues, gross margins et cetera that helped. We also did some things during the yearwhich had a nice impact to Sally. Some of the initiatives on improving marginson various products had a nice impact on the quarter. We would hope to see thatcarry through into fiscal ’08 as well. Then as I said on the BSG side it’sreally just been a steady march towards refilling the revenues that we lostthrough L’Oreal with some acquisitions and then adding new brands in.

Your next question comes from Linda Weiserfrom Openheimer.

Thank you very much. Can you break down the2.4% Sally same stores sales, maybe you could give us North America thenInternational and the currency translation benefits in the number?

We don’t break down the internationalversus the US,we haven’t provided that. The figure is without the currency impact, there isnone in there.

So the 2.4 does that include any currencybenefit?

Yes, it’s just on a local currency basis.

Can you give some idea as to whetherinternational growth was higher than the domestic, or lower?

It was generally the same type of trendscompared to domestic. It tended to be sometimes higher and lower but the samebasic trends in the USand International were in place.

Your next question comes from Justin Hottof Bear Stearns.

Hi, thank you. The first question I have ison BSG, can you give us some idea on the new products that you’ve added in thelast year or so, what’s working and not working? Are there any that you’re moreparticularly excited about? We’ve seen some positive things on Goldwell forexample?

We’re very excited about Goldwell. I thinkthat’s been a sleeper brand in the US because it has not historicallyhad real good distribution and has not had distribution with stores for themoist part. Also, Paul Mitchell is just exploding for us. With them reallygetting a handle on diverging and driving that down I think it’s helping theprofessional industry and obviously that helps us. We are excited about some of TG’s newinitiatives. The P&G brands are actually coming back stronger than weexperienced with the, two or two and a half years ago before they left. That’sworking well for us. Farook continues to be hot particularly in the appliancecategory, the chi irons are continuing to do well. We’ve been pretty selective, Justin on thebrands that we are getting involved with in a go-forward basis to replace theL’Oreal business. So the ones that we are teaming up with, we feel are goodbrands and that we have a good future with.

Okay, there are a couple of interestingthings about what you said on these brands. The first one, you mentioned addingSchwarzkopf European brand as you expand into Europe.I assume you’d have somewhat of an opportunity there. Secondly you mentioneddiversion going down. We’ve seen some recent diversion data, especially withMatrix that looks even worse than we’ve seen before. Can you comment – maybeflesh out those two things?

We already do a lot of business withSchwarzkopf in the UK and weexpect as we continue to expand through Europethat they will be a major partner for us there. And I think we’ll be doing moreand more business with Schwarzkopf here in the US. Justin, you may havemisunderstood me on diversion I said that Paul Mitchell’s diversion numberswere coming down significantly over the last six months, I did not say thatabout diversion in general. However I will add to that that the P&G peopleare doing a nice job bringing down Sebastian diversion, not as dramatically asPaul Mitchell yet, but it is going in the right direction. The other brands that we are involved withif you look at these diversion numbers, there virtually isn’t any withGoldwell, there isn’t any with Aquage, there’s almost none with Draco and Isoand as I said the Paul Mitchell numbers are coming down dramatically. We’reencouraged that even though diversion in general is getting worse, we’re realdisappointed in that the L’Oreal brands are getting much worse, but the brandsthat our sales consultants are out there promoting today seem to have a verygood handle on it. We’re comfortable with them going forward.

Your next question comes from LauraRichardson from DBNT.

Hi, I'm trying to get a one name thing tobuild my model for 2008 and I’m trying to piece together what you said aboutgross margin related to SG&A expense. Should gross margin extend more nextyear than SG&A decreases? Because it sounds like you still have someSG&A pressure from the warehouse consolidation and L’Oreal, in thebeginning of the year anyway.

As I mentioned at our year-end review wedid do some reallocations of corporate overhead to the segments. So as we saidwe expect the corporate overhead for fiscal ’08 to be between $80 million and$85 million including stock option expense. That’s what we think for modelingpurposes, is our expectation for corporate overhead. With respect to the segment operatingmargins by area, as we stated within BSG in ’06 the BSG operating margin forthe year was approximately 9%. And what we would hope to do is to move BSG’s operationmargins toward that 9% during the second half of ’08. Obviously we have atougher comparison in Q1 ’08 because we haven’t yet anniversied against theloss of the L’Oreal revenues. On the Sally side, the Sally operationmargins were over 17% pr the year. As has happened in prior years with theimprovements and sales in our control label area, our efforts to integrate animprove margins on the international business we would hope to see margins inthe Sally segment also continue to improve in ’08.

Within those segments, David, it stillsounds to me like probably if you’re looking at gross margin or SG&A you’regetting more benefit in gross margin. It looks like you got a lot more if it in2007 and it sounds like you should get more in 2008 compared to SG&A.

Year over year if you compare – if that endup being the right range of $80 to $85 million for corporate overhead forfiscal ’08, corporate overhead would effectively be relatively flat from ’07 to’08, whereas we would hope to see continued improvement of BSG debt margins,and the same for Sally.

Your next question comes from Reed Kim forMerrill Lynch.

Good morning, thanks, nice quarter. I wascurious within the BSG business if you could help us look at the components perthe bond memo last year. I just wanted to update that in terms of looking atwhat each piece was contributing in the top-line.

When you say each piece, you mean storesversus sales consultants?

Exactly.

It’s up to about two-thirds stores andone-thirds sales consultants.

Okay, related to that, and then I’ll ask mysecond question at the same time. In terms of the productivity of your salesforce, did that increase sequentially and how much do you think that canincrease next year with the new products? And then I guess the last question isjust on the acquisition front, if you were to acquire any brands to bring in-house,maybe on a dollar or Dow-multiple basis, how large would we see you go? Thanks.

On the sales consultant question, theycontinue to get more productive every quarter. Part of it goes back to theright-sizing we did earlier in the year. But also as you add more brands andthey have more to sell, their productivity obviously goes up. I assume with the brand question you’rereferring to BSG, at this point we don’t have any plans to purchase any brands.We’re aligned right now with some very large multi-national companies that havegreat R&D, that have great new product flow. And on the BSG side, we willcontinue to represent the main brands in our industry. We will however continueto look within the BSG segment for acquisitions related to distribution. So ifwe can pick up a territory of a brand or brands, distribution rights and nottake any, or little associated overhead with that, then that would be nicetransaction for us to do to fill in areas within the BSG distribution networkand add additional revenues for those DSCs to sell.

As David said it helps to fill out the DSCbag. But it also brings tremendous to the stores. You’re basically getting moresales without any overhead.

The next question comes from Emily Shenksof Lehman Brothers.

Hi, good morning. Terrific quarter, just acouple of questions, one, can you speak to any trends that you’re seeing on ageographical basis?

I can’t really, but it seems the Florida market is a bitsofter than we’ve experienced in the past. I recently saw an article where Ithink ’06 was the first year since 1920 that Florida actually lost population from theprevious year. It isn’t significant. Floridaand Californiacontinue to be great growth states for us. Again, like our business is notreally seasonal, there’s not a whole lot of geographic differences that wenotice.

Great, that’s what I thought. Then just thefinal question, when you think about the minimum cash balance that you need torun the business, what’s that amount?

We’re typically around - you see at the endof the quarter, we’re typically around a $25 to $30 million level. When youincorporate the cash in transit and cash that’s oversees, that’s about ourtypical level.

You have a follow-up question from Justin Hott. JustinHott – Bear Stearns: Yes, when you think about same-store salesin Sally and BSG, can you give us, especially in this economic environment,some indication about traffic versus ticket?

Sure, before I do, congratulations on yourbaby. JustinHott – Bear Stearns: She’s right here, she’s beautiful.

That’s great. BSG I think primarily becauseof the new brands that are available continues to see strong increases inaverage ticket and customer count. Sally as we’ve said many times in the past,our challenge with Sally for the last several years has been with customercount. That's the primary reason Mike Spinozi was brought in and it’s theprimary reason we’re focusing so much attention on CRM programs and loyaltyprograms and the matching up of the demographic and psycho-graphic target thatI mentioned earlier. I look for Sally’s business to continueseeing average ticket increases. And I expect Sally’s customer count challengeslike every retailer out there to continue to be challenging, but that's ourfocus. Like I said, I think Mike Spinozi’s doing a lot of things that are goingto help increase that. JustinHott – Bear Stearns: Two real quick ones, One how much controllabel do you see maybe optimizing out at in Sally, and secondly are you seeingany margin pressure in appliances maybe due to China?

Actually margins since we’re moving so muchof our electrical business to China, or to the Far East, a lot of it is Koreaas well, we’re actually seeing an enhancement to our margins which we’vediscussed in the past, as we move a lot of that business there and don’t dealwith a lot of the importers that we’ve been dealing with. So I'm not reallyseeing the margin pressure on electrical there. What was the other part of thequestion, Justin? JustinHott – Bear Stearns: How much control level do you have.

Right now as David mentioned in hiscomments we were at 40% in the Sally segment for fiscal ’07, that’s beengrowing about a point a year for a long, long time. I think it will continue togrow for the foreseeable future, a point or so a year. I don’t know what the topis. I think it could easily get to 50, but I think it could take 7 to 10 yearsto get there.

If you look within the various categoriesand we have categories that are well above the 40% and we have others that arewell below that. So obviously we’re looking to see where we can take the othercategories that are blow the 40% and increase them. We’re seeing some of thatthrough our Ion product. JustinHott – Bear Stearns: Okay, thank you.

You have a follow-up question from LauraRichardson.

Yes, thanks. I saw a 10% off Sally couponaround Thanksgiving. Is that something you do every year, if not why would itbe done this year?

We do a lot of different promotions, but inparticular over the Thanksgiving holiday we did a 10% return coupon for acustomer who’d come back in December. We do that a lot. We also do a lot ofe-mail to existing Beauty Club Card holders to come in at certain times of theyear, or different specials. Yes, it’s a common practice for us to either useit to try and get a repeat visit in the short term like we did over theThanksgiving holiday to come back in December, or for our e-mail communicationswith our customers.

Okay, thanks on that. Then I also want toask on the cost for the BSG warehouse consolidation, did I hear you say 4million for the year of expense?

Yes the entire capital project cost is 19million, so 14 million of that $19 million capital left for fiscal ’08. ThenWhat we said was that we expect to have about $4 million of operating expensesin restructuring charges associated with that project during ’08 and we’ll betalking about those as and if they occur during ’08.

Okay and those are going to be in thesegment operating profit for BSG.

Yes, just like this year when we had theBSG restructuring and some of the charges there, those fall under the BSGearning segment. So these would also fall into the segment and we’ll beproviding those for you.

Okay and do you have any idea now howthat’s going to flow? Like a million a quarter or-?

I believe they’re, yes, really throughoutthe year, but probably more in Q2 and Q3 type thing.

Okay, thanks a lot.

You have a follow-up question from LindaWeiser.

Yes, thanks, can you just remind us whatyou said about how much of the $10 million in cost savings from the DCconsolidation will occur in FY ’08?

Not much of it, really, it’s more in thefollowing years we said4 in our remarks. It’s mostly in FY ’09 we expect toachieve that. We may get some of that but it’s really a project that won’t befully implemented and won’t achieve some of the benefits of that until we gettowards the end of the year.

Okay, thanks.

There are no further questions at thistime.

Thank you for your interesting company andhave a safe and happy holiday this year.