Thank you, good morning everyone and welcome to the Sally Beauty Holdings First Quarter Earnings Conference Call. Before we begin, I want to point out to you that we have made a supplemental slide presentation available for today's call that can be viewed from the link provided at our investor site at sallybeautyholdings.com/investorrelations. In addition, I'd like to remind you that certain comments, including matters such as forecasted financial information, contracts or business and trend information made during this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Many of these forward-looking statements can be identified by the use of words such as believe, project, expect, can, may, estimate, should, plan, target, intend, could, will, would, anticipate, potential, confident, optimistic and similar words or phrases. These statements are subject to a number of factors that could cause our actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K. 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 Chris Brickman, President and Chief Executive Officer; and Aaron Alt, President of Sally Beauty Supply and Chief Financial Officer; and Heather Plutino, Group Vice President of Finance. Chris will start by offering some thoughts on our first quarter and give an update on our key transformation efforts. Aaron will then discuss our first quarter consolidated and segment financial results, touch on our supply chain modernization and then discuss our views on our full-year financial guidance for fiscal 2020. Now I'd like to turn the call over to Chris.

Thank you, Jeff and good morning everyone. During our first quarter, we continue to make significant progress against our transformation plan. We saw Beauty Systems Group and our European operations deliver positive comp growth and improve their gross margins. Beauty Systems Group achieved its highest sales revenue in a quarter ever. More significantly, we took important steps towards our goal of becoming a mobile first digital retailer enabled by a differentiated category position, a national store network and consumer centric fulfillment options. We did all of this while dealing with a retail calendar with six fewer shopping days. A retail consumer, who waited until the last minute to shop around both Thanksgiving and Christmas, and a series of significant technology implementation distractions, which impacted our retail top line, same store sales and gross margins. The good news is that we have a natural hedge between our retail and our professional businesses. We saw strength in Beauty Systems Group that offset the traffic challenges at Sally Beauty. For the core, we delivered only modestly negative same store sales down only 0.3% at the enterprise level, but with a 1.2% up at BSG and a positive comp in Europe as well. We largely held our gross margin despite headwinds, but as expected and predicted during last quarter's earnings call, we did see higher SG&A expenses as we invested in the business and responded to wage inflation. We recognize that short term challenges have created a gap with respect to earnings expectations. We've been working over the last six weeks to fill the gap. Aaron will bridge our results, our responsive actions and our view of the remainder of the year for you later in the call. While the decline in overall sales and the SG&A increase did results into the client operating…

Thank you, Chris. Good morning. I want to start my comments today by providing some color on our transformation efforts. We have a detailed transformation plan that is tied to our fiscal '20 strategies and to our operating plan. We are seeing significant progress versus where we were in fiscal '19. We've been quite open with the scale of the transformation agenda. Our fast paced stretch become an omni channel retailer, leveraging both our stores and our digital capabilities requires significant work. The first quarter and indeed the second and third quarters are the fulcrum point so much of our transformation, as multiple interdependencies across stores supply chain, technology, and retail fundamentals come together, and we turn dials to optimize our efforts. Notwithstanding the first quarter, we've got this, stick with us. There is no doubt that the first quarter was a tough quarter and below our expectations, the impact of the challenges we faced unquantifiable. On the top line sales decline $9.2 million versus the same quarter prior year and its simplest this is driven by fewer net stores a modestly lower combo same store sales and the impact of FX. However, the Sally US and Canada business and the BSG business, we're driving positive comp coming out of Q4. So at a high level, if you ask me what impacted sales from the trend you were on, I would offer the following directional context. The primary drivers of the change to trend were A, the impact of our technology disruptions on pricing and promotion and rewards. B, the traffic issues that the retail business encountered, and C, the impact of non-recurring benefits that we left from prior years that were expected to be offset by marketing and other initiatives that we dial back in the face with technology…

Thank you. [Operator Instructions] Our first question we will go to line of Karru Martinson with Jeffries. Please go ahead with your question.

I'm just wondering if we could dig into the Charlotte market remodels and kind of look at what has been different in those stores where you have put the money and put a lot of learnings into it versus the rest of it? How can we take those learnings and move them out to the national chain?

Great question. We're quite excited by the remodel cycles that we have underway both in Las Vegas and in Charlotte and now in each store that we remodel or the new stores that we have popping up across the country. We have been quite focused on the assortment. Really leading with our differentiated core with color and care with color and vivid color particularly being in front of the store. With the technology integration whether it's on the app or on the kiosks relative to color view, and then just better retail fundamentals around sidelines, guidance through the store wayfinding if you will, and focusing more on other elements portfolio like nail and men's etc. The Charlotte market is an iteration off of what we're doing in Las Vegas as we continue to improve and while we have all but 3 or 4 of the stores in that market now remodeled, we, of course, are going to continue to learn and evolve as we carry forward.

Then how are those stores comping relative to the national chain? Are they seeing greater e-commerce penetration? Where do they stand today?

I'll answer the question in connection with the Las Vegas market because it's too soon on Charlotte for me to have a statistically significant answer for you. They are comping positives to the control group that we're measuring it against. And we are seeing good lift relative to other parts of the portfolio e-commerce etc. That said we still have things we need to improve around some of the cosmetic categories as well as some of our inventory positions but we're quite pleased with the results so far.

Okay, just on professional brands. The three-year contract with Cody, have you thought about M&A on your own side? Are there brands that you would like to add to your portfolio of own brands or exclusives?

We always look at brands as they come available but in general, we've been mostly focused on acquiring regional distribution rights. And we have some more of those that we're working on now but the reality is they tend to be smaller acquisitions of distributors who have exclusive rights. We acquire those rights and add those to our existing stores which drive same-store sales. I would add one of the benefits of the organization we have is a robust pipeline of own brand technology and own-brand products for the Sally part of the portfolio. We're very careful how that translates to BSG given our partnerships, but we have significant capabilities from own brand development in-house.

Thank you very much, guys. Appreciate it.

Thank you. Our next question will come from the line of Oliver Chen with Cowen & Company. Please go ahead with your question.

Good morning. This is Ross on for Oliver. I just had a question on the firm guidance. First is the first quarter results. Could you speak a bit to the investment plans how they might evolve through the balance of the year just versus your original plan? You mentioned in the first quarter, you kind of tempered on the marketing spend given the top line so I just wanted to hear your thoughts and how you're thinking about the rest of the year. Thanks.

Happy to. I think if you go back to our last earnings call, while we don't issue quarterly guidance, I went out of my way to talk about the fact that the investment profile for us whether on the supply chain side or on the marketing investment side was particularly heavy in Q2, but also heavier in Q1. And so with much of our brand investment in Sally launching January 6, and with much of our capability investment spread Q1, Q2 and a little bit into Q3, our expectations for growth were more back and loaded. I think I was clear on that both from a sales perspective and from a profit perspective. No escaping the fact that we had some challenges in Q1 but we were able to reaffirm the guidance based on what we believe the impact of those investments to be.

Right, thank you. And then Chris, just following up on your remarks on the BSG looking to add either capabilities or brands, could you just elaborate a bit more on what you might be looking for there, the timing around that potentially, and then how this ties into the broader capital allocation strategy moving forward with the debt and the repurchases? Thanks so much.

As I said, I think the reality is, and you've seen this in past years, we have consistently found 1 or 2 acquisitions a year within BSG that are good regional fits, where we acquire distribution rights to brands, perhaps some stores and then we layer that brand distribution rights onto our existing footprint. So we continue to look for that. We have opportunities in the pipeline. I can't give timing on those at this point in time but we'll continue to work on those. And I expect they'll be some this year.

I believe the last acquisition we did for BSG was late 2017, early 2018. And like I said, we're back in the hunt. And this has been part of the business model for BSG. As it relates to capital allocation, our view has not changed. Again, if you go back to what I said last quarter, and I assume the quarters before that as well, the first priority is invest in the business. Our practical reality is we have plenty on our plate and investing further dollars against that we will land the year where we expected to from a capital perspective and where we have predicted. We are going to get our debt down to 2.5. I've been clear that that's our target as well and we'll only look at share repurchase after we've taken advantage of investing in the business where we need to, where we've found opportunities to bring our debt down and if the market presents us with an opportunity.

Great, thank you.

Thank you. Next, we will go to the line of Simeon Goodman with Morgan Stanley. Your line is open.

Hi, this is Josh [ph] on to Simeon Goodman. Thanks for taking our questions. There are a lot of positive things going on in the transformation but the initiatives are on a range of different timelines. Can you maybe talk about when you expect to see positive comps in both segments at the same time and what needs to occur for that to happen?

We guided into positive comps for this year and we continue to maintain that guidance. So we expect that to happen pretty quickly as you can imagine. I'm not going to give specific times and quarters and numbers. But listen, we're disappointed with what happened in Q1. There were a lot of things that contributed to that. We feel obviously with our revised guidance that we still feel positive about the year overall. We do feel like we've fixed a number of the issues that contributed to the Q1 performance and now we've got to go deliver.

I think it's important to add on that. One of the benefits we have we are increasingly getting at SBH is the combination of the work that Pam Cohn is doing across our merchandising organization in support of the greater whole. The work that Mark Spencer is doing with the BSG team. The work that the Sally team is driving as well. It's additive to each other versus being in silos. And while there's more work to do, part of what gives me confidence in the guidance that we've reissued today is that you're right, the time is a little different in different places, but will all come together and it'll be in service of the greater portfolio.

Thank you. And then just as a quick follow up, we've seen some other POS transition issues as recently as 2018. I know some of the headwinds in this quarter were a little bit for different reasons. But can you maybe talk about how you re-evaluated technology investments and the timelines following the issue, and whether you identified any other risks around the transformation to 2020?

Well, let me start by saying I think there's always risks around technology transformations, especially when you're touching as many pieces of the platform as we are at the same time. We experienced that to a large degree in Q1. And again, I believe we've fixed the majority of those. We are working very hard to try and consolidate to make sure that we're looking at all interdependencies. And that's very much the reason why we put together a chief transformation office, and that we're putting the resources against it and creating headroom in our P&L to make sure we have the resources against addressing issues as they come up and avoiding issues wherever we can. So I think we're well-positioned to execute the projects. That being said, I won't claim that there's no risk, but at the same time, I think we're putting the appropriate level of resources in it to make sure that we're looking for interdependencies and addressing them proactively. Obviously, Q1 was a wake-up call that we're working hard on.

All right. Thank you.

Thank you. Next, we'll go to the line of Olivia Tong with Bank of America. Please go ahead.

If you could provide a little bit more color on the disruption because your gross margin actually, while it came in light of our expectations, the decline was more pronounced or the delta was more pronounced in SGA. It sounds like the big surprise here was incorrectly price promotions, which presumably would have had a bigger impact in gross margin. So just would appreciate your help on if I'm missing something there. Then specifically to Sally Beauty, I know that traffic was down because of the shortened holiday but how about ticket? Because I always thought of Sally Beauty as sort of a little bit less exposed to holiday given this staple like nature of hair maintenance. So was the weakness disproportionately tied to like appliances? And do you now have a lot of like durables inventory to work down? Thank you.

That was a lot. Let me attempt to unpack and Chris will keep me honest as far as what pieces of the question that I may have missed as we carry forward. As it relates to your question gross margin SG&A, the answer is the following. Let me start from the reverse. Our SG&A was up versus prior year, but we had expected it to be up. We had expected to be up in connection with the wage and personnel inflation that we knew was coming our way, given the position within our team portfolio. We had expected to be up with more modest investments in marketing as well as some of the OpEx components of the implementations we have underway. The fact of reality is that while it was up it wasn't as up as much as we had planned for it to be because as we got into November, we realized we had a problem and we started optimizing to attempt to mitigate the impact. On the gross margin line, you're right. The impact versus last year was lower than SG&A versus the prior year. But what's important to understand is from what we were targeting or what we were after perspective. We were expecting higher same-store sales growth as well as increased gross margins, which was what was impacted by the factors that I called out. The POS issues, the integration issues, we had pricing dropping unexpectedly which was a direct hit to our top line. Similarly with some of the elements of the promotional strategy and the reward that was a direct impact to the top line and to the gross margin as well.

Let me just step in for a moment. I'm going kick it back to Aaron. As Aaron articulates we'd expected gross margin to be up more. As part of it then we were planning on investing more in the business at which we did do. The reality is it's a testament to the durability of our business that despite all these disruption issues and pricing issues, gross margin actually held up. It just didn't increase as much as we expected it to. And so I think the reality is now we've got most of those issues fixed and we are expecting gross margin to expand. And we continue to expect to need to invest in the business, which we articulated at the beginning of the year. I'm going to let Aaron answer the issue around our traffic issues route to the quarter and how that affected specific categories and ticket.

I think what I would say is this. We have a lot of inventory. It's one of our key issues internally of how are we going to bring our inventory down. We've seen more progress there at Sally in the U.S. and Canada than we have in Europe and in the industry. Those businesses are well aware and are working hard on their plans. I wouldn't call our inventory position to be tied directly to the traffic issues. I think we did a better job than prior years of managing our inventory and frankly, the businesses were better prepared for the calendar fourth quarter than they've ever been. We just ran into a couple of things along the way which were distracting as we carry forward. In the context of our portfolio, in the context of our business, we will work on resolving the inventory- dealing with the inventory that we have.

Did we see a decline in ticket quarter?

Not really, no.

Thank you, that's really helpful. And then just lastly, any sense in whether price promo issues may have driven some potential pantry loading by consumers? And could that potentially impact future quarters as a kind of capitalized on lower than expected prices? And then I'm sorry, one other thing. Does the leap year provide any benefit to specifically to next quarter? Sorry, that's it for me.

Let me start with the first one. I think it's unlikely it did much pantry loading. In many cases, the customer received the benefit as they got to the register, and we're checking out and ended up paying less than they expected. So I don't think we're going to see much in the way of pantry loading and we haven't seen it affect our sales post-Christmas. So I don't think we're going to see much from that. As for leap year, I don't know Aaron, if you have any thoughts on that.

Not much. It won't have a material impact.

Thank you so much.

Thank you. Next, we'll go to the line of Lauren Frasch with Wells Fargo. Your line is open.

Morning, everyone. Thanks for taking my question. I want to dig a little deeper and say your upset region has been a painful drag on Sally results last year, but it seemed like there was a pretty solid inflection in the first quarter. Can you detail some of the initiatives of your strategy out there and how confident are you that performance has reached more of a stable level now? Thank you.

Well, listen, I think we would say we have more work to do but we're pleased with the progress thus far. As I mentioned in my opening remarks, this project surge cuts around multiple platforms. A lot of progress is being made, especially in the U.K. on store and store apps. We're excited about that. The team is obviously working on some of their customer marketing and direct marketing activities and getting crisper in terms of how we communicate with our customers. They're working on product assortment. They've made good progress on adding to their product assortment issues, which I think that will help. We've got more innovation coming as I mentioned with the launch of red color coming in the latter half of the year. And obviously we've had some disruption there with technologies they've been working on and made a lot of progress stabilizing their IP platform. So I think the team feels good about where they're at. They've got lots of work left. But it was nice to see the progress in the quarter and we expect to see more as we move through the year.

I want to go back to a point that I made earlier. One of the reasons why I have confidence in where we're going, where this is taking us is the teams the leaders are working better together than they ever have before. With Olivier's leadership in Europe and with the benefit of some of the learnings we've already had in the U.S. on the retail side, particularly around store operations, first in the U.K. and increasingly on the continent as well. We're really starting to get back to the- to get the expertise in retail fundamentals that we need to succeed as we carry forward. So good progress but more work to do.

Great. Thank you so much.

Thank you. Next, we'll go to the line of Carla Casella with JP Morgan. Your line is open.

Hi. I'm wondering, you talked about the Cody agreement, which brands is that related to and was it similar to your past agreement?

It was and it covers all of the professional brands that sell through BSG. So all of the Wella [ph] color line, I believe, [indiscernible] as well as their other lightning lines, and Sebastian products. It's of all the professional products that flow through BSG.

Okay, would that preclude you from buying those brands if they are for sale or could that change if the buyer buys them?

It does not nor does it preclude us from buying them either.

Well, I guess the further layer I put it on that. Of course, we don't comment on any M&A. Anyone who does buy that business will inherit the contract with us and so that's- our comment on our script was it provides us with certainty as we carry forward. It gives them the certainty that one of their largest customers is in hand. It gives us the certainty that we don't have to worry about key brands like that in our portfolio for a three-year period.

Okay, great. That's really helpful. And then you mentioned the inventory being a little heavy post-holiday. How long do you think it will take to bring that down? And is there any inventory in there that you have risk of aging that you need to mark down and move more quickly?

Here's how I've answered the question. The team here is very clear that inventory has an impact on cash. The team here is increasingly clear that we need to ensure that we are managing the business both through the income statement and the cash flow. We are going to do everything we can to bring the inventory down without impacting our business to maximize our cash and without having to take a hit to the gross margin line that we want to avoid. And so I am not here today to call out and impact the guidance of our inventory. I don't want to overstate the concern based on our earlier answer. We view it as something we just have to manage through every day as a retailer.

Okay. And then just one last one. Amazon earlier had announced they want to go into that beauty business. It seems to have faded and not heard much about it lately. Is there any update from what you're seeing from a competitive standpoint, any changes in that professional beauty competitive landscape?

I haven't seen much. I mean, we watch it constant, as you can imagine, as we look at the website it looks the same as it did when it originally launched. Most of the brands that are carried on there actually sold through resellers. And you know, our view is, obviously we're continue to sign agreements such as the Cody agreements that are exclusive agreements with our vendors. So in our mind, it continues to be about the same. And our view is we're going to continue to execute. Again, I would go back to the point, which is from our vendors perspective, it doesn't bring anything incremental to the business in terms of helping them recruit new stylist to a color line, they need personal contact and training to accomplish that. So all Amazon would do would be transfer a customer from an existing channel to another channel as opposed to help them recruit new customers. So our job is to add the right digital and service capabilities to our existing business and help them build their brands. And obviously, we continue to do that. And I think that's why you're seeing our customers renew their contracts.

That's great. Okay, thank you so much.

Thank you. Next, we will go to the line of William Reuter with Bank of America. Your line is open.

Hi, just a couple. With regard to your exclusive brands or private label however you described them. Are there any that have grown to the point where you started to distribute them and in other channels or do you just view those as I guess ways to drive traffic to your own retail stores?

We view the own brands at Sally which is about 45% of our portfolio and our exclusive brands at BSG, which is about 53% of our portfolio as being key points of differentiation to us why they need to come to Sally or to BSG. In connection with the digital business, there are places as we're participating in marketplaces leading with our own brands, because they stay within our control in that way. As we sit here today, our focus has been on taking advantage of the technology, the brand in house that we have across our businesses, and so leveraging Europe in the US and US in the Europe, for instance, and not on driving sales of those own brands through other channels beyond our own digital efforts. I would just comment and Aaron has it exactly right, that we will continue to use these as a way to drive traffic to our existing stores and businesses. The Ion brand in Sally has become a major and significant brand as a global brand. And we sell it only through our outlets, but it is of a scale that that is quite large. And I think it's an underappreciated part of Sally.

Would you ever consider acquisitions of brands that would be so large that it would probably not make sense to have them be largely exclusive to a brick and mortar to your brick and mortar stores as opposed to being another brick and mortar stores?

I think that's hard. I'm not saying we would never consider it but it's hard to do. Because most cases those brands have global footprints that are extended well, but hot beyond our footprint, and it would be very hard for us to sustain the brand. So I think that would be tough to do. But we will always look at them as they come available.

Okay, and then just lastly, you talked about the traffic challenges in the first three weeks of November as well as December. Do you view those as being somewhat unique to the holiday period and that will be a continued challenge during that period of the year, or do you think this is something which could be a challenge and the other kind of timing quarters of the year as well?

Well, I guess I would answer it this way. I observed earlier my remarks that following Christmas, we saw traffic revert to the more positive trends that we had been calling out on early earnings calls. And so it is our hope without being a certainty that with everything we have going on with the impact on marketing, with the impact on better operations, retail fundamentals that, indeed, traffic that Q4 or rather Q1 financially for us was a unique set of circumstances and that we aren't repeating that.

Right. That makes sense. Thanks a lot.

Thank you. And we will go to the line of Gina Gemelli [ph] with Goldman Sachs. Your line is open.

Thanks so much. I appreciate you squeezing me in. I just wanted to follow up a little bit more on the technology and the PMS implementation issues. Is there any way you could maybe quantify the specifically the sales and the gross margin impact? And I guess where the comps have been positive. If we didn't have these issues, the gross margin has expanded, I guess, you know, you called out a number of times that these results are below your expectations. I guess excluding the tech issues, would they really have been more in line with your expectations? Thanks.

You know, I'm not going to put dollar figure on each of the impacts for the quarter although if you review my comments pretty carefully, you may be able to do the math around where we landed versus where we expected to be. The three or four factors I called were roughly equaled in significant, I believe it was three in the top line and four at the bottom line. And you can get some good assumptions around that.

Okay, that's helpful. And then I just I know you reaffirmed or mentioned the 2.5 times leverage target but was you're thinking about acquisitions, I guess how high would you be willing to take the leverage in the interim, really for such an acquisition, just to kind of give us a sense of the size and scale that you're thinking about or will to do?

I think I will leave you with this. We are not here today to announce an acquisition. We're not. And our operating plans put us in a place where we get back to the 2.5 right and so someday if we have something to announce, which has a material impact on our leverage plans, of course we'll talk about that. But as we sit here today, we are focused on investing in our business, bring our debt down, and then an organic the markets presents as an opportunity, you know, buying back some shares. The good news is we have plenty to do from an investment or business perspective, the teams are head down focused on getting us through a transformation with everything underway. Okay?

Thanks so much.

Thank you. I'm showing no further questions at this time. Please continue.

Well, then thank you for your questions today. So summarize. While a challenging quarter, we continue to make progress against our transformation efforts. And we are focused on landing the year consistent with the revised guidance we have provided. I want to leave you with this. Notwithstanding the first quarter, we got this and we will deliver on our transformation objectives. Thank you for joining us today.

Thank you and ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation. If you're using AT&T Executive Teleconference Service you may now disconnect.