Regis Corporation

Welcome to the Regis Quarterly Earnings Call. We will begin shortly. Welcome to the Regis Quarterly Earnings Call. We will begin shortly. Welcome to the Regis Quarterly Earnings Call. We will begin shortly. Welcome to the Regis Quarterly Earnings Call. We will begin shortly. Welcome to the Regis Quarterly Earnings Call. We will begin shortly. Welcome to the Regis Quarterly Earnings Call. We will begin shortly. Good morning, and thank you for joining the Regis second quarter 2022 earnings release conference call. All participants are in a listen-only mode. The prepared remarks by our interim chief executive officer, Matthew Docter, and executive vice president and chief financial officer, Kirsten Zupfer, are accompanied by slides to help participants follow along. After the prepared remarks, we will have time for questions. please use the chat feature or raise your hand feature to ask a question. Also joining Matt and Kirsten on this call is Jim Lane, our Chief Operations Officer. I am your host, Biz McShane, Vice President, Corporate Controller. As a reminder, this conference is being recorded. I would like to remind everyone that the language on forward-looking statements, including in our earnings release and 8 filing, also apply to our comments made on the call today. These documents, along with our presentation today, can be found on our website, www.regiscorp.com forward slash investor relations, along with a reconciliation of any non-GAAP financial measures mentioned on today's call with their corresponding gap measures. Today's slides are located in the supplemental financial section of the investor site. With that, I will now turn the call over to Matt.

Thanks, Biz, and good morning, everyone. Let me just start by saying how excited I am to be given the opportunity to step in as interim CEO here at Regis. Since I'm new in this role, let me share a bit about my background before I discuss our second quarter performance and why I believe we are well-positioned for future growth. Additionally, I'd like to spend more time on this call than we have historically, showing what this business can deliver on a more normalized, go-forward basis, given the many actions we've taken in fiscal 2021 and our move to a fully franchised model. We've made many announcements over the course of the past year regarding organizational changes, product distribution model changes, our operating company wind down, the rollout of Open Salon Pro, our G&A guidance, but we've never quite tied that all together into what that means from a profitability perspective. And I think we owe that to you all. I will also discuss our priorities to continue to drive our business forward. By way of background, I started my career as an investment banker in New York, After spending several years there, I looked to do something completely different and ended up entering the world of franchising, and I haven't looked back. I joined Restaurant Brands International in 2014 and held several roles there, mainly focused on development and franchising, having led global development and franchisee performance for the Burger King brand, as well as leading development efforts for Tim Hortons. While I was progressing my career, I always had in the back of my mind the desire to be an entrepreneur. I just never knew what the opportunity would look like. And then it hit me. After years of selling the benefits of large-scale franchisee ownership and working inside a large global franchisor, I decided to step on the other side of the table and become a franchisee in an important system. So I've had the unique opportunity of being both a franchisor and a franchisee. I became a franchisee in 2018, and my partners and I grew to 83 restaurants, ultimately culminating in the sale of most of our restaurants at the end of 2020. After the sale of our restaurants, I ended up joining Regis, initially as a consultant. And as a consultant for Regis, I saw a platform with tremendous potential in an industry that, while no doubt has been hit hard by the pandemic, represents a fundamental need. I became so energized by the opportunities here that I wanted to be part of helping Regis navigate this unprecedented time. And I started full time in February, 2021 as chief strategy officer. In addition to my background, there's some other qualities I'd like you to know about. I believe in respect and transparency. You can expect to hear a balanced view on the things that are going well and the challenges that we are facing. I'm also big on accountability. I'm big on execution. Turning to our second quarter results, we are still very much dealing with the same themes we've touched on in previous calls. Our sales recovery continues to be challenged by lower active stylists and customer counts compared to pre-COVID levels. Our priorities are built around addressing each of these items, as we have encouraging data that validates that salons demonstrate a greater number of active stylists and or retention of existing customers of sales that are back in line with 2019 levels. We have significantly reduced our operating losses for the quarter, even with our remaining company-owned salons and product business sales dampening our performance. With that being said, the shift in our business model and initiatives we've taken in fiscal year 2021 are really starting to come to light in our current results. In the second quarter, our franchise segment, which represents our go-forward business model, had a profit of $5.5 million for the first time since the pandemic. That segment turned a profit during a quarter where we saw two-year comps down 17%, and OSP only 44% rolled out in the U.S. salons. While our results did not meet our expectations, this is an encouraging step forward and shows the potential of the new asset light franchisor model. Now, I'd like to share why I believe this company has such exciting growth prospects and is well positioned for the future. Yes, we are no doubt in a challenging time, but I'd like to take the time to reframe the mindset and recognize all of the things that we have going for us. First, We have scale in an industry that represents a fundamental need that is not going away. We have well-known brands with years of equity behind them. We collectively have a large network of stylists. Given our size, we have inroads at beauty schools. We have scale and large presence in real estate. We have a relationship with Walmart as one of their largest tenants. We have a proprietary technology platform, and we have seasoned operators and a large franchisee base. Within all of these elements, there is an equation to meet the stylist needs and consumer demands, as well as enable the flexibility necessary to succeed in this ever-changing environment. Second, I have inherited a great committed team. I know there's been an evolution of this management team over the last year, but I think I can speak on behalf of all of them when I say we are in a good spot. We have complimentary skill sets who represent a mix of new players and legacy knowledge. And most importantly, we trust each other. And through all the changes, our employees have remained incredibly resilient. And I am grateful to be on this journey with everyone here at Regis. Third, we have an extremely dedicated and passionate franchisee base. These last few years have not been easy. And given Regis' change in business model, The majority of our salons moved from corporate to franchise either right before or during the pandemic. Our franchisees have worked tirelessly to run their businesses during the most difficult environment for our industry. And that needs to be recognized. The success of our franchisee base is of paramount importance and the key driver to the success of Regis. And I look forward to working closely with them and strengthening our partnership, ensuring that we incorporate their feedback along the way. Our goal is to enable franchisees to maximize profits, which in turn helps drive REGIS. Finally, we have a transformed business model, which will ultimately lead to more predictable revenue streams and cashflow generation. I think it's important to revisit the key accomplishments during 2021 that finalized our business transformation and sets the stage for the future. First, we wound down our operating company from over 1,600 salons to under 150 that are remaining today. This was a business that lost Regis $43 million of EBITDA in fiscal 21 and drove a major use of cash during the pandemic, as we were unable to qualify for any PPP loans given our status as a public company. We implemented G&A savings, the tune of around $10 million. We exited a product distribution business and started to become a financial and logistical challenge. And we began the rollout of Open Salon Pro, or OSP as we call it, that is now operating in over 2000 of our salons. Now I understand that a lot of these items relate to EBITDA loss mitigation and cost cutting. However, in a year of uncertainty, we had to focus on the items in our control that also coincide with the future of our business. The culmination of these efforts resulted in over $50 million of EBITDA savings based on our fiscal 21 results. And as I mentioned earlier, we're starting to see this come to bear in our Q2 22 results. Before I share a little bit more and go into what our normalized business can achieve and our current priorities, I'd like to turn the call over to Kirsten to dig a little deeper in our second quarter results, after which I will return post Kirsten's remarks to discuss these items. Kirsten.

Thanks, Matt, and good morning. Yesterday, we reported on a consolidated basis second quarter revenues that reflect our transition to a fully franchised business model and the continuing impact of the pandemic on the labor market. Total revenues of $70 million declined $34 million from the prior year due to 97% of our salons being franchised now compared to the 84% in the prior year. Second quarter revenues were below our expectations and reflect continued labor shortages and the persistence of the pandemic. We are encouraged by salons that have increased stylist hours quarter over quarter and have seen their sales improve. For example, 20% of our salons increased hours by 10% and saw approximately a 10% increase in comps. As Matt noted, addressing labor issues is one of our top priorities. Our system-wide revenue, which includes total sales at franchise and company-owned salons, increased $43 million from prior year, driven by an improvement in comparable same store sales of 22%. On a two-year basis, a comparison to pre-COVID, system-wide comps were down 17% in the quarter. We reported an operating loss of $1 million during the quarter. which is a significant improvement from an operating loss of $27 million in the prior year quarter. The improvement results from an increase in system-wide sales, our G&A savings initiatives, wind down of our company-owned salons, and a few one-time non-cash benefits. On an adjusted basis, second quarter consolidated adjusted EBITDA was $2 million, compared to a loss of $18 million in the prior year's quarter. Adjusted EBITDA improved due to higher operating income, higher system-wide sales, and lower costs. Additionally, the quarter benefited from a couple of non-cash benefits amounting to approximately $3 million that we do not expect to reoccur next quarter. Our core franchise business achieved adjusted EBITDA of $5.5 million, compared to a loss of $6.8 million in the prior year. We are pleased to see positive EBITDA in results, which reflects the cost savings initiatives we have undertaken. We do caution that the pandemic, and in particular, the Omicron variant will likely impact the third quarter, but to an extent we cannot predict. The company-owned segment recorded an adjusted EBITDA loss of approximately $3 million, including a charge to increase the inventory reserve by approximately $1 million. Our cost structure is nearing what we expect in terms of a go-forward run rate. We completed the exit of our distribution centers in the quarter and reorganized our salon support operations to better serve our franchisees and reduce costs. Second quarter GNA benefited from a reversal of stock compensation expense in the quarter of approximately $2 million and other one-time benefits of approximately $1 million in the quarter. We continue to believe our end state run rate GNA will be in the range of 65 to $70 million annually, likely at the low end of that range, and we expect we will achieve that level in the fourth quarter. Turning to liquidity, As of December 31st, we had $138 million of liquidity, including $82 million of available revolver capacity and $35 million of cash. Our net available liquidity as of December 31st was $63 million, which reflects our minimum liquidity covenant requirements and the permitted add-back of the shortfall in certain re-franchising proceeds in accordance with our credit agreement. Our liquidity provides us with sufficient operational and financial flexibility to navigate the recovery and operate as a pure asset light franchisor. In the second quarter, we used $12 million of cash from operations, which is consistent with our cash use in the first quarter. Included was $2.5 million of social security contributions we remitted in December that we had deferred as part of COVID relief the executive bonus related to fiscal year 2021 we expect our cash used in operations to continue to decline in the second half of the year due to our lower cost structure we believe regis is poised for a return to growth and sustained profitability as we emerge from the pandemic and look forward to continued recovery in the second half of the year this concludes my prepared remarks I'd like to thank you for your continued support and interest in Regis, and I'll now turn the call back to Matt.