Regis Corporation

Good morning and thank you for joining the Regis First Quarter 2022 Earnings Release Conference Call. All participants are in a listen-only mode. After the prepared remarks by our Chief Executive Officer, Felipe Ataite, and Executive Vice President and Chief Financial Officer, Kirsten Zupfer, we will have time for questions. Please use the chat feature or raise your hand feature to ask a question. Joining Felipe and Kirsten on this call, we have Matt Docter, Executive Vice President and Chief Strategy Officer, Amanda Russin, our General Counsel, and Jim Lane, our President of Franchise Operations. I'm your host, Biz McShane, Vice President, Controller. As a reminder, this conference call is being recorded. Before turning the call over to Felipe, I would like to remind everyone that the language on forward-looking statements included in our earnings release and 8K filing also apply to our comments made on the call today. These documents can be found on our website, www.regiscorp.com forward slash Investor Relations, along with any reconciliation of non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures. With that, I will now turn the call over to Felipe.

Thank you, Biz. Good morning and thank you for joining us. Before getting into our results for the quarter, I want to address a few key liquidity and profitability initiatives we undertook to ensure Regus is in a strong financial position. During the quarter, we utilized our at-the-market or ATM program and raised $37.2 million in unrestricted cash. This additional liquidity meaningfully bolsters our balance sheet and gives us additional flexibility as we focus on growing the business. Our initial ATM was registered for up to $50 million, so we still have capacity to issue more shares under the program and will assess the merits of doing so going forward. We also took another look at our organizational structure and realigned our business to decrease costs while optimizing the support for our brands and franchisees. This reorg was completed in October and is not reflected in the results we published yesterday. These changes are expected to result in annual savings of approximately 5 million, and I will let Kirsten outline the revised G&A range based on those recent changes. These savings are above and beyond the savings resulting from our zero-based budgeting process, which we concluded last June. As part of this reorg, I wanted to highlight the role of Jim Lane, who is now our president of franchise operations. Jim now leads all Regus brands from operational excellence and execution to franchisee relationships, business performance, and strategies to build traffic and drive customer satisfaction and loyalty. This does not represent the departure from our brand centric approach as brand centricity remains in many aspects of Jim's organization, such as marketing. In fact, we believe this best combines both brand focus in a flexible, efficient team structure. We look forward to seeing the progress Jim makes with our brands given his extensive experience in our industry. As we continue to navigate the current environment and sales recovery, we look to pull the levers within our control to ensure Regus is in a healthy financial position. And these two initiatives, the use of the ATM program and the reorg are major contributors to that effort. Turning to our results, Q1 of fiscal 22 saw improving same store sales of 23%. While we continue to demonstrate quarter over quarter improvement, staffing and labor continue to put pressure on our business. Not only are staffing hours down during normal business hours, but the shortage in labor is also driving salon closures during periods when they would have been historically open, such as Sundays and Mondays. Such staffing issues, which have been prevalent across a variety of retail and service businesses, are impeding our full recovery. Given the importance of labor to our business and revenue generation capabilities, we have made it our top priority to work with our franchisees to recruit stylists. We have invested in a premier mobile solution that streamlines the entire hiring process and are assisting our franchisees in recruiting from beauty schools. We're also closely monitoring beauty school enrollment as graduates from such schools are the main pipeline for new stylists in all of our region's brands. Students who began their training pre-COVID had an interruption in gaining their hours for licensure as the majority of states did not reduce the hour requirements for licensure during COVID to accommodate for school closures and capacity restrictions. As a result of this, many students either dropped out of beauty school or were delayed in getting their licenses, a problem which was compounded with very few new enrollments during that time. Through our relationship with Empire Education, we can see that new leads defined as people interested in enrolling in beauty schools have already returned to pre-COVID levels. At the same time, most beauty schools are back to pre-pandemic operating models, so we can expect the level of graduates to return to pre-COVID levels around June of 2022. This is good news for the industry, making it evident that interest in the beauty industry is intact, which gives us another data point to believe that the labor shortage is truly temporary. While the stats are encouraging, we need to work with our franchisees to ensure enrolled students end up converted to salon employees. We're implementing high-touch initiatives for empire education specifically that can ultimately be leveraged for beauty schools more broadly. We're also evaluating the merits of recruitment marketing in addition to identifying best-in-class pay plans and successful hiring and retention strategies from our top franchisees. I now want to touch on another key pillar of our strategy, which is the continued rollout of our proprietary salon booking and automation technology platform, Open Salon Pro. When it comes to this technology, our focus last quarter was to implement an important shift in leadership. Our prior Chief Technology Officer did an outstanding job building an entire team and system from scratch. The hiring of John Davie, our new CTO, marks a new milestone in our OSB strategy, which is to ensure the capabilities of our software match or exceed the capabilities of global competing store management and digital services as we continue to strive for both an unparalleled franchisee experience and for commercialization beyond our own industry and brands. John's experience in scaling consumer-facing platforms make him the perfect leader to take our open salon ecosystem to the next level. He is a fantastic addition to the Regus team. Another great addition to the Regus team is Lockie Andrews, who joined our board of directors in September. Lockie is a proven leader with deep expertise in e-commerce, digital transformation, and data analytics. We're thrilled to have her as a resource to Regis given the wealth of knowledge and experience she brings. Before I turn the call over to Kirsten, I'd like to reemphasize Regis' position as the largest hair salon network in the world. We are the industry leader with almost 100 years of heritage and operating experience. We comprise over 5,600 salons, spanning brands with some of the highest awareness levels in the industry. Our brands represent 45% of large chain hair care spend, spending that is not threatened by replacement technology. We are fully franchise business model with the most comprehensive service offering at the largest combined scale versus competitors, which means we offer the greatest opportunity for franchise investment. Our revamped management team is a mix of tenured Regis leaders and executives from other companies with complementary expertise in franchising, operations, marketing, development, international growth, finance, and technology. We see these pillars as fundamental sources of strength that, coupled with our new G&A structure and full migration to an asset-light model, position us well for growth and sustained profitability as we emerge from the pandemic. As we continue through fiscal 2022, our focus remains locked in on sales, for which the main lever is currently in the form of stylist recruiting, OSP adoption, bolstering our franchisee base to drive growth, and a healthy balance sheet. Thank you so much for your continued interest in Regis, and I will now turn the call over to Kirsten to take you through the numbers. Kirsten?

Thanks Felipe and good morning. Yesterday we reported on a consolidated basis first quarter revenues of $78 million, which represented a $34 million increase from the prior year. The increase is a result of our continual recovery from the COVID-19 pandemic. Currently our salons are not facing mandated closures or other significant government imposed restrictions. But as we've discussed, our return to pre-COVID volumes continues to be hampered by the labor shortage. On a two-year basis, a comparison to pre-COVID system-wide comps were down 17% in the quarter. This is an improvement over Q4 when we were down 21%. While comps historically have been the key indicator of the health of the business, due to the pandemic, I want to focus on total system sales. System-wide sales are a key indicator for our fully franchised business as each sale made by a franchisee directly improves our bottom line. Total system sales increased approximately 8% from the fourth quarter. We reported an operating loss of $6 million during the quarter compared to an operating loss of $32 million in the prior quarter. The improvement is a result of our recovery from COVID-19 and the transition to our franchisor model. First quarter consolidated adjusted EBITDA loss was $6 million compared to a loss of $23 million in Q4 2021. As we are nearing the end of our transformation, I want to call out some losses that we incurred in the quarter that we expect to eliminate or reduce by the end of the fiscal year. Our franchise product sales business and company-owned salons contributed losses of approximately $3 million and $1.6 million, respectively, both of which are not part of our Go Forward business. The actions we recently took to reduce G&A are not yet reflected in our results as the changes were made in October. The $5 million in annual savings Felipe mentioned will be seen in our Q2 Forward. As I mentioned on our last call, we expect our GNA to decrease throughout the fiscal year and anticipate that Q4 GNA will represent our run rate GNA. With the recent GNA changes, we now expect our end state run rate GNA to be in the range of $65 to $70 million annually. Turning to liquidity, as of September 30th, we had $148 million of liquidity, including $82 million of available revolver capacity and $46 million of cash. Our net available liquidity as of September 30th was $73 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. The $19 million quarterly increase in net available liquidity was due to utilizing the ATM. We raised $37 million in total, of which $32 million settled in September and $5 million settled in October. Our liquidity provides the company with sufficient operational and financial flexibility to navigate the recovery and progress to the next phase of our transformation to a pure asset-light franchisor. In the first quarter, we used $12 million of cash from operations, which is approximately $8 million less than our fourth quarter cash use of $20 million, driven in part by continued improving comps. Removing $2 million of cash used on one-time items, our cash use was $10 million in the first quarter. We expect our cash used in operations to continue to decline each quarter throughout fiscal year 22 as we exit distribution centers and realize savings from our recent G&A actions. On the business side, the reopening of our Canadian salons in the quarter was an important turning point. We are no longer facing government mandated closures, which have severely impacted our franchisees and our business. The middle part of the country continues to perform better than the coasts, but all regions are improving. We are hopeful that higher vaccination rates for adults, vaccines for kids, and less government assistance will encourage stylists to return to work as we head into the holiday season. To reiterate Felipe's closing comment, we believe we are well positioned for growth and sustained profitability as we emerge from the pandemic and look forward to continued recovery as we head into the holiday season. This concludes my prepared remarks. I would like to thank you for your continued support and interest in Regis and will now turn the call back to Biz for questions.

Thank you, Kirsten. We have no questions this morning. Thank you very much for joining. That concludes our call today.