Regis Corporation

Good morning, and thank you for joining the Regis First Quarter 2023 Earnings Release Conference Call. All participants enter a listen-only mode. The prepared remarks by our President and Chief Executive Officer, Matthew Docter, and Executive Vice President and Chief Financial Officer, Kirsten Zupfer, are accompanied by the 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'd like to remind everyone that the language on forward-looking statements, including our earnings release and 8 filing, are also applied to our comments made in the call today. These documents, along with our presentation, can be found on our website, www.regiscorp.com forward slash investor relations, along with the reconciliation of any non-GAAP financial measures mentioned on our call today with the corresponding GAAP measure. Today's slides are also located in the supplemental financial section of the investor site. With that, I will now turn the call over to Matt.

Thank you, Biz. Good morning, everyone, and thank you for your interest in Redis. I am excited to speak with you today and share our results for the quarter. Over the past several quarters, perhaps years even, we've been discussing what our company will look like and what the results should be on the other side of completing the transition to a fully franchised model and winding down our legacy businesses. Over the course of the past year, we've made a lot of progress on this front. And I mentioned on our last call that we should start demonstrating positive EBITDA going forward. And we are starting to do exactly that. We have come a long way through the hard work and resilience of the Regis team and our franchisees. And that work is coming to fruition in our results. I am pleased to share our positive start to the year with the first quarter marking key milestones as we make progress towards advancing our strategy. this end in the first quarter we generated more ebitda than all of fiscal 2022 and we recorded positive operating income for the first time since the quarter ended september 30th 2018. now while we have certainly come a long way i would be remiss if i didn't acknowledge there is still significant work ahead work that we are addressing head-on through the initiatives we have in place and have discussed at length on previous calls as we have strong conviction that they are the right ones to capitalize on the foundational work that has transformed Regis into an asset light franchise model. With a durable balance sheet, talented team, and dedicated franchisees, we continue to be laser focused on providing our franchisees with the tools to ensure we continue to build the momentum on which we are gaining and pave the way for a bright future for the entire Regis system. For today's call, I will highlight our results, I will share the progress that we've been making on our strategy, and I'll review the priorities we have for the business as we enter the second quarter and for the full fiscal year. Delving deeper into our first quarter results, same store sales rose 4.5% versus the prior year's first quarter. Adjusted EBITDA on a consolidated basis was $3.8 million compared to a loss of $5 million in the prior year's quarter. an $8.8 million improvement. Our franchise segment EBITDA was $5 million, increasing $8.5 million from a loss of $3.5 million in the first quarter of fiscal 2022. Our franchise segment EBITDA continues its positive trend, representing yet another quarter of strong franchise EBITDA growth. And as I mentioned in my opening remarks, we reported positive operating income of $2.5 million versus a loss of 4.9 million in Q1 of fiscal 22, representing again the first quarter of positive operating income in 16 quarters. Another financial highlight is our decreased cash use, as we've come a long way from the cash use we've seen over the past two years. Kirsten will get into the details of this item later during her remarks. Our liquidity position and capital structure remained strong, having successfully renegotiated our credit agreement during the quarter. We ended the quarter with total liquidity of $48 million, providing us ample runway to continue investing in and improving the business. Now turning to our business initiatives. Operationally, we are sticking with the game plan and staying on top of those items directly in our control and will be impactful. like reducing G&A and winding down company-owned salons. And we were also intently focused on driving salon-level sales and productivity with our initiatives in technology, stylists for retention and recruitment, and marketing expected to do just that. I want to take some time and touch on the areas within our control, as the team has done a great job of continuing to manage G&A while more aggressively winding down our company-owned salons. These actions we are taking will be instrumental in continuing to provide us the runway needed to drive the turnaround and position Regis for growth. We've been closely managing G&A and we are pleased where this is coming in. Kirsten will be updating you later in the call with more details on G&A and the expectation for continued improvement in our annual outlook for this metric. In addition to G&A, we have directed our real estate team to take an even more urgent approach to winding down company-owned salons. We ended the quarter with 95 company-owned salons, and we currently stand at 90 as of the end of October. These acceleration efforts should start bearing fruit in the quarters to come, as by getting out of these salons, we will avoid future losses, which would further benefit our results. And as we move ahead, we will continue to manage these two items very closely. Now moving on to our core salon initiatives of technology, stylus retention, recruiting, and marketing. Our priorities here remain exactly the same as I've laid out on prior calls. On the technology front, we are primarily focused on the rollout of the Zenoti platform across our salons. Since closing the deal, we have deployed Zenoti in our Roosters brand and have had franchisees from our other brands run pilot tests to ensure the functionality of the product meets the needs of our salons. Our franchisees in Zanotti have worked collaboratively throughout this process, as Zanotti has been very responsive in acknowledging and completing the necessary work to be done in a timely manner. I am encouraged that this partnership is set up to be a successful one. And after months of work, we are on the cusp of accelerating the rollout with the right feature set that meets the unique demands of all of our brands. Our expectation is during this month of November, weekly migration rates will ramp up into the triple digits and carry us to completion of the rollout by the end of our fiscal year. As discussed, we believe our franchisees will benefit significantly from the targeted marketing platform, improved guest communication tools, greater product stability, and many other only on Zenoti features. It should also be noted that during the quarter, we did receive $4 million in proceeds related to the refinancing holdback, as well as an additional $500,000 in October, bringing the total cash proceeds of $17.5 million from the sale thus far. And as a reminder, all proceeds will go towards repaying our bank debt. Now, in regards to stylists retention and recruitment and other customer marketing efforts, for the purposes of this call, I will mostly be reiterating the initiatives we have in place, and I'm going to reserve more details and updates on subsequent calls. I mentioned on the previous quarter's call that we expect these initiatives to be largely in effect by the end of the calendar year. So we'll likely start measuring and discussing results in a much more robust way during the back half of fiscal 2023. Now, with that said, we are starting to execute on our stylist retention and recruitment efforts with two major work streams, the first being our increased investment in stylist support and educational efforts, as well as recruitment-focused marketing. In terms of what we've been up to on the increased education front, our artistic directors have been getting back into salons regularly for the first time in years and providing live, customized, hands-on training across our entire Supercuts brand. We are also training a large amount of franchisee technical trainers. This will further increase the span and reach of our educational teams. We're increasing our visits to beauty schools and we're collecting current enrollee contact information to ensure we keep a dialogue with them as they move along their educational journey with the goal of being in front of them when they seek jobs upon graduation. Now, in addition to the technical side, we are also in the midst of creating salon manager and leader training modules to ensure we focus on the soft skills to create the right environment and the right culture for stylists in our brands. as retention is just as important as a strong pipeline of candidates. Our incentive award and advanced education trips have officially kicked off as we hosted our first event in mid-October in Las Vegas, with the next one to follow in January that will be attended by over a thousand managers, stylists, and owners. The second major work stream here is recruitment marketing. Now we've just started to test some collateral across very immediate channels to start gauging where we get the best return. We see this work as preliminarily, we see this work as laying groundwork in order to get a better sense for where messages are resonating with stylists so we can ultimately deploy newly developed creative assets across those channels with the best ROI. And in the meantime, we're continuing to work on unique ways to convey our employer value proposition and ensure we get our proper story across to stand out amongst the competition on both social and digital platforms. More to come on these efforts as we continue throughout the year. Now on the customer marketing front, the goal remains to drive traffic through better customer retention and build further stickiness and loyalty to our brands. We've started our shift in media spend to optimize search and social, and we are developing CRM test campaigns through both email and SMS text messaging for the first time, with the goal of getting out some of these initial test campaigns during the month of November. We have kicked off the design phase of our branded loyalty programs, and we are gearing up for holiday promotions to ensure we take advantage of these high volume months. We are also super excited to launch what we believe will be a differentiated, structured approach to our brand's promotional calendar efforts. Starting in December, we were releasing the first of our new seasonal trend promotional calendars for the majority of our brands in order to create more consistent brand stories and drive incremental service and retail add-ons along with educational tie-ins for our stylists. Given the scale that we have, we believe we should not be reactive to trends, but rather drive them. And each seasonal trend will have a service and retail focus for each month within the season with the goal of driving incremental sales. Not only do we believe this will be a strong marketing tool, but it's also yet another piece in the stylist recruitment and retention story as stylists will be receiving new and exciting educational training on relevant trends on a consistent, ongoing basis. This represents yet another item that we are launching that we believe we can execute on at a scale that cannot be matched. And I look forward to keeping you updated on the progress of these initiatives as we move throughout the year as well. Before wrapping up on the initiatives, I would like to touch on one other important business item, as we've not really addressed this on calls in the past, but I think it's worth discussing here, which is salon closures. As part of our overall strategy, we will be focused on not only closure mitigation, but also closure optimization. Speaking candidly, taking some steps back from a salon count perspective may be necessary to move forward. As carrying low volume, loss-making salons is not the best use of time and money for us, nor our franchisees. And while losing footprint is something that no system wants, we want to acknowledge the realities of the situation and ensure that when salons do close, that we can manage customers and stylists accordingly to optimize and improve those salons that represent the strongest return potential, ultimately benefiting from the transfer of sales and sales generating capabilities through more stylists as we migrate to ongoing salons. And to put this into context, the impact of salons that are closing are not a major financial drag. For example, these salons are generally averaging under $100,000 in annual sales, which translates to royalties of around $5,000 or less to Regis on an annual basis. Through optimizing closures and better performing fleet, we believe we can strengthen the system even more for the long run and get back to the path of net salon growth in the future. Now, as I stated before, all of these initiatives are meant to address driving the core of our business, which is the need for trained stylists and customer traffic, which in turn will drive sales, productivity, and operating performance at the salon level. To underscore the importance and make these more tangible regarding what exactly these initiatives are meant to achieve, I mentioned previously that our entire company will be sharing the same overarching KPIs to ensure we are fully aligned on moving the needle on the metrics that matter. Those targets and metrics are geared to result in the following outcomes, all of which have specific numerical targets and timelines around increasing stylist hours worked per salon per day, increasing 90-day customer retention, both laddering up to increasing overall sales, adoption of the Zanotti platform, and improved franchisee support scores by proactively asking our franchisees for feedback and acting on it accordingly. These are the focus set of initiatives for the year, and we believe that we can drive improvement in these metrics, we can make strides for our franchisees' profitability, and subsequently improve Regis' business. Now, as we begin the second quarter, our business is performing relatively in line with the first quarter. The challenges we've been facing continue to be present, with sales continuing to reflect the negative impact of labor constraints and shifts in customer behavior, such as the lengthening of haircut cycles. But we are confident in our plans. Our initiatives are expected to allow us to address these challenges over time as we improve stylus retention and recruitment through increased investment in education, drive traffic through more optimized marketing spend, and streamline operations through the right technology solution in Zenoti. I want to thank the entire Regis system for their contribution to our performance. I am proud of all of the team members. all of our franchise owners and our business partners for their passion and dedication to regis we believe we have identified and are implementing the initiatives that will allow us to build upon our improved operating platform and deliver long-term sustainable growth and I am encouraged that we can point to our results this quarter as the inflection point that we were striving towards, a testament to the work that has been done, and a glimpse into what we believe is an exciting future to come. I will now turn the call over to Kirsten to review the financials in more detail. Kirsten?

Thanks Matt and good morning. We are pleased to speak with you to share our first quarter performance, which demonstrated strong progress against our strategy to transform Regus into an asset light franchise operator. This has led to us delivering continued improvements in profitability. Notably, the first quarter marked our initial period of positive consolidated operating income since September of 2018. Driven by improved core revenue consisting of royalty and fee income, and reductions in G&A. Net income was another positive with an increase of $11.9 million to positive $1.5 million from a loss of $10.4 million in the first quarter last year. The increase in net income reflects the improvement in income from operations and the gain associated with proceeds received from the sale of OSP to Zanotti, which Matt discussed. Overall, we are very pleased with the overall progress in our business. On the top line, while total first quarter revenues of $62 million declined $15 million from the prior year as expected due to our transition to a fully franchised business model, core revenue improved by nearly $1 million due to higher average royalty rates. And system-wide same store sales increased 4.5% in the quarter. We remain intently focused on implementing initiatives to drive system-wide sales growth with actions to improve stylist recruitment and training. Our goal continues to be to increase awareness of the many opportunities and benefits stylists and beauty schools students can expect from joining our organization. I want to spend some time on our adjusted results to eliminate the noise we see in the reported results. On an adjusted basis, first quarter consolidated adjusted EBITDA was $4 million compared to a loss of $5 million in the prior year's quarter. Adjusted EBITDA improved due to higher royalties and our lower cost structure. Our adjusted GNA for the quarter was $14 million, which was lower than our expected run rate due to the timing of filling open positions and stylus recruiting events. We are continuously reviewing our G&A structure and have lowered our expected normalized G&A run rate from 60 to 63 million down to 57 to $60 million annually. Our core franchise business achieved adjusted EBITDA of $5 million, an $8 million improvement compared to a loss of $3 million in the prior year. Our core business results continue to be driven primarily by higher royalties and our right-size G&A structure. We narrowed our company-owned segment adjusted EBITDA loss to approximately $1 million, which is a $0.4 million improvement in adjusted EBITDA from the same period last year. The improvement is primarily related to having fewer loss-generating company-owned salons in the current period. Prior period results were boosted by Canadian COVID relief benefits of 1.7 million. Excluding these benefits, company-owned adjusted EBITDA increased $2 million. As Matt mentioned earlier in the call, company-owned salons continue to be a drag on the business, and our real estate team is focused on aggressively exiting these loss-generating salons. Turning to liquidity, as of September 30th, we had $48 million of liquidity including $38 million of available revolver capacity and $10 million of cash. In the first quarter, we used $5 million of cash from operations, which is an improvement of $7 million from the prior year. The $5 million includes our annual bonus payment and annual insurance prepayment and $1.3 million of other one-time payments. This is the closest we've been to generating cash from operations. since the fourth quarter of fiscal year 2019. And we expect our cash used in operations to continue to decline as sales and customer traffic improve. Additionally, with the sale of OSP, our expected future capital expenditures will be around a million dollars for the year. Given our working capital and modest capital expenditure requirements, we believe we have ample liquidity. This concludes my prepared remarks. I'd like to thank you for your continued support and interest in Regus and look forward to speaking with you at upcoming investor conferences, including the Wolf Consumer Conference in December and the ICR Conference in January. I will turn it back to Biz who will lead us through the Q&A.

Thank you, Kirsten. As a reminder, please use the raise your hand or Q&A feature to ask a question. The first question that we got was, tell us about the trends in the sales channel. We were hearing about other companies in the beauty industry where customers are spacing out time between appointments longer due to financial stress.

Yeah, sure. Thanks for the question, Matt. Touched on this a little bit earlier regarding some of the trends in consumer behavior, certainly something that we're seeing, not necessarily even due to financial stress, but I'd probably say another word I'd use is inconsistent since COVID, inconsistency between the lengths of lengthening out the cycles, having longer hairstyles, who they're going to and where and how long this will all last for. What I would say to that is even in this environment and even if that being the case, there's still significant opportunity for us to ensure even those who may be going less still stay with us and don't go elsewhere. So getting back to that point of customer retention and doing a better job there, this will be a positive impact on that. And also there's still the opportunity to drive new traffic and keep them as well. So even in this kind of environment, those two will still be net positives. And going back to something I said in the call, which is capitalizing on driving some trends, and this I mean actual hairstyle trends versus visitation trends, you know, having these folks within our salons, we can build service tickets to the promotional calendars we're talking about, hopefully ensuring that when folks do come on, we can be the salons they look for to go to for their baseline service, as well as drive trends in hair and give them further reason to come back versus just give me the usual, which, of course, is totally okay as well. All right, well, we're not seeing any further questions here. Appreciate everyone joining. I just want to say, probably won't be speaking to you until the new year. So have a happy and healthy holiday season and look forward to speaking to you all when we report second quarter results. Thank you.