Good morning. My name is Camille, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation Second Quarter 2012 Conference Call. [Operator Instructions] If anyone has not received a copy of today's press release, please call Regis Corporation at (952) 806-2154 and a copy will be faxed to you immediately. If you wish to access the replay for this call, you may do so by dialing 1 (800) 406-7325, using access code of 4504728#. The replay will be available 60 minutes after the conclusion of today's call. I would like to remind you that to the extent the company's statements or comments this morning represent forward-looking statements, I refer you to the risk factors and other cautionary factors in today's news release, as well as the company's SEC filings. Reconciliation to non-GAAP financial measures mentioned in the following presentation, as well as others, can be found on their website at www.regiscorp.com. With us today are Randy Pearce, President; and Mark Fosland, Senior Vice President of Finance. After management has completed its review of the quarter, we will open the call for questions. [Operator Instructions] I'd now like to turn the call over to Randy Pearce for his comments. Randy, you may now begin.

Camille, thank you. Good morning, everyone. Thanks for joining us once again. In addition to Mark Fosland joining me today are -- we have several members from the Regis Senior Management team. Once again, we have Brent Moen, our Chief Financial Officer; as well as Eric Bakken, our Executive Vice President and Interim Corporate Chief Operating Officer; also pleased to have joining us today Joel Connor. Joel is from the Regis board. He's our lead director. And Joel is available at the end should there be any questions that he can address from a board perspective. I'll begin by making a few remarks with respect to our second quarter results and then provide you an update on our strategic plan, including the progress we're making on our various business initiatives and other fronts. Today, we reported second quarter operational earnings of $0.32 a share, which exceeded revised street expectations and with $0.07 above results we reported in the same period last year. These results reflect a negative leverage from second quarter sales, which were more than offset by the continued reduction of our expense structure. As we continue to implement our longer-term operational strategies designed to drive increased customer trial, retention and revenue in our salons, we remain focused and achieving increased cost efficiencies throughout our organization. Mark will provide more detail behind our quarterly performance in just a few moments. Second quarter results also included certain nonoperational charges, the largest of which was related to a goodwill impairment charge associated with our Hair Club business. As we've previously disclosed, this business had the least amount of cushion when we performed our annual valuation testing. Today's press release provides additional detail regarding these one-off items. Let me update you on our plans to further refine our operations in order to…

Sure. Thanks, Randy, and good morning, everyone. We've added more detail regarding our operating segments in today's press release. And as a result, I will limit my prepared remarks to focus on the highlights of the quarter. As always, I will begin by discussing our consolidated financial and operating performance, followed by a review of our major items impacting each of our business segments. Our actual reported results for the second quarter were a net loss of $1.1 per share. However, this included after-tax nonoperational items of $77 million, or $1.33 per share, primarily related to goodwill impairment in our Hair Restoration Center segment. Excluding nonoperational charges, our operational earnings in the second quarter came in at $0.32 per share. With same-store sales declining 3% in the quarter, we would've expected our operational earnings results to be about $0.23 per share. Therefore, our operational results of $0.32 per share are about $0.09 higher than our comps would indicate. The majority of the upside relates to strong service margins, aggressive and responsible expense control and lower-than-planned income tax expense. As usual, we have included in today's press release, as well as on our corporate website, a concise reconciliation that bridges our reported earnings to our operational earnings for both the current year and the prior year second quarters. Also, please feel free to contact Andy Larew or myself here at Regis, should you have any additional questions regarding our financial models. I'll now address our second quarter operating results for each of our business segments. A breakout of our segment performance can also be found in today's press release. And my comments this morning will focus on our operational performance. I will begin with our largest segment, our North American salons. Our total North American salon revenue, which represents 87% of…

[Operator Instructions] And our first question is from the line of Lorraine Hutchinson with Bank of America Merrill Lynch.

It's Paul Alexander for Lorraine. Could you guys maybe recap for us the top 2 or 3 key sales driving initiatives that you have in place? And when do you think the payoff will be for each one? I think many of us are starting to look at 2013. And can you just try to help us understand whether 2013 should be thought of as the turning point year or will these initiatives still be slowly gaining steams through 2013 and it's really more like '14 that we should be looking for to reap the benefits?

Paul, let me take a shot of that. As I said in the prepared remarks, we all realize and I know you realize this as well that there's going to be a number of -- it's a holistic approach that we're addressing. And it will take time to implement although we're working with a tremendous sense of urgency. We have not yet finalized our financial models for the impact of these on fiscal '13 or '14 team, but they will be showing benefits clearly in fiscal '13 and will continue to show increased benefits beyond fiscal '13. In terms of just some of the initiatives that we keep focusing on the salon experience, we know that we've got some wonderful brands, some wonderful locations and many wonderful employees. What we want to make sure of is that when customers come to us, that we excite them, that's the term we use. We excite them to the extent that their expectations are not only met but exceeded. So that they will come back to us and perhaps even recommend us to a friend. And we realized that, that it starts with the employees. As I mentioned before, we're aggressively looking at finding people, whether it's people behind the chair and people that are supervising our salons that have the right skill sets to deliver those types of customer service experiences. We're also making sure that we're compensating in something those people for the behaviors that we're looking for. So again, it's going to be holistic. We also realize that -- I've mentioned before that we have to become a much more customer-centric organization. And with our CRM systems, we're able now to start knowing more specifically who our customers are in their visitation patterns so that we can communicate more effectively with them. So there's a number of key things currently underway. We are seeing improvement, although modest. We're not happy. But I would expect that we'll continue to see improvement in '13 and '14 and beyond.

Can you talk any more specifically about any of the initiatives like, for instance, Net Promoter Score or the Gallup, the effort to gauge experience with the Gallup Organization? Can you talk about anything you've seen so far there? Or earlier in the call you mentioned looking at customer retention and revisit visitations through credit card data, can you talk about anything you've learned through that?

Yes. I know Andy Cohen, who is our Chief Operating Officer for our Regis division, gave a very good update yesterday relative to Gallup. And as we -- look, that's one of the beauties that we have as an organization with nearly 8,000 company stores around the world is that we have the ability to test and to move quickly based on the results of those tests. And as we look at some of the early results with Gallup and employee engagement, we see positive trends that when we hire and incent people at the right level, performance is making a difference and it translates within the same-store sales that he's seeing in those stores. I think as well, as it relates to credit card information, what we're trying to do there is see directional trends. We realized that with credit cards, not every customer is always going to use a credit card when they come to us. Sometimes they will, sometimes they'll pay with cash. We also realize that at times, a customer may come to one store, one of our Supercuts, for example, and then visit another Supercuts. So it's not a precise science here. But directionally, what we're trying to see is what is the retention rate. People that came to us 90 days ago, what are they doing 90 days later? Just overall at a salon level. So that we can start creating visibility of those retention metrics at a salon level, to not only the salon manager and her staff but also the field supervisors. Once again, we have to focus on retention and that involves that salon experience, and a key element of this is just having visibility to being able to measure that. And we realize that we'll be much more precise in being able to measure it not only at a salon level, but on an employee level once our CRM is fully operational.

And our next question is from the line of Ian Zaffino with Oppenheimer & Co.

The question will be on the same-store sales front. Can you give us a breakdown between what company-owned stores did and what the franchise stores did?

Yes, Ian. The franchise stores performed better in the quarter than our company-owned stores have done.

That's not a new trend either, I mean, and one would just say that's intuitive. You would expect it would be intuitive because Hispanic [ph] control and average Supercuts franchisee, for example, may have 5 salons in a given market and they have a better understanding then of local market conditions and customers and being able to be a little bit more nimble in responding to them. Having said that, we have been very aggressive on working with our franchisees in trying to understand what they do and we -- for those results, and we find that certain strategies of ours have been validated when we start looking at how we pay people, incent people, the skill set levels. We see them doing some things that we're learning from as well. Yes, the franchisees in most of our salon divisions are performing slightly better than -- on a same-store basis than the related corporate stores.

Right. Just so are we talking about 100 basis points, a couple of hundred basis points, more than that?

It's in 100 to 200 basis point range.

Okay. With that said, is there may be an effort to de-emphasize company-owned stores and maybe emphasize franchisee stores? I mean, some of your competitors do that and they do it quite effectively.

Yes. Look, I like the franchise business. This has always been something -- by the way, we got into it back in the mid-90s with an acquisition of Supercuts. But as a result, we do have nearly 8,000 corporate stores and a couple thousand franchise stores in North America. I like that franchising model and I believe I speak for the management team and the board as well. It's one thing though that we can't always control in terms of that growth trend, but I'm going to tell you I'm really pleased on what I'm seeing so far this year. Eric Bakken, Paul Plate and a number of people on our senior management team have been tremendously focused on growing the franchise business. And as we've said in the past, our growth rate this year will probably be 2x, if not more, larger than that of the same period a year age. So we got a lot of good momentum on the franchise front. And I think one of the other things that we look to is we start looking at our overall portfolio, if it makes sense, in certain markets for a corporate store to be a franchise store. And if we have a franchisee that's interested, we'll certainly consider that.

Okay. And then on the stylist retention, you know there's an effort to maybe increase the tenure of your stylists. Where are you with that? I mean, can you give us a hard number of what it was previously and what it is today?

No. And I would say, Ian, that I hate to keep using the phrase it's too early, because we are moving in that direction. But that retention rate, you're right. I mean, that is so important. It's the stylist behind the chair that is so important. And we've seen time and time again in our better stores that the longer we can keep somebody behind the chair that's successful in delivering that customer experience, it's good for them monetarily, it's good for customers, it's good for the company. Retention is very, very important. So as we talk about this holistic approach to the customer experience, that includes retention and that includes making sure that we're hiring, first of all, the right people with the right skill sets and paying them appropriately, incentivizing them so that we can lengthen the retention pattern.

Our next question is from the line of Jeff Stein with Northcoast Research.

A question. Again, this goes back to your -- the company's hiring practices in the salons. I'm just kind of curious, it seems that you are improving your service margin largely because you have been altering your pay plans with your stylists. And I'm wondering, it almost seems to me to be counterintuitive to trying to improve the customer experience and at the same time the new stylist that you're being in you're cutting their pay. And I'm wondering, are you really getting the best people as you go through this stylist turnover on an annualized basis? And could that in part be impairing the company's performance? Unintentionally, of course. But could that be one of the reasons why things might be a little bit slower to come back?

We know that -- by the way, when we look at a lot of our margins, I think a large part of it is, well, Jeff, is the fact that we're just more effective at scheduling, making sure that we have people, staff in our salons that meet the customers visitation patterns that occur. We realize the payroll as a percentage of sales goes up to the extent that we've got people sitting there without the customers during that period of time. And by the way, when we talk about some of these leveraged pay plans, which I think you're referring to for some of our new people, certainly, you're right from the standpoint that compensation is important and I try to emphasize that earlier, this holistic approach. I also believe that incentivizing stylists for the behaviors that we're looking for also goes into that mix. We realize that in order to attract and retain people, part of the element is going to be a compensation package that's competitive. We believe that we're competitive. But we also believe that there's more that we can do to help us further that cause.

Okay. I'm wondering if you could talk a little bit about the equity line? It really jumped up quite nicely in the quarter and I know part of it was due to the increased stake that you took there. But I'm wondering, if you were to kind of peel back the onion a little bit, on an apples to apples basis, what was the performance of the salons that you controlled over the last year if -- had you not increased your equity stake? And the second part of the question is should we continue to expect that type of percentage increase in the equity line in the back half of the year?

Yes, Jeff. So about $0.02 of the earnings impact was related to just our increased ownership so that equates to about $1 million after tax. And so the rest of it, the majority was Empire. And what we've seen is -- we know Empire has got some challenges but they had a good quarter that cut cost. We also have seen growth in Provalliance. So we continue to expect Empire is going to have some challenges in the second half of the year because their populations are down and they're not going to be able to cut cost forever. So the amount we recorded in the quarter is a pretty good run rate going forward, maybe coming down slightly.

Got it, okay. And can you just quickly bring us up to date on CRM in terms of where you are and when you think the system will be fully implemented?

Yes, we have -- it's in 4,500 locations. Right now, we're rolling out POS to Supercuts and that will be done by the end of this fiscal year. And so we'll add another 1,000 or so locations by the end of this fiscal year. And then as we roll out POS throughout the first 6 to 9 months of fiscal '13, the rest of the salons will go on to CRM.

Okay. So would you say is that on target or a little bit behind target?

And we're a quarter or 2 behind.

Our next question is from the line of Bill Armstrong from CL King & Associates.

My question was on CRM which you just answered, but I did have other question and that is I think you mentioned in your opening remarks that traffic was up 1.8% year-to-date. Did I hear that right?

We said the trend. So if you look at our fiscal 2011 trend, we're down about 4%. Now we're running down closer to 2%. So the trend has improved but we're still running negative.

Okay. So it's improved by about 180 basis points?

Yes.

And our next question is from the line of Jill Caruthers with Johnson Rice.

If you could talk about some of the marketing tests you ran there in the second quarter. I know you've been talking about some coupons, maybe reaching a wider salon base, if you could kind of talk about the draw that it pulled in, maybe new versus existing customers or whatnot.

Yes. Let me just level set a little bit and maybe Mark has more specifics because I think we were generally pleased with some of those results. We understand that we need to be more effective in promoting our salons. This is that trial element. We've demonstrated in the August haircut sale that we were very effective in doing that. But we also recognize that we weren't very efficient, that the marketing medium and the cost were not producing the return on investment that we're looking for. So we've done a lot of refinement in that. This past holiday season -- and Jill, I always want to say I want to be intentionally nebulous because we are the only public company out there and I don't want to share a lot of findings publicly. But we were reallocating existing marketing dollars to try to continue to test other types of methods of promotion that were more efficient, and we were happy with a multi-store, multi-brand coupon event that took place over the holiday season. So there was not the cannibalization of existing sales to the extent that we saw in the August haircut sale and the return on investment was much better. But Mark, in terms some of the results of customer lift?

Yes, we saw that -- we tested various things in about 6,000 locations, primarily coupon drop. And we did see that, as expected with the haircut sale, you're going to drive more traffic and as Randy mentioned, you're going to discount more. So one of our strategies is couponing which is more focused on new trial and we saw retention rates of double of what we expected. Now the real challenge and where you have to be effective is to bring these customers back. It's all about the retention so we'll know more. Most of this happened in December and into January so we'll know more about retention in the upcoming quarters. But I think we saw about 40% of the redemptions were from new customers.

Okay, that's helpful. Last question. It looks like you converted 36 salons during the quarter to the Supercuts name. Could you talk about kind of where you're at in that strategy and your thought process of consolidating some of the brands on the regional base?

Yes. Eric -- This is a good question, perhaps, for Eric Bakken to address and he's leading that initiative.

Sure, sure. Yes, we've converted just shy of 80 locations this year and the bulk of the conversions that you're mentioning occurred in Chicago. We converted a brand called BoRics to Supercuts and we're pleased so far with the results of that conversion. I would say right now, we're going to continue down that path. We believe it is a great strategy for us and we'll continue it. We're really focused on improving the salon experience right now. So we're going to pull back a little bit on our conversions through the rest -- through the balance of this fiscal year. We anticipate perhaps another 30 to 50 stores through the balance of the year. And then once we get into the next year, we will ramp that up again. We've developed a conversion playbook. We've learned a lot through the process. We know how to more effectively communicate with our employees and with our customers. And we're still very excited about it where our focus is, by and large as Randy and Mark have talked about, is on improving the customer -- or the salon experience right now.

Our next question is from the line of Erika Maschmeyer with Robert W. Baird.

This is Jacob in for Erika. We're just wondering if you could update us on the effort to consolidate under those 3 banners. Any examples of efficiencies there and how far along you are?

Yes. We're developing, as I mentioned before, we continue to refine that plan. We realize that we have about 50 banners as our initial indications where most of them fit into one of those 3 categories. Some of the -- we know that's the right -- I mean, when we look at ourselves through the eyes of the customer, many times value concepts that we have like Supercuts or other types of banners, in the eyes of the customer they don't see a discernible difference amongst some of our value concepts, for example. So we realize the right thing to do is to narrow and simplify our execution by having the -- collapsing these banners into, in that example, the value segment. And the efficiencies that will be garnered, first of all, more effectiveness as it relates to a larger voice to the customer, more power of the brands in existing markets with more stores in that market. We also realize that we can be more effective in supporting those banners through common, for example, perhaps pay plans or customer service programs or marketing programs, merchandising programs and how we supervise multiple stores in a different -- in the same market. So I think there's a lot of efficiencies to be garnered from that. And for that reason, as we continue to go forward, we are fully expecting that we're going to see a lot of financial success as it relates to more effective with sales and more increased profitability as we go forward through increased efficiencies.

Our next question is from the line of Alex Yaggy with Cortina Asset Management.

I have 2 questions. First for Randy and Eric and then a second one for Paul, I believe it is. First, an answer to one of the questions you had earlier. You talked about potentially taking some of the franchise units and you're open to the idea -- or the company units being open to the idea of franchising those. Do you have an ideal mix in your mind of how many -- many restaurant companies are 70%, 80% franchise? Is that the right model for someone like Regis?

Well, first, let me -- okay, Eric wants to reply as well. But we can't -- the point is -- what I was trying to make earlier, Alex, is we can't control that. I like franchising. I like it a lot. And I think we, hopefully by our actions, continue to embrace that. We're open to growing and certainly are going to grow the franchise business. But to say long term here is what we're trying to achieve, it's harder to achieve or to say that with precision today because we do have nearly 8,000 corporate stores. And we can't control necessarily franchise growth although we're very pleased with our current year performance. But Eric -- the takeaway is I can't, with precision, say here is the target of franchise and corporate mix. I can't give you that number, but I think we are very much embracing the franchise model.

Yes, I agree with that completely. We're using the best brands, best market approach. We trying to be strong in our markets. We're strong corporately. That's where we're focusing our corporate growth. In other markets, we're focused on franchise growth. So as Randy has said, we love the franchise model. We're ratching it up, our growth there. We've learned a lot from our franchisees. It's collaborative approach. Our investment is low. So for a variety of reasons we really like that model.

And conceivably, you could sell company units to existing or new franchisees to continue that evolution, if that's what you choose to do?

That's correct. And we've done that to a limited degree, but that is certainly an option and one that we're looking at.

Okay, good. And then this is for, I guess, the board generally and I know it's early. But are there specific skill sets that you're looking for that would lean towards more marketing and sales driving initiatives through that skill set? Or is it more of a restructuring person that you're looking at? And rather any particular industries that you trying to recruit from for the leadership of the company?

It's Joel Connor. I think that the board is very much focused on supporting management's view that the single most important thing that needs to be addressed here is the in-store experience. And as such, we're looking at people that have a strong restaurant or retail or service sector background. I think that there are -- while Regis is clearly unique in its position, that there are other skill sets that have been developed in those categories that would be very applicable to this company.

And there are no further questions. I will now turn the call back over to Mr. Pearce. Please go ahead.

Camille, thank you. Joel, thanks for joining us today. Mark, thanks for your efforts. And all of you that joined in on the call, thanks for your interest and support. Bye now.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1 (800) 406-7325 with the access code of 4504728#. This concludes our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.