Good morning. My name is Lisa and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation Fiscal 2017 First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. 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 sent to you immediately. If you wish to access the replay for this call, you may do so by dialing 1-888-203-1112, access code 1755995. The replay will be available 60 minutes after the conclusion of today's call. I would like to remind everyone 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 Web-site at www.regiscorp.com. Speaking today will be, Dan Hanrahan, Chief Executive Officer; and Eric Bakken, Interim Chief Financial Officer. 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 Mr. Hanrahan for his comments. Dan, you may begin.

Thank you, Lisa. Good morning and thank you for joining us today. With me are, Eric Bakken, our Executive Vice President and Interim Chief Financial Officer; and Mark Fosland, our Senior Vice President of Finance. Although the first quarter operating income and adjusted EBITDA increased by $3.4 million and $1.1 million over the last year respectively, these operating results are not meeting our expectations. Since 2013, we have been reengineering our entire salon support infrastructure. A key objective of salon support is to provide the tools, processes and metrics necessary for our field leaders to operate salons at a level similar to the operational performance of our franchisees. This enhanced support has resulted in positive and sustainable growth in a significant number of our salons. These results are driven by strong field leaders who consistently execute against our initiatives and are driving quarter after quarter improvement by using tools, processes and metrics we provide. The strong results of our top leaders are overshadowed by our underperforming salons which continue to be a drag on our consolidated financial results. Executing more effectively at all levels of our organization is our biggest opportunity and top priority. Our actions over the last two years have established a solid foundation at a regional and territory level, the top two tiers of our field organization. To deliver consistent long-term growth, we must build off our foundation and expand our execution capabilities. Our franchise business had another strong quarter and I am really pleased with the performance of this business. The royalty and fees we reported in the first quarter were basically flat to last year, but these results are not reflective of the true growth in our franchising business. In our first quarter last year, we had a favorable benefit relating to the timing of…

Thanks, Dan, and good morning. Dan has done a nice job of recapping our performance in the quarter and our press release and 10-Q include detailed explanations for our major P&L line items. As a result, I'll limit my comments to financial housekeeping items and liquidity. On the housekeeping side, first I want to remind you that the valuation allowance in place against most of our deferred tax assets makes it very difficult to compare after-tax results to prior periods. In the quarter, we booked tax expense of $2.7 million at an effective tax rate of 45.5%. However, $2 million of this expense was non-cash and related to tax benefits we claim for goodwill amortization but cannot currently recognize for GAAP purposes. The non-cash tax expense related to this issue will approach $8 million for the full fiscal year and will continue annually in decreasing amounts as long as we have the deferred tax asset valuation allowance in place. As we have discussed in the past, this non-cash charge could fluctuate significantly on a quarterly basis due to highly effective tax rate as determined at interim periods. And finally, our fourth quarter G&A of $40.3 million is not indicative of our annual run rate. During the quarter, timing in one-time benefits reduced G&A expense by approximately $3.5 million. Therefore, I want to clarify that nothing has changed in our thinking from last quarter when we referenced a $177 million annual run rate for G&A. On the liquidity side, our business generated $12.3 million of operating cash flow during the quarter despite the top line headwinds Dan mentioned earlier. This was largely offset by a $9.6 million use of cash for investing activities, a $1.1 million use for a financing activities and a $0.5 million impact from exchange rates on our…

[Operator Instructions] Our first question comes from Jeff Stein, Northcoast Research.

A couple of questions for you, first with regard to franchising, can you talk about just in terms of what your thinking is in terms of the number of locations that you might look to sell this year and also how many new locations we might expect to be opened due to franchising activities?

Sure, Jeff. Let me start with that, and Eric is very involved on our franchise business, so I'll have Eric jump in. We have been opening in the neighborhood of 200 to 230 new franchisees, our new franchise locations a year, and that pace is one that we would like to accelerate quite a bit. I can't give you an exact number on that, but those are all really greenfield type operations. We haven't been aggressive about selling other opportunities, and one of the ones that we are going to open up to our franchise team is our SmartStyle salons in Walmart, and we believe that when we do that, we will get a lot of interest from both our existing franchisees and potentially new franchisees to partner with us in Walmart and run SmartStyle salons for us. So, I can't give you an exact number at this point. That's one of the things that Huron is going to help us with to model that process. But we do know that our entire franchise team is excited about the Walmart opportunity. So we see that number growing pretty substantially.

Are there any restrictions in your franchise agreement with Walmart that gives them the right of first refusal to turn down a potential franchisee or anything else that might cause an issue to execute that strategy?

This is Eric. No, there are not. Walmart is a good partner of ours and we'll work with them closely, but there are no restrictions that would limit our ability to bring new franchisees and operate stores and they are very receptive to what we're doing here.

Jeff, one of the things, and I'll pile on a little bit, one of the things that Eric said that is absolutely right is Walmart is a terrific partner and the fact they named us as Supplier of the Year this past year, so we work very well with them, and both Walmart and we are excited about the opportunity to take on more new stores as well as move some of the stores that we have struggled with, with our operators to get healthy and bring franchisees in to run them. The 200 plus that I referred to earlier are a good example of the work that we've been doing over the past couple of years to understand how selling salons to franchisees works. All of those salons were cash flow negative salons. So we obviously get the benefit of cash flow negative going off our books, we get franchise fees and then we get royalties. And the franchisees have done a nice job with those. They get a salon at a really good price that allows them to get a good return on their capital and we see them growing those things 10%, 15%, 20% annually. So, it's a win all the way all around and it's consistent with our strategy of making sure that we create jobs and we create good opportunity for styling.

So, I mean would it make sense ultimately to make Regis primarily a royalty company, a franchise company, or is that not your intent, will this just be selectively where you have underperforming locations?

Excellent question, so we're going to start with the underperforming locations because there is immediate impact there for us, and quite honestly it's a good deal for our franchisees too because we will sell those to them at a lower price than if we were going to sell very expensive ones, but that's some of the work that Huron is going to do with us who are going to be evaluating that model and see how quickly we move to more of a franchise model, but we are definitely, and I want to be clear about it, we are definitely going to move to more of a franchise model and we'll evaluate all our options along the way.

Okay. And final question, in terms of your ability to try to elevate some of your field leaders and try to get them into kind of top quartile performance, have you considered or tried taking some of your successful field leaders where they've shown consistent results and moving them to markets that are underperforming? I know there's probably some risk involved in doing that. Potentially you could see some erosion in the locations they leave. But have you at least tested something like that to try to move the needle on these underperforming locations?

Yes, so excellent question again. One of our very thoughtful Board members asked a very similar question at our last Board meeting. We have done some of it. People work for people. So, when we move one of our best-performing field leaders out of a market that they've been able to get healthy and grow, and move them to one that is underperforming, we are pretty convinced that they will, and we've seen it, that they will improve the underperforming market. The challenge that we have on the other side and we have to be very careful of is that we don't see a decline in that market, because this is such a people related business. So, it's one of the advantages our franchisees have, is that our franchisees are local market folks, on the ground, they are operating a fewer number of salons than our regional directors would operate, and they've got skin in the game, so they are very effective, and that's why we want to move much more towards that model and in a much more aggressive way than we have in the past.

Got it. Okay, thanks very much.

Next up we'll hear from Stephanie Wissink of Piper Jaffray.

I'm wondering if you can talk a little bit more about some of the transactional data within your comps, particularly in the value salons. I know you talked a little bit about the combo improvement, but maybe talk a little bit about some of the strategies in marketing. And then separately, with respect to the franchise opportunity, can you just help us appreciate how your franchise economics compare to some of the competitive opportunities out there and where you think you can start to strengthen some of your messaging around the opportunities that you afford some of your partners?

If I understand, the first question is, just what is it that we are doing to drive results in the salons? Do I have that right?

Yes, particularly related to the service and product combinations.

So, a number of things. You heard me refer to the good work our marketing team has done around Supercuts and the mobile app and the Web. We've also built those tools out for our premium salons in the malls and for the multiple brands that we have. We built a very sophisticated Web-site underneath signature salons. So, if somebody is searching for haircut, and there's a number of different terms that you can do that will get you to signature salons if we have one of those salons in the market. We are quite proud of those sites. Our marketing team did a great job. So those all are driving increased traffic. We're also doing a lot of work around, if you've heard us talk, these combo sales, and I think that's what you're referring to in the service and the product combined, to get our stylists to sell more of retail when they are in the store, and that's working. We are seeing our stylists execute against that. We're seeing an increase in the combo rate. And then we've got promotions planned through the holidays, both in store and on the edge of store to attract people in, as well as strong e-mail campaigns and search engine type work that we're doing. So, we're doing an awful lot in the marketing arena to help drive increased traffic. And then we're working with the stylists and with our field leaders on contests to help drive conversion once they get to the salon. And I'll let Eric start on the franchise and add anything that I think might be helpful.

From a competitive standpoint, Stephanie, if you look at the fees that are paid to start with, the fees are basically the same between different franchise concepts in our business and that applies to royalties and ad fund contributions and franchise fees, but some of the differences that we offer, we operate stores today, so we are able to share learnings, and that goes both ways. We think that's a big advantage. And we sell lot of product corporately. We are able to leverage our buying power and we sell product to our franchisees on favorable terms. Another thing we do is we sign the leases for our franchisees, and we think that gives us a competitive advantage in the marketplace. And something that we've rolled out in the last couple of years, just another example, is we actually offer a service where we construct the stores for our franchisees so they can focus on getting ready to run the business, getting a good marketing plan in place, getting staffed up while we take the build-out of the store, and we do that on favorable terms for our franchisees as well. So, we think when franchisees look at us and they look at our competition, we do very well in that environment.

I would add one other thing too, and I'd come back a little bit to the marketing and especially the execution of our franchisees and our best operators, Supercuts brand is consistently rated right up near the top of franchise opportunities in Entrepreneur Magazine, and in the past ranking we were #3 overall, obviously #1 in the hair salon business. And then as we open up SmartStyle to franchise opportunities, there are 5,000 people a day that walk through a Walmart Supercenter and Walmart is a great partner. So we've got a great brand there as well. So, we think that we'll be able to compete very favorably for good franchise talent and we think we've got a great franchise base today and we believe there will be interest from them in SmartStyle as well.

Thanks, guys. And then just one follow-up with respect to your fixed cost structure, you had some nice savings in this quarter and the prior quarters. Can you talk a little bit about some of your strategies there to try to tighten up and build in some leverage potential as we look forward over the next 12 to 18 months?

Sure. We have been very, very aggressive with our fixed cost structure, and I think I mentioned in one of the previous calls that in 2011 our G&A ran at $212 million and here there is today talk about it being in the mid-$170 million. So that's a pretty substantial reduction and we've absorbed inflation in that, but more importantly, we added an asset protection organization. We dramatically beefed up our technical education team, which is really important to stylists in being able to retain stylists and also attract as well as have them successful. Then we've built out a human resources capability here. So, when you look at that, we've also in that $170 million, we've also absorbed probably another $25 million-ish in G&A cost. So, we have a real focus on this and it's something that we constantly work on. Our entire organization is compensated on cash flow. So, to tell you a funny story, when we put up some signs in our windows to make sure that people knew that we were in the hair salon business around here, at an all-employee meeting I had one of our associates, been on the Company for a few years but hadn't been promoted to manager yet, asked me in an all-employee meeting, how much did those cost and what impact does that have on our cash flow? So, we've really gotten that message across that we need to be real stewards of cash and drive as much cash as possible.

Thank you, guys. Appreciate the story, Dan. Take care.

Our next question will come from Jill Nelson, Johnson Rice & Company.

Just trying to gather, you mentioned your existing franchisees have the opportunity to invest more in your business, and maybe if you could just talk about kind of the average number of salons your franchisee operate and kind of where do you think that number could go or what that existing base can expand to?

So I'll get it started. We've added close to 500 franchisees in the last several years, and when you look at the average, now average number of stores, they average about six stores, but that's a little bit understated given the number of new owners that we've added. So, we like to see that number get up a little bit higher when the franchise owner has 10 stores, it's easier for them to manage it. And once they get, they cross into that six, seven, eight stores, it's easier for them to get to 10 and then go on to 15 and 20 and beyond, and that's a good model for them and a really good model for us as well.

Okay. And then if you could just talk about the expense timing, you talked about $3.5 million cost in the first quarter, kind of where would that offset be? Is it mainly second quarter or is it kind of a flow through the year?

It's a mix between future quarters and the following year as well. So there is some timing in there, but it's a mix. The majority would be later in the year.

Okay. And then just quickly on the mall-based salons, particularly the Regis and MasterCuts, are you seeing a bigger hit on the comp side, is that mainly driven by weaker traffic and just kind of if you could talk about the mix there?

It is. It is driven by weaker traffic. As I said in my scripted comments that mall traffic has been challenging. We still have the stores since we have to operate them. So, we are really focused on what we can control. We have been closing mall stores at an increased pace and working hard when we do that to save stylists so that we can move stylists from one mall salon into potentially another mall salon or potentially even into a salon that isn't in the mall, because when we do that we can bring guests along with that stylist and we can help another salon be successful. But it is – a big challenge for us is the traffic right now.

Okay. And then if I could just sneak one last one in, just on the franchises, now you are evaluating to accelerate that business. Maybe if you could talk about just the past couple of years, what hurdles did you face that kind of delayed your step to accelerate that growth? And that's it from me.

Good question. So, a few things. Number one, when we started here, we said that our focus was going to be on making all of our salons successful. And I think that in a large portion of them, we see real success. I would say, three quarters of them were positive cash flow but we've got about a quarter from them that are not positive cash flow. And so, we've seen over that time the continued success of the franchise business, and the real interest when in 2013 when we started to sell much more aggressively to Supercuts brand, interest in our brand, and in my scripted remarks I talked about how fast we were growing there. So, as we looked at all those things together, we said, look, this is the real opportunity to accelerate this. We've sold right around 200 of them. But that time when we sold 200 of them, we weren't contemplating selling, potentially selling SmartStyle or potentially selling some of the Supercuts. It was more around – but we have sold some of the Supercuts, but very few, and no SmartStyle. So, when we started to look at it that way, we saw real opportunity to accelerate the business. So, it's kind of all those things coming together, Jill, that got us to the point that we should now take this business that is very profitable, growing very nicely and accelerate that growth because that will be good for Regis as a whole.

Thank you.

And this concludes the Q&A portion of the call. I will now turn the conference back to Dan.

Thanks, Lisa. Thanks everybody for joining us. If there are specific questions, I know Mark and Paul will be looking forward to talking to you offline, and we look forward to talking to you at the next call.