Thank you for standing by. Welcome to the Regis Corporation Fiscal 2018 Third Quarter Earnings Call. My name is Ryan, and I will be your conference facilitator today. At this time, all participants are in a listen-only mode. Following management’s presentation, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded for playback and will be available by approximately 12 PM Eastern Time today. I’ll now turn the conference over to Mr. Paul Dunn, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Ryan. Good morning, everyone, and thank you all for joining us. On the call with me today are Hugh Sawyer, our Chief Executive Officer; Andrew Lacko, our new Chief Financial Officer; Eric Bakken, President of our Franchise Segment; and Amanda Rusin, our General Counsel. Before turning the call over to Hugh, there are few housekeeping items I need to address. First, today’s earnings release and conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance, and by their nature, are subject to inherent risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to today’s release and our recent SEC filings for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Second, this morning’s conference call must be considered in conjunction with both the 10-Q filing and earnings release we issued this morning. In today’s call, we will be discussing non-GAAP financial results that exclude the impact of certain business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons but should not be considered superior to, or as a substitute for, and should be ready in conjunction with GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in this morning’s earnings release, which is available on our website at www.regiscorp.com/investor. With that, I will now turn the call over to Hugh.

Thank you, Paul, and good morning, everyone. Thanks for joining us and thanks as well for your interest in Regis. I’m delighted to report to you that it’s finally stopped snowing here in Minneapolis. I’m feeling a little better about the world as we look into the months ahead. My comments today will focus briefly on the status of our ongoing efforts to build a high-performing company, a journey which began last April. Andrew will then provide a recap of our financial results for the quarter. When I joined Regis just over a year ago, I outlined what I believe was an ambitious vision for the company that included the following elements: A strategic transformation of the business with an emphasis on the growth of our franchise platform; the restructuring of our non-performing cash flow negative company-owned salon portfolio; the operational turnaround of our underperforming company-owned salons by institutionalizing execution as a core competency; the utilization of technology to transform the business; thoughtful investments to support growth through better advertising content, digital advertising and leveraging broader channels of distribution for improved content through new relationships, our digital advertising programs and social media; efforts to upgrade stylist recruitment, training and retention; the vigorous elimination of non-essential, non-customer facing costs; and the revitalization of our guest experience in our local salons. We believe the initiatives we executed during a busy third quarter will help advance our aspiration to build a high-performing business here at Regis. And as we’ve reported, we completed the operational restructuring of our company-owned salon portfolio by closing 597 non-performing cash flow negative SmartStyle salons at the end of January. The SmartStyle restructuring was accomplished in what I believe was an exceptional manner by our cross functional field and corporate teams, and we have preserved our good relationship with…

Thanks, Hugh, and good morning, everyone. As Hugh mentioned in his opening remarks, not only did we accomplish a number of key initiatives in support of our strategic transformation of Regis during the quarter. At the same time, we continued to stabilize and improve the financial performance and trajectory of the business. On this morning’s call, I’d like to provide you with some additional color on both the third quarter and year-to-date financial results, along with the balance sheet and liquidity update that highlights the progress we have made in enhancing the company’s overall capital structure and flexibility. Turning to the results. On a consolidated basis, third quarter revenue totaled $301 million, a $13 million, or 4% year-over-year decrease. The revenue decline was driven primarily by the closure of 597 non-performing SmartStyle salons and the conversion of 376 company-owned salons to franchise locations over the past 12 months. This was partially offset by revenue growth in our Franchise segment and positive same-store accounts of 1.6%. I’d like to point out that our reported revenue includes approximately $2.1 million of deeply discounted close-out products sales as well as closure of 597 non-performing SmartStyle salons. Excluding this one-time sales of benefit, adjusted sales were $299 million and related same-store sales comps were 0.9%. Additionally, we estimate that the shift of the Easter holiday sales traffic into the third quarter this year versus the fourth quarter last year benefited third quarter same-store sales comps by approximately 90 basis points. Third quarter adjusted EBITDA of $20.8 million was $3 million, or 16% favorable year-over-year, and third quarter adjusted EBITDA as a percent of adjusted sales or adjusted EBITDA margin increased to 130 basis points year-over-year to 7%. The improvement in adjusted EBITDA was driven primarily by our operational initiatives, which delivered between $8 million…

[Operator Instructions] And we’ll go first to Steph Wissink with Jefferies.

Hi good morning everyone and congrats guys on the progress, a lot going on, well done.

Thanks Steph.

Thank you.

So two questions, the first I want to just unpack the concrete a little bit if we could. I know there were some moving parts in the quarter with Easter and some accelerated product sales related to those closer and transfers, but could you just talk a little bit about how you see the progression of your comp within the quarter and over the course of the next few months, should we start to see the residual base of stores delivering a slightly improved rate of comp kind of above that flattish range, are you feeling like this is at the level we should use to project out in the model kind of a flattish comp over the course of the year?

Yes, Steph this is Andrew. As you pointed out, there were a number of moving pieces in the quarter, specifically the increased product sales as a result of the SmartStyle closures that we – the 597 and the Easter shift. So, on a net-net basis we feel that the quarter was roughly a flat comp on a consolidated basis. Certainly we’re going to have the Easter headwinds as we look into the fourth quarter, but we do think that we’re starting to see some benefit from the investments that we’re making around strategic digital investments, the MLB relationship and some of the overall productivity initiatives that were – we have made over the past nine months.

Okay that’s very helpful. And then Hugh you rattled off a number and technology initiatives, Andrew just mentioned digital, but can you talk to us a little bit about how we should see the progression of those benefits, particularly related to some of the site level technology investments you are making, how should we attract and monitor those? How would you suggest we look for the improvements over the course of the next several quarters?

Thanks Steph for the question and thanks as well for your thoughtful comments as we started our discussion. I think when I think about the opportunity for the technology transformation at Regis, we’re still in very early days and we have initiated a number of what I view as straightforward and largely customer and employee focused initiatives that are designed to attract and retain stylists, particularly with the digital education platform which will result in, we believe, a better customer experience, a better trained stylist typically will do a better job in cutting hair. And so one of the initial investments that we targeted was to bring our training capabilities into the 21st century as many service industries have already done, particularly the airlines and hospitality industries, so that our stylists can continue their education long after they join Regis. The education playground platform is robust, Steph, and has well over 200 training videos on the site already, which were produced by Jamie Suarez who leads our creative team here in Minneapolis and we’ve been really pleased with the results. So initially focused on employee training to deliver a better guest experience, focused on using social media to recruit new stylists as we are all engaged in a war for talent in the service industries throughout North America. We want to make certain that our recruiting capabilities are best-in-class. And Jacob Kramer who joined our company earlier this year as Shawn Moren brought him in. Jacob and Shawn are doing great work in upgrading our recruiting capabilities through the utilization of technology. And then finally, making certain that we leverage the multiple opportunities to push content through the MLB sponsorship and to take digital advertising to the next level. Regis would never have been able to create the platforms that…

Thank you and then Andrew just one clarification. I think you mentioned that you escrowed a pool of dollars for bonuses. Can you just talk a little bit about that, that seem distinct from what we have seen in the past years, just a performance based pool of dollars and certainly signal the clarity around the importance of human capital and the field leaders to the model, maybe just give us a sense of kind of how that process went about? And then Hugh, would it be fair to start looking at kind of the cost of acquisition for your stylists and your customers and maybe a retention rate over the course of the next few years as measures of productivity in your business?

Yes, Steph, this is Andrew. The bonus accrual or escrow as you called it is standard practice, I would actually say think of it in two components that are impacting the year-over-year familiarity. First, last year was actually more of the anomaly in that due to the poor performance or lack of performance during the year relative to expectations. There was a very small amount of short-term incentive compensation that was paid out to the team. As a result, the bonus expense line last year was abnormally low, I would call or I would say. Then fast-forward to this year based on the great work the team has done and the trajectory that we’re on, the short-term incentive compensation expectations are probably a little higher than what we had initially planned. As a result, the accruals are probably a little higher than what we would have historically accrued to. So when you combine those two, that drives the year-over-year $4.2-ish million of headwinds that I talked about in my script.

But I think if you – for anyone that’s interested in the details of our comp programs that, strategy as you know, it’s in the proxy. And managements worked closely with the company’s comp committee to ensure that we have programs that are driven by performance rather than simply retention. And we have MBOs in place and action plans at a granular level to drive improved execution. And this is an accountability-oriented culture today and we tend to attract people who like to be a part of high-performing businesses and the comp plans are designed to drive shareholder value. So all we’re doing is accruing in the normal course consistent with the programming that’s in place and the comp plans have been designed and approved by the comp committee in collaboration with management. And we’ll continue to tweak those when we – in collaboration with a comp committee to drive ever higher levels of performance when the comp committee and its discretion thinks there’s an appropriate need to do so. As to measuring the investment and return on recruitment and of stylists and retention astrologer, you’re right. And it’s actually, I think, it’s getting cheaper. I know that’s an – maybe an outrageous statement. But you’ve heard me say before Steph, that one of the things I’m most concerned about as a – not specifically it reaches across the service industries is the ability to attract employees in a virtually a zero unemployment environment. And our challenge is to find young and men and women or more experienced stylists, who want to be a part of our team and make their careers at Regis. And so we’re committed to making certain that we leverage technology to enhance our recruiting capabilities. And to – so that we are the company of choice for folks that hold a license in this profession. And the technology has actually been an enabler and has made recruiting, I think, less expensive than it had been. Historically, back in the old days, you’d put somebody in a car and send them to a beauty school and they’d stand in a beauty school and try to recruit young stylist coming out of the beauty school. But that model’s kind of outdated. And young people today and even us and other folks, who have been around since the 60s and 70s were all living all these apps. And so I think, the acquisition cost of stylist will likely go down. What we need to make sure that we do is to measure the training costs and retention costs in an accurate way. And so, as you’re right Steph, as we blend us all together, we’re going to be disciplined and look very carefully about the investments we’re making in education to ensure that we’re getting the expected return on retention and improve the local salon performance. So the answer to your question, that’s a long, yes, Steph, but the answer is, yes.

Thank you, guys, for your follow-up.

You bet. Look forward to seeing you, again, soon.

We’ll go next to [Laurie Hilt] [ph] with SR Capital LLC

Guys, so there’s new disclosure in the 10-Q regarding The Beautiful Group transaction. And it’s – at the time of the transaction, I think, in October, Eric, had said that Beautiful Group is is well-capitalized and well-suited to invest in the assets that they were taking over. It looks like we’re kind of two quarters in and they come back to you to renegotiate some parameters of the transaction. Am I reading this correctly that you’ve extended them like $20 million of additional sort of working capital and other financing?

Yes, it is correct.

Okay.

We are in discussions, it’s not been finalized.

Do you expect those amounts to grow in future quarters?

We don’t have any expectation that the amounts will grow. And – but I think, we’re doing what we think is in the best interest of the shareholders. And I wouldn’t necessarily suggest that that doesn’t mean that The Beautiful Group is somehow unable to invest. They’re – Eric is sitting here, but they’re making, I think, Eric thoughtful investments in the future state of the business, particularly in technology and staffing and – but you can speak to that. But all we’re really doing is helping them build a bridge over the troubled waters that exist inside of mall-based retail. Our support finds them a little cash bandwidth, extends a runway, so that they can deploy their precious capital to the future state rather than to us in the current state. And we think that’s in the best interest of the shareholders. And Eric, you can add to that.

I think, that’s well put. They are making investments in every aspect of the business from human capital to technology and really trying to enhance execution in the salons and make improvements. To date, that hasn’t occurred, but they are focused on it and seemingly doing the right things.

If they had to really – Eric, they had to build a executive team really from the ground up, didn’t they?

They did.

And this was not a high-performing business at the time they took it over. But what I think as a shareholder, where you – where this might be misinterpreted it is to assume that they’re not investing in the future of the business. They are making prudent investments in the future state. We’re just providing some financial support in a way that we think we can – where we can be helpful and where we think it’s in the best interest of our company in the shareholders.

Okay. So just as we think about the future, so the amounts could potentially grow. What kind of appetite do you think The Beautiful Group has? I mean, the business was sort of at EBITDA negative when they took it over. It sounds like they’re investing further. I mean, if this doesn’t turn around, what are the potential lease liabilities that could come back to reach your shareholders?

Well, first, let me just correct you. I don’t think we said that they could potentially grow. We said the outcome was uncertain and we don’t yet know. We think we’ve taken the appropriate steps for here and today, but we’ve never suggest – and I didn’t suggest in my commentary that the amounts would grow. As to future lease liabilities, I think, that was all disclosed. I think it was and I don’t recall the extent of the disclosure at the time of the transaction. But we have disclosed that the lease liabilities come down on a monthly basis and we’re comfortable with where we are today. And we think this – we continue to believe that we’ll get a good outcome. We do have – Eric, we do have certain remedies under the terms and conditions of the original transaction, which you can remind them of.

Yes, we do. We have built in remedies to take back stores, if that’s what we were elected to do. There’s a guarantee in place that provide some measure of protection and other typical remedies as well.

And I think in any turnaround, we just – all of us need to – I would suggest respectfully, we need to remember, there’s only six months in. It’s not as if they’ve been at this for a few years and takes a little time for any turnaround to stabilize and game of traction and we’re monitoring it very closely. We’re in constant contact with them and we’re taking steps to support them, wherever we think it makes sense to do so right, Eric?

That’s absolutely right. We’re travelling out to see them this week.

Yes. So it’s – we’ll play it by year and see how it goes. And if it doesn’t go in a direction that we’re comparable with, we’ll act to protect our shareholders in the company.

Understood. Okay, thanks for taking the question.

You bet.

We’ll go next to Dusty Henderson with Eagle Assets.

Good morning, gentlemen. Thanks for taking the call. With the previous 5.5% bond holding Regis back in some way?

Was it the previous 5.5% bond holding?

Yes, you guy called it – yes, you called it over a year early and put – and then you put in the revolving credit, right, $295 million, I think I heard?

Yes it was just an opportunity to exercise some rate arbitrage. We ran them out and it made financial sense for us to pay the premium and redeem the senior term note and fund a portion of it was the lower rate revolver and uses of cash. But it wasn’t restricting us and it wasn’t holding us back from an optionality perspective.

It served a useful purpose for the time it was in place. And but with a new credit facility, we didn’t need it anymore and we saved some money by calling the note.

And the new rate as LIBOR plus $1.25 million to $1.85 million, is that right?

Right. It depends on where we are from a metric perspective, but it’s in the range of…

The more leverage it’s on it, the more expensive it is I’m guessing?

Correct.

Okay. Regarding the $11 million of CapEx, was that all technology inside the salon?

No, there was a portion of technology in the salons and then there was a portion as we start to do some refurbishment activity and just general maintenance CapEx.

Okay. So we’re refurbishing some of the company-owned salons?

We are looking at doing that, yes.

Where we think it makes sense and particularly with inside of Walmart. What – if you probably and if you’re following Walmart at all or if you have, they’re doing a lot of work to remodel and refurbish their own fleet of stores. And as they remodel and refurbish, we’re looking at opportunities to do the same, because we think it will help our business and drive traffic and we don’t want some ugly salon sitting in the middle of the modern looking Walmart. So where we have ugly, we go in and remodel it and make it look beautiful just like the new Walmart store, we’re not going to put lipstick on the pig.

I gotcha. So what do we expect CapEx to slowdown this year and next – this fiscal year or next, because you have one quarter left?

When you say slowdown relative to what?

Relative to year-over-year or quarter-over-quarter?

Well, I would say that last year as we’ve talked about on previous calls, it was probably a net normally low raised CapEx spend. We discussed that on a steady state basis. One can expect versus the past several years a slight uptick in CapEx as we invest in technology, as we invest and continued store refurbishment in general other maintenance CapEx. So I won’t expect it to slowdown if anything, as Hugh mentioned earlier in the discussion, as we launch into our technological transformation, there is going to be a need for CapEx to support that as well. We don’t know what that number is, because we need to have the new IT leader in place to help us establish the roadmap. Once we get more transparency as to what that potential CapEx spend could be, we’ll be in a better spot to give an idea of how much it’s going to cost.

But we don’t think, I mean, there’s nothing odd occurring here.

Yes.

I mean, the investments in salons are blocking and tackling remodels and refurbs and – which is just common sense that you don’t want to take your family to the salon that looks like it was built in 1970. So we’re making investments where it makes sense to do so particularly in our flagship brands. And on the technology side, we want to do it, because we believe it will create shareholder value and is transformative as it relates to the guest and stylists experience. So we – and Andrew is right. We just haven’t done enough work yet to ring-fence the dollars that will be required. But we’re working on it and we’re certain that the investments we make will be well considered and are designed to improve the performance of the company.

Yes, we run the math on every CapEx dollar that is spent and now the returns might not be immediate, we won’t invest CapEx unless there is a financial return or a very strong strategic component to invest the dollars.

Even at lower levels of CapEx.

Right.

Andrew and I approve it all.

Okay, great. And then franchise fees increased $1.4 million. So what was that – what was the actual number of franchise fees and the actual number for royalties broken out like I see that the combined number in the Q and in the press release, but have you ever broken it out?

We have not provided that level of disclosure.

Okay. Is there a put call provision with the agreement with The Beautiful Group?

There is not.

Okay. And then I was thinking about the 900 Supercuts that were referenced that were just called out that possibly could be franchised. Is there a big institutional purchaser that has appetite for those domestic stores?

I’ll let Eric take that one. He has been leading that effort.

Yes, I mean, it’s – we think that’s brand in the industry and there’s a lot of interest from a lot of folks from existing franchisees who are very successful today to new operators that have had success in business and are well-capitalized to more multi-unit type of operators that run big businesses – big franchise businesses and are looking to diversify. So we’ve had interest from all of those folks in Supercuts.

But Eric and I are – Eric is very careful and I’m too about who we choose to do business with. And the cause of the quality of the brand and the quality of the salons, we will – we are in the luxurious position of being able to pick and choose who we want to do business with. And we’re in no rush and we’re being thoughtful and careful and to make sure that we build a great business. And remember that, we’re making tremendous progress in franchise under Eric’s leadership and he hasn’t been at it that long. So he only became President of Franchise on a full-time basis few months ago. So if you look at these results, that’s – and I typically I’m encouraged by franchise, because I know we’re just getting started and we have a lot of organic growth.

Yes, I agree the results in that segments are terrific.

Yes, they really are.

If you keep growing the franchise base, that’ll lower the parent company obligation for the MLB advertising, correct? There’s like big pool of advertising funds somewhere that the franchisees are contributing?

Yes, that’s true. So we – the way Supercuts are structured, company-owned stores contribute at the same level as franchise locations, that’s a 5% ad fund. So each store contributes the same amount. So you’re right, that will be funded more by franchise locations as we go forward to the extent that we add additional franchised units in Supercuts.

But it’s also true to say, Eric, isn’t it that as you add organic salons to the mix that the overall size of the ad fund increases.

Absolutely, yes. As we grow the existing business and add additional organic locations, that will increase the size of the ad fund, yes.

And that concludes today’s question-and-answer session. I’d like to turn the conference back over to Mr. Hugh Sawyer for any additional or closing remarks.

Well, thanks so much, everyone, for the great questions and for your interest and support, and we look forward to talking to you again at the end of the year. Have a great day.

And that does conclude today’s conference. Thank you for your participation. You may now disconnect.