Regis Corporation (RGS) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation Fiscal 2019 Second Quarter Earnings Call. My name is Ebony, and I will be your conference facilitator today. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 12:00 PM Central time today. I’ll now turn the conference call over to Kersten Zupfer, Senior Vice President of Finance. Please go ahead, ma'am.

Thank you, Ebony. Good morning, everyone, and thank you all for joining us. On the call with me today, we have Hugh Sawyer, our Chief Executive Officer; Andrew Lacko, our Executive Vice President and Chief Financial Officer; and Eric Bakken, President of our Franchise Segment. Before turning the call over to Hugh, there are a couple of housekeeping items 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 the company's current earnings release and recent SEC filings, including our most recent 10-Q and June 30, 2018 10-K, 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 the earnings release we issued this morning and our previous SEC filings, including our most recent 10-K. On today's call, we will be discussing non-GAAP as adjusted financial results that exclude the impact of certain business events and other discrete items. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, which should not be considered superior to, as a substitute for and should be read in conjunction with GAAP financial measures for the period. A reconciliation of these financial measures to the most directly comparable GAAP financial measures can be found in this morning's release, which is available on our website at www.regiscorp.com/investor-relations. And lastly I'd like to remind everyone of the accounting changes related to revenue recognition that we adopted in the first quarter of this year. All of the periods presented this morning have been adjusted for the change and we have provided revised historical financial statements on our website for your reference. With that, I will now turn the call over to Hugh.

Thanks a lot, Kersten, and greetings everyone from the polar vortex, where the wind chill is expected to reach minus 50 degrees below zero sometime tonight or tomorrow. And of course, thank you for joining us and thanks as well for your interest in Regis. My comments today will focus briefly on the progress that we continue to make executing the core elements of our multi-year transformational strategy, and then Andrew will provide a recap of our financial results for the quarter. You may recall that beginning in April of 2017, we designed a plan that we believed would transform Regis, transform the Company into a high performing business, and in fact, we disclosed the key elements of our strategy in the August 2017 10-K. And although we continue to refine our approach as we gain greater visibility, we have not materially deviated from the plan we established to maximize shareholder value and first shared with you in 2017. In other words, we continue to keep the main things the main things. The restructuring phase of our work is now substantially behind us and we have turned our attention to the future state of our business which includes, among other transformational initiatives, accelerating the growth of our asset-light franchise portfolio where we believe it will add to shareholder value and support an evolving strategy for the business. At the end of this quarter, approximately 54% of our salon portfolio was franchised when including those salons operated by The Beautiful Group. In the past 12 months, our franchise team, led by Eric Bakken, has successfully converted 520 Company-owned salons to our asset-light franchise portfolio; 133 of these conversions coming in the second quarter. As a result, we saw royalties and fees grow roughly 20% versus the second quarter of last year. Another core element of our strategy is the elimination of non-essential G&A, and when necessary, removing stranded costs, as we transition Company-owned salons into our franchise portfolio. We are making ongoing investments in technology that we believe will position Regis as a leader in the beauty industry and establish a frictionless relationship with customers, franchisees and stylists. The investments we have made thus far in future state technology have been largely self-funded by reductions in non-core G&A. As a result, we are not incurring debt to facilitate this technology transition. Further, we expect these investments to ultimately generate a positive economic return. As we grow our franchise portfolio, we are also making prudent investments in the capabilities and value-added services needed to support our franchisees. And in our merchandise sector, we are making changes to become more trend-driven in our offerings and to reduce speed to market as we move product into our franchise and Company-owned salons. We intend to continue to leverage our differentiated digital advertising investments and further build on our growing relationship with Major League Baseball in our Supercuts branded business. And we continue to build muscle around customer data and analytics that allow us to be smarter and more efficient in our investments in staffing, pricing and the customer-facing offers we bring to market. And finally, we continue to make advancements in stylist recruiting and training and in the identification and monetization of non-core, non-strategic assets. As I noted in our press release, given our success in converting a portion of our Company-owned Supercuts portfolio to franchise and the shareholder value it has created, we expect to consider opportunities to franchise our other Company-owned brands in certain circumstances where we believe it will add to shareholder value and support the evolving strategy we have for our business. So these are the core elements of an evolving strategy that we first published in August of 2017: accelerate the growth of our asset-light franchise portfolio where we believe it will add to shareholder value and support our evolving strategy; eliminate non-core, non-essential G&A; make investments in technology to establish a frictionless relationship with customers, franchisees and stylists; make investments in the capabilities and value-added services to support our franchisees; drive changes to become more trend-driven in our product offerings and reduce speed to market; leverage our differentiated digital advertising and build on that Major League Baseball relationship; strengthen our muscle around customer data and analytics; continue to make advancements in stylist recruiting and training; monetize non-core, non-strategic assets; and finally, as I said, consider opportunities to franchise our other Company-owned brands in those circumstances where we believe it will add to shareholder value and support our evolving strategy for the business. In closing, our performance this quarter was achieved through a significant team effort that required disciplined cross-functional coordination, and I'm very proud of the professionalism and confidence that has been demonstrated by our associates and by our franchisees. Of course, all of us at Regis are also grateful for the support of our shareholders, as we continue on our journey to higher performance. With that said, I'll now pass this to Andrew Lacko, our Chief Financial Officer, who will provide details on the financial results for the quarter. Andrew?

Thanks Hugh, and good morning, everyone. Today, I'd like to provide you with some color around our results for the second quarter, as well as an update on several key financial items and liquidity. Additionally, given the increased volume and cadence in the sale and conversion of Company-owned salons into our asset-light franchise portfolio, I thought it'd be helpful to provide a high-level overview of how we think about the unit economics of these transactions. Turning to the results on a consolidated basis, second quarter revenue decreased $39.2 million or 12.5% versus the prior year to $274.7 million. This year-over-year revenue decline was driven primarily by the closure of a net 678 salons, a majority of which were unprofitable, the conversion of 520 Company-owned salons to the Company's franchise portfolio over the past 12 months, and the lapping of a onetime benefit received last year from the discontinuation of a piloted loyalty program. These headwinds were partially offset by an increase in franchise revenues, consisting of royalties and fees, and a 50 basis point improvement in Company-owned same-store sales. The same-store sales improvement was driven by a 5.2% increase in ticket, partially offset by a 4.7% decline in year-over-year transactions, or what we have historically referred to as traffic. Second quarter consolidated adjusted EBITDA of $20.6 million was $4 million or 24.1% favorable to the same period last year, driven primarily by a $9.4 million cash gain, excluding non-cash goodwill derecognition from the sale and conversion of Company-owned salons to the franchise portfolio. Excluding the $9.4 million and $200,000 gain from the sale of Company-owned salons during the current and prior year quarters respectively, second quarter adjusted EBITDA of $11.2 million was $5.2 million unfavorable year-over-year. The unfavorable year-over-year variance was driven almost entirely by the elimination of the EBITDA that have been generated in the prior year period from the 520 Company-owned salons that were sold and converted to the franchise platform. Second quarter adjusted EBITDA was also unfavorably impacted by the lapping of last year's one-time piloted loyalty program discontinuance benefit, strategic investments in both technology and the Company's franchisor capabilities and services, and differentiated digital advertising, including our Supercuts MLB relationship. As Hugh noted, these strategic investments were largely funded by the continued removal of non-contributory, non-strategic G&A costs. Looking at the segment-specific performance and starting with our Company-owned salons, second quarter revenue decreased $45.8 million or 16.4% versus the prior year to $234.3 million. The year-over-year decline is driven by and consistent with the decrease of approximately 1,197 Company-owned salons over the past 12 months, which can be bucketed into three main categories: first, the closure of 597 nonperforming SmartStyle salons during the third quarter of last fiscal year; second, the profitable sale and conversion of 520 Company-owned salons to our asset-light franchise platform over the course of the past 12 months; and lastly, the closure of approximately 80 Company-owned salons, most of which were unprofitable over the course of the prior -- over the past 12 months. As I mentioned earlier, the revenue decline was also impacted by the lapping of the prior year onetime favorable adjustment related to the discontinuation of a piloted loyalty program. These declines were partially offset by a 50 basis point increase in Company-owned same-store sales. Second quarter Company-owned salon segment adjusted EBITDA decreased $5.3 million year-over-year to $21.3 million. Consistent with the total Company consolidated results, the unfavorable year-over-year variance was driven almost entirely by the elimination of the adjusted EBITDA that had been generated in the prior year period from the 520 Company-owned salons that were sold and converted into the franchise platform over the past 12 months. The quarter was also unfavorably impacted year-over-year by last year's piloted loyalty program discontinuance benefit, increases in stylists' minimum wage and commissions, and strategic digital marketing investments. And again, as Hugh mentioned earlier, the strategic investments were largely funded by management initiatives that led to the elimination of non-core, non-essential G&A. In the Franchise segment, revenue of $40.4 million increased $6.6 million or 19.6% compared to the prior year quarter. Royalties and fees of $22.6 million increased $3.9 million or 20.6% versus the same period last year. Royalties increased 16.9%, driven primarily by positive same-store revenue in the quarter and increased franchise salon counts. Ad fund revenue increased $1.4 million, driven primarily by increased franchise salon counts. Product sales to franchisees increased $2.8 million year-over-year to $17.8 million. Of this, $800,000 related to sales to The Beautiful Group, which, as a reminder, are executed in line with the transaction agreements and currently at lower margin rates than our normal franchise business. Second quarter franchise adjusted EBITDA of $8.5 million declined approximately $100,000 year-over-year, driven by planned, strategic G&A investments to not only enhance our franchisor capabilities but also support the increased volume and cadence of transactions and conversions into the franchise portfolio, along with decreases in margins on product sold to franchisees, partially offset by increases in royalty and fee revenue. Turning now to corporate overhead, second quarter corporate overhead-related adjusted expenses of $9.1 million decreased $9.5 million or 51% compared to the prior year quarter. The primary driver of the year-over-year decrease was the $9.2 million of net gains excluding non-cash goodwill derecognition from the sale and conversion of Company-owned salons and the net impact of management initiatives to eliminate non-core, non-essential G&A expenses. Looking now at the balance sheet, we continue to maintain our strong overall liquidity position, while providing optimal balance sheet flexibility to fund the elements of the Company's transformational strategy. On the liquidity front, net-net quarter-end cash decreased from September 30, 2018 by $18.8 million to $97 million, and we had $90 million drawn on our existing credit facility. The reduction in cash was driven primarily by our continued investment in share repurchase activity. In fact, during the quarter, we repurchased 2.9 million shares, or approximately 7% of the total shares outstanding, for $45.8 million. Fiscal year-to-date, we have repurchased 4 million shares for $65.1 million, representing approximately 9% of the Company's total shares outstanding. The share repurchases to-date have been funded substantially by the monetization of non-core assets such as the Company-owned life insurance policies and the sale leaseback of our Salt Lake City Distribution Center. They were also funded through cash proceeds generated from the sale and conversion of Company-owned stores into our franchise platform. As of December 31st, we have $167 million of available capacity under our previously-approved stock repurchase program. Before turning the call back over to Ebony for questions, given the continued cadence of our profitable sale and conversion of Company-owned salons into the franchise portfolio, I thought it would be helpful to walk you through how we typically think about the unit economics of these transactions. As with most asset sales, a common proxy used for assessing transaction value is the sale price multiple, which usually can be calculated off the face of the financials. However, in this type of transaction, where we are selling and converting Company-owned salons into our franchise portfolio, the simple math may not fully recapture the total value created. This is because in addition to the upfront purchase price proceeds received, which drives the implied multiple, we typically expect to recapture a meaningful portion of the sold cash flow through items such as the predictable ongoing royalty fee stream, potential additional cash generated on incremental product sales to new franchisees, likely lower ongoing capital requirements for items such as salon maintenance and refurbishments, and anticipated reductions in our field and corporate overhead G&A expenses. Additionally, the growth in the franchise portfolio should provide us with a platform for future sustainable organic growth and an effective vehicle for potential brand consolidation in a highly-efficient and capital-light manner. As a result, when one takes into consideration the full range of the quantifiable benefits received, which not only include the sales price proceeds but also the recaptured ongoing cash flow, the resulting effective multiple could be meaningfully higher than what can be initially calculated off the face of the financials. It is also important to remember that in these types of transactions, there are a number of variables that impact the sales price multiple, including such things as mix of brand sold, profitability of the salon sold and required capital conversion cost to name a few. Of course, we are not the first company to embrace this strategy of converting from an operating platform to franchise, and I refer you to examples in the quick-serve restaurant industry for further reference. Lastly, I'd like to remind you that substantially all of our transactions to-date have and any potential transactions in the future likely will involve cash flow positive salons. This is important because in doing so, it may make period-over-period comparisons in your models difficult to estimate with a high degree of precision for a few of the following reasons. First, any comparison would need to be normalized for the likely onetime gains related to the sales proceeds received from the sale of the salons. Second, all prior year periods would need to be normalized for the impact of sold EBITDA that would be eliminated due to the transaction. And third, with regard specifically to product sales, as we transition certain salons to our franchise portfolio, we are converting from a higher-margin retail model in our Company-owned salons to a wholesale model in the franchise portfolio. Of course, when designing our strategy, we planned for and modeled this change in product sales margin and expect to generate greater overall economic value for our shareholders in those circumstances where we convert to an asset-light franchise model. Given these factors, when thinking about your forward-looking models, it is reasonable to expect that in those situations where we convert a Company-owned salon into the franchise portfolio, total revenue and adjusted EBITDA excluding proceeds would likely decline over the short term, driven primarily by a reduction in Company-owned salon segment EBITDA, partially offset by growth in the Franchise segment's adjusted EBITDA, anticipated reductions in company-wide G&A expenses, the expected returns on investments made in technology, the longer-term growth prospects of our merchandise business, and new services provided to our franchisees. Additionally, in this environment, it is likely that the Company's adjusted EBITDA margin would increase. Lastly, as Hugh mentioned earlier, given these -- the success with the sale and conversion of a number of Supercuts salons into our franchise portfolio to-date, as we look forward, we will consider opportunities to franchise our other Company-owned brands in those circumstances where we are convinced that it will add to shareholder value and support our evolving strategy for the business. With that, I'd like to thank you for your continued support and interest in Regis. And we will now turn the call back to Ebony for questions. Go ahead, Ebony.

[Operator Instructions] And we will take our first question from Stephanie Wissink with Jefferies. Please go ahead.

We have a few questions, and Hugh, the first one is for you. One of the things that you articulated in your 10-K in 2017 was the nonessential G&A and stranded costs. And I'm wondering if you can just give us a little bit more flavor for how deep you're digging in the organization and some of the strategic decisions you've made at headquarters and then any sort of field cost recalibration we should be thinking about as you move towards this franco model from an opco model.

As to stranded costs, we have historically addressed the stranded costs in the field on a rolling and regular basis. As you know, Steph, initially, as a consequence of the restructuring effort when we exited mall locations and when we exited certain SmartStyle locations within Walmart, we're actually very good at this. And Jim Lain, who leads our field organization, and I have developed a cadence of regular review. So as we move Company-owned salons to a franchise portfolio, we will continue to make adjustments in the field when it becomes necessary to do so. We also have many competent people in our opco field organization, and a number of those associates have actually moved into the franchise portfolio and have gone to the entrepreneurial side of our financial statements. So we do those adjustments in the field on a case-by-case basis. As to Salon Support, we made a material adjustment in staffing here at Salon Support early in the year and it was essentially a lift and shift of G&A costs where we lifted those non-core G&A costs out of Salon Support and then reinvested in the product engineering and software work we have underway at our offices in Fremont, California where we have staffed in a group of high-performing product engineers to work on the new technology that Chad Kapadia is leading with the Company. So given the history we have since 2017, we're very comfortable in saying that we will continue to make adjustments as we gain clarity in the balance of the portfolio, and we're very good at this and we typically stay ahead of any potential cost issues so that we don't erode earnings in the core portfolio. Andrew, you can add to that if you think I missed something.

No, absolutely. In addition to the removal of stranded costs and some of the costs tied to a smaller corporate salon footprint, we've also done a thorough portfolio review throughout our corporate support costs, getting more efficient, getting smarter on what we spend and really driving efficiencies throughout the organization. I'd also kind of point you back to some of our prior comments that we do see that there's an opportunity that as we further invest in technology and upgrade the back office capabilities that there's likely some additional synergies and efficiencies that we can get out just because of updating old technology.

And then I wanted to just unpack the advertising investment and also I think there's some transference of that value to your -- your franchise partners in terms of the toolkit you offer them. Traffic measure in your Company-owned comp did moderate just slightly. So I'm wondering, if you can talk to us a little bit about the effectiveness of some of the advertising investments you're making, the partnership with MLB. How should we think about the trajectory of closing that gap on traffic over time?

Steph, it's Hugh again. I'll take the opening comment and then let Andrew add to it and Eric may have a thought or two from the franchise group. But we -- sequencing investments in advertising is as important as sequencing investments in technology. I've seen circumstances, Steph, where management teams and CEOs have gotten ahead of themselves and invested too early and not ultimately generated the right economic returns. So we had some work to do in cleaning up the portfolio before we got aggressive around investing in future state advertising and in differentiating our brands. But we're getting to the point now where we're thinking - I think in a clear-eyed way about the future state of the portfolio and we're getting close to the point where we can become more optimistic around investing in differentiating our brands in digital advertising in MLB. So I would suggest that the initial investments that we have made in differentiation, in advertising have been early days, where we've dipped our toes in the water and tested different approaches to advertising and marketing and as we continue to cleanse the portfolio and as we continue to improve customer data and analytics. I think, it's fair to say that our investments in and around our brands -- and in advertising and in data analytics will become more robust, just as they have around technology. So sequencing here is important and we're reaching the stage where we're going to become more proactive in backing brands, supporting data and analytics and increasing our support for our -- both Opco and franchise organization with wisely invested advertising.

And Steph, it's Andrew, in addition to what Hugh mentioned, we have taken a very conscious effort over the past 9 months to 12 months to simplify the menu of services that we provide. If you recall, about a year and a quarter ago, we implemented the simplified pricing strategy in our SmartStyle brand. So we think that a combination of effective and targeted marketing along with constantly challenging ourselves to think about the portfolio of services that we provide and simplify the services that we provide, the product offering will help to continue to drive some closure of the gap in the traffic -- historical traffic declines.

And Eric, I think - Eric is with me too, Steph. Eric, isn't it true to say that over the Company's history, the organic growth results and franchise have historically been better and comps have been better. And isn't that a core element of our strategy?

Absolutely, yes. That is true and you'll see us continue to build on that obviously with our Vendition approach. We're doing it for a number of reasons that Hugh and Andrew have previously articulated but we also want to get growth out of the units that we're selling and we want to add additional organic locations as well. So that's right in the middle of everything we're doing with the transactions to sell the location, so. Yes, I would agree with him.

One of the aspirations we have as a management team is to continue to refine our data. So that we can at some point in the future feel comfortable and releasing franchisee comps for sales, Steph as you and other readers of our press release can see, these are Company-owned salons and don't yet include our franchise salons but we are under Chad's leadership and Eric's and Andrew's, we're continuing to improve the data out of our field organization and at some point while -- when we've got that data cleansed, we'll start to release franchisee comps, right Eric?

That's right. That'll help us report out. So folks can see what's happening. It will also allow us to use that data to help our franchisees perform better in their salons.

But in general, we feel confident about the growth prospects of our franchisee salons.

Absolutely. And on the marketing and advertising topic, we have invested over and above what's required with our advertising funds and Hugh has directed that. One example of that would be MLB. There are others across our portfolio franchise plans. But that would be one example where we've invested over and above what was required to make sure that we're able to activate that partnership in the best possible way.

And Eric, I guess, some of that includes the local club relationships we have, right?

That's right. We have several local club deals and that's growing every day.

Okay, that's extremely helpful. And then with - I'm sorry, go ahead, Hugh. I am sorry.

I was going to say, Steph, by local clubs, we mean local baseball franchise operations. We've -- for example the Red Sox are a great example of a local club deal that we have.

New York Yankees.

The Yankees.

Houston, being another one, Astros.

So it's not just the national MLB relationship. Eric's exactly right, we've come in behind that as we continue to get greater visibility and support some of the local teams with the support of our franchisees.

So kind of a multi level agreement versus just the national? And then Hugh, I want...

Yes, it's interesting, Steph - because MLB is both a national and a local brand like Supercuts, it's both national and local. So we like that model.

The last one is I don't want to push you too far because I think some of the things that you're working on technology wise might be proprietary and a bit future casted. But I wanted to just have you extrapolate a little bit on the investments you're making because we are seeing some of this in your CapEx or this lift and shift within the P&L. If you look at the salon or survey the salon landscape for franchise partners. Are there noticeable gaps in the technology that exists and so you feel like you have an opportunity to satisfy that gap and then maybe the same thing in terms of some of the other services you'll offer in the future for your franchise partners. I think some of the things that you've done on the product initiative side has actually been -- we're noticing visually some changes within your franchise system. How can you also support your franchisees with ensuring that you're getting best price on access to the newest and most novel goods so that their product side of their business is also flourishing?

I think Eric and I can probably tag team, this one, Steph, as to the technology investments, you're right. We have been careful not to say too much because, frankly, we don't want our competitors to know precisely what we're doing, but the investments that we're making thus far in technology are not hardware related. We have staffed a group of highly qualified product engineers in Fremont, California. Sourced those product engineers, out of Silicon Valley, which has the best software engineers in the world and they are led by Chad Kapadia and Chad and his team are working on what we believe will be differentiating technologies. And in fact differentiate us not simply against our - what we know is out there in the industry today, but perhaps lead the industry itself to a higher level of capabilities as it relates to consumer facing technologies, franchise facing technologies and the technologies that enable our stylist to do their jobs in a great way every single day. We're also looking as Andrew and I have said previously, we're also looking at certain infrastructure investments, but again not hardware related. We're looking at options to move off of our server dependency and into the cloud, which brings any number of potential benefits to the Company over time. So as you think about technology at Regis, it's all intended to improve relationships, make us easy to do business with, as it relates to consumers, franchisees and stylists and to facilitate the future state of the business to make our independent entrepreneurs and franchisees successful and ultimately to facilitate, a move away from a server dependency and get us up into cloud which as you know, Steph brings any number of potential efficiencies, as we do that. It takes a couple of years to get all of this in place but we're feeling very good about what's under way and Eric you may want to address the other components of our questions that relates to franchisees.

Yes Steph, you're right. We have been making changes on the product side and Hugh pointed out that we want to be more trend driven, we want to be faster to market, we want to identify products earlier, get them in our stores so that consumers can buy them from us. So we are making progress there and we'll continue to evolve in that area as we go forward. So we're pretty excited about that and the other sort of suite of services that we'll be offering, we have our ones that we offer today whether it's on the construction or maintenance side and that continues to evolve. But I'm particularly excited about the data analytics side that we've talked about. We think we can really add value there and our franchisees of course just like our Company owned stores are interested in growing the revenues but more importantly growing their profits and so we're there to try to help them in any way we can. Recruiting is another area that by using technology and other tactics that we can help our owners improve. So we're busy working on that as well.

So when franchisees think about the leader and technology in this industry or stylists think about it, or customers think about it, we want them to think about our brands and our Company, not somebody else, so we're - we feel good about our ability to accomplish that, and then at an appropriate cadence.

And we will take our next question from Rory Held with Summer Road. Please go ahead.

I just wanted to get back to the topic of sort of franchisee same store sales. I think in the prepared remarks you say they were positive but then in the answer to Steph's question you said you don't have the data. Can you just explain what the issue is that prevents you from disclosing sort of same store sales for the franchisees?

Actually we hope to do that in the near future. We had to make certain adjustments in our data retrieval capabilities over the last few months including our POS capabilities through our third-party provider to open up the pipe to get real time information which in a manner that is consistent with the way we collect data from our Company owned salons. It's very important that whatever we report to you be on the same basis as what we report in Company owned. And the companies longer term history has been as an operator of salons rather than as a franchisor of salons. So there's really nothing here behind the curtain. It just takes a little time and effort to get the programming in place and to do the blocking and tackling. But we're pretty - we're confident we're going to get that out to you guys as soon as we can and as soon as we and our auditors are comfortable that we have the data correct, we want to give it to you.

Yes, that's good. It'll help with modeling I mean all the - you referenced kind of the quick service companies, they all disclose it - and system wide sales. But I guess where I'm confused is you calculate royalties, right? I mean so presumably on the franchise side you know what the underlying stores are doing and so I guess I just don't understand why there's a data collection issue.

Well, Hugh brought up a very important point. We want to make sure that what we're providing is consistent with the way that we report our comp results for our Company owned stores and so we're confident and if we look at a month we're confident in figuring out what the comps are for that month but on a day-by-day approach to make sure that we marry it up with the corporate side we just want to make sure that we have it exactly right. We don't want to come back later and say oh, we were slightly off on that. So we’re trying to make sure that our ducks in a row and presenting it in a way that's consistent with our company-owned stores.

Okay, we’ll look forward to the disclosure. In terms of one other comparison to the quick service franchise model. So franchise is now like 53%, 54% of the total business, yet cash from operations is - there's a significant variance between cash from operations and adjusted EBITDA. And so can you explain what holds back cash conversion because in a franchise model it should be pretty tight?

Can you define what you mean by cash conversion?

Sure. So we look at the first six months you’ve done negative $10 million of cash from operations but $45 million of adjusted EBITDA. And so there's a - what's that $55 million delta between what you’re sort of reporting as adjusted EBITDA and what’s actually been cash collected. And when you look at any quick service restaurant there is a much, much tighter correlation there and they never really go negative cash from operations so just curious?

So Rory why don’t we take this offline because we can walk you through the puts and takes. There's a number of moving parts as we continue this transition that we will issue through to kind of walk you through the cash conversion.

And it’s not, - it may not be directly comparable likely isn't closer. I think Andrew’s quick-serve comment was merely indicated to illustrate that we’re not the first company that’s gone down the path of thinking about converting operating locations to franchise.

Especially as we are midway through the transition process.

Right.

Right I understand, but the franchise business should be - I mean it should be one month or whatever of receivable not EBITDA, right it should be pretty tight. So the cash conversion should be high is that a correct assumption?

It is pretty tight but as we continue to build out the muscle the franchise group as it's becoming a significant portion of our portfolio, there are investments that we need to make in order to facilitate the transactions because a number of transactions that we're putting through the pipe while temporarily require additional resources. So the conversion might be a little lower in the transition phase than what we ultimately would expect once we get to the other side of the river in a more steady state portfolio of mix.

But I think in an offline call we can get you Rory. We’ll help you to get there.

All right, I appreciate it. And one final one so The Beautiful Group situation seems like it's kind of deteriorated over the last six months. Would you guys hazard a guess like what the chances are that these stores may come back to?

Well the original thesis behind The Beautiful Group was a risk transfer model of the lease exposure to The Beautiful Group. And I'm not certain it would be accurate to state that things have eroded in the last six months. In fact we might have a different view of that. If I have said on other calls if it were to happen that some of these locations came back to you that came back to us. We’re in the business of operating salons and we knew when we did the transaction that it was hypothetically possible some of them will come back. So we have a number of mitigating options in the original transaction documents that reduced our exposure. And furthermore we’re in the business of operating salons and so if it happens we'll cross that bridge when we come to it, but I don't see anything in the data that convinces me that our risk has increased in fact quite the contrary since the transaction was consummated. Our risk has been materially reduced as it relates to the overall lease exposure.

We don't get - we only get as what’s in the sort of risk factors section and the language there has changed each quarter. So just seems like it's…

Actually it has improved since the date of the transaction.

Okay, very good. Thank you for the time and I'll follow up with a time you know for the cash flow discussion.

[Operator Instructions] And as there are no further questions in the queue at this time. I will turn the call back over to Hugh.

Thank you everyone for your interest today and we look forward to talking to you again next quarter, assuming we don't freeze to death tomorrow. Thanks everybody.

And once again ladies and gentlemen, this concludes our conference call for today. If you wish to access the replay for this presentation, you may do so by visiting regiscorp.com in the Investor Relations section of the website or by dialing in at 1-888-203-1112, access code 2197163. Thank you all for participating, and have a nice day. All parties may now disconnect.