Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation Fiscal 2019 Fourth Quarter Earnings Call. My name is John, and I will be your conference facilitator today. At this time, all participants are in a listen-only mode. Following the 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 12:00 PM Central Time today. I'll now turn the conference call over to Kersten Zupfer, Senior Vice President of Finance. Please go ahead.

Thank you, John. 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; Eric Bakken, President of our Franchise Segment; and Amanda Rusin, our General Counsel. Before turning the call over to Hugh, there are a few 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, 2019, 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 comparison, but should not be considered superior to as a substitute for and should that be read 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 release, which is available on our website at www.regiscorp.com/investor-relations. And lastly, I would 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.

Thank you, Kersten, and good day, everyone. When I joined Regis in April of 2017, my aspiration was to develop a transformational, enduring strategy to reinvigorate our company. Our directors wanted me to focus on making the right choices for the long-term value of the business and our core constituents, our shareholders, franchise owners, customers and employees. I believe the board demonstrated their commitment to a longer-term view by granting me options with a 10-year term. You may remember that during my first year we transferred the underperforming mall-based business to TBG and closed nearly 600 underperforming salons at Wal-Mart. These were frankly, tactical decisions meant to stabilize the business, remove the distraction, and derisk the company so we could focus on developing a long-term strategy for Regis. Andrew has an encouraging TBG update later in the call this morning. I also collaborated with the board to create an incentive plan for the rest of the management team that align their personal financial interests with me and our other shareholders. I am pleased to report that our Regis team and our franchise partners have been successfully executing a bold vision, I believe we all share. The key elements include converting our business to a capital light franchise platform and investing in the future state through disruptive technology, differentiated marketing and advertising, industry-leading style of recruiting and training, optimizing our supply chain capabilities, introducing trend driven merchandise, and establishing the core competencies needed to support the growth of our franchise portfolio. When developing a multi-year transformational strategy for the business, our analysis has suggested that a fully franchised salon portfolio would earn a much higher and sustainable return on capital and provide the most certain path to profitable growth. We believe that if we could restructure the company in that manner,…

Absolutely. Thanks to you and good morning, everyone. Looking at the results we reported this morning, on a consolidated basis fourth quarter revenue decreased $52.2 million or 17.4% versus the prior year; so $248.2 million. The year-over-year revenue decline was driven primarily by the conversion of 767 company-owned salons to the company's franchise portfolio over the past 12 months. The closure of 133 salons over the past 12 months, a majority of which were cash flow negative and that were not essential to our future franchising plans, and a 10 basis point decline in company-owned same-store sales. The revenue headwinds associated with our company-owned salons were partially offset by an increase in franchise revenues consisting primarily of royalties and fees. The slight company-owned same-store sales decline was driven primarily by a 4.3% decline in year-over-year in terms of transactions or what we have historically referred to as traffic, partially offset by a 4.2% increase in ticket. Fourth quarter consolidated adjusted EBITDA of $39.4 million was $10.1 million or 34.3% favorable to the same period last year, and was driven primarily by a $26.1 million cash gain excluding non-cash goodwill de-recognition related to the sale and conversion of 265 company-owned salons to the franchise portfolio during the quarter. Excluding the $26.1 million and $2.2 million gained from the sale company-owned salons during the quarter in prior year respectively, adjusted EBITDA totaled $13.3 million, which was $13.8 million unfavorable year-over-year. The year-over-year unfavorable variance was driven primarily by the elimination of the EBITDA that had been generated in the prior year period from the company-owned salons that have been sold and converted to the company's franchise platform over the past 12 months. Fourth quarter adjusted EBITDA was also unfavorably impacted by minimum wage increases in strategic investments in the company's future including…

Thank you, Hugh and Andrew. The question-and-answer session will begin at this time. [Operator Instructions] We will now move on to our first question from Laura Champine of Loop Capital. Please go ahead. Your line is open.

Thanks for taking my question. On the free cash flow line, it looks like based on the numbers your reporting today, you were negative, maybe $49 million in 2019 fiscal. Would you expect that to reverse in 2020?

Laura, this is Andrew. Thanks for the question. Yes, I would say that as you look at the cash flow statement, there's a number of items specifically related to some of the restructuring activity that we did this year, along with the timing, impact of the vendition activity related to some of accrued such as payroll, vacation, etcetera, that would be relatively onetime in nature. That should not be present in future periods, which would then result in a more favorable free cash flow number.

Got it. And then a follow on to the comment in the press release that adjusted EBITDA will be initially negatively impacted by your strategic plans. To clarify that, is it management's thinking that current expectations for EBITDA and fiscal 2020 are too high because we weren't including this. This accelerated transition in our models?

Once again, I don't want to start down the path of providing forward guidance, but it's reasonable to expect that if the analyst models that are out there in the ecosystem right now, did not contemplate a fully conditioned or full conversion to a franchise model over the next 18 to 24 months, it's probably -- they are probably light on the number of lines that we plan to convert in FY'20. And as a result, as we've been consistently saying over the past 9 months. As we convert these lines, it's reasonable to expect that top line revenue and EBITDA, will decline by the relative efficiency of that EBITDA becomes higher through improved margin performance.

It's all. It's you. It's also true to say that when we began down the path in 2019, we weren't yet certain what the cadence of conditions would be. We weren't yet sure how many of our existing franchisees would be interested in the assets, as we tried to unlock that capital out of the non-performing OPCO side of the business. And we weren't sure how many new franchisees we could attract. But with Eric Bakken's leadership and the franchise team's efforts, supported by our field operators, we were -- I think, incredibly successful in transitioning the salons at a pace that was robust. Not only that -- Not only did we get the salons transitioned over. We also filled the pipeline for 2020, which is an impressive accomplishment, in my view of that the efforts of many of our employees that created that opportunity for Regis to continue to free up this capital that's stuck in these non-performing OPCO side of the business. So we didn't we weren't quite certain what the outcome would be when we started down 2019. But it was pretty awesome to be able to vindication that many salons in the year and do that many transactions and fill the pipeline for 2020. So great team effort, by them by our Regis franchise organizations and supported by Salon Support and our build ups.

And just one last thing on that; as we begin to ramp up over the past four quarters, you've seen us operate rendition case of something in the low 100's to this quarter where we deliver to 65?

If you do the rough math over the next eight quarters, vanishing the remaining 3,000 -- there's probably to be some closures in there. But we are on the glide path to hitting that achievable vendition on a quarterly basis, but it's not going to be easy.

Understood. Thank you.

We will now take our next question from Steph Wissink of Jefferies. Please go ahead. Your line is open.

Thank you. Good morning, everyone. A few questions for the team if we can. Andrew, just to follow up on your closing comment to Laura's question on the closures, what would be a rough assessment do you think we should use in our models over the course of the next couple of years in terms of closures versus venditions? And the reason I ask, because I think you mentioned in your prepared remarks that the residual base of stores in the [indiscernible] are all cash flow positive. So should we assume a lower percentage of closures than what we've seen historically?

I don't think so. As I mentioned in my prepared remarks, we closed 133 salons in fiscal '19. On a steady state basis, that's probably the right number. But as we continue to vendition what's going to end up happening is you're going to find some geographically isolated marginally cash flow positive salon that just don't make sense. We don't have a partner to effectively sell these salons to, and will likely result in some additional closures. So I think it's reasonable to expect that we have a slight pickup from the current run rate of 130-ish annual salon closures. But it's not going to be a significantly large number. It's not going to be hundreds upon hundreds. I would say something just a little north of the 130, so call 200 to 300 salons in fiscal '20 to assume from a closure.

Steph, it's Hugh. We -- Eric and I and Andrew talk about this regularly with our finance team, and we are -- we're pretty good at stratifying these salons, looking at the individual markets and Eric's real estate team also looks at the implications from a real estate standpoint. So it's real estate. It's the stratification of the salons and a pretty -- and a hard look with James Townsend and his team on the local market, do we think that this local market can't continue to sustain sales growth and then we make a judgment call as to the salons that need to be closed, and that's [indiscernible].

Especially, in the -- with the lens of going to a fully franchised model, for a marginally performing salon, the amount of G&A that's required to support that just doesn't make sense from an ongoing concern for that particular salon.

Right, in addition to the extra expenses that the franchisees take on, even with anticipated growth, it can make many of those a challenge.

I guess, Eric, the key takeaway is, we think about a number of factors when reaching these decisions.

Yes, quality -- the real estate's a big one. Performance, obviously significant quality of the operator, etcetera. But I agree with all the comments that are made by Andrew's assessment of future closures.

That's extremely helpful. And then I think it's maybe Hugh and Eric. One of the objective in this evolution was to identify more large scale multi-unit operators to vanish and salons. And I'm just curious if you can give us a sense of the roughly 770 sites you did over the course of the last year, and the 600 plus that you have in negotiation stages. Are you seeing more scaled multi-unit buyers either in your existing base or in your pipeline? Are you starting to see that partnership model unfold [ph]?

Well, as, when we started down the path steps, Eric and I jointly made a decision that, we wanted to be thoughtful about how we balance the portfolio of owners. But it is true to say that Erik and his team had made great progress in that respect. And I'll let Erik share some of the details with you.

Thanks to you, Steph. Yes, we were continuing to see the large multi-unit operators being attracted to this investment opportunity. We continue to recruit in very high quality owners with operational experience and obviously capital and that continue. So we're pleased with the way that's going and we expect that I will continue throughout the next 18 months.

They're attracted, Erik, to the asset for the same reasons. We are -- that they like our people, right? They like the brands. They like the investments we're making in technology. They recognize that we're adding muscle strength into our franchise or capabilities. So they see the same things that we see. It's also interesting that, I think credit to reduce that many of our existing franchisees. scale, isn't that true?

That's absolutely true. We're continuing to see that we have a transaction we're working on right now, with an operator that, You had a relatively small number of units, but a lot of capacity who's growing significantly with us. And we see that with our existing base as well.

So it's always a good sign when the existing franchisees want to grow.

That's encouraging, if we can get them to come in here and meet with a collective team. We generally have a high success rate in getting something closed.

Okay, that's fantastic. And then the last question you personally answered, but I wanted to just explore a bit more of some of these complimentary services, part of the GAAP and the EBITDA was supposed to be filled or will be filled over time with some of these services. I think you've talked in the past about construction management, fixture packages, warehousing, certainly disruptive technologies and products sales. So if you could just give us an update. Not necessarily one by one, but just in aggregate, how you're feeling about, some of those initiatives, those investments you've made. And then related to that. Any update on the returns of some of the national marketing that you've put in place? I know it's a national contract with the [indiscernible], but certainly executed at the local level.

Sure, I'll start it and someone else can weigh in on the national advertising. So on the services staff, we are making progress when we look at the business, a big part of this is being able to attract and retain stylists. We made investments, as you and Andrew have mentioned, on franchiser services, including recruiting services that we're offering, that's continuing to gain traction as we go forward. Once we get them, we want to attract the folks. We need to retain them. On the training side, we've made significant investments in our training capabilities and we're rolling that out across the board to all of our franchisees right now. So that is going well. We also are helping with lease renewals in addition to the construction services, people are taking advantage of our construction services for sure. And on the lease renewal side. More and more folks, including existing long-term owners are taking us up and having us help them with that. And as we go forward, you'll continue -- we've talked a lot about technology investments and you'll continue to see us roll out additional functionality with technology. And we're very confident that that will add a lot of value in terms of traffic generation and providing additional customer facing and stylist facing technology.

And I think, Eric and I have been careful not to predetermine outcomes on the services to be provided. We have very close relationships with our franchisees. So we've also been doing a lot of listening on what they want and need in order to grow traffic and run their business as well. And we're trying to be responsive to that as we get greater and greater visibility. And we've looked -- we've also looked and modeled against other top tier franchise awards that are out there, not just in our industry, but in other industries to see what services they provide. So we feel actually good about what we're building and we think there's a potential for ongoing support and build out as we continue to move this forward. Eric's also right, we have invested significantly in our tech center in Fremont to establish frictionless relationships with our customers and to gather data from customers as we continue to build out our data warehouse under Chad Kapadia's leadership, that team has already rolled out Open Salon, which is a very slick mobile app that enables you to book direct into our salons and also is being enabled by Facebook Messenger and by Google Search and Google Maps, where you can check into our salons right off the Google Maps and right off of Google search. So we're committed to continuing those investments so that we have the best technology in the industry. As to the relationships that under marketing and advertising, Steph, I know you'll recall that 2019 was a year where we decided to ramp up our investment in marketing and advertising and the diagnostic work, needed to build out the future state for organic growth. We all -- All of us recognize us, all of us in…

Absolutely, I would say from a sales basis as well as a transaction count traffic measure. They perform better in that, that's occurred over a significant period of time. And to follow on your point. Here we have the best of all -- we're able to marry up our very best operators with our outstanding franchise candidates that we're bringing in. And we're having a lot of success doing that. We're placing our very best folks, the franchisees, and we end up with a nice marriage there as well.

In the very best folks out of our APCO business, as we lift and shift and as we free up the capital that's locked up capital, we lift and shift the business over to local owners and many of our employees end up working for the franchisee. And that was an aspect of the core principle of establishing local owners into this business and staff is not surprising, right. I mean, you put a bunch of your own money into a local business. You're going to make sure that business runs well and then you treat customers well and that you retain your stylist. So Eric's right. We got the best of both worlds, we lift -- we free up shareholder capital that's been locked up in a non-performing business for several years. We lift and shift the operation over to a local business owner and then -- our customers well, they serve stylists well, and we transfer many of our employees over to the franchise business to go with them.

That's great. Thanks, guys. Appreciate the information.

You're welcome.

[Operator Instructions]

So if there are no questions, I'll close the call by saying a word of heartfelt thanks to our Regis employees and our franchise partners for their many efforts this past year and support of our customers, our stylists and our shareholders. Thank you so much, and we look forward to speaking with you again soon.

Ladies and gentlemen, this concludes our conference call for today. If you wish to access the replay for the presentation, you may do so by visiting regiscorp.com in the Investor Relations section of the website by dialing 1-888-203-1112, access code 5001949. Thank you all for participating and have a nice day. All parties, you may now disconnect.