Regis Corporation (RGS) Q4 2019 Earnings Report, Transcript and Summary

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, it would require very little future capital investment in salons, and ultimately generate substantial free cash flow. As a result, after our restructuring and stabilizing efforts in 2017 and 2018, the year 2019 became an important opportunity to determine if we were in fact on the right path to prove our hypothesis for the business. So, let me share a few thoughts with you regarding what we learned during the past year during 2019. We discovered that our existing franchisees did have a high interest in buying our company-owned salons at prices that facilitated our strategic plan. We were able to attract many new franchisees into the system that were well capitalized and have proven track records of success. Our personnel developed the expertise and internal programming required to successfully execute the timely sale and transition of company-owned salons to franchisees. And in tandem, our management learned to judiciously eliminate non-essential G&A costs, both here corporately and in the field. We discovered that we could generate enough cash to self-fund investments in our future state initiatives, and our franchisees have continued to run great local businesses which deliver a consistent service experience. At the end of our financial year, we then took a hard look at our regional strategic hypothesis, our team's first re-examined the 2019 performance of our company-owned salons on a pro forma basis, as if they had been operated on an arm's length basis, paying what our owners pay for franchisees -- for franchise fees and merchandise. We then looked at the 2019 performance of our franchise business, modeling the G&A required to fully support our franchisees as a standalone entity. And when considering our 2019 performance and creating these pro formas for a potential future state, we attempted to be realistic in all respects. Please take a look at the slide we just posted and are sharing on WebEx, and that we will post on our IR website after this call. You'll see that this pro forma analysis restates our actual performance in FY '19 and we believe demonstrates that on arm's length basis when carrying our current G&A load, the company-owned salon portfolio did not generate an economic return. In fact, we estimate that in 2019, our company-owned salons consumed approximately $32 million of capital after we pro forma adjusted the FY 2019 results, to reflect a hypothetical fully franchised Regis salon portfolio. In other words, in simple terms, our company-owned salons represented an inferior use of our capital. However, in a franchise model, the historical G&A costs needed to manage these dispersed operations and brands would be substantially eliminated and be replaced with more efficient local owners and operators. What we have found overtime is that our local franchise owners can operate these salons far more effectively than any corporate field organization. The matter how well intended we may be a large company simply cannot replicate the commitment of a local owner with skin in the game; who is the person closest to the operations, and is interacting personally with our stylists and our paying customers. One economic proof-point that supports our thesis, is that new and existing franchisees paid us approximately $94.8 million for 767 salons in fiscal 2019, while also committing to grow their base with new salon openings over the next few years, and purchase merchandise from us going forward. We believe their investment in our franchise salons is partly based on the quality of our personnel, the support we provide, and the quality of our brands. In the case of our existing franchisees, their preference for growing their salon unit counts; opening multiple units often provides our experienced franchisees an opportunity to create a meaningful number of jobs in their local communities and work with their families, the social good we are proud to foster. So in summary; our analysis confirmed that we had a capital intensive business that didn't earn it's cost of capital on the one hand, and a capital light business that generated all of the cash economics for the company on the other, as well as providing a viable platform for future growth. Of course, as any operator on the call knows, there is a big difference between hypothetical business analysis, and the effective execution of a well-considered plan that leads to measurable improvement in the financial performance of a business. We therefore spent the past year 2019 stress testing the key elements of our strategy to determine if we could, in fact, successfully execute the sale of company-owned salons in total number of transactions at pricing levels that appropriately reflect the value of the assets, and with a cadence that would enhance shareholder value and facilitate our transformational strategy; the total number of salons sold, the price received for the asset, and the cadence. We learned in 2019 that we could do it, and we believe we did it well. When I arrived in 2019, approximately 28% of the company's salons were franchised. At the close of 2019, 56% of our salon portfolio is franchised. I believe this transformational performance is a credit to the efforts of our outstanding Regis employees, and the capabilities of our growing number of franchise partners. Moreover, at this time, over 1,300 salons or approximately 48% of the remaining company-owned salons are in various stages of negotiation to be purchased by new or existing franchisees. Although we certainly expect these transactions to close, given the potentially uncertain conditions in the external environment and other factors, things could still potentially change. After considerable analysis and consideration, and given the results of our stabilization efforts in 2017 and 2018, and the successful execution of evolving franchise strategy in 2019, we have now reached a decision to embrace a fully franchise model. We do believe this is the optimal path forward to maximize performance for our shareholders, franchise owners, customers and employees. From our experience so far, we believe we can estimate the timing of our transition to a fully franchise platform and the amount of net capital Regis can generate in the sale proceeds. Although the pace of vendition activity could be faster, we anticipate that it may require 18 to 24 months to complete our conversion to a fully franchised portfolio. Of course, as you know, this is subject to various risk, challenges and external factors which may impact our strategy, I'd refer you to the 10-K for a more fulsome review of the risk factors. We expect that the remaining company-owned salons will have therefore a finite life and are essentially ring-fixed in the organization. We have isolated the company-owned salons as Exi-Co [ph] with the remaining future state business identified as our franchise company. Our intention is to continue to return the net capital generated, the capital that we free up from this process from the sale of Exi-Co [ph]. We intend to return that to our shareholders while still investing in the future state of our business. We believe that the future franchise company will be a high quality business, producing a stable stream of cash flow with both strong organic and inorganic growth prospects. Further, we believe these characteristics could potentially earn the new franchise company a higher multiple than Regis receives today. In the spirit of transparency, we intend to disclose the status of our vendition pipeline to our shareholders each quarter, until we have substantially no Exi-Co [ph] assets remaining. As many of you know, banks and other companies often isolate non-performing assets in a similar fashion when they restructure their businesses. During the last year, we also confirmed other factors which we believe support the decision we reached to fully franchise our business. There is a clear improvement in return-on-capital as we fully franchise Regis. Franchising is a simpler business model, franchising creates a platform for sustainable organic growth. Our franchise owners consistently, over many years now, deliver a better and more localized service experience to our customers. Our franchise partners are a source of new ideas and services that are needed to continually refresh our brands. Franchising also enables Regis to consolidate it's numerous brands from over 50 banners to, we believe, five core banners; Supercuts, Smart Style, Cost Cutters, First Choice Hair Cutters, and Roosters, a Barbara Brand that we believe we can scale with a franchise orientation. Although we may retain a small number of niche brands in certain geographic areas, we expect these to be the five core brands; Smart Style, Supercuts, Cost Cutters, First Choice Hair Cutters and Roosters. It was also likely that we will support a modest number of company-owned salons to test new services, merchandise, operating concepts or our new disruptive technology. As we continue to transition to a franchise platform, we decided to examine all of our investments in non-core, non-strategic assets. This exercise proved fruitful as we were able to free-up nearly $70 million of cash that have been tied up in low return assets such as owned real estate company, company-owned life insurance policies, and restricted cash. In combination with approximately $95 million generated from our venditions, these actions significantly reduce the company's invested capital. With this freed up capital, we were able to return a portion of this cash to our owners via Regis share repurchases that reduced our share count by nearly 20% in 2019. Or to put this into perspective, in fiscal 2019, we repurchased 8.6 million shares representing approximately 10 times the investment we made in the company's new LTIP compensation plan. One of the many benefits of aligned interests is that our management and board think like owners; like you, we are shareholders and our executive team has the opportunity to continue to increase their ownership position each year through our new LTIP compensation plan, a program we believe aligns management's financial interests with the long-term health and viability of the company. One additional comment regarding our share repurchase program; there are some critics who argue that management teams only repurchase shares to support their share price for the short run, this isn't the case at Regis. This year we invested heavily in the future of our business, including transforming our technology with the launch of Open Salon, where we wrote the code, we own the code, and we have submitted patents for our code. Open Salon is a frictionless capability, that is our proprietary technology platform that allows customers to book salon services directly via mobile devices or desktops, it's also enabled by Google Search, Google Maps and Facebook Messenger. We've been building out our franchise or capabilities, improving our brand positioning, enhancing our stylist recruiting and training, and introducing new trend driven merchandise as we upgrade our strategic marketing. We also opened our new Fremont, California Tech Center and our marketing offices in New York City. All told, these investments cost us approximately $12.5 million of EBITDA and $19.6 million of cash. As we transform, we believe we are prudently investing in the future state of our business. To illustrate how strong this short -- excuse me, this long-term focus is, please consider the fact that several of our executives, including your CEO, didn't earn that portion of our short-term bonus that was based on the operating company EBITDA and margin. Regis' management could have easily deferred investments, slowed down vendition, and wisely accelerated G&A reductions in tech and many other actions that would have earned each of us a larger short-term bonus payment. But we didn't do that because like you, we're owners and we're focused on the long-term economic value of Regis, and building a sustainable high-performing business, even when we're making judgments where there is a direct and immediate dilutive impact or own compensation. In closing, after more than two years of carefully planned evolution, we have identified and now confirmed a compelling vision for Regis as a capital light, high growth, technology-enabled franchise company. Although the transition to a capital like franchise model will initially have a dilutive impact on the company's reported adjusted EBITDA, we are each convinced that a fully franchised business, that we expect to generate a higher return on it's capital will prove to be in the best long-term interests of our shareholders and our other constituents. We have more work to do before we finish the transformational phase of our strategy but we have growing confidence in our plan, the ability of the Regis team, and our franchise partners to successfully execute the transformation. And that in time, our shared vision for the company will be fully realized. Andrew, why don't you take us through the math?

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 investments in technology, stylist recruiting, marketing and merchandising. Additionally, the company has invested in it's franchiser capabilities and services, which were partially offset by lower year-over-year incentive compensation expense. On a full year basis, consolidated adjusted EBITDA of $122.3 million was $34.9 million or 39.9% favorable versus the same period last year. The year-over-year favorability was driven primarily by a $70 million cash gain, excluding non-cash goodwill derecognition related to the sale and conversion of 767 company-owned salons to the franchise portfolio. Excluding the $70 million and $4.1 million gain from the sale of the company-owned salons during the current year and prior year respectively, full year adjusted EBITDA totaled $52.3 million, which was $31 million unfavorable year-over-year. And like the fourth quarter results, this unfavorable variance is driven primarily by the elimination of EBITDA related to the sold and transferred salons over the past 12 months. Looking at the segment specific performance and starting with our franchise segment, fourth quarter franchise royalties and fees of $26 million increased to $5.1 million or 24.2% versus the same period last year, driven primarily by increased franchise salon counts. Product sales to franchisees decreased $3.9 million year-over-year to $12.1 million, driven primarily by a $5.7 million increase in products sold to TBG, partially offset by increased franchise salon counts. Total franchise same-store sales declined 130 basis points, and franchise same-store sales excluding TBG improved by 10 basis points during the fourth quarter. As a reminder, franchise same-store sales are calculated in a manner that is consistent with how we calculate same-store sales in our company-owned salons portfolio and represents the total change in sales for the salons that have been a franchise location for more than 12 months. As a result, given the large number of salons we are transitioning to our franchise platform, we expect it may take a year or two for these numbers to normalize for comparative purposes. Fourth quarter franchise adjusted EBITDA of $10.6 million improved approximately $350,000 year-over-year, driven by growth in franchise salon portfolio, partially offset by planned strategic G&A investments to further enhance our franchiser capabilities and to support the increased volume and cadence of transactions and conversions into the franchise portfolio. Full year franchise adjusted EBITDA of $38.7 million improved approximately $2.7 million or 7.5% year-over-year. Looking now at the company-owned salon segment; fourth quarter revenue decreased to $53.4 million or 20.3% versus the prior year to $210.1 million. This year-over-year decline is driven by and consistent with a decrease of approximately 858 company-owned salons over the past 12 months, which can be bucketed into three main categories. First, the profitable conversion of 767 company-owned salons to our asset light franchise platform over the course of the past 12 months, of which 265 were sold during the fourth quarter. Second, the closure of approximately 133 company-owned salons over the course of the last 12 months, most of which were unprofitable, and as I noted earlier, not essential to our future strategy. These net company-owned salon reductions were partially offset by 32 salons that were bought back from franchisees during the year, and 10 new salons constructed during the year. Fourth quarter company-owned salon segment adjusted EBITDA decreased $15.9 million year-over-year to $22.4 million. Consistent with the total company consolidated results, the unfavorable year-over-year variance was driven primarily by the elimination of adjusted EBITDA that had been generated in the prior year period from the company-owned salon that were sold and converted into the franchise platform over the past 12 months. The quarter was also unfavorably impacted year-over-year by increases in stylist minimum wage and commissions, and strategic digital marketing investments. On a full year basis company-owned salon adjusted EBITDA of $88.6 million was $38.5 million or 30.3% unfavorable versus the same period last year. The unfavorable year-over-year variance was primarily driven by the elimination of company-owned EBITDA related to the sold and transferred salons over the past 12 months. Turning now to corporate overhead; fourth quarter adjusted EBITDA of $6.3 million is driven primarily by the $26.1 million of net gains, excluding non-cash goodwill derecognition from the sale and conversion of company-owned salons, the net impact of management initiatives to eliminate non-core, non-essential G&A expenses, and lower year-over-year incentive expense. These are partially offset by investments in technology, stylist recruiting, and marketing capabilities. Looking now at the balance sheet; we continue to maintain our strong overall liquidity positions while providing optimal balance sheet flexibility to fund the key elements of the company's transformational strategy. On the liquidity front, net-net, quarter and cash equaled $70.1 million. During the fourth quarter, we repurchased 2.6 million shares or approximately 6.5% of the total shares outstanding for $48.3 million. And for the full year, we repurchased 8.6 million shares for $154.4 million, representing approximately 19% of the company's total shares outstanding. The share repurchase activity during the year was funded substantially by the cash proceeds generated from the sale and conversion of company-owned stores into our franchise platform and the monetization of several non-core assets during the year, including the company-owned life insurance policies in the first quarter and the sale leaseback of our Salt Lake City and Chattanooga, Tennessee Distribution Centers in Q2 and Q4 respectively. The fiscal year-end cash balance of $70.1 million reflects a $40 million reduction versus fiscal year-end 2018. We believe this is an impressive outcome given our share repurchase activity and the investments we have made in our future state business during the year. As of June 30, we have $80.9 million of remaining capacity under our previously approved stock repurchase program, and we had $90 million of outstanding borrowings under our existing credit facility. Turning now to TBG; as Hugh mentioned upfront, we believe we continue to make good progress in our efforts to mitigate our mall-based lease risk, while at the same time minimizing our exposure to other TBG matters. As we have stated on previous calls, the primary goal of the TBG transaction was and continues to be the effective transfer of our mall-based lease liability and to limit our exposure to the ongoing losses associated with the mall-based salon portfolio. In fact, at the time of the transaction closed in October 27, our remaining mall-based lease exposure was approximately $140 million. In June of this year, to support these efforts, we entered into a settlement agreement with TBG regarding the U.S. and Canadian mall-based salons in which, amongst other things, we released and forgave TBG from amounts due to Regis related to certain items such as inventory shipments, fees, services and accounts, and notes receivables which totaled approximately $33 million, all of which the company had previously disclosed and had reserved for over the past 18 months. At the same time, and potentially more importantly, TBG entered into a meaningful number of lease modification agreements that resulted in a material reduction in our lease liability exposure. In fact, as of July 31, 2019, prior to any mitigation efforts which may be available to us, we estimate that we remain liable for approximately $39 million of mall-based lease risk, which is approximately a $100 million reduction versus October of 2017. Additionally, the agreement also has enabled us to take further steps to minimize our future financial exposure to the two TBG through actions such as requiring prepayment for all shop and salon inventory shipments, and other salon services. Lastly, as part of that same settlement agreement and an acknowledgement that TBG has and continues to struggle as a viable operator of the salons; we have the right to assist TBG in the identification of an experienced and qualified operator in order to facilitate the transfer of a portion of these mall-based salons to a third-party. So in summary, over the course of the TBG transaction, we have invested approximately $33 million to support TBG since October 2017 that has resulted in an approximately $100 million reduction in our mall-based lease liability, and the avoidance of operating losses related to these mall-based salons. We continue to believe that this is a portfolio that can be appropriately managed and we are cautiously optimistic a new operator can be identified. Turning now to our decision to fully franchise the remaining company-owned salon portfolio over the next 18 to 24 months. I thought it'd be helpful to hit on a couple of additional items. First, as Hugh pointed out in his remarks, going forward, we intend to provide a pro forma view of our quarterly and annual results bifurcated between our modeled Exi-Co [ph] and franchised NewCo components of the business. In providing this, we intend Exi-Co [ph] to represent our company-owned salons models as though they were standalone businesses with cost allocations related to product sales and distribution expenses, corporate overhead and other one-time and stranded G&A costs. The pro forma franchise New Co component is intended to reflect what a fully franchised business would look like based on our FY '19 results and represents our existing and pro forma projected new franchise salons with allocations for product sales and distribution expense, long-term strategic technology investments, and corporate overhead G&A among other expenses; typical for the franchise business. The pro form of view enables one to potentially model the franchise new co portion of the business at a multiple that is more in line with other publicly traded pure franchise companies. Conversely, for the Exi-Co [ph] component of the business, given the fact that Exi-Co [ph] business is anticipated to have a relatively short lifecycle of 18 to 24 months and not continuing in perpetuity, we believe it could be and should be valued at it's nominal or absolute value and not having multiple applied against it. Lastly, as a reminder, what we have presented today reflects only FY '19 full year actual results on a restated pro forma basis. Therefore, this is not a forward-looking analysis, and when thinking about the overall sum of the parts for valuation purposes, we believe it would be necessary to consider other factors such as future period Exi-Co cash flow items including EBITDA and cash CapEx, net of sale proceeds along with franchise New Co cash CapEx. The final modeling note I'd like to provide related to the estimated future state of G&A expenses. Please note that this is also not intended to be used as a forward-looking guidance. However, we believe it is reasonable to model G&A at roughly $12,500 per salon in a fully franchised future state business, split roughly -- evenly between franchise direct G&A, which would include distribution center costs and corporate G&A. Of course, this may change as we gain greater visibility into the future state of our business. And lastly, before I turn the call back over to John for questions. Given the anticipated increase in volume in case of venditions over the next 18 to 24 months, I'd like to remind you about how we think about the unit economics of each of these transactions. Generally, in the sale and conversion of an OPCO salon coastline to the franchised portfolio. We receive a one-time cash purchase price payment that is equal to a multiple of the salons [indiscernible] cash flow. In addition to the cash purchase price, we also expect to recapture a meaningful percentage of the salon's cash flow in the years ahead through items such as a predictable and stable ongoing royalty feast, additional cash generated on incremental product sales to new franchisees, likely lower ongoing capital requirements overtime for items such as salon maintenance or refurbishments, and anticipated reductions on our field and corporate overhead G&A expenses. Another non-cash benefit to our transformation is that the growth in the franchise portfolio should provide us with a platform for future sustainable organic growth. And as you mentioned, we intend to use this work as an effective vehicle for brand consolidation in a highly efficient and capital like manner. Also, as we have disclosed in the past, we believe that substantially all of our future transactions will involve cash flow positive lines. As a result, this will likely make period-over-period revenue, and adjusted EBITDA comparisons increasingly difficult, and substantially less meaningful, as we move forward with our portfolio transformation for a number of reasons. First, any comparison will need to be normalized for the onetime purchase price and P&L gains related to the sales proceeds received from the sale this lines. Second, all prior year periods will need to be normalized for the impact of the sold revenue and EBITDA that would be eliminated due to the transaction. And third, as we transition slides to our franchise portfolio, one must consider the fact that we are converting from a higher margin retail model in our company owns land portfolio to a wholesale model in the franchise portfolio. Of course, when designing our strategy, we plan for and model this change in product sale margins and in the long run expect to generate greater overall economic value for our shareholders as we convert to an asset light franchise model. Given these factors, we're thinking about your forward looking models. We anticipate that on an absolute basis. The company's total revenue in adjusted EBITDA excluding vendition proceeds will decline over the short-term as OPCO revenue and EBITDA and cash flow is sold. However, over the longer term, we expect to see growth in the franchise segment's adjusted EBITDA reductions in the company wide G&A expenses, returns on investments made in technology and marketing, longer term growth of our merchandise business and longer -- and lower ongoing cash CapEx requirements over the long term. As a result, our expectation is that the company's longer term adjusted EBITDA margin rate will increase. To help track this progress as we continue on with our transformation to a fully franchise model, as Hugh mentioned in his remarks, we intend to provide regular disclosures around the progress made between the divestiture of Exi-Co [ph] assets and the progress of building the franchise New-Co portfolio, much like many other companies do when they ring fence [ph] or isolate the non-performing assets that are impacted as they transform their business. Additionally, given the importance of timing, we intend to regularly update you with the status of our vendition cadence and pipeline until we are substantially complete with our conversion to a fully franchise model. With that, I'd like to thank you for your continued support and interest in Regis, and we'll now turn the call back to John for questions. Go ahead, John.

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 executive management and the board. We all get it. We know that know will run out of vendition. So then what, we have to be able to grow the business, grow our revenues and grow our earnings. And so this was the year we invested in the Bain study, which took several months to complete to ensure that we had the right ideas about how to differentiate our brands, so that as we began to plow more cash into marketing and advertising, we wanted the diagnostic roadmap to do that. We retained two disruptive ad agencies this year Chiat/Day for Supercutsm, we’ve selected Chiat/Day in collaboration with our franchisees and Barkley to support SmartStyle and Cost Cutters. We went out and recruited a disruptive Chief Marketing Officer, James Townsend, who had been a global partner, was 72andSunny and James has already brought a level of discipline and diagnostic rigor to what we're doing in marketing and advertising. And I'm very confident that he's going to be highly impactful to the company. The MLB relationship, thus far we've been pleased with the results. But like everything else, nothing in life is permanent. We'll continue to look at the numbers. And James, in collaboration with Eric and the franchisees and the rest of us will make a decision about the long-term viability, of that relationship. We have a three-year commitment with them, that I believe ends next summer, and then we'll decide to reup after that. But so far, we like it's certainly building awareness of the brand. And we're going to get more good data, as we move into the world series season, and start to look at the impact to traffic. We're also under James's leadership. We're making investments and influencers. And in digital marketing, we're starting to market the open salon technology, which we had not done initially, but we're starting that up. And then finally, the fundamental decision to convert to a franchise platform is intended to grow the business. We have great people in the APCO side of our company, wonderful people, many of whom have spent their entire adult life at Regis. But there's just nothing like someone to invest their own capital in the business to get serious about giving great service and treating customers well and retaining stylus. So one of the fundamental core principles of converting to a franchise platform is that we believe local owners will grow their businesses. And Eric, I think, Eric, back over several years, the data confirms that local owners outperform company-owned salons from a same-store sales basis.

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.