Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation First Quarter Fiscal 2020 earnings call. My name is Cassidy and I will be your conference facilitator today. [Operator Instructions] Following management's presentation we will conduct a question and answer session. [Operator Instructions] As a reminder, this call is being recorded for playback and will be available by approximately 12:00 PM Central time today. I will now turn the conference call over to Kersten Zupfer, Senior Vice President of Finance. Please go ahead.

Thank you, Cassidy. 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 statement. Please refer to the company's current earnings release and recent SEC filings, including our most recent Form 10-Q and June 30, 2019 Form 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-Q and 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 item. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons but 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 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. With that I will now turn the call over to Hugh.

Thank you, Kersten, and good day everyone. As we discussed last quarter when I joined Regis, my aspiration was to develop a transformational enduring strategy to reinvigorate our company. My guiding principle has been to generate long-term value for the Company's core constituents, our shareholders, our franchise owners, customers, and employees. We are pleased to report this quarter meaningful progress in our ongoing strategic transformation to a capital-light high growth technology enabled franchise company. As we continue our transformation, we expect to utilize the cash proceeds we are generating from the sale of company-owned salons in various ways to maximize shareholder value. This may include, but not be limited to investments and the core capabilities we need to facilitate sustainable revenue and earnings growth in the future state as a fully franchised company. Those investments may include frictionless customer-facing technology, disruptive marketing and advertising, trend-driven merchandise, stylist recruiting and education franchise or capabilities, and the real estate locations to support future organic salon openings by our franchisees. We may also utilize our cash in the next 18 months to complete any remaining elements of our multi-year restructuring, including closing non-performing company owned salons, eliminating or reducing any ongoing lease risk associated with TBG, supporting our ongoing G&A reductions through severance programs, management of our capital structure as we continue to evolve to a franchise platform and if needed capital investments and some salon refurbishments and remodels as we consolidate our various brands throughout the portfolio. And as you know in the past we have utilized cash to repurchase our shares in circumstances where we believe that was in the best interest of our shareholders. So how do we expect to utilize the cash proceeds we generate from the sale of company-owned salons consistent with our past practice investments in the…

Sure. Thanks to you and good morning. As you mentioned, we are very pleased to report significant progress in our transition to a fully franchised model. Before getting into the details of the quarter, I'd like to share with you a quick overview of the changes we've -- related to our adoption of these new lease accounting standards that you likely noticed in this morning's release. Historically, we have recorded lease income and expense on a net basis through the rental expense line item on the P&L, however, with the new lease accounting guidelines, we now record franchise rental revenue and the corresponding rental expense on separate line items in the P&L, while the net impact is a gross-up of both revenue and expense line items on the P&L. The new lease standard does not impact overall operating income. I'd like to also point out that the new lease guidance is accounted for prospectively and we did not restate for comparative periods. So please consider this in your modeling. In addition to the P&L impact, the new lease accounting guidance also required us to record a lease asset and a lease liability of approximately $990 million on the balance sheet. However, a portion of this long-term lease liability is subleased to our growing portfolio franchisees. Now turning to the results, we reported this morning consolidated first quarter revenues of $247 million, which represented a decrease of $40.8 million or 14.2% versus the prior year. The year-over-year decline in revenue was driven primarily by the conversion of 1143 company owned salons to the Company's franchise portfolio over the past 12 months and the closure of 147 company owned salons over the past 12 months. A majority of which were cash flow negative and not essential to our future. These headwinds were…

[Operator Instructions] Our first question comes from Stephanie Wissink of Jefferies.

Hi, this is Ashley Helgans on for Stephanie Wissink, thanks for taking my question. You guys had a nice strong level of venditions in the quarter, how should we model the average gain when we look at the current value of your remaining salons relative to the average multiple you're getting per sale.

Andrew, you want to take that?

Yeah, sure. Hey, Ashley good morning. So as you look forward from a cash gain I would use as a good proxy our results to date, so last year FY '19 in the first quarter because again we intended to provide additional disclosure last October with first quarter of FY '19 that clearly lays out number of salons vendition cash proceeds, the net gains, so you can see kind of the assumed PP&E in inventory that's included. We then have the goodwill derecognition to get to what the net gains are. Because it is a very fluid process with which we're selling depending on whether it's a SmartStyle, a Signature Style, or Supercuts salon that gets vendition. I would just use kind of that those rough averages based on the experience to date to calculate on a per unit basis what the proceeds or what the net gain could be. And then in my prepared remarks, I also talked about the fact that on a per unit basis, cash received per unit was lower this quarter. And again, that's a function of the mix of salons that we sold with the SmartStyle and Signature Style salons, those portfolios typically receiving slightly lower cash flow multiple than Supercuts. If you look at the total balance of the portfolio at the end of this quarter, you can see we're largely through the Supercuts portfolio and we have the majority of the venditions to remain are in the SmartStyle and Signature Style portfolio. So from a cash proceeds per unit, it's probably going to be lower than the average transaction history to date, especially as you consider we're using the Signature Style venditions as a very capital-light cost effective way to effectuate our brand consolidation.

Great, thank you. And if I could just squeeze in one more, how was the response been to the tech and product enhancements you've made to date.

Hi, it's Hugh. We've actually been encouraged if you think about open salon is a good -- simple way to think about open salon, it's an aggregator. That doesn't mean that we won't price our branded apps as well. Travel facilities can live in the same e-customers the Delta Airlines app. So you should expect us going forward to continue to drive adoption of open salon. We like the technology because it gives us access to Google's user base, to the Facebook Messenger user base and to the Alexa user base and so in combination that opens up a portal to customers that we may have never done business with in the history of the company. But at the same time you will see we just continue to support our branded absolute Supercuts and SmartStyle and Cost Cutters for the past five, so that these two concepts live in the same world together and give us access to longtime loyal customers and new consumers who may never have experienced service at one of our salons. We've been encouraged by both adoption of customers and adoption of our franchisees as we continue to migrate through the technology enabled world, we need to all existent today. So we are optimistic about it. We feel good about it.

Great . Thanks...

Yeah.

And our next question comes from Laura Champine of Loop Capital.

Good morning, thanks for taking my questions. So the comps, we were hoping for a flatter comp than what we got in, particularly in Supercuts given the advertising on MLB and elsewhere. What's driving that comp lower year-on-year?

I'll take the first, you want to take that Andrew?

No, go ahead.

Thank you. I'll take the first part and then, Andrew, you can weigh in others. Please recall Andrew's earlier point on the year-over-year comparative may not always be relevant or accurate, so there's going to be -- it's going to take some time for the dust to settle on the comp analysis as we continue to convert to a franchise platform in order to get an accurate comparative view on a quarter-to-quarter basis. So I actually continue to be optimistic about the future comps. As you know, Laura, one of the reasons we embrace the franchise strategy is, although these are national brands but local market business and when you have owners put their own capital to work in a local market business, they tend to be proactive and enthusiastic about growing their businesses. And you're right, we are supplementing that and working in collaboration with them to upgrade the marketing and advertising in the company, both with retaining to disruptive agencies like Barkley, Chiat\Day, Barkley for Cost Cutters and Chiat\Day for Supercuts and we're continuing to invest in influencers in digital and the other campaigns that we think will be necessary to multi-growth in the future years. But I think the most important component of this and then I'll pass it back to Andrew is, it will take some time for the dust to settle so that we get an accurate year-over-year view of the comps, since there -- they're not, we measure this in the same way we do in the other comp sale for OpCo. Andrew, you want to tag on there?

Well, actually Eric wants to a few comments on franchise, then I'll take…

Sure.

Hey, Laura. Its Eric Bakken. So if you look at the business particularly Supercuts, obviously the vast majority now are on the franchise side and when you factor in the number of locations that we have deals on were down to 126 corporate Supercuts locations and that number will go down in the near term as well, but if you look at it from a comp perspective in the quarter, Supercuts franchise was up 1.6% service for the quarter down in retail and up 1.1% overall and we were gaining momentum as we move through the quarter. So we're making good progress from, we don't release the traffic numbers on that or transaction numbers, but that number is obviously far better on the franchise side. So we're focused on -- heavily on all of our businesses but in particular on Supercuts and you mentioned the marketing and advertising, Hugh touched on that as well, but we're also very actively involved in improving our ability to attract recruit and hire the best stylist and so that's -- we have a significant focus on that and that is starting to pay dividends as we go forward. For all of our businesses but in particular for Supercuts. So we always want it to be better, but it's positive in the quarter and, we're seeing some improvement as we move ahead as well.

And the only thing I would add is, Laura, it's Andrew, on the company-owned salons with Supercuts the remaining portfolio at the end of the quarter was just north of 300 salons. So while it is a negative 3.4 in service comps total down 3.9. The impact is relatively de minimis now, just given the small size of the portfolio and inevitably as we're going through this transition there is likely to be some disruption on the OpCo side just given the uncertainty with the transition to a fully franchised model that we think, Jim Lain and the field leadership team has done an excellent job of minimizing and managing through. But it would be remiss for us not to acknowledge that there is at least a small amount of disruption happening just because of the transition that's going on. That's why it's imperative that we move quickly -- to move to the fully franchised model.

Yeah, just to add to that, I would say disruption exist overall throughout the entire organization. And so we're managing it on all sides of course but we're transitioning a lot of stores and that takes the time, energy and effort of the entire field team, both on the OpCo and franchise side.

And Andrew, in the OpCo portfolio, isn't it correct to say that historically we utilized pricing to offset minimum wage increases?

That is correct.

That impacts comps as well, right?

That is correct.

The OpCo portfolio continues to be a melting ice cube.

Yeah.

Got it. I appreciate all that and also the comments about how the mix shift in the venditions is impacting your take per salon, but is it fair to say that what you're left with at the corporate level would be your less productive salons and therefore that price per vendition should stay compressed and we shouldn't expect much comp improvement on the Company owned side.

I don't think that's a fair statement. I think it's more a function of the portfolio mix. The fact that just, I mean, per our publicly disclosed FTD disclosures, Supercuts tends to be a higher performing, higher margin piece of the business that tends to have higher unit -- average unit revenue. So as we have substantially venditioned fully through the Supercuts portfolio and now we're getting into the Smart Style and the Signature Style portfolio, one would expect that the average multiple that we get and we've been fully transparent that disclosure, tends to be a little less than Supercuts and then again with the Signature Style portfolio with many of these salons. We are using this process to convert the salons into one of the, as you call them, the Fab Five brands or the brand consolidation effort that we are undergoing. And in doing so, we offset some of the remodel and refurb costs with the purchase price. So it gets recorded as relatively low, if not zero purchase price, but on the other side, the new franchisee has funded a substantial amount of conversion and it's a brand new Supercuts, Cost Cutters, First Choice Haircutters or whatever the ending salon is. So that's really the dynamics of what's driving the lower cash proceeds per unit this quarter and likely going forward. We don't think it's a function of being left with a bunch of dogs and cats and under performing salons because we do believe that the remaining portfolio is actually a strong performing portfolio.

And if that's not strong, Laura, we'll deal with it in a different way. If it's a nonperforming salon, we are going to close it. We're not going to vendition or sell it. And I think I would also highlight and I think, Laura, I know you know this, but it's worth it bears mentioning that these OpCo comps become meaningfully less important to the financial performance of the company with each passing month. As the time -- as the clock runs and we continue our vendition process, the OpCo comps. While we monitor them and we -- and as Andrew mentioned Jim Lain and our team have done a wonderful work in running our OpCo business during this transformation, the comps become at some point, far less relevant to the financial performance of the company.

Right. Got it. So last question and something that should be relevant to NewCo. I mean you mentioned Hugh the part of the thesis is that you converting to an asset light, higher returns, high growth model. Is the growth you expect to see comp growth or do you expect that it is franchisees take ownership of territories that they will expand the salon count in their territories?

And I'll let Eric tag on to this too, but I -- we are actually. I'm -- I'll speak from my side. I'm very optimistic that we have a great group of franchisees and I think they will grow organically within the four walls of their businesses within that local salon because that's what entrepreneurs do, when they put capital work, they grow their businesses. They hug their stylist every day and they hug the customers when they come through the door and thank you so much for visiting our Supercuts, but at the same time we think there is, Laura, a meaningful opportunity for organic openings and we are pursuing a real estate strategy where we pre-position those assets in advance of organic salon openings by our franchisees. So I think the answer to your question is both. We expect same store sales comp increases from our franchisees on both the service and merchandise side and we also expect that our great franchisees are going to want to pursue new organic openings in the years ahead. And that's why we're out ahead of that investing in these. So that when they're ready to grow, we're ready to provide them with the lease location and Eric, you can add to that too if you'd like.

Sure. Yes, I agree with all of that, we obviously need to grow the businesses that we're selling. So we need to get the comp growth, but we also need to add additional organic locations and Laura, as you might recall, as part of these deals that we build in a store opening requirement to all of the transactions generally if they buy three, they need to open one additional location. So, Hugh mentioned we're securing real estate ahead of that. And you'll see those -- the organic numbers improved significantly as we get through the vendition process. What's happening as you have the vast majority of our owners, existing owners who were growing previously and the new owners are obviously buying the vendition locations. So they are quite busy and shoring up the operations and making enhancements and improvements both to the physical plant into the employee base in the salon, so they're busy doing that, right and as they get that process to a point where they're comfortable, then you'll see them go into the market and work with us to add additional locations and we will be well positioned to help them with that as we secure real estate in many instances ahead of having a franchise to take those locations.

Understood. Thank you.

You're welcome.

This concludes the Q&A portion of the call. I will now turn the conference back to Hugh.

Well, thanks, Cassidy. So I would be remiss if I just didn't take a moment to express our heartfelt appreciation to our shareholders for their continued support. And to our franchisees and employees for the awesome work they do every single day on behalf of our customers and our shareholders. So thank you everyone and we look forward to talking to you again at the close in the next quarter. Thanks and goodbye.

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 1-888-203-1112 access code 3231103. Thank you all for participating and have a nice day. All parties may now disconnect.