Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation Second Quarter Fiscal 2020 Earnings Call. My name is Gail and I will be your conference facilitator today. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded for playback and will be available by approximately 12:00 p.m. Central Time today. I'll now turn the conference call over to Biz McShane, AVP Finance. Please go ahead.

Thank you, Gail. Good morning, everyone and thank you all for joining us. On the call with me today, we have Hugh Sawyer, our Chief Executive Officer; Kersten Zupfer, our Executive Vice President and Chief Financial Officer; Eric Bakken, President of 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 today's 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 in 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 comparisons, but should not be considered superior to or a substitute for our GAAP financial measures 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/investorrelations. With that, I will now turn the call over to Hugh.

Thank you, Biz and good day. Although a lot has changed in the world and in our business since our last earnings call, we remain committed to a strategy that we believe will enhance shareholder value. I expect Regis to become a company with significant long-term potential, a business we can all be proud to own. Our multiyear strategy is built around completing a franchising plan to position our company-owned salons to a capital-light model, while positioning the company for sustainable growth in units, sales, and profitability. The key elements of our strategy are unchanged and include converting company-owned salons to a franchise platform. As we reported today, approximately 74% of our portfolio has already been franchised, transforming the business with technology, particularly customer-facing technology, improved salon management systems, and digital training, eliminating non-essential non-strategic G&A. In January, we eliminated approximately $19 million in annualized G&A costs, and we do intend to do more to rationalize our costs when the time is right to do so. We've been upgrading stylists recruiting and training with an emphasis on digital training. We've been restructuring our portfolio in order to focus on five core brands, the fab five, which we expect will improve the precision and efficiency of our marketing. And we've been revitalizing our merchandise business, focusing on own brands like Designline and Blossom. Now, although our core strategy has not changed, we have intelligently adapted our salon operations to the new normal with an intense focus on safety. In March of this year, various state and local government mandates resulting from the COVID-19 pandemic forced us to close a substantial majority of our franchise and company-owned salons. These closures significantly impacted our fiscal third quarter results and will continue to negatively impact our results in the fiscal fourth quarter, as the majority of our salons in both our franchise portfolio and company-owned portfolio remain closed during the months of April and May. Now to mitigate the negative impacts of these salon closures, you may recall that we took immediate action, including a furlough program, wage reductions, and aggressive management of our purchasing and payable cycles. As of the beginning of this week, approximately 68% of our portfolio has reopened, that's a combination of both our franchise and company-owned salons. We are re-launching our salon safely, but at a brisk pace. We expect to reopen roughly 81% of our salons by the end of June, the end of this month. As we reopen salons, the health and safety of our customers and stylists has been and continues to be our highest priority. As we previously reported, a cross-functional Regis team led by Eric Bakken that also included a number of our franchisees worked with infectious disease specialists at the University of Minnesota Medical School to ensure that the health and safety of our customers and stylists would be at the forefront of our salon reopening plans. These physicians provided recommendations on the proper PPE and additional safety measures that have been communicated throughout the company's entire salon portfolio to help educate and prepare the company's franchise partners and stylists for operating salons with a safety emphasis in a COVID-19 environment. Moreover, in a manner consistent with our company values, James Townsend and our team in merchandise, including Andrew Priadka, proactively invested a very significant amount of capital in the personal protective equipment required to safely reopen our salons. In retrospect, that proved to be a very good decision here at Regis. Our new internal slogan is 'safety first and hair second', which I think emphasizes the company's focus on the moral imperative and doing the right thing, because it's never wrong to do the right thing. Despite the hibernation period caused by the pandemic, we continued to make meaningful progress in all areas of our strategy and remain committed to our transformation to a fully franchised capital-light model on an ambitious timetable. During the quarter, we sold 375 company-owned salons and transferred these salons to our asset-light franchise portfolio. At the end of the quarter, as we reported, approximately 74% of our salon portfolio has been franchised. We've also previously reported that we expected to substantially complete our re-franchising by the end of this calendar year in 2020. Given the hibernation of our business during the pandemic, this goal may be somewhat delayed, but frankly, I'm still optimistic we will substantially complete transformation on an ambitious timetable. Our team is doing great work despite the challenges of the pandemic. In May, Kersten and our finance team, working with advisors at Guggenheim successfully amended our credit facility that expires in March of 2023. We believe the amendment of our $295 million revolving credit facility will give us the flexibility and debt capacity to manage the business through our strategic transformation, as well as the ongoing uncertainty generated by the COVID-19 pandemic. We think we're in great shape as it relates to that new amendment and our balance sheet. As we previously said, the amendment is capital-light, covenant light, and being covenant light means we were able to remove all prior financial covenants, including the net leverage ratio and fixed charge coverage ratio. We only added a minimum liquidity covenant that we are comfortable with. Additionally, the amendment provides the company's lenders security in the company's assets. In closing, I want to thank our franchisees and the associates for their many contributions to our business during this extraordinary period in the company's nearly 100-year history. I also want to recognize the University of Minnesota Medical School and acknowledge their support during this tragic pandemic. I'm also grateful to each one of you for your continued interest and support. I'll now turn the call over to Kersten to take you through the numbers.

Thanks, Hugh and good morning, everyone. As Hugh mentioned, the last few months have been unprecedented, but we are committed more than ever to our strategy, and we continue to be pleased with the results of our restructuring and the cadence of our vendition process given the major disruption of the COVID-19 pandemic. We reported this morning on a consolidated basis, third quarter revenues of $153.8 million, which represented a decrease of $104.6 million or 40.5% versus the prior year. The year-over-year revenue decline was driven primarily by the conversion of a net 1,581 company-owned salons to the company franchise portfolio over the past 12 months and the closure of 208 non-performing salons, the majority of which were cash flow negative and not essential to our future plans. In late March, we made the decision to refund our franchise partners approximately $15 million of previously collected cooperative advertising fund contributions. Many of our franchisees were able to take advantage of the government assistance programs, which will help them recover. We wanted to provide some immediate cash relief by refunding previously collected ad contributions. Given the near-term challenges faced by our franchisees, we concluded that this accommodation would ease the financial burden associated with the government-mandated hibernation of the franchise brands during the pandemic. This also contributed to the decline in revenue; however, it had no impact on operating income. These revenue headwinds in the quarter were offset by a $2.1 million increase in franchise royalties and fees and $31.8 million of rent revenue recorded in connection with the new lease accounting guidance adopted in the first quarter of fiscal 2020. While I would normally not address technical accounting matters, it's important for me to comment on the $45 million one-time non-cash goodwill impairment charge related to our company-owned salon segment that we reported during the quarter. This was a full impairment of company-owned goodwill. This non-cash charge is highly technical in nature and does not have any economic impact on our business model. Prior to the COVID-19 crisis, the company was on track to recognize its goodwill over several quarters as part of our vendition strategy. The economic disruption caused by the pandemic resulted in a charge this quarter, which eliminates future derecognition charges. Absent the goodwill impairment charge, the company-owned goodwill would have been recognized over the course of our transition to a franchise platform. For clarity with the full impairment this quarter, there will be no further goodwill derecognition. Third quarter consolidated adjusted EBITDA of $6 million decreased $31.2 million or 84% compared to the same period last year and was driven primarily by the decrease in the gain associated with the sale of company-owned salons of $17.8 million and the elimination of EBITDA generated in the prior year from the net 1,581 company-owned salons sold and converted to the franchise portfolio over the past 12 months, partially offset by significant reductions in G&A and marketing. As we've previously discussed, you should expect the gain from the sale of company-owned salons to continue to diminish as we enter the later stages of our transformation. The COVID-19 pandemic also contributed to the decline in the third quarter adjusted EBITDA by approximately $8 million due to the government-mandated hibernation of salons caused by the pandemic and a decrease in guest visits leading up to the salon closures as customers across the country began to shelter-in-place. As a reminder, all of our company-owned salons closed near the end of March as did the substantial majority of our franchise salons. Since the closures continued into April and May and substantially hindered revenue generation during this period, we expect to experience a much greater impact on our fourth quarter results. Although the pandemic had a dramatic impact on our earnings, we are reopening our salons at a rapid pace. As Hugh mentioned, approximately 68% of our portfolio has reopened, and we anticipate that as we enter our new fiscal year, the majority of our business will be operational. Please note that excluding discrete items and the income from discontinued operations, the company reported a decreased third quarter 2020 adjusted net loss of $4.5 million or $0.12 per diluted share compared to adjusted net income of $15.4 million or $0.37 per diluted share for the same period last year. The year-over-year earnings decrease in adjusted net income was driven primarily by the decrease in adjusted gains from the sale of salons to franchisees and the corresponding elimination of adjusted net income generated in the prior period from the sold salons. These decreases were offset by a decrease in adjusted tax expense due primarily to the impact of valuation allowance. On a year-to-date basis, consolidated adjusted EBITDA of $52.8 million was $30.1 million or 36.3% unfavorable compared to the same period last year. The change includes a $6.9 million increase in the gain, excluding non-cash goodwill derecognition related to the year-to-date sale and conversion of company-owned salons to the franchise portfolio. Excluding the impact of the gain and the non-cash goodwill impairment charge, third-quarter year-to-date adjusted EBITDA totaled $1.9 million, which was $37 million unfavorable year-over-year. Similar to the third-quarter results, this unfavorable variance is largely driven 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, third-quarter franchise royalties and fees of $8.7 million decreased $14.1 million or 61.8% versus the same quarter last year. As I previously mentioned, this decline in royalties and fees is driven primarily by the one-time refunding of approximately $15 million of previously collected contributions to cooperative advertising funds, which had no impact on operating results. The decrease in advertising fund revenue was partially offset by an increase in royalties due to an increase in franchise locations. Product sales for franchisees decreased by $1 million year-over-year or $15.3 million, primarily due to a $3.77 million decrease in products sold to TBG partially offset by increased franchise salon account. Franchise same-store sales were unfavorable by 4.1% and we believe were negatively impacted by the reduced guest visits leading up to the government-mandated closures. Third-quarter franchise adjusted EBITDA of $11.5 million improved approximately $1.7 million year-over-year, driven by growth in the franchise salon portfolio, partially offset by lower margins on franchise product sales. The performance of our franchise portfolio was also challenged by the COVID-19 pandemic, as well as the operational complexity of onboarding new owners and transitioning salons to more experienced owners, among other factors. Year-to-date franchise adjusted EBITDA of $36.4 million improved approximately $8.3 million or 29.7% year-over-year. Looking now at the company-owned salon segment, third-quarter revenue decreased $123 million or 55.7% versus the prior year to $97.9 million. This year-over-year decline is driven by and consistent with the decrease of approximately 1,561 company-owned salons over the past 12 months, which can be categorized into three main categories. First, the conversion of 1,628 company-owned salons to our asset-light franchise platform over the past 12 months, of which 375 were sold during the third quarter. Second, the closure of approximately 208 company-owned salons over the past 12 months, most of which were underperforming salons at lease expiration and, as I noted earlier, not essential to our future strategy. The next company-owned salon reductions were partially offset by 254 salons that were bought back from franchisees over the last year and 21 new company-owned organic salon openings during the last 12 months, which we expect to transition to our franchise portfolio in the months ahead. Third-quarter company-owned salon segment adjusted EBITDA decreased $18.5 million year-over-year to negative $1.3 million. Consistent with the total company consolidated results, the unfavorable year-over-year variance was driven primarily by the elimination of the adjusted EBITDA generated in the prior year from company-owned salons sold and converted into the franchise platform over the past 12 months. This quarter was also negatively impacted year-over-year by the reduced guest visits and temporary closure of company-owned salons due to the COVID-19 pandemic as well as increases in stylists' minimum wage and a decline of same-store sales in our company-owned salons pre-COVID-19. On a year-to-date basis, company-owned salons consolidated adjusted EBITDA was $14.5 million, a decrease of $51.7 million versus the same period last year. The unfavorable year-over-year variance is driven by the elimination of adjusted EBITDA related to the sold and transferred salons over the past 12 months, partially offset by management initiatives to right-size the support structure in the field. Of course, it's important to note that our company-owned salon performance will continue to become less critical to the future trajectory of our business as we continue our conversion to a capital-light franchise model. Turning to corporate overhead, third-quarter adjusted EBITDA of $4.3 million decreased $14.4 million and is primarily driven by the $17.8 million decline in net gain, excluding non-cash goodwill derecognition and the sale of company-owned salons, partially offset by the net impact of management initiatives to eliminate non-core and essential G&A expenses and lower year-over-year equity compensation due to the reversal of equity expense related to performance. In January, based on the improved visibility and the speed of our transition, we began meaningful reductions in our G&A expenses by eliminating approximately 290 positions, including 15 contractors across the U.S. and Canada, which is expected to result in $19 million of annualized G&A expense savings. Lastly, I wanted to point out that vendition cash proceeds during the quarter were approximately $49,000 per salon compared to approximately $71,000 per salon in the second quarter of fiscal 2020. As you may recall from our previous earnings calls, we've cautioned that we are venditioning more Signature Style salons this fiscal year, which could lower net proceeds per salon due to the cost of converting some of these salons as part of our brand consolidation efforts along with more SmartStyle venditions. Additionally, the COVID-19 pandemic caused us to temporarily suspend the vendition process at the end of March, and we've just restarted the process. Looking now at the balance sheet. At the end of the quarter, we made an $183 million draw on our revolving credit facility. This draw was done to increase our cash position and preserve financial flexibility in light of the COVID-19 pandemic. This increased our cash balance to $241 million as of the end of March. As Hugh previously mentioned in May, we amended our revolving credit facility that expires in March of 2023. The successful amendment provides relief from the maximum consolidated net leverage covenant and minimum fixed charge coverage ratio covenants. Given our successful vendition process, we have known for some time that our existing credit facility would not be appropriate for our end-state franchise business, and that we'd need to reengineer a credit facility to leverage the opportunities inherent in our new business product. We are very pleased with the new credit facility terms and appreciate the support of our bank syndicate. We believe the new amendment will provide the long-term flexibility we need to see our strategy through to completion and enable us to successfully navigate the uncertainties caused by this pandemic. In summary, our third and fourth quarters have proven to be unprecedented in our history. However, despite the hibernation of our business, we successfully amended our credit facility and continued forward momentum of our vendition strategy. We continue to believe that we will complete our transformation and be well-positioned to generate long-term shareholder value. With that, I'd like to thank you for your continued support and interest in Regis. And now I'll turn the call back to Gail for questions.

Thank you, Hugh and Kersten. Our first question is coming from Steph Wissink from Jefferies. Please go ahead. Your line is open.

Thank you. Good morning, everyone. Hugh, I have a couple of questions for you and then Kersten as well. I know you don't typically like to give comps by months, but I think it would be just helpful to scope the business coming through January/February into the downturn in March and then being down April/May, and then what you've seen so far in the recovery in June as your salons have reopened? If you're willing to just give us even contextually some shape of the comp performance, that'd be helpful.

Sure, Steph. And I think what I'll do just at a high level is set the table here for Eric. It's still such early days in the reopening cycle, that you're right. We are reluctant to say more than we should say, but I think Eric can give you a pretty good flavor of what we're seeing as franchisees were out ahead of the company-owned salons on the reopening schedule. So, Eric, why don't you talk about what we're seeing in the franchise business, because that'll give you some good insight into the contextual patterns we're seeing, Steph.

Sure, thanks, Hugh. Hi, Steph. That's a great question, and I appreciate the opportunity to address both parts. Looking at the quarter, in January and February, our franchise business was performing quite well, with service up 2.4% and total up 1.5%. Specifically for Supercuts, we saw service increase by 3.3% and total by 2.7%. However, in March, we experienced a decline of 19%, which resulted in an overall drop of 4%. This outlines what transpired during the quarter. We started opening franchise salons on April 24, beginning with Georgia and Oklahoma, and we’ve been steadily opening more since then, reaching over 4,000 franchise salons now operational. We're beginning to accumulate a significant number of salons that have been open for over 30 days, allowing us to better understand the current haircut cycle. At the beginning, when we reopened in various states, we effectively opened as soon as possible, with our franchisees doing an excellent job. Initially, we saw a surge in pent-up demand during the first week, with salons fully booked and operating at maximum capacity. However, after that first week, the demand began to decrease. Currently, with many salons now past the 30-day mark and moving into a new haircut cycle, we are seeing a resurgence in demand, which is very encouraging. We anticipated the initial visit and focused on ensuring that both customers and stylists felt safe in our salons, which has contributed to the encouraging return rates. While I won't reveal specific numbers, this reflects the general trend we’ve observed. We are also navigating challenges related to salon capacity. For example, in a typical setup with six stations, we are generally limiting capacity to four due to social distancing protocols. This is manageable during off-peak times but can become a constraint during busier periods, impacting our revenue despite extended hours. We have been exploring creative solutions to enhance capacity in our salons, such as relocating the front desk and adding portable stations. Even a small increase in available stations can make a significant difference. So, that's where we stand. I'll pause there.

Kersten, I think it's also true to say, Kersten, that closed salons are not included in the number, right, in the same-store sales.

That's right. So, the decline that you see in comp in March is people starting to shelter-in-place, but we still have the salon open. Once the salon closes, it's no longer included in the comp.

Yeah. And our franchisees hung in there for a fair amount of time. So, moving through March, you're right, Kersten; you're exactly right. The transactions and the traffic were curtailing dramatically, even though they kept some of those salons open. So, they're open for just a few hours; it would still be counted in the comp and that hurt us as well.

Okay. Kersten, that's an interesting kind of technicality. So when the salon closes, it falls out of the comp base. So, when you report your June quarter comps, will the months of April and May reflect zero salons? Eric, you mentioned a few were opening in the latter part of April. So, if you just help us scope from a technicality perspective, will you report a fully loaded comp in the June quarter or an adjusted comp? How should we be modeling the June quarter?

I think that's a challenging situation. It has been difficult for us to focus on comparable sales because many salons were closed for most of the quarter. We can discuss offline how to model this going forward, considering the unique circumstances in April and May and how those salons factor into the comparable sales.

Okay. That's helpful. And then two really quick ones. Just on the share dislocation, clearly, the independent chains and the independent salons are feeling a significant amount of pressure. So, if you can just help us, maybe Hugh, think through share opportunities for your franchise network in terms of those local salon visits? And then Eric for you, just remind us, are you seeing any price increases across the menu or any surcharges being added to the tickets to cover some of the incremental COVID-related expenses?

As for the first part of your question, I've mentioned before that the COVID pandemic has been tragic for the country and challenging for our company. However, I've consistently stated that a recession would be beneficial for Regis. I noted this back in 2017, as a recession, especially one tied to job losses, would help us attract more stylists, who are our production employees, and it would apply significant pressure on independent salon operators. I regret that the recession resulted from COVID, but from a competitive perspective, I'm pleased it's here because it will increase pressure on small family-run businesses. I believe many customers who previously sought higher-priced services will return to more affordable options, especially given the economic strain on many families. Instead of spending 50 dollars at a high-end barbershop, they will likely choose Supercuts for a good haircut at a lower price. While the pandemic is unfortunate, the recession could be advantageous, and I am optimistic about it. The pressure on our competitors will likely draw customers back to our salons. Furthermore, I expect that hiring stylists will become easier than it has been in recent years. Regarding pricing, I don't think any consumer-oriented business can avoid making adjustments today. Operating safely in the COVID environment brings increased costs. All consumer-facing businesses, including ours, need to adapt pricing to this new reality. We are doing this in our company-owned salons, and while we do not control pricing at our franchise locations, many of our franchisees seem to be making similar adjustments. Whether in the restaurant, bar, hotel, or hair salon sector, the costs of doing business have risen, making price increases unavoidable from my viewpoint.

I got disconnected, so I missed most of it. I'll be very brief to avoid repetition. On the franchise side, nearly all franchisees are raising prices, and we will likely increase them further as we move ahead. Clearly, our costs have risen, and service times have lengthened. Therefore, you can expect franchisees to implement additional price increases going forward.

Okay. And last…

Sure.

… wanted to tidy up a housekeeping number that you typically give us, which is the percentage of your remaining opco salons that are under LOI. I know you've paused your venditioning cycle. But any update on the progress around some of those conversations?

We have received several questions about our salon negotiations. A significant majority of our company-owned salons were in various stages of negotiation when we entered hibernation, and most of them were actually under written agreements. We are reviewing that list to ensure we can finalize those deals and transition them into the franchise sector. Eric and I have a strong track record in this area. Kurt Landwehr, who oversees much of our corporate development and recruits new franchisees, mentioned that the period following the Great Recession was a prime time for franchise recruiting, as many corporate individuals who lost their jobs sought to own their own businesses. While Eric may have a different perspective, I remain confident that we will accomplish this and work through our portfolio as initially planned. We expected to complete this within the calendar year; we might experience a slight delay, but I don't anticipate it being significant. Eric can also address this if he wishes.

Sure. We're feeling good about our relationships with the parties we have agreements with to purchase stores during the closures. We continue to maintain close communication with them and are making good progress. It is taking a bit longer to finalize the transfers now, as lenders often require that we open the salons before the transfer takes place. We are currently working through that process. However, we are optimistic that we will successfully navigate the agreements we have and are also making strides in negotiations for additional opportunities. While it is more complex than back in February, we remain confident that we will achieve our goals. We are still in the process of recruiting owners, and we are pleased with the progress there as well.

I don't worry about the re-franchising or the reductions in general and administrative expenses. We've acknowledged for two years that action was necessary, and we will take it. What keeps me awake at night is the uncertainty. We need to gather more data in the COVID environment to understand how the salons are performing and what the volume looks like. Like any business with variable expenses, we will adapt as needed. The new normal isn’t disastrous; it simply requires us to realign our operations to fit the current business landscape. Our company has been around for almost a century. If we've weathered the Great Depression, World War II, and numerous recessions, we will navigate this as well. We just need to gather more insights into the numbers before making adjustments, just as we’ve done many times before.

All right. Great. Thank you guys for the information.

You bet.

Thank you.

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

Well, thanks, everyone. We appreciate your ongoing support and interest, and we wish you Godspeed and stay safe. Please leave your homes and go get your haircut at a Regis salon near you. Thank you everybody. Bye-bye.

Ladies and gentlemen, this concludes our conference call for today. If you wish to access the replay for this presentation, you may do so by visiting regiscorp.com in the Investor Relations section of the website or by dialing in 1-888-203-1112, access code 5153028. Thank you all for participating and have a nice day. All parties may now disconnect.