RGS - NASDAQ

Good morning, and thank you for joining the Regus Second Quarter 2023 Earnings Release Conference Call. I'm your host, Biz McShane, Vice President and Corporate Controller. All participants are in a listen-only mode. The prepared remarks by our President and Chief Executive Officer, Matthew Doctor; and Executive Vice President and Chief Financial Officer, Kersten

Thank you, Biz. Good morning, everyone, and thank you for your interest in Regis. For today's call, I will highlight our second quarter fiscal 2023 results and reiterate our strategy and the priorities we have for the business as we enter the second half of our fiscal 2023 year. I am pleased to report continued business progress that resulted in a strong quarter for Regis and our best start to a fiscal year in quite some time. We have built upon our positive start to the fiscal year by delivering further sales and EBITDA growth with Q2 2023 adjusted EBITDA of $8 million dollars more than double our adjusted EBITDA of $4 million that we reported last quarter. These results come just 18 months after we reported an adjusted EBITDA loss of $77 million for our full fiscal year 2021. In the last two quarters, we have reported adjusted EBITDA of $12 million, which is a testament to the progress made by the Regis team and our franchisees. It is worth mentioning again, as I have on previous calls that I am proud of the progress we are continuing to make in a relatively short period of time. Coming out of fiscal 2021, we utilized 2022 as a year to stabilize Regis through the winding down of our legacy businesses, streamlining our G&A, selling our technology platform and amending and extending our credit agreement while simultaneously aligning on a go-forward strategy with our franchisees to drive our business forward, all of which required a tremendous amount of work and execution and that work continues to come through in our results. And not only having turned the corner on profitability from an adjusted EBITDA perspective, but also accelerating it. We will continue to focus and execute against our strategic initiatives of stylist retention and recruitment, customer retention and traffic-driving and the rollout of our technology partners

Thanks, Matt, and good morning. We are pleased to speak with you to share our second quarter and first half fiscal 2023 performance. The quarter marked our start to a fiscal year in five years when measured by GAAP operating income and demonstrates the future of Regis as an asset-light franchisor. Our operating income improvement is driven by our focus on controlling G&A, the wind-down of last generating company-owned salons and our distribution centers and to a lesser extent, the benefit some onetime items, which were partially offset by onetime costs. Reviewing the second quarter in more detail and beginning with the income statement. On a GAAP basis, total second quarter revenues were $60 million and declined $9 million from the prior year. This revenue decline was expected and relates primarily to a reduction in franchise rental income and the wind down of our company-owned salons. Franchise rental income flows through both revenue and expense therefore, has no impact on profitability. We believe a better reflection of our revenue performance is system-wide same-store sales, which grew 4.5% in the quarter. We continue to believe our initiatives to drive stylist hours and customer traffic will support continued improvement in system-wide same-store sales. As I mentioned, we posted another quarter of GAAP operating profit and a strong start to the year. The increase in operating profit was driven by the wind down of loss-generating company-owned salons and our continued focus on managing G&A. Additionally, I'd like to call your attention to onetime expenses and benefits in our GAAP operating income for the quarter. On expense side, we had a $2.6 million depreciation charge driven by the consolidation of our office space and a $1.2 million inventory reserve charge. As it relates to benefits, we had positive insurance adjustments, which lowered G&A in the quarter by $600,000. Now let's turn to our adjusted results, which eliminates the noise in the reported results. On an adjusted basis, second quarter consolidated adjusted EBITDA was $8 million compared to $3 million in the prior year's quarter. The $5 million improvement was driven by our lower G&A which included a $600,000 positive actuarial insurance adjustment, the wind down of loss-generating company-owned salons and a $1.1 million grant from the State of North Carolina related to COVID-19 relief. Our core franchise business achieved adjusted EBITDA of $8 million in the quarter, a $2 million improvement compared to $6 million in the prior year quarter. On an adjusted EBITDA basis, our company-owned segment was just above breakeven for the quarter and improved $3 million from the second quarter last year. The improvement is driven by the $1.1 million grant from the State of North Carolina related to COVID-19 relief and having fewer loss-generating company-owned stores in the current period as we are closing stores at the lease end and negotiating early buyouts where appropriate. For the first half of fiscal 2023, revenues were $122 million compared to $146 million in the first half of fiscal year 2022, similar to the second quarter revenue decline, this decline was expected and relates primarily to a reduction in franchise rental income and the wind down of our corporate-owned salons, as well lower product sales to franchisees. Adjusted EBITDA for the first half of the year was $12 million, a $14 million improvement compared to a $2 million loss in the first half of fiscal year 2022. Adjusted EBITDA improved primarily due to our lower G&A, the wind down of loss-generating corporate-owned salons and a $1.1 million grant from the State of North Carolina. Breaking this down further, adjusted G&A was $25 million for the first half of the year. This is lower than our expected run rate in the second half of the year due to our investment spend on training, recruiting and retention, which will increase as we accelerate these initiatives in the second half of the year. As Matt mentioned, we continue to optimize our G&A spend. And last quarter, revised our expected normalized G&A spend to $57 million to $60 million from $60 million $63 million. Even with the planned strategic spend in the back half of fiscal year 2023, we are now reducing our G&A outlook further and expect G&A to normalize between $54 million and $57 million annually with fiscal '23 trending towards the low end of that range. Turning to liquidity. As of December 31, we had $44 million of liquidity, including $34 million of available revolver capacity and $9 million of cash. In the first half of the year, we used $7 million of cash from operations, of which $5 million was used in Q1 and $2 million was used in Q2. On a year-over-year basis, cash used in the first half of 2023 improved $17 million from the prior year. The $2 million cash used in the second quarter includes $2.5 million of deferred social security payments and another $500,000 in payments to complete our obligations related to our transition services agreement with our former point-of-sale provider. These cash uses were offset by the $1.1 million of cash received, as I mentioned earlier. Adjusting for these cash uses, second quarter cash used in operations was flat. We expect to use more cash in the back half of fiscal 2023 as we further invest in training, recruitment and retention. With the sale of OSP, our capital expenditures have decreased by approximately $3 million this year which is in addition to the cash saved on G&A. Given our working capital and modest capital expenditure requirements, we believe we have ample liquidity. This concludes my prepared remarks. I'd like to thank you again for your continued support and interest in Regis. With that, I will turn it back to Biz who will lead us through the Q&A.

Thank you, Kersten. Please remember to use the chat feature or raise your hand feature to ask a question. The first question we have is through the chat. Kersten, this is for you. Please give an update on the NYSE compliance.

Great question. We are currently in compliance with the New York Stock Exchange stock price requirement as well as the market cap requirement, we're just awaiting the final compliance letter from the exchange.

Thank you. All right. On the line, we have Eric Beder from Small Cap Consumer Research. Eric, please remember to unmute your line.

Good morning. Can you hear me?

Yes.

Yes, Eric.

Congratulations on a solid Q2.

Thanks Eric.

You guys made a lot of progress - when do you see the potential to start adding more - salons to the franchise mix? Obviously, you spent a lot of time cleaning the base up. When do you look at it going forward to potentially start adding to the mix?

Yes. Eric it's, Matt and good morning and thanks for the question. I think you had mentioned a lot of time cleaning the base up. I think from our standpoint, we're just continuing to focus on executing on - business and all the initiatives we just mentioned. That's really where it starts and ends right now on just continuing to move this business forward, continuing to continuing to bring stylists back into the equation, continuing to drive our customer traffic. Because that's really where the conversation starts getting a lot easier amongst franchisees and even folks on the outside who have shown have shown interest in growing. But our focus right now is ensuring that franchisee profitability is optimized to ensure we have the right business case, that is ongoing, and I see that to probably be the case or call it the next year. So we're really going to really continue to focus on the turnaround, which again, we'll unlock those conversations, make it easier for the franchisees who have expressed that interest. We do have interest from the outside, but really just want to focus on business model as much as possible right now. And kind of as we mentioned on calls in the past, along with that cleaning up is coming with some cleanup of the footprint. I mentioned on the previous call and I'll say it again, right now, what we're seeing is a bit of a cleanup of salons - of underperforming salons, which has been a drain on resources and time. And I think that has a benefit to the system as well. So as we continue with kind of winding down those that are underperforming, we're going to start putting our focus back on getting into growth modes.

No you talked about - you talk obviously about the franchisees. You had this event last month in Las Vegas. What was the feedback you were getting from the franchisees in terms of what they're looking to see going forward how they are feeling of what's going on in the world?

Yes, no absolutely. It was a fantastic event. I can't speak to that enough. And by everyone who is in conjunction with putting that on that came through a big collaboration with our franchisees actually. They even concept of the idea of that event came out of our regional road shows we did last year, and we asked how can we better ensure that we're engaging and retaining our stylists, rewarding top talent, ensuring that we have some more essence of the brand culture, excitement, bringing that back amongst the stylist community. And this is something that we aligned on with them as being a key tool as part of that initiative. So it was awesome to see that was a conversation that happened beginning middle of next year and for that to come to fruition around six months later after that, and to have an event where 850-plus stylist managers, trainers, franchisees, vendors came was pretty incredible. So it was an awesome event from that standpoint, stylists and managers left super engaged. We also had an owner track to your point on we use it as an opportunity of further touch base with them to get to the latest feedback on, hey, here's what's going on from a recruitment marketing perspective? What are your views on that? Here's what's going on from the latest brand campaign, revamped that we're going through, showing some previews, what are your views on that? Here's the latest with

Yes, thank you. When you step back, we've gone through COVID. We've gone through now people coming back to work. What are you seeing - what your franchisees seeing in terms of the customer? How often they're coming? Is this - business with customer resistance or economic slowdown resistance? How should we be thinking about the changes that have happened or really in the customer base being affected and flowing through into your business?

Yes, no, absolutely. It's a good question. And yes, we are seeing some stretching of visitation. Things are different, right? I think I kind of mentioned people ask of the dynamic, it's just different. And even so, I would say, regardless of that factor, there's still a ton of opportunity. I mean, what gets me excited is the fact that everything that we've just talked about, the momentum we're gaining, the progress we're making. They're largely coming without the effects of the strategic initiatives that we're talking about fully taking hold. And what I mean by that. Now a lot of the work has been done to this point on those to get us in the position to execute - customer data cleanup, foundational groundwork research, talking with our franchisees, piloting various messages, testing and learning various channels, I mean we're getting smarter every day on what's going on now. So from my perspective, we haven't even scratched the surface regarding the impacts we can have on these yet are still moving forward. So given that, I think the incrementality of those initiatives can have there's, plenty of customers out there. There's plenty of opportunity for us to increase our relationship with our customers, drive further retention, drive traffic. And you kind of mentioned a little bit about the industry, and I mentioned that as a highlight. This is kind of the most subscription like model without being an official subscription due to the fact that haircare is more of a need versus a want and people look to get their haircut and colored, whatever have you, and they prefer to do that with training professionals. So regardless of the time, regardless of customer behavior, I think there's really a lot of space for us given that dynamic, and I really like our positioning and prospects to capitalize that. Given our scale, convenience, value for money, quality of service are salons suffice at attractive price points, what I think this will be resilient through all economic cycles and the incrementality of these initiatives can have regardless on stretching out of cycles here. There's, a lot of customers to go after attract keep and retain and build loyalty to our brands.

Yes, it's still pretty difficult to cut your hair online?

You can't, that's absolutely true.

And the last question here. I know this is longer term look, where do you want to be longer - you've obviously made great progress on cash flow. Where do you want to be longer term with the debt in terms of potential on ratios or levels? How should we be thinking obviously, as I don't think this is a fiscal '23 question, but how should we think the longer term in terms of where the right level of debt should be here?

Yes, no it's a good question. And I think it comes back to kind of what I said on earlier, what we're focused on, just what's going to bring us back to growth. What's going to end up leading to debt paydown is ultimately, well its two things. The first and foremost, this continued execution on the business. As we look to increase our top line, as we look to continue to drive profitability, a lot of - and generate cash flow. A lot of that will go down to paying debt that is a big piece of the value equation here, unlocking further value for stakeholders. So that is ultimately a place that we're looking to get through in the way that we get there is ultimately continuing on the path we're on - continue to grow that top line and essentially be able to get in the position to start paying that down. The other piece that comes along with this as well, that I don't want to lose sight of that may be a bit of a '23 thing is the payment stream that we could be getting from

Great good luck for the rest of the year.

Thanks Eric.

Thanks Eric.

All right. Next, we will go to Sydney Wagner from Jefferies. Please remember to unmute your line, Sydney Wagner

Hi, are you guys able to hear me okay?

Yes.

Yes, we can.

Yes, we can.

Perfect well, thank you for taking my question. So my first question was just around the labor market and stylist retention and recruitment. Where do stylist count levels fall relative to where they were pre-COVID. And then I'm just curious on any early reads or feedback you have from the stylist recruitment initiatives?

Sure, thanks this is Matt. So I appreciate the question where they fall versus pre-COVID - it's pretty interesting. I think you've talked about this at late it kind of matches up pretty much with kind of traffic declines that we're seeing. So this is around 20% down from an hour's work perspective versus pre-COVID. And again, that is something that recently has been fairly stable and any incrementality of just increasing those hours works even just one hour, 1.5 hour per salon per day can have some significant impact on our franchisees' profitability on top line. So the various factors that have been moving this in a positive direction where we see it, a lot of different things, franchisee pay plans, commission structure, salon culture, access to training, all the things that we've hear and we've seen, which is why this is where we're putting so much of our focus in to: one, get the story out there; two, ensure our training leaders and managers are trained on the soft skills to provide a great culture. So we know how important managers are. So when we talk about salon training and education, we really felt this was really a very important place to put some time and effort even we know like a lot of industries. [indiscernible] to bad managers. So we can't overlook that piece of the education side, and so we're excited to start rolling that piece out and other things regarding the technical trainers that get hands on in our salons. I had mentioned some early findings that those salons and technical trainers are outperforming the system. I'll add some more figures and context around that. And some of the data that I'm quoting is November and December results just given, it's been early days since we've scaled that up so fast. But from a level of sales outperformance on an overall brand perspective, we're seeing that range from salons that have these trainers and them from anywhere from 4% above the rest of the system in one brand, up to 14% in another. And we're also seeing that requisite outperformance in styled hours and 90-day retention for those who have those design team members. Some are retaining 4% better from a 90-day retention side and even up to 7% more stylist hours work. So these are things early figures, encouraged that they're seem to be working on the right path regarding that investment, and we're going to continue to do so in an effort to move the needle on that recruitment and retention side.

Got it. That's helpful. And then just another one kind of on the customer wait time. So I think you'd called it out as one to two months. So just curious like what your target time is. And then if you're seeing any shifts in spend per visit, curious on any color there.

Yes. I think it's less so on target how often we're getting folks to visit. I think we're going to be okay with stretching cycles out as long as we're increasing our traffic base. So -- and that's between two things. One, just keeping those who are coming in whatever cycle they're coming in at a better rate which I think we have a ton of opportunity to do and probably the highest ROI and focus we can have right now. We have a lot of traffic coming through our system. Let's just keep them better. And that will go a long, long way and something that's in our control through the development of, as I mentioned, CRM and loyalty, bring in that stickiness, that's going to go a long way from the traffic we already have, regardless of how often and the various reasons are coming through. And then obviously, there's the opportunity to drive additional. So we can drive additional folks, and I'll just add to that pool, which will go a long way into effectuating that traffic number kind of regardless of where that cycle is. In terms of spend, yes, spend has been up, and that's just been a product of price increases that franchisees and our system has been taking, which has been quite in line with other industries and retail and what have you. So kind of we're seeing anywhere from 20% to 25% higher tickets versus a pre-COVID level due to the price that has been taken here.

Got it. That's helpful. And then just my last question is just about the same-store sales up 4.5% and the trends that you're seeing there. And then how those maybe vary by region and concept.

Yes. I would say probably more so by concept than region. And I'd point you to our press release where you can have kind of the breakdown of the various brands. So you can see supercuts and portfolio of brands being up anywhere from 6 to 7-plus percent. And that's really kind of in those couple groupings of buckets and then the SmartStyle brand is actually down on a year-over-year perspective. So I will say, disparity is really kind of driven by those brand perspectives. Regionally within the brands, we actually see fairly uniform performance, which actually that means that we can effectuate on kind of an overall layer across the brand, so really taking more of a brand approach than having to take a regional approach.

Got it. Thank you so much.

Thank you.

All right. We're going to go now to a question from the chat. Matt talk about the health of the franchise system and where we see our franchise system going?

Yes. No, it's a good question. I appreciate you asking. As I mentioned, this comes back to just continuing on the recovery. The franchisees have gone through a couple of years of a difficult time given what's happened through COVID and we're just focused on getting that business back on track. I mentioned stylist hours worked per a previous question, about 20% down. So we have a lot of opportunity to drive our sales, to drive franchisee traffic, to drive franchisee profitability through increasing that workforce to making them more productive. I think that will go a long way for franchisees businesses. And really kind of everything we're doing here, every program that we're looking to roll out from a technology platform perspective, as I mentioned, from our efforts around recruiting and retention perspective, from our customer marketing and 90-day retention for that, that is all in an effort to look to increase franchisee sales and franchisee profitability, which we know is the most important thing right now.