RGS - NASDAQ

Good morning, and thank you for joining the Regis Fourth Quarter and Full-Year 2024 Earnings Conference Call. I am your host, Kersten

Thank you, and good morning, everyone. I'm thrilled to be talking to you all today and to share perspectives on our next chapter here at Regis. This is my third fiscal year-end conference call as CEO, and I want to begin by reflecting on our recent achievements that have transformed the business to position it for growth. This also marks the first time I am speaking since the conclusion of our strategic review process, which resulted in the refinancing of our debt with new lender partners, TCW and Midcap Financial. This is an outstanding result, which has reduced our indebtedness by more than $80 million, saves us approximately $7 million in cash interest annually and puts Regis back on solid financial foundation with right size leverage of approximately 4.5 times debt to adjusted EBITDA versus close to 8 times just two months ago. This important milestone also has many other benefits, the first being the longer duration maturity extending from what was August 2025 to June of 2029. We have increased financial flexibility and can develop a capital allocation strategy to invest in the business and pursue growth initiatives that could not have been possible or contemplated otherwise. This removes a major distraction to our employees, franchisees and shareholders. Importantly, management now has increased bandwidth to focus solely on the strategy and execution to grow the business itself alongside our franchisees. I can say with confidence that this is a new day and chapter for Regis in which we can finally operate as a true franchisor, as was intended all along when Regis set out on that journey to become fully franchised close to seven years ago. This is a major step for Regis and all of our stakeholders on our path to sustainable long-term growth and value creation. Next, I want to reflect on the progress we've made during the past few years. First and foremost, we've stabilized the business and returned to profitability and strong adjusted EBITDA margins. We've gone from highly negative adjusted EBITDA in fiscal year ‘21 to roughly breakeven in fiscal year 2022 to $21 million in fiscal ‘23 to $26 million in fiscal 2024, with a full-year adjusted franchise EBITDA margin of 35%. The improvements were driven largely through stabilization of the business coming out of the pandemic combined with operational rigor around risk and expense management. We've done a lot of work rightsizing our G&A to match the company we have become, and this work has continued. We'll provide an update on our G&A efforts later during this call. Second, during that period of stabilizing and returning to profitability, we further streamlined our focus and business model with an eye towards the future. The sale of our proprietary point-of-sale software system OpenSalon Pro to

Thanks, Matt. For this morning's call, I will review our fourth quarter and full-year results. In the fourth quarter and full year, we reported improved operating income, net income and earnings per share as well as improved adjusted EBITDA and cash from operations. Reviewing the fourth quarter in more detail. Total fourth quarter revenues were $49.4 million and declined $6.3 million from the prior year. This revenue decline was expected and relates primarily to a reduction in franchise rental income and advertising fund revenue, which are a gross up of revenue and expense and have no impact on profitability. Royalty and fee revenue of $18.5 million, which represents our core business revenue, was down $1.1 million versus the prior year fourth quarter due to the number of salon closures over the course of the last 12 months and a decrease in revenue related to terminated development agreements. Another reflection of our revenue performance is system-wide same-store sales, which declined 1.3% in the quarter. We closed a net 149 locations, including three company-owned locations in the fourth quarter of fiscal year 2024. We posted GAAP operating income of $4.6 million in the fourth quarter, compared to $3.6 million in the prior year quarter. The year-over-year increase in GAAP operating income of $1 million was driven by a lower rent expense in the fourth quarter of fiscal year 2024, primarily related to franchise rent accruals in the fourth quarter of fiscal year 2023 that did not reoccur, partially offset by lower core business revenue. We continue to produce operating profit each quarter, and we expect that trend to continue. We reported GAAP net income of $91.2 million and diluted earnings per share of $38.10 in the fourth quarter compared to a loss of $4.8 million and diluted loss per share of $2.07 a year ago. The majority of the improvement in the quarter was the result of the $94.6 million net gain on the extinguishment of debt related to the debt refinance we executed in June. As it relates to the significant gain, the company utilized its U.S. federal and state NOLs to offset the entire tax liability related to the extinguishment of debt. Now let's turn to our adjusted results, which we believe is a more representative view of the business. On an adjusted basis, fourth quarter consolidated EBITDA was $7.4 million, compared to $5.2 million in the prior year quarter. The $2.2 million improvement was due primarily to lower rent expense of $2 million, as previously discussed, the recognition of $1.3 million of non-cash revenue related to a change in estimate for gift card breakage, partially offset by lower core franchise revenue. Our core franchise business achieved adjusted EBITDA of $6.1 million in the quarter, a $600,000 increase, compared to $5.5 million in the prior year quarter. This improvement is primarily due to lower rent expense, partially offset by lower core franchise revenue. On an adjusted EBITDA basis, our company-owned segment reported $1.3 million for the quarter, an improvement of $1.6 million from the same quarter last year, primarily related to the recognition of non-cash revenue, resulting from a change in estimate for gift card breakage. As of June 30, 2024, we had 17 company-owned locations and as of today, we have nine locations. During the three months ended June 30, we generated $5 million of cash from operations, which is a $4.5 million improvement from the prior three month period, primarily due to improved operating income and less cash used for working capital. With incentive compensation and other scheduled payments like insurance that get paid in the first quarter of our fiscal year 2025, cash generation may be challenged in Q1, but we do believe that we will generate cash in the second quarter and for the remainder of fiscal year 2025. Moving to full-year results. Revenues for fiscal year 2024 were $203 million, compared to $233 million for the full-year fiscal 2023. Similar to the fourth quarter revenue decline, this decline was expected and relates primarily to a reduction in franchise rental income, advertising revenue and the wind down of our company-owned salons, as well as lower product sales to franchisees. Royalties were also down due to fewer franchise locations, partially offset by system-wide same-store sales for our franchise locations of 60 basis points for the fiscal full-year. Full-year system-wide same-store sales improved 70 basis points in the year. We closed a net 455 locations, including 51 company-owned locations during fiscal year 2024. We posted GAAP operating income of $20.9 million in fiscal year 2024, compared to $8.8 million in the prior year. The year-over-year increase in GAAP operating income of $12.1 million was driven by lower rent expense, the recognition of $1.3 million of noncash revenue related to a change in estimate for the gift card breakage and lower G&A, partially offset by lower core franchise revenue. We reported GAAP net income of $91.1 million and diluted earnings per share of $38.34 in fiscal year 2024, compared to a loss of $7.4 million and diluted loss per share of $3.18 a year ago. The majority of the improvement was the result of a $94.6 million net gain on the extinguishment of debt related to the debt refinance executed in June. Adjusted EBITDA for the full-year was $25.9 million, a $4.9 million improvement, compared to $21 million in fiscal year 2023. Adjusted EBITDA improved primarily due to our lower G&A expense, lower rent and recognition of the non-cash revenue related to the estimate for gift card breakage, partially offset by the $1.1 million grant from North Carolina received last year. Adjusted G&A expense of $45 million is down $3.7 million due to lower compensation, legal and insurance expense and technical education spend efficiencies. In fiscal year 2024, we used $2 million of cash from operations, which is a $5.9 million improvement from prior year. Excluding the $1.1 million grant received from the State of North Carolina in fiscal year 2023, cash used in operations improved $7 million due primarily to improved operating income and less cash used for working capital. Turning to liquidity. Our new credit facility with TCW and Midcap Financial consists of $105 million term loan and a $25 million revolver. Due to the transition of our letters of credit to our new lenders, we were required to temporarily draw $10.2 million on our line of credit to cash collateralize our letters of credit with our former lenders. As of today, the amount drawn on our revolver is $4.4 million, and our availability under the revolver is $15.6 million. The draw and the reduction in availability relates to the company's letters of credit issued by our new lenders. As a reminder, due to accounting standards, our balance sheet shows approximately $300 million of operating lease liabilities related to liabilities associated with subleasing salons to our franchisees over the entire life of their respective leases. These liabilities are serviced by our franchisees and should not be factored in Regis' debt position. These liabilities have decreased approximately $289 million over the last three years due to the reduction in salon count and also due to Regis moving off of franchise leases. Regis is solely responsible for lease liabilities for our corporate office space and the remaining company-owned salons, which amounts to $9 million over the life of the leases. As Matt mentioned, we wanted to give you some insight on key drivers of the business as we enter fiscal 2025. With the continued focus on our corporate G&A and the recent rightsizing of the organization, we expect our fiscal year 2025 G&A to be in the range of $40 million to $42 million and our run rate G&A to be closer to $38 million to $40 million. The middle of the run rate range represents close to $6 million of savings versus fiscal year 2024. While the $38 million to $40 million range represents additional investments in our business that offset savings to the extent we see opportunity to further invest in our initiatives, this range may change. In addition to the G&A savings, we have now successfully subleased three of the four floors of our corporate office space. The sublease income of approximately $1.2 million in fiscal year 2025 associated with the three subleases will be recorded in the other income line of our income statement. As we've discussed on previous calls, we do expect further closure of unprofitable franchise locations. We believe that the number of salon closures will be in the same order of magnitude as fiscal year 2024, with the majority of the closures occurring in the third quarter of fiscal year 2025 as that is when many of the SmartStyle leases end. From a cash perspective, we expect to receive additional