Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation Second Quarter Fiscal 2020 Earnings Call. My name is Britney, and I will be your conference facilitator today. [Operator Instructions]. 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.

Thank you, Britney. 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 I'd like to address. First, yesterday'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 yesterday 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 the 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 yesterday'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, Biz, and good morning, everyone. Our guiding principle at Regis is to generate long-term value for our shareholders and key stakeholders. In that regard, I was honored to be asked to chair our company's Board of Directors, in addition to my continuing role as President and Chief Executive Officer. I believe that assuming the Chairman's role will help ensure continuity of leadership in our multiphase transformational strategy, during a period of ongoing change. The second quarter does represent an important milestone where we gained greater clarity into the end date of our portfolio transformation. Based on our year-to-date results and a robust pipeline of potential transactions, we now believe that our transition to a fully franchised business will be substantially complete by the end of this calendar year. This improved visibility into the cadence of our portfolio transition enabled us to begin meaningful reductions in our cost structure and to initiate other plans we have for the business, including reengineering our capital structure so that it will be appropriate for a fully franchised capital-light growth platform. We are pleased to report this quarter that we continue to make meaningful progress in our ongoing strategic transformation to a capital-light, high-growth franchise company. In August of 2019, we estimated that it would take us 18 to 24 months to complete our conversion to a fully franchised portfolio. However, due to the success we've had in the first half of fiscal year 2020, we expect that we will substantially complete this conversion at a somewhat earlier date than we originally anticipated. In the first half of fiscal 2020, we have converted 988 salons to franchise owners, with line of sight to the sale of approximately 900 additional salons. This means that net of closing roughly 350 to 500 underperforming salons, which…

Thanks, Hugh, and good morning. As you mentioned, we are pleased to share significant progress in our transition to a fully franchised model. Yesterday, we reported on a consolidated basis, second quarter revenues of $208.8 million, which represented a decrease of $65.9 million or 24% versus the prior year. The year-over-year revenue decline was driven primarily by the conversion of a net 1,447 company-owned salons to the company's franchise portfolio over the past 12 months and the closure of 172 salons, of which the majority were cash-flow negative and not essential to our future plans. When targeting salons for closure, our bias is to exit the location at lease expiration, unless the economics justify a course of action to buy out of the lease early. The headwinds in the quarter were partially offset by a $5.8 million increase in franchise revenues and $33.6 million of rent revenue recorded in connection with the new lease accounting guidance adopted in the first quarter of fiscal 2020. Second quarter consolidated adjusted EBITDA of $17 million was $3.6 million or 17.5% unfavorable to the same period last year and was driven primarily by the elimination of the EBITDA that had been generated in the prior period from the net 1,447 company-owned salons that had been sold and converted to the franchise portfolio over the past 12 months. Second quarter adjusted EBITDA was also impacted by lower comps, minimum wage increases and strategic investments in technology. We believe our comps may have been impacted by fewer retail days between the Thanksgiving and Christmas holidays. The decline in adjusted EBITDA was partially offset by a $5.6 million increase in the gain associated with the sale of company-owned salons. Excluding discrete items and the income from discontinued operations the company reported decreased second quarter 2020 adjusted net…

[Operator Instructions]. And our first question will come from Stephanie Wissink with Jefferies.

This is Sebastian Barbero for Stephanie Wissink. Just had a couple of questions and a couple of follow-ups, if I may. The first one, the comp sales performance of the system and franchise level, any further explanation for the December quarter step down and how has the business performed post-holiday? And the second one, on the product sales to the core franchisees were up nicely year-over-year. Can you talk about the initiative, including the rebranding and updating of your private label brands? And what percentage of product sales are now private label? And do you believe there's a room to advance on that percentage?

Why don't I take the first part of the -- both questions, and I'll toss it to Eric for follow-up on franchise. We still have a high degree of confidence in the ability of our franchise partners to grow their service and product sales at the salon level. We do believe strongly that they were impacted by the retail days that occurred between the holidays, the compressed retail days between the holidays of Thanksgiving and Christmas. So we don't have a high degree of concern about our partners' ability or franchise partners' ability to grow their businesses with [Technical Difficulty] hypothesis from the beginning has been that when you turn these salons over to local owners who are entrepreneurial and they put their own capital to work, they tend to be highly focused on growth and performance. But it's also important to remember that the vendition process is a distraction for all of us. It's a distraction for the corporation. And it's a distraction for new franchisees and our legacy franchisees who take control of salons that we're venditioning. But that's transitional in nature. And we're coming to the end state of that, and I still feel very confident that our franchise partners will grow their businesses and all the historical data that we have confirms that. As to the new private label brands, Blossom and DESIGNLINE, DESIGNLINE has been an important part of our company for years, and it's been extremely successful with great margins. We repackaged DESIGNLINE and reformulated DESIGNLINE to support future growth initiatives and that's relaunching prior to the summer. And Blossom is a brand-new product line that's been reformulated with an emphasis on sustainability. And so we feel very optimistic about both of those launches. We don't yet know what percentage of merchandise sales it will represent in the future years. But we're very well aware of the success other retailers have had with private label, including Target and Walmart, and we're watching their results. So we got behind this initiative and supported it, and we're optimistic that it will become an important part of our merchandise offering for our franchisees and for the end consumer. And Eric, you can build on -- please do build on all of that.

Sure. Thanks, Hugh. So this is Eric Bakken. As it relates to the comps, if you peel back the layers a little bit, for the quarter Supercuts, on the Service side, was still positive, up 0.1%. And we were negatively impacted in December for the reasons that both Hugh and Kersten mentioned. If you look at year-to-date, Supercuts on the Service side was up 0.9% and then overall franchise Service was up 0.3% in the year-to-date numbers. So we saw some negative impact in December, and in December, our service comp in franchise was off 2.5%. So that really hurt our numbers, it's an important month, but we're confident that we'll see the numbers bounce back as we go forward. As it relates to retail, just 1 item that I would mention on the franchise side. So when we transfer stores to franchisees on the corporate side, we utilize auto-replenishment. So that is all centralized here in Minneapolis. When we converted the stores to franchise, they did not have that model in place. So we've developed that now internally, and we're able to provide a very similar replenishment model for our franchisees, it's called auto guided ordering. And the only difference is that the franchisees can decide if they want to modify what we suggest that they order. So we now have north of 500 locations on auto guided ordering, and that number will grow. We're making some technology enhancements to it to make it work more effectively and efficiently. And we expect, as I said, that number to grow as we go forward.

Got it. And one more, if I may. Could you please reiterate the bridge to a $12,500 in G&A per salon and how do marketing costs get accounted for in the future? And this does include tech investment?

So the marketing is not included in our G&A line, that marketing, advertising expenses are included in the site operating line. As we move to a fully franchised entity platform those marketing and advertising costs will be borne by the ad fund. The 12.5% as it relates to the G&A per store, some of the guidance that we have provided in the past, that does include technology spend in the G&A of the 12.5%.

And to emphasize Eric's point, which is an important one, the auto guided ordering is enabling merchandise growth through technology. It essentially is a lift and shift of the historical capability we had in OpCo that we did not yet have fully integrated and franchised. Where they can make informed judgments, our franchise partners can they conform judgments by utilizing that technology. So it's an important initiative. And as Eric noted, we have about 500 of the franchise salons enabled but we're going to continue to migrate that throughout the platform.

Our next question comes from Laura Champine with Loop Capital.

It strikes us that you paid down debt in the quarter, although the goal with Guggenheim is to raise debt, were there EBITDA covenants that were at risk of being violated? Is that why you paid down debt in the quarter?

It wasn't -- well, our intent with Guggenheim, Laura, is -- our intent with Guggenheim is not to raise that, but it's a debt replacement facility. We'll scale that facility that we put in place for the franchise business. The prior facility, I suspect, would -- if you do the comparative analysis would be larger than what we will need going forward. We look at some of the covenants that were in the existing historical facility. And we knew that some of the net leverage ratios would not -- could not be supported by the future franchise business. But we -- Laura, we've known this for months, maybe a year. We just wanted to time our entry into the debt markets at the right moment. And as you well know, the debt markets are robust today, and there's a lot of money out there to put to work. And so we feel good that we've selected the right moment in time when we have the visibility we need to make informed judgment. We could have proceeded down this path earlier, but we didn't have all the visibility or facts when needed. So the simple way to think about it is we had a an old facility that was designed for a different time and a different company, and it just simply is not structured correctly for the future state of the business. So it's bound to make that transition, too.

Understood. With the shortened calendar, can you look back to the last time we had that same calendar and tell us how much that impacted comps then? Because it's just tough to parse out what's going on with disruption versus the calendar in December?

I'll take the first -- go ahead, Kersten. The answer is yes. We did actually go back and price back through the history and then -- that's a good question, Laura, because we -- it doesn't happen very often, but it's always academically interesting until it happens to you [Technical Difficulty].

Dearest to us that, that haircut that haircut or color that occurred before the Thanksgiving holiday, and we picked up in early January, at some point in January.

Got it. And then lastly, if it's -- if you had more of a haircut, but you still would've comped negatively, how do you get comfort that your investments in tech are working? So the relationship with Google, it's been long enough, I would think, for it to have an impact. You've had the group in Silicon Valley for a while. So how do you get comfort that those tech investments are the right thing to do with the comps getting worse, not better?

Laura, as you may remember when we started down the path of technology investments, the board was quite focused on generating the appropriate return on those investments and to help govern the process, we went out and recruited a world-class Director Virginia Gambale, who, if you've had a chance to look at her bio, she is extraordinarily gifted in the technology space. And so we convened the tech committee of the board on a quarterly basis to make certain that we are utilizing our shareholders' money in a good way, and we continue to feel good about the technology investments we're making. When you think about it, break it into 3 buckets. Bucket one is demand gen, which is open salon, which essentially gives us access to users of Facebook Messenger, Alexa and Google through all the Google search functions, but particularly important, Laura, is the investments that we've made in our back office salon support capability. That program is in beta. And as you think about that back office support capability, think about it as a fee-generating capability that will begin to migrate this year and -- calendar year. And as to the third components of technology, we've just publicly disclosed on prior calls that we know we need to make an ERP conversion at some point in the process, and we're looking at various options in that regard as well. We need to bring reaches into the modern age on our back office technology functionality, and we're beginning to think about that as well. And we've talked about that in our prior calls, and we intend to do it. So 3 basic functions, back office technology,for our salons, back office technology for corporate and demand gen capability with open salon.

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

Well, thanks, everyone, for your attendance today. We appreciate your continued support and interest in Regis, and look forward to speaking with you again next quarter. Thank you, everyone. Good day.

Thank you. 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 1-888-2031112, access code 8274513. Thank you for all for participating, and have a nice day. All parties may now disconnect.