Ladies and gentlemen, thank you for standing by. Welcome to the Regis Corporation Second Quarter Fiscal Year 2021 Earnings Call. My name is Mary, and I will be your conference facilitator today. [Operator Instructions]. As a reminder, this call is being recorded for playback and will be available approximately 12:00 p.m. Central Time today. I will now hand the conference over to Biz McShane, AVP, Finance. Please go ahead.

Good morning, everyone, and thank you for joining us. On the call with me today we have Felipe Athayde, our Chief Executive Officer; Kersten Zupfer, our Chief Financial Officer; Jim Lain, Executive Vice President of Portfolio Brands; and Amanda Rusin, our General Counsel. Before I turn the call over to Felipe, I would like to remind everyone that the language on forward-looking statements included in our earnings release and 8-K filings also apply to our comments made on the call today. These documents can be found on our website, www.regiscorp.com/Investor Relations, along with any reconciliations of non-GAAP financial measures mentioned on today's call with the corresponding GAAP measures. With that, I will now turn the call over to Felipe.

Thank you, Biz. Good morning, and thank you for joining us. Q2 of fiscal year 2021 represents the first 3 months of my 4-month tenure at Regis. And while the effects of the pandemic are evident in our results, we remain very confident about the strength of our business and our brands. Allow me to first focus on why we're confident about the recovery of our business, after which I would like to cover 4 important topics. Our recent corporate reorganization, our zero-based budgeting process, the progress of our corporate salon refranchising and our proprietary POS and salon management technology OpenSalon Pro. Outside of government-imposed restrictions and closures, the main factors impacting the hair salon business is the disruption of daily booth, rather than people's desire to permanently chance their salon habits. Customers are socializing less and working from home more, both of which are typical demand drivers for our services. According to the December release of McKinsey's U.S. Consumer Sentiment during the coronavirus survey, the level of concern of Americans when visiting a hair salon is more than indeed the incumbent activities such as dining in restaurants, visiting a shopping mall, staying at a hotel or using a ride sharing service. At the heart of our confidence around the solid comeback is the fact that our category has the potential to be down in a way that is not applied to other retail and services. In support, you cannot get your haircut online and few people are willing to give or receive haircuts at home. Our stylists have been correcting do-it-yourself hair color every day and sales of at home hair color products have slowed down as salons reopened. We're confident that most hair care services cannot be replaced or replicated and as [indiscernible] continue to roll out and…

Thank you, Felipe, and good morning. Yesterday afternoon, we reported, on a consolidated basis, second quarter revenues of $104 million which represented a 50% decrease from the prior year. This decrease is the natural result of the transition to an asset-light franchise model, coupled with lower traffic levels, primarily as the result of the COVID-19 pandemic. California, certain areas in Canada, primarily Ontario and a small amount of one-off locations, experienced government mandating closures for most of December and into January. California restrictions have since relaxed, and currently all California salons are available to be open for business. We have approximately 400 salons in Canada currently closed, and we are expecting an update regarding the reopening of these salons on Monday, February 8th. We reported an operating loss of $27 million during the quarter, mostly driven by the economic disruptions caused by the pandemic as it has been since the last quarter of our prior fiscal year. Second quarter consolidated adjusted EBITDA loss of $18 million was $35 million unfavorable 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 $18 million and the planned elimination of the EBITDA that had been generated in the prior year period from the net 768 company-owned salons that have been sold and converted to the franchise portfolio over the past 12 months. Rapid declines and related pressure on labor optimization also contributed to the decline in the second quarter adjusted EBITDA. Looking at the segment-specific performance and starting with our franchise segment, second quarter franchise royalties and fees of $20 million decreased $9 million or 32% versus the same quarter last year. The majority of the year-over-year decline was due to a $6 million decline in cooperative advertising time,…

[Operator Instructions]. We can take our first question now from Laura Champine of Loop Capital.

It's on the trajectory of selling off the remaining company-owned locations. I heard, Kersten, you say that the plan is still to have that done on the prior schedule. Is that reliant mostly on financing for those franchisees? How many of the conversions, for how many of the conversions have you identified a buyer?

Thanks for the question, Laura. As it relates to the pipeline, we have about 50% of the remaining locations in some various stage of the pipeline at this point.

Laura, Felipe here. Look, the main concern that we had in this process throughout the past quarter was a change in direction when it comes to the refranchising process, right? So we went, to Kersten's point, from having an average transaction of 4 salon portfolios to steering towards our largest franchisees already in the system who want to grow and allow them the ability to acquire new portfolios from which they can consolidate faster and then get to a more robust future organic growth. So some of the deals on the pipeline, to Kersten's point about we have transactions on the pipeline for about 50% of the opco portfolio, some of these deals are north of 100 salons in terms of their size. So I want to make sure that we have the right franchisees growing, and we're also bringing in new blood into the system. I mean think people who have operated other franchise brands outside of hair salons or broader retail as well, right? So it's less about the ability to finance and more about us wanting to bring in a slightly different type of incoming franchisee as the transition process moves through.

We can now take our next question from Stephanie Wissink of Jefferies.

We have two follow-up questions, if we could. Kersten, the first one is for you. Just on the lease liabilities, if we could come back to that, thank you for all of the detail. Help us think through the franchisee responsibility where you may have transitioned the salon and you might still be the master tenant on that lease. Can you just help bring us up to speed on where you are in rolling off some of those master and minor roles more towards a franchise direct to landlord responsibility? And then secondly, Felipe, maybe this one is for you, it was a little bit hard to hear some of your comments on merchandising, product development and the rollout of OpenSalon Pro. If you could just go back to those key areas of franchise support services, talk a bit about DESIGNLINE and Blossom, some of the uptake and interest there, some of the things that you have planned for merchandising, and maybe more systemizing the merchandising and some of the inventory flow to your salon partners? And then lastly, on OpenSalon Pro, if you could just remind us where you are in the rollout of that. How many salons are in test or actively using it? Maybe some of the initial feedback would be great. Thank you.

Thanks, Steph. Thanks for the question. So as it relates to our change in strategy on the lease liability, the way that we're executing that is as leases come up for renewal and as franchise agreements allow for, we are making that conversion from us, Regis Corporation, being on the lease to the lease being in the name of the franchisee. Which allows them more flexibility in terms of communication and being able to negotiate leases and having that relationship with their landlord. Like I said, it's happening as leases come up for renewal.

Felipe here. So a little bit on the progress of OSP. So our focus this past quarter was to launch some functionalities that automate some of the manual non-value-added activities in the salons, right? So to give you an example, the ability to automatically upload merchandise that is ordered by a salon into the salon management system, right? So this is a process that would have taken many hours per month that is now fully automated. Still on merchandising, we have now a capability of algorithmic replenishment. So basically, there's an AI system that looks into the sales of that specific salon in places in ideal order that then the franchisee has the ability to edit as they please. So we wanted to make sure that before we pushed OpenSalon Pro more broadly that we would have those capabilities that would drastically over time improve franchise profitability just by eliminating nonproductive labor hours. So at this point, we have about 1,000 contracts, 1,000 salons committed to installing OSP in the next few weeks and months, of which 350, just north of 350, are live. Remember, there's a few important buckets when it comes to OSP. One is, to my point, franchise profitability and the just automation of activities that can be automated by the system instead of manual work. Our ability to leverage transactional level data. So if you can look at the granularity of single transactions, you will better understand consumer behavior and hence, will be able to better drive traffic and check. And to your point about DESIGNLINE and Blossom, it's going to allow us to gather much more intelligence around not only our third-party brands, but our private label brands as well, right? So we can optimize the merchandising portfolio, not only from a brand-specific perspective, but also from an individual salon perspective. It can vary based on demographics, it can vary based on local tastes and all of that. And lastly, the ability for us to have consumer test capabilities that will drive traffic and loyalty, right? So we've had, for example, our cost cutters brand has recently launched its loyalty platform. It's still very early days, but we're very optimistic about the potential for incrementality here. And we want all of our top 5, the Fab 5 brands to have some sort of loyalty program in the future that will be powered by OpenSalon Pro, right? So now that these capabilities are in place and live, and especially on the cost saving side, we're going to push OpenSalon Pro much more aggressively. And from now through the end of the year, it will become a brand standard for all of our brands and we will announce a system-wide mandate.

That's great. One follow-up on OpenSalon Pro. And maybe, Kersten, this is best for you, but the investment on the front end was quite high. With fully based comments of 1,000 salons potentially on the system here in the very near term, where are you in that pathway towards covering that cost on an annual basis? What's the stair-step look like as you look out over the next several quarters in terms of getting to a cost cover on an annual investment basis around OpenSalon?

Yes, good question. Unfortunately, we haven't disclosed the actual amount of what we've invested in, in OpenSalon Pro. But as we roll out OpenSalon Pro to our locations here within Regis Corporation, and then as we look even outside of Regis Corporation to continue to roll that out, the majority of that investment in OpenSalon Pro has been incurred. So going forward, the majority of that revenue stream, the monthly net revenue stream associated with OpenSalon Pro drops down to EBITDA.

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

Thank you, Mary. And I apologize everyone. I heard from a few of you that there have been a few technological issues on the audio side. We're going to post, obviously, the webcast to our website very soon. Thank you so much for your continued interest in Regis, and I look forward to updating all of you on our Q3 progress. Thank you, and have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.