Good morning, and thank you for joining the Regis Third Quarter 2021 Earnings Release Conference Call. All participants are in a listen-only mode. After the prepared remarks by our Chief Executive Officer, Felipe Athayde; and Chief Financial Officer, Kersten Zupfer, will have time for questions. Please use a chat feature or raise your hand feature to ask a question. Joining Felipe and Kersten are Amanda Rusin, our General Counsel; and Jim Lain, our Portfolio Brands, President. I am your host, Biz McShane, AVP, Finance. As a reminder, this conference is being recorded. Before 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 filing also apply to our comments made on the call today. These documents can be found on our website, www.regiscorp.com/investorrelations, along with any reconciliation of non-GAAP financial measures mentioned on today’s call with our 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. Q3 of fiscal year 2021 has been an important quarter when it comes to progress on key initiatives that are critical to Regis’s long-term business model as a technology-enabled, fully franchised, asset-light organization. And while the effects of COVID-19 are still ongoing and evident in our results, we remain confident about our business and our brands getting back on track as we emerge from the pandemic. Before we jump into our key initiatives, I’ll focus on recent sales trends and provide some color on consumer behavior. Outside of government-imposed restrictions and closures, which have been most prominent in California and Ontario, we continue to see a very linear correlation between traffic counts and the level of disruption to people’s daily routines, such routines being typical demand drivers for hair salon services. Despite the challenges of looking at comp figures as we start to lap the pandemic, we have seen an important quarter-over-quarter recovery in comp traffic to the magnitude of 10 points. Furthermore, in states where daily routines have been disrupted the least, such as Texas or Florida, comparable sales figures are performing 5 to 15 points better than most restricted states, such as California or Massachusetts. We also see a very linear correlation between urban density and traffic counts with denser areas such as downtown locations performing significantly worse than suburban locations, which is also an important proxy for the impact of daily routine disruptions as customers work-from-home. During the month of April, we conducted extensive research to assess what the return to normal in hair care looks like and discovered some key learnings. For those who have returned to salons, most are currently spending what they would have spent before the pandemic. Those spending more are fixing…

Thanks, Felipe, and good morning. Yesterday afternoon, we reported on a consolidated basis, third quarter revenues of $100 million, which represented a 35% decrease from the prior year. This decrease is consistent with our transition to an asset light franchise model and also reflects lower traffic levels, which are primarily the result of the COVID-19 pandemic. California and Ontario experienced government-mandated closures for most of January and into February, which also contributed to the decline in revenue. These locations accounted for approximately 15% of our fleet. In Q3, we reported a decline in system-wide comps of 21%. While system-wide comps were down 21% in the quarter, we are pleased that system-wide comps improved approximately 11% from down 32% in Q2 to down 21% in Q3. We reported an operating loss of $19 million during the quarter, which includes a $5 million non-cash inventory reserve charge associated with the change in our merchandising strategy that Felipe just described. Third quarter consolidated adjusted EBITDA loss was $20 million, which is $26 million lower versus Q3 of 2020 and was driven primarily by the decrease in the gain associated with the sale of company-owned salons of $14 million and the planned elimination of the EBITDA that had been generated in the prior year period from the net 519 company-owned salons that have been sold and converted to the franchise portfolio over the past 12 months. In Q2 2021, our adjusted EBITDA loss was $18 million. However, when normalizing EBITDA for the loss from additions in both periods and onetime non-cash inventory reserve charge in the third quarter of fiscal 2021, adjusted EBITDA for Q3 was a loss of $10 million versus a loss of $14 million in Q2, representing an improvement of $4 million from Q2 to Q3 due to improved comps and…

Thank you, Kersten. [Operator instructions] Our first question is from Laura Champine from Loop Capital. Please go ahead, Laura.

Thanks for taking my question. It is really on the transitions to a franchised model. As you decide which stores just are not suitable to be franchised, kind of where are you setting the hurdle rates for the stores that you – or the salons that you intend to vendition as opposed to the ones that will just close?

Hi, Laura, it’s Kersten. I’ll take that question. As it relates to the salons that we don’t expect to vendition, some of those, contractually, we cannot vendition. And then others, there’s a couple of different components that we look at when looking at those salons: one of which is location, other is the economics of that particular salon, and then also, the brand also plays in. So each salon that we look at is unique, but there isn’t a specific like threshold in terms of economics that just pushes it over to one side or the other. It’s a combination of many factors in determining whether or not we should vendition those locations.

And, hey, Laura, Felipe here. So just to give you more clarity on that. To Kersten’s point, it’s not that we have a hurdle rate for an individual salon, but rather, we try to build healthy viable portfolios to the incoming franchisees, right? So a good example to give you. We had a 60 salon transaction in one of our geographies, which we end up making into a 160 salon transaction, right? So we added 100 salons to a portfolio of 60, which we made into 160. If you look at this delta of 100 salons that were added, 40 of them probably would have been not viable on a stand-alone basis, right? Probably, these would have led to the closure of those 40. But the aggregate portfolio of 160 is very viable. It’s a healthy one. It provides the incoming franchisee with a very interesting position from where to consolidate with the opportunity of acquiring franchisees in those geographies, in the surrounding areas and also a good position from where to grow greenfield. So we have this very holistic portfolio centric view, and that’s how we’ve approached them. So to Kersten’s point, a lot of those 250 to 300 salons that we expect to remain in opco and then run off the leases from there, either we could not contractually transfer or we believe that as part of portfolios, they probably wouldn’t have been viable to the health of our franchisees. So we want to make sure that our franchisees are going to be into a very viable position moving forward economically, so they can prosper and grow.

Got it. And this just maybe mechanics on a business that I think you’re discontinuing anyway. But it looks like for your company-owned stores, the product sales were actually loss-creating, so the gross margin looks negative if I go through your Q today. What drove that? And how could we – any kind of pointers you can give us to model the wind-down of your in-house-managed product line would be helpful.

Laura, the – Laura, it’s Kersten. The largest driver of that is the inventory reserve that we recorded in the quarter to the tune of $5 million. So that’s the largest driver of that cost of sales, non-cash one-time charge that we took in the quarter.

Got it. Thank you.

Thank you, Laura.

Okay. Our next question is from Steph Wissink from Jefferies. Please go ahead.

Hi, it’s Grace Menk on for Steph. Can you hear me okay?

Yes, we can. Thank you.

Great. So I have a couple of questions. The first being on the monthly cadence that you saw in the quarter. So within that down 20% number, was there an acceleration into March? Or any color you can give there?

Hi, Grace, it’s Kersten. Yeah, as it relates to kind of the month-to-month progression in comps, we kind of sought in the similar range for the entire quarter, maybe a little bit of recovery in January, February and into March but nothing significant.

Okay, great. Thanks. And then, pivoting to the rollout of the OpenSalon Pro, which appears to be ahead of plan, can you remind us how that value flows through the P&L? Is it in royalties and fees? Is there a pass-through for hardware sales?

Yes. So again, this is Kersten. Two components to this. There’s the hardware component. So franchisees are purchasing the hardware when they migrate to OpenSalon Pro. That’s coming through the royalties and fees line. And then, the other component of it is the monthly subscription. So that also is a – for each location, they pay a monthly subscription that also runs through the royalties and the fees line in the P&L.

Okay, got it. Thank you. That’s helpful. And then, on G&A, can you just give us a framework for what level of G&A you need to support the business and how you think about the dollars per salon in the future periods?

Yes. As we mentioned in the call, we’re still wrapping up the ZBB process and going through – I don’t know how familiar you are with how that process works, but we’re going through what we kind of call negotiations in terms of the G&A spend for next year and future years. So at this point, I’m asking people to hold tight until we can share that information in our fourth-quarter earnings call.

Okay, that makes sense. Thanks. And then, lastly, can you share more about…

Hey, Grace, so just a quick comment, right? So the balance here is, look, to adjust the G&A to the current realities of the business while still keeping our capabilities to grow from here and have a sustainable level of support to our franchisees, right? So that’s the balance that we’re going to strike. To Kersten’s point, please hold on until Q4. We’re not going to be able to share with you with more details, but the process is very much on track, and it’s been very meticulous so far.

Okay, thank you for that color. And then, just lastly, if you could share some more about the external distribution partnership for product and how the economic benefit goes to Regis. And then, do you get a referral fee or sales loyalty for the business you direct to the distributor?

Yes, hey, Grace, Felipe here. So look, since we’re still in negotiations with the partners, I mean, we prefer not to disclose too much right now about the model and the economics, but more to come later. As we finalize those deals, we’re going to come up with a press release kind of announcing a little bit more of how this is going to play out, but we’re still the in process. But the important thing here is we are changing the model right away from being wholesale distributors ourselves such that we can focus on our core business, which is managing brands and managing a franchise system, right? We’re going to leave products in the hands of partners that can help our franchisees with much stronger sales support, stylist education. We’re going to focus a lot on our private-label brands as well, which are more profitable to our franchisees, right? So we’re going to focus on the core of what we do as a franchise company and then have merchandise in the hands of the experts here. But as soon as we finalized those deals, we will offer you more color.

Great. Thank you so much.

Sure.

That concludes our question-and-answer. We thank you for joining us this morning. A reminder that this webcast recording will be available on our website later today. Thank you, and have a great day.