Q1 2024 Regis Corp Earnings Call
Yeah.
Welcome to the <unk> quarterly earnings call, we will begin shortly.
Yeah.
[music].
Yeah.
Welcome to the Regis quarterly earnings call, we will begin shortly.
Okay.
[music].
Okay.
Okay.
[music].
Okay.
Good morning, and thank you for joining the <unk> first quarter fiscal 2024 earnings conference call I'm, a house business Jain Vice President 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 Christians up R. R.
Our company by five to help participants all.
After their prepared remarks, we will have time for questions.
Please use the chat feature or raise your hand feature to ask a question.
As a reminder, this conference is being recorded.
I would like to remind everyone, but 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 along with our presentation today can be found on our website Www Dot Regis Corp, Dotcom forward Slash Investor Relations.
Along with.
Reconciliation of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.
Today's slides are located in the investor presentation, and supplemental financial statements section of the Investor site.
With that I will now turn the call over to Matt.
Thank you Beth and good morning, everyone.
On today's call we will go through our Q1 fiscal 2024 results.
Quarter in which we continue to make financial progress.
In addition to our Q1 results, we announced the process to evaluate strategic alternatives with the intent of strengthening our balance sheet and position <unk> for future growth.
We determined now is the proper time to launch this process as we are doing so proactively during a time in which we are not in the fall.
We're projecting to be in default of any of our debt covenants, we have ample liquidity and we can take control of the process.
Wanted to take advantage of this window of time, we have to go broad and maximize our optionality as opposed to waiting until closer to maturity. We're a regular way refinancing may prove more challenging.
We believe this process is a solid way to evaluate several potential structures and complement our current work streams.
Where to best set read yourself for the future and maximize value.
And with this announcement I also feel that it's appropriate to provide some more context as to how we got here and why now.
Whether you have been following <unk> for a while.
Your new follower or investor in the company.
I believe it will be beneficial to recap the sequence of events, leading up to the current state.
<unk> was in the middle of two major business model shifts when the COVID-19 pandemic disrupted the business.
<unk> business model shifts being one the transition from a company owned Salon business to one that is fully franchised and too.
In house development and rollout of our proprietary point of sale technology product called open Salon probe.
The pandemic with highly disruptive to read as this business.
He has over 1800 company owned salons remained as of March 31 2023.
During a time of government mandated salon shutdowns and restrictions custom.
Customer traffic was highly impaired and slow to recover and the industry began experiencing significant labor issues.
Due to our size, we were unable to qualify for government funding and we had to drawn our revolver to fund the operational cash burn and manage through the uncertainty of the business.
As of December 31, 2019.
<unk> had $32 million of debt, including letters of credit net of cash.
Due to adjusted EBITDA losses that reached $79 million in fiscal year 2021.
Cumulative cash use of $190 million in fiscal 2020, and fiscal 2021, our debt, including letters of credit net of cash ended up around $190 million level that it is today as a result, as a result of navigating through those times.
Now I had mentioned on previous calls that when I stepped in as CEO in December of 2021.
We were nearing the completion of our transition to that fully franchise model.
We're still in the midst of rolling out open Salon Pro and we had a revolver maturity of March 2023 that was approaching.
At that time, we had $174 $5 million of debt, including letters of credit net of cash in the last 12 months adjusted EBITDA losses of close to $50 million.
Now as I mentioned during our fiscal 2023 recap call in August we are meeting a lot of progress building the business back in the last few years in the midst of what was and remains a challenging operating environment.
During that time, we completed the business transition to a fully franchise model.
We sold the open Salon pro product to ensure we have proper focus on our core business, which is hair care and not technology.
While simultaneously eliminating the cash burn associated with the development and support of the product.
We used the upfront proceeds from the sale to Delever and help our case for our refinancing with our lenders.
All culminating in an amending extending our credit agreement in August of 2022, while the business was continuing to turnaround and.
And right before what became a challenging credit environment.
While we acknowledge the amend and extend it wasn't the complete solution to our capital structure. It did offer us time to continue to execute on our plans and put <unk> in a better position financially from a P&L perspective.
Since then.
We've grown same store sales, albeit mainly through pricing.
We further wound down our loss, making company owned salons, we managed our G&A and Capex closely and ultimately grew our profitability.
We achieved a number of key milestones along the way such as positive adjusted EBITDA.
<unk> operating income for the first time since fiscal year 2017, and positive GAAP earnings per share during this quarter. The first time since fiscal year 2018.
We've put plans in place to address our core business and have been implementing our strategies and even announced an agreement to enter a new market in India.
At this point in time, we can say that our business is largely stable with last 12 months adjusted EBITDA of $25 million versus the adjusted EBITDA loss of 79 million that I mentioned to.
Earlier in fiscal 2021.
All of that being said.
While the business has stabilized the level of stabilization in comparison to our debt level of close to $190 million an amount that as I mentioned is due to navigating the effects of the pandemic still leaves a highly levered company.
The challenges, we have alluded to regarding labor customer behavior, and the resulting salon closures still remain business headwinds that we are constantly looking at new ways to solve for in this reset operating environment.
Combined those challenges with the rising rate environment, driving higher cash interest expense in.
In addition to the cash outflows related to the tail of our legacy business.
There is still work to be done in order to overcome those challenges and that is work that we're doing every day.
I've mentioned on every call that while we continue to see progress there is still much to do.
And this process is now one of the key work streams. In addition to the plans that we already have in place.
As we look out to the foreseeable future we continue to be focused on increasing our profitability.
That will not change.
We believe there is progress that <unk> made and we have solid plans in place that we developed in conjunction with our franchise partners to advance our brands and seek to address the challenges related to the shift in stylists and customer behavior.
And I have been clear that these take time.
All of this work will continue to be done as planned in conjunction with this process that is designed to proactively address the balance sheet side of the equation for the long term.
Which leads me back to today's announcement on exploring strategic alternatives.
This is another chapter in the turnaround that has been ongoing for years.
It is worth noting that we have been engaged and continued and constructive dialogue with our current lenders.
This is a process that will enable us to evaluate a wide range of options to ensure completeness.
The story in the business have improved from our last process in that region is on much more solid foundation versus before and I want to reiterate that this is the right window of time to do this when we have control over the situation.
Now continuing under the status quo as an option as well as I mentioned, we have plenty of liquidity and a full compliance of all our debt covenants.
If at the end of this process keeping on as his proves to be the best option and that is what we will do.
And I also know throughout the course of this we will likely get a lot of questions around specifics around which path may or may not be considered.
So all of that I will say this given how fluid this process will be.
Operator: welcome to the Regis quarterly earnings call. We will begin shortly.
Operator: Welcome to the Regis quarterly earnings call. We will begin shortly.
And any comments on specifics will be complete speculation.
All I can say is we're going to do our best to maximize value for all stakeholders, which of course includes shareholders and we will evaluate all of the various options appropriately.
Once again.
We strongly believe that this is the right move to make at the right time for Regus in order to best position us for growth.
And one last note on the strategic alternatives process before moving onto the results.
I just wanted to take a moment to address the franchisees and employees, who may be listening to this call and just hearing this announcement.
There is no change to the initiatives and plans we worked hard on putting together collaboratively over the past few years to strengthen our brands.
There hasn't been a lot of collective thought a lot of dialogue between us and we've advanced our working relationships and I want to reassure you that all of that still holds.
This will continue as usual as it relates to our brand initiatives.
And we will remain laser focused on our efforts to drive the core business and implement winning strategies to address the stylus customer and in Salon operations.
This process is intended to strengthen our ability to support all of your best as franchisor.
Now turning to our Q1 2024 results.
Q1 same store sales rose one 8% versus the prior year's first quarter and.
And while same store sales were up slightly.
Royalty and fee revenue, which represents our core business revenue were down around $700000 versus the prior year's first quarter due to the number of salon closures over the course of fiscal 'twenty three.
And despite lower royalty and fee revenue, we continue to improve our profitability.
Adjusted Q1, EBITDA on a consolidated basis was $7 5 million compared to $3 8 million in the prior year's quarter, a $3 $6 million improvement.
Our adjusted franchise EBITDA, eliminating the impact of our company owned salons was $8 million compared to $5 million in Q1 of fiscal 'twenty three.
The progress that we're making here continues to demonstrate the efforts that we've made to stabilize the business.
We reported our fifth quarter in a row of positive operating income of $7 4 million versus an operating profit of $2 5 million in Q1 fiscal 'twenty three.
The $5 million improvement.
And for the first time since fiscal 2018, we reported positive net income from continuing operations of $1 2 million and earnings per share of <unk> <unk>.
Biz McChain: Good morning and thank you for joining the Regis first quarter fiscal 2024 earnings conference call.
Compared to a loss of $1 8 million a year ago during Q1 'twenty three.
Biz McChain: I'm your host, Biz McChain, Vice President 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 Zupfer, are accompanied by slides to help participants follow along.
A total loss of $12 million for the full fiscal 2023 year.
From a cash flow perspective, we used $2 8 million in the quarter versus $5 $1 million a year ago our.
Our profitability gains were offset by increases in interest expense cash associated with the legacy company owned business as I mentioned earlier.
Biz McChain: After their prepared remarks, we will have time for questions. Please use the chat feature or raise your hand feature to ask your questions, as a reminder that conferences being recorded. I would like to remind everyone that the language on forward-looking statements include in our earnings release an AK filing also applied to our comments made on the call today. These documents, along with our presentation today, can be found on our website www.regiscorp.com forward slash investor relations, along with reconciliation of any non-gap financial measures mentioned on today's call with their corresponding gap measures. Today's slides are located in the investor presentation and supplemental financial statements section of the investor site.
As well as timing of payments that are specific to Q1 as well as investments that we're making into our business.
From a franchise Salon count perspective.
52 salons closed in Q1, putting our franchise Salon count at 4745.
Of the 52 closures 24, where supercuts 15, smart style and the remaining 13 from our portfolio brands.
The average volumes for these closures were $122000 and as I mentioned on previous calls. These closures are the byproduct of the challenging operating environment. We are in.
<unk> performance has been exacerbated by the labor constraints and customer traffic changes.
We continue to expect this rationalization of the portfolio and the focus is on ensuring that we optimize and get the most out of the footprint that we have going forward.
Matthew Doctor: With that, I will now turn the call over to Matt. Thank you, Biz, and good morning, everyone. On today's call, we will go through our Q1 SISCAL 2024 results, a quarter in which we continue to make financial progress.
The key drivers of our results during the quarter remain the work that we are doing the continually manage our G&A expenses and our company owned Salon footprint.
Matthew Doctor: In addition to our Q1 results, we announced the process to evaluate strategic alternatives with the intent of strengthening our balance sheet and position regists for future growth. We determine now is the proper time to launch this process. As we're doing so proactively during a time in which we are not in default, nor projecting to be in default, of any of our debt covenants, we have ample liquidity, and we can take control of the process.
Our G&A improvement of close to $3 million versus the prior year quarter.
And company owned Salon, EBITA improvement of $700000 year over year combined with the topline growth of our remaining stores enabled us to grow profitability. Despite the lower royalty and fee revenue due to salon closures.
Now regarding an update on annuity, which is perhaps the top initiative related to our Salon operations right now given the foundation of the platform sets for a personalized marketing and operational initiatives.
Matthew Doctor: We wanted to take advantage of this window of time. We have to go broad and maximize our optionality, as opposed to waiting until closer to maturity, where a regular way refinancing may prove more challenging. We believe this process is a solid way to evaluate several potential structures and complement our current work streams, in order to best set regists up for the future and maximize value.
We have crossed the 1000 salon threshold with a 1140 active locations.
As a reminder, while migration payments are part of the open Salon Pro transaction, we did receive $18 million of cash to date with another $2 million anticipated in December.
Matthew Doctor: In which this announcement, I also feel that it's appropriate to provide some more context that's how we got here and why now, whether you've been following regists for a while, or you're a new follower or investor in the company, I believe it will be beneficial to recap the sequence of events leading up to the current state. Now, regists was in the middle of two major business model shifts when the COVID-19 pandemic disrupted the business.
These upfront payments enabled us to pay down part of our debt leading up to the amend and extend last year and in addition to the upfront proceeds we are operating without the G&A and capex burden of product development.
Which combined were higher than the associated product revenue that we were taking in.
Matthew Doctor: Those business model shifts being one, the transition from a company owned salon business to one that is fully franchised, and two, the in-house development and rollout of a proprietary point of sale technology product called Open Salon Pro. The pandemic was highly disrupted to regist's business, as over 1800 company owned salons remained as of March 31st, 2020, during a time of government-mandated salon shutdowns and restrictions. Customer traffic was highly impaired and so to recover, and the industry began experiencing significant labor issues.
Additionally, as part of the transaction is annuity purchased open Salon pro from US and there are currently approximately 2000 salons running an open salon pro giving us a clear line of sight into over 3000 salons to run on the annuity and.
And given the ability to move this cohort due to the direct controls annuity has over the platform.
We are prioritizing those salons running on a third party system called Super Salon.
A system that franchisees have utilized preview and salon pro days of which there are approximately 1400 salons remaining running on that system, many of which have signed up to convert over to the annuity.
I've gotten a lot of questions around the speed and the ability for us to simply forced the conversion and to which I will answer that it is much more nuanced than that.
Matthew Doctor: Now, due to our size, we were unable to qualify for government funding, and we had to draw on our revolver to fund the operational cash burn and manage through the uncertainty of the business. As of December 31st, 2019, regists had $32 million of debt, including letters of credit, net of cash. Due to adjusted EBITDA losses that reached $79 million in fiscal year 2021, and a capital of cash use of $190 million in fiscal 2020 and fiscal 2021, our debt, including letters of credit, net of cash, ended up around the $190 million level that it is today as a result of navigating through those times.
This is a large scale change management exercise with close to 600 franchisees, who manage a group of corporate employees stylists.
The variations of back office processes, and permutations of how they run their business.
There is a delicate balance.
Between pushing and collaborating that we have been navigating.
And while the conversion has no doubt slower than we would've liked or even initially anticipated and communicated with the info that we have today.
As required based upon the work to be able to customize the product to meet the unique business needs of our franchisees and also guide that changed to what is already a challenging operating environment.
Matthew Doctor: Now, I had mentioned on previous calls that when I stepped in a CEO in December of 2021, we were nearing the completion of our transition to that fully franchise model. We were still in the midst of rolling out open salon pro, and we had a revolver maturity of March of 2023 that was approaching. At that time, we had $174.5 million of debt including letters of credit, net of cash, and the last 12 months adjusted EBITDA losses of close to $50 million.
We have made it clear that heading into the new calendar year. That's annuity is the required point of sale system for our franchisees.
And we believe that the timing of consolidating our salons onto this platform by the end of our fiscal year still holds.
And I would like to reiterate that we are currently living.
With the benefits of this transaction.
This was the right move for us to make and we wouldn't be where we are today had we not done it.
Matthew Doctor: Now, as I mentioned during our fiscal 2023 recap call in August, we have made a lot of progress building the business back in the last few years and the midst of what was and remains a challenging operating environment. During that time, we completed the business transition to a fully franchise model. We sold the open salon pro product to ensure we have proper focus on our core business, which is hair care and not technology.
And while our financial results continue to be largely driven by G&A and company owned Salon management.
We are focused intently on driving same store sales as we maintain our discipline on those key items.
<unk> will play a key role here, given the platform's functionality and ability to optimize the use of our data through CRM and loyalty efforts in order to drive more frequency.
Matthew Doctor: While simultaneously eliminating the cash bird associated with the development and support of the product, we used the upfront proceeds from the sale to de-lever and help our case for refinancing with our lenders. All culminating in an amending extending of credit agreement in August of 2022, while the business was continuing to turn around and right before what became a challenge and credit environment, and while we acknowledged the amending extend, it wasn't the complete solution to our capital structure.
We're testing various promotions to drive incremental visitation and are thinking of some larger scale more transformational marketing ideas to take some bigger swings are differentiating our brands.
I know that is a bit vague in it is vague on purpose because I want to ensure that we keep those ideas of differentiation close in an industry where products and services themselves are largely similar purely from a menu offering standpoint.
We are also placing an even greater focus on salon operations and brand standards, given the services nature of our business.
Matthew Doctor: It did offer us time to continue to execute on our plans and put regions in a better position financially from a P&L perspective. Since then, we've grown same-source sales, albeit mainly through pricing. We further wound down our loss-making company own salons. We managed our G&A and Capix closely and ultimately grew our profitability.
It is critical to start streamlining and holding even greater accountability of uniformity in our system to further strengthen our brands and ensure positive in salon experiences as we see from our data that friendliness and stylus skill are amongst the biggest drivers of customer satisfaction.
In addition, we're kicking off a project that is focused on high volume salons with the goal of taking those salons with solid foundation to the next level, which has the potential to yield returns for both our franchisees and for Regis.
Matthew Doctor: We achieved a number of key milestones along the way, such as positive adjusted EBITDA, positive operating income for the first time since fiscal year 2017, and positive gap earnings per share during this quarter, the first time since fiscal year 2018. We've put plans in place to address our core business and have been implementing our strategies and even announced an agreement to enter a new market in India. At this point in time, we can say that our business is largely stable.
And during the quarter. We also took our first step towards getting back on the track of Salon growth.
While we still have a way to go here as the focus has been and remains on driving the core business in order to create the right business case to accelerate new Salon builds we announced the supercuts brand will be entering India through a master franchise partnership with an existing franchisee within our system.
Matthew Doctor: With last 12 months adjusted EBITDA of $25 million versus the adjusted EBITDA loss of $79 million that I mentioned to earlier in fiscal 2021. All of that being said, while the business has stabilized, the level of stabilization and comparison to our debt level of close to $190 million and amounts that, as I mentioned, is due to navigating the effect of the pandemic still leaves a highly levered company. The challenges we have alluded to regarding labor, customer behavior, and the resulting salon closures still remain business headwinds that we are constantly looking at new ways to solve for in this reset operating environment.
As we continue to work on the business domestically, we see opportunity abroad. As many markets are fragmented with lack of a large scale player.
And hair care is just as much of a need as it isn't one.
There is opportunity that exists to bring our systems processes education tools technology offerings price point and operational know how to other geographies in India represents a great country to prove out the thesis.
Now part of the agreement our franchise partner will manage the territory locally and will build a minimum of 100 locations over the next five years and when built out this market has the potential to be an incremental contributor to profitability for regus.
Matthew Doctor: Combine those challenges with the rising rate environment driving higher cash, interest expense. In addition to the cash outflows related to the tail of our legacy business, there is still work to be done in order to overcome those challenges, and that is work that we are doing every day.
We see the success of India as a way to one enable even further growth in that country.
And to set the standard model for replication in other international markets. Our partner is aiming to get the first location opened by the end of March of 2024, and we look forward to this exciting new development for aegis and the Supercuts brand.
Matthew Doctor: I've mentioned on every call that while we continue to see progress, there is still much to do and this process is now one of the key work streams in addition to the plans that we already have in place. As we look out to the foreseeable future, we continue to be focused on increasing our profitability. That will not change. We believe there is progress to be made and we have solid plans in place that we develop in conjunction with our franchise partners to advance our brands and seek to address the challenges related to the shift and stylists and customer behavior.
Now before turning it over to Kersten to go through the financials in more detail.
I want to close by reiterating my confidence in the actions, we are taking to best position <unk> for the future.
By complementing the initiatives, we have in place to drive profitability with a strategic alternatives process aimed to address our balance sheet.
We are proactively covering our basis in order to best position <unk> for the future and to maximize value.
Matthew Doctor: And I've been clear that these take time. All this work will continue to be done as planned in conjunction with this process that is designed to proactively address the balance side of the equation for the long term.
Thank you for your interest in <unk> and I will now turn the call over to Kirsten.
Matthew Doctor: Which leads me back to today's announcement on exploring strategic alternatives. This is another chapter in the turnaround that has been ongoing for years. It is worth noting that we have been engaged in continued and constructive dialogue with our current lenders. This is a process that will enable us to evaluate a wide range of options to ensure completeness. The story and the business have improved from our last process and that reaches us on much more solid foundation versus before.
Thanks, Pat and good morning, the first quarter saw positive system wide same store sales increased operating income positive net income positive earnings per share and improved adjusted EBITDA. Overall, we are pleased with the health of our business.
During the first quarter in more detail and beginning with the income statement. The first quarter revenues were $53 $4 million and declined $8 5 million from the prior year.
This revenue decline was expected and relates primarily to a reduction in franchise rental income, which is a gross up of revenue and expense and has no impact on profitability.
Matthew Doctor: And I want to reiterate that this is the right window of time to do this when we have control over the situation. Now continuing under the status quo is an option as well. As I mentioned, we have play of liquidity and our full compliance of all our debt covenants. If at the end of this process keeping on as if proves to be the best option, then that is what we'll do. And I also note throughout the course of this, we will likely get a lot of questions around specifics around which paths may or may not be considered.
Additionally, transitioning out of company owned salons in product sales reduced revenue with minimal impact on profitability.
Royalty and fee revenue of $19 2 million, which represents our core business revenue was down approximately $700000 versus the prior years first quarter due to the number of salon closures during fiscal year 2023.
Matthew Doctor: To all of that, I will say this given how fluid this process will be in any comments on specifics will be complete speculation. All I can say is we are going to do our best to maximize values for all stakeholders, which of course includes shareholders and will evaluate all of the various options appropriately. And once again, we strongly believe that this is the right move to make it the right time for readers in order to best position us for growth.
System wide same store sales grew one 8% in the quarter.
Matthew Doctor: And one last note on the strategic alternatives process before moving on to the results. As I just want to take a moment to address the franchisees and employees who may be listening to this call and just hearing this announcement. There is no change to the initiatives and plans we've worked hard on putting together collaboratively over the past few years to strengthen our brands. There has been a lot of collective thought, a lot of dialogue between us and we've advanced our working relationships and I want to reassure you that all of that still holds.
Matthew Doctor: Business will continue as usual as it relates to our brand initiatives and we will remain laser focused on our efforts to drive the core business and implement winning strategies to address the stylist, customer and in salon operations. This process is intended to strengthen our ability to support all of you best as franchise or.
Matthew Doctor: Now, turning to our Q1 2024 results. In Q1, Save Store sales rose 1.8% versus the prior years first quarter, and Wal-Stame Source Sales were up slightly. Royalty and Fee Revenue, which represents our core business revenue, were down around $700,000 versus the prior years, first quarter, due to the number of salon closures over the course of fiscal 23. Despite lower Royalty and Fee revenue, we continue to improve our profitability. Adjusted Q1 EBITDA on a consolidated basis was $7.5 million, compared to $3.8 million in the prior years quarter.
First quarter.
The improvement relates primarily to lower head count and lower professional fees year over year.
R G and a run rate as a metric we monitor very closely Q1 is typically our lowest G&A quarter due to the timing of course.
Looking forward, we believe our annual run rate G&A will be in the range of $47 million to $50 million.
Our core franchise business achieved adjusted EBITDA of $8 million in the quarter, a 3 million dollar improvement compared to $5 million in the prior year quarter.
On an adjusted EBITDA basis, our company on segment lost just under a half a million dollars for the quarter and improved $700000 from the same quarter last year. The improvement is driven by having fewer lost generating company on salons in the current period as we are closing salons, either at least then or in negotiating a.
Matthew Doctor: A $3.6 million improvement. Our adjusted franchise EBITDA, eliminating the impact of our company on salons, was $8 million compared to $5 million in Q1 of fiscal 23. The progress that we are making here continues to demonstrate the efforts that we've made to stabilize the business. We reported our fifth quarter in a row of positive operating income of $7.4 million versus an operating profit of $2.5 million in Q1 fiscal 23. A $5 million improvement.
<unk> when it makes economic sense to do so.
Approximately two thirds of our remaining company on salons will come to Lisa by February of next year. So our company on Salon segment will have significantly less impact in the second half of our fiscal year 2024.
Turning to liquidity as of September 30th we had $42.4 million of liquidity, including $33.1 million are available revolve our capacity and $9.3 million of cash amongst that continued to remain stable and relatively unchanged from our last fiscal quarter.
Matthew Doctor: And for the first time since fiscal 2018, we reported positive net income from continuing operations of $1.2 million in earnings per share of three cents, compared to a loss of $1.8 million a year ago during Q1 23, and a total loss of $12 million for a full fiscal 2023 year. From a cash flow perspective, we used $2.8 million in the quarter versus $5.1 million a year ago. Our profitability gains were offset by increases in interest expense. Cash associated with the legacy company own business I mentioned earlier, as well as timing of payments that are specific to Q1 as well as investments that we are making into our business.
At September 30th 2023, our debt outstanding excluding deferred financing fees was $186.1 million. Additionally, we have $9.8 million of letters of credit outstanding.
We are in compliance with our debt covenants currently and we do not expect to violate any of the covenants during the term of our credit facility.
Additionally, we believe we have adequate liquidity to operate the business.
As Matt mentioned, we are announcing today that we are evaluating strategic alternatives with the intent of strengthening our balance sheet and positioning reaches for growth.
Matthew Doctor: From a franchise, it's a long count perspective. 52 salons close in Q1, putting our franchise to a long count at 4,745. Of the 52 closures, 24 were supercuts, 15 smart style, and the remaining 13 from our portfolio brands. The average volumes for these closures were $122,000. And as I mentioned on previous calls, these closures are the byproduct of the challenging operating environment we are in. And these salons performance has been exacerbated by the labor constraints and customer traffic changes.
As a reminder, due to accounting standards, our balance sheet shows approximately $350 million of operating lease liabilities related to liabilities associated with sub leasing our salons to our franchisees over the entire life of their respective Lisa.
These liabilities our service by our franchisees it should not be factored in to read this is that position. So long as a franchisees continued to pay their obligations as they have been.
<unk> is solely responsible for at least liabilities for corporate office space and the 66 remaining company on salons, which amounts to $10.7 million over the life of all the leases.
Matthew Doctor: We continue to expect this rationalization of the portfolio, and the focus is ensuring that we optimize and get the most out of the footprint that we have going forward. The key drivers of our results during the quarter remain the work that we are doing to continually manage our GNA expenses and our company own salon footprint. Our GNA improvement of close to $3 million versus the prior year quarter, and company own salon EBITDA improvement of $700,000 a year over a year, combined with the top-line growth of our remaining stores, enabled us to grow profitability despite the lower royalty and fee revenue due to salon closures.
And the first three months of the year, we use $2.8 million of cash from operations, which is a 2.2 million dollar improvement from the prior year the.
The improvement is due to our lower cost structure, partially offset by increased interest expense of approximately $1.6 million due primarily to higher variable interest rates on our bank debt.
Operating cash used in the quarter was driven by.
By close to $5 million of cash interest expense and close to $3 million related to several prepaid items that occur in the first quarter, such as insurance premiums and licenses. In addition to legacy insurance claims and rental payments on dark salon as well as working capital use related to investing in the marketing of our <unk>.
Matthew Doctor: Now, regarding an update on Zanote, which is perhaps the top initiative related to our salon operations right now, given the foundation the platform sets for our personalized marketing and operational initiatives. We have crossed the 1000 salon threshold with 1140 active locations, as a reminder, while migration payments are part of the open salon pro-transaction, we did receive $18 million of cash today, with another $2 million anticipated in December. These upfront payments enabled us to pay down part of our debt leading up to the men next end last year.
Brands and timing of cash received from add one collection.
The remaining use is driven by the timing of incentive compensation payments made during the first quarter that represents total incentive compensation for fiscal year 2023.
Operating cash use in Q1 is generally the highest for us due to the compensation payouts in prepaid expenses. However, we do continue to deal with longer tail items like rental payments on dark salons and workers compensation related to when we were primarily accompany on business.
Matthew Doctor: And in addition to the upfront proceeds, we are operating without the GNA and CapEx burden of product development, which combined were higher than the associated product revenue that we were taking in. Additionally, as part of the transaction, Zanote purchased open salon pro from us, and there are currently approximately 2,000 salons running on open salon pro, giving us a clear line of sight into over 3,000 salons to run on Zanote. And given the ability to move this cohort, due to the direct controls Zanote has over the platform, we have prioritized those salons running on a third-party system called Super Salon.
While these amounts are getting smaller and smaller there continues to be a tale that will wind down over the coming years.
We typically have our highest cashews quarter in the first quarter due to the prepaid expenses and incentive compensation payments.
Future cash use may be impacted by variability in interest rates that we cannot control.
Management remains committed to continued cash management and returning to cash generation.
Matthew Doctor: A system that franchisees have utilized preview open salon pro days, of which there are approximately 1,400 salons remaining running on that system, many of which have signed up to convert over to Zanote. Now, I've gotten a lot of questions around the speed and the ability for us to simply force the conversion, and to which I will answer that it is much more nuanced than that. This is a large scale change management exercise, with close to 600 franchisees who manage a group of corporate employees, stylists, with variations of back office processes and permutations of how they run their business.
This concludes my prepared remarks, I would like to thank you for your continued support and interest in <unk> I will turn the call back to <unk>, who will lead us through the Q&A.
Thank you person. Our first question is from Eric Peter a small cap consumer research. Please remember to Unmute Eric.
Okay can you hear me yeah, that's again.
Thank you.
Mhm congratulations on the Halo to progress your when you look at <unk> they'll overthrow those stores what is <unk>. What is the enabling you to do in terms of <unk> reached out to customers that you couldn't do before how did you view that as a potential driver going forward.
Matthew Doctor: There is a delicate balance between pushing and collaborating that we have been navigating. And while the conversion is no doubt slower than we would have liked, or even initially anticipated and communicated, with the info that we have today, it was required based upon the work to be able to customize the product to meet the unique business needs of our franchisees, and also guide that change through what is already a challenging operating environment.
Yeah, Eric Thanks for the question as well.
Throughout this a lot love of intervention Super foundational to that because of the lost a lot of things that weren't able to be done on prior systems.
I talked a lot about personalized to work today, it's very very easy to understand your your audience experienced your customer base.
Matthew Doctor: We have made it clear that heading into the new calendar year that Zanote is the required point of sale system for our franchisees. And we believe that the timing of consolidating our salons onto this platform by the end of our fiscal year still holds. And I would like to reiterate that we are currently living with the benefits of this transaction. This was the right move for us to make, and we wouldn't be where we are today had we not done it.
The requirements of data collection are much higher in strength and Zanotti from just so just being an audit alone Katherine way more customer data or just a good foundation <unk> ability to convert that customer data interaction or something but a super streamlined through the platform.
He is going in and and actually being proactive.
So just to send the individuals to setting settings based on a this person generally comes in at this time, we'll send them a rubber reminder, it a few weeks so I did forget it let it go.
Matthew Doctor: And while our financial results continue to be largely driven by GNA and company owned salon management, we are focused intently on driving same-store sales as we maintain our discipline on those key items. Zanote will play a key role here given the platform's functionality and ability to optimize the use of our data through CRM and loyalty efforts in order to drive more frequencies. We are testing various promotions to drive incrementally a visitation.
General blanket.
Permission lacrosse, hey for all cohorts sends a a text or an email over the course of X amount of time to remind them and enables reminders.
They're checking.
Sure. It's just a lot more of an ability to.
Speak one on one with the customer so we haven't had before in order to interact with them during the service before and after it prescribed frequency to drive a loyalty, it's usually a lot of great.
Matthew Doctor: And our thinking of some larger scale, more transformational marketing ideas, to take some bigger swings at differentiating our brands. I know that is a bit vague and is vague on purpose. I want to ensure that we keep those ideas of differentiation close in an industry, where products and services themselves are largely similar purely from a menu offering standpoint. We are also placing an even greater focus on salon operations and brand standards given the services nature of our business.
Personalized marketing initiatives around the so we can tap into even the idea of running a platform base loyalty program that is enabled.
As well other things beyond just the marketing side of things, but I think it's super important that I alluded to this in my comments is this notion of Solon operations in branch standards outside of reviews on Google and Yelp right now we don't have a lot of insight to this now.
Matthew Doctor: It is critical to start streamlining and holding even greater accountability of uniformity in our system to further strengthen our brands and ensure positive, in salon experiences as we see from our data that friendliness and stylish skill are amongst the biggest drivers of customer satisfaction. In addition, we are kicking off a project that is focused on high volume salons with the goal of taking those salons with solid foundation to the next level, which has the potential to yield returns for both our franchisees and for Regis.
Now, there's a lot of customer feedback.
No. The platform that is very streamlined where we can get right away that our franchisees operationalize on on the fly when they get that feedback on thanks to work on and we can call. It that we can correlate that the results retail or with your positive reviews.
Those prompts a already automatically upload those to Google and Yelp, which helps with digital footprint. So there's a lot of really great things.
Matthew Doctor: And during the quarter, we also took our first step towards getting back on the track of salon growth. While we still have a way to go here, as the focus has been and remains on driving the core business in order to create the right business case to accelerate new salon builds, we announced the SuperCuts brand will be entering India through a master franchise partnership with an existing franchisee within our system. As we continue to work on the business domestically, we see opportunity abroad as many markets are fragmented with lack of a large-scale player and hair care is just as much as a need as it is a want.
That can happen with this platform and.
It'll be way more strengthened once the entire system is on it first the 11 40 that at all today.
Okay.
Sounds great Uhm could you provide us you mentioned that you're getting $2 million in progress fees from Zoe what's remaining to be done in terms of potential for that.
Moreover, it's supposed to go for the dead is that still correct.
Yeah, that's that's still correct. So yeah, there's 2 million, which is part of the original.
As part of the original $20 million upfront purchase price.
Matthew Doctor: There is opportunity that exists to bring our systems, processes, education tools, technology offerings, price point, and operational know-how to other geographies. And India represents a great country to prove out this thesis. Now, pretty agreement, our franchise partner will manage the territory locally and will build a minimum of 100 locations over the next five years. And when built out, this market has the potential to be an incremental contributor to profitability for regions.
And then the remaining proceeds you know we had mentioned as part of the original transaction that there was about <unk>.
19 million of additional potential proceeds at that time that was based on a number of factors. The key one being the amount of <unk> migrated in our Salon count has gone down since that time. So you can kind of we haven't given what the exact payment is first along but you can kind of do some extra.
Matthew Doctor: We see the success of India as a way to one enable even further growth in that country and to set the standard and model for replication in other international markets. Our partner is aiming to get the first location open by the end of March of 2024 and we look forward to this exciting new development for regions and the SuperCuts brand.
Appalachian.
Approximately $19 million or so long count out the time and kind of take a look at where it is now and that will give you. Some view of what's what's left remaining to collect.
Okay.
And that does.
Sorry, but those go towards with it.
I know that you've been extended marketing materials for any more regularity changed some of the <unk> what has been the impact.
Matthew Doctor: Now, before turning it over to Kirsten to go through financials in more detail, I want to close by reiterating my confidence in the action we are taking to best position regions for the future. By complementing the initiatives we have in place to drive profitability with a strategic alternative process aimed to address our balance sheet, we are proactively covering our basis in order to best position regions for the future and to maximize value.
Impact of that and you know what also has been now that you are done for almost a year now and storm off in stores <unk>, how is that continued to expand.
So those are really strong.
Foundational items that we are putting into place I would say, it's a little hard to track the exact impact of that because as opposed to some sort of trackable.
Kersten Zupfer: Thank you for your interest in regions, and I will now turn the call over to Kirsten. Thanks, Matt, and good morning. The first quarter saw positive system-wide same-source sales, increased operating income, positive net income, positive earnings per share, and improved adjusted EBITDA. Overall, we are pleased with the health of our business.
Customer that came in and doing any certain things you know.
There's nothing trackable on on a poster or sinus and collateral, but can say okay. This is exactly what drove this customer behavior to that that being said.
We do think things like that are complete table steaks and so our job is to continue to do them.
Kersten Zupfer: Reviewing the first quarter in more detail in beginning with the income statement, the first quarter revenues were $53.4 million in declined eight and a half million dollars from the prior year. This revenue decline was expected and relates primarily to a reduction in franchise rental income, which is a growth of a revenue and expense and has no impact on profitability. EDITIONALY Transitioning Out of Company Owned Salons and Product Sales Reduced Revenue with minimal impact on profitability.
And ensure that are done well the other side of that equation is again I kind of mentioned and alluded to brand standards is not just kind of rolling this out.
But at this point, we've kind of more shifted towards.
That they're used and they're used properly so we've kind of.
Senate around it's important to have this out there let's have it out there.
Let's get a practice of using it now let's ensure that there's use of it. So there's gonna be a lot of focus on ensuring that our franchisees are properly using these tools that we have out. There are also does us no. Good to have them out there to have around their six so it's really at this point in time, ensuring the uptake of those tracking the uptake and there'll be able.
Kersten Zupfer: Royal TNC Revenue of $19.2 million, which represents our core business revenue, was down approximately $700,000 versus the prior year's first quarter due to the number of salon closures during fiscal year 2023. System-wide, same-store sales grew 1.8% in the quarter. We reported GAAP operating profit of $7.4 million. The increase in GAAP operating profit of $5 million was driven by our focus on controlling GNA and the wind-down of loss-generating company Owned Salons. We continue to produce operating profit each quarter and we expect that trend to continue.
To have a little bit of a better sense of okay. We know X Y Z franchisees are using this has its intended Guido xyz maybe are not so then we can now start correlating to see which salons that are using it properly versus those that are not and come up with data that way, which will even help drive further adoption of this.
Programs as well.
Kersten Zupfer: We reported positive net income of $1.2 million from continuing operations and earnings per share of $3 cents compared to a loss of $1.8 million a year ago during Q1 of 2023, and a loss of $11.3 million for the full fiscal 2023 year. This is the first time we have positive earnings per share since fiscal year 2018.
And the last question in terms of inflation and the ability to raise prices are now that you mentioned previously that.
A lot of the games in Com has been installation on price freezing is that still something that we should be thinking about in terms of the driver here or is that gonna slow down.
How should you thinking about going forward I guess as the overall drivers of the business and shop.
Comes with that thank you yeah no. Thanks, Eric.
Kersten Zupfer: Now let's turn to our adjusted results, which eliminates the noise and the reported results. On an adjusted basis, first quarter consolidated EBITDA was $7.5 million compared to $3.8 million in the prior year's quarter. The $3.6 million improvement was driven by lower GNA and the wind-down of loss-generating company Owned Salons. Our adjusted GNA was $10.7 million for the first quarter in improvement of $2.9 million from the prior year first quarter. The improvement relates primarily to a lower head account and lower professional fees year over year.
That piece that has been <unk>.
We know we need to start moving.
The needle on customer traffic, that's an equation that has been hard to solve for a very long time in the game Miss Chaves reset a little bit through the Pentagon got how often people go where people are going what the considerations are to visit so yes. So we have a we are testing a number of things out there to really optimize our customer accounts.
Try to drive as much productivity through increased customer accounts <unk>.
<unk> through traffic driving initiatives, such as promotions and other things of that nature, which will help I mean, those will be incremental and when we find et cetera around those that seemed to make the most impact will look to do that at a much broader scale now beyond that cause I kind of mentioned on the call and I was vague.
Kersten Zupfer: Our GNA run rate is a metric we monitor very closely. Q1 is typically our lowest GNA quarter due to the timing of cost. Looking forward, we believe our annual run rate GNA will be in the range of $47 to $50 million. Our core franchise business achieved the adjusted EBITDA of $8 million in the quarter. A $3 million improvement compared to $5 million in the prior year quarter. On an adjusted EBITDA basis, our company own segment lost just under a half a million dollars for the quarter, and improved $700,000 from the same quarter last year.
About this.
Those are all good incremental things and they should be done and I think they will have an impact but I do think there are other means and it's a good time for us to take some bigger swings of sources of differentiation that run beyond traditional promotional campaign.
Campaigns, and et cetera, bigger swings to move the needle and like I said versus being very specific given.
Kersten Zupfer: The improvement is driven by having fewer lost-generating company Owned Salons in the current period as we are closing funds either at least then, or negotiating a bio when it makes economic sense to do so. Approximately two-thirds of our remaining company Owned Salons will come to lease on by February of next year, so our company Owned Salon segment will have significantly less impact in the second half of our fiscal year 2024.
How important uniqueness and speed is in this industry, rather kind of let you know the whole working on those things and any sort of specifics around those things. However, once we start actually implementing enrolling them out over the next call at six to eight months, we can definitely start talking about them more.
As are showing up foreign markets.
Okay rats and good luck for the holiday.
Thank you.
Kersten Zupfer: Turning to liquidity, as of September 30th, we had $42.4 million of liquidity, including $33.1 million of available revolver capacity and $9.3 million of cash. Amounts that continue to remain stable and relatively unchanged from our last fiscal quarter. At September 30th of 2023, our debt outstanding, excluding deferred financing fees, was $186.1 million. Additionally, we have $9.8 million of letters of credit We are in compliance with our debt covenants currently and we do not expect to violate any of the covenants during the term of our credit facility. Additionally, we believe we have adequate liquidity to operate the business.
With no further questions, we will conclude the call by thinking everyone for joining.
And have a great day.
Goodbye.
Kersten Zupfer: As Matt mentioned, we are announcing today that we are evaluating strategic alternatives with the intent of strengthening our balance sheet and positioning Regis for growth. As a reminder, due to accounting standards, our balance sheet shows approximately $350 million of operating lease liabilities related to liabilities associated with sub-leasing our 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 to Regis's debt position, so long as the franchisees continue to pay their obligations as they have been. Regis is solely responsible for lease liabilities for a corporate office space and the 66 remaining company on salons, which amounts to $10.7 million over the life of all the leases.
Kersten Zupfer: In the first three months of the year, we use $2.8 million of cash from operations, which is a $2.2 million improvement from the prior year. The improvement is due to our lower cost structure partially offset by increased interest expense of approximately $1.6 million due primarily to higher variable interest rates on our bank debt. Operating cash used in the quarter was driven by close to $5 million of cash interest expense and close to $3 million related to several prepaid items that occur in the first quarter, such as insurance premiums and licenses, in addition to legacy insurance claims and rental payments on dark salons, as well as working capital used related to investing in the marketing of our brands and timing of cash received from ad fund collection.
Kersten Zupfer: The remaining use is driven by the timing of incentive compensation payments made during the first quarter that represents total incentive compensation for fiscal year 2023. Operating cash used in Q1 is generally the highest for us due to the compensation payouts and prepaid expenses. However, we do continue to deal with longer tail items like rental payments on dark salons and workers' compensation related to when we were primarily a company owned business. While these amounts are getting smaller and smaller, there continues to be a tail that will wind down over the coming years.
Kersten Zupfer: We typically have our highest cash use quarter in the first quarter due to the prepaid expenses and incentive compensation payments. Future cash use may be impacted by variability and interest rates that we cannot control. Management remains committed to continued cash management and returning to cash generation.
Kersten Zupfer: This concludes my prepared remarks.
Kersten Zupfer: I would like to thank you for your continued support and interest in readers.
Biz McChain: I will turn the call back to Biz who will lead us through the Q&A. Thank you, person.
Matthew Doctor: Our first question is from Eric Beater of Small Cap Consumer Research. Please remember to unmute Eric. Okay, can you hear me? Yes, again. Great, thank you, so congratulations on making a lot of progress here. When you look at to noting now over a thousand stores, what is thousands of lawns? What is that enabling you to do in terms of CRM and reaching out to customers that you couldn't do before? And how do you view that as a potential driver going forward?
Matthew Doctor: Eric, thanks for the question that's Matt. Yeah, we're spoken about this a lot and as we mentioned, it's super foundational to that because it unlocks a lot of things that weren't able to be done on prior systems. I talked a lot about personalized marketing. It's very, very easy to understand your audience base, your customer base, the requirements of data collection are much higher and stringent in the node. So just being on it alone, we're capturing way more customer data just as a foundation.
Matthew Doctor: And the ability to then convert that customer data into action is something that is super streamlined through the platform as easy as going in and actually being proactive on messages to send individuals to setting settings based on, hey, this person generally comes in at this time, let's send them a reminder in a few weeks, set it, forget it, let it go. General blanket permission across, hey, for all cohorts, send them a text or email over the course of X amount of time to remind them and enables reminders of that their check-in is there.
Matthew Doctor: It's just a lot more of an ability to speak one-on-one with the customer that we haven't had before in order to interact with them during the service before and after it to drive frequency, to drive loyalty. So there's a lot of great, you know, just personalized marketing initiatives around that that we can tap into. Even the idea of running a platform-based loyalty program, that is enabled on Zanote as well. Other things, beyond just the marketing side of things, but I think it's super important and I alluded to this in my comments as this notion of salon operations and brand standards.
Matthew Doctor: Outside of reviews on Google and Yelp right now, we don't have a lot of insight to this. Now there's a lot of customer feedback through the Zanote platform that is very streamlined that we can get right away that our franchisees and operationalize on the fly when they get that feedback on things to work on, and we can correlate that, we can correlate that to results, we can, when we get positive reviews, there's prompts to automatically upload those to Google and Yelp, which helps with digital footprint.
Matthew Doctor: So there's a lot of really great things, you know, that can happen with this platform. And you know, it'll be way more strengthened once the entire system is on it versus the, you know, 1140 that are out of the day.
Matthew Doctor: Okay, sounds great. You mentioned that you're getting $2 million in progress fees from Zanote. What's remaining to be done in terms of potential for that? I remember it's supposed to go for the debt. Is that still correct? Yeah, that's still correct. So yeah, there's $2 million, which is part of the original, is part of the original $20 million upfront purchase price. And then the remaining proceeds, you know, we had mentioned this part of the original transaction that there was about 19 million of additional potential proceeds at that time that was based on a number of factors.
Matthew Doctor: The key one being the amount of salon that migrated, now our salon count has gone down since that time. So you can kind of, we haven't given what the exact payment is per salon, but you can kind of do some extrapolation of, you know, approximately 19 million, our salon count at the time, and kind of take a look at where it is now, and that'll give you some view of what's left remaining to collect.
Matthew Doctor: Okay I know that you've been expanding marketing materials, bringing more regularity to some of the in-store marketing. What has been the impact of that and what also has been now that you are done for almost a year now in store-mark in stores teaching, how does that continue to expand? Yeah, so those are really strong foundational items that we've put into place. I would say it's a little hard to track the exact impact of that because as opposed to some sort of trackable customer that came in due to certain things, there's nothing trackable on a poster or a signage and collateral.
Matthew Doctor: I can say, okay, this is exactly what you're of this customer behavior to that. That being said, you know, we do think things like that are complete table stakes and so our job is to continue to do them and ensure that they're done well. The other side of that equation is, again, I kind of mentioned and alluded to brand standards, it's not just kind of rolling this out but at this point we've kind of more shifted towards that they're used and they're used properly.
Matthew Doctor: So, you know, we've kind of set it around. It's important to have this out there. Let's have it out there. Let's, you know, get a practice of using it. Now, let's ensure that there's use of it. So there's going to be a lot of focus on ensuring that our franchisees are properly using these tools that we have out there or else it does us no good to have them out there to have them out their stakes.
Matthew Doctor: So it's really at this point in time ensuring the uptake of those, tracking the uptake, and then we'll be able to have a little bit of a better sense of, okay, we know XYZ franchisees are using this as it's intended. We know XYZ maybe are not. So then we can now start correlating to see which salons that are using it properly versus those that are not and come up with data that way, which will even help drive further adoption of those programs as well.
Matthew Doctor: Great. And the last question, in terms of inflation and ability to raise prices, I know that you mentioned previously that a lot of the gains and cons has been in inflation and on price raising. Is that still something that we should be thinking about in terms of the driver here? Or is that going to slow down? How should we think about going forward? I guess as the overall drivers of the business in time in terms of that.
Matthew Doctor: Thank you. Yeah. Well, thanks Eric. And on that piece, it has been, right? And we know we need to start moving the needle on customer traffic. That's an equation that has been hard to solve for a very long time. And the game has changed, we've set a little bit through the pen to everyone how often people go, where people are going, what the considerations are to visit. So yes, so we have a, we are testing a number of things out there to really optimize our customer accounts, try to drive as much productivity through increased customer accounts through, you know, traffic driving initiatives such as promotions and other things of that nature, which will help.
Matthew Doctor: I mean, those will be incremental. And when we find and center around those that seem to make the most impact, we'll look to do that in a much broader scale. Now, beyond that, as I kind of mentioned on the call, and I was vague about this, those are all good incremental things and they should be done. And I think they will have an impact. But I do think there are other means.
Matthew Doctor: And it's a good time for us to take some bigger swings of sources of differentiation that run beyond traditional promotional campaigns, et cetera, bigger swings to move the needle. And like I said, versus being very specific given how important uniqueness and speed is in this industry, rather kind of let you know that we're working on those things and any sort of statistics around those things. However, once we start actually implementing and rolling them out over the next call, it's six to eight months, we can definitely start talking about them more as they're showing up more in market. Thank you.
Operator: With no further questions, we will conclude the calls by thanking everyone for joining and have a great day. Good Bye.