Q4 2019 Earnings Call
Good day, ladies and gentlemen, you are currently on hold for today's conference call. At this time, we were seven audience.
Shortly.
I appreciate your patience sometimes.
Thank you.
Ladies and gentlemen, thank you for standing by welcome to the <unk> Regis Corporation fiscal 2019 fourth quarter earnings call. My name is John and I will be your conference facilitator today at this time all participants are in a listen only mode.
Following management's presentation, we will conduct a question answer session.
She would like to ask a question. During this time. Please press Star then one on your push button telephone if you wish to withdraw your question. Please press star followed by two as a reminder, this call is being recorded for playback and will be available by approximately 12 PM central time today.
I'll now turn the conference call over to Kirsten <unk> Senior Vice President of Finance. Please go ahead.
Thank you John Good morning, everyone and thank you all for joining us on the call with me today, we have Sinclair, our Chief Executive Officer, Andrew will Echo, our executive Vice President and Chief Financial Officer, Eric Bakken President of our franchise segment and Amanda Robertson, Our general counsel before turning the call over to Hugh there are a few housekeeping items to address.
First today's earnings release and conference call include forward looking statements with it 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 our most recent 10-Q and June 32019, 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 this morning in 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 as a substitute for and should that 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 this morning's release, which is available on our website at www Dot Regis Corp. Dotcom Flash Investor Relations.
And lastly, I would like to remind everyone of the accounting changes related to revenue recognition that we adopted in the first quarter of this year all of the periods presented this morning have been adjusted for the change and we have provided revised historical financial statements on our website for your reference.
With that I will now turn the call over to Hugh Thank you Kirsten and good day everyone.
When I joined Regis in April of 2017, my aspiration was to develop a transformational enduring strategy to reinvigorate our company.
Our directors wanted me to focus on making the right choices for the long term value of the business and our core constituents, our shareholders franchise owners customers and employees.
I believe the board demonstrated their commitment to a longer term view by granting me options with a 10 year term.
You may remember.
During my first year, we transferred the underperforming mall based business to TPG and closed nearly 600 underperforming salons at Walmart.
These were frankly tactical decisions not to stabilize the business removed the distraction and de risk. The company. So we could focus on developing a long term strategy for Regis.
Andrew has an encouraging TPG update later in the call. This morning.
I also collaborated with the board to create an incentive plan for the rest of the management team that align their personal financial interest with me.
And our other shareholders.
I am pleased to report that our Regis team and our franchise partners have been successfully executing.
A bold vision I believe we all share the key elements include converting our business to a capital light franchise platform and investing in the future state through disruptive technology.
Differentiated marketing and advertising industry, leading stylist recruiting and training.
Optimizing our supply chain capabilities, introducing trend driven merchandise.
And establishing the core competencies needed to support the growth of our franchise portfolio.
When developing a multi year transformational strategy for the business. Our analysis has suggested that a fully franchised.
Salon portfolio would earn a much higher and sustainable return on capital.
And provide the most certain path to profitable growth.
We believe that if we could restructure the company in that manner. It would require very little future capital investment in the salons.
And ultimately generate substantial free cash flow.
As a result, after our restructuring and stabilizing efforts in 2017 in 2018.
The year 2019 became an important opportunity to determine if we were in fact on the right path to prove our hypothesis for the business.
So let me share a few thoughts with you regarding what we learned during the past year during 2019.
We discovered that our existing franchisees did have a high interest in buying our company owned salons.
At prices that facilitated our strategic plan.
We were able to attract many new franchisees into the system. So we're well capitalized and have proven track records of success.
Our personnel developed the expertise and internal programming required to successfully execute.
The timely sale and transition of company owned salons to franchisees.
And in tandem our management learn to judiciously eliminate.
Non essential GNS costs, both here corporately and in the field.
We discovered that we could generate enough cash to self fund investments and our future state initiatives.
And our franchisees have continued to run great local businesses.
Which deliver a consistent service experience.
At the end of our financial year. We then took a hard look at our regional strategic hypothesis, our teens first re examine.
The 2019 performance of our company owned salons.
On a pro forma basis as if they had been operated on an alarmist linked basis paying what our owners pay for franchisees for franchise fees and merchandise.
We then look at the 2019 performance of our franchise business.
Modeling the DNA required to fully support our franchisees as a standalone entity.
And when considering our 2019 performance and creating these pro formas for a potential future state.
We attempted to be realistic in all respects.
Please take a look at the slide we just posted in our sharing on Webex and that we will post on our IR website.
After this call.
You will see that this pro forma analysis restates, our actual performance and Thats why 19, and we believe demonstrates.
But on an arm's length basis, when comparing our current DNA load the company owned Salon portfolio did not.
Did not generate an economic return in fact, we estimate that in 2019, our company owned salons consumed approximately.
32 million of capital after we pro forma adjusted the F. why 2019 results to reflect a hypothetical fully franchise Regis Salon portfolio in other words in simple terms our company owned salons represented an inferior use of our capital.
However, in a franchise model the historical DNA costs needed to manage these dispersed operations and brands would be substantially eliminated.
And be replaced with more associate a more efficient local owners and operators.
What we have found overtime is that our local franchise owners can operate these salons far more effectively than any corporate field organization.
No matter, how well intended we may be a large company simply cannot replicate the commitment of a local owner with skin in the game, who is the person closest to the operations and is interacting personally with our stylists and our paying customers.
One economic proof point that supports our thesis is that new and existing franchisees paid us approximately $94.8 million for 767 salons.
In fiscal 2019, while also committing to grow their base with new Salon openings over the next few years and purchase merchandise from us going forward.
We believe that our investment in our franchise salons as partly based on the quality of our personnel.
The support we provide and the quality of our brands and into the case of our existing franchisees their preference for growing their salon unit count opening multiple units often provides our experienced franchisees an opportunity to create a meaningful number of jobs in their local communities.
And work with their families.
Social good we are proud to foster.
So in summary, our analysis confirmed that we had a capital intensive business that didn't earn its cost of capital on the one hand, and a capital light business that generated all of the cash economics for the company on the other.
As well as providing a viable platform for future growth.
Of course as any operator on the call knows there is a big difference between hypothetical business analysis and the effective execution of a well considered plan that leads to measurable improvement.
In the financial performance of the business. We therefore spent the past year 2019 stress testing the key elements of our strategy to determine if we could in fact successfully execute the sale of company owned salons in total number of transactions at pricing levels that appropriately reflect the value of the assets and what the cadence that would enhance shareholder value.
And facilitate our transformational strategy.
The total number of Salon sold the price received for the asset and the cadence.
We learned in 2019 that we could do it and we believe we did it well.
When I arrived in 2019, approximately 28% of the company's salons were franchised.
At the close of 2019, 56% of our Salon portfolio is franchised.
I believe this transformational performance is a credit to the efforts of our outstanding Regis employees.
And the capabilities of our growing number of franchise partners.
Moreover, at this time over 1300 salons or approximately 48% of the remaining company owned salons are in various stages of negotiation to be purchased by new or existing franchisees.
Although we certainly expect these transactions to close given the potentially uncertain conditions in the external environment and other factors things could still potentially change.
After considerable analysis and consideration and given the results of our stabilization efforts in 2017 and 2018.
And the successful execution of of evolving franchise strategy. In 2019, we have now reached a decision to embrace a fully franchise model.
We do believe this is the optimal path forward to maximize performance for our shareholders franchise owners customers and employees.
From our experience so far we believe we can estimate the timing of our transition to a fully franchise platform.
And the amount of net capital reduce can generate from the sale proceeds.
Although the pace of condition activity could be faster.
We anticipate that it may require 18 to 24 months to complete our conversion to a fully franchise portfolio.
Of course as you know this is subject to various risks challenges and external factors.
Which may impact our strategy I'd refer you to the 10-K for more fulsome review of the risk factors.
We expect that the remaining company owned salons will have therefore, a finite life.
And our essentially ring fenced in the organization.
We have isolated the company owned salons as extra cope with the remaining future state business identified as our franchise company.
Our intention is to continue to return the net capital generated the capital that we free up from this process from the sale of Mexico.
We intend to return that to our shareholders, while still investing in the future state of our business.
We believe that the future franchise company will be a high quality business.
Producing a stable stream of cash flow with both strong organic and inorganic growth prospects.
Further we believe these characteristics could potentially earn the new franchise company.
A higher multiple than Regis received today.
In the spirit of transparency, we intend to disclose the status of our condition pipeline.
To our shareholders each quarter until we have substantially no extra coal assets remaining.
As many of you know banks and other companies often isolate nonperforming assets in a similar fashion.
When they restructure their businesses.
During the last year. We also concern confirmed other factors, which we believe support the decision we reached to fully franchise our business.
There is a clear improvement in return on capital as we fully franchise regions.
Franchising is a simpler business model franchising creates a platform.
For sustainable organic growth.
Our franchise owners consistently over many years now deliver a better and more localized service experience to our customers.
Our franchise partners are a source of new ideas and services that are needed to continually refreshed our brands.
Franchising also enables regis to consolidate its numerous brands from over 50 banners.
Two we believe five core banners.
Supercuts Smartstyle cost cutters first choice hair cutters, and Roosters, a barber brand that we believe we can scale with a franchise orientation.
Although we may retain.
Small number of niche brands in certain geographic areas. We expect these to be the five core brands Smartstyle and supercuts cost cutters first choice here cutters and Roosters.
It was also likely that we will support a modest number of company owned salons to test new services merchandise operating concepts or our new disruptive technology.
As we continue to transition to a franchise platform, we decided to examine all of our investments in non core non strategic assets.
This exercise proved fruitful as we were able to free up nearly $70 million of cash that had been tied up in low return assets such as real estate.
Opening company owned life insurance policies and restricted cash.
In combination with approximately 95 million generated from our conditions.
These actions significantly reduce the company's invested capital.
With this freed up capital we were able to return a portion of this cash to our owners the <unk> Regis share repurchases.
That reduced our share count by nearly 20% in 2019.
Or to put this into perspective in fiscal 2019, we repurchased 8.6 million shares.
Representing approximately 10 times the investment.
We made in the company's new L. to compensation plan.
One of the many benefits of aligned interest. This is that our management and board think like owners like you. We are shareholders and our executive team has the opportunity to continue to increase that our ownership position each year.
Through our new L tip compensation plan.
Our program, we believe aligns management's financial interest with the long term health and viability of the company.
One additional comment regarding our share repurchase program. There are some critics, who argue that management teams only repurchase shares.
To support their share price for the short run this isn't the case at Regis. This year, we invested heavily in the future of our business, including.
Transforming our technology with the launch of open Salon, where we wrote the code we own the code and we have submitted patents for our code opened Salon is a frictionless.
Capability that is our proprietary technology platform that allows customers to book Salon services directly via mobile DAU devices or desktops. It's also enabled by Google search, Google maps and Facebook messenger.
We've been building out our franchise or capabilities, improving our brand positioning.
Enhancing our stylists recruiting and training and introducing new trend driven merchandise as we upgrade our strategic marketing. We also opened our new Fremont, California Tech Center, and our marketing offices in New York City. All told these investments cost us approximately 12, and a half million of EBITDA and 19.6 million of cash.
As we transform we believe we are prudently investing in the future state of our business.
To illustrate how strong the short excuse me. This long term focus is please consider the fact that several of our executives, including your CEO didnt earn that portion of our short term bonus that was based on the operating company EBITDA margin.
Regis management could have easily deferred investments slowed down condition.
Unwisely accelerated year DNA reductions and taken many other actions that would have earned each of us a larger short term bonus payment, but we didnt do that because like you were owners and were focused on the long term economic value Regis.
And building a sustainable high performing business, even when we're making judgments where there is a direct and immediate dilutive impact on our own compensation.
In closing after more than two years of carefully planned evolution, we have identified.
And now confirmed a confession compelling vision for Regis as a capital light high growth technology enabled franchise company.
Although the transition to a capital light franchise model will initially have a dilutive impact on the company's reported adjusted EBITDA.
We are each convinced that a fully franchise business that we expect to generate a higher return on its capital will prove to be in the best long term interests of our shareholders and our other constituents.
We have more work to do before we finish the transformational phase of our strategy, but we have growing confidence in our plan.
The ability of the region's team and our franchise partners to successfully execute the transformation and that end time, our shared vision for the company will be fully realized.
Andrew why don't you take us through the math, absolutely. Thanks, you and good morning, everyone.
Looking at the results we reported this morning on a consolidated basis fourth quarter revenue decreased $52.2 million or 17.4% versus the prior year to $248.2 million.
The year over year revenue decline was driven primarily by the conversion of 767 company owned salons to the company's franchise portfolio over the past 12 months the closure of 133 slots over the past 12 months, the majority of which were cash flow negative and that were not essential to our future franchising plans.
And a 10 basis point decline in company owned same store sales.
The revenue headwinds associated with our company owned salons were partially offset by an increase in franchise revenues, consisting primarily of royalties and fees.
The slight company owned same store sales decline was driven primarily by a 4.3% decline in year over year terms of transactions were what we have historically referred to as traffic, partially offset by a 4.2% increase in ticket.
Fourth quarter consolidated adjusted EBITDA of $39.4 million was $10.1 million or 34.3% favorable to the same period last year and was driven primarily by a $26.1 million cash gain excluding noncash goodwill derecognition related to the sale and conversion of 265 company owned salons to the franchise portfolio during the quarter.
Excluding the $26.1 million and 2.2 million gain from the sale of company owned slides during the quarter and prior year, respectively. Adjusted EBITDA totaled $13.3 million, which was 13.8 million unfavorable year over year.
The year over year unfavorable variance was driven primarily by the elimination of the EBITDA that have been generated in the prior year period from the company owned salons that have been sold and converted the company's franchise platform over the past 12 months.
Fourth quarter adjusted EBITDA was also unfavorably impacted by minimum wage increases and strategic investments in the company's future, including investments in technology stylist recruiting marketing and merchandising.
Additionally, the company has invested in its franchise or capabilities and services, which were partially offset by lower year over year incentive compensation expense.
On a full year basis consolidated adjusted EBITDA of $122.3 million was 34.9 million or 39.9% favorable versus the same period last year.
The year over year favorability was driven primarily by a $70 million cash gain excluding noncash goodwill derecognition related to the sale and conversion of 767 company owned salons to the franchise portfolio.
Excluding the $70 million and $4.1 million gain from the sale of the company owned salons during the current year and prior year respectively.
Full year, adjusted EBITDA totaled $52.3 million, which was 31 million unfavorable year over year.
In like the fourth quarter results. This unfavorable variance is driven primarily by the elimination of EBITDA related to the sold and transferred salons over the past 12 months.
Looking at the segments specific performance and starting with our franchise segment.
Fourth quarter franchise royalties and fees of $26 million increased $5.1 million or 24.2% versus the same period last year, driven primarily by increased franchise Salon counts.
Product sales to franchisees decreased 3.9 million year over year to 12.1 million driven primarily by a $5.7 million increase in products sold the TPG, partially offset by increased franchise Salon counts.
Total franchise same store sales declined 130 basis points in France, I franchise same store sales, excluding TPG improved by 10 basis points during the fourth quarter.
As a reminder franchise same store sales are calculated in a manner that is consistent with how we calculate same store sales in our company owned salons portfolio and represents the total change in sales for the slides that have been a franchise location for more than 12 months.
As a result, given the large number of slides we are transitioning to our franchise platform. We expect it may take a year or two for these numbers to normalize for comparative purposes.
Fourth quarter franchise, adjusted EBITDA of $10.6 million improved approximately $350000 year over year driven by growth in franchise loan portfolio, partially offset by planned strategic Gina investments to further enhance our franchise it capabilities and to support the increased volume and cains of transactions and conversions into the franchise portfolio.
Full year franchise, adjusted EBITDA of 38.7 million improved approximately $2.7 million or 7.5% year over year.
Looking now at the company owned salons segment fourth quarter revenue decreased to 53.4 million or 20.3% versus the prior year to 210.1 million.
This year over year decline is driven by and consistent with the decrease of approximately 858 company owned salons over the 12, Pat over the past 12 months, which can be bucketed into three main categories first the profitable conversion of 767 company owned salons to our asset light franchise platform over the course of the past 12 months of which 265 were sold during the fourth quarter.
Second the closure of approximately 133 company owned salons over the course of the last 12 months most of which were unprofitable.
And as I noted earlier not essential to our future strategy.
These net company owned slight reductions were partially offset by 32 slots that were bought back from franchisees during the year and 10, new salons constructed during the year.
Fourth quarter company owned salons segment, adjusted EBITDA decreased $15.9 million year over year to 22.4 million.
Consistent with the total company consolidated results the unfavorable year over year variance was driven primarily by the elimination of adjusted EBITDA that have been generated in the prior year period from the company on slides that were sold and converted into the franchise platform over the past 12 months.
The quarter was also unfavorably impacted year over year by increases in stylists minimum wage in commissions and strategic digital marketing investments.
On a full year basis company owned Salon, adjusted EBITDA of $88.6 million was $38.5 million or 30.3% unfavorable versus the same period last year.
The unfavorable year over year variance was primarily driven by the elimination of company owned EBITDA related to the sold and transferred transferred salons over the past 12 months.
Turning now to corporate overhead fourth quarter adjusted EBITDA of $6.3 million is driven primarily by the $26.1 million net gains excluding noncash goodwill de recognition from the sale and conversion accompanying slides.
The net impact of management initiatives to eliminate non core non essential Gina expenses and lower year over year incentive expense. These were partially offset by investments in technology stylist recruiting and marketing capabilities.
Looking now at the balance sheet, we continue to maintain our strong overall liquidity positions, while providing optimal balance sheet flexibility to fund the key elements of the company's transformational strategy.
On the liquidity front net net quarter end cash equaled $70.1 million.
During the fourth quarter, we repurchased 2.6 million shares or approximately 6.5% of the total shares outstanding for 48.3 million and for the full year, we repurchased 8.6 million shares for 154.4 million, representing approximately 19% of the company's total shares outstanding.
The share repurchase activity during the year was funded substantially by the cash proceeds generated from the sale and conversion of company owned stores into our franchise platform and the monetization of several non core assets during the year, including the company owned life insurance policies in the first quarter in the sale leaseback of our Salt Lake City in Chattanooga, Tennessee distribution centers in Q2 and Q4, respectively.
The fiscal year end cash balance of $70.1 million reflects a $40 million reduction versus fiscal year end 2018.
We believe this is an impressive outcome given our share repurchase activity and the investments we have made in our future state business during the year.
As of June Thirtyth, we had $80.9 million of remaining capacity under our previously approved stock repurchase program and we had $90 million of outstanding borrowings under our existing credit facility.
Turning now to TPG as Hugh mentioned upfront. We believe we continue to make good progress in our efforts to mitigate our mall based lease risk while at the same time minimizing our exposure to other TPG matters.
As we have stated on previous calls the primary goal of the TV treat TPG transaction was and continues to be effective transfer of our mall based lease liability and to limit our exposure to the ongoing losses associated with the mall base Salon portfolio.
In fact at the time of the transaction closed in October 2007, our remaining mall based lease exposure was approximately $140 million.
In June of this year to support these efforts we entered into a settlement settlement agreement with TPG regarding the us and Canadian Mall base lines in which amongst other things we released in forgave TPG from amounts due to reach as related to certain items, such as inventory shipments These services and accounts and notes receivables, which total approximately $33 million.
All of which the company had previously disclosed and had reserved for over the past 18 months.
At the same time and potentially more importantly, TPG entered into a meaningful number of lease modification agreements that resulted in a material reduction in our lease liability exposure.
In fact as of July 31, 2018 prior to any mitigation efforts, which may be available to us. We estimate that we remain liable for approximately 30 $939 million of mall based lease risk, which is approximately $100 million reduction versus October of 2017.
Additionally, the agreement also has enabled us to take further steps to minimize our future financial exposure to the team to TPG through actions, such as requiring prepayment for all shop, and Salon inventory shipments and other Salon services.
Lastly, as part of that same settlement agreement and in an acknowledgment that TPG has and continues to struggle as a viable operator of the salons, we have the right to assist TPG in the identification of an experienced and qualified operator in order to facilitate the transfer of a portion of these mall based salons to a third party.
So in summary over the course of the TPG transaction, we haven't invested approximately $33 million to support TVG. Since October 2017 that has resulted in an approximately $100 million reduction in our mall based lease liability in the avoidance of operating losses related to these mall based salons.
We continue to believe that this is a portfolio that can be appropriately manage and we are cautiously optimistic and new operator can be identified.
Turning now to the to our decision to fully franchise. The remaining company owned Salon portfolio over the next 18 to 24 months I thought it'd be helpful to hit on a couple of additional items.
First as you pointed out in his remarks going forward, we intend to provide a pro forma view of our quarterly and annual results bifurcated between our modeled execution in franchise newco components of the business.
In providing this we intend to execute to represent our company owned salons models as though they were standalone businesses.
With cost allocations related to product sales and distribution expenses corporate have overhead and other onetime and stranded DNA costs.
The pro forma franchise Newco component is intended to reflect what a fully franchise business would look like based on our financial results and represents our existing and pro forma projected new franchise lines with allocations for product sales and distribution expense long term strategic technology investments in corporate overhead DNA. Among other expenses typically typical for the franchise business.
The pro forma view enables one to potentially model the franchise newco portion of the business at a multiple that is more in line with other publicly traded pure franchise companies. Conversely for the exit co component of the business given the fact that Mexico business is anticipated to have a relatively short lifecycle of 18 to 24 months and not continue in perpetuity, we believe it could be and should be valued at its nominal or absolute value and not having multiple applied against it.
Lastly, as a reminder, what we have presented today reflects only ethylene 19 full year actual results on a restated pro forma basis.
Therefore, this is not a forward looking analysis and when thinking about the overall sum of the parts for valuation purposes. We believe it would be necessary to consider other factors such as future period execute cash flow items, including EBITDA and cash net cash capex net of sales proceeds along with franchise newco cash cap that capex.
The final modeling note I'd like to provide relates to the estimated future state of Jena expenses.
Please note that this is also not intended to be used as forward looking guidance. However, we believe it is reasonable to model gene a at roughly $12500 personal on in a fully franchise future state business split roughly evenly between franchise direct Gionee, which would include distribution center costs and corporate DNA of course. This may change as we gain greater visibility into the future state of our business.
And lastly, before I turn the call back over to John for questions given the anticipated increase in volume and cadence of conditions over the next 18 to 24 months I'd like to remind you about how we think about the unit economics of each of these transactions.
Generally in the sale and conversion of an Opco salon to the franchise portfolio. We received a one time cash purchase price payment that is equal to the multiple of the slides four wall cash flow.
In addition to the cash purchase price. We also expect to recapture a meaningful percentage of the slides cash flow in the years ahead through items, such as a predictable and stable ongoing royalty fee stream.
Additional cash generated on incremental product sales to new franchisees likely lower ongoing capital requirements over time for items, such as lawn maintenance and Refurbishments.
And anticipated reductions in our field and corporate overhead expenses.
Another non cash benefit to our transformation is that the growth in the franchise portfolio should provide us with a platform for future sustainable organic growth and as you mentioned, we intend to use this work as an effective vehicle for brand consolidation in a highly efficient and capital light manner.
Also as we have disclosed in the past, we believe that substantially all of our future transactions will involve cash flow positive slides.
As a result, this will likely make period over period revenue and adjusted EBITDA comparisons increasingly difficult and substantially less meaningful as we move forward with our portfolio transformation for a number of reasons first any comparison will need to be normalized for the onetime purchase price and pinedale gains related to the sales proceeds received from the sale. This lines second all prior year periods will need to be normalized for the impact of the sold revenue and EBITDA that would be eliminated due to the transaction.
And third as we present transition slides to our franchise portfolio. One must consider the fact that we are converting from a higher margin retail model in our company owned salons portfolio to a wholesale model in the franchise portfolio.
Of course, when designing our strategy, we plan for and modeled this change in product sale margins and in the Lauren long run expect to generate greater overall economic value for our shareholders as we convert to an asset light franchise model.
Given these factors when thinking about your forward looking models, we anticipate that on an absolute basis. The company's total revenue and adjusted EBITDA, excluding vending proceeds will decline over the short term as opco revenue and EBITDA.
And cash flow is sold.
However over the longer term, we expect to see growth in the franchise segments adjusted EBITDA reductions in the company wide Gina expenses returns on investments made in technology and marketing.
Longer term growth of our merchandise business in longer or and lower ongoing cash capex requirements over the long term.
As a result, our expectation is that the company is longer term adjusted EBITDA margin rate will increase.
To help track this progress as we continue on with our transformation to a fully franchise model as you mentioned in his remarks, we intend to provide regular just group disclosures around the progress made between the divestiture of exit co assets in the progress of building the franchise newco portfolio much like many other companies do when they ring fence or isolate the nonperforming assets that are impacted as they transform their business.
Additionally, given the importance of timing, we intend to regularly update you with the status of our vending cadence in pipeline until we are substantially complete with our conversion to a fully franchise model with that I'd like to thank you for your continued continued support and interest in Regis and will now turn the call back to John for questions go ahead John .
Thank you Hugh and onto the question and answer session will begin at this time, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again as a reminder, please press star one to ask a question.
Pause for a brief moment, hello, everyone and opportunities to signal for questions.
We will now move on to our first question from Laura Champine of Loop capital. Please go ahead. Your line is open.
Thanks for taking my question on the free cash flow line looks like based on on the numbers. You are reporting today were negative maybe 49 million in 2019 fiscal <unk> would you expect that to reverse in 2020.
Laura This is Andrew thanks for the question.
Yes, I would say that as you look at the cash flow statement. There is a number of items specifically related to some of the restructuring activity that we did this year along with the timing.
The impact of the vending and activity related to some accrued such as payroll.
Vacation et cetera that would be relatively onetime in nature that should.
Not be present in future periods, which would then result in a more favorable free cash flow number.
Got it and then a follow on to the comment in the press release that adjusted EBITDA will be initially negatively impacted by your strategic plans.
Just to clarify that.
Is it managements thinking that current expectations for EBITDA on fiscal 2020.
Too high because we werent, including this this accelerated transition in our models.
Once again I don't want to start down the path of providing forward guidance, but it's reasonable to expect that if the.
Analyst models that are out there in the in the ecosystem right now did not contemplate a fully vending gender full conversion to franchise model over the next 18 to 24 months, it's probably they are probably light on the number of slots that we plan to convert and fly 20, and as a result, as we have been consistently saying over the past nine months as we convert these lines, it's reasonable to expect that topline revenue and EBITDA will decline, but as the the relative efficiency of that EBITDA.
Becomes higher through improved margin performance. That's all it's you. It's also true to say that when we began found the path and 2019.
We work yet certain.
What's the cadence of additions would be we were yeah sure how many of our existing franchisees would be interested in the assets.
As we tried to unlock back capital.
Out of the nonperforming opco side of the business.
And we weren't sure how many new franchisees, we could attract but with Eric Bakken his leadership and the franchise teams efforts supported by our field operators we were.
I think incredibly successful in transitioning the salons at a pace that was robust not only that.
Not only did we get the.
Salons transition over we also filled the pipeline for 2020, which is.
An impressive accomplishment in my view.
That that the efforts of many of our employees that created the opportunity for Regis to continue to free up this capital that stuck in these nonperforming opco side of the business. So we we didn't we weren't quite certain what the outcome would we when we started down 2019, but.
It was.
It's pretty awesome.
To be able to vindication that many salons in the year and do that many transactions and filled the pipeline for 2020.
So great team effort by them My our Regis franchise organizations and supported by Salon support in our field ops.
Got it yes, and it was much sorry, one last thing on that as we've begun to ramp up over the past four quarters, you've seen us.
Operate condition cadence of something in the low hundreds to this quarter, where we delivered to 65, if you do the rough math over the next eight quarters of initially in the remaining 3000 slides, there's probably can be some closures in there.
But.
We are.
On the glide path to to hitting that achievable than addition gains on a quarterly basis.
But it's not going to be easy.
Understood. Thank you.
We will now take our next question from Steph Wissink of Jefferies. Please go ahead. Your line is open.
Thank you good morning, everyone. A few questions for the team if we can add Andrew just to follow up on your closing comments Hillary's question on the closures what would be a rough assessment do you think we should use in our models over the course of the next couple of years in terms of closures versus the conditions and the reason I ask because I think you mentioned in your prepared remarks that the residual base of stores in the exit co are all cash flow positive. So I'm should we assume a lower percentage of closures than what we've seen historically.
I don't think so as I mentioned, Michael or in my prepared remarks, we closed 133 salons, yeah in fiscal 19.
On a steady state basis, that's probably the right number but as we continue to vending and what's going to end up happening is you're going to find some geographically isolated marginally cash flow positive slot that just don't make sense, we don't have a partner to effectively sell islam's too.
And we'll likely resulting in some additional closure. So I think it's reasonable to expect that we'd have a slight pick up from the current run rate of 130 ish.
Annual Salon closures, but it's not going to be a significantly large number it's not going be hundreds upon hundreds I would say.
So just a little north of.
The the 130, so call it two to 300 salons in fiscal 2000 to two soon from a closure, but we wait staff it to we Eric and I am Andrew talk about those regularly with our finance team and we are we're pretty good at Stratifying. These salons looking at individual markets and Spirit's real estate team also looks at the implications from a real estate standpoint. So it's it's real estate is that stratification of the salons.
And a pretty hard look with Jamestown and his team on the local market do we think that this local market campaigns can continue to sustain.
Sales growth and then we make a judgment call as to the salons that need to be closed in Mexico, right now, especially in the with the lens of going to a fully franchise model.
For a marginally performing salon the amount of DNA that is required to to support that just doesn't make sense from a.
Ongoing.
Concern for that particular slump right. In addition to the extra expenses that the franchisees take on it even with anticipated growth. It can make many of those are challenged with I guess are the key takeaway as we think about a number of factors.
When reaching these decisions gas quality of the real estate is a big one.
Performance, obviously significant quality of the operator et cetera, but I agree with all the comments are made and Anders assessment of future closures.
Okay. That's extremely helpful. And then I think that's an maybe you and Eric one of the objectives. In this evolution was to identify more large scale multi unit operators to vendors and salons to and I'm. Just curious if you can give us a sense of the roughly 770 sites you did over the course of the last year and the 600 plus that you have in negotiation stages are you seeing more scaled multi unit buyers either in your existing base or in your pipeline are you starting to see kind of that partnership model unfold.
Well as you know when we started down the path staff, Eric and jointly made a decision that we wanted to be thoughtful about how we balance the portfolio of owners.
But it is true to say that Eric and his team have made great progress in that respect and I'll, let Eric share some of the details with you. Thanks Your stuff, yes, we're continuing to see the large multi unit operators being attracted to this investment opportunity. We continue to recruit in very high quality owners with operational experience and obviously capital and that continues. So we're pleased with the way that's growing and we expect that that will continue throughout the next 18 months, yes. They are attractive Eric to the asset for the same reasons. We are they are they like our people right. We like the brands like the investments, we're making in technology.
Hey, they recognize that we're we're adding muscle strength and through our franchise or capabilities. So they see the same things that we see it's also at first thing that I think credit to redress.
That many of our existing franchisees scaled isn't that true Eric that's absolutely true we're continuing to see that we have a transaction we're working on right now with an operator that.
Had a relatively small number of units, but a lot of capacity, who is growing significantly with us and we see that with our existing base as well. So it's always a good sign when the existing franchisees want to grow that's encouraging if we can get them to come in here and meet with a collective team we generally have a.
Hi success rate and getting something closed.
Okay. That's fantastic and then the last question you partially answered, but I wanted to just explore a bit more if somebody's complimentary services.
Part of the gap in the EBITDA was up was supposed to be filled or will be filled over over time with some of these services Weve I think weve you've talked in the past about construction management fixture packages warehousing, certainly disruptive technologies and product sales. So if you could just give us an update not necessarily one by one but just in aggregate how you're feeling about some of those initiatives those investments you've made.
And then related to that any update on the returns of some of the national marketing that you've put in place I know, it's a national contract with the MLB, but certainly executed at the local level.
Sure I'll start it and someone else can weigh in on the national advertising. So on the services stuff, we are making progress when we look at the business you know a big part of this is being able to attract and retain stylists. We made investments as few as Andrew mentioned on franchise or services, including recruiting services that we're offering that's continuing to gain traction as we go forward once we get that only one tractor the folks we need to retain them on the training side, we've made significant investments in our training.
Capabilities, and we're rolling that out across the board to all of our franchisees right now so that.
Is going well, we also are helping with lease renewals. In addition to the construction services people are taking advantage of our construction services for sure and on the lease renewal side more and more folks including existing long term owners are taking us up and having us help them with that and as we go forward you will continue and we've talked a lot about technology investments and you'll continue to see us roll out additional functionality with technology and and we're very confident that that will add a lot of value in terms of traffic generation and providing additional.
Customer facing and stylist facing technology, and I think Eric and I have been careful not to predetermine outcomes on the services to be provided we have.
Very close relationships with our franchisees. So we're we've also been doing a lot of listening.
On what they want and need in order to grow traffic and run their business as well.
And we're trying to be responsive to that as we get greater and greater visibility and we've looked at we've also looked and modeled against the other.
Top tier franchise awards that are out there not just in our industry, but in other industries to see what services. They provide so we feel actually good about what we are building and we think there is a.
Control for ongoing support and build out as we continue to move this forward Eric's also right we have.
Invested significantly in our Tech center in Fremont to establish frictionless relationships with our customers and to gather data from customers as we continue to build out our data warehouse under Chad capacity as leadership that team has already rolled out open salon, which is.
Okay very slick.
Mobile App that enables you to book direct.
And our salons on also has been enabled by.
Facebook messenger and by Google search and Google maps, where you can track into our salons write off of Google maps and write off of Google search.
So we're committed to continuing those investments so that we have the best technology in the industry as to the relationships that under marketing and advertising Stefano you will recall that.
2019 was a year, where we decided to.
Ramp up our investment.
In marketing and advertising in the diagnostic work needed to build out the future stay for organic growth. We all all of US recognize all of us and executive management and the board will get it we know that it will run out of indications. So then what we have to be able to grow the business grow our revenues and grow earnings and so this was the year. We invested in the Bane study, which took took several months to complete to ensure that we have the right ideas about how to differentiate our brands.
So that as we began to plow more cash in the marketing and advertising.
We wanted the diagnostic roadmap to do that.
We retained two disruptive AD agencies this year.
They for Supercuts, we select the chat day in collaboration with our franchisees.
And Mark late to support Smartstyle and cost cutters.
We went out and recruited.
Disruptive.
Chief Marketing Officer, James Townsend, who had been a global partner with 72 in Sunny and James has already brought a level of discipline and diagnostic rigor to what we're doing in marketing and advertising and I'm very confident that is going to be highly impactful to the company.
The MLB relationship.
Thus far we've been pleased with the results, but like everything else.
No nothing in life is permanent we'll continue to look at the numbers and James and collaboration with Eric and the franchisees and the rest of US we'll make a decision about the long term viability of that relationship.
We have a three year commitment with them, but I believe ends next summer.
And then we will decide to re up after that but so far we we like it. It's certainly building awareness of the brand and we're going to get more good data.
As we move into the World series season, and start to look at the impact to traffic were also under James's leadership, we're making investments and influencers.
And in digital marketing.
We're starting to market the open Salon technology, which we have not done.
Initially, but we're starting there.
And then finally the fundamental decision soon.
Revert to a franchise platform is intended to grow the business.
We have great people in the Opco side of our company wonderful people many of whom have spent their entire adult life at Regis.
But theres just nothing alike.
Some want to invest in our own capital in the business to get serious about giving great service and treating customers well and retaining stylists. So one of the fundamental core principles are converting to a franchise platform is that we believe local owners will grow their businesses and Eric I think.
You know Eric back over several years the data confirms that local arent owners outperform company owned salons from a same store sales, but absolutely I would say from a sales basis as well as our transaction count traffic measure they performed better and that thats occurred over a significant period of time and to follow on your point here. We have the best of both worlds, we're able to marry up our very best operators with our outstanding franchise candidates that we're bringing in and we're having a lot of success doing that we're placing our very best folks with franchisees and we end up with a nice marriage, there as well and the very best folks out of our Opco business as we lift and shift and as we free up the capital.
This locked up capital, we lift and shift the business over to local owners.
And many of our employees end up working for the franchisee and that was an aspect of the core principle of establishing local owners into this business and staff is not surprising right. I mean, you know you you put a bunch of your own money and our local business you are going to make sure that business runs well and that you treat customers well and that you retained your stylists. So erics right. We've got the best of both worlds, we lift we free up.
Shareholder capital that's been locked up in a nonperforming business for several years, we lift and shift the operation over to a local business owner and a nice our customers well they sort of style as well and we transfer many of our employees over to the franchise business to go with.
That's great. Thanks, guys appreciate the information.
You're welcome.
Once again, ladies and gentlemen, if you wish to ask a question. Please signal by pressing star followed by one.
[noise].
So a third.
No questions I'll close the call by saying a word of heartfelt. Thanks.
Two our Regis employees and our franchise partners.
For their many efforts this past year in support of our customers.
Our stylists and our shareholders.
Thank you so much and we look forward to speaking with you again soon.
Ladies and gentlemen, this concludes our conference call for today, if you wish to access the replay for the presentation. You may do so by visiting <unk> Regis Corp. Dot com and the Investor Relations section of the website by dialing one eight A.H. two old tree.
111 too.
Access code.
500 1949.
Thank you all for participating and have a nice day all parties you may now disconnect.