Regis Corp (RGS) 2017 Q3 法說會逐字稿

Good morning, my name is Sarah, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation Fiscal 2017 Third Quarter Earnings Call. (Operator Instructions) If anyone has not received a copy of today's press release, please call Regis Corporation at (952) 806-2154, and a copy will be sent to you immediately. If you wish to access the replay for this call, you may do so by dialing 1 (888) 203-1112 and using access code 754-0672.

The replay will be available 60 minutes after the conclusion of today's call. I would like to remind everyone, to the extent the company's statements or comments this morning represent forward-looking statements, I refer you to the risk factors and other cautionary factors in today's news release, as well as the company's SEC filings. Reconciliation to non-GAAP financial measures mentioned in the following presentation, as well as others, can be found on their website at www.regiscorp.com.

Speaking today will be Hugh Sawyer, Chief Executive Officer; and Mike Pomeroy, Interim Chief Financial Officer. After management has completed its review of the quarter, we will open the call for questions. (Operator Instructions) I'd now like to turn the call over to Mr. Pomeroy for comments. Mike, you may begin.

Thanks, Sarah, and good morning, everyone, and thank you for joining us. With me today are Hugh Sawyer, our new President and Chief Executive Officer; Eric Bakken, our President of Franchise; Mark Fosland, our Senior Vice President of Finance; and Paul Dunn, our Vice President of Finance.

This morning, I will provide a brief overview of our results for the third quarter and provide updates on some financial housekeeping items and liquidity following that. I'll remind you that our 10-Q press release website all contain more detailed explanations of our financial results, and our comments today should be considered within the context of these and other public business disclosure documents. Paul Dunn is also available to answer any questions after the call.

Getting into the third quarter. Third quarter results highlight the operational challenges Regis faces in its company-owned salons. Adjusted EBITDA of $14.8 million in the third quarter was down $8.1 million when compared to the third quarter last year. The major items driving the erosions in profitability are related to guest traffic and variable labor costs.

Same-store sales declined 2.9% but same-store traffic is down 5.7%, driven primarily by reduced stylist productivity. Cost of service increased 200 basis points in the quarter. On the financial housekeeping front, there are 3 items I would like to share. But first, I want to take a few minutes to provide some clarity around G&A. There are a number of puts and takes in our year-to-date results that make it challenging to understand, what to expect for the fiscal year, and what should be considered a true run rate.

Let me first start with G&A as reported. During last quarter's call, you'll remember, I mentioned we were anticipating our full year G&A to be in the range of $170 million due to timing, one-time benefits and purposeful efforts to reduce the company's G&A cost. Based on year-to-date results for the third quarter, it now appears our fully reported G&A will likely be somewhere in the range of $175 million due largely to expenses incurred for our strategic transformation. It is important to note, however, that there are a number of discrete costs in this figure that make it more than our operational run rate would require.

G&A, as adjusted, is a better proxy for our run rate right now. Our year-to-date adjusted G&A of $119.9 million is down $3.3 million when compared to the same period last year. Roughly 1/3 of this decrease is caused by purposeful cost reductions that are undertaken by the company. The other 2/3 is largely related to one-time benefits from items such as incentive comp, professional fees, vacancy of positions and travel, all of which we hope to return to normal levels in fiscal year 2018. We continue to take a disciplined approach to managing our overall G&A. When you remove all the puts and takes, we are expecting a run rate of G&A to be in the range of $5 million to $10 million lower than the total fiscal year 2016 adjusted G&A results.

Secondly, I want to remind you, the valuation allowance in place against most of our deferred tax assets makes it very difficult to compare after-tax results for prior periods. For the 9 months ended March 31, 2017, we recorded tax expense of $7.3 million. However, there were -- $6.4 million was noncash and related to tax benefits we claimed for goodwill amortization, but of course, cannot currently recognize for GAAP purposes. The noncash tax expense related to this issue will approach $7.7 million for the year, and we expect that will continue on an annual basis, going forward, in decreasing amounts, as long as we have the deferred tax asset valuation allowance in place. As management has discussed in the past, this noncash charge or benefit could fluctuate significantly from quarter-to-quarter as a result of how the effective tax rate is determined at interim periods. Thirdly, included in today's press release, as well as on our corporate website, is management's reconciliation -- bridging report -- excuse me, bridging reported results to earnings, as adjusted for the impact of discrete items for the third quarter of the current prior years.

Lastly, on the liquidity front, our business generated $46.8 million of the cash flow via operating activities during the first 9 months of the fiscal year despite the top line headwinds we have been facing. We spent $23 million in investing activities, used $1.7 million for financing activities and had a $900,000 negative impact from exchange. Overall, our cash balance had increased roughly $21.3 million compared to the end of fiscal year 2016.

Finally, as a part of that, we finished the quarter with $169 million of cash, cash on hand, $122 million of debt, total debt, and no outstanding borrowings under our $200 million revolving credit facility.

In closing, we remain focused on funding strategic investments that drive growth, as well as reducing inflation impacts through continued disciplined cost management to ensure we maximize the results, and of course, protect our strong balance sheet.

This concludes the financial portion of the call. I would now like to turn it over to Hugh Sawyer, the company's new President and Chief Executive Officer. Hugh?

Well, thank you, Mike, and good day, everyone. Thank you for joining us, and thanks as well for your interest in Regis.

I have 4 objectives for today's call. I will provide a few additional details regarding my background and qualifications. I'll give you some insight into my style and approach to the CEO's role. I'll share a few preliminary thoughts regarding the company's history of underperformance, and more importantly, what we intend to do to improve the trajectory of the business. And finally, although it is clearly early days, I want to provide a forum for you to ask any questions you may have at the end of the call.

So let's begin with a few more details about my background, which I hope will be helpful to you. Over a 40-year career, I've had the privilege of serving as President or CEO of 8 companies prior to Regis, and 13 boards, often in highly complex matters. Someone asked me this week, how in the world anyone could serve as a CEO so many times, and the answer is, I started very young. I was fortunate and became a CEO at 34 years old when I ran a subsidiary of Borg-Warner, and some of you on this call may remember that Borg-Warner went through what was at the time, the country's largest leveraged buyout in the late 1980s, and I was a member of that team. And since that time, I have been in the CEO or President's Chair for all but a few years, and during that period, I acted as the Chief Administrative Officer of Fisker Automotive, and later advised the executive management team and board of Hertz Global Holdings and Hertz Equipment Rental.

I suppose it would be accurate to say that I have developed a special set of skills as to what we often call a turnaround executive. I frankly, am not the doctor you would see when you have a cold. Instead, I am a specialist who leads the diagnostic effort to determine the source of a company's illness, and then establishes the protocols to cure that illness, and working with the management team, restore the business to vibrant health. Essentially, a career focused on strategic transformations and operational turnarounds, designed to improve shareholder value often in intense time critical circumstances. I have been fortunate to lead or help govern companies in a very broad range of industries, including service intensive B2C businesses, with large sophisticated constituents facing complex challenges. As a result, I believe my experience set translates well to the needs of Regis.

As a little further insight, here are a few more details and what I think you'll see is the relevance of my background. Regis, as you know, has thousands of stylists who are licensed to cut hair. At Wells Fargo Armored Service Corporation, where I served as CEO, we had thousands of employees who are licensed. They were licensed to carry loaded guns in Washington, D.C., New York, Los Angeles and other major metropolitan areas. So folks I get it. I understand the importance of attracting, training, retaining and motivating licensed stylists, who deliver a wonderful guest experience. The Cunningham Group was a graphic arts and printing company that served the craft industry and consumers who frequented stores like Michaels. National Lending Service was North America's largest industrial laundry. We supplied bed sheets and pillow cases to hospitals and hotels and linens to the fine dining industry. My largest client there was the Darden Restaurant Group. Aegis Communication Group provided CRM solutions to Fortune 500 companies. We also had internal capabilities that did predictive modeling to predict consumer buying patterns. Our largest customers were American Express, AT&T and Western Union.

Allied Holdings was North America's largest transporter of new cars and trucks for GM, Ford, Chrysler, Toyota and Honda. At that company, we transported approximately 10 million vehicles per year and the company operated 24 hours a day, 7 days a week. Like Regis, lots of transactions in a service intensive environment. Legendary Holdings was a large B2C business in Florida that had a portfolio of assets, including a large condo hotel complex, restaurants, a golf course, office buildings, retail villages and one of the largest marine retail businesses in Florida with both dry storage and water marina services. At Legendary, if we didn't serve the guests well, they would not come back to our hotel, they wouldn't frequent our restaurants, they wouldn't play our golf course, and they would not bring their boat to our marina. JHT Holdings transports Class 8 trucks to market for Paccar, Daimler Freightliner and Navistar straight into owned fleets and dealerships.

Euramax is a multinational manufacturer that bends and paints metal, providing consumer products to Home Depot and Lowe's. So I have very extensive experience in dealing with the big-box retailers, like Walmart, a critical relationship here at Regis, and Euramax provides highly-engineered commercial applications to large building projects in Europe.

A few of the board roles that might be of interest to you include, of course, Spiegel and Eddie Bauer. Eddie Bauer is clearly B2C. Paradise Holdings, while you may not recognize that board, but you will recognize the Atlantis hotel property in the Bahamas. Not a bad gig for a board member.

Edison Mission Energy was the operating subsidiary of Southern California Edison, powering straight into homeowners in the Chicago Metroplex. TXU Energy was and is one of the largest utilities in the country, delivering electricity to homeowners in Texas, and all of these boards in the B2C environment.

So I hope you found this brief trip down the memory lane of my career to be helpful and relevant to the road ahead.

While I am only in the third week of my tenure as CEO, I have spent the last 6 months at Regis leading a Huron Business Advisory team that has been working collaboratively with executive management and the board. Huron's on-site engagement allowed me to see that Regis is an organization with a portfolio of strong brands and a talented group of stylists, managers and professionals.

A number of people, including a number of friends, have asked me why I accepted the role, and the reasons are actually very simple. Like the first time I saw my wife walking down the stairs at the sorority house, it was love at first sight. I fell in love with the company and the opportunity. And during my months here at the company, I became more and more convinced that with these wonderful people and portfolio of great brands and a highly competent and engaged board, we could accomplish great things together.

Additionally, I determined and I saw a significant and achievable opportunity to accelerate the growth of the franchise model while improving the competitive capabilities and the financial performance of the Regis company-owned salons.

Moreover, after what is arguably a long career, I do believe there's a moral imperative to leadership. There are 40,000 employees and their families at Regis, and of course, shareholder families who are impacted by our financial performance. Given my background and skills, I was confident that I could help and further, that joining this team was the right thing to do. So in simple terms, I fell in love with the company, and I agreed to diagnose, treat and help cure this patient.

In terms of my style and approach to the role of CEO, I think you'll find in the coming months and years, that I am open and transparent. I believe in servant leadership, and I understand very well my responsibility to all of our core constituents. Our paying guests, our employees here at the corporate center and our talented stylist, our franchisees, and of course, our shareholders. I have a principled approach to doing business. We will do the right thing for all of our stakeholders and implement the necessary decisions to drive shareholder value.

I intend to nurture what is best at Regis while addressing those issues that represent a barrier to the company's long-term financial success.

I believe in accountability for results and not simply activity. A culture of urgency will emerge at the company, and you should expect that the velocity of the decision-making and accountability for those results will increase at all levels of the Regis business.

For additional clarity, every Regis department, program and policy will be judged, judged based on the economic value that is generated for our shareholders. If that department, program or policy adds value, we will certainly support it. If not, we will adjust accordingly, and where it is appropriate to do so, we will just invest in that department, program or policy, all based on the economic value generated for our shareholders.

Now that I have briefly described my background, style and approach, let me share a few early days and preliminary thoughts regarding the company's history of underperformance, and more importantly, what we intend to do to improve the trajectory of this great company.

As many of you know, over the last few years, the salon support infrastructure has been reengineered. Efforts have been made to improve the Regis culture and the company's balance sheet was strengthened. Additionally, the company's strategy evolved, as Eric Bakken led an effort to increase focus on franchise opportunities. Despite a history of underperformance, these are all very important achievements on which we can now build.

As noted earlier in today's call, I will serve and support all 4 stakeholders, because I have learned over many years of experience that a balanced approach to guests, employees, franchise partners, and of course, our shareholders facilitates greater commercial success.

The company has made a well-intended effort to focus on our stylists, however, while loving our employees is absolutely imperative, and folks, I will love them, we must also aggressively focus on the consistent delivery of an exceptional guest experience in our company-owned salons, and we must also focus on financial performance.

Eric and I just returned from an inspiring Supercuts franchise meeting. Our franchisees are key partners, and I expect them to play an important role in improving the financial health of Regis. We are fortunate to be able to partner with so many talented entrepreneurs, who do a superior job of extending and enhancing our brands.

One of my first decisions as CEO was to promote Eric Bakken to President of the Franchise Business. Eric is an outstanding executive, and I think this decision should demonstrate to you my commitment to the ongoing growth of our franchise business. I can tell you after having stood in front of all those franchise owners at Supercuts, Eric was celebrated. He's a rock star for our franchise owners and they were delighted with this decision. Of course, under his leadership, we've already seen significant growth in the franchise operations, and of course, I will partner with Eric in the years ahead to maximize the opportunity that we have.

As you know, in the third quarter, we made further progress in this area by reaching agreements to transition nearly 200 company-owned SmartStyle salons to our franchise owners. These specific salons, in aggregate, produce negative 4-wall cash flow over the last 12 months. Proceeds from the sale of these salons we've deposited, and we will also receive franchise fees. Additionally, we will be collecting ongoing revenues from these salons in the form of royalties and product sales.

We expect the bulk of these re-franchise agreements to close in the first quarter of fiscal 2018. In August, Eric and I will provide an update as to our progress, and expect to provide some additional clarity as to our longer term views regarding franchise efforts and the incredible opportunities we have there.

Let me also add that I believe there may be options to improve franchise opportunities other than converting underperforming corporate salons. Eric and I will consider all viable options to expand our capabilities and our success in this area. The evolution of the business to an expanded franchise portfolio is an important element of our strategic transformation. However, having said that, to maximize shareholder value, we also must be an effective, capable and consistent operator of company-owned salons.

Over the last few months folks, I've seen nothing that indicates to me that Regis cannot successfully operate company-owned salons. In fact, quite to the contrary, Regis has many salons operating at or above the levels of our franchisees. Someone recently asked me at one of our meetings, whether I prefer the company-owned salons or the franchise business. Well, that's a little like asking me which of my children I love the most. I love them both. I love them equally, but for different reasons. I believe that a mixed portfolio of both company-owned salons and franchised salons creates inherent optionality, improves our competitive position, and as a wise course, to stabilize and improve shareholder value.

Regis is a great company. However, as Mike mentioned earlier in the call, the financial results at Regis are clearly not yet great. Regis has an unacceptable level of guest traffic and management of variable labor costs in company-owned salons has not been effective. And to improve our results, we must take steps to drive guest traffic, improve guest retention and better manage variable labor in our company salons, among the other opportunities we have to improve overall financial performance.

As I mentioned to you earlier, to the extent it's appropriate for me to do so, I intend to be transparent and direct with all of our core stakeholders, with everyone. As we speak, we are in the process of implementing a 120-day turnaround plan, designed to effectively stabilize the near-term results of our company-owned salons. Because the plan is still in the early days of execution, and has not yet been fully communicated to our organization, I'm not at a point where I can share the details. However, I can tell you that the initial phase is focused on improving salon labor-management, along with steps to disinvest in certain programming that is not creating value for our shareholders or for our guests.

Last week, I assigned and redeployed key personnel within the organization to these initiatives. For example, Mark Fosland has accepted responsibility for the ongoing execution of variable labor-management in our company salons. Mark is a 25-year veteran at Regis, and he and his team are analytically gifted. I believe that Mark is the best executive in the company to bring this area of our business effectively under control.

Additionally, we're in the process of recruiting a permanent Chief Financial Officer and a new General Counsel, as Eric moves full-time into his role as President of Franchise. I'm also considering candidates to lead and improve the company's marketing efforts here in the days ahead. And over the next few months, we'll be focused on improving both the speed and effectiveness of our execution.

Frankly, execution, as in many distributed networks of P&L centers, execution must become a core competency at Regis, so that we deliver on the promises we make, the promises we make to our shareholders, the promises we make to our employees and stylists, the promises we make to our Board of Directors, the promises we make to our franchise owners. Execution, speed and effectiveness must become a core competency at Regis.

During our end of the year call in August, I will provide an update on the results of our 120-day plan, and provide more insight into my view of potential opportunities to improve the longer-term renewal of the financial performance of Regis.

Now a few thoughts in closing before we take your questions. I fully understand and I take very seriously my duty and obligation to the company's shareholders.

After a long and successful career, I expect this will be my last role of a CEO, and I have no intention of failing. I am not going to spend the next 30 years of retirement thinking about a failure. In fact, I can tell you I would not have accepted this role if I did not believe it could be done and done well.

I am certain, however, that each one of you already recognizes there are significant opportunities here to improve the financial performance of the company. In fact, I suspect that many of you may be frustrated with the company's historical performance. You know and I know that talk is cheap. Therefore, I would ask for your continued patience and support, as we take steps to make real my commitment to the company's owners. In our future calls, I won't spend much time looking in the rearview mirror, instead, we will focus on building a better future and the efforts underway to establish a winning team at Regis.

You each know that business is a competitive sport, and winning is a learned behavior. At the new Regis and under my leadership, we will undergo a diagnostic process, we will consider the hard data, we will make informed judgments, and we will take the necessary actions that are required to win for all of our stakeholders.

Please know that in the years ahead, I will do my very best to deliver results that will warrant your continued confidence in our company.

Operator, you can now open the line for questions.

(Operator Instructions) And as there are no questions, I will turn the call back over to Hugh.

Thanks, everyone, for giving me a hall pass on the questions. I look forward to talking to you again in just a few more weeks. Thank you, and see you soon.

Thank you. Ladies and gentlemen, this does conclude our conference call again, for today. If you do wish to access the replay for this presentation, you may do so by visiting regiscorp.com in the Investor Relations section of the website or by calling 1 (888) 203-1112, and again, using access code 754-0672. Thank you, all, for participating, and have a nice day. All parties may now disconnect.