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Text: Before turning the call over to Hugh, there are a few housekeeping items I'd like to address.
These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons but should not be considered superior to or the substitute for our GAAP financial measures and should 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 yesterday's release, which is available on our website at www.
Our guiding principle at Regis is to generate long-term value for our shareholders and key stakeholders.
In that regard, I was honored to be asked to chair our company's Board of Directors, in addition to my continuing role as President and Chief Executive Officer.
I believe that assuming the Chairman's role will help ensure continuity of leadership in our multiphase transformational strategy, during a period of ongoing change.
The second quarter does represent an important milestone where we gained greater clarity into the end date of our portfolio transformation.
Based on our year-to-date results and a robust pipeline of potential transactions, we now believe that our transition to a fully franchised business will be substantially complete by the end of this calendar year.
This improved visibility into the cadence of our portfolio transfer transition enabled us to begin meaningful reductions in our cost structure and to initiate other plans we have for the business including reengineering our capital structure, so that so that it will be appropriate for a fully franchised capital like growth platform.
We are pleased to report this quarter that we continue to make meaningful progress in our ongoing strategic transformation to capital light high growth franchise company in August 2019 we estimated that it would take us 18 to 24 months to complete our conversion to a fully franchise portfolio.
However, due to the success we've had in the first half of fiscal year 2020 are, we expect that we will substantially complete this conversion at a somewhat earlier date than we originally anticipated.
In the first half of fiscal 2020, we have converted 988 salons to franchise owners, with line of sight to the sale of approximately 900 additional salons.
This means that net of closing roughly 350 to 500 underperforming salons, which typically occurs at lease expiration.
We have approximately 50% of the remaining company-owned salon portfolio in the pipeline at various stages of transition.
As of December 31, nearly 70% of our portfolio is now franchised.
And you may recall that when I began my tenure as CEO in April of 2017, our salon portfolio was roughly 28% franchised and 72% company-owned.
So by any measure, very significant progress in our portfolio transformation.
As I mentioned, our transition to a fully franchised model has been occurring at a rapid pace.
And as a result, we have been thoughtful and intentional in our plans to begin more aggressive expense reductions.
In January, we announced actions that will reduce G&A by approximately $19 million on an annualized basis.
As we consider the magnitude of these planned G&A reductions, we decided to schedule our actions at the beginning of the third quarter, as we recognized by scheduling the execution of these G&A reductions in January would dilute our second quarter results, given the increased pace of our venditions.
However, we wanted to ensure that our actions to reduce expense did not create an unacceptable level of risk to the stability of our company-owned salons and corporate operations.
We expect to consider further G&A reductions as we draw closer to the end date of our transition and gain additional visibility into our path to sustainable growth.
Further, we believe it is the right time to redesign our capital structure so that our debt facility is better suited for a company that is now 70% franchised.
We recently engaged Guggenheim Securities to help us design the optimal capital structure for what is now a franchise business.
Guggenheim has an outstanding track record of success in working with large franchisors and assuming continued favorable market conditions, we anticipate that this process will be successful and that we will complete our replacement financing no later than the fourth quarter.
Once we have completed our financing, we anticipate that we will continue to make investments to prepare the company for the growth phase of our multi-phase transformation.
This could include additional investments in the following franchisor capabilities: frictionless customer-facing technology; the company's new internally developed back office salon management system, which is now in beta; disruptive marketing and advertising; print driven merchandise, including investments we have made in a new private label brand, we've named Blossom, and the relaunch of our historically successful DESIGNLINE brand.
Ongoing investments in stylists' recruiting and education and then stylists and franchise partner education will also be considered.
We may also utilize our cash in the next 18 months to complete any remaining elements of our multiyear restructuring, including closing nonperforming company-owned salons, when it's justified by the economics, although our operational bias is typically to manage these salons to lease expiration; paying down some debt, we determined that it's wise to do so; supporting our ongoing G&A reductions through severance programs and if needed, capital investments in salon refurbishments and remodels as we consolidated our various brands into what we have called the Fab 5.
And as you all know, we have utilized cash to repurchase our shares in circumstances where we believe that would be in the best interest of our shareholders.
We decided to push the pause button on share repurchases during the second quarter in order to reduce our debt levels and continue investments in other growth initiatives.
Upon completion of our refinancing, management and the board will continue to assess our capital allocation strategies on a periodic basis as we have done historically.
Despite the inherent variability and near-term risks associated with our transformational strategy, we remain convinced that a fully franchised business has the potential to generate a higher return on its capital and will prove to be in the best long-term interest of our shareholders and franchise constituents.
We do have a significant amount of work ahead of us in order to substantially complete the portfolio transformational phase of our strategy by calendar year-end.
However, we are determined to bring this phase to a conclusion so that we can continue to shift our time and energy in our talent toward the organic growth phase of our strategy.
Although conditions could change, we have growing confidence in our plan and our ability to successfully execute our multiphase transformation.
Our restructuring and portfolio transformational phases are each moving rapidly toward their end dates.
And we intend for Regis to be well positioned for its growth phase, a period we expect to generate sustainable revenue and earnings in the years ahead.
With that, I'll ask Kersten Zupfer, our Chief Financial Officer, to take us through the numbers.
As you mentioned, we are pleased to share significant progress in our transition to a fully franchised model.
Yesterday, we reported on a consolidated basis, second quarter revenues of $208.8 million, which represented a decrease of $65.9 million or 24% versus the prior year.
The year-over-year revenue decline was driven primarily by the conversion of a net 1,447 company-owned salons to the company's franchise portfolio over the past 12 months and the closure of 172 salons, of which the majority were cash-flow negative and not essential to our future plans.
When targeting salons for closure, our bias is to exit the location at lease expiration, unless the economics justify a course of action to buy out of the lease early.
The headwinds in the quarter were partially offset by a $5.8 million increase in franchise revenues and $33.6 million of rent revenue recorded in connection with the new lease accounting guidance adopted in the first quarter of fiscal 2020.
Second quarter consolidated adjusted EBITDA of $17 million was $3.6 million or 17.5% unfavorable to the same period last year, and was driven primarily by the elimination of the EBITDA that had been generated in the prior period from the net 1447 company on salon that have been sold and converted to the franchise portfolio over the past 12 months.
Second quarter adjusted Eva dial was also impacted by lower comp, minimum wage increases and strategic investments in technology.
The decline in adjusted EBITDA was partially offset by a $5.6 million increase in the gain associated with the sale of company-owned salons.
Excluding discrete items and the income from discontinued operations the company reported decreased second quarter 2020 adjusted net income of $4.6 million or $0.13 earnings per diluted share as compared to adjusted net income of $8 million or $0.18 earnings per diluted share for the same period last year.
The year-over-year decrease in adjusted net income was driven primarily by the elimination of adjusted net income that had been generated in the prior year from salons that were sold and converted to the company's asset-light franchise portfolio over the past 12 months.
On a year-to-date basis, consolidated adjusted EBITDA of $46.8 million was $1.1 million or 2.3% favorable versus the same period last year.
The year-over-year favorability was driven primarily by a $24.7 million increase in the gain, excluding noncash goodwill derecognition related to the year-to-date sale and conversion of 988 company-owned salons to the franchise portfolio.
Excluding the impact of the gains second quarter year-to-date adjusted EBITDA totaled $5.6 million, which was $23.7 million unfavorable year-over-year and like the second quarter results, this unfavorable variance is also driven largely by the elimination of EBITDA related to the sold and transferred salons over the past 12 months.
As you noted, we disclosed at the close of fiscal year 2019 that our transition to a capital-light franchise model would initially have a dilutive impact on the company's adjusted EBITDA.
So this decline in our reported adjusted EBITDA was not unexpected.
Nevertheless, please note that as we continue our transition, we are certainly paying attention to cash from operations.
As you know, we do not provide guidance.
However, assuming no unexpected changes in market conditions and after adjusting for unusual and transition-related items.
Our objective is for our run rate trajectory to be cash flow positive in the fourth quarter as we accelerate into the end state of our transition.
Looking at the segment-specific performance and starting with our franchise segment second quarter franchise royalties and fees of $29.3 million increased $6.7 million or 29.8% versus the same quarter last year, driven primarily by increased franchise salon counts.
Product sales to franchisees decreased to $1 million year-over-year, to $16.9 million, driven primarily by a $6.5 million decrease in products sold to TBG, partially offset by increased franchise salon counts.
As a reminder, franchise same-store sales are calculated in a manner that is consistent with how we calculate our same-store sales in our company-owned salon portfolio and represents the total change in sales for salons that have been a franchise location for more than 12 months.
As we are in this transition phase, salons are leading company-owned comps but not entering franchise comps for 12 months, which adds temporary noise to same-store sales comparisons.
Second quarter franchise adjusted EBITDA of $13.1 million grew approximately $4.6 million year-over-year, driven by growth in the franchise salon portfolio and better leverage of our cost structure, partially offset by lower margins on franchise product sales.
We believe that the franchise portfolio may have been temporarily challenged by the operational complexity of onboarding new owners and transitioning salons to a more -- to our more experienced owners, among other factors.
With the revenue recognition and the lease accounting guidance we have adopted over the last two years as well as sales of merchandise to TBG at cost, our EBITDA margin percentage is not comparable year-over-year.
After adjusting for the noncontributory revenue associated with ad fund revenue, franchisee rent revenue and TBG product sales EBITDA margin was approximately 37.5%, which is approximately 4.2% favorable year-over-year and is in line with where we would expect it to be.
Year-to-date, franchise adjusted EBITDA of $24.9 million grew approximately $6.6 million or 36% year-over-year.
Now looking at the company-owned salon segment, second quarter revenue decreased $105.3 million or 45% versus the prior year to $128.9 million.
This year-over-year decline is driven and consistent with the decrease of approximately 1,598 company-owned salons over the past 12 months, which can be bucketed into two main categories.
First, the conversion of 1,498 company-owned salons to our asset-light franchise platform over the course of the past 12 months.
These net company-owned salon reductions were partially offset by 51 salons that were brought -- bought back from franchisees over the last year and 21 new company-owned organic salon openings during the last 12 months, which we expect to transition to our portfolio in the month's end.
Second quarter company-owned salon segment adjusted EBITDA decreased $17 million year-over-year to $4.2 million.
Consistent with the total company consolidated results, the year-over-year variance was driven primarily by the elimination of the adjusted EBITDA that had been generated in the prior year period from the company-owned salons that were sold and converted into the franchise platform over the past 12 months.
The quarter was also impacted year-over-year by increases in stylist minimum wage and styles commissions and a decline in same-store sales in our company-owned salon.
As you might expect, we are carefully monitoring our company-owned salons as we continue through our transition.
Our objective is to maintain focus and stability in those salons until they are venditioned.
On a year-to-date basis, company-owned salon consolidated adjusted EBITDA of $15.7 million was $33.2 million unfavorable versus the same period last year.
The unfavorable year-over-year variance is driven by the elimination of the adjusted EBITDA related to the sold and transferred salons over the past 12 months, partially offset by management initiatives to rightsize the source structure in the field.
Of course, it's important to note that our company-owned salon performance will continue to become less critical to the future trajectory of our business as we accelerate our conversion to franchise.
Turning now to corporate overhead.
Second quarter adjusted EBITDA of $0.3 million increased $8.8 million and is driven primarily by the $15 million of net gains excluding noncash goodwill derecognition from the sale and conversion of company owned salons, the net impact of management initiatives to eliminate noncore, nonessential G&A expense and lower year-over-year incentive and equity compensation.
In January, based on the improved visibility into the speed of our transition, we began meaningful reductions in our expenses.
By eliminating approximately 290 positions, including 15 contractors across the U.S. and Canada, which is expected to result in approximately $19 million of annualized G&A savings as the company accelerates into its multiyear transformation.
We expect the removal of these G&A costs will also positively impact the company's cash from operations in the back half of fiscal 2020 and in future periods.
Lastly, I wanted to point out that vendition cash proceeds during the second quarter were approximately $71,000 per salon compared to approximately $69,000 per salon in the first quarter of our fiscal 2020, which is consistent quarter-over-quarter.
However, as we vendition more Signature Style salons this fiscal year, we may have lower net proceeds per salon due to the cost of converting some of these salons as part of our brand consolidation efforts, along with more SmartStyle venditions.
Looking now at the balance sheet.
At the end of the quarter, we made a decision to pay $30 million toward our outstanding debt, which decreased our cash balance to $49.8 million as of December 31, 2019.
We paid down the debt to remain in compliance with the net leverage covenants that are part of our existing credit facility.
Given our successful vendition process, we have known for some time that our existing credit facility would not be appropriate for our end state franchise business and that we would need to reengineer our credit facility to meet the opportunities inherent in our new business model.
We believe we now have the visibility and facts that we need to move forward with our refinancing efforts.
After careful consideration, we retained Guggenheim because they have a strong track record of establishing capital structures for growth-oriented franchise companies.
We expect a successful outcome in our refinancing efforts and to complete the process, no later than the fourth quarter of this fiscal year.
Turning now to cash flow.
I thought it might be helpful to provide a high-level reconciliation of how we see adjusted EBITDA flow-through to cash from operations and our free cash flow.
When looking at the cash flow statement, the single largest use of cash is approximately $17 million use of working capital.
As we noted in the prior quarter, this net use of cash is significantly impacted by cash outlays associated with the wind down of company-owned salons as we convert to a fully franchised platform, including transaction-related payments and severance payments related to restructuring our field teams to better align with our future state.
As you noted, we also invested in our new Blossom brand of our private label merchandise, which was received in December and will be in the salons in the spring.
We have also invested in the repackaging and reformulation of our historically successful DESIGNLINE private label brands.
In addition to change in working capital, when reconciling the adjusted EBITDA to operating capital, you will need to take into account the fact that the $41.2 million net gain from the conversion of our company-owned salons to the franchise platform are included in our net income and adjusted EBITDA but not included in cash from operations as the proceeds are reported as inflows in the investing section of the cash flow statement.
I also wanted to provide a brief update on TBG.
At the end of December, TBG transferred back to Regis 207 of its North American mall-based salons, a roughly 10% of the company's portfolio.
When TBG approached Regis about their financial situation in late 2019, we just determined that acquiring the salons, where we just had continuing obligations under real estate leases, would provide greater control over the outcome and maximum optionality for these locations.
This was always a previously considered strategy for these salons.
The remaining lease liability associated with the TBG salons is approximately $30 million and Regis will operate the salons until lease end date or until a new franchise owner is identified.
Essentially, we are now managing these salons in the normal course and will treat the former TBG salons as we would any other location in our company-owned salons portfolio.
We continue to believe the overall transaction, which was always intended to mitigate the company's lease obligation on these salons, was a financial and strategic success.
As a reminder, when we executed the original transaction with TBG back in October of 2017, the lease liability for the mall-based portfolio was approximately $140 million, and as noted, is less than $30 million today.

user
q2 revenue fell 24 percent to $208.8 million.
q2 earnings per share $0.13 excluding items.
dave williams to remain board's lead independent director.
board elects hugh sawyer, president and chief executive officer, as chairman.
company begins meaningful g&a reductions.
about 900 co-owned salons,available for sale are in various stages of negotiations to be purchased.

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