Good morning and thank you all for joining the Regis 4th Quarter 2021 Earnings Release Conference Call. All participants are in a listen only mode. After the prepared remarks by our Chief Executive Officer, Felipe Ataydi And Executive Vice President and Chief Financial Officer, Kirsten Zuppfer, we will have time for questions. Please use the chat feature or the raise your hand feature to ask a question. Joining Felipe and Kirsten, On this call, we have Jim Lean, President of SmartStyle and Portfolio Brands Matt Docter, Executive Vice President and Chief Strategy Officer and Amanda Rustin, our General Counsel.
I am your host, Biz McShane, AVP Finance. As a reminder, this conference call is being recorded. Before turning the call over to Felipe, I would like to remind everyone that the language on forward looking statements included in our earnings release and 8 ks filing also apply to our comments made on the call today. These documents can be found on our website, www dotregiscorp.com/investorrelations.html, along with any reconciliation of non GAAP financial measures mentioned on today's call with their corresponding GAAP measures. With that, I will now turn the call over to Felipe.
Thank you, Biz. Good morning and thank you for joining us. The end of fiscal 2021 marks an important milestone in the history of Regis. The journey towards a fully franchised business model away from an operating company began 4 years ago and I can proudly say that this major transformational phase is now complete. Our salons are essentially fully in the hands of franchise partners and we can for the first time make decisions for Regis through the lens of a true franchisor with a management team that combines both deep expertise in franchising and legacy operational know how.
Along with the full transformation of our business model, I am very pleased to say that we have a large number of salons running on our proprietary tech platform, Open Salon Pro, a platform that until 3 years ago simply did not exist. These are all remarkable accomplishments in the face of unprecedented times, and I want to take this opportunity to personally thank both our teams and our franchisees For working tirelessly through such challenging environments. I want to take a few moments to update you on the progress we have made on key initiatives that have gone hand in hand with our business transformation. Major highlights for the year include assembling a new management team with deep franchising expertise, a reorganization of our business to focus on our brands, The elimination of 1356 company owned salons through refranchising, negotiated lease buyouts or closing at the end of lease terms, A new organizational structure based on 0 based budgeting, the transition of almost 2,000 salons onto to create a performance driven culture. It is because of these changes that I believe we're in the best position to fully unlock the value of the Medias platform.
As it relates to the current business and our results, we're still very much feeling the effects of the pandemic. However, what began as a Declining consumer demand due to unprecedented disruption of routines has now shifted into a shortage of labor supply at our salons. While retail and services are broadly feeling the effects of this labor shortage, it is amplified in our industry since salon staffing directly translates to revenue generation. Our nominal sales continue to improve month over month as Q4 2021 comps were 4 points better than Q3 2021, But perhaps even more telling is that salon hours worked is down 25% versus pre pandemic levels, causing a slower sales recovery than we would have liked to see. We're confident that this disruption is temporary in nature, As in the one fourth of our franchise salons that ran flat in labor hours compared to pre COVID levels also ran flat in sales, indicated that when we're able to capture more labor hours, the sales do return.
We were encouraged last week by the announcement of From a geography perspective, in our largest brand Supercuts, states such as Florida, Oklahoma, Alabama and Arizona Have been able to improve labor hours by 5 to 10 points versus the rest of our fleet, resulting in these states, which were posting sales 10 points short of pre COVID levels in Q4, almost touching pre COVID comps as we moved into July. Additionally, The states that reopened earlier continue to outperform states such as California and the Northeastern states, which have been more restrictive during the pandemic with residents taking longer to return to their normal routines. States that ended unemployment benefits earlier are also performing better. Supporting our franchisees and ensuring their salons are properly staffed is one of our top priorities, and we're actively working with our franchisees to facilitate these efforts. We're implementing a new recruiting tool that delivers a fast, frictionless mobile solution that streamlines the entire hiring process to assist our franchisees in hiring the stylist they need.
This will save our franchisees time every week and give candidates a white glove experience that has been shown to increase hiring conversion rates and overall candidate satisfaction. We think this has the potential to provide us with competitive differentiation, which is key in a world where our people are our product. If we can help our franchisees hire the best stylists before their competitors do so, It is a major win for our brands. I will also remind you that we are the employer of choice for Empire Education Beauty School Graduates, Giving us preferred access to new stylists just entering the labor force. We're also encouraged by the industry we're in.
While it has no doubt that an industry hit harder than others, it is also one that remains resilient. The disruption other industries have seen to their service and delivery models It's one that does not exist in hair care as the need for physical retail space and a professionally trained stylist to provide our services will continue to hold true And the desire for people to use these services to look and feel their best is not going away. We're confident that staffing will return to pre pandemic levels, But what we cannot do is to predict the exact timing of when that will occur. Whenever that timing is, Regis is in the best position to capitalize on growth opportunities Given our many transformations over the past year, the Regis of today is an entirely different company when compared to the beginning of fiscal 2021, From our management team to our technology platform and everything in between. We have a new team, a brand centric focus set to drive sales, The right business model for growth and the right size org structure and tech platform to support and drive that growth.
The skill set of our management team matches our business model with a hungry, driven and aggressive growth mindset. They represent the perfect blend of deep franchising expertise and legacy Regis operational know how. The level of franchise expertise this team has is something we Never had before, joined upon experiences driving value for franchisees in other systems. This combined with close to 100 years of Regis operating history is a differentiator from other franchisors. We organize ourselves in a brand centric manner compared to a brand agnostic approach prior.
Great franchise systems align both the franchisor and franchisees around optimizing their respective brands. A key to brand building here will be further driving sales and we are in the best position to deploy our marketing dollars than ever before. Through collaboration with our Supercuts franchise council, Regis will be centrally managing the Supercuts ad fund for the first time versus having the majority inefficiently spent by franchisees themselves on local initiatives. This past practice left Regis with insufficient visibility the marketing investments being made for Supercuts and an inability to measure the effectiveness of incremental return on the investments. It also resulted in limited dollars to drive national media, marketing and brand initiatives that would have leveraged Supercuts to scale.
We're now able to do all of this, making use of our scale to deploy our add fund dollars more efficiently into impactful initiatives that the entire Supercuts fleet can benefit from. During the pandemic and continuing to today, we have made the conscious decision to pause most of our marketing efforts given the labor shortages. The last thing we want is to spend promotional dollars to drive customers into salons that are staffed below full capacity. We're currently rebuilding our advertising funds As labor comes back into our salons and we'll be ready to go with tactical marketing promotions when the timing is right. As I mentioned earlier, our salons are now essentially fully operated by franchisees, the major business transformation that we embarked on 4 years ago.
As of today, only about 200 company owned salons are left in our portfolio. The acceleration and completion of this refranchising process Given the current business environment was remarkable and we could have easily been here with 100 small corporate salons given the continuing uncertainty of the pandemic nature of the remaining salons. The pipeline of remaining van additions is set to get this figure down to under 130 corporate salons by the end of this calendar year, making the transition essentially complete. Our team is now free to focus their efforts on fully supporting our franchisees and shifting to Phase 2 of our refranchising process, providing growth opportunities to our most capable franchisees, both existing and new. It is imperative now to ensure our salons are in the hands of Capable, well capitalized business partners that can be the best representative of our brands and it is those partners that will enable Regis to fill in the geographies that we identify White space salon growth opportunities.
In parallel with the refranchising, we're working on our Salon of the Future concept to ensure new builds across our brands Not only elevate our customer experience, but also provide a strong ROI to accelerate unit growth both domestically and internationally. We have completed our corporate reorganization and our zero based budgeting work to ensure we have the right structure to support a fully franchised business model. We have conducted a robust 6 month assessment of our people and cost structure and these changes are a major component of the plan to bring Regis back onto a path of growth and profitability. While we do expect net savings, it is important to remember that investment is needed in our brands, In our technology platform and in other areas of our business in order for Regis to grow. Kirsten will discuss our G and A in more detail, But I want to state that while we believe our go forward structure supports our growth initiatives in the most efficient manner, we will always continue to assess our structure As 0 based budgeting is a continuous process, we also made important progress in our rollout of Open Salon Pro.
We now have just under 1900 salons live on OSB with another 200 contracts to install the system in the coming weeks. We also entered into a transition services agreement with our former POS supplier to make the transition into OSB even more seamless for our franchisees. Our goal is to have most of our salons running on OSB by the end of fiscal 2022 and all of them by the end of calendar 2022. One of the most important aspects of having our salons on OSB is the quality of the data we're able to collect and utilize so we can drive sales and traffic into our salons. This data will help us understand behavioral patterns, design new promotions and drive individualized marketing initiatives with CRM and loyalty.
Stylix around the country have reported improvements in ease of use as well as speed of checking in and checking out customers, While our franchise owners have reported far better visibility into key business metrics, thanks to the Open Salon Go app, a functionality that gives owners and their field leaders real time dashboard reporting of their businesses. Our product engineering team continues to enhance All aspects of OSB and we're excited as to the impact this will continue to have on the business and serve as a differentiator for Redis Alliance. I also want to express how excited I am to have welcomed Mike Mansbach into the Regis Board back in June. As former President of MINDBODY, A software as a service firm that supports the fitness and wellness industries, Mike helped grow the business before playing an instrumental role in the sale of MINDBODY to Vista Equity Partners. Mike is a tech industry veteran who brings a depth of expertise in connecting digitally with customers, a skill set that I'm confident will help enhance the overall customer experience for our Regus brands.
And as we continue to evaluate our strategic related to Open Swan Pro, Mike's experience in building enterprise value, product strategy and marketing while creating global scale will help ensure we maximize value to our shareholders. While we're still investing in OpenSalon Pro and our top priority is to bring our entire fleet on board Before considering potential external customers, I am encouraged to see tech companies offering similar products achieve substantial valuations, some of which with a customer basis much smaller than ours. It is a combination of all these achievements that enable us to look ahead and position us well for fiscal 2022. Our focus is clear. We need to continue to drive system wide sales, ensure our franchisee base is as strong as it can be By providing our existing franchisees with opportunities to grow and bringing in new franchise partners, continue the OSP rollout and laid the foundation for growth through a Salon of the Future framework that provides an investment case for large scale development agreements, both domestically and internationally.
For all the challenges that fiscal 2021 brought, the Regis we are today is a fundamentally different company than the Regis of 1 year ago. I'm encouraged that Regus is best positioned for the future and I'm confident that we have the right people in place to execute on our plans. Thank you so much for your continued interest in Regis. And I'll now turn the call over to Kirsten to take you through the numbers. Kirsten?
Thanks, Felipe, and good morning. On a consolidated basis, we reported 4th quarter revenue of $99,000,000 versus $60,000,000 in the prior year, which was 65% higher as the majority of our salons were closed in the Q4 of last year. Core royalties and fee Revenue increased 2 63 percent from Q4 of 2020 from $7,000,000 to $27,000,000 The increase is due to improved comps and fewer government mandated closures. Quarter over quarter comps and royalties improved due to improved performance and fewer government mandated closures. The only significant shutdowns in Q4 were in Canada, where approximately 300 salons were closed, impacting our overall revenue by approximately 5%.
In the remaining fleet, we can see improvements in our nominal sales as we move away from reopening dates and states normalize their environment. As we look at some of the states and regions negatively impacting our comps, Particularly California and the Northeast, which are returning to normalcy more slowly, we are seeing 10% to 20% increases in nominal revenue per store since the beginning of Q4, which means they are growing, they are just behind the curve. Overall, with the direct Correlation between labor hour performance and sales performance that Felipe mentioned and 75% of our stores running well below pre COVID levels From a labor hour perspective, we remain unclear to the exact timing of staffing levels returning to pre COVID levels. We reported an operating loss of $27,000,000 during the quarter, which includes a $5,000,000 non cash inventory reserve associated with the change in our merchandising strategy. 4th quarter consolidated adjusted EBITDA loss of $23,000,000 compared to a $34,000,000 adjusted EBITDA loss in the Q4 of 2020 as we are lapping the closure of our fleet last year.
It's worth noting that this quarter's adjusted EBITDA includes $13,000,000 of losses related to our company owned salon portfolio that will be dramatically reduced as we exit these salons. Looking at the segment specific performance and starting with our franchise segment, I mentioned 4th quarter royalties and fees increased $19,000,000 versus the same quarter last year, primarily due to the government mandated shutdowns last year. 4th quarter franchise adjusted EBITDA was $11,000,000 an increase of $10,000,000 year over year, driven by increased sales and increased salon count. In our company owned salon segment, 4th quarter revenue was $25,000,000 an increase of $10,000,000 or 65% versus the prior year. Company owned salons segment adjusted EBITDA increased $9,000,000 year over year to a loss of $13,000,000 versus a loss of $22,000,000 primarily due to the shutdown last year.
As it relates to corporate overhead, 4th quarter adjusted EBITDA loss of $21,000,000 increased $8,000,000 year over year compared to adjusted EBITDA loss of $14,000,000 in the prior year. This increase was driven primarily by the furlough program in effect for the majority of the workforce across the corporate office, field support and distribution centers in the Q4 of the prior year. Switching gears to G and A, as many of you have been asking about what our future state looks like. Upon the successful execution of our 0 based budgeting, we expect G and A, excluding rent, to be in the range of $72,000,000 to $80,000,000 annually, which not only represents G and A for our franchisor structure, but also G and A for our full technology company that develops, supports and maintains Open Salon Pro. To be clear, this run rate is expected to be achieved in Q4 of fiscal year 2022 due to the exiting of the distribution centers and refranchising company owned salons in the first half of fiscal year twenty twenty two.
Achievement of these G and A levels is subject to the risk Factors disclosed in our fiscal year 2021 10 ks filed this morning. I want to also state that while our corporate reorganization And ZBB projects have rightsized our G and A to be identified needs of Regis in the short term, ZBB is a continuous process, which we believe will continue to identify savings. I also thought it would be helpful to spend a few minutes discussing our transition away from the wholesale product business. A few weeks ago, we announced that we will be partnering with SalonCentric and BSG for the distribution of product to our franchisees. Salon Centric and BSG will be able to better service our franchisees as we move to a fully franchised model versus purchasing wholesale from Regis.
Had we continued to operate as is, our wholesale product business would have lost $2,000,000 to $3,000,000 in fiscal year 'twenty two. On the flip side, had we wanted to prevent this loss, given the nature of our cost structure to support a fully franchised business, We would have had to raise product pricing to our franchisees considerably, which would have been a detriment to their 4 wall profitability. We believe that our new model will bring value to our franchisees, preserve our private label business and be EBITDA positive while greatly reducing the complexity of our business. Turning to the balance sheet and liquidity. As of June 30, we had $129,000,000 of liquidity, including $89,000,000 of available revolver and $19,000,000 of cash.
Our net available liquidity as of June 30th was $54,000,000 which reflects our minimum liquidity covenant requirements and the permitted add back of the shortfall in certain refranchising proceeds in accordance with our amended credit facility. Looking forward to fiscal year 2022, we expect to continue to remain a net user of cash for the fiscal year as we refranchise or close the remainder of our company owned salons and wind down our 2 distribution centers. However, as a post pandemic recovery continues, Coupled with the realization of the savings identified as part of the ZBB process, we expect to achieve monthly positive cash flow inflections during the latter half of fiscal twenty twenty two. We believe that our current liquidity levels are sufficient to fund our cash needs during fiscal year 2022. In closing, progress on key initiatives accompanied with encouraging trends has us feeling very confident as we wrap up fiscal year 2021 and move into fiscal year 'twenty two.
This concludes my prepared remarks. I would like to thank you for your continued support and interest in Regis. Our first question is from Steph Wiecznyk of Jefferies. Please go ahead, Steph. Thank you.
Good morning, everyone. We have two questions to begin, if we could. Kristen, just in relation to your final questions on cash, Thinking about cash use in the first half, it sounds like maybe an inflection in the back half. But can you help us think about the puts and takes, Inventory on the balance sheet, I would guess, would be a cash contributor as you move away from the products business. Any other things we should be thinking about that relate to the final kind of downdraft in the old model and the investments in the new model from a cash perspective?
Yes, great question, Steph. The other two factors
is, as we roll out of the 2 distribution centers, there's Cash uses associated with that wind down as well as the remaining refranchising efforts that will occur in the first quarter of this fiscal year. So as we move through those, then we start to see some Moving from being a cash user to the latter half of the year where we'll generate some cash in certain months.
Okay, that's helpful. And then my second question, it's super encouraging to hear about the G and A excluding rent being around that $72,000,000 to $80,000,000 on a full year basis. Think it's running closer to low 90s run rate exiting Q4. Can you just help us bridge the roughly $2,000,000 to $4,000,000 a Quarter, where are the incremental savings expected to be realized? And maybe it also relates to
the defeat. But just trying
to bridge the incremental cuts that you're anticipating to realize here over the course of the next 12 months? Yes. I mean, it's going to come in various places within the organization.
Obviously, the distribution center is a key component of that. And As we've discussed in previous quarters, the ZBB process and the ZVO process is starting from a white piece of paper. We went through that process and built the org structure to support the business. So as part of that, there were Some eliminations that we made at the end of June that you'll see those savings come through as we move into fiscal.
Great. And then my last one, if I could tap one more in, is just related to the products business under the new agreement with Salon Centric and DSG. Can you just give us some of how the dollars would flow through the franchise and then the corporate model, just want to make sure we fully appreciate that. You may still have Access to some of the product value, but you're not directly selling to the franchisees, so just walking through an illustration,
I think, would be helpful. Thank you.
Yes. So as it relates to how it will flow through the models, there is a rebate with the distribution partners that we will recognize as revenue that will come through, a P and L. Is that your question, Seth? I want to make sure that I'm answering
Yes, that's exactly right. Just making sure we understand what's happening to the mechanics of the revenue recognition. Beth, do you have anything else? Kristen, could you just talk a little bit more about that? So the revenue rebate, but then what is the attributed margin to the rebate?
Is there any expense Behind the rebate? Yes. So I mean as it relates to product sales, there will be a
rebate that runs through revenue. And then What hasn't changed is we'll continue to receive a royalty on the product sales that our franchisees are making in their salons.
Okay. So from a margin perspective, the royalty, of course, would be at your historic margin levels. The rebate would be at almost Sure. Margin? Is that the way we should think about it?
Yes. Okay. All right. Very helpful. I'll turn it to the next question after.
Thank you. Thank you, Steph. Our next question is from Laura Schumpstein from Loop Capital. Please go ahead, Laura.
Okay. Sorry, bad quality of the call here from on my end. I wanted to talk a little bit about the labor shortage that you're facing And see how much of the problem you think goes away once we cycle through the enhanced unemployment benefits. And I also wanted to see what you think you can do to help franchisees increase their hiring of Folks who have been independent stylists, see if there's much you can do there.
Hey, Laura, Felipe here. So look, right now, the major roadblock to Sales recovery has been the labor shortage, right. But we're very encouraged with some of the facts that I talked about in my prepared remarks. So states, for example, that ended the unemployment benefit sooner have seen a faster sales recovery. And also if you look at the top performing one quarter of our salons in terms of labor hours versus last year, I mean, these guys have been the fastest to recover sales as well.
So we've seen a very linear relationship between the recovery of labor hours And the recovery of sales, right? I mean, in this industry, of course, the availability of stylists correlates directly with our ability To do sales, right? So that's as we we're very, very confident that as we Our status return to the workforce that this will directly translate into sales. And with respect to the second part of your question, which is we can help franchisees. We're about to implement a new recruiting solution to be used by our franchisees, which is based on artificial intelligence.
Basically, the provider is a leader in this segment. There's been a very successful global franchisor who adopted The system and with a lot of success, really we want to replicate their success in recruiting on our end as well. So we're very Excited about that and we think that the effects will be seen shortly after the implementation of this tool. Laura, I think we are losing you again, if you wouldn't mind repeating, you're breaking up again.
Okay. I'll take the rest of my questions offline. Thank you.
Thank you, Laura. Appreciate it.
With no further questions, we will adjourn. Thank you very much for joining today.