Daniel Hanrahan - Chief Executive Officer Steven Spiegel - Executive Vice President and Chief Financial Officer

Jeff Stein - Northcoast Research Stephanie Wissink - Piper Jaffray Jill Nelson - Johnson Rice

Good morning. My name is Jason, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation Fiscal 2016 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, access code 2664226. The replay will be available 60 minutes after the conclusion of today’s call. I would like to remind everyone that 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 Dan Hanrahan, Chief Executive Officer; and Steve Spiegel, 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. Hanrahan for his comments. Dan, you may begin.

Thank you, Jason. Good morning, everyone, and thank you for joining us. With me today are Steve Spiegel, our Executive Vice President and Chief Financial Officer; Eric Bakken, our Executive Vice President and Chief Administrative Officer; and Mark Fosland, our Senior Vice President of Finance. Before discussing our third quarter performance, this coming Saturday is Stylist Appreciation Day, and I would like to thank all of our stylists for their passion and energy in delivering great guest experiences day in and day out. Our stylists are the lifeblood of our business, and without them we wouldn’t be in business. Our third quarter performance reflects similar themes of those we have discussed in the past. We continue to execute against key strategies focused on leadership development, technical education, and asset protection. Our strong field leaders continue to drive sustainable improvement by using tools, processes, and metrics we provide to drive growth in their districts and salons quarter-after-quarter. Our opportunity remains our underperforming leaders who have yet to show consistent revenue progress. In these situations, we continue to provide additional training and development or upgrade talent as necessary. As I’ve said in the past, our key strategies and the investments we are making behind them will enable us to fulfill our vision to make Regis a place where stylists have successful and satisfying careers. We are transforming a culture comprised of 45,000 stylists, 7,000 salons, and over 1,000 field leaders. This change takes time, and we are moving in the right direction. However, as I’ve said all along, improvement will not be linear. Our third quarter performance consists of three distinct storylines. First is our growth story. Our North American value business representing approximately 85% of our total fleet continues to demonstrate improvement. In this segment, we reported 100 basis points of same-store sales improvement for the quarter compared to a 30 basis point decline in the prior year quarter. Supercuts and SmartStyle, our two largest national brands representing more than 50% of overall salon portfolio, posted combined same-store sales improvement of 220 basis points compared to 70 basis points in the prior year quarter. These national brands have now achieved year-to-date combined same-store sales of 350 basis points and reinforced how our key strategies are leading to improved execution. Both Supercuts and SmartStyle are benefiting from the brand positioning work our marketing department has done and from stylists executing the brand experience in increasing guest satisfaction. Our franchise business continues to be a highlight. We continue to grow our franchise space both in quarter and year-to-date revenue gains of 9.1% and 8.3% respectively. Our aggressive expansion of the Supercuts footprint is contributing to revenue, cash flow, and the Supercuts advertising fund. The growing Supercuts add fund has enabled us to run national TV advertising, which is having a positive impact on our franchise and corporate salons. The second storyline is in our mall business, mainly comprised of our North American premium and MasterCuts business where we faced some challenges and reported combined same-store sales declines of 600 basis points in the quarter. Our primary focus has been on our value business, and it is improving. We are in the process of increasing our intention on our mall business and implementing strategies to turn this business. We have been upgrading our premium leadership talent over the past several quarters at both regional and district levels. While this talent upgrade is necessary and ongoing, it is impacting our performance. Salon leaders and stylists have a hard time dealing with change. We saw disruption in our value business when we restructured that organization in fiscal 2014. However, we are seeing the progress those changes are making today. The third storyline relates to our retail business. While retail comps have improved 200 basis points year-to-date, they declined 350 basis points during the quarter. The results varied by month with our softest performance in January followed by improved trends throughout February and March. The consumer didn’t respond as well as we had planned to our January and February promotion. In March, we launched a new promotion which made it easier and more fun for stylists to engage guests to buy retail products and included a great incentive for service guests to buy product. As a result, we had a much better March. Looking forward, we have leveraged learning from this quarter to improve upon future promotional windows. Collectively, third-quarter same-store sales declined 40 basis points, same-store services sales improved 30 basis points and retail same-store sales declined 350 basis points. As I share leadership trends for the quarter, it is important to keep in mind these three storylines. Simply comparing leaders to our positively comping based overall same-store sales, we will show we have lost some ground since last quarter. For reasons just discussed, this quarter’s performance for our mall-based salons and our retail business impacts overall trends in a way I don’t believe reflects our field execution progress. For comparability and completeness, we will show our performance in total and excluding these issues. During our third quarter, a slightly lower percentage of our regional vice presidents, regional directors and district leaders posted positive overall same-store sales comps when compared to last quarter. If you peel back the onion and look at our North American value service business, leadership trends were stronger. To drive long-term sustainable growth, we are developing and upgrading these leaders who have yet to show revenue growth and are slowing the momentum of our overall growth. We also must grow our service traffic. While many of our strong leaders are driving quarter-over-quarter growth in service traffic, we have not yet posted positive growth in service traffic. Our comps are benefiting from the good work done around these areas - three areas. Focused price increases, increased average ticket from shift and service mix, and our asset protection activities. Now let me shift our discussion to third quarter business updates. During the quarter, we continue to make progress with our digital integration initiatives, focused on guest satisfaction, mobile and web check-in, and guest data capture. Since its launch just over a year-ago, approximately 675,000 guests have downloaded our Supercuts mobile app. Supercuts.com and smartstyle.com combined saw 67% in traffic in the third quarter. Digital check-in continues to grow, driving repeat guest visits. We expect to reach 2 million digital check-ins during the fourth quarter and expect digital check-ins to more than double next year. Our path to a strong digital presence across our brand portfolio is now nearly complete. In early April, we launched our new regissalons.com, and in the next few weeks, we plan to launch signaturestyle.com, representing the collection of our other brands within our value business portfolio. These new websites showcase enhanced functionality on a unified platform and include focus areas such as fashionable and upscale imaging, a social media gathering gallery that invites guests to share selfies, the latest how to use and style advice. Our guests’ feedback tool is showing year-over-year improvement across most brands in guest satisfaction. We know haircut quality and positive stylist interactions represent our greatest opportunity to satisfy more guests and are using this information to inform our technical education curriculum. Through this tool, our field leaders and stylists are also receiving more guest feedback than ever. Last quarter, we discussed how we are leveraging our database guest to offer promotions to our guests and upsell add-on services or retail sales in a more targeted fashion. We tailor our guest message to drive repeat traffic with service reminders and promotional events, and we use our digital knowledge to market a guest while in the salon. Early feedback suggests our stylists are quite enthused with this new capability because it helps them drive incremental business. Before I update you on the quarter’s progress and franchising, I want to provide some context on the strong progress we’ve made in this area of our business over the past few years. Since fiscal 2013, we made a conscious decision to concentrate our franchise expansions to growing our Supercuts brand. Doing so has allowed us to expand in a capital-like fashion in key growth markets, while strengthening overall contributions to the Supercuts advertising fund and enabling national advertising campaigns. The result is that Supercuts nationwide system has never been stronger. From the start of fiscal 2013 through the end of March 2016 our Supercuts nationwide footprint has grown approximately 15% to nearly 2,600 salons. Our franchise footprint has grown almost 50% with 1,534 locations. We shifted some of our advertising spending towards national advertising and have seen strong results in driving traffic to system-wide locations. As I mentioned earlier, our franchise business posted 9.1% revenue improvement during the third quarter. We added 12 new franchisees to the system and opened 46 new franchise salons during the quarter. These new franchisees are helping to expand our Supercuts footprint and along with our strong existing franchise base are contributing to revenue cash flow in the Supercuts marketing fund. Now, let’s briefly cover our progress against our key initiatives focused around leadership development, technical education and asset protection. I’ll start with leadership development. Our means to sustainable growth is in the quality of our field leadership. Our top priority continues to be the development of our field leaders and where necessary moving forward to upgrade underperformers. For those of you who research and follow multiunit operations this may sound a bit like apple pie, as most organizations’ foundational programs exist and are often taken for granted. In ours’ case, we started from scratch a couple years ago and are proud of the progress. In the third quarter, we held our regional director leadership conference where we focused on how to help an individual salon leader plan and grow her business. We conducted training for a premium or mall-based regional directors where we rolled out our new premium brand experience, accentuating the focus on the guest consultation. Our salon leader training program, which we launched in the first fiscal quarter continue to be leveraged in onboarding 450 new salon managers during the quarter. An example of how leadership development is improving execution is in the way our organization responded to investing in understaffed salons. An empty salon chair represents lost revenue opportunity. Toward the end of last fiscal year we identified approximately 1,100 understaffed salons. Since that time we improved staffing level in these salons by over 40%. Our leaders built and executed plans and ensured we did not get over our seats with labor cost. Additionally, when compared to last year our third quarter combo percentage, which are retail sales with the service grew 13% to 9.7%, which is another sign of improving execution. Not all that long ago I could not have made statements like these. Technical education has significant potential to impact retention of our stylists and their performance, because it touches each of our 45,000 stylists, who place a high premium on developing their craft. Supercuts is most illustrative of this point. Supercuts has the most robust training program within our portfolio and has posted positive same-store sales for the past two fiscal years and on a year-to-date basis. As I mentioned last quarter, we completed the build-out of our technical education team for the remainder of the portfolio. Year-to-date we have trained over 30,000 stylists and are on track to achieve our first year goal of in-salon technical education in all of our salons. Moving on to asset protection, our asset protection team is partnering with field leaders to help stylists grow their businesses and earn higher commissions. We continue to see positive trends in these salons, where we’ve conducted awareness training sessions and salon visits. During the third quarter, we conducted approximately 1,000 awareness training sessions and salon visits, bringing our year-to-date total to approximately 2,900. As I conclude, I think it’s important to remind our listeners the value of business has grown same-store comps for the third consecutive quarter. Our national brands, Supercuts and SmartStyle are performing well and our franchise business is performing extremely well. We tried some fresh promotional ideas in our retail business and the consumer didn’t respond. We learn from this and we’ll be better going forward. Our mall-based business remains an opportunity and we are in the process of increasing our attention in implementing strategies to improve. We are transforming the culture here at Regis and the transformation is a journey. We remain maniacally focused on ways to accelerate improvement in our field execution capabilities. I remain confident we are following the right strategies and our execution capabilities are improving as we drive to make Regis a place where stylists can have successful and satisfying careers. We have work to do to drive sustainable growth and guest traffic, which will enable us to realize the potential of each of our salons and results and long-term growth and shareholder value. Now, I’d like to turn it over to Steve.

Thank you, Dan, and good morning. Before discussion our performance for the third quarter I want to cover two housekeeping items. First, included in today’s press release as well as in our corporate website, is a reconciliation bridging reported results to earnings as adjusted for the impact of discrete items for the third quarter of the current and prior years. Also on our website are revisions to our fiscal 2015 quarterly income statements. Second, the presence of evaluation allowance against most of our deferred tax assets affects comparability of reported and as adjusted results to prior periods, mainly as a result of tax benefits reclaimed for goodwill amortization, but do not recognize for GAAP purposes. Our income tax expense for the nine months ended March 31, 2016 of $4.9 million includes $3.4 million of non-cash tax expense associated with goodwill amortization. The total non-cash tax expense related to this matter is expected to approach $8 million for the fiscal year ending June 30, 2016 and will continue annually in decreasing amounts as long as we have a deferred tax asset valuation in place. As we’ve said in the past, the associated quarterly non-cash charge or benefit could fluctuate significantly as a result of how the effective tax rate is determined in interim periods. Our press release and 10-Q include detailed explanations for our major P&L line items, so I won’t repeat them here. I will clarify that our current quarter G&A of $42.6 million benefited from timing of certain expenses. Accordingly, our year-to-date G&A expense of $135 million is more reflective of our overall run rate. I will focus the rest of my comments on our liquidity and financial position. Year-to-date we have repurchased 7.4 million shares of our stock for $97 million at an average price approximating $13.17 per share excluding transaction costs. At March 31, 2016, $64 million remained outstanding under our existing share repurchase authorization. We remain focused on funding investments and managing inflation for disciplined cost management and rigorous review of all spending to ensure we continue to protect our strong balance sheet. To that end, our business generated approximately $39 million of operating cash flow year to date. We finished the quarter with $141 million of cash, $120 million of total debt and no outstanding borrowings under our revolving credit facility. This concludes the financial portion of the call. We would now like to answer any questions you may have. Jason, can you please provide the instructions for the Q&A portion of the call?

Thank you, Dan and Steve. The question-and-answer session will begin at this time. [Operator Instructions] And we’ll take our first question from Jeff Stein with Northcoast Research.

Hey, Dan. Good morning. So when I look at your business mix, you made tremendous progress at Supercuts and SmartStyle, but then when you aggregate Regis, MasterCuts, Other Value and international, I mean, collectively that’s roughly half your business in terms of revenues. So the question is where are you in terms of addressing the underperforming sides of each of these businesses? You have talked a little bit about the fact that the Regis division is maybe about a year behind, but how about some of the other segments and what are you doing to address those? And more importantly, do you have the resources in-house to address those issues in a timely fashion? Thank you.

Sure, Thanks, Jeff. So you’re right, I think we’ve done a terrific job with SmartStyle and Supercuts. We focused on those first. Those are our two biggest brands. And we thought that those were where we could make the biggest difference. The things that we did there, around figuring out the brand positioning to really understand what motivates the consumer has made a real impact. So when I look at what’s happening there, I see value that we are getting out of price increases. I see value we are getting out of the marketing. But where we are really gaining a lot of value is our stylists executing against the consumer positioning work that we’ve done and our marketing department really helped us understand what we needed to do there. So we focused on those two first. And I think that we have seen that it has made a difference. Now what we are doing is we are doing the same thing with our other businesses. So when you look at Regis and then the ones you referred to sort of MasterCuts and the Other Value, we are doing the same things there that we did with SmartStyle and Supercuts, so a really thorough understanding of the consumer. We’re building out the consumer positioning and giving our stylists something that they can execute. We’re a little farther down the road with that - with Regis than we are with our other value business. With the Regis, we are in the market right now and one of the Regis testing the consumer positioning work. So we are in the very, very early stages on that. The other way we benefited both SmartStyle and Supercuts is we built out their websites, and the websites are strong and are helping create interest and awareness of the brands. We just finished the Regis Salon website, so that just launched within the last couple of weeks. And the MasterCuts and Other Value brands is underway now. We will launch that in the next couple of weeks. So we are following the same game plan. You asked if I think we have the resources to do it. We have got a really terrific marketing department that did great work on the brand positioning work in SmartStyle and Supercuts, and I see no reason why the work they are doing now in Regis and the Other Value won’t be just as good. And we’ve seen the value that the digital side brings. So yes, I think we have the resources. No worries about it at all that we have the resources inside and that we can do the same work. The one differentiating factor that I would point out is that both Regis and MasterCuts are more appointment-based business. So we do feel it a little more if we lose a stylist, and it is important that we recruit stylists that come with a guest mix with them. So that makes it a little easier and a little harder at the same time because, when we do bring a stylist in, that brings a book of guests with. We see the impact right away. And we’ve done a really nice job I think in the premium group developing a much stronger group of regional directors over the last about a year. And I think all of that over time is going to pay off for us, Jeff.

Given the fact that you do have a database and you could see, I guess measured to some degree the behavior of your customers, what kind of metrics are you seeing in terms of customer retention for each of your brands?

So we’re actually seeing some improvement in customer retention across-the-board, not dramatic at this point, but we are seeing some. Where we are seeing improvement is in guest satisfaction, because our My Salon Listens tool enables that instantaneously. So a guest when they - if we have a guest e-mail as they’re walking out the door of our salon, they get an email, and they can fill out the guest satisfaction study or questionnaire rather. And then we have that real-time. So we know right away what kind of experience the guest has had. And that’s been extremely helpful in driving guest satisfaction. And at the end of the day, strong guest satisfaction is going to be what ends up driving improved guest retention. But that work is still - that’s relatively new to our company. But it is - we’re seeing that it has a strong impact. It motivates stylists, because they get the feedback that they like. But then it also gives us a tool that is great coaching tool. So if we do see an issue we can respond to it. We also ask the guest if they were particularly unhappy, if they would like a telephone call, and then they get a telephone call from our district leader. And what we’re finding is that’s another great retention tool. So we’re really focused on it, Jeff. I think that over time we’ll continue to see it grow. But it’s not declining anymore. It’s growing slightly and when we first put the tool we were seeing a decline and now we’re starting to see it head in the right direction.

Okay. So if retention is improving, I guess, I am a little confused. Why is the transaction count still going down year on year?

So we get an awful lot of new guests into the system all the time. And retention doesn’t always mean that we get every single one of the guest haircuts. And the value business, it’s a convenience-based business. So there are times when we don’t get them. So we’ve got to continue to improve retention to make sure that we can - that’s going to be a big helper in slowing the decline and then getting us to the point where we start to grow guest traffic.

Got it, and just one additional question, Dan. Your growth in comp-store sales at your franchisees, can you talk a little bit about that? And I am referring to Supercuts, and how that - and if you are beginning to see a narrowing in the performance gap in terms of revenue per location and a franchised unit versus company-owned?

So we are both our franchised Supercuts and our company-owned Supercuts are both growing nicely. So we haven’t seen a narrowing of the gap because they are both growing. We had another very strong quarter. We don’t break out franchise comps, but we had another very strong quarter with our Supercuts franchisees. And, as you saw, our revenue was up nicely, and that is driven by new stores, but it is also driven by really strong comps. So we haven’t narrowed the gap because we are both growing, and so I am happy to see that both are moving in the right direction.

Got it. Okay, thank you.

Thanks, Jeff.

And we’ll take our next question from Stephanie Wissink at Piper Jaffray.

Hi, good morning, everyone. Just a couple of questions related to the competitive marketplace. Can you talk a little bit about what you are seeing across your peer set in terms of pricing and also service menus? Any changes overall in the competitive dynamic? And then secondly, just with respect to your own pricing modules, can you give us some insight into how you are thinking about some of the pricing across both the value and the premium salon? Thank you.

Sure. So in terms of competitive dynamics, we track what our competitors do, so we are pretty much in tune with their pricing. We haven’t seen anything change dramatically there. So I would say that, in general, prices are going up slightly, but nothing dramatic. And then, our pricing, we have been - we built a very strong pricing model here, so - and we look at a number of things when we make a decision about taking pricing up. You heard me talk earlier in my comments about our ability to increase staffing in stores, where we deem them to be understaffed. When we decide to make a pricing decision or we start to think about our pricing decision, we look at what’s going on in the marketplace and we have a good understanding of what’s going on in the marketplace. We look at how well the store is staffed and what retention is like and what the business trends are like in that particular store. And then we make the pricing decision. And we look at - obviously, we look at haircuts, but we have also started to do a much more in-depth look at color pricing, and we take pricing where we can. At this point, our goal is not to have it have an impact on guest traffic. We don’t want to create - we don’t want to take an ambush approach to our guests where, once they get out of the chair and they go out to the register, they end up having to pay a little more money than they thought. So we’ve been really careful on it. In terms of overall service menus, there hasn’t been any significant change there. Our focus so far has been on pricing with haircuts and with color and seeing what we could do to take price there in those two areas.

Thank you. That’s really helpful. How about also on some of the emergence of new specialty concepts within the cutting space in particular? I’m just curious if you have seen any changes in the dynamics in the market around consumers in some of these either gender-based or just broadly more specialized cutting studios?

We’ve seen a little bit of this barber business, but nothing dramatic. And I think the fact that there is some interest in the barber business is benefiting our Supercuts business. Our Supercuts business is a business that is all about service, quality, and convenience. And we do a really, really good job in that area, and that is a little bit of what that barbering business is about. I would stack our stylists in our Supercuts up against that barber business any day. So that has been - I think we are benefiting from it. We have seen a little bit of movement in dry bars, and we are doing some testing right now in some of our salons around - of brown [ph] blowouts and looking at what that might mean for us in terms of - it is a nice service. It is not a really difficult service, it is very convenient. So we are looking at that. But none of that has - we don’t think any of that has had a real big impact on us. I think that sort of the exciting thing about us looking at how we can use blowouts is we are at a point where we now think that we can do that kind of thing in our salons. A couple of years ago, I would have said that we would have just had to ignore that, because we would not have been ready. But we have a test in one of our markets on blowouts in our SmartStyle salon. Because it matches up great with the brand positioning work we have done and thorough understanding of the consumer we have. And we are looking to see if that can help us capture a larger percentage of the consumers who walk into Walmart stores.

Thank you. I appreciate it.

Thanks, Stephanie.

And we’ll take our next question from Jill Nelson at Johnson Rice.

Good morning. Just trying to get some more clarification, we saw pressure accelerate on the service margins during the quarter. If you could talk about kind of maybe quantify some staffing investments you made that you have kind of quantified first-half impact. And then, also maybe the Easter pay hit, given that might be more of a shift one-time, if that was a significant impact in the quarter as well.

Yes, in the quarter our service margins were about 150 basis points higher year over year - not margins, costs. And that was mainly impacted by health insurance costs. This quarter we just seemed to get hit with an unusually large number of health insurance claims. That was probably the single biggest driver affecting us. Second to that was just the customary minimum wage and inflationary impacts we’ve been talking about quarter-after-quarter. And then stylist investment in hours had an impact, but I wouldn’t say it was a very big impact this quarter. Rough justice, it was probably under $1 million. And if you think about the incremental volume we got by investing in our salons, it was probably less than that. And Easter holiday pay was probably, rough justice again, about $0.5 million.

Okay. And then, just looking at kind of the new focus on the mall-based salons, trying to improve that, if you could talk about it, I think MasterCuts is almost 100% in mall, Regis maybe 85%, 90%, maybe if you could just clarify that percentage exposure to the mall. And then, the lease expirations in some of those stores and whether you are seeing increase and maybe some kick-out clauses as we see a lot of department stores closing, some anchor stores closings and things of that nature. Thank you.

Yes, so your percentages are basically right. Our MasterCuts is all in malls and they are - our Regis business is a higher percentage than that, but it is predominantly a mall business. The way we’re starting to look a little more closely at the malls is what is our total investments in the malls and what are we getting out of the mall. And as I said earlier, our mall-based business is really an appointment-based business. So it’s - if we hire the right stylist and we are very focused on that. We see a move pretty quickly. And as I said, we upgraded our regional directors. So I’ve got a really good feeling about the regional director team there. And that we are working on the consumer experience or the guest experience, so I feel good about that. We haven’t seen any real issues around kick-outs or anything like that. And I continue to believe that there is an awful lot of traffic in the malls, regardless of what we read about declining mall traffic. There is still plenty of mall traffic for us to tap into. We just have to do a better job executing and making sure that we do a good job hiring stylists and we’ve got a well-staffed salon. So we’re working on that and like I said I think that it will take time. But I believe that over time we’ll see the same benefit for making these changes that we saw on our value business.

Thank you.

Thank you.

This does conclude the Q&A portion of today’s call. I’ll now turn the conference back over to Dan.

Thanks, Jason. Thanks everybody for joining us today. Look forward to talking to you on the next call.

Ladies and gentlemen, this concludes our conference for today. If you 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 dialing 1-888-203-1112, access code 2664226. Thank you all for participating and have a nice day. All parties may now disconnect.