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Executives

Paul D. Finkelstein - Chairman, President and Chief Executive Officer

Randy L. Pearce - Senior Executive Vice President, Chief Financial and Administrative Officer

Analysts

Lorraine Hutchinson - Bank of America - Merrill Lynch

Paul Lejuez - Credit Suisse

Jeff Stein - Soleil Securities

Erika K. Maschmeyer - Robert W Baird & Co.

Dan Hofkin - William Blair & Company

Jill R. Caruthers - Johnson Rice & Company

Mike Hamilton - RBC Dain Rauscher

Regis Corp. (RGS) F4Q09 (Qtr End 06/30/09) Earnings Call August 20, 2009 11:00 AM ET

Operator

Good morning. My name is Julie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Regis Corporation Fourth Quarter and Fiscal Year 2009 Conference Call. All lines have been placed on mute to prevent any background noise. 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 faxed to you immediately. If you wish to access the reply for this call, you may do so by dialing 800-406-7325; using access-code, 4119600 followed by the #. The reply will be available 60 minutes after the conclusion of today's call.

I would like to remind you 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 can be found on their website at www.regiscrop.com.

With us today are Paul Finkelstein, Chairman, President and Chief Executive Officer; and Randy Pearce, Senior Executive Vice President and Chief Financial and Administrative Officer.

After management has completed its review of the quarter and year, we will open this call for questions. (Operator Instructions). I would now like to turn the call over to Paul Finkelstein for his comments. Paul you may begin.

Paul D. Finkelstein

Thank you Julie and good morning everyone, and thank you for joining us. I'm pleased to report operational earnings ahead of plan at $0.59 a share versus the plan of $0.51 a share. Randy Pearce will go into the details of reported earnings and on operational items in his portion of the transcript.

In times like these, one must focus on cost control and on controlling margins and major factors for earnings being ahead of plan, on a strong discipline relating to cost control as well as a $0.06 per share tax benefit. Both our product and service margins were better than planned. Product margins are more favorable on our promotional items but our major cost savings initiative relates to payrolls. We've been gradually shifting most of our valued contents to a leverage payroll plan, whereby the stylist earns more dollars on incremental sales but at a lower percentage of the incremental sales.

In other words, if the stylist had an effective commission rate of 45% and at same style increased sales by $10, scheduled would now get $12.20 or a 42% commission on the incremental business rather than $4.50 or a 45% commission. This obviously works against us when the sales go down. However in the long run, we are highly confident with price increases and appropriate scheduling, we can increase the productivity of our stylists and at the same time, reduce their effective payroll cost. In addition to improved payrolls, we benefited from reduced travel expenses, and reduced workers comp costs.

Fourth quarter same-store sales were negative 4%, which was essentially on plan. Service comps went minus 3.7% versus plus 2.7% last year. May and June customer visits were slightly weaker than trend, primarily due to the stimulus that was paid last year.

Our average ticket increased 3.1%; customer accounts decreased 6.8%. Our core business, which is value, performed much better than our higher price concept.

Regis division comps were a negative 11%. Value concept, service comps were minus 1.4%.

Hair Club continues to perform better than planned. However as we stated in the last conference call, we are budgeting Hair Club to have a slightly lower EBITDA performance in fiscal 2010, solely due to the economy.

Let's move on to the big story of the summer and that is re-equitising of our balance sheet. Time has changed. For many years, in fact for too many years, debt was inexpensive and too readily available. We grew our company via accessing debt. We have spent hundreds of millions of dollars on new construction and acquisitions and due to the fact that we never had a same-store negative year in our history until this year.

And due to the predictability of our cash flow, we felt it was prudent to appropriately leverage our balance sheet. We even purchased close to $170 million of our common stock. Life was good, perhaps too good. However, we always had a strategy of trying to be conservative.

Our debt-to-cap ratio was mostly in the low 40s because we cherished our investment grade status. Than came the biggest economic shocks since the great depression. Therefore it was time to change the strategy and focus on the balance sheet. We successfully raised gross proceeds of $336 million, by issuing 13.2 million shares of common stock and selling $172.5 million worth of convertible senior notes. We used the proceeds to pay down debt and we believe we've put the dept covenant issue behind us.

We realized that we could not access the capital markets for several years, so we felt that we were far better off being conservative and raising perhaps too much equity rather than too little. We wanted this re-equitization of the balance sheet to be a permanent fix. This was not the most popular decision with all of our shareholders, however most were extremely supportive.

It's important to note that dilution would have occurred either way. We are looking at interest rate cost increasing by as much as 400 basis points, which would have reduced our earnings by a third. Thus, we decided to issue stock. As long as we're going to have dilution, we might as well pay off a bunch of our debt. The answer to us was obvious and we had total Board support. Thus we took on our medicine and got the balance sheet less levered for now. We fully understand what leverage can do for us and when the economy improves and our visitations normalize we'll resume our North American Salon growth strategy.

CapEx and acquisition opportunities will continue to be there. Our business model still works with respect to both new construction and acquisitions.

Just a couple of points before I turn the call over to Randy. Our UK business still remains extremely difficult. We plan to close up to 80 stores within the next six months. These stores are presently loosing $2.5 million annually. By the way, we did close 70 locations prior to the end of our leases in North America and where we see reductions in 46 locations.

Our 55% interest in Empire Education Group should eventually be monetized. Their performance has been excellent with EBITDA for the year increasing to over $16 million compared to $9 million last year.

Empire is budgeting a significant increase in EBITDA for fiscal 2010. As you know from past conference calls, our long-term strategy continues to be to focus on our value context. They have performed much better than most retailers in this economic environment and when customer visitation patterns anniversary and they will anniversary, we'll ramp up our new store construction.

The value concepts have a better return on investments with boundless growth opportunities. As I mentioned in previous conference call, how it is one of the few businesses, we had a sealing relating to growth, we presently have almost 13,000 salons in our portfolio, and our future is limitless as we certainly have the infrastructure and the opportunity to one day have 30 to 40,000 stores.

I'd now like to address our 30% ownership in Provalliance, a chain of 2500 franchised and company-owned locations located primarily on the European continent. As we discussed in our revenue press release dated July 6, this business has been hard hit by the downturn in the European economy. This has not only impacted the base business, but also had a big impact on several of their recent acquisitions. Based on the current trends, the accounting dictates, that we lay down $110 million investment in this business by $28 million.

In many ways, the situation parallels our school business. We partnered with Empire and we took a write-down and the first two results were below expectation. Despite a disappointing first year results, we knew the business model was solid and we believed the Empire management team would execute and they certainly have.

My crystal ball tells me today that our investment in Empire will far exceed our book value when we monetize this investment. Similarly, we have a tremendous amount of confidence in the Provo business model and the Provo management team. My expectation is that long-term, it will create tremendous value far beyond our initial investments.

Finally, I'd like to address our outlook for fiscal 2010. Last spring, we provided some commentary on fiscal 2010. Today, we still expect comps of negative 3% to positive 1% and we expect comps to improve throughout the year, with the first quarter being most difficult. At these comps, we should be able to generate cash flow -- excess cash flow of 30 to $50 million, which will be used to pay down additional debt.

With that, I'd like to the pass the baton on to Randy.

Randy L. Pearce

Thanks Paul and good morning everyone. Today, we are reporting fourth quarter fiscal 2009 operational earnings of $0.59 a share, which is up from the $0.55 we reported in the fourth quarter last year.

For many years, we've talked about the direct correlation of our earnings with our same-store sales performance. With our actual comps coming in at negative 4% during the fourth quarter, we would have expected our operational earnings to be above $0.51 a share, which included an incremental $10 million of planned cost saving initiatives which we discussed with you in recent quarters. Therefore our operational results of $0.59 a share, is $0.08 higher than what are comps would indicate.

$0.06 of this upside to our earnings was a result of a lower than expected income tax rate during the quarter, primarily due to the statutory expiration of certain prior year tax positions. The remaining $0.02 of net benefit was derived from strong expense control in a number of areas, including salon payroll costs, partially offset by a greater than expected operational loss from our European salon investment with the Franck Provost business.

As you are no doubt aware, we also have several non-operational items running through our fourth quarter P&L that caused our actual reported results to be a net loss of $0.11 per share during the quarter. Let me take a moment to identify and quantify these non-operational items.

And there were four items, which on the net overall basis, served to reduce our earnings by $0.70 per share in the quarter.

The first and the largest item was a non-cash charge we recorded of $28 million or $0.65 a share associated with the partial write-down of our European investment in the Frank Provost Salon chain. We talked about this in our revenue release in July 6 as well in our recent S-3 registration statement. The tough state of the European economy continues to negatively impact the Provo business and as a result, we wanted to get this issue behind us. So we were conservative and wrote down a portion of our investment in the fourth quarter.

The second item relates to our efforts to close certain underperforming salons prior to the end of their current lease term. As you know, we launched this project in early fiscal 2009 for a relatively small number of our salons in North America. Late in the fiscal year, we expanded this project to include the potential closure of up to 80 additional salons in the United Kingdom.

During the fourth quarter, we incurred lease termination fees and recorded fixed asset write-offs that on a combined basis for both of these projects, totaled 5.8 million or $0.09 a share.

The third non-operational item related to an unplanned favorable adjustment of $3 million or $0.05 a share to our prior year workers compensation and insurance claim reserves. This is a continued result of our successful salon safety and return to work programs.

The final item related to just under a penny a share of expense that primarily related to a small write-off of distribution center inventories that had been solely used to support our trade secrete operations. This expense is recorded within the lined item titled, loss on discontinued operations.

We've included in today's press release as well as on our corporate website, a concise reconciliation that bridges our reported earnings to our operational earnings for the quarter. Also, feel free to contact Mark Fosland or Alex Forliti here at Regis should you have additional questions regarding your financial models.

I'll now transition my comments by giving a bit more color behind our fourth quarter operating results for each of our business segments. A breakout of our segment performance is found in today's press release and my comments this morning are going to focus on our operational performance, and I'll begin with the largest revenue segment which is our North American salons.

Let me once again remind you that the current and prior year results of Trade Secret have been removed from the individual revenue and expense line items on the North American segment P&L, as this is required by the discontinued operations accounting treatment. I'd also like to point out that the financial statements in our press release today, once again includes two line items related to the sale of retail product by Regis to Premier Salons, who now owns Trade Secret.

As we discussed in past quarters, Regis has agreed to provide certain transitional support services to Premier, including the supply of certain retail products at Regis' cost. In order to separate these results from our ongoing operations, we've added a revenue line item that's called, Products sold to Premier; and we've added a related expense line item that's labeled, cost of product sold to Premier.

These two items exactly offset each other and have no impact on the profitability of Regis. Therefore, I'm going to exclude these two line items for the remainder of my discussion.

Our total North American salon revenue, which represented 86% of our consolidated fourth quarter revenue, decreased 3% during the quarter to $523 million. This revenue decrease was the result of a decline in total same-store sales of 390 basis points, partially offset by revenue from company-owned salons that were built or acquired over the past year.

Service revenue, which represented 80% of North American revenues, declined 280 basis points during the quarter to $417 million. This reduction was due to a decline in service comps during the quarter of 3.5%, partially offset by revenue from new and acquired salons over the last twelve months.

We're pleased to say that our same-store sales benefited during the fourth quarter by an increase in average ticket of 3.1%; in large part, due to price increases we implemented during our third fiscal quarter. However more than offsetting the increase in average ticket was a 6.6% decline in same-store customer business during the quarter, as many consumers are lengthening their visitation patterns due to the economy.

Product revenue fell 5.1% in the quarter to $97 million, due to a decline in product comps of 5.8%. Royalties and fees from our North American franchise salons were down 6% in the fourth quarter to $9 million. New franchise units that were added to the system over the past twelve months were more than offset by franchise buybacks, franchise unit closures and relocations. In addition, our franchise salons are experiencing the same weakness in customer visitation patterns and same-store sales trends as are company-owned comp sets.

I'm now going to talk about gross margin. And I'm very pleased to report that our combined gross margin rate for North American salons came in much better than planned at exactly 45%. And that was a 100 basis point better than the rate we reported last year in our fourth quarter. As I'll discuss in a moment, we experienced margin improvement in both our service and our product areas. We're extremely pleased with these results especially when you consider the challenging sales environment.

We're pleased that our fourth quarter service margin rate improved to 43.6%, which was better than our plan and was 80 basis points better than the same quarter of last year. Reduced salon labor costs, as Paul pointed out, were the single largest contributor to our improved service margins. We proactively adjusted many of our salon commission plans when we implemented our recent price increases. As a result, we were able to leverage the increase in average ticket and improve our overall labor cost during the fourth quarter.

Now having said this, we expect that some of this benefit could be dampened during our current 2010 year due to a planned increase in healthcare and supply cost and to a lesser extent, to minimum wage increases.

At this point in time we expect that during fiscal 2010, our service gross margin rate for North American salons should be comparable to slightly better than the 42.6% rate we reported for all of our 2009 fiscal year.

Our retail product margin rate for the fourth quarter improved to 51%, which was a 190 basis point increase from the rate we reported last year in the fourth quarter. We had planned for this improvement in rate largely due two factors that artificially depressed last year's fourth quarter product margin rate.

Last year in our fourth quarter, we rolled off some slow moving inventories and in addition during the prior year fourth quarter, we were selling through higher cost inventories that we obtained in connection with several acquisitions.

Let me make one other comment regarding product margins and this is more perspective in nature. Effective this past May 15, we made a decision to pay all new stylists here at Regis, a product commission rate of 8% rather than the traditional rate of 10%. We did this because in the majority of instances, our products are purchased by consumers that are simply walking by our salons. Overtime, the reduced commission arrangement will help improve our product margins even further without negatively impacting product sales.

Let me now address our site operating expense, which includes cost directly incurred by our salons such as advertising, insurance, utilities and janitorial costs. Our reported site operating expense came in at 7.7% of sales during the quarter; that was up 60 basis points from the same period a year ago. Let me say that the expense we reported in both the fourth quarter this year as well as last year, benefited from significant unplanned reductions in our workers compensation and other insurance reserves.

As you know the frequency and the severity of our insurance claims continues to decrease due in large part to enhanced salon safety measures and aggressive return to work programs. As a result, our insurance actuaries continue to authorize reductions to our prior year claim reserves, which amounted to $3.2 million in the fourth quarter of fiscal 2009, and an identical $3.2 million in the fourth quarter of the previous 2008 fiscal year.

Therefore if you factor out these benefits from both quarterly results, our fourth quarter fiscal 2009 site operating costs would have been 8.3%, up 60 basis points from the comparable period a year ago. This increase was mostly due to the P&L reclassification that we initiated and discussed with you during the last two quarterly conference calls.

Certain expense items, which had previously been categorized within our rent expense, have now been appropriately reclassified into our site operating expense. These items primarily related to utilities and rubbish removal costs for which Regis pays it's landlords as part of our lease agreements.

Next, we'll talk about our North American general and administrative expense, which came in at 5.3% of revenue during the fourth quarter. This rate came in 20 basis points better than planned and 40 basis points better than the same period last year. The planned improvement related to the numerous cost cutting initiatives we implemented last fall.

As you recall, we reduced our field supervisory staff by about 10% due to our reduced growth plans and we also reduced the budget for certain marketing expenses. And as we saw last quarter, we continue to see a significant reduction in our overall field supervisor travel cost, in fact, more than we expected. Much of this improvement is related to the implementation of further expense control initiatives by our operating management team.

In addition, we have reduced expenditures for salon manager and staff meetings. These reductions in travel cost is a great example of how our entire organization here at Regis continues to focus on expense control during these difficult sales environment.

Rent expense, which is primarily a fixed cost came in at 13.9% of total fourth quarter sales. And that was 20 basis points better than the rate we reported last year in the comparable quarter. The reclassification of certain expenses from rent into site operating expense we just discussed, favorably reduced our fourth quarter rent rate by 80 basis points. However offsetting this rate improvement was negative leverage in this fixed cost category caused by reduced sales volume.

Depreciation and amortization came in slightly better than planned at 3.4% of sales, which was identical to the rate we reported last year on our fourth quarter. Our lower level of capital spending during the fiscal 2009 year helped us to offset the negative leverage from reduced same-store sales.

The net effect of all the items I just discussed caused our reported operating income to come in at 15.3% of sales, up from 14.7% last year. On an operational basis which excludes such items as the benefit from prior year worker comp reserves and lease termination cost, our operating income from North American salons improved 15.1% of fourth quarter revenue, up from 14.1% in the same period last year.

Next, let's review the fourth quarter performance of our international salon segment. This segment includes our company-owned salons located primarily in the United Kingdom. As we've discussed with you over the last couple of years, the UK economy has been particularly hard hit and so has our UK salon business. So when reviewing the year-over-year changes in financial performance, most of the trends have been impacted by negative leverage caused from reduced level of same-store sales. However, I'll provide a bit more color behind the quarterly change in revenue and also give you some high level comments on any expense categories that we may have been surprised by during the quarter.

Once again, those of you who build segment models may want to give Mark or Alex a call here at Regis and they'll certainly help you.

Total revenue from the international segment represented 8% of our consolidated fourth quarter revenue and came in at $46 million in the fourth quarter, which was a quarter-over-quarter decline in sales that was largely due to two factors.

The first related to foreign currency. As nearly $13 million of the overall revenue decrease was primarily due to a quarter-over-quarter decline in the British pound exchange rate against the strengthening U.S. dollar. The second factor contributing to the sales decline related to negative comps, as our UK salons experienced a 6.6% decrease in overall fourth quarter same-store sales.

The one item perhaps worth discussing in more detail is product margins. Our international product margin rate in the fourth quarter came in at 55.4%, which quite frankly was much higher than normal. Results from our semi-annual physical inventory count were favorable with the entire eight-month adjustment running through our fourth quarter results, which again artificially increased our product margin rate for the quarter.

Our UK operations continued to experience a reduction in their product cost as a result of having product shipped to them directly from our Chattanooga, Tennessee distribution center rather than buying directly from distributors. In addition, our sales mix has shifted a bit towards higher margin products and our shrink rate continues to improve.

The international product gross margin rate we reported for the entire 2009 fiscal year was 47.1%, up 30 basis points over the prior year. We expect our product margins in the UK should remain in the low to mid 40s per 7% range during our current 2010 fiscal year.

One final item of note relates to our international depreciation and amortization expense, which came in higher than normal during the quarter at $7.7 million. This amount included an additional 2.9 million of expense related to the fixed asset write-offs for those underperforming locations that we hope to close in our current 2010 fiscal year.

Let's now switch gears and talk about Hair Club for men and women. Although our Hair Club business continues to perform well, the economy is having an impact, with fourth quarter comps declining slightly by 1.4%. But let me highlight a couple of items.

Fourth quarter revenue from our hair restoration centers came in at $36 million, which was up just slightly from the same period a year ago and represented 6% of our consolidated fourth quarter sales. Hair Club's revenue benefited from the acquisition of two franchise centers and the construction of three new corporate locations over the past year. This revenue growth was partially offset by the negative comps of 1.4% during the quarter.

Fourth quarter operating margin rate for Hair Club came in at 19%, which as we expected, was down slightly from the rate of 20.1% we reported last year in our fourth quarter. This planned decrease was due to slightly lower operating margins from the two recently acquired franchise centers and the three recently built locations. Negative comps also put a bit of pressure on Hair Club's operating margin rate.

Hair Club's fourth quarter EBITDA margin came in just over 27%, essentially the same as we reported last year in the comparable quarter. It's a very strong rate and we remain very pleased with the performance of this segment of our business.

Let me switch gears once again and make a couple of comments regarding our corporate G&A expense. The major component within our corporate G&A continues to be salaries and related benefits for the 800 or so employees working here in Minneapolis and the 500 associates that work in our two distribution centers.

Centralized back office support functions provide us leverage to our operating model. As I've said in the past, over the past five years, our company-owned salon counts have increased at a compounded annual rate of over 9% and our sales have grown double-digit, yet our home office headcount has grown at a much slower rate of 5%. Despite this leverage, we continue to be very aggressive with expense control during these challenging times of slow sales growth.

Our corporate G&A expense came in at under $32 million in the fourth quarter, which was $0.5 million less than the same period a year ago. Our fourth quarter expense included about $1 million in professional fess related to a one time tax restructuring project, which will allow us in fiscal 2010, our current year, to permanently repatriate nearly $90 million of excess international cash balances with virtually no tax consequences.

After these professional fees, our G&A costs have declined due to our ongoing expense control initiatives. We are pleased with the results of our efforts.

And let me make one reminder type comment to your regarding our corporate G&A. This expense category in the fourth quarter included about $2 million of home, office and distribution centre costs related to providing transitional back office support to our former Trade Secret salons. As we've discussed with you on the past, Premier Salons who now owns Trade is fully reimbursing Regis for these costs. However, accounting convention requires that the expense reimbursement be included on our P&L as other income rather than netted against our G&A expense.

Now that concludes my comments regarding the business segments and let me move on to our investments which are reported on the P&L line item labeled equity and affiliated companies. This line primarily includes the after-tax results of our investments in Empire Education Group and the Franck Provost business on the continent of Europe.

Our investment in cosmetology schools managed by Empire performed on plan in the fourth quarter with our share of the quarterly after-tax earnings growing to $1.8 million. However as I mentioned at the beginning of my comments, the reported and operational results related to our European salon investment in Provo came in well below plan.

As we expected, the Provost business has been impacted by back office integration costs. However in addition to this, the recent downturn in the European economy has hurt the core salon business as well as the performance of salons recently acquired, especially during the latter half of our fiscal 2009.

As a result, during the fourth quarter, we recorded a partial write-down of $27.8 million or $0.65 a share to our investment in the Provost Salon business. We felt it was prudent to be conservative and write down the investment at this time given the current state of the European economic environment. We simply wanted to get this issue behind us. We continue to have a tremendous amount of confidence in Franck Provost and his management team and their ability to effectively and profitably grow this business.

Let me make a comment regarding our effective income tax rate which came in at 33.6% in the fourth quarter. As I mentioned, this rate was lower than we expected largely due to the benefit we received from the statutory expiration of certain prior year tax positions.

As I previously stated, this benefit served to increase our reported fourth quarter earnings by about $0.06 a share. Looking forward we anticipate the underlying tax rate for our current 2010 fiscal year should be in the range of 38 to 40%.

I'd now like to briefly update you on our debt covenant ratios and our initiatives to strengthen our balance sheet.

And I remind everyone that as part of our equity and convertible debt offerings last month in July, we were able to successfully amend our debt covenants with our lenders. The most significant change to our debt covenants was a reduction of the fixed charge coverage ratio from 1.5 times down to 1.3 times.

Our fixed charge coverage ratio at June 30 improved to 1.62 times, well above the new minimum threshold of 1.3. Our leverage ratio at June 30 was 2.4 times, put on a pro-forma basis considering the equity and convert transaction, stood at only 1.9 times, well below the covenant maximum of three times.

During the fourth quarter, we continued to make significant progress in achieving the expense reduction in cash low enhancement initiatives, we announced at the beginning of our second fiscal quarter. And let me update you on those results.

We far exceeded our plan to bring total debt levels down below 700 million by June 30. I am pleased to report that our total debt at the end of the fiscal year stood at $634 million, down $173 million from our debt balance just nine months prior at the end of our first fiscal quarter. On a pro forma basis, after last month's equity and convert transaction, our debt levels were further reduced to $462 million.

The stock inventory: Inventory levels at the end of our fiscal year came in at $159 million. Now if you exclude the impact of the Trade Secret divestiture, our inventory levels have been reduced by $38 million over the last three quarters, far exceeding our planned reduction of 20 million. We expect the inventory levels for our current 2010 fiscal year to remain relatively flat to our June 30 level. However there will likely be some seasonal growth in the first half of the fiscal year.

As you recall, this last October we implemented a variety of expense reduction initiatives designed to save $20 million through the balance of our 2009 fiscal year. We surpassed our goal and achieved more than $22 million of cost savings, including $9 million in the fourth quarter.

In addition, our Regis gross margin cost savings program, which we've discussed with you in the past couple of years, yielded annual savings of $10 million in fiscal 2009 of which about half of that was incremental to the prior year.

And then lastly, this past October we also took steps to curtail our growth plans and we've reduced our capital budget for new and acquired stores from 170 million to about 135 million. Actual expenditures for the entire 2009 fiscal year totaled 131 million; again, below our plan.

Once again we're very pleased at the success we achieved in reducing expenses, in conserving cash, and in paying down debt.

So I'm all ready to turn it over for questions. But before I do, can I make one quick comment regarding our upcoming fiscal 2010 first quarter results. We will be taking a first quarter charge for two items and we're required to do this.

First accounting convention requires that we expense the make-whole premiums and the other fees we incurred in connection with the modification of our debt covenants and the prepayment of our debt that took place last month in July.

Again, these fees were all done in connection with our recent equity and convert offering. We anticipate recording a pre-tax charge relating to those fees of about $18 million.

Second, we anticipate recording lease termination and professional fees of about $3.4 million in next quarter in connection with our efforts to close certain underperforming salons in United Kingdom prior to the end of their current lease term.

Closing these salons will be accretive to our bottom line and to our EBITDA. We may not be successful in closing all 80 salons that we've targeted, but if we did, our annual EBITDA would improve by $2.5 million.

That's that. That completes my prepared remarks. So Paul and I would be happy to answer any questions you have. So Julie if you could step in and provide some instructions, we'd appreciate it.

Question-and-Answer Session

Operator

Thank you, Paul and Randy. The question-and-answer session will begin at this time. (Operator Instructions). There will be a short pause while our participants register for question. The first question comes from Lorraine Hutchinson from Bank of America - Merrill Lynch. Please go ahead.

Lorraine Hutchinson - Bank of America - Merrill Lynch

Thank you. Good morning. I was hoping that you could provide some color on what your weighted average cost of debt will be now that you've loosened some of the covenants and renegotiated some of your facilities, perhaps you could give that to us excluding the convert?

Randy Pearce

That's got to be tough because I have it with the convert which is modeled -- the total weighted average cost of our will likely be around 8%. Accounting conventions going -- now that includes the convert and I'm not going to bore your or try to confuse you with all the accounting requirements here but the reason why it's higher than what we initially had even prior to the equity convert offering is that we have to book more of a market rate of interest on for book purposes on the convert link which is causing the overall rate to be about 8%.

Cash interest will be about -- will be 5%, right. So we'll pay far less in cash than the book interest. In total we expect our book interest expense for the 2009 -- 2010 fiscal year should be about $40 million comparable to what we reported in '09.

Paul Finkelstein

And by the way cash interest will be about $31 million.

Lorraine Hutchinson - Bank of America - Merrill Lynch

Okay. And then just a bigger picture question; you had spoken about once visitation trends stabilize, you'd resume your North American growth strategy. Can you just give us some color on the expectations for that? I mean is it solely focused on value, will it be salon-only or can we expect more of these ancillary investments? Just, if you could just give us a little bit more detail on the future growth prospects.

Paul Finkelstein

Oh no Lorraine, where we form centers, is it going to be salon for quite a while. We are not going to go on to pig farming, I can assure you of that. And realistically the returns are much greater on the small investment value salons. So we'll get the lion's share the CapEx. And we're especially focused on areas where we have very-very strong brand equity like North and New Jersey for Supercuts and Hawaii for Supercuts et cetera. So, I mean that's our program.

Lorraine Hutchinson - Bank of America - Merrill Lynch

Thank you.

Paul Finkelstein

You're welcome.

Operator

Thank you. Your next question comes from Paul Lejuez from Credit Suisse. Please go ahead.

Paul Lejuez - Credit Suisse

Hey you guys, Paul Lejuez.

Randy Pearce

Hi Paul.

Paul Finkelstein

Hi Paul.

Paul Lejuez - Credit Suisse

Hey. So I guess I'm just looking, historically I think EPS has been the primary driver for you guys in terms of incentive-based compensation. I'm just wondering how, given the changes in the environment and the capital structure, there are new metrics being considered in terms of how you guys are going to get paid.

Paul Finkelstein

Going forward it will be EBITDA which is consistent with what's happening with a lot of our peer group companies. And there'll be some additional components relating to other goals that will be set for such as reduction of debt average check whatever and that all will be highlighted in the proxy that will be coming out next month.

Paul Lejuez - Credit Suisse

There'd be anything related to return on invested capital in that structure?

Randy Pearce

Not formally. What we -- believe me Paul, we are focusing on enhancing our return on invested capital as Paul Finkelstein mentioned. Too many Paul's here, as Paul Finkelstein mentioned.

Paul Finkelstein

Which is our favorite.

Randy Pearce

Yeah.

Paul Finkelstein

You got to stand for me for that.

Randy Pearce

Our focus is going to be trying to spend capital in a way that's going to provide us the highest return, including acquisitions of core salon concepts at multiples that would generally be in the 3.5 to 4 times.

We have found, we used to have several years ago, a portion of our incentive-based comp plan was based on return on invested capital. And that incentive comp plan covers about 50 officers of the company. And what we found was that people could not translate the decision making that they were making day in and day out to what impact that had on return on invested capital. It was too confusing for most people. So what we're doing is focusing on other things here in terms of metrics; not at the expense of return on invested capital, but I will think that you'll start seeing an improvement to our ROIC.

Paul Lejuez - Credit Suisse

Got you. And your guidance I believe on EBITDA was 200 to 240 million. Correct me if I am wrong, and I guess on the high side that would imply 60 million per quarter and EBITDA. You just did 80 million plus. So I am just trying to reconcile that too.

Randy Pearce

Well if you're going to have a little bit that the big year-over-year change is always going to be comps. We've said one percentage point change in comps equates to about $10 million of EBITDA. So if we did this year and Mark help me, I think we did 271 to $275 million of EBITDA, if you assume, remember our tipping point, our inflection point is generally 2% comps.

So if you assume that our comps are going to be at, let's say negative one, just pick a number; that's 30 basis points -- 300 basis points below our tipping point which would equate to about $30 million less EBITDA from the 271. That's the major factor there.

I will say that we think that that range of 200 to 240 -- I mean, I hope we're going to be at or above the high end of that range.

Paul Lejuez - Credit Suisse

And you mentioned the time -- you mentioned the monetization of Empire, any sense of timing there?

Paul Finkelstein

Oh it's going to be at least four or five years. Franck's Chairman is a young manufacturer. And with relatively high unemployment and we believe it's systemic, the education business should be a very good business. And his projections for EBITDA for the next two or three years are very-very bullish.

Paul Lejuez - Credit Suisse

Great thanks.

Paul Finkelstein

And as you know Paul, EBITDA multiples for education business are pretty strong. So, they are highly confident that we're going to get a lot of our investment back and more.

Paul Lejuez - Credit Suisse

Yeah. Okay great. Thanks and good luck.

Randy Pearce

Thanks Paul.

Operator

Thank you. Your next question comes from Jeff Stein from Soleil Securities. Please go ahead.

Jeff Stein - Soleil Securities

Good morning, guys. Two questions for you Paul; one is the leverage point and maybe Randy you can answer this as well. You've talked historically about 2% is kind of the threshold you need to hold your SG&A flat and achieve leverage. Now in kind of this new world of tougher comps, most companies have been able to effectively reduce that leverage point and I'm wondering; is 2% still a realistic target that we should be looking at go forward or might you'd be able to figure out ways to bring that down below 2%? That would be question number one.

Paul Finkelstein

Jeff, it could very easily be 1.6, 1.7. But two is certainly conservative. There are costs that we just have very little control over, such as taxes, our occupancy cost, for instance our basic rents, are very much in control, the cam and taxes are beyond our control, certain insurance categories, certain utilities, they are going down but they will be going up as mayflower's night (ph) and its those costs primarily that create the 2% number and we'd rather be conservative but to your point, it could be slightly less than 2% but not much.

Jeff Stein - Soleil Securities

Okay. And the other thing Paul is you've talked historical about somewhere between 250 and 300,000 salons in the United States. And it's a highly fragmented space, largely mom and pop. Consolidation has been a big story across retail and I'm wondering if you have any statistics that might help us understand what if any consolidation trends we should be looking at in the hair salon industry? How much capacity, in other words might come out of the industry over the next 12 months?

Paul Finkelstein

There's excess capacity Jeff, as you know and largely every industry in America, whether it'd be manufacturing or retail. Now it's interesting I have been talking about, I think too many stores in America about 15 years only came through. There will be a historically the number one seller in urban communities would be restaurants and number two would be salons and barber shops. That probably will accelerate. Of the 300 and some add thousand salons and barber shops, 70 or 80,000 we'll encounter in people's homes, but we are seeing about 5 or 6% industry shrinkage.

We think we're there in the middle of it and that shrinkage will create more salon closures than before. Because the model doesn't work to that modern parlor as well as it did years ago. So that ma and pa owned now frankly is better coming to Regis and earning a 50% commission rate and staying where he or she is, in a private salon. And those customers and those dollars closed salons have to go somewhere.

So I mean we are quite confident that they'll come to us. We have the locations and we have brands and we have the training. So we should be able to increase share just because of that dynamic.

Jeff Stein - Soleil Securities

Okay. And finally if you could address the issue, you talk about taking your commission rates down and I am wondering how the turnover within your hair stylists to pull so to speak, would affect your ability to continue to succeed in driving that payroll percentage down? In other words, what percent of your hair stylists turnover on an annualized basis?

Paul Finkelstein

No, I get it. Look and this just return is about 60%. The average new hire is a 21 year old female, a very mobile part of the population, our return is 40% and that's overstayed it. Because if somebody goes from downtown to Beachwood in Cleveland, and I assume the store in Cleveland?

Randy Pearce

Yeah.

Paul Finkelstein

That's a time for us because we close him on a payroll. And if somebody leaves us and comes back three years later, and comes back a month and year later, that's the time for us. So our turnover is been well under the industry turn because they can develop business far more quickly with us than going with the ma and pa.

Our return and especially given the fact that most of our concepts are value-driven concepts rather than appointment-driven concepts, the power really rests with the store rather than the stylist. So our return should not be affected. Demand has proven to be very -- and the last thing. And we make sure that our people are going to earn more money because we raise prices. So we are happy campers.

Jeff Stein - Soleil Securities

Okay thank you.

Paul Finkelstein

Welcome.

Operator

Thank you. The next question comes from Erika Maschmeyer from Robert W Baird. Please go ahead.

Erika Maschmeyer - Robert W Baird & Co.

Good morning, nice job in a tough environment.

Paul Finkelstein

Thank you.

Erika Maschmeyer - Robert W Baird & Co.

Could you give some additional detail on the aspects of your cost saving initiatives that you expect to continue to benefit in 2010 which ones you can repeat and then may be talk a little bit about expectations for full year for company operating expenses and G&A in 2010?

Randy Pearce

Erika that was a multiple.

Erika Maschmeyer - Robert W Baird & Co.

Sorry...

Randy Pearce

Let me take a little bit of stab at it unless Paul wants to but -- all right. The cost saving initiatives; we achieved about $32 million in this current fiscal year that just ended 2009. About 25 million was incremental to '08. We are expecting -- and we've said it before, you can only save a dollar once. We expect though that incremental cost savings could be close to $10 million in our current 2010 fiscal year.

We continue to have here Regis gross mart initiative that we implemented a couple of years ago. We have people from all levels and all departments within the corporate organization that continue to get together and look at ways to save dollars and we've had a lot of ideas that we are continuing to work on. But I would say that we would have about 30 -- I am sorry, about $10 million of incremental cost savings that we should be able to achieve, and hopefully more in our current fiscal year.

Now Erika you were then talking about corporate G&A going forward?

Erika Maschmeyer - Robert W Baird & Co.

Yes.

Randy Pearce

Our corporate G&A, and again I am going from memory here, is about $120 million a year and that includes our corporate office as well as our two distribution centers. It's been running about $30 million a quarter and coming down. We are going to see that -- there's two counter-bailing factors. One was that, the largest expense item made up within our corporate G&A are going to be the salaries for the 1300 people that we have here in Minneapolis and in our distribution centers.

So if you assume normal inflationary salary increases, that would cause G&A to go up. Having said that, we will see G&A come down by other initiatives, other cost saving initiatives. I would expect that our corporate G&A shouldn't move much in our fiscal year. It maybe up slightly but not materially.

Erika Maschmeyer - Robert W Baird & Co.

Okay, great. And then, how do you think of marketing expense for next year?

Randy Pearce

Well, we're -- overall there was some give and take. We are continuing to -- marketing is not going to be -- at this point in time, nothing is been contemplated to reduce marketing expenses even further. We continue to work with Gordon Nelson and Mary Kiley in our marketing group as to how to best redeploy existing dollars. So no, I think we're going to see more stability in our marketing spend in 2010.

Erika Maschmeyer - Robert W Baird & Co.

Okay. And then could you talk about, I guess any updates on your expected price increases for 2010 and benefit on ticket?

Randy Pearce

Yeah, we've traditionally over the last few years, taken a more aggressive hard look at price increases to be implemented during the January, February, March timeframe. So when we look at beginning of calendar 2010, we'll likely be looking at price increases. We are anticipating that the overall impact in 2010 to average ticket would be in that perhaps 2 to 3% range.

Erika Maschmeyer - Robert W Baird & Co.

Okay, great. And then any update on trends to-date in Q1 and back-to-school for comps?

Paul Finkelstein

Well there's comps as you know on a quarterly basis and it's really business as usual at this point in time. This sort of mirror fourth quarter of fiscal 2009 as we are in the middle of August. We contemplate comps being weak for the first quarter. And then they should start strengthening significantly during the Christmas quarter.

Erika Maschmeyer - Robert W Baird & Co.

Okay. Thank you.

Paul Finkelstein

Welcome.

Randy Pearce

You're welcome.

Operator

Thank you. The next question comes from Daniel Hoffkin from William Blair and Company. Please go ahead.

Dan Hofkin - William Blair & Company

Good morning, guys. Just a question -- clarification. Had you indicated that you felt last year's June quarter or perhaps the first part of your fiscal 2009 first quarter benefited from the stimulus tax last year? Just wondering if that's a part of maybe what you think you are seeing quarter to-date why that hasn't necessarily picked up? And if so, where did you see that most significantly across your concepts?

And then second; can you just sort of tie together, what given the comp sales range that you've provided on an EPS diluted basis using the new share account where you think that would come out top end and bottom end for the quarter and the year?

Paul Finkelstein

Yeah, we'll go last question first. We are not giving the EPS guidance. I think you can -- we are sort of giving EBITDA guidance of 200 to 240. And as Randy pointed out, we expect our results to be at the high end of that guidance. With respect to the stimulus checks, now it's interesting, obviously they effected us. One of our state divisions is more style (ph) in Wal-Mart and as you know Wal-Mart had one or 2% negative comps in large for us it is a stimulus checks last year on June and July, and we had the same effect with respect to stimulus checks last June and July contrast with this year.

I think our -- I think the effect on us is pretty similar to most retailers. As you know, last six months of last fiscal was ended June '09, we have the stronger service comps in North America in what eight years. So stimulus checks definitely help.

Randy Pearce

If that ended June '08.

Paul Finkelstein

Yeah.

Randy Pearce

June '08.

Paul Finkelstein

June '08. I am sorry.

Dan Hofkin - William Blair & Company

I am sorry. Could you just clarify that last comment, if then you're saying through...

Paul Finkelstein

The last six months of last fiscal, I mean in June '08 we have the best service comps we had North America in eight years, in part due to the stimulus checks but that was just a small part.

Dan Hofkin - William Blair & Company

Okay. So you're talking 12 to 18 months ago?

Paul Finkelstein

12 to 18 months ago, correct.

Dan Hofkin - William Blair & Company

Thank you.

Operator

Thank you. The next question comes from Jill Caruthers from Johnson Rice & Company. Please go ahead.

Jill Caruthers - Johnson Rice & Company

Good morning. If you could address the service margins again on a consolidated basis, that came bearish on 44%, I can't really find in the past years where you've posted that strong of a number and now you've addressed the change in competition. If you could just talk a little bit more about that why that that's kind of fall from the 44% had into fiscal?

Paul Finkelstein

Jill there are two factors; one related to the fact that we are trying to obviously parts of the leverage in our payroll. The second fact that relates to mix but we have better service margin and Smartstyle and Supercuts that we have in Regis. And the Smartstyle and Supercuts continue to garner a greater share of the total sales mix. Obviously that affects our overall consolidated service margins. So it's really a mix play.

Jill Caruthers - Johnson Rice & Company

Okay. And what do you see that level going out in the future as the Smartstyle becomes a bigger part of your mix and what not?

Paul Finkelstein

Now it's glacial but there should be marginal improvement for several years.

Randy Pearce

We continue to tweak...

Paul Finkelstein

10, 20 basis points in that range Jill.

Randy Pearce

Paul is absolutely correct. I mean if you look over a long period of time, the largest expense item in our business model are salon payrolls and the related benefits we pay. That's in our service and our product margin. You'll see both of those line items in good times and in tough times, be remarkably stable.

Paul has and operating folks here at Regis have started becoming aggressive in with new hires on tweaking some of the new commission arrangements that should give us more positive leverage. Paul talked about that. So that's a positive going forward.

I just -- may be we're a little cautious but we continue to see some of the benefit side like healthcare costs are continuing the increase. Ours are not auto controlled but again nationally you just see cost increasing. That's going to dampen some of the service margin, service gross margin rate.

Supply costs, we are holding those down best we can but some of the supply cost for hair color for example, indications are, they could go up a bit this year; not sure yet. So, we are just tempering expectations a bit right now to say that, a lot of good things going on to control payrolls. Some of that that we saw in the fourth quarter may be dampened a bit from some cost increases in the current fiscal year. But Paul's right. You will see over a long period of time more stability but slight increases in margins.

Jill Caruthers - Johnson Rice & Company

Okay. And then just last question kind of broad. Now we're kind of looking for the fall October, November act as sort of an inflection point of just anniversaring some of the drops in traffic. If you could talk about may be the environment out there, are you seeing kind of price wars right now with other salons, increased marketing coupons type deals that might dampen that stabilization in comps? Thank you.

Paul Finkelstein

We aren't seeing greater discounting happening industry wide. I think demand has proving to be quite in the last with respect to price. And we just don't see it.

Jill Caruthers - Johnson Rice & Company

Thank you

Paul Finkelstein

Welcome

Operator

Thank you. The next question comes from Mike Hamilton from RBC. Please go ahead

Mike Hamilton - RBC Dain Rauscher

Paul, if you could give your thoughts on hair trends at this stage as we go into 10.

Paul Finkelstein

You must be kidding.

Mike Hamilton - RBC Dain Rauscher

I'm...

Paul Finkelstein

He is not kidding obviously. Randy, you want to take a shot at it? The hair trends are so individualized. It isn't like Dorothy Hamile, years ago. I mean people do their own thing today. And we don't really see a trend per se by the male or female. And you guys have a fashion business in terms of trend.

Our business is really glacial in terms of change. Most people have their same hair styles year in-year out. And that's what's so good about this business. I mean I don't know how many retailers could state, didn't have a negative comp for 87 years. And we'll get back there whether it's this year or next year. It's a very stable and predictable business and there should not be a significant trend issue. We just don't see fashion moving that way. Fashion is so individualized.

Mike Hamilton - RBC Dain Rauscher

Thanks. Let me may be put it a fairer way. In the last couple of years we've seen a steady trend in expansion of the time between visits. Is it going to purely a functional economy that changes that?

Paul Finkelstein

With our average customers spending about $130 a year on service, we -- and especially those out of work, have to look good if they want to get work. Eventually at last, if a guy got his haircut every three weeks and now in four weeks, then its highly unlikely that on average they are going to go five or six weeks it lapse. We don't expect it to go back to the prior level.

We expect that to last at the current level not the prior level. And if someone who went every four weeks, now going in to five weeks, we have no expectations that that individual's going to go back to four weeks.

Mike Hamilton - RBC Dain Rauscher

Yeah.

Paul Finkelstein

We also don't expect him or her to go to six weeks.

Mike Hamilton - RBC Dain Rauscher

Thanks.

Paul Finkelstein

Welcome.

Mike Hamilton - RBC Dain Rauscher

Detailed question for Randy; to the best you can, could you walk through timing and implications on the repatriation on the tax side?

Randy Pearce

Yeah, effectively it's been done Mike because we've been able to through the balance of our latter half of our 2009 fiscal year, able to repatriate cash on a more -- I think it was a 90-day basis. And then we had some of the cash back to our international banks and then it comes, were able to re-borrow it. Everything was done on a temporarily basis. I think there had been some government legislation that enabled companies like us to do that.

What we've been doing over the last several months is trying to come up with a permanent solution, because we've got a lot of cash largely in Canada, but we've got some cash in the UK and a little bit in Europe as well that is sitting there and we'd like to be able to utilize it here in the United States. So we have reached a solution for that; a permanent repatriation. And so cash -- you're not going to see debt levels come down incrementally more Mike as we've been able to do it on a temporary basis, now it'll be permanent. So we can sleep at night.

Mike Hamilton - RBC Dain Rauscher

And we aren't going to see anything that's going to have an impact on tax rate?

Randy Pearce

No, no. This is more of a -- the strategy has virtually no impact to our tax rate.

Mike Hamilton - RBC Dain Rauscher

Okay. Yeah thanks for the clarification.

Randy Pearce

Alright, you're welcome Mike.

Operator

Thank you. If there are no other questions, I will now turn the conference back to Paul.

Paul Finkelstein

Thank you very much for joining us everyone. Have a good day.

Operator

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 1-800-406-7325, with an id number of 4119600 followed by the hash. This concludes the conference for today. Thank you for your participating and have a nice day. All parties may now disconnect.

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