XWELL Inc (XWEL) 2017 Q4 法說會逐字稿

Greetings, and welcome to the XpresSpa Group Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Carolyn Capaccio of LHA. Thank you. You may begin.

Thank you, operator, and good morning, everyone. I'm joined on the call today by Andrew Perlman, XpresSpa Chief Executive Officer; Anastasia Nyrkovskaya, XpresSpa Chief Financial Officer; and Ed Jankowski, XpresSpa President.

Before we begin, please note that comments made on today's call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on current assumptions and opinions and involve a variety of known and unknown risks and uncertainties. Actual results may differ materially from those contained in or suggested by such forward-looking statements.

Important factors that might cause such differences include those set forth from time to time in the company's SEC filings, including the company's report on Form 10-K for the year ended December 31, 2017, being filed today, and other current and periodic reports the company filed with the SEC, which you are advised to read.

At this time, I'd like to introduce Andrew Perlman, the Chief Executive Officer. Andrew?

Good morning, and thank you all for joining us today.

I'll begin by giving you a recap of our achievements in 2017, where we stand today and our 2018 priorities. Then Anastasia will take us through the financials, after which we'll take your questions.

2017 was a transformational year as we established our leading position as a health and wellness experience provider, perfected the short-format spa and revolutionized our operations in preparation for growth.

During the year, we accomplished a tremendous amount. We installed top retail talent in our corporate and field teams, we overhauled our corporate culture, fixing retention and recruiting throughout the organization and making the company a great place to work. We completed a firm-wide point of sale and technology backbone upgrade, creating the framework for stronger systems and labor efficiency going forward.

We enhanced our retail offering through partnerships with essie, Dermalogica and Nordic Cryotherapy. We created efficiency and broadened our reach beyond the 4 walls of our stores with our Capelli partnership. We opened 9 new XpresSpas and closed 5 underperformers, giving us a more productive store base. We created the XpresRecover brand extension concept and identified locations to launch it. We put our franchising strategy in motion, and we began divestitures of noncore assets to focus solely on our health and wellness opportunity. These are now complete, allowing management to fully focus on our core business.

And we rebranded the company with the XpresSpa name and XSPA ticker symbol. Today, 15 months after the XpresSpa acquisition, we speak to you as a branded, on-the-go health and wellness pure play with a solid foundation for growth. We are entirely focused on capturing the enormous opportunity we enjoy through our unique position in our underserved market.

Let's talk for a moment about the fourth quarter specifics. This morning, we reported fourth quarter 2017 revenues of $11.8 million and segment-level adjusted EBITDA of $386,000. These results reflect normally lower fourth quarter seasonality, as our target demographic is the business traveler; and delays in new store openings, which penalized the top line by -- in excess of $1.2 million, while carrying approximately $100,000 in cost of new store activity at the expense line.

This revenue penalty, all sizable, also indicates the high productivity rates of our healthy store model. Notably, our store-level gross margin improved, and for the first time, it was over 20% at 20.4%, a sequential improvement even with the downward pressure of seasonality. Adjusting for the preopening store labor cost, our gross margins would be in excess of 21%.

Accountability is part of our corporate culture. In December, we replaced our Head of Construction & Design and have since seen a marked turnaround in the pace of new store construction. We now have a template, a process and a playbook for each project going forward. The delayed stores remain in our pipeline and are under development for opening this year, though their later openings will continue to affect revenue in the near term.

Demand from airport operators, for wellness-based concepts and the XpresSpa concept, in particular, as we offer a differentiated experience in the airport space, continues to increase.

During the fourth quarter, we opened 5 new XpresSpas, including our first location in Terminal 8 of JFK, our second and third location in Charlotte Douglas International, our second location in Miami International and our second location at Dubai International.

We ended the year with 56 locations, 5 of which are international. As we discussed on our last quarterly call, we also launched the XpresCryo facial service with our partner Nordic Cryotherapy and implemented this offering at our location at JFK's Terminal 4 Gate B.

While this launch was just a test, the results compelled us to roll the service out at Dallas-Fort Worth, and we have additional rollouts planned.

In all, we are proud of our work in 2017 in each store, throughout the corporate organization and at the brand level. The health and wellness market is large, $3.7 trillion globally and growing, supported by shifts in consumer spending towards experiences and increased air travel by business people, who have generally higher incomes, tend to be health and wellness focused, and who are enduring longer wait times in airports. Airport operators are in turn increasing both their infrastructure development and the differentiation they offer bored, rushed and stressed travelers.

XpresSpa's unique branded positioning is the only experience being offered in most airports, with a size at 4x our closest competitor domestically, addresses all these needs and offers a high-value answer to our airport partners. Our mission, long term, is to dominate the on-the-go wellness space on a global basis. Therefore, building on the foundation late last year, our priorities for 2018 center on enhancing both our efficiency and our growth capability in preparation for acceleration in 2019. First, having completed the installation of our point-of-sale backbone in all locations, we are implementing the next phase of our technology initiative to increase store productivity, overall contribution margin and raise the overall efficiency of our business model. We have nearly completed the rollout of our CRM, which will enable real-time sales analysis and improve labor scheduling. Putting this capability in place will enable us to both schedule more efficiently and communicate better with our spa-based workforce, which will benefit both our results and our team members' job satisfaction. We are also studying airport traffic flows and will analyze the results to determine whether there are additional adjustments we can make and opportunities to pursue later this year.

Second, we will add, expand our collaborations with partners in and around the travel vertical that enable us to more fully monetize the strategic value of our unique positioning as the only branded wellness experience in the airport. XpresSpa has a very large opportunity to expand our focus beyond massage, and we are creating amazing experiences for our customers through innovative products and services that also drive same-store sales and enhance gross margin.

To name one example, essie, owned by L'Oreal, is the premier salon nail polish brand. Our essie partnership is performing well and drawing additional female travelers into our spa locations.

As I mentioned earlier, XpresCryo facial was launched as a test at JFK in October and will be deployed at select locations this year. Also, earlier this month, we announced that we joined Upside Business Traveler (sic) [Upside Business Travel], the first online travel service built just for the do-it-yourself business traveler, The Wall Street Journal and several other brands in celebrating the first annual National Business Traveler Day, taking place on Tuesday, April 24.

We anticipate announcing additional partnerships this year that support the XpresSpa brand in the wellness space and expand our product and services offering.

We expect that the composition of our revenues will shift further toward products from services in our mix, particularly through our private-label accessories developed and sourced through Capelli, which should additionally benefit our gross margin.

Third, with our new spa construction process in place, we plan to open additional airport locations that we are developing through both direct collaboration with airport relationships and through RFPs. As I stated earlier in the call, we continue to have robust demand for our stores as air travel and airport waiting time both increase, the nature of the airport is changing, and XpresSpa has played a role in influencing thinking about this infrastructure. Municipalities and developers are now asking for space to be devoted to the wellness category in existing airport spaces as well as in the airports of the future, which are being designed today.

As the trailblazer in the category, XpresSpa and the XpresRecover concepts are excellently positioned to win RFP competitions and are, in some cases, being requested by name. We see this large and growing opportunity as ours to capture.

To do so, we have made franchising a new component of our growth. We developed this capability to give ourselves an avenue to keep pace with demand that is not possible, both from a capital management and operational perspective, through company-owned store expansion alone.

As we move forward, we will be placing an increased emphasis on franchising to help us grow. Our franchise disclosure documents were approved by New York state, which is a key first step that gives us the right to advance our capability in other states. Originally, our franchising strategy was conceived of to capture additional demand, primarily in Tier 2 and Tier 3 airports. But given the level of demand from all airports, we are now adding focus to use this model for some larger Tier 1 airports as well, while we continue to open company-owned XpresSpa and XpresRecover locations already in our pipeline.

We have received nearly 1,000 inquiries for potential franchisees and recently attended the ARN Conference & Exhibition in Orlando, where we conducted dozens of meetings. We are currently working on on-site identification and determining franchisee awards. Given the delays we faced last year in construction that caused us to miss our plan for 60 locations by year-end 2017, we want to be sure we have our plans nailed before stating the exact store count and mix of franchise and company-owned locations we expect to have at the close of this year.

However, given demand for our concepts both domestically and internationally, as well as our franchising capability, it is entirely possible that in 2 years' time we can have 100 locations. Once we have finalized our thinking, we will come back during this year and offer more concrete plans for new construction in 2018.

We can say today that we do expect to open up additional locations in some of our busiest airports, such as Charlotte, Atlanta, as well as in Austin, where we previously announced we had won an RFP. Additionally, as you know, many of our airport developer relationships also develop other types of venues and are also courting experienced economy retailers for these venues. Many have approached us to develop off-airport locations. Our first such location in the World Trade Center's Oculus opened in January. We're carefully and slowly, for the moment, evaluating the opportunity to open additional off-airport sites.

Finally, in March, we launched our new e-commerce platform at XpresSpa.com. The site offers a seamless shopping experience that is optimized for mobile devices with a simplified checkout process and also offers a location finder, product reviews and more. The platform leverages our partnership with Capelli, offering a full-line of XpresSpa-branded travel accessories, and also offers products from global designers and manufacturers of on-trend, private-label and branded products.

In summary, we established our foundation in 2017 and are positioned for a great 2018, focused solely on the execution of our core strategy and with clear priorities of driving increased operating efficiency and expanding XpresSpa's scale and brand. Our target trajectory for this year is to position ourselves for accelerated growth in 2019.

Now I will turn the call over to Anastasia for a review of the numbers.

Thank you, Andrew, and good morning, everyone. As noted in the press release we issued this morning, consolidated results for 2016 include only 8 days of operations for the Wellness segment, from December 3, 2016, and as such are not comparable to the 2017 results. Specifically, the tables do have GAAP results presented in the press release, compares 2017 results, which include the Wellness and intellectual property segments, to 2016 results that include only 8 days of Wellness segment and a full year of intellectual property segment results.

Also, FLI Charge and Group Mobile are presented as discontinued operations. The businesses were sold in October 2017 and March 2018, respectively. As such, I will focus my comments on the Wellness segment only.

Moving to the fourth quarter of 2017. XpresSpa revenue was $11.8 million in the quarter. As Andrew mentioned, we estimate that the revenue was affected by approximately $1.2 million due to delayed new store openings. During the quarter, we opened 5 airport locations. Gross profit was $2.4 million or 20.4%. We also incurred approximately $100,000 in labor and other indirect costs related to new store openings.

General and administrative expenses were $2.1 million. We further optimized our expenses and expect to realize the reductions in 2018. Operating loss was $1.2 million. Adjusted EBITDA was $0.4 million.

In December, Congress enacted the Tax Cuts and Jobs Act of 2017. This legislation resulted in revaluation of our deferred tax assets and liabilities, which was largely offset by our U.S. valuation allowance. There is no material net impact to the company's consolidated financial statement.

With respect to full year 2017 Wellness segment performance and compared to the unaudited full year 2016 results, total revenue is $48.4 million, an increase of $10.4 million from 2016. Hurricanes had a $400,000 negative impact on our revenue. Same-store sales growth was 3%.

During the year, we opened 9 stores, completed 2 major renovations and closed 5 nonperforming stores, resulting in a more productive store base as average sales per store increased 18% to over $1 million in 2017.

Gross profit for the year was 19.4% as compared to 20% in 2016, primarily due to increased labor and set-up costs from new store opening.

General and administrative expenses were $8.7 million compared to $15.7 million in 2016. Net operating loss was $7.3 million as compared to $12.4 million in 2016.

Adjusted EBITDA of $1.9 million improved $8.8 million from a loss of $6.9 million in the prior year, inclusive of $1.3 million of integration and onetime costs.

Now moving to the balance sheet. At December 31, 2017, our cash balance was $6.4 million and current assets was $16.1 million. Assets held for disposal was $6.4 million, and liabilities held for disposal was $3.8 million. Our long-term debt was $6.5 million.

This concludes our prepared remarks. Operator, would you please give the instructions for the Q&A?

(Operator Instructions) Our first question comes from the line of [John Riley] with Eden Rock Advisors.

With regard to corporate overhead, are you taking a look at management compensation levels and structure as a means to reduce the corporate overhead given the size of the company? And the second part of the question is, will management receive equity performance incentives?

So we absolutely are looking at both the overhead and executive compensation. We're clearly a much simpler company as we're completely focused on the wellness component of our business. And we're actively talking internally and to our board about reducing or deferring, or both, executive compensation. You can expect to hear more from us before we report our first quarter financials.

Does that complete your question?

Yes, thank you.

Our next question comes from the line of [Charles Anderson], a private investor.

Nice to see we're moving forward in a positive direction. Pardon me, I've got a bit of a cold. I got a question concerning corporate headquarters in Manhattan. Can you address how much longer we're going to have to sit in that particular space, and what you all might envision in terms of reducing that part of the overhead in terms of -- at least I realize it's not a whole heck of a lot of money, but still it's somewhat -- could be considered a concern?

Yes, absolutely. So our lease term in Manhattan runs through October of 2019. I believe that's disclosed in the K. As for corporate overhead, I think that this fits with the general theme, which is that we are actively looking at every way to drive value by putting the capital in the right places, which is adding stores and building on the talent. So over time, we'll absolutely look to move the company to a cheaper office and/or venue.

That's great to know. And one other question I have concerning any remaining IP on the docket or holdover from the Vringo/FORM Holdings period of life. What's the intent on doing that? Are we going to continue to try to monetize that? How much attention -- and that's sort of a hard question to answer, is how much attention you are going to do to monetize that, but if you might be able to discuss that briefly?

Sure. As is noted in our K, it accounted for about $450,000 of revenue in 2017 relative to our Wellness segment. Obviously, that's very small. And I think that in terms of management's focus, we are completely focused on building the Wellness segment. If monetization opportunities arise, we'll absolutely take them. The focus is total and complete on health and wellness.

(Operator Instructions) Our next question comes from the line of Josh Kattef, a private investor.

Can you shed light on what's contained in the assets and liabilities held for disposal lines on the balance sheet?

This is Anastasia. Absolutely. So the way -- how assets and liabilities are presented, it's basically one line accumulating all various assets. And what's in there are predominantly inventory, fixed assets that are being also sold over time or used in operations. And those amounts are offset by amounts of regular trade payables and receivables.

It seems like there was a big quarter-over-quarter increase in both of those lines?

Yes, absolutely. That increase is driven by the fact that in the fourth quarter of this year, we presented Group Mobile as discontinued operations. In the prior quarters, you would notice that only FLI Charge was presented as the DiscOp, whereas the Group Mobile was still continued operations. Therefore, you see the increase.

Okay. Got it. One more question for you -- 2 more questions, actually. The products, supplies and other operating costs line for the quarter was significantly lower, an improvement. Is that just a result of the efficiencies?

Yes. It was -- we were in the transition to Capelli, which happened in the end of December. We were trying to liquidate as much of the product that was either ready to expire or that was [all] product as possible. And literally, on January 1, we transferred all the inventory that we had in our outside third-party warehouse over to Capelli to manage our inventory going forward. We will be out of the inventory that we actually owned probably by the end of this month. And all go-forward inventory will be housed by Capelli. And we will not own that inventory, but we will do purchase orders to fill in any of the inventory that we're buying from them.

So in the reconciliation of operating loss from continuing operations to adjusted EBITDA, that products, supplies and other operating costs, should we expect that to be lower than $1 million, whereas it's been in the $1.7 million to $2.6 million range for the first 3 quarters of the year?

We definitely expect a reduction in this line item as compared to the first 3 quarters of the year. I'm not going to advise on the exact number.

And the K [is expected to be] filed this afternoon, which will give you a breakdown.

Okay. And Andrew, I know in your remarks you said that you didn't have an estimate for total store distribution between franchise owned and company owned for the end of the year 2018. Do you have any guidance on the number of new store openings in the pipeline for the traditional corporate-owned model?

Yes, absolutely. But I would just say as a general theme, even a number of stores that are in the pipeline we may choose to open as franchise locations. Overall, there are 13 locations that are in the pipeline that have been in the pipeline for some time. And we'll address the mix between company and franchise owned as we go through the coming months.

When we say in the pipeline, does that mean that they've won RFPs or they've submitted RFPs?

What I would consider firmly in the pipeline is either an RFP win, an identified and agreed -- identified space with agreed upon terms, a signed term sheet or a signed lease.

Okay. So should investors be reading into the movement to the franchise model as a way to reduce corporate cash burn?

Well, it unquestionably is a way to mitigate and reduce the capital outlay for new locations. It's also, in our view, a way to grow our footprint more quickly.

Mr. Perlman, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thanks again, everyone, for joining us on the call today. Later this afternoon, I'll be presenting at the Sidoti Spring Conference, and it will be webcast as well. Look forward to giving you an update when we report the first quarter results. Thank you, and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.