Operator: Greetings and welcome to the Town Sports International Holdings first quarter 2015 earnings conference. [Operator Instructions] I would now like to turn the conference over to your host, Ms. Carolyn Spatafora, CFO for Town Sports International Holdings. Thank you. You may begin.
Carolyn Spatafora: Thank you for joining us today. This is the Town Sports International Holdings earnings conference call discussing results for the first quarter of 2015. I am Carolyn Spatafora, Chief Financial Officer of the company. I caution listeners that any remarks we make in this conference call relating to matters that are not historical facts constitute forward-looking statements, which are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which are outside of our control, which may cause actual results to be materially different from any forecasts we have made. These risks and uncertainties are described in our reports filed with the SEC including those discussed in the Risk Factors, MD&A and other sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on February 27, 2015. We have issued a press release discussing our results for the quarter ended March 31, 2015, which has been filed with the SEC under Form 8-K. We disclaim any duty to update or revise such forward-looking statements whether as a result of future events or otherwise. In addition, for those of you who do not have access to this release and filing, we have also made them available at our website, www.mysportsclubs.com. This conference call is also being webcast and may be accessed via the Investor Relations section of our website. Also, a replay and transcript of the call will be made available on our website on May 6, 2015. I will now turn this call over to our Chief Executive Officer, Dan Gallagher.
Daniel Gallagher: Thanks, Carolyn, and good afternoon, everyone. I first want to give a brief update on our high value low price or what we call HVLP club conversion initiative that we've been working so hard at for the past nine months. I am pleased to announce that our HVLP rollout is now complete, and today we are operating 124 of our clubs under the HVLP umbrella. This conversion was no small task, and I am proud of the efforts of the entire organization, including our dedicated field teams as well as all those who support the field, and who worked so hard to get to this point. We are now in the execution phase, and we will look to gain market share with this new model. In Q1 specifically, we netted approximately 21,000 new members, a direct result of increased membership sales at our HVLP clubs. This is the largest quarterly membership increase we have had in at least five years. Prior to our launch of the HVLP product, we were experiencing net member losses. Looking back to the second half of 2013, we had a net loss of approximately 15,000 members, and this was followed by losing another 18,000 members net in the first three quarters of 2014. As we began to convert clubs to the HVLP model, we increased our member base by approximately 5,000 members in Q4 2014. And in Q1 this year, seasonally a quarter more conducive to net member adds, we were able to build our membership base further by 21,000 versus losing 1,000 members a year ago. We believe our HVLP strategy was the driving force behind our member additions. This membership increase was delivered even as the competitive dynamics in our markets continued unabated. The total join fees associated strictly with HVLP clubs we converted in Q1 averaged approximately $180, which represents an increase over the average of $100 per member collected in Q4 at the clubs converted in 2014. We also believe these higher join fees resulted in less membership sales volumes than we had anticipated. We believe that the pace at which we sign new members can be accelerated with a modification in join fees, and this is a tactic we will be deploying in select clubs in the coming weeks, as we determine the resulting potential membership volume. We will continue to learn how to maximize this new model with more weeks and months of operating HVLP clubs under our belts, and will have the flexibility to either test and quickly implement any learnings across the clubs. As we discussed in our last call, we believe our value proposition with the HVLP clubs is resonating, as we work to build awareness of our offering in each of our markets. Our topline equipment, group exercise, personal training, UXF zones, and in some clubs basketball courts and swimming pools are all key differentiating attributes of the Town Sports club experience relative to other low cost operators we compete with. While I believe our members are getting a lot of value for their monthly dues, I also believe we can improve on the member experience we deliver. We will continue to invest in our clubs and our people to elevate the member experience. We are putting a lot of effort around improving our facilities and improving the cleanliness of our clubs. We are replacing flooring, renovating locker rooms, replacing equipment, and at the same time we are working on initiatives to deliver a consistently clean and friendly experience to our members. Our member experience is top priority. With respect to our personal training offering, we delivered an 8.3% increase in PT revenue in Q1. We continue to receive positive feedback on our UXF zones, which provide great support for our personal training product. And given their success to date, we plan to expand a number of these zones in select clubs in 2015. This fairly capital-light reconfiguration of floor space, reallocate more productive space towards this more productive UXF area. Turning to BFX, we soft opened our second Manhattan BFX location in the Financial District in mid-March, and we're receiving great reviews, which helps us to further build our brand. BFX Studio has been cited for its innovative approach to boutique fitness in magazines such as Self, Details and Well+Good. In early 2016, we expect to open our third Manhattan BFX Studio on the Upper East Side, better establishing the brand in this very important market. Our first BFX location in Boston, on Boylston Street Back Bay is on schedule to soft open later this month, with the grand opening scheduled for early June. Our expert instructors, our three core offerings, and the intimate boutique experience delivered on our BFX Studios are all well-received and we look forward to continuing to build this exciting brand. Turning back to our core business, we ended Q1 with a footprint of 158 clubs in total, of which 123 were HVLP clubs and as of today we have 124 HVLP clubs. At this time, the remainder of our clubs are not planned to be converted to HVLP. This compares to 162 clubs at the end of Q1 2014. We continue to analyze our club base and are keenly focused on maximizing profitability. To that end, we have identified four to six clubs for possible closure in 2015, as we continue to seek efficiencies in cost saving opportunities during this turnaround phase for our business. Lastly, I know many of you have questions around the strategic review process. As you know in March, we welcomed new Board members to our Board, who had been designated by our largest shareholders. Our new Board members have been reviewing our business and current strategies as part of our ongoing strategic review process, which is currently focused on strategies for improving our clubs, leveraging the HVLP model and seeking efficiencies to maximize profitability. In closing, we have a great team, which has worked towards a successful completion of our HVLP rollout and we continue to work tirelessly to execute our strategies. We now offer a superior value alternative to the market segment seeking low-cost gym memberships. We have a passport-only offering in markets where we believe appropriate and we have our BFX Studio offering to penetrate the growing boutique fitness studio market. We continue to seek ways to maximize the productivity of our existing clubs including opportunities for efficiencies in club closures. As our strategies take hold, and as we build the member base at converted clubs, we look forward to updating you on our progress. With that I hand it over to Carolyn to discuss our first quarter financials in more detail.
Carolyn Spatafora: Thanks, Dan. I will now review the income statement and key statistics for the quarter. Total revenue for Q1 2015 decreased $4.5 million or 3.9% compared to Q1 2014, primarily due to the member loss in 2014 and a lower average dues associated with the implementation of our HVLP strategy. The HVLP clubs are expected to experience revenue pressure in the near term. The affected existing members opting for lower dues and new member enrolling at lower rates have not been offset by the increase in membership sales volume. However, we expect to attract a number of new members at each of clubs through this strategy in the long-term. Our Q1 2015 revenue was $1.6 million lower than our most recent guidance. This was driven by a lower volume of sales than anticipated, and at the same time, the mix of sales and member downgrades were more weighted towards our lower monthly dues rate at the higher initiation fees than we anticipated. We also saw our due pressures from cancellations related to our higher paying members. That said these lower monthly dues come at noticeably higher initiation fees. Overall, we continue to believe our HVLP strategies will increase market share for our brands in the long-term from the increased membership sales volume, and as Dan said we would testing modifications in joint fees to determine what degree reduced joint fees result in accelerated membership growth. Our total net member count increased by 21,000 members from end of the year from 484,000 members to 505,000 members at the end of the quarter. This increase represents the largest since Q1 of 2008, which included member growth from 17 news clubs opened in 2007 and Q1 2008. Monthly attrition in the first quarter averaged 3.7%, down about 20 basis points from last quarter, but up about 20 basis points from last year's first quarter. The average monthly membership dues charge in the first quarter decreased to $55.97 from $60.12 in Q1 of 2014. Joint fees collected overall per member Q1 2015 average $118.51 compared to $56.19 in Q1 2014. As a reminder, we recognize the majority of these joint fees as revenue over the course of the estimated member life, which was 22 months in the first quarter of 2015. In Q1 2015, cash collected for joint fees was $11.3 million compared to $2.9 million in Q1 2014. The 2015 amounts include $3.8 million of initial annual fee paid when the member joins our clubs. Total ancillary club revenue increased 6.1% to $24 million from $22.6 million in Q1 2014, driven primarily by an 8.3% increase in personal training revenue, as we continue to see increases related to our personal training memberships. Revenue at our clubs opened from more than 12 months decreased 3.5% for the quarter compared to a decrease of 4.7% in Q1 2014, and a decrease of 3.9% in Q4 2014. Turning to expenses. Operating expenses for Q1 2015 increased $1.4 million or 1.2% compared to Q1 2014. Operating expenses in 2015 include cost of $2.2 million related to our newly opened club and BFX Studio locations, and $1.3 million for separation accrual related to our former Executive Chairman. These increases were offset by a decrease in fixed asset and goodwill impairment charges of $2.6 million and a decrease in expense of $2.5 million related to our closed clubs. Separate from these items, operating expenses increased $3 million, primarily reflecting increased marketing spend of $2.9 million due to the conversion to the HVLP pricing strategy, and $809,000 of increased occupancy expenses at our mature clubs, partially offset by decline in utility expenses of $1 million. Club operating expenses increased 3.4% from last year, driven by increased advertising expenses related to the HVLP strategy as well as increased rent and occupancy expenses, mainly for new clubs and studios, partially offset by low utility expense than last year. General and administrative expenses increased $128,000 or 1.5% in Q1 2015 compared to Q1 2014. Included in this increase is $200,000 associated with stock award grants to the new members of the Board of Directors, and $385,000 related to legal and other cost in connection with a proxy contest and related settlement. These expenses were partially offset by decreases in general liability insurance expense or $245,000 and other cost savings. Excluding these unusual charges, G&A was favorable to Q1 2014 and to guidance. As a percent of total revenue, general and administrative expenses increased to 7.5% in Q1 2015 from 7.1% in Q1 2014. Operating loss was $7.9 million in Q1 2015 compared with operating lost of $2.1 million in the first quarter of 2014. Adjusted EBITDA for the quarter was $6.8 million compared to $14.1 million in Q1 of 2014, approximately $0.5 million lower than guidance, driven by the revenue shortfall, partially offset by favorable payroll and marketing expense. BFX negatively impacted EBITDA by approximately $949,000 in Q1, mostly due to startup, occupancy and payroll cost. The BFX contribution reflects revenue from one studio, which was opened last year and one studio had a soft opening in mid-March 2015, and expenses from those two studios plus preliminary and pre-opening expenses for the additional two studios we attempt to open in 2015 and 2016. Net loss for Q1 was $12.8 million or negative $0.52 per diluted share compared to a net loss of $3.5 million or a negative $0.15 per diluted share for the first quarter of 2014. Total outstanding debt as of Mach 31, 2015, was $307.5 million. Our cash position was $110.8 million for net debt level of $196.7 million compared to a net debt level of $214.8 million as of December 31, 2014. Of the $110.8 million of cash on hand, over $40 million is held at the holding company and not subject to restrictions of our credit facility. As of March 31, 2015, there were no outstanding revolving loan facility borrowings, and the outstanding letters of credit issued totaled $3 million. Under our senior credit facility, we are required to keep a total leverage ratio of 4.5:1 or less, in order to borrow on the $445 million of our revolving loan facility. As of March 31, our leverage ratio was in excess of 4.5:1. Therefore, only 25% or $11.25 million of our total revolver was available to borrow. Given our cash on hands, we do not expect to draw on the revolver in the near future. Capital expenditures totaled $6.4 million in the first quarter compared with $7.2 million in the first quarter of 2014. The decrease was driven by fewer openings in 2015 as compared to 2014. For the full year of 2015, we now expect capital expenditures to be between $30 million and $34 million, including $7 million to $8 million related to one BFX Studio and one club opening during March, and two additional BFX Studio openings in the remainder of the 2015 and early 2016. As we continue to work on our HVLP model, including evaluating the data obtained in the past several quarters, we believe at this time it is more difficult to accurately predict our future quarterly revenue and expenses than in the past. And therefore have determined to suspend our historical practice of giving quarterly revenue, expense and adjusted EBITDA guidance. In connection with the implementation of the HVLP strategy over the past nine months, we experienced various levels of success in different markets with different clubs. While we have seen an increase in memberships with our HVLP strategy, particularly in the first quarter of 2015, we are still refining our strategy, particularly as it relates to the appropriate balance between join fees and membership levels. Retention of existing members at passport membership prices embrace at which existing members downgrade to or new members enroll at the lower tier HVLP level pricing rather than at the higher tier pricing. We will continue to evaluate our practices with respect to guidance, and may in the future determine to resume providing guidance, if we feel it's appropriate at that time. This concludes our prepared remarks. We would now like to turn the call over for questions.
Operator: [Operator Instructions] Ladies and gentlemen, our first question is coming from the line of Sean Naughton with Piper Jaffray.
Sean Naughton: So a quick question for you. So competition, obviously, you guys are doing things that are disrupting the market there a little bit. I know there is a lot of change going on. But can you talk about any responses that you've seen from competition, whether it's some more of the bulk price players essentially going after some members that may not like the HVLP model or maybe looking for something a little bit different. But anything in terms of competitive responses out there from competition would be helpful?
Daniel Gallagher: I think some of the more notable responses we're seeing are more from the low-cost providers, the ones that have less service and less amenities than we have. And what they're doing is giving zero to join compared to our much higher join fees that we've been collecting. But they've also been giving free months, join today, zero to join, get a free month. We've seen definitely pockets of that, depending upon which club of ours is there near. But as far as the middle-tier firms, I don't know that there has been that much change in those yet. It's more around the low-cost providers that we seem to be doing a nice job against with this new model.
Sean Naughton: And then just speaking of that a little further. When you talked about had some success with the model, maybe a little bit more challenging conversion, maybe not going quite as well as you guys had anticipated. Can you elaborate maybe a little bit more maybe what you've learned about the model, where it's successful, where you're having success with it? And what are some of the key levers? It sounds like it might be that join fee as the primary one, but is there anything else in terms of that you've been learning here?
Daniel Gallagher: I think the join fee is indeed probably the biggest thing that we talked about. The join fees are the clubs that we launched in March, almost for predominantly $249 to get to 1995 price point. And that was a large group of clubs. I think it was over 20 clubs. And in an entire quarter, the clubs that we launched for the most part had much higher join fees. And I think they were high enough to the point that the prospect's appetite was not that of what we saw before the first quarter. So as we do reduce the fee, as one would expect, we do see an increase in the membership volume of sales. So it's definitely a lever that we can go after, and it's one we're going to monitor very closely to see how much those sales go up as we drop it X dollars versus Y dollars. And I would say that that is probably the biggest learning. And the reason why those fees were higher than predecessors, because these were in general clubs that were in more dense markets with higher membership levels. And so as we rolled out clubs, the join fee was getting higher and higher almost with each and every launch. And it's the last few launches that had an amount that was probably too high for the prospects to hit the sales multiples that we were looking for. I think that's probably the biggest thing. I do think we called it out on a call that our personal training revenue was up over 8% this quarter, it's actually the highest first quarter of PT revenue we've ever had in company history. And I think one of the learnings we're having is that this model is supporting our personal training product. We have many other things supporting the personal training product like our UXF zone that I referred to on the call. But we are seeing a certain lift in personal training revenue, as we roll out this product to our clubs, and we hope to continue that.
Sean Naughton: And then just, maybe lastly on the cancellations that you're getting from some of the members that be in the club. What are you hearing back from those members, as the reason for cancellation? So I would assume that some of those members could downgrade or maybe I just misunderstood that get more member downgrades with cancellations. But just any clarification on the cancellations will be helpful?
Daniel Gallagher: We do distinguish between the downgrades and the cancel. So on the downgrade side, and it's probably for the same reason that we talked about regarding member prospects and an ability to convert, we were seeing less downgrades than we were expecting, slightly less, but it's very much tracking to what we were expecting. In the beginning of the quarter it's not a little better, as far as how many downgrades we're getting, but again, that could easily be a function of the joint fee that's required to downgrade. But it's also a function of some of the recipe that we have where many members that were single club only are now afforded passport privileges or limited passport privileges depending up on their club. And with that comes other things, like towel service and group exercise reservation privileges. So overall, I would say our downgrades, we're happy with how many downgrades we had, and it's basically what we were expecting, if not even better. On the cancel side, we're about 20 basis points higher than last year. And I would say about half of that increase is due to the handful of clubs that we closed during the quarter or that we announced that we're going to close. I think we closed two and we announced one during the quarter, and I think this time last year we didn't have any of those situations.
Sean Naughton: And then anything on the -- I think there was some different pricing you have on the HVLP members, you might not want to get into this level of details, but how many of your members are HVLP members now? And what is going to be average dues for that member kind of [ph] virtual deal for all kind of Town Sports numbers that we calculated.
Daniel Gallagher: I don't have that readily available, Sean.
Operator: Our next question is coming from the line of George Kelly with Craig-Hallum.
George Kelly: First, a question on BFX. Wondering what you're seeing, if the initial club that you opened is profitable and kind of what the trends are with that first club?
Daniel Gallagher: The first unit right now is continuing to build, I'll call it, traffic each and every month. And as we look at Q1 versus when it opened, it is continuing to build its revenue base each and every month during the quarter. So we are continuing to certainly build and we're continuing to build on the brand. I don't think this unit is on a monthly basis profitable yet. It's our first unit and it's absorbing many of the cost that we have to launch such a unit, but it's not profitable yet. I don't think we disclosed exactly how much one you did make, so we have a footnote that will come out in our 10-Q about BFX. And I do think it's worth calling out, some of the charges that are included in BFX relate to clubs that are going to either just open -- not clubs, but units of BFX that just opened like our FiDi unit, but also our Back Bay unit up in Boston is scheduled to open very soon, and we're already incurring some pre-opening charges at that unit also. So still building a brand, we re still very happy with it. We're getting terrific reviews, terrific buzz about the product and it's a brand we look forward to keep building on. Like I said, we just opened FiDi and Back Bay is going to be open very shortly.
George Kelly: And then second questions on the clubs that are still, that have not been converted to HVLP's core sort of urban clubs. What's the trend like there year-over-year? Has there been any relief? I know there was a lot of pressure from Studios, and I'm just wondering if that's approved at all?
Daniel Gallagher: Those clubs in general, before we launched HVLP, we had more than a handful of clubs that, what we call, passport-only clubs. So we have clubs that when you look into the club before HVLP rollout, the membership that we offered there was predominantly a passport membership. And what we did at the clubs that we didn't launch, for the most part they're still where they were before. We didn't change the model. We didn't change anything about HVLP. We left those clubs at the price points pretty much they were at and the services that they provided. I think those clubs, I don't have separate statistics on those to give out, but I would say the trends that they were experiencing before HVLP conversions are probably somewhat similar. I would say that the PT trends are probably also better like our HVLP clubs are, but perhaps not as accelerated as our HVLP clubs.
Operator: Our next question is coming from the line of John O'Neil with Imperial Capital.
John ONeil: Wanted to just talk obviously about the HVLP a little more and you've talked on how different clubs depending on the phase of the rollout have responded differently. Can we go back to kind of the first 70 clubs that you did in the back half of last year, which were kind of most in need? You had talked on the prior conference call a quarter ago and how the metrics still seem to be similar with what you had expected, 3x the signups and so forth. If you just look at that first wave of 70 clubs, have those metrics changed over the last three months when you talked about changing metrics, is it really that the club that you did this quarter were different than the ones you did in the back half of last year?
Daniel Gallagher: I think those clubs are still probably the better group of clubs by way of what their multiple is versus the prior year. But I think as we move forward, I'm not going to be giving different slices of guidance on different slices of our launches, because they're starting to blend more together in the markets that they are in, because some of these clubs are in same markets that other clubs are in. But it is safe to say that these are clubs that had the lower joint fee from the get go and the retained that lower joint fee and they actually pretty much retained having a higher sales multiple than the clubs that we just recently launched. I think that's probably the best color I can give you. I think I mentioned on the earlier call that the sales ratio we were seeing at that earlier group of clubs did come down a little bit, but I don't want to over exaggerate by how much that did come down, because January is always our biggest months, and it's probably hardest to comp x times January for that very reason. So I don't want to make more of that than as possible, but the clubs with the lower joint fees are generally having a higher multiple is what we're seeing and the clubs that we just launched with the more significant joint fees are having lower multiples.
John ONeil: And nice cash generation in the quarter with the joint fees, so if we look at EBITDAs kind of adding back the change in deferred revenue, that was pretty solid. How should we think of cash build or burned over the next couple of quarters?
Carolyn Spatafora: We're not going to be sharing forward-looking guidance on cash or on revenue, John, I'm sorry about that. But we did had a healthy increase in our cash. We're at a $110 million at this point. And you're correct, a lot it sits in the deferred revenue account. We did collect $11.3 million of cash this year compared to last year about $2.9 million in the same quarter, so we did have $8.4 million increase.
John ONeil: And then maybe could you just talk a little bit about now with the change in Board composition, what things are you focusing on? Are there financial issues what to do with the cash at the holding company, or is it more operational issues, what's the focus?
Daniel Gallagher: I think I can answer that. Our capital allocation issues -- or not issues, our policy is really unchanged from where we've been the last few quarters. There is nothing to announce about that. But I can say, our strategic initiatives are very much focused on membership build, revenue generation, cost efficiencies, but also improving the member experience. So it's more centered around those things. And right now there is nothing to announce about capital allocation.
Operator: Excuse me, everyone, we do have one follow-up question coming from the line of George Kelly with Craig-Hallum.
George Kelly: Just one quick follow-up. You mentioned a couple of times that your attention with CapEx is on refreshing the clubs and just wondering if you feel like you are behind? The things that you're doing didn't sound like any major over host. Just wondering if you were behind in kind of maintenance CapEx?
Daniel Gallagher: No, I don't feel like we're behind. We're actually spending, I want to say very, very similar amounts to what we've done in the past, but I think what we are doing, we're still putting new cardio equipment in our clubs, we're going to be expanding our UXF zones a little bit. I do think I'm piloting some areas regarding our locker rooms, and how we can make a locker room refreshed with left hours and equally important having a locker room closed for less amount of time. I didn't get into that detail on the club, but we are looking at trying to improve our locker rooms a little bit. And I don't think it's necessarily a delay in CapEx, but its an area of focus that I think I'm hearing from the members in the surveys that we should be -- at some of our clubs we could be doing better in our locker rooms, whether it'd be sauna and the steam rooms, and that's an area of focus that we're having, but it's no additional CapEx. When you look at the part of maintenance CapEx this analyst call it, we're not spending anything more than that. We're actually trying to get more efficient with how we're spending our money.
Operator: Ladies and gentlemen, at this time we have no further questions, and I would like to turn the floor back over to our management team for any closing remarks. End of Q&A
Carolyn Spatafora: Dan and I would like to thank you for joining us this evening and taking the time to listen to our call. And we look forward to speaking with you at our next call.
Operator: Thank you. Ladies and Gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Have a great day.