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Edited Transcript of FH earnings conference call or presentation 14-Aug-19 8:30pm GMT

Q2 2019 XpresSpa Group Inc Earnings Call

New York Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of XpresSpa Group Inc earnings conference call or presentation Wednesday, August 14, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas Satzman

XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director

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Presentation

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Operator [1]

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Greetings, and welcome to XpresSpa Group Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

Today's conference call is being hosted by Mr. Doug Satzman, CEO. Before I turn the call over to him, I need to advise you of the following: 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, 2018, and other current and periodic reports the company files with the SEC.

During today's call, the company will refer to certain non-GAAP financial measures, which it believes can be useful in evaluating its performance. The presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures, GAAP measures and a discussion of why the company considers these measures useful, please refer to today's earnings release.

With that, I'd like to turn the call over to Mr. Doug Satzman, CEO.

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Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [2]

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Thank you, operator, and thank you for all joining us today. I'd like to begin by providing a business update before moving on to review of our second quarter financial results and recent debt and equity transaction.

As you know, in the six months since joining the company, I have been working diligently with the team to improve sales while enhancing the guest experience and by identifying cost savings measures to improve our financial condition. I'm pleased to report that many of the initiatives that I've laid out on prior 2 conference calls are beginning to pay dividends for XpresSpa, and we are only just at the beginning.

These green shoots include the following: 5 consecutive months of positive comparable store sale for March through July; second quarter comparable store sales increased 3.8%; and year-to-date with the first half of the year, we were up 1.4%. There are 2 factors behind this momentum. First, we are getting better upselling services, including the length of massages through employee incentive. Notably, in July, the successful cycles over a massage price increase from last year and we're still able to grow our comparable store sales. Second, our average retail ticket increased 8.6% in the second quarter compared to the prior year quarter as we improved our supply chain and are now able to carry more relevant items in stock. The retail sales percent of our business continues to be restored although transactions fell 3.4% during the second quarter due to shifting enplanements from terminal to terminal.

Next, we experienced a 4.5% increase in average sales per store as we closed 1 underperforming location compared to the prior-year period. And subsequent to the quarter end, we closed 2 additional spas at the end of July and our single non-airport location in the World Trade Center in New York City.

This location alone cost approximately $0.5 million at the store level over the last 4 quarters. So we are pleased to have exited this and other locations that were negatively impacting our business. We will continue to closely monitor all of our spa locations, and when necessary, close other locations for the health of our overall business.

Our store margin increased 14% to $3.1 million and rose to 23.7% of total revenue as we benefit from leverage on comparable store sales, streamlined processes, reduced store-level cost and the closure of underperforming stores. We reduced our G&A significantly by streamlining processes at the field and corporate level along with the reduction in stock-based compensation versus the prior year.

The totality of these efforts led to a substantial increase of our adjusted EBITDA to a positive $441,000 compared to an adjusted EBITDA loss of a negative $538,000 in second quarter 2018. This marks our first quarter positive adjusted EBITDA since the fourth quarter of 2017.

As you can see, the improvement in our sales momentum, margin and narrowing of our operating loss are validating our operating strategy. Of course, we are still early in the process and look forward to accomplishing more during the remainder of this transitional year and beyond. In July, we took the much-needed necessary steps to greatly improve our capital structure. This was done through a series of debt and equity transactions that I will detail shortly.

As a reminder, our senior secured lender, B3D LLC, once again restructured our senior secured credit facility and we received our second investment from calm.com, while extending and broadening our strategic partnership. We are confident this new round of funding will provide us with the necessary working capital for operations, new initiatives to improve the business and capital to continue to renovate existing spas and to open new spas by the end of 2019.

Now I would like to provide updates on our near-term priorities, including what we have accomplished recently and what we hope to accomplish over the next few months. One, staffing up through recruiting, training and retention. A, because of our improved capital structure and sale improvements, we are now able to attract better talent across our organization.

In July, we appointed our first Chief People Officer, Scott Milford. Scott is responsible for attracting top talent across the organization, helping employees to train and retention, fostering a people-first culture and elevating the customer experience. Having worked with Scott at a prior company, I know Scott is an excellent fit within the XpresSpa team and culture and will play an important part in our strategic plan. We look forward to continuing this positive momentum in the future recruitment as we upgrade our talent at all levels across the organization.

B, we are shifting the mindset of some of our staff from highly skilled independent contractors to a unified XpresSpa team at each spa. This is ongoing and critical to enhancing the job satisfaction and strengthening retention in a very competitive environment for skilled labor. And also critical to attracting the very best people to our brand.

C, we're planning a more robust employee stock plan that will extend deeper down in the organization and further incent behaviors aligned with shareholder interest as well as attract and retain the strongest talent.

D, we continue to gain momentum in the retool leadership team that was put in place last fall.

Number two, building transactions through improved scheduling, loyalty and launching an XpresSpa app to fill in the gaps within the overall customer experience.

Under this, we have, A, we have rolled out Phase 1 of our new in-store app across all domestic spas after more customer data is enabling us to better schedule services, including the creation of a digital queue and texting customers when we're ready for them. This is leading to greater customer satisfaction and higher retention as we minimize walk away.

B, in the fourth quarter, we intend to roll out an XpresSpa consumer-facing app in Phase 2, which will enable customers at the airport to schedule services before they get through security and reach the spa. We will also better track loyalty so that we can increase the frequency of our best high-spend customers.

C, we've launched a new online training tool that incorporates a gaming methodology which increases participation, effectiveness and retention of the training material. We've started with our concierge population as our first investment into improving our guest experience and further supporting upselling behaviors.

Three, increasing our average ticket by fixing our own retail supply chain and upselling services. As I mentioned earlier, we have improved our product assortment issues and have been able to increase our average ticket by offering our customers an array of quality retail items that they are interested in purchasing.

And four, selectively opening high-performing new spas and renovating existing spas.

A, we have several high visibility new store openings planned for 2019. This includes Atlanta, Philadelphia and Las Vegas, where we already operate in one or more profitable spas; and Austin, where we will be opening our first airport franchise-owned spa and a company-owned spa. Our focus remains on thoughtful and regimented capital allocation so that we can maximize our return on investment for shareholders. We expect about half of the stores to open in the third quarter and half to open in the fourth quarter.

B, we will also refreshen our brand with 3 to 4 renovation projects in addition to 3 already completed. This is both an offensive and defensive move to elevate perceptions of XpresSpa.

As I referenced on our prior conference calls, I also will be activating partnerships with like-minded wellness brands, a critical opportunity for us as well. We are exploring conversations with several companies to this end. This is why I am so excited that we were able to extend and broaden our strategic partnership with calm.com, world's #1 app for sleep, meditation and relaxation.

The relationship now encompasses XpresSpa's international portfolio, all future spas and the brands will collaborate on testing an expanded Calm brick-and-mortar experience at select domestic XpresSpa location. For example, this fall we intend to begin selling a Calm-branded weighted IMAP and a weighted travel blanket as we expand our Calm product line with high-end items relevant to our customer.

Finally, we're going to begin testing cashless payment in 5 spas. And after a period of time, we will assess customer feedback before considering next steps. Collecting cash and depositing in the bank from the airport is actually more expensive than credit card fees. So we're eager to see if this test proves beneficial as a spa cost-savings initiative.

Now let me move to the second quarter itself. Revenue was $12.9 million, representing a slight decrease of 1% or $130,000 compared to the prior 3-month period of $13.0 million. Revenue decrease was due to net 3 less stores versus the prior year second quarter, including 1 spa closure during the second quarter 2019 itself. This decrease was partially offset by a 3.8% increase in comparable store sales. As I said earlier, comparable store sales have been positive every month since March through to July, and rose 1.4% through the first half of the year.

Cost of sales decreased to $9.9 million from $10.4 million in the prior year. This was due primarily to our cost savings initiative that reduced labor cost by 420 basis points to 45.6% as a percentage of sales compared to the year -- the year ago period. We also incurred slightly lower occupancy costs related to the closure of underperforming stores.

Gross profit, therefore, increased 14.0% to $3.1 million from $2.7 million in the prior year period. And gross profit margin increased 320 basis points to 23.7% from 20.5% in prior year.

General and administrative expenses decreased 36.1% to $2.5 million compared to $3.9 million in the prior year 3-month period as we made traction in reducing our administrative costs through streamlined processes at the corporate level coupled with the reduction in stock-based compensation.

Adjusted EBITDA was $441,000, reflecting a $979 improvement compared to a negative $538,000 adjusted EBITDA loss in the prior year. As we know, in early July, we announced a series of debt and equity transactions that improved our capital structure and significantly strengthened its financial condition. Our Board has limited options to simplify and enhance our capital structure, address potential loan defaults and secure additional working capital to support operation, investing in technology, attract top talent, renovate spas and build 5 new spas by year-end.

These series of transactions dilute existing common shareholders in the short term, it also benefits common shareholders through the removal of the liquidation preference of the Series B preferred shareholders, which is a necessary positive step forward for XpresSpa. We have now substantially improved our balance sheet through the restructuring and refinancing of outstanding secure debt and conversion of preferred shares to common, both subject to shareholders' approval.

First, on June 27, 2019, we worked with our second lien lender to eliminate over $2.3 million of secured convertible notes that were due November 17, 2019, by converting the notes into 942,432 shares of underlying common stock consisting of: 585,660 shares of common stock that were immediately issued; and 356,772 shares underlying warrants that were issued. All of those warrants have been exercised and 354,502 shares issued in connection with those warrant exercises.

The conversion price of the notes was $2.48 per share. The conversion freed up cash flows from operations being directed to debt service, while also creating more availability and flexibility under our $11 million debt ceiling.

Second, our senior secured lender, B3D LLC, agreed to amend its $6.5 million senior secured note. The amendments include: Extending its maturity by 17 months to May 31, 2021; reducing the interest rate from 11.24% to 9.00%, representing net saving of $145,000 per year; and giving us the option to conserve cash by paying interest in common stock rather than in cash subject to shareholder approval.

In exchange, we agreed to increase the principal amount by $0.5 million. Equally as important, but subject to shareholder approval, the entire principal amount of the senior secured note will be convertible into shares of common stock at the company's option at a conversion price of $2 per share.

The lower interest rate and ability to service debt and shares saves $730,000 per year in cash, while the repayment of principal and shares in nearly 2 years, likely unshackles us from needing to raise $7 million in cash.

Third, the holders of the majority of the outstanding shares of the Series D preferred stock agreed to convert approximately $24 million of the Series D 9% convertible preferred stock into shares of common stock at a price of $2 per share, again subject to shareholder approval. The conversion of the Series D preferred stock creates a more simplified capital structure, aligns the holders of the Series D preferred stock with common shareholders, and importantly, removes the dilutive uncertainty associated with the Series D preferred stock and then automatically converted into common stock at maturity after then current market price. Conversion to common also removes the liquidation preference of the Series D preferred shareholders in the event of the sale or liquidation of the company. This places these preferred shareholders now on equal footing with common stockholders, which is a necessary and positive step forward.

Fourth, based on this reengineering of the capital structure and liquidity, we received a second capital infusion of Calm.com, Inc. This new round of capital consist of $2.5 million and 5% unsecured convertible notes due May 31, 2022, with the outstanding principal balance convertible at Calm's option into shares of Series E preferred stock at a conversion price equal to $3.10 per share. Calm was also issued warrants to purchase 937,500 shares of common stock, which are exercisable beginning 6 months from the time of issuance, have a term of 5 years and feature an exercise price of $2 per share subject to shareholder approval.

And lastly, we entered into an amendment with the investors to our May 2018 securities purchase agreement that among other things waives certain provisions regarding restrictions on subsequent equity sales by the company, waives participation in subsequent financing by the company, and ultimately the removal of certain such provisions upon such of shareholder approval. These investors are the former holders of the secured notes that converted in late June. This amendment removes their influence on future financings by the company.

In exchange, it also amends certain other provisions of the Alpha Class A warrants, including one following receipt of shareholder approval, and cancels all outstanding Class B warrants.

Finally, it establishes a new class of preferred stock to be designated Series F convertible preferred stock. And the issuance of 9,000 shares of such Series F preferred stock is a party to the May 2018 SPA amendment that will be convertible in the common stock on receipt of shareholder approval.

To conclude, we are now in better financial shape than we were just 2 months ago and eager to execute on our business priority. We are already seeing signs of traction with respect to strengthening comparable store sales trend and a substantial narrowing of our operating losses, which supports my belief that we have a lot of potential and keeps me bullish on our future.

We intend to achieve positive EBITDA and positive operating cash flow in due time. And if we can enhance the results of our existing spas, continue to identify strategic opportunities and expand wisely, I'm confident that we will get there.

Our 700 team members are providing great hospitality and holistic wellness experiences to our guests, and in doing so, strengthening their perceptions of our brand, which we expect over time yield greater loyalty and frequency.

Before we take your questions, I would like to remind you that we're holding our 2019 annual meeting of stockholders at 11 a.m. Eastern Standard Time on Monday, September 9, 2019, New York City.

At this meeting, we are asking our shareholders to consider numerous proposals, many of which I've referenced a few months ago. While I will not list all of them here now, I urge you to read and consider them carefully and then vote accordingly.

Thank you for your time and interest in XpresSpa. And now, we will turn to Q&A portion of our call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from [Ryan Lupin].

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Unidentified Analyst, [2]

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You mentioned your Series D preferred shareholders are planning to convert to common. Isn't that just shifting one from to another?

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Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [3]

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Thanks, Ryan. I don't think so. I think anytime you can align shareholder interest, with many parties as possible it's a good thing for the business. By way of background, the Series B holders represents former shareholders of XpresSpa upon the merger of XpresSpa and FORM Holdings in 2016. Converting to common simplifies our equity structure by eliminating a Class of stock that would've preferred liquidation -- or that would have preferred liquidation or -- and conversion rights. And once converted, the former Series D holders will now be perfectly aligned with the common shareholders, as I mentioned, allowing the market to clearly assess the proper capitalization of XpresSpa. And allowing for what some already believe that the dilution is already priced into our stock price.

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Operator [4]

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The next question comes from [Steven Nelson].

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Unidentified Analyst, [5]

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I have several, actually. Can you discuss the reason for the shelf filing? And also do you plan on raising equity in the near future? Also lastly, if I may add one more question related to your expansion. Why not limit further expansion until the company ends on stronger financial footing from the transaction already completed and improving store operations?

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Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [6]

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Okay. Let me see if I get these. So, one reason for filing the shelf, it's just good governance. Shelf filing allows the Board to take advantage of opportunities to refinance the debt and working capital of the company. I think your second question was, do we plan on raising the equity in the near future? I don't expect to use this device in the near future, but it's an important tool to have, for management to have should our stock move in a positive direction that rewards everyone. And then why not work toward a stronger financial footing? Again, there's no immediate plans to use a shelf. Job one is getting the business self-funding back on its own 2 feet, and we've made a lot of progress in a very short amount of time. That will remain the priority. But as the numbers continue to improve, I'll be looking for wanting to grow, investing more spas the next year, the following year. So as many tools will only serve the company better.

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Operator [7]

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The next question comes from [Michelle Steel].

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Unidentified Analyst, [8]

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Some quick questions on me. But first, Calm. Can you give examples of other partnerships that you're seeking?

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Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [9]

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Michelle, thank you for asking. I can't really answer that until I have something to announce as I'm sure you can appreciate. But what I will say is we are talking with different groups, some maybe services related in health and wellness, some maybe products that they want in place, but the consistent theme is there are a number of emerging and big players that see the same value in the real estate that we have and some of the best airports in the world, certainly in the U.S. and the exposure that we have. There's not a lot of health and wellness plays in the airports. So we draw a lot of very desirable segmented customers made into our spot. So hopefully, I'll have some more things to share in the future, but it's very squarely with our strategic partnership platform that I'm trying to build.

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Operator [10]

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The next question comes from [Marissa Abitbol].

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Unidentified Analyst, [11]

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Do you have any update on your franchising efforts beyond the Austin store, which I understand will be opening in the next month or so? And can you explain why you opened a company-operated spa and a franchise spa in the same airport? Would that seem counterproductive to you?

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Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [12]

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Yes, as you know, I've been asked that question before. It's an untraditional move we've taken. First, let me get to your first question. We are just starting to entertain other franchisees into our system but nothing in the immediate future. Our focus right now is getting our first franchisee off the ground, so Austin airport. We are opening a company-owned store and a franchise store in the same venue. That is unusual. Our intent though is to ensure that this first franchisee has a really great foundation and hopefully succeeds. We believe he and she will. With that, we are also in the organization and franchising, and I have some franchising experience from my background that most of the company and most of the team members at XpresSpa do not. So we have learning to make sure we start developing best-of-class tools that other franchising organizations have built over the years. Fortunately, with our first franchisee, he's a really strong experienced operator that's teaching us along the way while we are getting -- he and his partner off the ground. Long term, our goal is not to operate, have 2 different operators under the same roof. Typically it will be either all company-owned stores, if there's more than one or supporting a franchisee to have more than one operation in the airport. But more to come.

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Operator [13]

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The next question comes from [Ryan Lupin].

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Unidentified Analyst, [14]

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So what other services are you looking to add to your existing spas? Or what services would you consider eliminating? And are you comfortable now with your current product assortment?

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Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [15]

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So I think we're trying to do too many things and less is more, in my view. And the spas business is, by far, the biggest piece of our business, followed by nail service and facial. What we're doing here in a few spas, there is several one-off tests that are very common with a family-led company for a long time, which XpresSpa was for the most of its life, is you test things and we get them going and then sometimes somebody ever ends the tests, and you just have these legacy one-off things. So part of what I'm doing is cleaning up some of these one-off things that aren't scalable, aren't replicatable (sic) [replicable] or maybe even successful. At the same time, I'm looking at bringing in innovation into the spas. So some of it might be very traditional things. Our facial business is growing. So are there any up-and-coming cosmetic companies that can bring some new protocols and we can further accelerate my facial business. The nail business is constantly innovating with new products and services, so we capitalized on the gel trend last year. But now a dip trend, which is another application process, is quite popular. So we're going to test our ability to execute that in a timely manner. So we're watching the nail business. But more importantly, I'm looking for innovation that will help me better leverage my labor. So I can have 1 technician supporting 2, 3 guests a time, that's much better. Right now, I have a very labor-intensive -- if somebody wants a service, I have somebody there to provide that service one-on-one. But as we find new products having more flexibility, and we've been able to increase our throughput without adding more people every time we add another customer offer is something I'll be able to test and then rollout over time. Thank you for that question.

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Operator [16]

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This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Doug Satzman for any closing remarks.

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Douglas Satzman, XpresSpa Group, Inc. - CEO, Principal Financial Officer, Principal Accounting Officer & Director [17]

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Okay. Well, I think we are done. Thank you very much for calling in, and your interest in XpresSpa. I look forward to presenting again 1 quarter from now. Have a great day.

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Operator [18]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.