Joint Corp (JYNT) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to The Joint Corp. 2014 fourth-quarter and full-year results conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Peter Vozzo of Westwicke Partners, you may begin.

Thank you, Nicole. Good afternoon, everyone, and welcome to The Joint Corp. fourth-quarter and full-year 2014 financial results conference call. I am joined by John B. Richards, Chief Executive Officer, Frank Joyce, Chief Financial Officer, and David Orwasher, Chief Operating Officer.

Before we begin, if you do not already have a copy of the 2014 fourth-quarter and full-year financial results press release, the financial statements can be found in the Investor Relations section of our website at www.thejoint.com.

Please be advised that this today's discussion includes forward-looking, statements including predictions, expectations, estimates, and other information that might be considered forward-looking. Throughout today's discussion, we will present some important factors relating to our business which could affect these forward-looking statements. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from the statements we make today. As a result, we caution you again to placing undue reliance on these forward-looking statements and would encourage you to review our filings with the SEC for a discussion of these factors and other risks that may affect our future results or the market price of our stock.

Finally, we are not obligating ourselves to revise our results or publicly release any updates to these forward-looking statements in light of new information or future events.

With that, I will turn the call over to John.

Thank you, Peter, and thanks, everyone, for joining us on today's call to discuss our 2014 fourth-quarter and full-year results.

During the fourth quarter and for the full year, we made excellent progress in terms of revenue growth, clinic openings, and organizational development that will set the stage for continued strong corporate growth.

We are committed to building a national provider of chiropractic services through growth of our system and in particular the accelerated development and/or acquisition of chiropractic clinics. It is our strategy to do this in concentrated clusters for both Company managed clinics and through the continued but select sale of additional franchises. This expansion is well underway and David will provide more details on clinic openings in 2014 as well as other operational activities in a minute.

Again, as is consistent with our long-term strategy, we will continue to open franchise clinics but will do so in a more focused, selective manner than we have done in the past and emphasize the addition of corporate owned or managed clinics over franchise clinic growth. This balance and pace of unit growth will improve both Company-wide operational performance and profitability.

As a reminder, on average, these units turn cash positive within approximately 12 to 15 months and generate EBITDA margins in the range of 25% to 35% as they approach maturity. The greater control afforded the Company over corporate managed and owned clinics will enable us to accelerate our clinic development timeline as well as implement our operating standards and to capture a greater share of clinic economics. This strategy of development, management, and/or ownership of these clinics will have a substantial impact on overall profitability and enterprise value to The Joint Corp. moving forward.

Since the beginning of 2015, we have begun the process of operating 11 corporate owned clinics. This has been fueled by the repurchase of strategically targeted franchises in LA, San Diego, and Orange County, California as well as in Phoenix and Tucson, Arizona. In addition, we have recently acquired the regional developer rights for LA and San Diego counties, one of the largest metropolitan statistical areas in the country. Reacquiring regional developer rights in these key regions sets the stage for accelerated corporate development of these important markets. We will continue to aggressively target strategically important regions and franchises beginning first primarily in the western United States.

Now, I would like to turn the call over to David Orwasher, our Chief Operating Officer, to provide more detail on operational results for the fourth quarter and the full year. David?

Thank you, John. As of December 31, 2014, we had 246 clinics open. This represents an increase of 71 clinics, or 41%, as compared to 175 at the close of 2013 on December 31. This represents an increase of 16 clinics from September 30, 2014 alone.

Please note that the growth in 2014 was exclusively based on the expansion of franchise clinics. And as John mentioned and as is consistent with our strategy since the beginning of 2015, we have begun operating 11 corporate owned or managed clinics. That growth strategy will increasingly focus on us operating corporate owned clinics through both greenfield development together with the acquisition of strategically targeted franchise clinics. This will result in slower and more selective growth of franchise clinics as compared to the growth of our franchise clinics over the past few years.

On a go-forward basis, all clinic growth, both Company and franchise, will revolve around our cluster development strategy. This is in order to facilitate the leverage and optimization of both our marketing and operational and labor efficiencies. This cluster development approach capitalizes on our growing economies of scale and is in contrast to that of the typical independent competitor in the marketplace today.

Our developing pipeline of potential repurchases of franchises and potential acquisitions continues to grow. As we stated in our press release issued just today, we expect to open 65 to 75 clinics in 2015, including between 38 and 42 corporate owned or operated clinics.

It's important to note that growth in Company owned managed clinics will drive profitability to the enterprise over time. And as such, it's this larger focus on the corporate enterprise corporate clinics that will reshape the clinic portfolio over time.

To date, our focus is in key western markets. Whereas John has said and I have said earlier, we have acquired 11 clinics in California and in Arizona. Our first greenfield clinics are currently targeted to open in Tucson, Phoenix, and Los Angeles later this spring.

Supportive of this focused strategic clustering strategy is the strategy to simultaneously strengthen our base, our franchise base, and accelerate our overall time to market. To that end, we will continue to concentrate on both strengthening and upgrading our existing base of franchise units and also improving our marketing and operational oversight.

During 2014, we built operational strength in our management team to help support this growth -- to support our growth objectives in 2015 and beyond by scaling our organization. This included the addition of senior operational personnel, customer analytical teams, a real estate development team to grow units and accelerate the penetration of franchise units, a data management team all designed to accelerate our growth and precision and utilization of data in our expansion.

As an extension of our strategy to accelerate both unit growth and performance and, again, as is consistent with the overall strategy to bring concentration of effort and focus across all disciplines, we have now turned our focus and done so in our marketing and messaging arena. To wit, we have hired a national marketing firm, Moroch Partners, out of Dallas, a firm experienced in supporting a multiunit business of our type.

We are in the process of developing consolidated messaging and marketing and have begun our drive to focus on a digitally oriented customer acquisition set of tools in those markets where we have sufficient scale. Together with concentrated densities, we will gain efficiencies by engaging in broadcast marketing efficiencies as we move forward as well. Again, we will focus these initiatives in our key markets to gain our leverage and concentration.

As part of our overall scaling strategy, again, and to ensure our ability to execute the opening and operating of our clinics in a timely fashion, I am pleased to announce the addition of Curtis Gray, who has joined us as our Senior Vice President of Operations. Curt is a proven retail operations executive with over 25 years experience, including time spent at Barnes & Noble, Chapters Inc. of Canada, and Starbucks during those companies' high expansion growth periods. Curt brings a wealth of experience in retail operations, store expansion, and franchising, and will help us execute our strategy soundly, effectively, and timely.

That being said I would now like to turn the call over to Frank Joyce, our Chief Financial Officer, to discuss the 2014 fourth-quarter and full-year results and provide a general outlook for the full year of 2015.

Thank you, David. We have provided detail on our financial performance for the three months and full year ended December 31, 2014 in the press release issued earlier today. I will now take a few moments minutes and discuss some of the highlights.

As David mentioned, we had 246 clinics opened at December 31, 2014, an increase of 71 clinics since the end of 2013. As a result, revenues increased 24.4% in the fourth quarter of 2014 to $2.06 million, and increased 19.4% for the full year of 2014 to $7.12 million, both as compared to the prior-year periods.

Revenue growth for both periods was partially offset by a reduction in initial franchise fees as a result of fewer clinics being open during the fourth quarter and full year compared to the same period a year ago. We expect that revenue from initial franchise fees will continue to decrease as our blend of corporate owned clinics increases and franchise expansion continues but becomes more selective and more targeted.

Net loss in the fourth quarter of 2014 was $2.57 million, or $0.35 per share, as compared to a loss of just under $1,000, or $0.00 per share, in the fourth quarter of 2013. For full-year 2014, net loss was $3.03 million, or $0.56 per share, compared to net income of $155,000 or $0.02 per diluted share in 2013. It's important to note that net loss in both 2014 periods includes a non-cash charge of $2.1 million to establish a valuation allowance for the Company's deferred tax assets. Net loss in the 2014 periods compared to the same periods a year ago also reflects the increase in the number of employees hired during 2014, the increase in infrastructure to support our growth and scaling initiatives, together with an increase in professional fees due largely to our becoming a public company.

Adjusted EBITDA for the fourth quarter of 2014 was a loss of approximately $813,000 compared to a positive EBITDA of $156,000 in the fourth quarter of 2013. We define adjusted EBITDA as EBITDA before acquisition related expenses as well as stock-based compensation expense. Adjusted EBITDA for full-year 2014 was a loss of $1.4 million compared to adjusted EBITDA of positive $479,000 in 2013.

Now, turning to the balance sheet, as of December 31, 2014, cash and cash equivalents were $20.8 million compared to $3.52 million in December 31, 2013. During November of 2014, we completed an initial public offering issuing 3.45 million common shares at a price of $6.50 per share for net proceeds of approximately $20 million. As of March 11, there were approximately 9.621 million shares outstanding.

Today, we are providing 2015 financial guidance for the first time. For full-year 2015, we are expecting total revenues in the range of $14 million to $15 million and full-year 2015 adjusted EBITDA loss in the range of $7.1 million to $7.5 million. We expect net new clinic openings in the range of 65 to 75 clinics. This includes an estimate of between 38 to 42 corporate owned clinics and between 45 to 55 franchise units. The Company owned clinics will be from both buybacks of existing franchises and greenfield, or newly constructed units.

As we previously stated, our revenue will be comprised of three distinct revenue streams -- franchise revenue from royalties, franchise revenue from the opening of franchise clinics, and corporate revenues from acquired or newly built greenfield clinics. In 2015, we expect this revenue to evolve from 100% franchise generated revenue in 2014 to an increasing portion of corporate revenue by year end. This blend will continue to evolve in favor of corporate units as our growth in this area accelerates.

And with that, I would like to turn it back to John.

Thank you, Frank. This has been a very exciting and productive year for The Joint Corp. in terms of clinic growth and the buildout of our operational infrastructure to support our continuing momentum, not the least of which includes our having become a public company in November of 2014.

I am pleased to say that 2015 is off to a very strong start, and we look forward to updating you on our progress in the months to come.

I also want to take a moment to thank each and every one of our employees and our franchisees for their continued hard work and dedication to the business. We indeed are very passionate about our business and are excited about the opportunities ahead. Our strategy is to become the leader in the national market for core chiropractic adjustment services through the rapid expansion of corporate owned or managed clinics and the continued but more focused expansion of franchise owned or franchise managed clinics.

And with those comments, we would like to open the floor for questions.

(Operator Instructions). Tony Brenner, ROTH Capital Partners.

Thank you. A couple of questions. Of the 11 stores that you acquired, some of those were closed. Are there still 11 in operation or is that a reduced number?

None of them were closed, Tony.

But you didn't acquire the ones that were closed as I recall?

That's correct.

How long have those 11 stores been open? Have any of them been open for 12 months or longer I guess is what I am really interested in.

Each of them are open in a range. Some are less than 12 months. Some are a little bit longer than 12 months.

So are those stores close to breaking even or being profitable or are they profitable going forward?

In the month of January, they are pretty close to breakeven, the ones that we had under our belt.

It's a range, to be perfectly candid. It's a range. So, some are there; some are not. Remember, our focused strategy is to acquire opportunities in concentrated markets and to apply our operational disciplines into the future. We are talking about some acquisitions that are a week old and others that at the longest are January 1, effectively. So a very short period, Tony.

Okay. And in your guidance for the number of company clinics that would be open, it looks like a pretty even split of 20/20 acquisitions versus greenfield? Is that about right?

That's how the math works out. We haven't really broken down the exact number. We are leaving a little bit of flexibility there but, yes, we understand where you are coming from.

It's a fungible mix, to be perfectly blunt.

Okay. And the greenfields I presume would be in the California/Phoenix market?

As we stated, yes, we are focusing on key western markets and that's where both our acquisition and greenfield strategy will take place. And, Tony, since you raised the question, I'm sure you have asked it before, our limited range of performance within the 11 -- amongst the 11 units that we acquired, we've already demonstrated some positive revenue impact.

Okay. One other question -- in your guidance for revenues for example, what is assumed for regional developer acquisitions in that number?

Well, in general, we will continue to look at the opportunity to acquire strategically important regions as we move forward. In this particular year, our first priority was to acquire regions as they were available in markets in the near West, if you will, so that would facilitate our development of Company units within what were formerly regions managed by others. So it's a sequential process and right now we have a very clear runway in these key western markets and now we intend to accelerate the development there.

And the correlative benefit of retiring these regional developer licenses is that we also retire the associated royalty contribution that they may be getting.

I understand. That's why I asked the question. What's the assumption for the number of regional developers and the associated number of clinics that they cover and your revenue and EBITDA guidance?

Clearly, we haven't broken down the number of greenfields versus buybacks, but we have factored in the loss of royalties as a result. So, we don't have any double accounting, if that's your question.

But it sounds like there's not much built in for benefit from buying these back.

The benefit is from a financial point of view is the retirement of the debt obligation to them on the royalty share. And the other financial benefit is not going to be so apparent but it's from -- if there is continued selling of franchises in those territories that were formerly under an RD license, the revenue share on that sale is no longer present. So, we would capture 100% of that franchise sales fee.

Said another way, we have built in all the benefits that you would expect to accrue to us when we acquire those units. It just depends upon how much active development we are going to target in a particular region.

No, I get that. And it all comes down to the bottom line, which is why I am questioning what's assumed. To me it doesn't sound like there is much of that benefit built into your guidance or am I mistaken?

I think it's not expressly line item, it's built into the overall guidance as to the enterprise EBITDA. That's how it's reflected. It's also reflected in each one of the three -- or two of the three revenue streams, in the franchise sales revenue stream and in the overall EBITDA revenue stream because we are reducing an obligation. We are eliminating a debt.

Right. Okay. Thank you.

Not expressed guidance on each particular transaction, but it's embedded within the entirety of what we are guiding. Yes, so if we are targeting the development of a certain number of corporate units and within that potential buybacks and they happen within a region, certainly we are going to take full advantage and expect to take full accounting advantage of the benefits that accrue to us there, but you would expect us to do that, obviously.

Right. Thank you.

(Operator Instructions). Brent Rystrom, Feltl.

Maybe you can expand on that last topic to give a little clarity so people aren't confused by it. Maybe I would suggest if we look at LA County, you can maybe tell us how many stores you think LA County could eventually hold and then we could work the math backwards and say, okay, if the average store does $300,000 and you are saving 3% in Aberdeen, 3% royalty on that $300,000 per store, we could work the math to kind to see what the benefit would be, all according to the regional developer?

Okay. The holding capacity, if you looked at it at the moment in time that the LA agreement was -- benefit was about $50,000. You can do the math from there.

All right. So it would be reasonable to say that you picked up about five stores, so net that would be about 45 stores that you would have been paying -- that they would have been getting the royalty on, and that royalty eventually would have been closed stores at $400,000 per store would be $12,000 per store times 45, it would be about $0.5 million per year you are picking up by making this change?

That's right.

All right. I just wanted to make sure that was clarified. Okay, from a simplistic perspective, can you give us a sense in the fourth quarter, I know there were two areas where there were public company expenses cited. One was in SG&A or you talked about -- or sales and marketing where you talked about travel expenses. The other was public company expenses what I'm assuming is accounting and legal expenses. Can you give us a sense of what those were in the fourth quarter? Were they in the $200,000 to $300,000 range?

I don't have them offhand, but they were roughly in that range. We also had a disproportionate amount of marketing costs and some compensation related expenses related to the IPO that were in the fourth quarter and not in the rest of the year. So it was a fairly heavy weighted fourth quarter.

So from a simplistic perspective, I purposefully didn't have the public -- the IPO related expenses. My model is not including those. Would you say, in total, the $200,00 to $300,000 is a good guess? Was it maybe a little bit more than that, including for things you were talking about, or was that kind of the range?

I think that's a reasonable guess.

Thank you. So then maybe one question I have on the guidance -- the EBITDA loss, right now the guidance of $7.1 million to $7.5 million loss for the year. We just had an $800,000-some EBITDA runway loss in the fourth quarter. I would assume a little of that is abnormal given what we just talked about with the public company expenses and whatnot. So maybe say the EBITDA runway loss in that quarter was maybe $600,000 to $650,000. We are going to double or triple the rates to about $1.5 million to $1.7 million per quarter. What is going to be kind of the construct you are using? What's driving that increase? I would assume that large amounts of it is the greenfield development stores and the negative EBITDA they run at. And then what else is in that delta? Can you kind of break down that $1 million gain per quarter and kind of what drives that in the loss?

So just generally speaking, the G&A number for the full year includes partials for a lot of new people. So while most people are on board now, next year there is going to be some unfavorable comparisons where all will be in for a 12-month period. Some will be in for a one-month, two-month, three-month period. So that's a big driver in G&A increases. That's about the biggest one that I can come up from.

In one or two cases, we've identified maybe $500,000 for some local marketing initiatives that are relatively new after taking a look at the regions that we are in and the clinics we have. So that's another piece but I would be glad to take you through the model in a sidebar if that makes sense.

Sure. And maybe one quick question on that that might clarify a little is when you model a greenfield unit, but what are you modeling it will lose EBITDA in the first year?

It will start to be profitable around the end of the first year. I don't have specific numbers because it depends on where it is, the location and all of that, rent and so forth. But we see our model show it starting to turn a profit in about 13 months.

Would it be maybe a $50,000 EBIT loss, EBITDA loss the first year?

It could be more than that and obviously -- and I know you know this -- the more greenfields that we bring on next year, the higher the EBITDA loss we will have. So if we are successful in getting more on the ground, we will have higher EBITDA losses, but it varies a bit.

It's a very simple model, Brent, as you well know, and the occupancy cost and the focus in the western markets is going to be a bit of a driver of that as they are slightly more expensive.

And that was going to be, David, kind of my last question -- was is the focus on the western markets, is there something there that you see in revenue? Is there something there you see competitively? Or is it just simply that it's easy to hop on a plane from Phoenix and go to San Diego, LA, Tucson or someplace and that's why you are starting there with your emphasis?

Yes, the last part of it is certainly true. It's our intention to concentrate our operational and marketing focus close at home as we scale up the business and you will recall that from previous conversations. But also remember that we cleared out the RD territories in these areas as well. Relatively speaking, these markets are substantially underpenetrated relative to their opportunity. So this all kind of combines for a nice first step for the Company to get it's greenfield legs under it, if you will, and also capture the multiplier benefit of having a region which of course doesn't have a regional developer license associated with it.

Also it's not coincidence that the Los Angeles market is the number two MSA in this country. So going long and going deep and concentrating your efforts in a market with a high return is quite sensible and the operational efficiencies from, yes, being able to oversight this in our first year is I think just good, sound business. So, that's why we've strategically focused on those markets.

All right. Then my final question would be just simply then that of the top 25 MSAs, how many of them have a regional developer agreement in place? And how many are pretty much free to run?

That's an interesting question. The number one MSA has a -- currently has a regional developer and I remind you of our strategy. Los Angeles is the number two. We spoke of that. Number three is Chicago, clear. Four is Houston, and that does have a regional developer. Five is either Dallas or Massachusetts, Austin depending on your perspective. Dallas is encumbered with a regional developer, Massachusetts is not. And New Jersey -- New York/New Jersey is in there and, again, each of those are -- we will march along our strategic path rather methodically.

Thanks, guys.

(Operator Instructions). I am showing no further questions at this time. I'll hand the call back over to John Richards for any closing remarks.

Thank you, operator, and thank you, everyone, for attending our call today. Just to repeat, we are extremely excited about the prospects of rolling out our strategy this year and feel we have an excellent start to the year, really cleared the runaway for a very focused and successful development of Company units in the western United States initially and also a much more focused and much more targeted effort around franchise development. So all of the stars are aligning, and we are looking forward to really discussing all this with you in the coming months as some of these strategies actually take hold and we have more to report on them. So, it's exciting times here at The Joint Corp., and we very much appreciate everyone's interest and certainly the support of our employees and franchisees for helping us make all of this possible. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.