Joint Corp (JYNT) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the The Joint Corporation 2015 first-quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Peter Vozzo with Westwick Partners.

Thank you Candace. Good afternoon, everyone, and welcome to The Joint Corp. first-quarter 2015 financial results conference call. I am joined by John Richards, Chief Executive Officer; David Orwasher, Chief Operating Officer; and Frank Joyce, Chief Financial Officer.

Before we begin, if you do not already have a copy of the 2015 first-quarter financial results press release, the financial statements can be found in the Investor Relations section of our website at www.joint.com.

Please be advised that 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. The 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 against 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 turn the call over to John.

Thank you, Peter, and thanks, everyone, for joining us on today's call to discuss our 2015 first-quarter results. We are pleased to report that we are off to a very good start in 2015 with strong operational and financial performance. During the quarter, we continue to execute on our strategy of building a national provider of chiropractic services through the growth of our system and in particular accelerating the development and/or acquisition of Company-owned or managed chiropractic clinics. It is our strategy to grow our system in concentrated clusters. David will provide more details on clinic openings so far in 2015, as well as operational activities.

Again, as is consistent with our long-term strategy, we will continue to open franchise clinics but will do so in a more deliberate, focused and selected manner than we have done in the past. We will continue to grow the enterprise revenue base, but will be doing so more aggressively through the addition of Company-owned or managed clinics. This evolving balance, trajectory, pace and mix of unit growth will serve to leverage Company general and administrative expenses in the long-term and improve both Company-wide operational performance and profitability.

As a reminder, Company-owned or managed clinics are projected on average to turn cash positive within approximately 12 to 15 months and thereafter begin to generate EBITDA margins in the range of 25% to 35% as they approach maturity. The greater control afforded the Company over Company-owned or managed clinics will not only enable us to accelerate our clinic development timeline but also enable us to more consistently and fully implement our operating standards to capture this greater share of clinic operating economics. Our overall strategy to self-develop, manage and/or operate clinics rather than simply franchise clinics and collect royalties will have a substantial impact on overall revenue, profitability, speed to market, system control and enterprise value to The Joint Corp. moving forward, both for now and in the for seeable future.

Following our IPO in November 2014 and beginning in 2015, we initiated the process of operating 15 Company-owned or managed clinics. This has been fueled by our repurchase of 15 strategically targeted franchises in L.A., San Diego, California, as well as in Phoenix and Tucson, Arizona. In addition, we acquired the regional developer rights for L.A. And San Diego counties in California and in the state of New Jersey. Reacquiring regional developer rights in both convenient and dense metropolitan statistical areas will continue to set the stage for accelerated corporate development of these important markets, as David will outline for you in more detail.

Now, I would like to turn the call over to David Orwasher, our Chief Operating Officer, to provide more detail on operational results in the first quarter of 2015. David?

Thank you, John. As of March 31, 2015, we had 253 clinics open. This represented an increase of 61 clinics, or 32%, as compared to 192 as of March 31, 2014, and represents an increase of seven clinics since December 31, 2014. As John mentioned and as is especially notable, this number for the first time includes 12 Company-owned or managed units which were acquired in the first quarter, together with three additional units acquired thus far in the second quarter to total the reference number 15. Both the unit numbers and the regional developer acquisitions are consistent with our earlier stated strategy to evolve the enterprise, and as John stated, to one increasingly comprised of Company-owned or managed units, developed both by greenfielding and acquisition of the existing units. Executing on this Company unit growth strategy will also result in a more deliberate, targeted and selected growth of franchise clinics as compared to past franchise clinic sales growth rates. We will also apply this strategy not only to our Company units but also to our franchise units as we seek to leverage and improve operational and marketing efficiencies across the entire system.

It is important to emphasize that the critical strategic value of the addition of Company-owned or managed clinics in the portfolio is that they will, over time, measurably accelerate into price revenues as compared to that of a franchise enterprise whose revenues are singularly derived from that of royalties.

Again, consistent with our previously announced strategies, we will and have first sought to penetrate key Western markets that is within are ready operational control. As John noted, we now own or manage 15 clinics in Arizona and California, in particular in Los Angeles, San Diego, Phoenix and the Tucson markets, and we have reacquired the associate regional developer territories in those markets where we are now free to accelerate further development. In addition, we have reacquired the right to the populous state of New Jersey to facilitate development there in the near future.

As for those units that we acquired, and while it is still early, I am pleased to point out that our initial operational influence on sales performance has been strong across the portfolio of the 12 Company units owned or managed that we acquired in the first quarter. In those first two months of operations under the Company's aegis, we have seen sales increase in those units by over 10%. This is, by any measure, a very encouraging result. Again, as we reaffirmed in our guidance, we remain on track to open 65 to 75 clinics in 2015, which includes between 38 to 42 Company-owned or managed clinics.

Lastly and before I conclude, and underscoring our commitment to become the employer of choice within the critically important chiropractic community, I am delighted to announce the addition of Richard Ashby to the joint team. Richard Ashby comes to us with over 25 years of experience in the medical recruiting space, most recently having served at Ascension Health System in St. Louis, the largest not-for-profit health system in the country and the third largest health system overall, where he recruited physicians, physicians assistants, nurse practitioners and Allied Health professionals. We heartily welcome Richard to The Joint.

I would like to take this opportunity to turn the call over to Frank Joyce, our Chief Financial Officer, to discuss 2015 first-quarter results and general outlook for the full year of 2015.

Thank you, David. We have provided detail on our financial performance for the first three months ended March 31, 2015 in the press release issued earlier today. I will now take a few minutes to discuss some of the highlights.

As David mentioned, we had 253 clinics opened at March 31, 2015, an increase of 61 clinics since the end of the first quarter of 2014. As a result, revenues increased 65.8% in the first quarter of 2015 to $2.5 million from $1.5 million in the same period last year. Revenue growth was partially offset by a reduction in initial franchise fees as a result of four fewer franchise clinics opening during the first quarter of 2015 compared to the same quarter of the previous year.

Net loss in the first quarter of 2015 was $1.9 million, or $0.20 per share, as compared to a net loss of $127,000, or $0.03 a share, in the first quarter of 2014. Net loss in the first quarter of 2015 compared to the same period a year ago reflects the increase in the number of employees hired during 2014, the increase in infrastructure to support our growing and scaling initiatives, the cost of our annual national franchise convention held in January of 2015, expenses related to the continued development of a more focused national marketing program, and an increase in professional fees due largely to our becoming a public company.

Adjusted EBITDA for the first quarter of 2015 was a loss of $1.5 million compared to an adjusted EBITDA loss of $100,000 in the first quarter of 2014. We define adjusted EBITDA as EBITDA before acquisition related expenses and stock-based compensation expense.

Turning now to the balance sheet, as of March 31, 2015, cash and cash equivalents were $17.1 million compared to $20.8 million at December 31, 2014. And as of May 8, there were approximately 9.6 million shares outstanding.

The Company is adjusting its full-year 2015 revenue guidance due to the required accounting treatment associated with the introduction of Company-owned or managed clinics in professional corporation states, and is otherwise reaffirming the balance of its previously issued 2015 guidance, including adjusted EBITDA and the number of new clinics opened that it originally provided in March of 2015. Our previous revenue guidance is being reduced by $1 million, along with a corresponding $1 million reduction in operating expenses, as these amounts are reflected on the books of doctor-owned professional corporations in the PC states in which we operate. Since The Joint does not consolidate the doctor-owned professional corporations, we are making a net zero adjustment to adjusted EBITDA guidance to reflect the required accounting treatment. The Joint earns a management fee from clinics in PC states, which result in equivalent economics to the Company. With that said, Company guidance is as follows: total revenues are expected to be in the range of $13 million to $14 million, a change from the previous guidance of $14 million to $15 million; adjusted EBITDA loss will remain in the range of $7.1 million to $7.5 million; and new clinic openings will remain in the range of 65 to 75, including 38 to 42 Company-owned or managed clinics and 45 to 55 franchise clinics.

With that, I'd like to turn it back to John.

Thank you, Frank. Overall, we are indeed very pleased with our first quarter. We are very excited about the opportunities and the very large market opportunity ahead of us. The first quarter was a good start to the year and we look for 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 are indeed very passionate about our business and are excited about the opportunities ahead. Our strategy is to become a leader in the national market for core chiropractic adjustment services through the rapid expansion of Company-owned or managed clinics and the continued but more focused expansion of franchise-owned or franchise-managed clinics.

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

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

Thank you. So, California and Arizona are PC states? Is that what's happening?

California is; Arizona is not. There is about -- David, there is closer -- about 21 or 22 total?

22 total.

-- PC states.

You were operating Arizona stores in the first quarter, or not?

Yes.

Then, why is there not any line item for cost of Company clinics in the income statement?

There essentially is no cost of sales with Company clinics. You may be thinking about a franchise sale in a regional development area where there is cost of sale, which is a franchise commission. But --

I'm thinking of labor expense, occupancy expense.

Those are all in G&A. So, for instance, in selling, general and administrative and G&A.

That's hard to break it out that way, but -- I mean there's really no way, then, to monitor what's happening with Company store margins as we go forward. Right?

That's actually a very good question. As we go forward, and I would anticipate, in the next couple of quarters, we will be breaking it out as a segment for sure. And in the first quarter, the EBITDA numbers for Company clinics were breakeven or slightly positive.

Which I guess reflects the fact that all the clinics that you're operating were open for I guess longer than a year.

They were all acquired clinics, so they were up and running when we bought them. That would be a fair statement.

Tony Brenner

Okay. Earlier, you had talked about clinics reaching breakeven on average after 11 months. Now you're talking about 12 to 15 months. Is there any reason for that change?

We did not intend to indicate that it was 12 to 15 months. You know, it's anywhere between 11 and 13, something like that, for breakeven.

Yes, our outlook on the breakeven characteristics of the business have not changed really.

Well, then, why not just talk about 11 to 12 months instead of 12 to 15? And since that's what you've outlined previously?

The results of the quarter haven't changed our view of the operations of clinics or clinics' potential going forward, so there has really been no change.

Okay. One other question if I might. Net new openings of 60 to 65, the total openings were around 85 to 95, implying that there will be 20 to 30 clinics closed over the next year. Are these concentrated in one or two franchises, or franchisees I should say, or are they spread out? And it seems like an inordinately large number of clinics that might be closed. I wonder if you could just elaborate a little on that.

No, you know, what it is, you may be confusing buybacks. And here's one way to look at it. Our guidance is 45 to 55 franchise openings and then 38 to 42 Company stores to come to 65 to 75 new clinic openings. Really, some portion of our Company-owned clinics are buybacks, so, really, you are taking the franchise openings and only adding the greenfields to come to 65. So we are not anticipating anything in the neighborhood of 20 clinics closed this year.

What are you anticipating?

It's not something we forecast at this point, but that's not a number that we've seen.

We are not anticipating any closures. This is a transfer of the buybacks.

I knew that was going to be your answer, David.

But in fairness, in fairness, in looking at franchise openings to get to total openings and knowing that we have something like 38 of Company, some portion of that 38 is greenfield and only that portion can you add to the franchise clinics to get there. I (multiple speakers)

I understand. I get it.

One other thing, you bring up a good question, though. In the first quarter, there were six closings, four of which the Company initiated through its buybacks strategy. So the Company bought back clusters of units and decided that some would not open. So, as the Company does that, it obviously forces some of those.

Thank you very much.

(Operator Instructions). Brent Rystrom, Feltl.

Good morning guys. Just a couple of quick questions. On the PC states, can you walk us through the accounting? So, from what I am gathering in those states, basically those clinics will have revenues, they will have expenses, and then the delta between those shows up as income or loss on your income statement. Is that correct?

You are pretty much there. Essentially, the PC itself as a separate entity, you know, and it pretty much has revenues and doctor expenses. However, that entity also pays a management fee to The Joint Corp. So, in essence, what you are seeing is, if you look at The Joint Corp.'s financial statements, the EBITDA levels would be the same as if -- whether it is or isn't in a PC state, but certain line items are not there. So, in other words, revenues minus doctor salaries, those items don't appear on there but there is a management fee that compensates for it. So it has more to do with the technical way in which we must manage patient care than it does the accounting. It's almost like a captive subsidiary that you are not consolidating where the benefits are, for the most part, rolling into The Joint. That is probably the best way I could describe it.

And at the end of the quarter, of the 12 clinics, you said one was managed and 11 were owned?

No. It's probably about 50/50 I would say.

Well, let me add this legal distinction. In PC states, we don't own the clinics. The PC owns the clinics. We are the operator of the management company. That is the legal distinction.

And then, so kind of getting back to what I was just asking then, of the 12 stores, how many were classified as PC and how many were Company-owned?

I would say it's about 50/50 in the quarter.

Yes.

Thank you. During the first quarter, what was the average age of the clinics acquired? Do you know what the age was by month on average?

I'd say around 20 or so, 20 months, somewhere in that range. So, some were clearly relatively new.

20 is about right.

And then, from the perspective of the new corporate clinics, I may have missed this. But your schedule -- you may have already done it. Have you opened new corporate clinics this quarter de novo, or have those not opened yet?

Are you referring to greenfield clinics, Brent, or --

Yes, yes.

No, not yet.

All right. When are you having your first openings of greenfield?

I think we expect within six weeks or so.

Next quarter or so.

Yes, next quarter.

All right.

We are in the process of citing and leasing as we speak for quite a number of them.

And then, from a store level investment perspective, are you finding anything different as you are looking as those first half-dozen clinics? We originally kind of expected a store level investment of about [$150 million], not including the working capital to run the clinic. Is that still looking to be a viable number?

I would say to you that we are on plan, Brent.

All right. Anything as far as the -- thoughts as far as -- you had mentioned hiring (technical difficulty) recruiting. Can you give us a quick overview on your thoughts there? I know you view staffing at both franchise clinics in particular, because that is pretty much the majority you have now, and then eventually your own clinic staffing of chiropractors is a big deal. Can you kind of walk us through what you found the last year as you have been looking at a lot of these franchise clinics and what led you to hire him, and what you expect his department to do?

We are really quite delighted. Richard is a 25-year-plus senior exec in the medical space recruiting physicians and related professionals. And he has been able to add some real clarity and focus around recruiting DCs and has been able to help us fill our pipeline as well as assist franchisees in their selected markets on a demand basis. So we are really quite pleased -- including bringing a level of elevated screening to the process to fit our appropriate profile. So I think it has been a terrific positive for us. He has been here about a quarter now and has hit the ground running.

I think, just to build on that, obviously it's a critical resource in our business. And very early on, we determined that we had to have the right level of resources and focus on this piece of it. This was also insight that we gained from our franchise base very early on as well. So when you have a whole bunch of clinics that you're managing on your own, you have to have the right kind of resources to make sure your staffing happens the way you want it to. So, this is not any different than any other retail business. But in this case, it is a more specialized resource, so we have to have specialized talent to make sure we can find it.

And as you well know, to maintain these numbers and to deliver openings, it's not just delivering openings but to deliver them on time, you have to staff them on time. So this is part of our appropriate G&A and our executional efforts to finish the entirety of that process and as I said in our notes, to be an employer of choice. So it's a fully integrated compensation journey and recruiting journey, and that is what we are doing.

And I think maybe to build on that, you know, your question sort of alluded to what we found from the franchise base and obviously the clinics we've acquired. I think it's fairly typical that, from time to time, it is appropriate and necessary to upgrade the quality of the staff. That's not surprising. I think making sure that we have the appropriate hours so that the clinic can capture all the revenue that it should and, you know, then tuning up or upgrading the operational focus and standards which we're underway we are underway with really help the clinic operate the way it's supposed to in a more consistent fashion. These are the kinds of things that happen very early on when we walk into a clinic and get it going.

I would have thought that one of you guys would have said something the 10% increase in sales. And oh my God.

We are not going to let you off that easy, David. (laughter)

Good answer.

So when you talk about that, can you put that, David, then, if you are going to open that can of worms, can you put that into a context? So when you acquired these stores, they were at a run rate of X and you have seen that bump up to Y?

Say it again? I'm sorry, Brent, say it one more time.

Can you put it into context? So, if you look at the first 11 stores or whatever you were taking that measure of a 10% bump in revenue in the three months you owned them, with the stores you acquired, were they doing on average a run rate of so many hours per year and you bumped them at a run rate to 10% above that? How do you get to that number?

First off, it's two months. And it's a rolling period of time because we didn't acquire them all at a single date. That's one. And they were all, for us, the real estate, demographic, psychographic paradigms as well as geography. But, you know, in the first phase, some of the fundamental operational influence was blocking and tackling. And it was above their somewhat historical run rate trends. So, we are very pleased by that result. Of course, I am not going to extrapolate that into some hyperbolic extreme.

What I'm wondering, David, is, so when you say you've bumped revenues by 10%, so a store that you own for two months, I guess what you are saying is the run rate it was at when you bought it, by the end of that two months, it was 10% higher. Is that a fair assessment?

That's fair.

That is a fair assessment.

Each one of the 12 were open two months. Some were not open three months. So I will add the two-month comparison, but yes, that is exactly right. Revenues two months afterward for the Group were 10% higher.

Above the run rate. That's correct.

I think you said better than 10% if I read it, but yes.

I did say better than 10%.

And as I alluded to earlier, Brent, there is a standard set of operating procedures that we follow when we acquire a clinic to tune up the operation. And those things I mentioned, staffing adjustments, hours, remedial marketing, patient recontact, those kinds of things happen immediately and have given us the kinds of results that David mentioned earlier. So this is really before we get into the, shall we say, the more intense kind of outreach that happens over a longer period of time.

And then my final question has to deal with the depreciation -- amortization. Of the $122,000, are you willing to tell us how much of that was store level EBITDA or store level (multiple speakers) excuse me?

I'm sorry, I missed that question. Could you (multiple speakers)

I believe you reported total depreciation of $122,596 and I think Frank or one of you guys said that 11 stores were slightly EBITDA positive. So, I am wondering if you can tell us, of that $122,596 of DA, how much of that was store level? Was that almost all store level?

I would say about somewhere around $20,000 to $25,000 was store level and the balance was corporate.

All right. Thanks guys.

Thank you. I'm showing no further questions from the phone lines at this time. I'd like to turn the conference back over to Mr. John Richards for any further remarks.

Thank you moderator. Just to reiterate, we really feel very, very good about the start we've had to this year acquiring units and setting the stage for further accelerated development first in the West and then ultimately moving east. Some of the results that you heard David allude to give you a sense of the early results we are starting to see with what we consider to be focused and planned management as we begin to acquire these clinics. So we are really quite excited about it. We are pleased to be seeing pretty much what we expected, and we look forward to providing a lot of interesting news for you folks over the coming months.

Once again, thanks to our employees and our franchisees for their support and certainly to our new investors that we have seen in the early stages in our life as a public company.

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