Joint Corp (JYNT) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to The Joint Corp.'s second-quarter 2015 results conference call. (Operator Instructions) As reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Peter Vozzo, The Joint Investor Relations. Sir, you may begin.

Thank you, Bridget. Good morning, everyone, and welcome to The Joint Corp. second-quarter 2015 financial results conference call. Before we begin, if you do not already have a copy of the 2015 second-quarter financial results press release with financial statement can be found in the investor relations section of our website at www.thejoint.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.

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 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 will turn the call over to John.

Thank you, Peter, and thanks, everyone, for joining us on today's call to discuss our 2015 second-quarter results. Joining me to present on the call is David Orwasher, Chief Operating Officer, and Frank Joyce, our Chief Financial Officer. We are pleased to be able to provide you with this second-quarter update.

We achieved another quarter of outstanding operational performance, marked by strong revenue growth and rapid clinic expansion. We added 11 Company-owned or managed clinics during quarter through the repurchase of franchise clinics, bringing the total number of Company-owned or managed clinics to 23 as of June 30, 2015.

During the second quarter, we continued to execute 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. David will provide more details on clinic openings so far in 2015 as well as other operational activities.

Consistent with our strategy of expanding through the addition of Company-owned or managed clinics, we are excited to have opened during July our first greenfield clinic in Tucson, Arizona. We are also excited to announce that we will be entering the country's third-largest metropolitan statistical area, Chicago, with a number of managed clinics later this year. We have signed several leases already for further expansion.

Turning now to the Northeast region of the US, I am also pleased to have announced that we recently acquired a managed unit in Upstate New York and reacquired the regional developer license for New York State. These steps set the stage for the Company's further expansion in the Northeast, including the country's number one metropolitan statistical area, the New York City area. With previously acquired regional developer licenses in New Jersey; Orange County, California; Los Angeles; and San Diego, The Joint now controls four of the top six MSAs in the United States for further clinic growth.

To help describe operating performance on a systemwide basis, we are providing systemwide sales growth performance for the first time today. Systemwide comp sales in the second quarter of 2015 increased 35% over systemwide comp sales in the same period last year. And comp sales, as you know, include only the sales from clinics that have been opened at least 13 months and exclude clinics that have been closed.

Again, consistent with our long-term strategy, we will continue to open franchise clinics, but will do so in a more deliberate, focused, and selective manner than we have done in the past. We will continue to grow the enterprise revenue base and will be doing so more aggressively through the addition of Company-owned or managed clinics. This evolving balance, trajectory, 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.

Now we are proud to have announced during the second quarter that we reached another significant milestone with the delivery of over 2 million chiropractic adjustments per year. This is important to take note and is reflective of the Company's growing role with patients across the profession.

On average, traditional clinics perform approximately 450 adjustments a month compared to The Joint's average of more than 1,600 adjustments on a per-month basis for our well-established clinics of comparable age.

The Joint clinics perform almost four times more adjustments than traditional clinics we compete with because our convenience and affordability and self-pay model attracts both long-term patients who want to maintain an active lifestyle as well as new patients. In fact, 20% of those receiving treatment at The Joint are new to chiropractic care.

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 second quarter of 2015. David?

Thank you, John. As of June 30, 2015, we had 262 clinics open. This represents an increase of 47 clinics or 22% as compared to the 215 open on June 30, 2014, and also represents a net increase of 9 clinics since March 31, 2015.

During the second quarter, we continued to add Company-owned or managed clinics through the acquisition of franchise managed clinics. And as of June 30, 2015, we numbered 23 Company-owned or managed clinics, including 11 added in the second quarter 2015.

Furthermore, I am pleased to announce, and as John mentioned earlier, that we opened our first greenfield clinic in Tucson, Arizona. The addition of Tucson brings the number of Company-owned or managed clinic as of July 31 to 25. The Tucson clinic represents our second open clinic in the market and will be accompanied by a third greenfield unit currently under construction, expected to open in the third quarter of 2015. In the very short time this greenfield unit has been opened, our performance has been on or above expectation.

Both the unit and regional developer acquisitions previously mentioned are consistent with our stated strategy to evolve the enterprise to one increasingly comprised of Company-owned or managed units developed by both greenfielding and acquisition. As John noted earlier, executing on this Company unit growth strategy will also result in a more deliberate, targeted, and selective growth of franchised clinics as compared to past franchised clinic sales growth rates.

We will continue to apply our clustering strategy not only to our Company units, but also to our franchised units, as we seek to gain leverage and improve operational and marketing efficiencies across the entire system that clustering affords.

In further support of this clustering strategy and our planned growth in the Northeast, including our intention to enter the New York City metropolitan statistical areas, our recently announced acquisition of a managed unit in Upstate New York, together with the acquisition of the regional developer license for New York State, again coupled with the previously acquired regional developer licenses in New Jersey; Orange County, California; Los Angeles; and San Diego, California, The Joint Corp. now has a clear field and controls four of the top six MSAs in the United States for continued clustered clinic growth.

It remains important to emphasize that the clinical strategic value of the addition of Company-owned or managed clinics to the portfolio is that they will over time measurably accelerate enterprise revenues as compared to that solely of franchise unit revenues, which are singularly derived from royalties.

Company-owned or managed units are projected on average to turn cash positive approximately 12 to 15 months -- within 12 to 15 months of operation 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 for greenfielding, but will also enable us to more consistently and more fully and rapidly implement our systemwide operating standards and capture a greater share of these clinic operating economics. Our overall strategy to self-develop, manage, and/or own and operate clinics, in addition to franchising clinics and collection of royalties, will have a substantial growth impact on overall revenue, profitability, speed to market, system control, and enterprise value to The Joint Corp. moving forward, both now and into the foreseeable future.

While it is still early, I am pleased to announce that our initial operational influence on sales performance has been strong across the portfolio of the newly acquired 23 Company-owned or managed clinics acquired in the first 6 months of 2015. Our progress in acquiring and upgrading these operations is squarely on target with our unit guidance and we remain on track to open 65 to 75 clinics in total in 2015, including between 38 and 42 Company-owned or managed clinics.

Revenue growth for the clinics we acquired this year continues to be strong. As example, June 2015 revenues for those clinics that we operated for the full 6 months of 2015 have increased 40% over the revenues from the month prior to acquisition. Similarly, revenue for those clinics that we operated for each a four-month and two-month period grew by 16% over the same pre-acquisition base period. While these growth rates are certainly strong on an absolute basis, they have also exceeded our expectations.

Lastly, and of critical importance in reaffirming The Joint's commitment to ensuring the delivery of strong and efficacious standards across The Joint system, I am delighted to announce the appointment of James Edwards, DC, as The Joint's Chief Chiropractic and Compliance Officer.

Dr. Edwards brings over 30 years of professional experience to the Company, including having served as past Chairman of the Board of Governors of the American Chiropractic Association as well as President of the Kansas State Board of Chiropractic. Other prominent leadership posts held by Dr. Edwards include having served as Chairman of the American Chiropractic Association Political Action Committee and Chairman of the National Chiropractic Legal Action Fund.

He brings not only a wealth of chiropractic experience from his practice base, but also brings to The Joint invaluable insights from a career -- a distinguished career -- of over 30 years of being recognized and acknowledged as an acknowledged thought leader and author across the profession who has developed deep-rooted professional association ties as well as an established regulatory involvement. Dr. Edwards will be responsible for ensuring that The Joint's more than 250 clinics and nearly 750 doctors deliver quality care that adheres to the operating standards of the profession. Welcome, Dr. Edwards.

At this juncture, I would like to turn the call over to Frank Joyce, our Chief Financial Officer, to discuss the 2015 second-quarter results and general outlook for the balance of the year 2015. Frank?

Thank you, David. We have provided detail on our financial performance for the three months ended June 30, 2015, in the press release issued earlier today. I will now take a few moments and discuss some of the highlights.

As David mentioned, we had 262 clinics opened at June 30, an increase of 47 clinics since the end of the second quarter of 2014. As a result, revenues increased 98% in the second quarter of 2015 to $3.4 million from $1.7 million in the same period last year. This strong growth was driven primarily by the addition of 23 Company-owned or managed clinics since the beginning of 2015 and the year-over-year increase in the number of franchised clinics, and was partially offset by a reduction in initial franchise fees as the result of fewer franchised clinics opening during the second quarter of 2015 versus the same quarter last year. Second-quarter results also include $580,000 in revenues and $236,000 in related costs in connection with the termination of 20 franchise licenses during the second quarter of 2015.

Net loss in the second quarter of 2015 was $1.9 million or $0.19 per share as compared to a net loss of $133,000 or $0.03 per share in the second quarter of 2014. Net loss in the second quarter of 2015 compared to the same period a year ago reflects the increase in the number of employees to support our growth initiatives, professional fees for both acquisition-related expenses and public Company operations, and increased advertising fund expense as the Company continues to roll out its national marketing campaign.

On SG&A, total SG&A for the quarter grew sequentially over the first quarter of 2015 by about $625,000 or 22%. However, corporate SG&A grew sequentially by only $236,000 or 10% over the first quarter of 2015, meaning that the vast majority of SG&A growth in the quarter was at the clinic level. Going forward, I expect corporate SG&A to grow sequentially at a more modest pace of around 4% over the next 2 quarters.

Adjusted EBITDA for the second quarter of 2015 was a loss of $1.3 million compared to adjusted EBITDA loss of $0.2 million in the second quarter of 2014. We define adjusted EBITDA as EBITDA before acquisition-related expenses as well as stock-based compensation.

Turning now to the balance sheet, as of June 30, 2015, cash and cash equivalents were $12.6 million compared to $20.8 million at December 31, 2014. And as of August 7, there were approximately 9.8 million shares outstanding.

The Company is reiterating its previously issued 2015 guidance, including total revenue, adjusted EBITDA, and a number of new clinic openings. Accordingly, total revenues are expected to be in the range of $13 million to $14 million, adjusted EBITDA loss in the range of $7.1 million to $7.5 million, and new clinic openings in the range of 65 to 75, including 38 to 42 Company-owned or managed clinics and 45 to 55 franchise clinics.

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

Thank you, Frank. Overall, we are very pleased with our second quarter and we are extremely excited about the opportunities ahead of us in the very large market opportunity.

I also want to take a moment to thank each and every one of our employees and their franchisees for their continued hard work and dedication to our 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 Company-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) Brent Rystrom, Feltl and Company.

This is Shawn Bitzan sitting in for Brent Rystrom. So we were pleased to see the appointment of Dr. Edwards. And one minor complaint we have heard with some consistency in franchise clinics that have been -- patients feel the experience and treatment is stronger at some locations than others. For example, in Dallas, we interviewed several dozen patients outside several clinics, and the feedback from several patients was that they much preferred the location on the Northwest Highway to others in the area because of the way the doctors had worked.

Will Dr. Edwards being involved in getting stronger consistency on this front at all franchise clinics, or do you have other plans or thoughts on this topic?

Great question, Shawn. The answer is absolutely, yes, one of the roles of Dr. Edwards in our system is to make more consistent our operating standards. Of course, DCs are professionals in their own right and subject to their execution of practice. From a systemwide control point of view, Dr. Edwards' influence will hopefully ensure a more consistent in quality experience across the system.

It's a certainly true that in a rapidly growing system like ours that you are going to have some variation in terms of execution in the early days. Our principal mission here is to ensure efficacious delivery of service, consistency, and quality across the system. And clearly, Dr. Edwards is part of that formula as the lead professional in that environment.

That's great to hear. You have discussed previously your hopes to cluster ownership in corporate stores initially in a few key markets. It looks like from what you guys have been saying, these markets will be LA, San Diego, Chicago, and New York. Can you give us a sense for how many stores we might expect in each one of these markets by year end?

The articulation of the units will be principally based in California, across California, and in Chicago. As you know, we just announced the entry into New York. And as it's August, we will focus on those markets for the balance of the year.

Okay. But no specific number in each one of those, just focusing mostly on California and Chicago for the meantime?

We are acting in accordance with our general guidance. We have a number -- we have about 12 leases executed already in those various markets; a number of LOIs supporting them behind that. And we expect to achieve our targets, Shawn.

Okay, great, great. Another question -- you hired a doctor recruiter. How has the experience been so far? Can you give us some examples of how he is helping corporate and franchise stores?

Richard Ashby is a 25-plus-year experienced medical recruiter. And he is spearheading our organized effort to secure quality DCs who understand the system that we operate in. And he has contributed to our staffing and opening of units. He is also an adjunct support to the franchise units as they make requests for that additional support. So we are pleased with his production and the results.

And coupled with the addition of Dr. Edwards to secure a greater level of operating consistency, I think this closes the circle, if you will, in terms of the hiring practices and operating standards. Then again, remember our commitment to be the employer of choice across the system, to create a great work environment for DCs, and our entire compensation package. So this is all part of a harmonious strategic effort to be the industry leader across all the metrics and standards.

That's great. On Brent's recent trip to Dallas, he noticed when he Googled your stores from his cell phone, he started getting updates on his phone about nearby locations. Is this a program that's just specific to Dallas? Or is it a program that all clinics use?

No. As part of our marketing strategy, we expect to be -- lead in search results in the key markets we compete in. And it's a deliberate strategy. We feel we have a competitive advantage in this area.

And when people go to look for chiropractic services, which is, of course, the first market we go after, we want to be clearly visible and recognized by them. So it is very deliberate, and in all the key markets where we operate now and have any reasonable level of scale, we expect that to be the case.

And then one final one. We have also heard that in response to customer frustration on wait times that you have a new app that tells customers on their phones what their wait times are like at a given store. Is this something that is being tested at selective stores, or is it rolling on at all stores?

It is being tested at selective stores. And certainly I think people are generally aware that these sorts of applications do exist. Restaurants use them and other types of businesses that have a queuing system. And certainly, as time goes on, we will refine this as necessary.

Certainly, it's a more complex challenge than that because a lot of this has to do with the staffing and the capacity of the unit. And it's difficult to generalize about it. Certain units are staffed in a certain way and need to organize their capacity accordingly. I will also comment that our busiest and largest units are typically staffed by two doctors to basically impact the waiting times and to continue to deliver superior service.

Great, great. And the stores that have been trying it, what has the feedback been so far on it?

Well, I have had personal experience with this in my field trips as well. And it is handy in those areas where -- and this is fairly typical of our units. Our units are typically located in convenience-oriented locations, by intention.

So people come to these clinics initially because they are visible and convenient, and they reference other things that they do during the day. So it's pretty easy for someone, for example, to run other errands -- grocery shopping, whatever it might be -- in close proximity to the clinic and then come back later if they choose to do so.

But ultimately, our job is to deliver convenient, accessible, affordable care. And that gets down to managing the unit operations efficiently so that these kinds of things don't present a problem. I think any busy consumer service has a certain amount of waiting associated with it. And our job is to keep it at a bare minimum.

Great. That's all the questions I have for today. Thanks so much and nice quarter.

Tony Brenner with ROTH Capital Partners.

Frank mentioned that your second-quarter results included $580,000 in revenues from the termination of franchisee licenses. I presume those were stores that were in default of their development program. Could you indicate how many stores that those revenues represented? Were they concentrated geographically? And how many stores remain in default of their development program?

I'll start off with part of it. The $580,000 was due to 20 stores. So there were 20 units that were behind that. And David may want to comment on the progress and the balance.

Well, Tony, as we referenced in the initial S1, there were a number of units that were behind in their development schedule. We have been diligent in trying to bring people into compliance and get these units opened, and some were not capable. So those that were terminated, the revenue was recognized as Frank just described, about 20 of them. I don't think there's a particular geographic locus or concentration associated with those that is reflective of any particular pattern.

Okay. And the number of stores that remain in default? I think it was a pretty big number.

Well, I don't believe -- well, the number in the original S1 that were behind was significantly greater than that. So we will keep you posted on our efforts to engage in the reinstatement efforts and the termination efforts as time evolves to clean the portfolio and reengage.

Because we are in the business of getting units open, and on a franchise side and on the Company side. So our first stimulus is to try to cause these units to be open. It's only as a final effort that results in the acknowledgment and the determination that these particular licenses are not going to be [active].

Yes, this is obviously an effort to refocus the system, as we have been saying all along. To bring it into not only to balance, but also make sure that the units that we're expecting to open actually open. That's our job. And of course, it's the franchisees' responsibility as well. So we work together to ensure that that happens.

There are situations that do emerge, as in any business, where people have difficulties that they didn't foresee and we have to either try to rectify them or move on. That's not unusual. But we are very, very diligent about understanding exactly what is happening today as we move forward because, clearly, we want to be able to report growth that we can count on.

Okay. Your guidance suggests that you will open between 15 and 19 Company clinics in the second half. Could you give an indication as to what portion of those will be greenfield versus acquired units?

The predominance of the units in the second half will be in the greenfield area, Tony.

Okay. And then the New York and Chicago markets are already established markets, franchised markets, I take it. Will you be acquiring clinics in those areas or as you open Company units, will they, too, be mostly greenfield?

Well, Chicago is not a franchise market and Chicago will be entirely greenfield. The New York market was relatively young from a franchising point of view and has a handful of units. So the predominance of growth in the New York market when we go there will also be in the greenfield arena as opposed to the acquisition.

Yes. And maybe just because there may be some confusion about this, we have stated all along that we want to develop in concentrated clusters initially close to home so we can control the operation and do it correctly. And then obviously as we accelerate that growth, we start to move further out and tap into some of these large MSAs -- for example, beyond LA, where we already have a pretty significant presence.

Chicago and New York are essentially virgin territory. So people shouldn't misunderstand that. They are huge markets with gigantic potential and we have done the appropriate legal and development organization so that we can develop those as we see fit, when we see fit. And that leaves some pretty big playing field out there for us to control in an organized way when we get to it.

But Tony, we did announce Chicago as an intentional market for 2015.

Yes. Last question -- during the first half of the year, you've burned through a little over $8 million in cash. You've got a little over $12.5 million left as you begin to accelerate the number of greenfield clinic openings. I wonder if you would just address the issue of cash flow and at what point might you need additional financing.

Sure, gladly. Right now through June 30, we are exactly on plan, maybe a little bit ahead in terms of cash consumption. And our model is such that we believe we have enough cash to take us through to EBITDA breakeven and cash flow positive.

However, as we have said consistently, that means reducing the number of total units in years 2016 and 2017 versus 2015. The stretch there is to get units up and running in 2015 so that they start to generate cash flows and then actually start to propagate themselves. So we have enough cash to take us through breakeven. However, that has consistently meant that we will be rolling out less units in 2016 and 2017 versus 2015.

Right. When you say reduce the number of units, you are talking about openings, not --

Yes, exactly.

-- shaving your system? Okay.

Yes, exactly. So the ramp rate will be lessened in 2016 and 2017 at current cash levels.

And that has been our plan all along. It was the initial plan that we discussed pre and during the IPO. It's typical in retail, as I think everyone knows, for new units to take a period of time to cure and generate cash. And that's exactly how we are managing it.

Now, I think it's fair to say that as we continue to see the kind of acceptance and success that we've had so far, and the comments we made today are a good example of that, that we may determine at some point that it is appropriate and desirable to accelerate growth beyond our current plan. We don't have to, but opportunistically, it may be the case.

And if so, then we would look to the market or certainly look to sources to accelerate that growth to basically lock down development markets, some of which we mentioned today, further and faster than we are currently doing. We feel we have the capacity. It's just a question of really managing this in the right way and moving forward that way.

Okay, thank you very much.

Thank you. I'm not showing any further questions, so I would now like to turn the call back over to Chief Operating Officer John Richards for closing remarks.

Thank you, moderator. Let me just say that I want to thank everyone for participating in our call today. And thanks for your thoughtful questions. We certainly look forward to keeping you all up to date on our progress.

And I will just reiterate what we said earlier. We are extremely excited about the prospects for this business and about the receptivity of the model in the various markets we are currently operating in. And as you've seen, we are laying the groundwork for some pretty interesting expansion moving forward.

So thanks very much for listening, everyone. And we look forward to staying in touch with you as the quarters roll forward. Have a great day, everyone, and a good weekend.

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