Joint Corp (JYNT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to The Joint Corp. second-quarter 2016 earnings results. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Peter Vozzo. Sir, you may begin.

Thank you, Esther. Good afternoon, everyone. Today, after the close of the market, The Joint Corp. released financial results for the second quarter ended June 30, 2016. Before we begin, if you do not already have a copy, the press release announcing these financial results 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 Peter Holt, Chief Executive Officer.

Thank you, Peter and thanks, everyone, for joining us on today's call to discuss our 2016 second-quarter results. Joining me to present on the call is John Meloun, our Director of Financial Planning and Analysis.

As you are aware, we announced preliminary second-quarter 2016 revenue and adjusted EBITDA on July 20 and the final financial results for the quarter that we are reviewing this afternoon are in line with that earlier disclosure. I will provide financial highlights for the quarter and details on clinic expansion and operational performance and John will discuss the financial results in more detail.

During the second quarter, we continue to execute our strategy of building a leading national provider of chiropractic services. Strong revenue growth of 45% for the second quarter of 2016 reflects the addition of 79 clinics over the last 12 months, including 38 Company-owned or managed clinics. We added seven Company-owned or managed clinics during the quarter, including one greenfield and a net 3 franchise clinics during the quarter. The number of total clinics increased to 341 as of June 30, 2016, an increase of 79 clinics or 30% from June 30, 2015. This is also a net increase of 29 clinics during the first six months of 2016.

During the second quarter, we opened 11 franchise clinics across seven states. Of the seven Company-owned or managed clinics added to the second quarter, six were acquisitions of clinics in Los Angeles, California and Albuquerque, New Mexico and the one greenfield clinic was added in the second quarter opened in Amherst, New York near Buffalo.

This is consistent with our stated strategy to build in existing markets and to locate in concentrated clusters with the goal of achieving critical mass that optimizes our marketing and operational leverage. As of June 30, 2016, the 61 Company-owned or managed clinics represented 18% of the clinic portfolio as compared to 23, or 9% of the clinic portfolio at the same point this time last year.

I'm pleased to announce that the operational influence on sales performance in the second quarter of 2016 of both newly acquired clinics and more mature clinics remains strong. Our progress in acquiring and upgrading these operations is on target for 2016. For example, most clinics acquired in 2015 that we've owned or managed for at least nine months saw their gross sales increase on average of 47% through the second quarter of 2016.

Systemwide comp sales in the second quarter of 2016 were 27% with the performance of our most mature clinics, those that have operated for more than 48 months or greater, continuing their strong comp clinic revenue growth growing at 13% compared to prior year. Comp sales include only the sales from clinics that have been opened for at least 13 full months and exclude any clinics that have closed. Total systemwide sales increased to $23.8 million in the second quarter of 2016, an increase of approximately $7 million or 42% from the same quarter 2015.

Adjusted EBITDA for the second quarter of 2016 was a loss of $2 million compared to a loss of $1.3 million in the same period last year. Corporate clinics contributed the material portion of this increase due to having 29 early-stage greenfield clinics in operation during the second quarter of 2016 versus none in the same quarter the prior year.

As we previously mentioned, we will not be adding any new corporate-owned or managed clinics for the rest of 2016 allowing for the new class of 2015 and 2016 greenfield clinics an opportunity to mature while managing our capital and our growth accordingly. This approach will improve short-term Companywide operational performance while giving the relatively large number of greenfield clinics time to mature, many of which have opened in the fourth quarter of 2015.

We initiated a targeted marketing campaign in the second quarter this year, which will continue for the remainder of 2016 with the goal of reversing a slower-than-expected gross sales ramp of our Chicago greenfield clinic that we've already discussed. As I mentioned on our July call, on a gross sales basis, their performance has recently improved growing 151% in the second quarter of 2016 compared to the first quarter of 2016, albeit from a small base. We are aggressively working to build on this trend and believe the Chicago clinics will continue to grow within their approximate historical percentage rate of clinics of that respective age of maturity.

The most powerful tool we have for building the Joint brand is our storefront. As we mentioned in July, there will be a renewed effort to fully unleash the power of the franchise model while at the same time nurturing and developing our corporate clinics. We expect to add 50 to 55 franchise clinics in 2016 and this is important as the royalty stream from franchise clinics is a relatively predictable source of revenue that will contribute to our drive for profitability.

We will continue to apply our clustering strategy, not only to our corporate clinics, but also to our franchise clinics across the entirety of our systems as we continually seek to leverage and improve systemwide operational and marketing efficiencies. With a total of $6.1 million in cash and cash equivalents as of June 30, 2016, we remain in a good position to execute on the strategy of measured clinic expansion while growing the sales and increasing operational performance.

Lastly, it's an honor to be named Chief Executive Officer for The Joint Corp. I thank the Board and the Joint leadership team for their support. I've worked closely with the Joint management team over the last several months and during that time it has become apparent to me that we are uniquely positioned to succeed in this exciting industry. I look forward to leading this effort to successfully deliver on the promise of the Joint opportunity.

Regarding the CFO role, we do not have anything more to disclose regarding the announcement of a new Chief Financial Officer. We believe we have a very strong finance and accounting team in place that allows the Company to move more deliberately in filling the CFO role.

I'd now like to turn the call over to John Meloun, our Director of Financial Planning and Analysis, to discuss the 2016 second-quarter results and general outlook for the full year of 2016.

Thanks, Peter. We have provided detail on our financial performance for the second quarter ended June 30, 2016 in the press release issued earlier today. I will now take a few moments and discuss some of the highlights.

As mentioned, revenues increased 45% in the second quarter of 2016 to $5 million, up from $3.4 million in the same quarter last year. This increase was driven primarily by the addition and growth of 38 Company-owned or managed clinics and the addition of 41 franchise clinics since June 30, 2015.

Beginning in the first quarter of 2016, the Company has provided segment financial data for its two operating segments -- corporate clinics and franchise operations -- as well as unallocated corporate overhead. This segment data, which I will highlight, will be available in our 10-Q, which will be filed no later than early next week.

Looking at the $1.3 million increase in consolidated loss from operations by segment, virtually all of the increase in operating loss is due to $1.1 million in higher losses to our Company-owned or managed clinics where the Company had 29 greenfield clinics in operation during the second quarter of 2016 versus none in the same period a year ago.

All of our greenfield clinics were in the 0 to 12-month age class and given that we don't expect our clinics to become EBITDA-profitable on average until after the first 12 to 18 months in operation, having 29 greenfields in this important 0 to 12-month age class was a significant drag on profitability in the quarter.

Franchise operations, which consist of franchise royalties, franchise fees and related overhead, had operating income in the quarter of $1 million, a slight decrease of $0.1 million from the same quarter last year. The decrease was primarily driven by franchise support headcount to manage our national expansion and higher national marketing fund expenses. Corporate overhead in the second quarter of 2016 increased by only $0.2 million to $2.6 million due to slightly higher payroll and stock comp expenses.

Turning to consolidated expenses, total general and administrative expenses increased to $5.6 million in the second quarter compared to $3.7 million in the same period last year. This increase was driven by additional payroll and occupancy expenses associated with having more clinics opened in the second quarter of 2016 compared to the second quarter of 2015.

Selling and marketing expenses was $1.2 million in the second quarter of 2016 compared to $0.5 million in the same period last year due to an increase in the number of Company-owned or managed clinics and the timing of the Company's national marketing fund expenditures.

Adjusted EBITDA for the second quarter of 2016 was a loss of $2 million compared to a loss of $1.3 million in the same period last year. As I have mentioned earlier, greenfield clinics contributed the material portion of this increase.

During the second quarter, our 61 Company-owned or managed clinics generated an adjusted EBITDA loss of $1.1 million. Acquired clinics as a group generated positive adjusted EBITDA. In fact, the vast majority of acquired clinics were profitable in the quarter. In order to put this $1.1 million loss in perspective, we grew our clinic result into the following five age groups -- those that are 0 to 12-months old; those that are 13 to 24-months old; 25 to 36 months; 37 to 48 months; and 48 months and older.

As expected, most clinics in the 0 to 12-month category as a group generated adjusted EBITDA losses during the quarter due to the fact that this group includes all 29 of the Company's greenfields. The average age of the clinics in the 0 to 12-month category is approximately six months old. However, it's important to note that the totals for each of the other four age classes generated positive adjusted EBITDA during the quarter.

Said differently, the total for all clinics grouped in the 13 to 24-month category, the 25 to 36-month category, the 37 to 48-month category and the 48-month-plus categories all generated positive adjusted EBITDA.

Consistent with the first quarter of 2015, the adjusted EBITDA margins grew in line with the age classes such that the lowest margins were in the 13 to 24-month category and then grew steadily through to the 48-month-plus category, which had the highest adjusted EBITDA margins. This profit growth is, of course, driven by strong comp store sales our clinics experience as they mature.

With the clinics in the first year of comp store sales, that is those in the 13 to 24-month category growing at the fastest rate, and those clinics over four years old still growing at a rate of 17% all on a very stable cost structure. Net loss in the first quarter of 2016 was $3.3 million or $0.26 per share as compared to a net loss of $1.9 million or $0.19 per share in the second quarter of 2015.

Approximately 12.7 million weighted average common shares were outstanding in the second quarter of 2016 as compared to 9.8 million weighted average shares for the same period last year. The increase in weighted average shares is due primarily to the Company's underwritten offering of approximately 2.6 million shares of common stock in the fourth quarter of 2015. And as Peter mentioned, as of June 30, 2016, cash and cash equivalents were $6.1 million compared to $16.8 million as of December 31, 2015.

Now turning to 2016 guidance, today, we are reiterating our previously issued full-year 2016 guidance for total revenue, adjusted EBITDA and net new clinic openings. We continue to expect total revenue in the range of $19 million to $21 million; adjusted EBITDA loss in the range of $8.9 million to $8.2 million and net new clinic openings in the range of 58 to 63, including greenfields, which make up 8 of the 14 Company-owned or managed clinics added during the first six months of 2016 and 50 to 55 franchise clinics. And with that, I would like to turn it back to Peter.

Thank you, John. Overall, our second-quarter 2016 results showed a continuation of our overall positive growth and operating strategy. 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 their dedication to this business. We indeed are very passionate about our business and we are excited about the opportunities ahead.

Our strategy is to become the leader of the national market of core chiropractic adjustment services through the strategic expansion of Company-owned or managed clinics and the continued expansion of franchise-owned or franchise-managed clinics. And with those comments, we'd like to open up to the floor for questions.

(Operator Instructions). Brent Rystrom, Feltl.

From a simplistic perspective, Peter, you gave us the average age of a greenfield store was six months at the end of the second quarter. Do you know what the average age of the acquired stores were at the end of the second quarter?

John, do you have that? Off the top of my head, I don't have it.

Yes, most of the clinics that were acquired were in the 24 to 48 age range, month age range.

So would it be reasonable to assume 36 months at the average then?

Yes, 36 is pretty average, yes.

Looking at the implications of what you gave earlier for the various age classes, the 0 to 12, 13 to 24 and so on, sometime around the third quarter of next year in theory then your system should be generating substantial -- not substantial -- but between the second and third quarter, store-level EBITDA should go positive. Is that a reasonable assumption, if you are not opening more stores?

Yes, I think so. I think, of course, the plan is to continue to open up more stores and, again, that number is going to fluctuate, but I think that the idea of being sometime in the third quarter, fourth quarter profitable is a reasonable assumption.

I just want to clarify, Peter, are you saying Companywide profitable, or are you saying store-level profitable?

Store level.

Store level. Okay. And then from the perspective of signaling what you are looking for, what the Board is looking for as far as growth, when store-level profitability starts to turn positive, is that the signal the Board is looking for to start to resume growth, or is it corporate profitability? I'm talking on EBITDA.

Sure. Really it's a simple equation. As we've talked about many times, we have a parallel path for growth. It's going to be continuing to expand our franchise operations. We continue to believe in operating corporate stores. The additional growth of corporate stores is going to be a direct function of capital available to invest. So right now, we are very focused on managing our operating costs. We are focused on improving profitability and that we are going to continue to make sure that the 61 clinics that we have become -- those that aren't profitable become there, and that as capital is available, of course, that would be a reasonable strategy to continue acquiring or building new corporate clinics.

And as you look at the next year say what is the targeted minimum level of cash you'd like to see the balance sheet hold? Is it a couple million dollars? Do you have a number that the Board or the plan would suggest is the minimum you'd like to hit?

I would say the Board is very carefully watching that position and that the current forecast shows that we can get through with the plan that's in place. That doesn't mean that you are not exploring alternatives. We haven't set a minimum threshold that we would look at before that we do some alternative, but right now we believe that based on forecasts and what we are doing is that we are in good shape to be able to execute to the plan that we have.

Anything as you are kind of digging through in your first couple of months on the job, when we think about the concept -- the store-level concept -- as it's been told over the last year and a half, two years, is there any changes that you see as far as say EBITDA margins? The Company has previously talked about store-level EBITDA margins of 25% to 30%. Is that something that for (multiple speakers)?

No, I think that this is a remarkably sound concept. In the time that I've been here and working with this business and understanding profoundly the unit economics is that I would reaffirm that. This is a remarkably powerful model in small-box retail as I would describe it.

And then my final question, can you give us a little more clarity -- I think you said that you opened in seven states. Could you just let us know what seven states those were? Thank you.

I will get that to you. I don't have it off the top of my head. I know somewhere in California, in Texas, in Colorado. I don't have the list right in front of me, but I can certainly get that for you.

All right. Appreciate it. Thank you.

(Operator Instructions). At this time, I'm showing no further questions. I would like to turn the call back over to Peter Holt for any closing remarks.

I want to thank everyone for participating on the call today and for your questions. We look forward to keeping you up-to-date on our progress and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.