Joint Corp (JYNT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Joint Corp. third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today Peter Vozzo, Investor Relations. You have the floor, sir.

Thank you, Andrew. Good afternoon everyone. Today after the close of market The Joint Corp. released financial results for the third quarter ended September 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.

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 update 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 the call today to discuss our 2016 third-quarter results.

Joining me to present the call is John Meloun who we announced today as our new Chief Financial Officer. John has been the Director of Financial Planning and Analysis for The Joint Corp. since early 2015. His financial and business insights have added great value and will be instrumental in the continued growth of our Company. I look forward to working closely with John, and I am confident that he has the expertise and readiness to take on this important responsibility as Chief Financial Officer of our Company.

I will provide financial highlights for the quarter and details on our clinic expansion and operational performance and John will discuss the financial results in more detail. Strong revenue growth of 33% in the third quarter of 2016 reflects the addition of 77 clinics over the last 12 months, including 45 franchise clinics and 32 company-owned or managed clinics.

During the third quarter we added a net 13 franchise clinics, bringing the total number of clinics to 354 as of September 30, 2016. This compares to the 341 total clinics on June 30, 2016 and 277 at September 30, 2015. The 13 franchise clinics added this quarter followed our strategy of clustering clinics in existing markets. As of September 30, 2016 we had 61 company-owned or managed clinics which represented 17% of our clinic portfolio as compared to 29 or 10% of the clinic portfolio at the same point last year.

We continue to see improved operational performance in the third quarter of 2016 of both our newly acquired clinics and greenfield clinics. Our corporate-owned and managed clinic buybacks as a portfolio are cash positive and our greenfield clinics continue to make progress towards profitability. For example, the clinics acquired in 2015 that we have owned or managed for at least 12 months saw their gross sales increase on average by 42% through the third quarter of 2016.

Regarding the Chicago area clinics, overall sales improved 18% compared to the second quarter of 2016 but did not achieve the level of performance that we were expecting for clinics of their age class. While we are working to improve the operating performance of these clinics we are also exploring strategic alternatives.

System-wide comp sales in the third quarter of 2016 increased by 26% over the same period last year with the performance of our most mature clinics, those that have been operating for 48 months or longer, continuing their strong comp clinic revenue growth, increasing by 13% over the prior year. Comp sales include only those sales from clinics that have been operating for 13 full months and excludes any clinics that have closed.

System-wide sales for all clinics were $25.6 million in the third quarter of 2016, an increase of approximately $7.4 million or 41% from the same quarter in 2015. Adjusted EBITDA for the third quarter in 2016 was a loss of $1.7 million compared to a loss of $1.2 million the same period last year. However, this improvement over adjusted EBITDA loss in each of the first two quarters -- this is an improvement over adjusted EBITDA loss in each of the first two quarters of 2016.

Corporate clinics contributed the material portion of this increased loss due to having 29 early-stage greenfield clinics in operation during the third quarter of 2016 versus four in the same quarter the prior year. We did not add any new corporate-owned or managed clinics in the third quarter and will not be adding any new corporate-owned or managed clinics until we reach profitability. This approach will improve short-term company-wide operational performance while giving the relatively large number of greenfield clinics time to mature.

The most powerful tool we have for building The Joint brand is our storefront. As we've mentioned previously, there's a renewed effort to fully unleash the power of the franchise model while at the same time we are nurturing and developing our corporate clinics. This will be important as the royalty stream from franchise clinics is a relatively predictable source of revenue and will contribute to our drive to profitability.

As we announced earlier today, Eric Simon has recently joined the Company to lead our franchise development team. Eric has an impressive track record of helping brands grow through franchise sales and development which will be a tremendous benefit to the Company as we see franchise sales as an integral part of our expansion.

To further accelerate our growth Eric will play a key role in reenergizing and expanding our regional developer program. Our regional developer program accelerates the growth by allowing qualified developers to assist in the selling of franchises and provide an ongoing support to the franchisees in specific markets.

In August The Joint held its Annual National Conference in Scottsdale, Arizona. The conference brought our franchise community together and allowed us to share experiences and learn from other franchisees and celebrate achievements.

We specifically focused on best practices and the advancement of three key areas that drive our business: attracting, converting and retaining patients. Training areas highlighted during the program included how to better understand and execute digital marketing, grassroots marketing, patients flow and overall patient experience. New programs and incentives were introduced and awards were handed out based on performance metrics achieved honoring franchisees who excelled above and beyond the previously set benchmark.

Lastly, we had a total of $3.4 million in cash and cash equivalents as of September 30, 2016. While our use of cash has significantly diminished in each of the last three quarters of 2016, we expected greater franchise sales to further lessen the use of cash in the third quarter which did not fully materialize. However, with the appointment of Eric Simon, our lead franchise team, we're poised to be accelerate our franchise sales.

Given our commitment not to open additional corporate clinics, the improvement of the operational performance of our company-owned or managed clinics and options to consider those clinics that are continuing to underperform in the Chicago market we have a viable path to profitability by the end of 2017. In addition, we are exploring our options with respect to obtaining access to non-dilutive cash reserves.

I'd now like to turn the call over to John Meloun to discuss the 2016 third-quarter results and the general outlook for the full year of 2016.

Thanks, Peter. I'd first like to thank Peter and the Board for the appointment as Chief Financial Officer. I look forward to continue working closely with Peter and the team and to participate in the exciting growth of this Company.

My experience as Director of Financial Planning and Analysis with The Joint has allowed me to be involved with many different aspects of our Company's operations, which I can now build on in executing our financial and capital strategy. We have provided details on our financial performance for the quarter ended September 30, 2016 in the press release issued earlier today.

I will now take a few moments and discuss some of the highlights. As mentioned, revenue increased 33% in the third quarter of 2016 to $5.5 million, up from the $4.1 million in the same quarter last year. 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 Monday, November 14, 2016.

The $0.6 million increase in consolidated loss from operations is primarily due to losses at our company-owned or managed clinics where the Company had 29 greenfield clinics in operation during the third quarter of 2016 versus four clinics in the thing period a year ago. All but three 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 26 greenfields in this 0 to 12-month age class was a significant drag on profitability in the quarter.

I would like to note that the group of three greenfields that are now in the 13- to 24-month age class are EBITDA profitable and continue to exceed our growth expectations. Franchise operations, which consist of franchise royalties, franchise fees and related overhead, had operating income in the quarter of $1.2 million, a slight decrease of $0.1 million from the same quarter last year.

Corporate overhead in the third quarter of 2016 decreased slightly to $2.3 million compared to the same period last year due to slightly lower payroll and stock comp expenses in 2016. Excluding stock-based compensation and depreciation and amortization, corporate overhead came in at $2 million for the third quarter of 2016, which is in line with the consecutive sequential quarterly decreases we expected from both the second quarter and first quarter of 2016 due to our focused efforts on controlling costs.

Turning to consolidated expenses, total general and administrative expense increased to $5.4 million in the third quarter compared to $4.5 million in the same period last year. This increase was driven by occupancy costs associated with having a greater number of clinics open in the third quarter of 2016 compared to the same period the prior year and also takes into consideration a decrease in real estate development cost resulting from halted development of greenfield clinics.

Selling and marketing expense was $1.3 million in the third 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 expenses associated with the Company's national franchise conference that was held in August of 2016. Adjusted EBITDA for the third quarter of 2016 was a loss of $1.7 million compared to a loss of $1.2 million in the same period last year. As I mentioned earlier, greenfield clinics contributed the material portion of this increase.

During the third quarter our 61 company-owned or managed clinics generated an adjusted EBITDA loss of $0.9 million. The clinics we bought back from franchisees as a group generated positive adjusted EBITDA.

The profit growth is, of course, driven by the strong comp sales our clinics experienced as they mature with clinics in the first year of comp 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% quarterly, all on a very stable cost structure. Net loss in the third quarter of 2016 was $2.6 million or $0.21 per share as compared to a net loss of $1.7 million or $0.17 per share in the third quarter of 2015. The weighted average number of shares of common stock outstanding in the third quarter of 2016 was approximately 12.7 million 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 September 30, 2016 cash and cash equivalents were $3.4 million compared to $16.8 million as of December 31, 2015. Our use of cash has diminished in each of the last three quarters as operating losses generated from our corporate clinics, which is our biggest use of cash, continues to improve and as we suspended adding new corporate clinics effective the second quarter of 2016.

Now turning to 2016 guidance, today we are updating guidance for total revenues and adjusted EBITDA and reiterating guidance for net new clinic openings. We are tightening total expected revenues in the range of $20 million to $21 million compared to previously expected total revenues of $19 million to $21 million.

We are improving the expected adjusted EBITDA loss in the range of $7.9 million to $7.3 million compared to previously expected adjusted EBITDA loss in the range of $8.9 million to $8.2 million. This improvement in adjusted EBITDA guidance is due primarily to the significant progress we have made in reducing general and administrative expenses.

We continue to expect approximately 58 to 63 new clinic openings by year end including eight company-owned or managed greenfield clinics and 50 to 55 franchise clinics. It is important to note that full-year 2016 guidance excludes potential non-cash charges relating to any strategic alternatives that the Company may undertake for its Chicago area clinics, including restructuring and relative initiatives.

And with that I would like to turn it back to Peter.

Thank you, John. Overall we've made significant progress in the third quarter of 2016 strategically and financially. Our results showed a continuation of our overall positive growth and operating strategy.

This growth would not be possible without the commitment and perseverance of our franchise community and our employees. And I want to thank every one of them for their efforts. We indeed are very passionate about our business and excited about the opportunities ahead. Our strategy to become the leader of the national market for core chiropractic adjustment services through strategic expansion of company-owned or managed clinics and the continued expansion of our franchise-owned or managed clinics prevails.

And with those comments I'd like to open the floor to questions.

(Operator Instructions) Brent Rystrom, Feltl.

Thank you. Good afternoon.

From a simplistic perspective looking at your adjusted EBITDA guidance for the year, the high end of that range, the improvement in EBITDA implies that by the third quarter of next year you could actually be at positive adjusted EBITDA. Is that a reasonable way to look at that?

Yes.

All right. From the perspective, I apologize, for some reason I got cut off of the call for a little bit, so if you addressed this in your comments I apologize. In talking about looking at some non-dilutive forms of financing did you expand at all from the press release on what you mean by that?

We did not. We are, obviously, looking at some alternatives that we made it very clear that we are not looking to do any kind of major raising of any additional funds at this point, that we are really focused on our profitability and controlling cost. But we also want to make sure that we have opportunity and we have a reserve if we need it for those issues that we can't control.

And would a likely source be some sort of bank line or a private placement of debt? What are the --

We've looked at, exactly, we've looked at lines of credit, we are looking at sources of debt that would be probably without warrants that would just allow us to have that backup, that reserve in place in case we needed.

All right. Peter, is there any seasonality to the sales of atypical clinic?

There's a little bit of seasonality. It's nowhere near that you see in a lot of other small box retail concepts like frozen desserts, but we do see typically fall off around the April-May area is kind of a lower period for us.

We have a little bit of a falloff in the December month, maybe November-December. But what I've always been impressed by this concept is how uniform it really is compared to some of the other retail concepts that I've seen that have a much higher seasonality to them.

Okay. And then there is no seasonal weakness relative to say back to school or anything?

No. Well, there's perhaps that kind of April-May, it's not back to school but it's ending school, that's where you see a little bit of a softness compared to other months. But as we go into the fall that's actually where we see it pick up.

Okay. Can you guys give us a sense now that you've had clinics that you greenfield for over a year, can you give us a sense of how the revenue build looks by quarter for a typical greenfield?

Yes, so typically with a greenfield when they start building beyond, in the first year you will see anywhere the green fields that we have, let's say the three that are older than the 12 months, these are our all-star green fields that have come out of the gate and these are actually all profitable.

What you typically see is clinics in the 12 months, they are in the 15-month sales range or $15,000 sales range per month, so around $45,000 a quarter. And you will see them build over the next quarter about $5,000 per month.

So by the time they hit the 24 month those clinics are usually profitable pushing $25,000 to $30,000 a month in sales or about anywhere from $75,000 a quarter at that point in sales. So usually you see about $5,000 to $15,000 per quarter from that point forward.

So one more time on that, John. So by the 12th month you are seeing typically $15,000 per month and then by the 24th month you are someplace around $25,000 to $30,000?

$25,000 to $30,000, so you will see that billed by about $5,000 a quarter, yes. Now the three initial greenfields that we have seen that are over the 12 months, those are already exceeding that level's performance.

All right. They are already above the $25,000 to $30,000?

Yes, they are $25,000 is probably a fair way of looking at it. But, yes, they are definitely exceeding the normal performance that we would have expected.

And then, John, while I've got you could you -- I've tried to find us in the press release and I can't. Can you just list for me the system sales first quarter of 2015 through this most, I've got the 25 and change for this quarter, but the prior six quarters, do you have easily available the system-wide sales?

I don't have the prior I don't have with you. But I could follow up and send those to you.

Sure. If you just want to email them that would be great. Thinking about the cash and then thinking about Chicago, just looking at strategic alternatives is that basically, is that primarily wording that you are looking at selling those or is it possible you might close some of the Chicago stores?

What we are really looking at is really three strategies. And we are doing it all at the same time. And one is to be very aggressive about improving performance of the clinics themselves that we put a full-court --

John?

Can you hear me? This is Peter. Can you hear me, Brent?

In terms of Chicago we are looking at three things, and one is certainly to focus on improving operations. The second is really looking at if there's an interested, qualified buyer that we would consider that. We are also looking at if there is in any of the clinics right now that we have no plan to close any, but we certainly can look at that as an alternative, as well.

(Operator Instructions) Walter Morris, Baraboo Growth.

Good afternoon. A question on goals and targets for franchise unit growth.

You indicated that you missed your franchise growth target numbers in the third quarter. Can you give us some perspective on what your goals are on a go-forward basis in that regard?

Sure. We are just finalizing them right now that we will -- and there are two pieces to this.

One is open clinics. And as we've said we feel confident in our guidance between in 2016 we will open between 50 and 55 franchise clinics, and at that same time, of course, that we are signing new licenses that probably there's a six- to nine-month process before they get open. And I would say that we should be able to look at least 60 sells a year would be a very reasonable approach for new development for this Company.

Good. Thank you, Peter. I appreciate it.

(Operator Instructions) I am seeing no other questioners in the queue at this time. So I'd like to turn the call back over to management for closing comments.

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

Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program and you may all disconnect at this time. Everyone have a great day.