Joint Corp (JYNT) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Joint Corp. second-quarter 2017 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Peter Vozzo, Investor Relations. Sir, you may begin.

Thank you, Shannon. Good afternoon, everyone. Today after the close of the market, The Joint Corp. released financial results for the quarter ended June 30, 2017. 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 updates to these forward-looking statements in light of new information or future events.

With that, I'll 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 2017 second-quarter results. Joining me to present is John Meloun, our Chief Financial Officer. I'm going to provide the financial and operational highlights for the quarter, and John will discuss our financial results in more detail.

For the benefit of you that are listening to our quarterly call for the first time, our purpose at The Joint is to improve the quality of life of our patients we serve. We do it through our network of 400 retail clinics utilizing over 800 fully licensed chiropractic doctors who performed more than 4 million chiropractic adjustments last year. Our doctors provide patient care focused on pain relief and ongoing wellness to promote a healthy lifestyle.

As a retail concept, two of the most important measures of the health of the business is system-wide comp sales and overall revenue growth. Comp sales are simply comparative retail sales of the same clinic or clinics for a same period one year earlier to measure whether sales are expanding or contracting. Comp sales only include sales from clinics that have been open for at least 13 full months, and excludes any clinics that have closed.

To get a context of broad industry trends, according to eMarketer, a research firm specializing in retail trends, the 65 retailers that they tracked had a combined comp sales of a negative 0.9% in the fiscal first quarter of 2017.

During that same period, our system-wide comp sales were up 19%. And in the second quarter of 2017, our system-wide comp sales continued to be up 19% compared to the same period last year. This reflects the growing market acceptance of chiropractic services while bucking the trend of following comp sales that have impacted the general retail market in the United States.

As I mentioned, over 4.1 million adjustments occurred in a Joint clinic last year. And even more importantly, 21% of our patients are new to chiropractic care. The industry fundamentals are strong, driven in part by the general trend toward health and wellness and a non-invasive approach to pain management, especially among the Millennials.

The consumer attitudes of this large demographic, while we estimate it to be about a third of our current patient base, can be defined by their more holistic approach towards health and wellness and a willingness to embrace health alternatives that were less accepted by previous generations.

Millennials as a group are known to be dedicated to wellness and devoting time and money to exercising and an active lifestyle. According to the U.S. Census data, the Millennials are the largest living generation in US history. And as they reached their prime working and spending years, their impact on the economy and on our business only continues to grow in significance.

At the corporate level, our revenue growth of 21% or $6 million for the second quarter of 2017 compared to this quarter last year reflects a net addition of 42 clinics over the last 12 months and a double-digit growth in comp sales that we've experienced.

During the second quarter, we continued to make progress on our goals towards accelerated growth. First, we sold two new regional developer territories covering Ohio and central Florida coming which included Tampa, Orlando, and Jacksonville. For clarification, we sell to a regional developer the rights to open a minimum number of clinics in a defined territory. They, in turn, help us to identify and qualify potential new franchisees in that territory, and assist us in the providing of field training, clinic opening, and ongoing support. And for this assistance, we share part of the initial franchise fee collected, and the ongoing royalties.

In my career, I have often worked with regional developers; and, when effectively managed, they provide an opportunity for accelerated growth of the business. This most recent regional developer expansion follows three new developer -- regional developer territories in the first quarter of this year covering Chicago, Philadelphia, and the State of Washington.

The combined development schedules for the new Central Florida and Ohio territories, together with the new regional developer territories announced in the first quarter of this year, require the opening and operating of a minimum of 149 clinics over the next 10 years.

The Central Florida regional developer team is a partnership of current Joint franchisees with proven success in a combined 11 clinics in the Atlanta market. Members of this team are also experienced franchisees of other retail concepts. This group has started out, fast out of the gate, and have already sold five franchise licenses in the Jacksonville area. The new regional developer for the State of Ohio has been in franchising for 10 years, including a successful Joint franchisee since 2012 with two clinics in Columbus, and is a multi-unit operator for another franchise concept.

As we continue to improve our franchise system, our upcoming national conference in October in Scottsdale is perhaps one of the most important events that we can hold. This is a time when our franchise community comes together to learn about the latest trends in our business, celebrate last year's accomplishments, and most importantly, share best practices. This is an essential meeting that helps us improve the overall performance of our entire system.

Core to our continuing growth is opening and operating franchised clinics. During the second quarter, we added 11 new franchised clinics and closed one franchised clinic. This brought the total number of clinics to 383 as of June 30, 2017, up from 341 on June 30, 2016. Of the 11 clinics that we opened in the second quarter, 10 were opened by existing franchisees in markets in which we already serve, adding to our strategy of clustered development.

We forecast that we'll be adding a total of 50 to 60 new franchised clinics in 2017. And based upon our current core customer profile and usage, we have identified the opportunity to expand to more than 1,700 clinics across this country over time.

Another important element of our growth strategy is opening and operating company owned or managed clinics. During the second quarter, our company owned or managed clinics continued to demonstrate improved performance. As of June 30, 2017, we had 47 company owned or managed clinics, which represented 12% of our clinic portfolio as compared to 61 or 18% of the clinic portfolio in the same point the previous year. 31 of the 47 clinics were bought from existing franchisees, which we refer to as buybacks. And 16 of the clinics were built from the ground up, which we refer to as greenfields.

Our company owned or managed clinic buybacks as a portfolio remains cash positive at the clinic level. And while during the second quarter, our greenfields continued to make progress towards profitability, and is in line with our expectations.

We remain focused on continuing to improve the operating performance of our corporate clinics. And to that end, we have taken steps in the second quarter to add operational support for these clinics and redefine the support staff's roles and responsibilities. The additional support staff will have direct oversight of the corporate clinics, and we have reduced the scope of responsibility from our field staff from overseeing approximately 20 clinics per person to around 8 to 10 each. And finally, a new training program for corporate clinic staff has been developed and implemented.

Our corporate clinic performance continues to improve. And now with a new team in place, we expect these investments will help us bolster long-term sales growth and an operational performance of our company owned or managed clinics.

In the second quarter, adjusted EBITDA on the corporate clinic level improved 97% compared to the same period in 2016. Adjusted EBITDA for the second quarter of 2017 was a loss of a negative $0.3 million, an improvement compared to the loss of $2 million in the same period last year. And it's our sixth consecutive quarterly improvement in adjusted EBITDA.

I'd also like to point out that our cash balance at the end of second quarter was $3 million, a sequential quarterly improvement from $2.7 million at the end of the first quarter of 2017. This increase is primarily due to increases in regional developer strategy [or sales] and new franchise sales, plus our ongoing focus on management of working capital.

For the remainder of 2017, we're focused on achieving profitability of our corporate clinic segment, expanding our franchise network, and continuing to control costs to operate our business. While earlier this year, when we sold the regional developer rights to Chicago in six of our corporate clinics in that area, we believe that we'd be close to positive adjusted EBITDA by the first half of 2017.

And while we continue to experience consecutive quarterly improvement in adjusted EBITDA, as I just mentioned, this quarter we have invested to increase the operational oversight of our remaining corporate clinics, which has, in the short term, impact on a timing to adjusted EBITDA -- profitability. We remain focused on achieving adjusted EBITDA breakeven as quickly as possible.

Finally, as we announced in our press release today, newly elected Board member Matt Rubel was appointed lead director of The Joint Corp. Matt brings extensive C suite and public company Board experience to The Joint Corp. He most recently served as the Chief Executive Officer, President, and Board member of Varsity Brands. And from 2005 to 2011, he served as Chief Executive Officer and President of Collective Brands. Matt succeeds Ron DaVella as Lead Director, who will remain on the Board and remain Chairperson of the Company's Audit Committee.

With nearly 400 clinics today, the road before us is clear. To fully capitalize on this opportunity, we'll focus on the rapid expansion through our franchising efforts, amplified by the network of strategically located company owned or managed clinics.

With that, I'd like to turn the call over to John Meloun to discuss the 2017 second-quarter results and a general outlook for the full year of 2017.

Thanks, Peter. We have provided detail on our financial performance for the quarter ended June 30, 2017, in the press release issued earlier today. I will now take a few moments and discuss some of the highlights broken down by the two operating segments, corporate clinics and franchised operations, as well as our unallocated corporate overhead. This segment data will be available in our 10-Q, which will be filed tomorrow, August 11.

Revenues increased 21% in the second quarter of 2017, or approximately $1 million, to $6 million compared to the same period last year. This increase was split evenly between the corporate clinic segment and from our franchise operations. Revenue growth in the corporate clinic segment is attributed to an increase in sales in our existing clinic portfolio, and from the six clinics that were acquired since the end of the first quarter of 2016. Franchise segment revenue increased due to higher sales from both existing clinics and from a net 56 clinics added since the end of the second quarter of 2016.

The improvements in both our corporate clinic segment and franchise segment revenues are driven by the comp sales that our clinics continue to experience as they mature. As Peter mentioned, system-wide comp sales in the second quarter of 2017 increased by 19% over the same period last year.

With the performance of our most mature clinics, those that have operated for 48 months or more, continue their strong comp clinic sales growth, increasing by 12% over the prior year. Further reflecting the growth of our business, system-wide comp sales for all clinics were $30.5 million in the second quarter of 2017, an increase of $6.7 million or 28.4% from the same quarter of 2016.

Our company owned or managed clinic buybacks as a portfolio continue to be adjusted EBITDA positive at the clinic level. Gross sales of these clinics since the month prior to when they were acquired increased, on average, by 50% through June 2017. In addition, during the quarter our greenfield clinics continued to make progress towards profitability. The greenfields that were open for the full second quarter of 2016 experienced a 61% increase in the second quarter 2017 sales compared to the second quarter of 2016. While this is a significant increase, it also is a reflection of the smaller base of patients our clinics experienced in the first year, which increases over time.

Cost of revenues of $0.8 million in the second quarter of 2017 increased 6% compared to the second quarter last year, due primarily to higher regional developer royalties from increased sales of franchises. Selling and marketing expenses decreased by 10% or $0.1 million to $1.1 million compared to $1.2 million in the same period last year, primarily due to 14 corporate clinics in the second quarter -- excuse me, primarily due to 14 fewer corporate clinics in the second quarter of 2017 compared to the same period last year.

General and administrative expenses decreased 17% or $1 million to $4.7 million in the second quarter of 2017 compared to $5.6 million in the second quarter of 2016, due to lower payroll and occupancy costs from 14 fewer corporate clinics in the second quarter of 2017 compared to the year-earlier period. In addition, the second quarter of 2016 was negatively impacted by a $0.3 million charge related to halting greenfield clinic development. Total depreciation and amortization expenses decreased for the second quarter of 2017 compared to the prior-year quarter, due to the aforementioned 14 fewer clinics in 2017 second quarter compared to the same quarter last year.

Consolidated loss from operations improved by 69% or $2.2 million in the quarter, from a $3.2 million loss in the second quarter of 2016 to a $1 million loss in the second quarter of 2017. Loss from operations in our corporate clinic segment improved by $1.2 million and improved in our franchise operations by $0.4 million, in both cases as compared to the second quarter of 2016.

We continue to leverage corporate overhead and expand the business with nominal increases in costs. Unallocated corporate overhead, which we define as all expenses that are not directly tied to our corporate clinic or franchise segment, was down $0.6 million to $2 million compared to $2.6 million in the same period the prior year. Unallocated corporate overhead was 33% of revenue compared to 51% in the same period the prior year.

Adjusted EBITDA loss in the second quarter of 2017 was $0.3 million, an improvement over our $2 million loss in the same quarter last year. $1.1 million of the improvement was generated in the corporate clinic segment due to the growth in sales. Our franchise operation, which made up $0.4 million in adjusted EBITDA improvement, continues to grow in profitability from increasing sales as well. Our unallocated corporate overhead made up the remaining $0.1 million in adjusted EBITDA improvement, which, as I just mentioned, is attributed to a reduction in expenses.

Net loss in the second quarter of 2017 was a negative $1 million or $0.08 per share, as compared to a net loss of $3.3 million or $0.26 per share in the second quarter of 2016. Approximately 13.1 million weighted average common shares were outstanding in the second quarter of 2017 as compared to 12.7 million shares in the same period the prior year.

At June 30, 2017, cash and cash equivalents were $3 million, equal to the $3 million as of December 31, 2016. I do note that the $1 million minimum required draw per the terms of our line of credit was taken in the first quarter of this year. This draw remains unused, and is part of our cash and cash equivalents on the Company's balance sheet as of June 30, 2017.

As Peter mentioned, our cash balance at the end of the second quarter was up by $0.3 million compared to cash balance at March 31, 2017. This is primarily due to the increase in regional developer sales and new franchise license sales, plus the ongoing focus on managing our working capital.

Now turning to 2017 guidance. We continue to expect total revenues in the range of $22 million to $24 million; adjusted EBITDA loss in the range of a negative $1.5 million to a negative $0.5 million. In addition, in 2017, we expect net new franchise clinic openings in the range of 50 to 60. Finally, we believe we can achieve all our 2017 financial goals with the current cash available.

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

Thanks, John. We remain on track to achieve our 2017 financial and operational goals. And our second-quarter 2017 results shows a continuation of overall positive growth in operating strategy. This progress would not be possible without the commitment and hard work of our franchise community and of our employees. And I want to thank each and every one of them for their efforts as we continue to improve the quality of life of our patients by providing affordable and routine chiropractic care.

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

(Operator Instructions). Mike Malouf, Craig-Hallum Capital.

Can you -- and you might have gone over this, and I might have missed it -- but could you talk a little bit more about franchise fees? It was down sequentially, down year-over-year. I just kind of wonder, how volatile is that number? And where do you expect it to play out over the next few quarters?

Mike, franchise fees are really a function of the number of openings we have in the period, the number of franchise openings. So really it's more of a timing of the 50 to 60 that we guided to in year, when they actually open. In the second quarter, we had 11 clinic openings. We do expect a larger number of openings in Q3 and Q4 to balance out the 50 to 60 we guided to.

How many did you have in Q1?

There was 12 in Q1.

Right. (multiple speakers) Yes, we had -- in Q1 we had 12 new openings. And then we sold six of the 11 clinics in Chicago. So there was a total of 18 franchises into Q1. But six of them were corporate clinics that were turned over to our [D Group] there. And then we had 11 clinics that opened in -- or Q2 2017.

And Mike, another function of the franchise -- that drives franchise fees is the current license cost is $39,000, or $39,900, for an opening -- or for a license sale. Prior to that we used to sell license at $29,000. So the mix of older license openings versus new license openings does have an impact on that.

Okay. So there might have been a tougher mix in the second quarter?

Yes. That does have an impact, yes.

Got it, okay. That's helpful. I was just doing the math, and not coming up with the right number. Good. And then when you take a look at the 1,700 clinics that you've targeted out there, can you give us a sense of where you think that percentage would end up being, between franchised units and corporate owned units?

Mike, that's a great question. I actually get asked that quite often from investors and talking to people interested in the Company. And that right now, with the 47 clinics against the 383 open, that's about 12% of it that are corporately owned. And as I look forward, while there is not a specific number that we've all agreed upon; but I would expect that to range over time, depending on time and capital, between, let's say, 10% and 25% of the overall portfolio.

Okay, great. Thanks. That's a pretty wide target to look at. And then (multiple speakers)

But also, Mike, you (technical difficulty) change over time. Just watching other franchise systems and you can see their strategy changes. Sometimes they're going to be really focused on more corporate clinics as opposed to franchising, and you can see some major franchisors. So I haven't seen it where it's just usually just this fixed number that you keep set, because there's just a number of factors that are going to influence that.

Right, right. When you guys take a look at the back half of the year, you would expect to be up year-over-year in revenues in the back half, correct?

Absolutely.

So why do you keep -- what scenario -- because a lot of companies will look at ranges of guidance as potential ranges. Ranges that, if things were a little slow we'd be at the low end; and if things could do a little bit better, we'll be at the high end, and maybe a good target is in the middle. If you used the last year's numbers, you almost come up to the middle of the range. So I'm just trying to understand the philosophy around the guidance. Specifically on the top end -- I mean on the top line, because it doesn't seem like $22 million to $23 million -- that range is sort of even in the possibility.

The guidance that we have provided for revenue is currently where we see the business heading. Being a small company, there's fluctuations that we could experience. But right now, the performance for Q1 and Q2 and what we see for Q3 and Q4, the guidance, we feel, is representative of the business. And if we get to a point where the guidance needs to be adjusted, we'll do it at that time. But at this point in time, the $22 million, $24 million is what we feel is an accurate depiction of where we're heading.

Right. But you just said that you thought you would certainly be up year-over-year in the back half. So what would be accurate about you coming in within the $22 million to $23 million range?

Well, one of the things we're trying to do here, as well, is to make sure that our guidance is as accurate as possible. And as John said, we'll change it when we believe that it should be. But we also, coming into this, certainly as the new management, is that some of the guidance that was previously provided wasn't quite as accurate; and so that we're trying to be very thoughtful about the expectations that we're setting, and still be truly reflective of our view of the business.

Got it. Okay. Just trying to understand that. That's all I got. Thank you.

(Operator Instructions). I'm currently showing no further questions at this time. I'd like to turn the call back over to Peter Holt for closing remarks.

I want to thank everyone for participating on today's call, and for your questions. And we look forward to keeping you up to date on all of our progress. And have a great day.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.