The Joint Corp. (JYNT) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2016 Joint Corp Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As reminder, this conference is being recorded. I would now turn the conference over to your host for today, Peter Vozzo, Joint Corp Investor Relations. You may begin.

Thank you, Sonia. Good afternoon, everyone. Today after the close of the market The Joint Corp released financial results for the fourth quarter and year ended December 31, 2016. Before we begin, if you do not already have a copy of the press release announcing these financial results, it can be found in the Investor Relations section of our Web site 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 the 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 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 today's call to discuss our 2016 fourth quarter and full year results. Joining me to present on the call is John Meloun, our Chief Financial Officer and George Vomentero, our Vice President of Operations, who joined the company in January. George brings more than 30 years' experience driving operational excellence and managing franchise relationships with national brand, such as McDonald, Dunkin brands, which are invaluable to The Joint, as we continue to open new clinic. Worked improved economics for our existing clinics and build our brand across the country. I will provide financial and operational highlights for the quarter and for the year, George will provide an overview of operational improvements going forward and John will discuss the financial results in more detail. During the fourth quarter we added a net 16 franchise clinics, bringing the total number of clinics to 370 as of December 31, 2016. This compares to 354 total clinics at September 30, 2016 and 312 at December 31, 2015. In January, we announced the sale of regional developer rights for the Chicago area and the transfer of 6 of the 11 Chicago clinics to a group that includes experienced an successful franchises of The Joint Corp. The remaining five clinics as well as three company managed clinics in upstate New York were consolidated or closed in January. The transfer and consolidation and closing of this clinic will improve cash usage and allow us to focus further on a company owned and managed clinics in other existing markets. Importantly, we believe these actions will accelerate the point to a point which the company will reach its adjusted EBITDA breakeven which we are working towards achieving during the first half of 2017 compared to our previous expectations at the end of 2017. It's also important to note that the new regional developer is committed to opening a minimum of 30 clinics in the Chicago area over the next 10-years including plans to open between 5 and 10 clinics over the next 18 months. The remaining 47 corporate owned or managed clinics continue to demonstrate performance improvements in the fourth quarter of 2016. As of December 31, 2016 we had 61 company owned or managed clinics which represented 16% of the clinics portfolio, as compared to 47 clinics or 15% of the clinics portfolio at the same points in the previous year. As we've stated last quarter, our company owned and managed clinic buybacks as a portfolio are cash positive on the clinic level and our Greenfield continue to make progress towards profitability. For example, growth sales of those clinics acquired in 2015 that we owned or managed for at least 12-months have increased on average by 48% through the fourth quarter of 2016. System wide comp sales in the fourth quarter of 2016 increased by 26% over the same period last year with the performance of our most mature clinics, those that have operated for more than 48-months or greater continuing their strong comp clinic growth, increasing by 14% over the prior year. Comp sales include only those sales from clinics which have been open for at least 13 full months and excludes any clinics that have been closed. System wide sales for all clinics were $27.2 million in the fourth quarter of 2016, an increase of approximately $7.4 million or 37% from the same quarter in 2015. System wide sales for the full-year of 2016 were $98.6 million, an increase of approximately $28.5 million or 41% for the full-year of 2015. Our growth in strong comp sales results are reflected in the company's crossing the milestone of reaching a trailing 12-months system wide sales of the $100 million for the first time in the company's history in January 2017. In addition, that was a company's second highest system wide sales month after November 2016 which was its highest system wide sales months as a result of our brands successful Black Friday promotion. Strong revenue growth of 54% to $5.8 million for the fourth quarter of 2016 as compared to same quarter last year reflects the additions of 58 clinics over the last 12 months. Full year 2016 revenue increased 48% over the full year 2015 to $20.5 million. Adjusted EBITDA for the fourth quarter in 2016 was a loss of 1.4 million a significant improvement compared to the loss of 2.8 million in the same period the prior year and an improvement over adjusted EBITDA loss in the first three quarters of 2016. Our total cash and cash equivalents were 3 million at December 31, 2016 compared to 3.4 million at the end of the third quarter in 2016. To further strengthen our financial position in January this year we announced obtaining non-dilutive line of credit of up to $5 million. During 2016 we reduced our corporate overhead, we executed a plan to convert the Chicago clinic from an expense to a revenue generator by transferring them to our franchisee and aligning the company for a strong 2017 and beyond. We're now working towards achieving company-wide adjusted EBITDA break even during the first half of 2017 which positions us for accelerated growth as we move through 2017 and 2018. I'd now like to turn the call over to George Vomentero to discuss our clinic operation.

Thank you, Peter, I'd first like to thank Peter and the management team for appointing me as Vice President of Operations. I'm excited to be with the company to help build the success and participate in the continuing growth. As I reflect on my role within the organization my immediate goal is to focus on the California Greenfield clinics and to bring them to profitability as quickly as possible. To do this I will create a cross-functional team to design and implement core competencies to operations with emphasis on improved patient experience, which is a key to our success in the business or any retail business. While the Joint business model was unique, it in that is had it's offering a chiropractic service, the key across all retail platforms is customer service. At the Joint the number one source for new patients is generated from referrals from existing patients. Therefore, patient experience is significant and will have a significant impact on whether and how often patient recommends our services to friends and family, by focusing on a patient, creating a more uniform and highly high quality experience we believe that we will able to significantly improve our profitability, of our clinics. We will then hold ourselves and our teams accountable to implement these improvements across the entire network in the system. Another key area of focus is to increase the capability and efficiency of our franchisees and regional developers. What I have learned over the past 30 years of operational experience is that that solid base for a national chain can only be built by creating and utilizing and updating operating models of the business systems. This is accomplished through first establishing standards based on best practices in the network and secondly standardizing our clinics and field operations and finally refining our training programs to teach the new protocols. This is always a work in progress and requires continual improvement. We are also excited to re-energize and expand our regional developer program. Working with all of our key stakeholders in the company we're rebuilding from the ground up a more structure regional developer program, teaching franchise sales, training operational support to truly accelerate our growth through our regional developer community. I would now like to turn it over to John Meloun to discuss the 2016 fourth quarter and full year results and general outlook for 2017.

Thanks George. We have provided detail on our financial performance for the quarter and full year ended December 31, 2016 in the press release issued earlier today. I will now take few moments and discuss some of the highlights broken down by two operating segments, corporate clinic and franchise operations as well as our unallocated corporate overhead. This segment data will be available in our 10-K which we file by tomorrow March 10. Starting with the fourth quarter results, revenues increased 54% or 2 million or 5.8 million compared to the same period last year. 1.1 million of the increase is from the corporate clinic segment and 0.9 million from our franchise operations. The revenue growth in the corporate clinic segment is attributed to increasing sales in our existing clinic portfolio, complimented by 14 additional clinics that were acquired or new clinics open in 2016. The franchise segment revenue increased due to higher sales from both existing clinics and from the 44 additional clinics added in 2016. Cost of revenues increased slightly by 20,000 to 0.8 million compared to the fourth quarter of 2015, which is due to regional developer royalties from higher sales in our franchise operations. Selling and marketing expenses increased by 28% or 0.3 million to 1.2 million compared to 1 million in the same period last year primarily due to increased spending in our franchise operations and national marketing program. General and administrative expenses increased 73% or 3.8 million to 8.9 million compared to fourth quarters of 2015. However, 3.5 million of the increase is due to a non-cash imperilment and disposition charge associated with the transfer and closing of company managed clinics in Chicago and New York that we announced in January of 2017. The remaining increase of 0.3 million was driven by occupancy expenses associated with having a greater number of company owned or managed clinics in operation compared to the same period of prior year. depreciation and amortization expenses increased 48% or 0.2 million to 0.7 million compared to the prior year quarter of which almost all was driven from property, equipment and intangible assets in acquisitions of franchises, regional developer rights as well as growth in the number of Greenfield clinics in our corporate clinic segment. We had a consolidated loss from operations of 5.7 million in the fourth quarter of 2016 compared to 3.5 million in the fourth quarter of 2015. This 2.2 million increase in consolidated operational loss includes the 3.5 million imperilment and disposition charge mentioned earlier in our corporate clinic segment. excluding this onetime charge, loss from our operations in our corporate clinic segment improved by 0.9 million and improved in our franchise operations by 0.4 million, in both cases as compared to the fourth quarter of 2015. Adjusted EBITDA loss in the fourth quarter of 2016 was 1.4 million, an improvement compared to 2.8 million loss in the same quarter of the prior year. 1.1 million of improvement was generated in the corporate clinic segment because of the growth in sales. Our franchise operations, which made up remaining 0.3 million in adjusted EBITDA improvement continues to grow in profitability from increasing sales as well. The improvement in our both corporate clinic segments and franchise segments are driven by the strong comp sales that our clinics typically experience as they mature. With clinics in the first year of comp sales that is those in the 13 to 24 month category growing at a fastest rate and those clinic over four years old still growing at a range of 14% quarterly comp, all in a very stable cost structure. Now focusing on full year 2016, revenues increased 48% or 6.7 million to 20.5 million. 5.1 million of this increase is attributed to performance in our corporate clinic segment and 1.6 million to our franchise operations. This year-over-year growth is due to increasing sales from existing clinics in both operating segments and the addition of 14 company-owned or managed clinic and 44 franchise clinics since December 31, 2015. Cost of revenues increased 4% or 0.1 million to 2.9 million, compared to 2015, which is again due to regional development royalties from higher sales in our franchise operation. Selling and marketing expenses increase to 4.4 million in 2016, compared to 2.8 million in the prior year. The primary reason for this increase were the higher number of company owned our managed clinic operating and associated direct marketing, plus increased spending in our national marketing programs. General and Administrative expenses increased to 25.6 million, compared to 16.2 million in 2015. This increased primarily in the corporate clinic segment includes the impairment and disposition loss of 3.5 million. Additional occupancy expenses associated with having a greater number of clinics open in 2016, compared to 2015, as well as real estate development costs for halting expansion of new corporate segment clinics earlier in the year. For the full year 2016, consolidated loss from operations was 15 million, compared to a 9.3 million loss in 2015. 9.7 million of the losses was in our corporate clinic segment and include the 3.5 million impairment and disposition charge for Chicago and New York. The franchise operation segment had an operating income for the full year 2016 of 4.6 million an increase from 4.2 million for full year 2015. Our unallocated corporate overhead increased slightly by 0.1 million to an operational loss of 9.9 million. Adjusted EBITDA loss in 2016 was 7.7 million, compared to 6.8 million in the year prior. The increase in adjusted EBITDA loss was primarily due to a larger number of company-owned or managed clinics in operation during 2016. Net loss in the fourth quarter of 2016 was 5.8 million or a negative $0.45 per share as compared to a net loss of 3.4 million, or negative $0.31 per share in the fourth quarter of 2015. Excluding the impairment and disposition charge of 3.5 million fourth quarter 2016 net loss was 2.2 million, or negative $0.17 per share. Net loss for full year 2016 was 15.2 million or a negative $1.20 per share compared to a net loss of 8.8 million or a negative $0.88 per share in 2015. Excluding the impairment and disposition charge net loss for full year 2016 was 11.7 million or a negative $0.92 per share. Approximately 12.8 million weighted average common shares were outstanding in the fourth quarter of 2016 and approximately 12.7 million shares for full year 2016 as compared to 10.8 million shares and 10 million shares in the same periods for the prior year. The increase in weighted average shares for both periods is due primarily to the company's underwritten offering of approximately 2.6 million shares of common stock in the fourth quarter of 2015. As Peter mentioned as of December 31, 2016 cash and cash equivalents were 3 million compared to 16.8 million as of December 31, 2015. In the fourth quarter cash and cash equivalents only decreased by 0.4 million. Our use of cash has diminished in each of the last four quarters as operating losses generated from our company owned or managed clinic continues to improve. Now turning to our 2017 guidance, we expect total revenue in the range of 22 million to 24 million and adjusted EBITDA loss in the range of 1.5 million to 0.5 million. We anticipate that the sequential quarter-to-quarter trend of improving adjusted EBITDA will continue in 2017. In addition, in 2017 we expect new franchise clinic openings in the range of 50 to 60. Finally, based on our current cash balance and operational plan we believe that we have sufficient cash to reach companywide adjusted EBITDA breakeven and to fund planned operations through 2017. And with that I'd like to turn it back to Peter.

Thank you, John. Overall, we made significant progress in the fourth quarter of 2016 strategically and financially. Our results show the continuation of our positive growth and operating strategy. This progress would not be possible without the commitment and perseverance of our franchise community and our employees and I want to thank each one of them for their efforts. We indeed are very passionate about our business and excited about the opportunities ahead. And with those comments, we'd like to open the floor to questions.

Thank you. [Operator Instructions] And our first question comes from Mark Smith of Salty Company. Your line is now open.

A couple of quick questions for you. First off looking at the growth of the franchise clinic openings in the guidance, how many of these are coming from existing franchises versus any from new franchises?

As I recall, when I was looking at this look at this, looking at the total number in 2016, I believe around 56% of them were from existing franchises. But I'll confirm that for you Mark, but at least over half of them were existing franchises who were purchasing additional clinics.

Excellent, and then just looking at kind of balance sheet and slowing down the cash burn and having some availability of debt, looking long-term, when do you guys think that you would be able to return to opening corporate clinics?

What we said to this steam, we'll continue to maintain is that we will go back to opening the corporate clinics when our overall portfolio of corporate clinics are profitable. And as we said, we are seeing -- we expect that to be taking place in 2017, and so as we prepare into 2017 and going into 2018, we really have that strategic opportunities to look at careful buybacks in additional corporate clinics and new markets.

Perfect. And then just looking at Q1 is there any seasonality that you guys see in first quarter also there is lack leap year this year or the Easter holiday shift making the impact on the model here in Q1?

It’s a great question coming out of the small box retail and for example I have involved in closing over it and [indiscernible] require well and the seasonality of that business as it's significant. One of the interesting things coming to the joint is while there is the only small changes in seasonality, it's really pretty steady throughout the year and we maybe have --maybe as we go into the end of the school season in May, we see a little drop up and sometimes a little bit of the drop offs into October/November. But it's I would have really said from -- looking at this in the normal small box usual environment, there is very, very little seasonality to this business.

And with those holiday shift is that just really just a day that you lose for leap year and maybe pick-up the day from Easter holiday?

Possibly. Now sometimes just talks about school, as people get out to school, they aren’t necessarily going back to the corporate clinic for going to our clinics for service, but it's very, very slight, if at all, I mean look at it over in a 12-months period.

Excellent. Thank you.

Thank you. [Operator Instructions] And we do have a question from Lucas Lee of Maxim Group. Your line is open.

So congrats on the quarter, so I have a quick question, you said January reaching your second highest system wide sales after November 2016 and it states that November 2016 was due to Black Friday promotion right? I don't know if I have missed it, but what the reason for January reaching one of your second highest system wide sales month? Is it due to the success in your franchisees or what was the reason for that?

Well I would say it's just a -- it’s a reflection of the continued same store sales that we experienced. As we said that our same store sales for 2016 system wide were 26% up and that you have more units, we opened up the 58 net units in 2016 and so certainly I think that we're getting better, we're getting more efficient, our same store sales are increasing, we're opening up new clinics and we're just seeing that monthly gross sales number increase, and that we would expect that to continue the trend as we go through 2017 and beyond.

I see, no that's great answer. And if a may ask one more thing, is your gross margin going to be improving going forward?

The gross margin will improve over time and purely because as the sales grow and revenue grows on the corporate side of the portfolio which doesn't have any cost of sales you'll see that improving in the gross margin. The only real gross margin we have is related to you know some of the regional developer costs we have on the franchise segment, but the revenue growth in the corporate segment will outpace the revenue growth in the franchise, in essence improving gross margin over time.

So if you could ball park it, should we be looking at like 88% to 90%, that's doable?

To be honest, let me follow up with you on that answer and kind of give you a range of where I expect it to be at.

Okay, and one last question, during last quarter you said that April and May will be on the softer quarter, is that still the case?

I'm sorry can you repeat the question one more time?

You said in last conference call that April and May maybe on the softer side in terms of revenue due to the ending schools, is that still the case?

Well I think, going back to the question that Mark Smith asked, is that, there is a slight seasonality to our business, but it's very -- not significant and so if we do see any kind of seasonality, there is a slight softness in kind of that May-ish time period. But what I would say about this business is it’s pretty consistent on a monthly basis in terms of usage of our patients, so you don't see those seasonalities, [indiscernible] accustomed to when I was working in smoothies or frozen desserts or even like a mailboxe, et cetera model or the UPS stores that as you can imagine with the holidays and the shipping, is that their December was a significantly higher revenue month for them compared to any other month of the year. And we just don't have any of those swings like that in The Joint model.

That's great, thank you for the answers, I’ll get back in the queue.

Great, thank you.

Thank you. And this does conclude our question and answer session, I would now like to turn the call back over to Peter Holt for any closing remarks.

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

Ladies and gentlemen thank you for participating in today's conference. This conclude today's program. You may all disconnect. Everyone have a great day.