The Joint Corp. (JYNT) Q1 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and thank you standing by. Welcome to The Joint Corporation First Quarter 2017 Results Conference Call. [Operator Instructions] As reminder, this conference is being recorded. Now it's my pleasure to welcome and turn the call to Mr. Peter Vozzo, Investor Relations for The Joint Corp. You may begin.

Thank you, Carmen. Good afternoon, everyone. Today after the close of the market The Joint Corp released financial results for quarter ended March 31, 2017. 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 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 2017 first quarter results. Joining me to present is John Meloun, our Chief Financial Officer. I will provide the financial and operational highlights for the quarter and then provide an overview of clinical operational improvements going forward and then John will discuss our financial results in more detail. For the benefit of those of you who are listening to our quarterly call for the first time, our purpose of The Joint is to improve the quality of life for the patients we serve. We do that through our network of over 370 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 healthy active lifestyles. As a retail concept, one of the most important measures of health of the business is systemwide comp sales and overall revenue growth. Comp sales simply means comparing retail sales to the same clinic or clinics, to the same period one year earlier to measure whether sales are expanding or contracting. In the first quarter of 2017 our systemwide comp sales were up 19% and our revenue of $5.7 million was up 33% compared to the same period last year. Comp sales includes only those sales from clinics that have been opened for at least 13 full months and excludes any clinics that have been closed. Additionally, we'll continue to make progress toward profitability demonstrated by the fact that our adjusted EBITDA continues to improve year-over-year. Adjusted EBITDA for the first quarter of 2017 was a loss of $0.5 million, a meaningful improvement compared to the loss of $2.7 million in the same period last year. During the first quarter we added 12 new franchise clinics and closed one franchise clinic. As a part of our plan to improve cash usage, we closed five company managed clinics in the Chicago area and three company managed clinics in upstate New York which accelerates our progress towards profitability. This brought the total number of clinics to 373 as of March 31, 2017 up from 331 clinics as of March 31, 2016. During the first quarter, our company-owned or managed clinics continue to demonstrate improved performance. As of March 31, 2017 we had 47 company-owned or managed clinics which represented 13% of the clinic portfolio. As compared to 54% or 16% of the clinic portfolio the same point previous year. 31 of the 47 clinics were acquired 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 buybacks as a portfolio continued to be cash positive on the clinic level. Gross sales for those clinics acquired in 2015 that we've owned and managed for at least 12 month have increased on average by 59% through the first quarter of 2017. In addition, during the quarter our Greenfield clinics continued to make progress towards profitability. The Greenfields that were open for the full first quarter of 2016 experienced 102% increase in first quarter 2017 sales compared to the first quarter of 2016. As I mentioned, systemwide comp sales in the first 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 continuing their strong comp clinic sales growth increasing by 11% over the prior year. Systemwide sales for the clinics were $28.1 million in the first quarter of 2017, an increase of approximately $6.1 million or 28% up in the same quarter 2016. At the corporate level, our strong revenue growth of 33% to $5.7 million for the first quarter of 2017 as compared to the same quarter last year, reflects the net addition of 42 clinics over the last 12 months. It's important to highlight our continuing efforts to control costs. Unallocated corporate overhead which we define as all expenses that are not directly tied to our corporate clinic segment or a franchise segment was down 0.4 million to 2.4 million compared to 2.8 million in the same period prior year. Unallocated corporate overhead was 42% of revenue compared to 65% in the same period prior year. This is the power of our business model. We're able to leverage corporate overhead and expand the business within nominal increases in costs. In 2017 we forecast to add 50 to 60 new franchised clinics with little expected growth in our unallocated corporate overhead. From my 30 plus years in experience in building and managing franchise systems, I have understood that one of the essential steps necessary to improve the performance of our franchising corporate owned or managed clinics is to stay focused on the operational learnings from the field and incorporate those best practices into our training and ongoing support program. With a companywide initiative led by our newly hired VP of Operations, we've been able to work with our top-performing franchisees to distill and share the collective experience of our strongest operators to restructure the training and operational programs. Concerning franchise sales and development, in the first quarter of this year we've opened the 12 new franchised clinics and sold three regional developer territory covering Chicago, Philadelphia and the State of Washington. Their combined development schedules require the opening and operating of a minimum of 70 clinics over the next 10-years. As a remainder of 2017, we're focused on achieving profitability for our corporate clinic segment, expanding our franchise network and continuing to control cost to operate our business. We anticipate improvements in adjusted EBITDA each quarter for the remainder of 2017 and we will remain focused on achieving adjusted EBITDA breakeven as quickly as possible. Based upon our current core customer profile and usage, we have identified the opportunity to expand to more than 1700 clinics across the country. With 373 clinics today, the road before us is clear. To fully capitalize on this opportunity, we will focus on the rapid expansion to our franchise efforts, amplify by the network of strategically located company-owned or managed clinics. I'd now like to turn the call over to John Meloun, who will discuss the 2017 first quarter results and a general outlook for the full year 2017.

Thanks Peter. We have provided detail on our financial performance for the quarter ended March 31, 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 Franchise Operations, as well as our unallocated corporate overhead. This segment data will be available in our 10-Q which we'll file tomorrow May 12. Revenues increased 33% or $1.4 million to $5.7 million compared to the same period last year. $0.8 million of the increase is from the corporate clinic segment and $0.6 million from our franchise operations. Revenue growth in the corporate clinic segment is attributed to increasing 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 49 clinics added since the end of the first quarter of 2016. The improvements in both our corporate clinic segment and franchise segment revenues are driven by strong comp sales that our clinics continue to 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 notably those clinics over four years old still growing at a rate of 11% in the first quarter all on a very stable cost structure. Cost of revenues of $0.7 million in the first quarter of 2017 were virtually flat compared to the first quarter of last year, as lower regional developer commissions from fewer clinic openings were offset by higher regional developer royalties in the first quarter of 2017. Selling and marketing expenses increased by 30% or $0.2 million to $1 million compared to $0.7 million in the same period last year primarily due to increased spending in our franchise operations national marketing program. General and administrative expenses decreased 20% or $1.1 million to $4.6 million in the first quarter of 2017 compared to $5.7 million in the first quarter of 2016 due to lower payroll and lower legal and accounting expenses. Loss on disposition or impairment was $0.4 million in the first quarter of 2017 due to exit cost obligations from the closure of company managed clinics in Chicago and New York. Depreciation and amortization expenses were unchanged from the year earlier period at $0.6 million. Consolidated loss from operations improved by 54% or $1.9 million in the quarter from $3.5 million in the first quarter 2016 to $1.6 million in the first quarter 2017. Loss from operations in our corporate clinic segment improved by $1.1 million and improved in our franchise operations by $0.4 million. In both cases as compared to the first quarter of 2016, our unallocated corporate overhead decreased by $0.4 million to $2.4 million reflecting the reduction in expenses. Adjusted EBITDA loss in the first quarter of 2017 was $0.5 million, an improvement over $2.7 million loss in the same quarter last year. $1 million of the improvement was generated in the corporate clinic segment due to growth in sales. Our franchise operations 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 $0.8 million in adjusted EBITDA improvement which is attributed to reduction in expenses. Net loss in the first quarter of 2017 was $1.6 million or negative $0.13 per share as compared to a net loss of $3.5 million or negative $0.28 per share in the first quarter of 2016. Approximately $13 million weighted average common shares were outstanding in the first quarter of 2017 as compared to $12.6 million shares in the same period the prior year. At March 31, 2017 cash and cash equivalents were $2.7 million compared to $3 million as of December 31, 2016. Once again our use of cash diminished in the first quarter of 2017 compared to the first quarter of 2016 as operating losses generated from our company owned or managed clinics which is our biggest use of cash continues to improve along with a reduced run rate in unallocated corporate overhead expenses. It should be noted that the cash balance in the quarter was positively impacted by the $1 million minimum required draw per the terms of our line of credit. This draw remains unused and is part of our cash and cash equivalents on the company's balance sheet as of March 31, 2017. Now turning to the 2017 guidance. We continue to expect total revenues in the range of $22 million to $24 million. Adjusted EBITDA loss in the range of $1.5 million to $0.5 million. In addition in 2017, we expect net new franchise clinic openings in the range of 50 to 60. Finally, based on our current cash balance and operating 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. We remain on track to achieve our 2017 financial operational goals and our first quarter 2017 results show a continuation of our overall positive growth and operating strategy. This progress would not be possible without the commitment and perseverance of our franchise community and employees. And I want to thank each and every 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.

[Operator Instructions] And our first question is from the line of Mark Smith with Feltl and Company. Your line is now open.

First off, just a couple of housekeeping things. Was the impairment charge the 418,000, was that all due to clinics that were previously sold or closed or was there anything else in that line?

The impairment charge was related to all clinics that were closed and the leases for those clinics.

And do we expect anything else going forward from those closures as far as impairment charges?

At this point in time we have no expectations of additional charges.

Okay. Then just one more housekeeping. When would you expect to get some maybe [indiscernible] with the pretax loss or do you expect the tax kind of which you report into to stay at this current rate?

Expectations of that will stay at the current rate.

Okay, perfect. And then more big picture - it’s good to see you on track to hit the opening guidance with franchisees, a couple of questions on that. First, how do you feel your relationship with your franchisees is today, and then secondly, anything that you can speak to as far as the health of the franchisees and the franchise system?

Sure, Mark, it's Peter. First of all I would say that I think our relationships with the franchisees are continuing to improve and that - quite frankly was one of the first reasons that I was brought in almost a year ago is to really work with our franchise community to improve those relationships which quite frankly had gone [frail] [ph]. And my experience is that with any franchise system, the management of that relationship between the franchisee and the franchisor is absolutely the most important responsibility that we have as a franchisor. And it’s not something that you have a national conference or you have a good speech and that they're solved, it’s something that you work on every day to improve. And when you have that trust and that relationship with those franchise community, it is remarkable what can be unleashed in that franchise system. And my view is that we have made great progress in improving relationships with our franchise community and that we're not done yet and we will continue to do so. Related to your relationship with your franchise community, its profitability, unit economics, I mean as a franchisee my experience is even if they may have a kind of troubled relationship with their franchisor if their business is doing well and they’re profitable, it’s a lot easier to deal with those challenges than that we’re dealing with other issues. And certainly in the time that I've been with this company and looking at fundamental unit economics of this business model is that they’re very, very strong for that small box retail environment. And when I say small box retail what I’m talking about is that 1,000 square feet in line anchored by a supermarket where most of our clinics are located and that I think that we have some very, very strong unit economics that drive our business. That doesn't mean that we can’t continue to improve them, to increase the time to breakeven in a new clinic that’s opening, but it’s a strong base to work from.

And then last one from me, I think last quarter you guy spoke a little bit to this but do you still feel like you can get to positive EBITDA perhaps here in the first half or and maybe in third quarter?

Well as I said in my comments, we are working as aggressively as possible to get there and with changes in Chicago by transferring six of the franchise clinics to our top franchisees, closing the five and three in New York that diminished our cash usage and absolutely increased the timeframe to profitability and that we're working very aggressively to get there.

[Operator Instructions] And our next question is from the line of Ken Bachman, sorry. And I'm not showing any further questions in the queue.

Okay. Well I thank all of you for participating in today's call and for your questions. We look forward to keeping you informed and update on our progress. Have a great day. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.