The Joint Corp. (JYNT) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Joint Corporation's Third Quarter 2017 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 provided at that time. [Operator Instructions]. And as a reminder, this conference is being recorded. And I'd now like to turn the conference over to Ms. Becky Herrick with LHA.

Thank you, James. Good afternoon, everyone. This is Becky Herrick of LHA, Investor Relations. On the call today, CEO, Peter Holt, will provide quarterly highlights, CFO, John Meloun, will review the financial details and then Peter will provide the company vision and open the call for questions. Today after the close of market The Joint Corp. issued its financial results for the quarter ended September 30, 2017. If you do not already have a copy of this press release, it can be found in the Investor Relations section of the company's website at www.thejoint.com. Please be advised 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 that 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're 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, it's now my pleasure to turn the call over to Peter Holt, Chief Executive Officer. Peter?

Thank you, Becky, and thank you for all joining us today. We've had an another quarter of strong growth. We're excited to review our continued improving progress, our successful franchise convention last month, and share our long-term vision of our company. Before we get into the details, for those of you who are new listeners today, our purpose at The Joint is to improve the quality of life for our patients we provide by providing routine and affordable chiropractic care. We do it through our network of nearly 400 clinics utilizing 850 fully licensed chiropractic doctors who performed more than 4.1 million adjustments last year. Our doctors provide patient care focused on pain relief and ongoing wellness to promote a healthy lifestyle. Our dual strategy model, franchise and company-owned or managed clinics is powerful because it provides us uniquely predictable revenue stream which is capital light and reflective of a small box retail business model. As we focus on pain relief and ongoing wellness, we serve a dynamic and growing market. Today, pain cost us nation more than $650 billion annually. If we only look at back pain, Americans spend more than $90 billion a year with $15 billion of that spent in chiropractic care. And the chiropractic care continues to move to the main stream, 62 million Americans are chiropractor in the last five years, 35.5 million in the last 12 months. This is especially notable as our nation is grappling with an opioid crisis that has been recently declared a public health emergency. Increasingly the medical community is acknowledging that prescription drugs are not necessarily the most effective solution for back pain management, and in fact, the American College of Physicians and National Organization of Internus which is the largest medical specialty organization and a second largest physician group in the United States with over 152,000 members now when I quote, recommends for patients with lower back pain non-drug therapies such as spinal manipulation as the first line of treatment, in the quote. As I reflect on our quarterly highlights, we continue to demonstrate our reinvigorated commitment to helping franchisees deliver results. In fact Q3 2017 is our seventh consecutive quarter of financial improvement. As compared to Q3 2016 our revenue grew by 19%, system-wide comp sales or retail sales for those clinics had been open for at least 13 full months increased 17%. While this demonstrates strong same-store sales growth is lower than the 19% that we've experienced in the first half of this year, due to the impact of the Hurricanes in Houston, Florida, and the East Coast had, where we had a significant presence. Our net loss improved by 85% and adjusted EBITDA was positive for the first time in the history of being public reaching $0.3 million. This means adjusted EBITDA improves almost $600,000 from the second quarter 2017, and $2 million improvement from third quarter 2016, demonstrating that our drive towards sustainable profitability is taking hold. During Q3, we opened six new franchise clinics and we did not close any units. This brought the year-to-date new franchises to 29, total franchises to 342, and the total clinic portfolio to 389 as of September 30, 2017. At quarter end, 88% of our portfolio was franchised and 12% was company-owned or managed compared to 83% and 17% respectively at September 30, 2016. The slowdown of the new franchise opening is a realization that our expectations for 2017 were a little aggressive and was also impacted by the Q3 -- in Q3 by the Hurricanes in some of our fastest growing territories. Nonetheless, our leading growth indicators remain strong. Year-to-date we've already sold 23% more franchised licenses than we did in all of 2016. Additionally, we've doubled the number of regional developers signing eight new regional developers compared to zero in 2016. All that said it's important to remember that it can take six to 12 months from license purchase to open clinics, which bodes well for 2018. Moving on, I'd like to discuss one of the most important events that the franchise can hold, it's national convention. Last month our franchise community came together which coincided with the National Chiropractic Health Month to celebrate our franchise successors and offer ongoing support. Our theme was our road to success, attract, convert, retain, referring to our patients. Notably 29 were recognized for their annual gross sales performance in 2016, 21 clinics achieved more than a 550,000 annual gross sales, up from 14 clinics that achieved that same level of performance in 2015. The high achieving clinic almost broke a $1 million in gross sales for 2016. Excitingly the clinics are on track to do even better in 2017. And equally important, in addition to expanding the top producer pool, we steadily improved our time to break-even for new clinics. We used a convention as a powerful vehicle to deliver new robust set of tools for our franchisees. We also brought in a keynote speaker who spoke to the benefits of selling with a noble purpose. It shouldn't surprise anyone that companies excel and create competitive advantage when employees and franchisees have emotional engagement. Franchising by its very nature and investment, attracts franchisees to concepts that personally resonate to them the most and The Joint has a leg on that, a leg up on that because our best doctors understand that they are trusted advisors to our patients who are looking for guidance to be relieved from their pain and maintain a pain free lifestyle. Based on our franchisee feedback, I can say that our convention was our strongest to-date. Our third-party survey results surveyed an overwhelming approval rate of 97% for the event. We believe the convention is critical importance because engaged franchisees and regional developers accelerate our ability to scale. Studies show that franchisors that reached that 1,000 unit achieve a tipping point in national recognition and can further drive accelerated growth. We already have closed 400 units which places us in the top 10% to 11% of active franchise businesses and we've driving for more. The Joint is a unique franchise brand in a small box retail environment and that we have detailed information about every one of our patients or our customers. Our data analytics team dissects the patient usage and prop out extrapolate and very specifically determine the best points of future distribution. Based on analytics, we believe that we have a 1,700 plus clinic opportunity in the United States. But it also call that the scale is easier and faster to achieve, when franchisors use a regional developer model which is exactly why we implemented the strategy. For clarification, we sell a regional developer the rights to open a minimum develop at a minimum number of clinics in a defined territory and they in turn help us identify and qualify new potential franchisees in that territory, assist us with providing field training, clinic opening, and ongoing support. And for this assistance, we share part of the national franchise fee collected in the ongoing royalties. In reviewing our regional developer progress during the quarter we sold three new RD agreements. Two of the new regions, the State of Maryland and DC and six counties in Northern New Jersey each had a minimum development schedule to open 23 clinics in 10 years. The third region Minneapolis St. Paul already has seven clinics and our agreement for minimum development schedules were 16 clinics in 10 years. All of these new regional developers are structured as teams and in every case at least part of that team has been with The Joint Corp. in running clinics for several years. These RDs bring a wealth of experience including a chiropractor license for decades, a Major League Baseball player, an insurance business expert, a colonel in the military, and franchisees with McDonald's, Massage Envy, and of course The Joint experience. Year-to-date, we've sold eight new regional developer territories bringing our total RDs to 16. The combined development schedules require to opening and operating of a minimum of 211 clinics over the next 10 years in the territories just mentioned as well as Chicago, Philadelphia, Washington State, Ohio, and Central Florida. And with that, I'd like to turn it over to John to review the financial results.

Thank you, Peter. We have provided detail on our financial performance for the third quarter of 2017 compared to the third quarter of 2016. I will now take a few moments to 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 on Monday, November 13. As a reminder, for our retail concept two of the most important health measures of the business are overall revenue growth and system-wide comp sales. As Peter mentioned system-wide comp sales in the third quarter of 2017 increased by 17% over the same period last year. Our most mature clinics those that have operated for 48 months or more continue their strong comp clinic sale increasing by 9% over the prior year quarter further reflecting the growth of our business. A point of clarification on our corporate clinic segment, 31 of the 47 clinics were bought from existing franchisees which we refer to as buyback and 16 of the clinics were built from the ground up which we refer to as Greenfield. Our company-owned or managed clinic buybacks as a portfolio continue to be adjusted EBITDA positive at the clinical level. Gross sales of these clinics since a month prior to when they were acquired have increased on average by 57% through September 2017. Buyback sales are up 13% in Q3 2017 versus Q3 2016 and have an average age of 53 months as of September 2017. Greenfield sales are up 51% in Q3 2017 versus Q3 2016 reflecting continued progress towards profitability. Their average age is 22 months as of September 2017. While this is a significant increase, it also reflects the smaller base of patients in first year clinics that is expected to increase over time. The buyback has been profitable and now for the first time, our total corporate clinic portfolio was profitable as well. This reflects the steady progress we have made in our corporate clinic performance. Revenue in the third quarter of 2017 grew by 19% to $6.5 million from $5.5 million in the same period last year. The improvement in both our corporate clinic segment and franchise segment revenues are driven by the comp sales that our clinics continuing to experience as they mature. Of the $1 million increase, corporate clinics contributed 56% and franchise operations 44%. Revenue growth in the corporate clinic segment is attributed to the increasing sales in our distinct clinic portfolio and from the six clinics were acquired since the end of the first quarter of 2016. The franchise segment revenue growth was due to higher sales from both existing clinics and from a net 49 clinics added since the end of the third quarter 2016. Cost of revenues in the third quarter of 2017 was $0.8 million increasing 14% over the same period last year due primarily to higher regional developer royalties from increased growth sales of franchised clinics in regional developer territories. Selling and marketing expenses in the third quarter of 2017 decreased by 8% to $1.2 million compared to the same period last year, primarily due to 14 fewer corporate clinics operating in the third quarter of 217 compared to the same period last year, and due to the National Conference timing being held in Q4 2017 versus Q3 of 2016. General and administrative expenses decreased 18% to $4.5 million due to lower payroll and occupancy cost again due to 14 fewer corporate clinics operating in the third quarter of 2017 compared to the year earlier period. In addition, the third quarter of 2016 was negatively impacted by $0.3 million in expenses related to the halting of Greenfield clinic development. Depreciation and amortization expenses also decreased due to the aforementioned 14 fewer corporate clinics this year. Loss from operations improved $2.2 million in the third quarter of 2017 from a loss from operations of $2.6 million in the third quarter of 2016. Net loss in the third quarter of 2017 was $404,000 or $0.03 per share compared to a net loss of $2.6 million or $0.21 per share in the same period last year. Total adjusted EBITDA income in the third quarter of 2017 was $316,000 improving $2 million compared to the adjusted EBITDA loss of $1.7 million in the same quarter last year. Of the $2 million improvement corporate clinics contributed $1.1 million, franchise operations contributed $0.5 million, and unallocated corporate overhead contributed $0.4 million. For Q3 for the first time both operating segments, corporate clinics and franchise operations were adjusted EBITDA positive. As of September 30, 2017, cash and cash equivalents were $2.6 million compared to $3 million at December 31, 2016. Pursuant to the terms of our credit agreement, during the first quarter 2017 the company borrowed a required $1 million on its line of credit which remains unused as part of cash and cash equivalents on the balance sheet. Now turning to our 2017 guidance due to higher than anticipated revenue from corporate clinics and franchise operations and through the reduced operating expenses, we are increasing revenue and adjusted EBITDA expectations. We now expect revenue to be between $24 million and $26 million, up from $22 million to $24 million, and we now expect adjusted EBITDA to be between a loss of $0.5 million to an income of $0.5 million, improving from a range of a loss of $1.5 million to a loss of $0.5 million. Regarding franchise operations, as Peter indicated, we started 2017 with an aggressive based on our prior pipeline. At this time, we think it's prudent to reduce 2017 expected openings to 40 to 50 from 50 to 60. We plan to communicate our 2018 guidance on the Q4 conference call. Thanks everyone for your time. And I'll now turn the call back over to Peter.

Thanks John. We continue to execute on our long-term vision which is to one, be the premier provider of chiropractor care in wellness and health plans; two, accelerate our footprints to corporate our franchise strategies; three, be the career path of choice for chiropractors; four, build a world class organizational structure; five, faster robust regional developer community; and six, build and maintain a world-class IT platform. I'd like to repeat our progress would not be possible without the commitment and the hard work of our franchise community and our employees. It was a pleasure to see everybody at the convention and I want to thank each and every one of them again for their efforts as we continue to improve the quality of life for our patients by providing affordable and routine chiropractor care. Before I open up to Q&A, I'd like to note that we will be at the following Investor Conferences over the next two months: Craig-Hallum, Alpha Select in New York City next week, LD Micro Annual Invitational, Los Angeles, and Annual ROTH Utah Active & Healthy Lifestyle Corporate Access Event in Park City. If you have any questions or would like a meeting please reach out to LHA Investor Relations. James, I'm ready to take Q&A.

Thank you, sir. [Operator Instructions]. Our first question comes from David Bain with ROTH Capital. Your line is open.

Great thank you. First, congratulations on strategically repositioning the company back towards profitability. First the clinics beat the revenue per clinic number again they are up 8% quarter-over-quarter that they owned clinics outside of sort of a continued acclamation of the concept by pay trends. Maybe you can give us an idea 3Q seasonality versus 2Q and any specific changes you've done that have been enhancing results at those particular locations. And I did hop on about four or five slides, if you went through that, I apologize.

Hey, David no problem at all. Thanks for the congratulations and that it's interesting and I've been involved in a lot of different retail concepts that have significant seasonality in my frozen desserts, even like a shipping business, or you see us during the holidays, if there's much higher revenue in that quarter, in that month, and you see overall. And I say what's so interesting about The Joint is that while that we have some slight seasonality by month when we look at it on a quarter-to-quarter basis it's pretty even.

Okay.

And so if you look at for example with our same-store sales Q1 was -- for those up and more than 13 months, Q1 was 19% same-store sales, Q2 was 19% same-store sales, Q3 was 17% same-store sales. And I really think that that drop is reflective of we have quite a number of clinics particularly in the Houston market which were flooded and closed for between seven and 10 days. And so I think when we come out with a 17% in Q3 it's truly reflection of not just Houston but then of course the East Coast as well because we have a number of clinics just right up from Florida up to the Carolinas and into Georgia. So I think that's a -- is the reason why you see that one difference between the 17% and the 19% for the first half of the year. To answer your question as why do we see discontinued performance on, particularly on the operational side. I really believe it's much of what we discussed on the last call is that the changes that our VP of Operations made in the way in which that we were managing our corporate clinics is that Jorge Armenteros came on board in January. He spent three months out in the field, he talked to our best franchisees about their best practices, took that information, and literally deconstructed the operation team, met -- eliminated one level of supervision, added another level, so that he has, I think a much more robust team in place with a smaller scope of control over the corporate clinics that we have. And that we're starting to see the results of that effort.

Great. And I mean looking at that and now that you're EBITDA positive and the same-store number that you just articulated continues at that kind of pace proving out a model of faster profitability per store. Then the concepts proving up pretty quickly are you investigating opportunity to increase the ownership mix and are you seeing any opportunities out there in general as other strategy that's still something kind of under review for the time period off into the future.

Well, and again it's a great question. And if you recall as of last year we came out and we said no new corporate clinics until we get our overall clinic per portfolio profit. And obviously that we are achieving that goal and that we're working very closely with our board and just strategically to think about okay, what is the best way. We've said all along that we believe in this dual model both corporate clinics and franchise clinics as a way of expanding this business and now we've not moved from that position. You know, we're just working closely with the board to determine, what's the most effective way to do that, what's the best timing of that, is that more buybacks is that more Greenfields, they all have different implications in capital requirement but it's very much a part of our overall strategy.

Okay and then just final one promise. You mentioned faster trends towards profitability for new store openings. Can you provide any sort of numbers behind that anything you can share with us?

Sure. I'm what I would say is that historically our same-store -- our time to breakeven is we've been talking about is that 12 to 18 months and it's been closer to the 18 months and the 12 months. And as we've not opened any new corporate clinics so I can't measure that against any of our corporate clinics. But as we look at the programs the 29 units that we've opened in 2017 that our goal has always been to try to move that to a to six to nine months breakeven point and that we are getting very close to that. So we will completely restructure our grand opening process, we've implemented new program, and we're starting to see the results of that. As we get further into this I think we can talk more specifically about the results but what we're saying is we're moving closer and closer to that goal of about six to nine months as a breakeven.

Very nice. Congrats guys.

Thank you.

Thank you very much.

Thank you. [Operator Instructions]. Our next question comes from Mike Malouf of Craig-Hallum. Your line is open.

Hey guys. This is Eric Des Lauriers on for Mike. Congrats on the great quarter.

Hi, Eric.

Hi, Eric.

If I could just press in a little bit more of that previous question of expanding the managed clinic portfolio. As you said I know it's kind of been the goal to wait and see until this is profitable to decide whether to expand or not. Does that provide guidance of 40 to 50 openings this year? Does that include the possibility of any managed clinics or does that at least for -- for this just this next quarter does that look like it's going to be still 100% franchised clinics or I would be able to see some company on once in the coming quarter. Thanks.

No, that we've said all along that we will not be opening any corporate clinics to until we're profitable through 2017 so that number of 40 to 50 is a 100% franchised clinics.

Okay, got it. And then going into that hurricane impact a little bit more I was wondering if you guys were able to quantify that for us at all, how many openings might have been without the hurricanes and if you're not able to quantify that just wondering if any of those that may have been impacted this quarter those to be pushed out to 2018 or you're kind of looking at new areas altogether.

Right, no, it's a great question and I don't want to talk too much about the impact of the hurricane because as I said really I think why we're more than anything else why we're lowering the guidance on new clinics. I think are we a little too aggressive last year with the range of 50 to 60 versus the 40 to 50? And that what I would tell you is all of the clinics that have been impacted by the hurricane and it's not just the hurricane comes in the dam but then they have to it's the construction teams they are now doing all this other stuff it's getting premium in place I mean there's a lot of factors that continue to affect that that part of the country as they try to recover and that certainly has implications on our openings because we've got number of clinics in that Texas and the Florida area and the Carolinas. And so if we're trying to quantify the total number that I would attribute to the hurricane is I'd be able to answer him by the end of the quarter because some of this may push into Q1 they all will open, so that none of them are like oh my gosh something happened they won’t open but I think you are to put a number to it, it'd probably be like three to five.

Okay. And then just final question, so your same-store sales continue to be strong even with that maybe 2% attributable to couple Houston and perhaps Florida clinics that have been closed. But just given the strong continued strength I'm wondering if you guys are seeing any difference in whether that's driven more from increasing number of customers to the clinics or if you guys are succeeding in being able to extract more value out of the same number of customers. Thanks.

I think it's a combination of both, that as we are measuring our new patients, those numbers have been I think since earlier this year been continuing to increase. So we are seeing new patients in the door and we absolutely are seeing our existing patients use this more often. So I think it's a real combination of those two elements that are driving that number and that number is absolutely pure number about those two elements. Last year, we did have a price increase, so when we had that 28% same-store sales a portion of that increase was you could attribute to the price increase. But in this case everything you've seen so far for the last -- for the last three quarters of this year is purely growth on that unit level.

Great. Thanks guys.

Thank you. [Operator Instructions]. I'm showing no further questions on the phones. So I would like to turn the conference back over to Mr. Holt.

Thanks, James. In closing, I want to thank you again for your interest in our company. We're passion about delivering quality assessable, affordable chiropractic care and we renewed our commitment to our franchisees, adopted a proven developer model, and improved our ability to scale we're accelerating growth. Already we've closed 400 clinics we're approaching the Top 10% of franchise brands and have set an aggressive target of 1,700 clinics. We are making chiropractic services accessible to communities that never had them before and impact on our patients is life-changing, it's big, it's important, it’s noble. And I would like to finish by telling a story that illustrates our impact. Lonnie White is a U.S. Army veteran who as a result of his service was suffering from the degenerative disk in his back, bone spurs, and a pinch nerve in his neck, he couldn't bend or stretch and even walking was painful. He started visiting The Joint in Richmond, Virginia and although it has taken a few sessions to get him pain free, he considers his chiropractic care to be a game changer for him. He states regarding visits of The Joint, it was amazing; you have nothing to lose and everything to gain. We're proud to help our members of the military through our military approach appreciation program and offering discounted visits to our members of the Armed Forces and their immediate family members. I look forward to reporting more in the coming quarters. Thank you very much for your time and attention.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.