The Joint Corp - Earnings Call - Q1 2019

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to The Joint Corporation First Quarter twenty nineteen Preliminary Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Kirsten Chapman, LHA Investor Relations. You may begin.

Speaker 1

Thank you, Tiffany. Good afternoon, everyone. This is Kirsten Chapman of LHA Investor Relations. Welcome to The Joint Corp. First Quarter twenty nineteen Preliminary Results Conference Call.

Today, President and CEO, Peter Holt, will review our operating metrics and our growth strategy. CFO, Jake Fingleton, will discuss our first quarter twenty nineteen preliminary financial performance, and Peter will close with our long term vision and open the call for questions. Please note we are using a slide presentation that can be found at ir.thejoint.com/events. Today after the close of market, The Joint issued its preliminary unaudited financial results for the quarter ended March 3139. If you do not already have a copy of the release, it can be found in the Investor Relations section of the company's website.

As provided on Slide two, please be advised today's discussion includes forward looking statements, including statements concerning our strategy, future operations, future financial position and plans and objectives of management. Throughout today's discussion, we will present some important factors relating to our business that could affect those forward looking statements. The forward looking statements are made based on our current predictions, expectations, estimates and assumptions and are 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 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 our 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.

Please note in those states which require a licensed doctor of chiropractic to own the entity that offers chiropractic services, the company enters into a management agreement with a professional corporation known as a PC licensed in the state to provide chiropractic services. To increase transparency into operating results and to align with accounting rules, the company will now consolidate the full operations of the PC. This will result in increases to our revenue and G and A expenses by identical amounts and would have no impact on our bottom line except in instances when the PC has sold treatment packages and wellness plans. Revenue from these packages and plans will now be deferred and will be recognized when the patient uses their visits. The company has previously consolidated its clinic operations in non PC states such as Arizona and New Mexico and the deferred revenue around the package and plans was already reflected in its financial statements.

Therefore these adjustments are isolated to the managed clinics in PC states. These adjustments will have no impact on cash flow. Based on our preliminary analysis the recording of all the accumulated deferred revenue in one adjustment would represent a material change to the current period financial statements. As such the company will revise the historical financial statements so the reader has a preliminary understanding that the comparative periods as reflected in the preliminary financial statements and in the commentary reflected in adjusted figures. Due to the accounting adjustments related to the consolidation of PCs affecting the past five years, the company intends to file the SEC Form 12b-twenty five Notification of Late Filing for the quarter ended March 3139 and expects to file the 10 Q with the SEC on May 15.

Management uses EBITDA and adjusted EBITDA which are non GAAP financial measures. These are presented because they are important measures used by management to assess the financial performance. Management believes they provide a more transparent view of the company's underlying operating performance and operating trends. A reconciliation of net income or loss to EBITDA and adjusted EBITDA is presented in the press release. The company defines adjusted EBITDA as EBITDA before acquisition related expenses, bargain purchase gain, loss on disposition or impairment and stock based compensation expenses.

The company defines EBITDA as net income or loss before net interest, tax expense, depreciation and amortization expenses. Turning to Slide three, it is my pleasure to turn the call over to Peter Holt. Please go ahead, sir.

Speaker 2

Thank you, Kirsten, and thank you all for joining us. I'm delighted to speak with you today and pleased to report our continued forward momentum, including seven consecutive quarters of positive adjusted EBITDA. We've moved beyond stabilizing the business and now are driving accelerated growth and profitability. We remain focused on delivering the key initiatives that drive the company's success, executing our franchise development and regional development strategies accelerating the expansion of our corporate clinic portfolio within clustered locations improving corporate clinic performance increasing new patient counts stabilizing and improving the security of our IT platform increasing cash and strengthening our balance sheet, achieving positive GAAP net income and increasing shareholder value. As a result, we've delivered one of the strongest quarters to date.

I'll review the key metrics for Q1 twenty nineteen compared to the same period last year. We sold 30 franchise licenses compared to 16 in Q1 twenty eighteen. We opened 12 new franchise clinics and two company owned managed company owned or managed greenfields for a total of 14 units compared to seven franchise and no corporate openings in Q1 twenty eighteen. Turning to Slide four. Gross system wide sales grew 32% quarter over quarter.

System wide comp sales or same store retail sales of clinics that have been open for at least thirteen months increased 25%. Our bottom line continues to improve, reflecting sustainable profitability. Once again in this quarter, we've achieved positive GAAP net income of $1,000,000 and adjusted EBITDA was positive for the seventh consecutive quarter at $1,500,000 Further, our unrestricted cash and cash equivalents were $8,100,000 at March 3139, compared to $8,700,000 on December 3138. Our strengthened balance sheet supports our expansion strategy. Before we get into the details, I'd like to welcome our newer investors and provide some background on our company.

The foundation of The Joint is to revolutionize access to chiropractic care. We do this in a convenient retail setting, providing concierge style membership based services with no appointments, no insurance and convenient hours of operation, including evenings and weekends. The Joint's purpose is to alleviate pain and help move our patients toward a healthier lifestyle, the sweet spot of the growing health and wellness industry. The Joint's mission is to improve the quality of life through routine and affordable chiropractic care. Our doctors focus on patient care on the pain relief and ongoing wellness to help our patients live the best version of themselves.

Patients are attracted to The Joint due to our accessibility, credibility and empathy, as verified by the extensive consumer research we conducted in 2018. This architecture will guide us as we enhance our brand building efforts in 2019. Turning to Slide five, let's review the portfolio during the first quarter. Regarding franchises, we opened 12 clinics, bought back one unit and closed one unit for a net increase of 10, bringing the total franchise count as of March 3139 to four zero four. Regarding company owned or managed clinics, we opened our first two greenfields since 2016.

The Carlsbad, California location grand opening was in February and the Azusa, California opening took place in March. In addition, we've acquired a franchise clinic in Los Angeles in March. In Costa Mesa, California, we consolidated two nearby corporate clinics into one. Net, the March 3139, we reached 50 company owned or managed clinics. Notably, after the quarter closed, we opened our third greenfield clinic for the year in Flagstaff, further expanding our Arizona portfolio.

We expect this to be the only additional corporate Greenfield clinic in Q2. Our full year 2019 guidance is open to is to open eight to 12 company owned or managed clinics through the April, we grew our company portfolio by four, consisting of three greenfields and one acquisition. This compares to one acquisition in the same period of 2018. At March 3139, we had a total of four fifty four clinics, 89% were franchise clinics and 11% were company owned and managed clinics. Turning to Slide six, we continue to experience positive impact of our operational efforts.

Traditionally, a well performing small box retail franchise achieves breakeven in six to nine months. Thanks to the new operational tools and protocols that we've developed, we've accomplished this goal. We've reduced the time from opening to breakeven from our historical average of eighteen to twenty four months to nine months in 2017 and approximately six months in 2018. For our Greenfield clinics, we're using the same programs to tame similar success. And our early twenty nineteen trend is as strong or better than the 2018 class.

Importantly, the impact of this success is ongoing as we have evidence that clinics that start strong tend to stay strong. Turning to Slide seven, let's discuss one of our key growth drivers, our Regional Developer or RD program. Today, our RD support three quarters of our franchisees and cover almost half the metropolitan statistical areas in The United States. Their work enables us to leverage and accelerate the joint franchise concept. RDs continue to perform to the expectation and were responsible for 100% of our 30 franchise license sales, and some of these were multiunit sales.

Every April, we tend to experience a higher number of franchise sales prior to our annual update of the Franchise Disclosure Document or the FDD. In April 2019, we sold 30 franchise licenses, bringing the year to date to 60. This compares to 27 franchise license sales for the same period last year. Traditionally, we expect franchise license sales to be a little slower for the rest of the quarter as we go through each state's approval process for the new FDD. We closed the first quarter with 21 IDs identical to the number at the end of twenty eighteen.

From time to time as the territory matures, we have the potential to repurchase the region and repatriate the royalty stream. This quarter, we bought back the rights of South Carolina, which had 23 operating units. We also continue to expand in newer regions. In March, we sold territory rights for Pittsburgh, Pennsylvania, West Virginia and a portion of Virginia to a longtime existing RD who originally purchased the rights to North Carolina and is seeking to expand his business. This territory carries a minimum ten year development schedule of 40 units.

In aggregate, our total ten year minimum development schedule for the 15 new RDs comes to four twenty one clinics. This large foundation of unit commitment bodes well for continued clinic expansion and sales growth in 2019 and beyond. Turning to Slide eight, let's review marketing. We continue to work to enhance our marketing methodology and optimize our tactics, not only in lead generation, but also in awareness building and existing patient engagement. Our marketing foundation is built upon a robust SEO practice, which delivered a record number of organic leads to our clinics in Q1, and which is increasingly important source for new leads for us.

We've also improved our ability to convert these prospects by enhancing our lead nurturing campaigns and training our franchisees on how to leverage our tools. We're also utilizing digital marketing tactics to boost the overall awareness of the brand and the benefits of chiropractic care. For example, in Q1, we aired TV spots to targeted customers in each of our clinic trade areas via the YouTube platform. We believe campaigns like these are helping to attract people who've never tried chiropractic before, which now compromises 26% of our new patient base. We're working to grow collaboration and investment by our local advertising co ops.

One example of this is our Raleigh Durham co op, which recently entered into an exclusive partnership with famed minor league baseball club, the Durham Bulls. This strategy is paying dividends in marketing throughout the country, allowing increased marketing sophistication at the local level. In 2019, we'll add this increased effort on our patient relationship or CRM marketing through tactics like email and SMS. Additionally, we're actively developing new advertising assets for our franchisees, leveraging the insights gained from our 2018 consumer research and our new brand architecture. Turning to Slide nine.

We continue to be excited about the progress in implementing our new more robust IT platform. We've completed the design and development stage and now are in the testing and training. Frankly, we've been very deliberate with our testing and training to ensure we minimize the impact to our business as we go through this transition. Ultimately, we believe that we can use this platform to better understand our patient behavior, laying the foundation for even more sophisticated consumer marketing. Overall, we continue to deliver strong quarterly performance, and we believe that we're well positioned to drive continued momentum.

And with that, I'll turn the call over to Jake Singleton, our CFO, to review the financial results.

Speaker 3

Thank you, Peter. Before I review our preliminary financial results, I'd like to address an accounting adjustment we made regarding a portion of our corporately managed clinics. Certain states require a licensed doctor of chiropractic to own the entity that offers chiropractic services. In those states, we enter into a management agreement with a professional corporation or PC,

Speaker 2

which

Speaker 3

is licensed in that state to provide chiropractic services. The Joint Corp provides management services to the PC and in turn the PC pays a fixed management fee each month. Historically, we recognized these management fees in the period in which they were received, net of certain expenses incurred by the PC to provide patient care. While these expenses lowered our GAAP revenues, they also reduced our general and administrative expenses. To increase transparency into our operating results and to align with ASC eight ten, which addresses the consolidation of variable interest entities, we will now consolidate the full operations of the PCs.

This will result in increases to our revenue and G and A expenses by an identical amount and will have no impact on our bottom line except in instances where the PC has sold treatment packages and wellness plans. We will now defer package and plan revenue for clinics in PC states and will recognize revenue when patients use their visits. The company has previously consolidated its clinic operations in non PC states such as Arizona and New Mexico and deferred revenue around packages and plans in those states and they are already reflected in our financial statements. Therefore, these adjustments are isolated to the managed clinics in PC states. These adjustments will have no impact to cash flows.

Based on our preliminary analysis, the recording of all accumulated deferred revenue in one adjustment would result in a material change to the current period financial statements. As such, we'll revise the historical financial statements so that you understand the comparatives as reflected in the preliminary financial statements. The following commentary reflects these adjusted figures. As Peter mentioned, we continue to deliver strong growth across all our metrics. For this section, I will compare first quarter twenty nineteen to the first quarter of twenty eighteen.

Gross sales for all clinics open for any amount of time grew 32% to $48,900,000 System wide comp sales for all clinics opened thirteen months or more increased 25%. And significantly system wide comp sales for mature clinics opened forty eight months or more increased 18%. Turning to Slide 11, revenue for Q1 twenty nineteen grew to $10,700,000 up $2,000,000 or 24%. Corporate clinics contributed revenue of $5,600,000 increasing 17% from a year ago, reflecting improved marketing and increased adoption of chiropractic care. Franchise operations contributed $5,000,000 of revenue, up 31% compared to last year.

This growth reflects the same benefits as our corporate clinics driving greater sales from existing clinics, plus the sales from 45 additional clinics. Cost of revenues was $1,200,000 increasing 24% over the same period last year. As cost of revenue is largely driven by regional developer royalties and commissions, The expense increase reflects the success of this program. At the end of the quarter, we had 21 RDs responsible for 100% of the franchise license sales. Gross profit increased 23% to $9,500,000 Selling and marketing expenses were $1,500,000 or 14% of revenue in Q1 twenty nineteen compared to 1,100,000 or 13% of revenue in Q1 twenty eighteen, reflecting the increased local marketing spend on corporate clinics, including the extra spend associated with the grand opening of corporate greenfield clinics.

General and administrative expenses were $6,600,000 or 61% of revenue compared to $6,300,000 or 73% of revenue in Q1 twenty eighteen, reflecting the leverage in our operating model. We posted positive GAAP net income for the second consecutive quarter. Net income was $1,000,000 or $07 per diluted share compared to a net loss of $32,000 or $00 per share for Q1 twenty eighteen. The improvement reflects the strengthening operations by our existing corporate clinic portfolio and franchises that are increasingly using our tools and protocols as well as the fact that our newer cohorts have stronger performance, which is increasing their impact on an ongoing basis. Total adjusted EBITDA in Q1 twenty nineteen was positive for the seventh consecutive quarter at $1,500,000 improving $1,000,000 compared to adjusted EBITDA of $511,000 in Q1 twenty eighteen.

Franchise adjusted EBITDA income increased 32% to $2,400,000 Corporate clinic adjusted EBITDA income increased to 50% to $1,200,000 And corporate expense adjusted EBITDA loss was maintained at $2,100,000 Regarding the balance sheet, as of March 3139, cash and cash equivalents were $8,100,000 compared to $8,700,000 at December 3138. The decrease reflects year end bonus payments and investment in Greenfield clinics, offset by increased cash from greater gross sales and increased franchise sales. Turning to Slide 12, as we entered the New Year, we've updated our unit economics charts. Today, we've included diversion from the franchisee perspective, which reflects the success of our newer cohorts as they're faster time to breakeven. The key message is that our newer cohorts are significantly outpacing older clinics, reflecting operational and marketing excellence we put in place over the last three years.

On to Slide 13 to review guidance. Based on our preliminary financial results, we are reiterating the full year 2019 guidance, expecting the same percentage increases over the adjusted 2018 results. Please note that with the new accounting policies in place, we expect revenues to grow at a smoother trajectory due to the deferment of revenues generated from sales and packages. This will have the largest impact during the fourth quarter when we perform our year end promotions. Regarding expenses, the National Franchise Conference will increase expenses in the quarter in which it occurs, which this year is the second quarter.

For the full year 2019, based on preliminary financial results, we continue to expect our revenue to increase between 2632% compared to thirty six point seven million dollars in 2018. Adjusted EBITDA to grow between 67100% compared to $2,900,000 in 2018 franchise clinic openings to range from 70 to 80 and company owned or managed clinic expansion through a combination of both greenfields and buybacks to range from eight to 12. And with that, I'll turn the call back over to Peter.

Speaker 2

Thanks, Jake. Turning to Slide 14. According to a recent study carried out by the Yale School of Medicine at Yale University, patients who have experienced who visited a chiropractor for musculoskeletal pain and associated conditions are forty nine percent less likely to be issued and to receive an opioid prescription when compared to their counterparts who sought help from other health care providers. This bodes well for our nation and for our marketing opportunity as we work to address this increasing need for drug free solutions to help solve the opioid obesity and pain epidemics. Turning to Slide 15.

Overall, our hybrid model for franchised and company owned or managed clinics enables us to expand in a capital light fashion. Our enhanced marketing is generating sales growth rates that lead the range for small box retail and franchise concepts. And our greater operating efficiencies increasing operating leverage. These improvements are being amplified by the growing market opportunity. As we build our national brand and scale our clinics, we expect the momentum to continue to increase and to deliver value to shareholders.

Before I open it to Q and A, I'd like to share some events in May and June. On May 23, we'll be presenting at the B. Riley twentieth Annual FBR Institutional Investor Conference in Beverly Hills. On May 29, we'll be at the Craig Hallum Sixteenth Annual Institutional Investor Conference in Minneapolis. And on May 31, we'll hold our own annual meeting of shareholders here in Scottsdale.

And finally, on June 3, we're excited to host our first Investor and Analyst Day also here in Scottsdale. For more details, please contact our LHA Investor Relations. Finally, I'd like to thank our franchise community, our RDs, our employees for their remarkable contributions to the health and growth of this company. This progress would not be possible without their commitment and hard work. Tiffany, I'm ready to begin the Q and A.

Speaker 0

Thank And our first question comes from Brooks O'Neil with Lake Street Capital. Please proceed.

Speaker 4

Thank you and good afternoon guys. Congratulations on the continued progress.

Speaker 2

Thanks Brooks. Hey Brooks, thank you very much.

Speaker 4

So I'd like to just confirm, I know you probably said this once, Jake, and I think Kristen said it once as well. But these accounting adjustments really do not reflect any material fundamental change in the business or the business dynamics, right?

Speaker 3

I think you got it, Brooks. The core momentum of this business is exactly the same. This is an accounting entry to consolidate these, but the largest impact is really neutral to the bottom line. So I think you have it right.

Speaker 2

Well, quite frankly, we talked about it. Brooks, it actually gives greater transparency on our corporate clinic performance because now that we're consolidating the PCs into the overall portfolio, whereas before we would see a suppression in revenue and a suppression in expenses, now that all flows through until you'll see that much more clearly.

Speaker 4

Cool. I think that's good. Let me just ask you a somewhat different question is, I have heard sort of anecdotally that there may have been some gradual, let's call it strengthening, although I'm not meaning to cast any dispersions on your historic franchisee community. But it sounds to me like perhaps you've had success attracting some perhaps larger, deeper pocketed, more experienced franchisees who are interested and capable of opening a greater number of units and controlling them over time. Can you just give us any color on, A, whether that's accurate?

B, whether what's going on?

Speaker 2

Brooks, I think that's a fair reflection of the quality of franchisees that are being drawn into this network. Absolutely, that we are still having more of our existing franchisees who are buying new clinics. So I think of the 60 clinics that we had, I want to say 40% of them were from existing franchisees, but we are also attracting those newer franchisees. And for example, there's been two of the sales that comes to mind is that they are existing Planet Fitness franchisees that already have a very sophisticated number of units in their territory. They're sold out.

They're looking for additional ways to invest and leverage the overhead they have in place to support the franchisees they have in that territory. And that we have two of them have just signed to a couple of multi unit agreements in Florida. And I think if you were to talk to our VP of Sales, he absolutely reaffirm that he's seen a higher quality of franchisee with more experience coming in as we see these franchise sales accelerating.

Speaker 4

That's great. I think that's a huge deal and I continue to be really excited about the development you're doing. So congratulations. Keep up the good work.

Speaker 2

Thank you very much.

Speaker 0

Thank you. Our next question comes from Mike Malouf with Craig Hallum. Please proceed.

Speaker 5

Great. Thanks for taking my questions.

Speaker 2

Hey Mike, how are you doing?

Speaker 5

I'm doing well. Can you talk a little bit about as far as the percent of package and packages that run through the P and L? Just give us a sense of that.

Speaker 3

Absolutely. So historically 79% of our revenues are generated from the wellness plans. So that continues to be the overarching majority of our gross sales. The packages come in depending on the period somewhere between 1012% of gross sales and the rest is made up of those walk in visits.

Speaker 5

Okay, great. And then a question overall, you've had a lot of exposure here of turning around the system and my congrats to well done for you and your entire team. When you take a look at competition though now, are you seeing any resurgence there? Either it's from maybe perhaps some smaller chains that are trying to emulate you or perhaps some reinvigorated mom and pops out there? I'd love some color

Speaker 4

Yes, on that. Sure Mike. That's such

Speaker 2

a great question. And as you look at the only real national franchised chiropractic chain out there, it's called HealthSource, is that quite frankly, they have been shrinking in size in their overall portfolio compared to our growing in size. And part of that is that they are still a traditional insurance based model. It's more of a shared services. So they've been attracting existing chiropractic clinics that convert into their system.

And clearly, for whatever reason, that those clinics aren't staying with them as they've gone forward. You're right to note that we are being or how do I say this, there's a lot of franchise owners out there that are trying to replicate our experience. And so I was looking at one recently in Texas, where if you go to their website and look at the clinic and the memberships and packages they're offering, the only difference there is you don't see our name on it. I was at IFA National Conference in February, and I was moderating the panel and this young man came up to me and he said, Hey, I've got this chiropractic chain of six clinics in Connecticut and what can you do to help me? And so I told him he should learn more about franchising.

But yes, we will continue to spawn our competitors. I haven't seen anybody out there that has any significant momentum. And you can we do, do careful scans on a regular basis. So just keeping our pulse on marketplace. At this point, we have such a strong first mover advantage that it's going to be hard for anybody to catch up to us in this specific model that we're working, but we always have to be thoughtful.

Speaker 5

Great. Appreciate it. Thanks.

Speaker 4

Thanks, Mike.

Speaker 0

Thank you. And with that, this concludes our Q and A session for today. I'd like to turn the call back over to CEO, Peter Holt, for closing remarks.

Speaker 2

Thank you, Tiffany, and thank you all for your interest. As you know, we've been sharing patient testimonials on these calls. And today, I want to tell you a very personal experience I recently had in one of our clinics. Three years ago, we implemented an annual clinic visitation day program, where we closed down our corporate headquarter and send the entire staff to the field to work for a full day in the clinics. The experience gives our corporate team a greater insight into the day to day operations of our clinics and a deeper understanding of the impact that we're having on the patients that we serve.

During my visit to a clinic in the Phoenix area, I was sitting at the wellness coordinator desk when a woman in severe pain walked in. She explained that she'd thrown her back out four days ago while she was sitting on the couch and nothing was making it better. Her pain level had reached 11 on a scale of one to 10. Out of desperation, she came to The Joint, having never been to a chiropractor before. And she had very little understanding of how chiropractic care works and quite frankly was very scared.

But she couldn't bear the pain for any longer. After examination, consultation and adjustment, the treatment she received lowered her pain to a two on that scale. Greatly relieved of her pain, she hugged the doctor and claimed this was she was a miracle worker. It was incredible to witness her transformation in person. It's experiences like these that validate the life changing care that The Joint is providing to patients across the country.

Thank you, and stay well adjusted.

Speaker 0

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.