Good afternoon, everyone. Welcome to The Joint Corp. Second Quarter of 2019 Results Conference Call. Today, President and CEO, Peter Holt, will review our operating metrics and our growth strategy; CFO, Jake Singleton, will discuss our financial performance; and Peter will close with our long-term vision and open the call for questions.

Please note, we’re using a slide presentation that can be found on the Investor Relations section of The Joint’s website. Today, after the close of the market, The Joint Corp. issued its financial results for the quarter ended June 30, 2019.

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. As provided on Slide 2.

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’ll present some important factors relating to our business that could affect these forward-looking statements.

The forward-looking statements are made based on our current predictions, expectations, estimates and assumptions and 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 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 obliged to revise our results or publicly release any updates to these forward-looking statements in light of new information or future events. The company intends to file the SEC Form 10-Q for the quarter ended June 30, 2019, on August 9. 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 financial performance. Management believes they provide a more transparent view of the company’s underlying operating performance and operating trends. 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 or impairment and stock-based compensation expenses. The company defines EBITDA as net income loss before net interest, tax expense, depreciation and amortization expenses. It’s my pleasure to turn the call over to Peter Holt.

Go ahead, Peter..

$59; $69; and $79 a month, depending upon the market. The last system-wide price increase was in 2016 when we raised all tiers by $10. During the last half of 2018, we tested in a limited number of clinics in Arizona and California by moving the wellness pricing plan to the next tier. In the first half of 2019, we added 2 more markets in Texas.

Based on the positive results of these tests, we anticipate expanding the tiered-pricing adjustments to additional markets in Q4. Turning to Slide 8. Let’s review our progress in implementing our new IT platform. This CRM, that we call Axis, is critical to our system.

It will combine our capabilities for point of sale, financial systems, business intelligence, marketing automation and patient feedback. It needs to be fully tested before we introduce it to the field with everyone trained on the new system. To that end, we’ll be running deep and broad internal test to ensure its functionality.

We’ve also begun the development of a thorough training program. We’ll continue to be very deliberate with our testing and our training to ensure we minimize the impact to our business with its implementation.

Ultimately, we believe that we can use this platform to better understand patient behavior, laying the foundation for even more sophisticated consumer marketing. In conclusion, we continue to deliver strong quarterly performance and believe that we’re well positioned to accelerate our growth momentum.

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

our revenue to increase between 26% and 32% compared to $36.7 million in 2018; adjusted EBITDA to grow between 67% and 100% compared to $2.9 million in 2018; for franchise clinic openings to range from 70 to 80 compared to 47 in 2018 and company-owned or managed clinic expansion, through a combination of both greenfields and buybacks, to range from 8 to 12 compared to 1 in 2018.

And with that, I’ll turn the call back over to Peter..

our enormous market opportunity to scale our clinics; our enhanced marketing, building our national brand; our improved protocols, generating increased operating leverage; our RD model, accelerating franchise license sales and growth; and our hybrid franchise corporate clinic model, enabling our capital-light expansion.

As a result, we’re posting exceptional sales comp growth that leads the range of small-box retail and franchise concepts. Combined, we expect the momentum to continue to increase and to deliver value to our shareholders. Before I open up to Q&A, I wanted to share the events that we will be attending in September and October.

On September 12, we’ll be in Lake Street’s Best Ideas Conference in New York; and on October 3, we’ll be at the B. Riley Consumer & Media Conference in New York. And finally, I’d like to thank our franchise community, our RDs and our employees for their remarkable contributions to the health and growth of our company.

This progress would not be possible without their commitment and their hard work. Sarah, I’m ready to begin the Q&A..

[Operator Instructions] Our first question comes from the line of David Bain with Roth Capital..

Not really into the obligatory, Great quarter, but great KPIs and everything once again. My questions – I guess, the first would be in Investor Day, you mentioned you were close to securing an RD for the Northeast that could potentially be a 350-plus store opportunity. I was wondering if you have any update on that..

We are continuing to look for qualified RDs in various markets. And so that – we have no updates since the investor call. But we still see there’s a number of RD opportunities as we look into the rest of 2019..

Okay. And I guess I have a couple questions on the guide. So on guidance, you’re up to 10 corporate clinics versus the guidance of 8 to 12. We still have a lot of year left pretty much anyway. Is it possible that, one, you could exceed that? And then also, you mentioned the pricing adjustment and that augmenting across the board for 4Q.

Should that have an impact in that quarter? Or should we be looking out more for 2020?.

I’ll answer the question concerning kind of where we are with our corporate portfolio guidance, and then Jake can answer the question about impact of the pricing adjustment we have on our – we would’ve expected to have. And you’re right. We’re seeing – are guiding between 8 to 12, and we’re sitting at 10.

That – and there’s 2 elements to that, what drives that number. And that first element, of course, is greenfield. And we have a pretty long trail of when those greenfields are going to open.

We have a number of leases and LOIs out there that are in process and that we are expecting that we would open up at least another 1 or 2 more – let’s say 1 or 2 greenfields by the end of the year. But they have their own timing and they could flip into Q1 just as easily as fall into Q4.

On the acquisition side, as you know, it’s a far more opportunistic situation and that there’s certainly a timing to them, so where they fall. But it’s not something that we have so much control over. And so to answer your question, could we exceed guidance based on where we are in 2019? It’s possible.

We believe that right now that we are reiterating guidance between that 8 and 12..

And Dave, this is Jake. On the market adjustment piece, I think the key point there is that as we expand that in the fourth quarter, we do grandfather the existing wellness plan holders into their rate. So as – we will expect some lift from that, but it will be a little bit more gradual because it’s really going to take effect as new members sign up..

Great. And just – I’m sorry, just one big-picture question on the store-within-a-store because you’ve guided that before.

Is the concept longer term to possibly have a big corporate deal exclusivity, that type of thing, with a much larger chain? Or will this remain sort of a niche-oriented opportunity within different regions or brands?.

The way I’d answer that is as you’re building out any kind of retail system, you have your traditional footprint. And it’s not unusual, as you’re building that brand and taking advantage of opportunities, you would go for the more nontraditional opportunities. And they’re going to vary.

Obviously, that – we’ve done the – our first clinic inside of a store, the Relax The Back store. That’s a chain of 100 units across the country. So far, the results of that have been positive that we would expect to see that to continue expand. There’s other options, whether it’s military bases or with maybe other larger chains there.

We’re putting a concept inside of their existing platform. You would look at those opportunities and respond to them as they come up. But the core of building a retail brand is absolutely those small-box retailers that you put across the country, so that 1,700 units that we’re really focused on getting opened in the shorter period of time..

Our next question comes from the line of Jeff Van Sinderen with B. Riley..

Let me add my congratulations on terrific Q2 metrics, especially the comps. Can you speak more about the franchises you recently acquired? Maybe – any performance metrics you can share? I know you said that they’re among the top performers.

But do you think there are still improvements you can make operating those units? Or do you feel like they’re running optimally at this point?.

No. I think there’s still room for improvement. One of the things that we preach is the new protocols and practices that we’re rolling out across our system. We practice what we preach, so yes, we think by instituting those policies that we can continue to see lift even in mature clinics.

And you can see that in our comps for our 48-months-or-more clinics, they’re still comping at 18%. So yes, we believe there’s still room to grow there, and we think we can have some operational influence..

Okay. Good. And then on the franchises you sold, just wondering if there’s any more detail you can give in terms of geography.

Was there any concentration in certain areas, maybe how strong the performance is in those markets relative to other markets? And how many of those were in RD markets?.

Sure. Of the 75 sales that we’ve had year-to-date, that – they’re pretty much spread where most of our – really following the clusters of where we already have. And Jeff, that’s not unusual in franchising because as you build the brand in a market, there’s more and more awareness of it.

And not only does it attract more and more patients to go in that door for the first time, but it also attracts franchisees. So it’s not surprising to see that continued buildup. And with – the greatest number of leads we’re generating typically are generated from where we have the greatest concentration of clinics.

And so out of those 75 clinics, 95% of them are inside one of the RD territories..

Okay.

And then I’m just wondering, and I’m sure you guys do a lot of research and a lot of crunching numbers and data, but any change that you guys have noticed over the last, I don’t know, call it, 6 to 12 months in terms of customer behavior trends that are worth mentioning? Also wondering what sort of response you’re seeing as you evolve marketing?.

Sure. I would say it’s really clear. The 2 biggest trends that we’ve been following and tracking by the day is that we are seeing more and more new patients open that door for the first time. It’s almost every month, we’re breaking records of having more patients per clinic open up that door.

And so that were – without question, seeing more – as this concept expands and as we have more exposure, you’re seeing more and more people open that door. So our new patient counts are – and we talked a lot about that in Analyst Day.

We’re just showing you this over time how much they have increased, and that’s been a primary focus over the last several years. The other side of that is we’ve improved the operational protocols of how we run the clinics and how our doctors work with our patients.

What we’re seeing is that our patients are, in fact, using us more often, and they’re staying with us longer. I remember a couple of years ago, when we talked about how long was the average patient with you, the numbers we were giving was 4 months. Today, they’re with us for 6 months in terms of their membership.

We do, obviously, account daily on how many adjustments we’re doing per clinic and per area. And again, not only are we seeing new patients open that door for the first time, but we’re seeing existing patients use us most often.

And to me, that’s a reflection, of course, our comps, and that’s a reflection of everything that we’re doing here is being amplified by a market that’s expanding. I mean chiropractic is going – becoming more and more aware. To me, I think, that’s the biggest opportunity that we have in front of us.

As we’ve talked about before, 50% of American people don’t even know what the word chiropractic means. I think that once people understand the efficacy and the value of chiropractic, it’s only going to become more and more mainstream. And that’s clearly the strategy as we go forward..

Our next question comes from the line of Michael Kawamoto with D.A. Davidson..

Just first off, at your Analyst Day, you talked about getting to 1,000 doors as quickly as possible in the next 4 to 7 years, which would entail accelerating growth again for the next couple of years by my math. It seems like the system can handle more openings, at least operationally.

Could we see 80, 90, 100 doors opening per year in the near future? Is there a capacity you see? And do your franchisees have the appetite to do that?.

No. I think, Mike, we do expect to see it continue to accelerate. We’ve got the infrastructure right now, obviously, to do between 70 and 80. To accelerate on that will take a lot more infrastructure from us to get the additional franchise doors open. And you can also look at our franchise sales as those continue to accelerate.

You’ve got a very robust pipeline right now, so we do expect those to continue to accelerate in the near term..

Got it.

And then can you just talk about what the labor market looks like for chiropractors right now? Are you and your franchisees able to find good [indiscernible] just given how quickly you’re expanding?.

there’s over 70,000 licensed doctors who are registered in some 1 of the 50 states to practice; there’s over 40,000 independent practitioners now in operation; that there’s 16 accredited schools that graduate roughly 2,400 doctors a year.

Now if you look at our whole umbrella, with our 468 clinics, we have probably a little over 1,200 doctors under our umbrella. And so you can see with those numbers, now they – you have to make sure that they’re not just a doctor. They’re a qualified doctor, and they actually live or want to live where you want to open up that clinic.

So do we see these challenges in certain markets where we have a lot of clinics opening? Of course, and we’re always trying to manage that.

We just finished actually a survey of existing doctors and former doctors to truly understand what is attractive to a doctor to work for us and then what are the things that are important to them to have them stay with us.

So that we’re really trying to refine the quality of the doctor who is attracted into our business, and then make sure that we and our franchisees are creating an environment where they want to stay with us..

Got it. That’s really helpful. And then on the comp, they remain one of the strongest of any concept that I’ve seen.

Curious if there’s any difference between the corporate owned or franchise? And are there any regions that are really strong compared to the rest of the country?.

Yes. Mike, that’s one of the things that I think is unique about our concept is when you compare our clinics against the franchise base, when you look at them in terms of month in operations, so the same age class type of clinic, we don’t really see a material variance between franchisee and corporate-run clinics.

So I think that is unique to us, something that we’re proud of on the corporate clinic side..

Our next question comes from the line of Brooks O’Neil with Lake Street Capital..

And we’re looking forward to having you at our conference in New York in September..

Absolutely..

So I personally am excited about the continued ramp of the corporate store base, so I was hoping you might discuss if there’s been any sort of unexpected results or impacts of your expansion this year. And then maybe just talk a little bit about the return dynamics difference between buying existing franchise units and opening stores greenfield..

Sure. Yes, I don’t think we’ve had any surprises, Brooks. Maybe the volume of clinics that we have acquired, but I think we do a pretty deep due diligence. So I don’t think we’ve had surprises in terms of the acquisitions. The second part of your question was on the difference between the acquired unit and a greenfield unit.

I did – the key differentiation is when we build a greenfield unit from the ground up, you’re going to take those early working capital losses as that clinic marches to breakeven. We’re not targeting loss-making clinics when we do an acquisition, so we expect those to be immediately accretive to earnings when we acquire them.

Obviously, the stronger the unit, the more accretive it will be. So there is a big difference, especially in the near term. When you look at the second quarter, we had multiple greenfields kind of marching through the quarter, and the acquired clinics are going to come in, in the second half of the year.

So I think you can see that phenomenon in the Q2 results, and we’ll see a nice lift in the second half of the year..

That’s great. That’s very helpful. Let me ask you a different question. I recognize the power and importance of the franchise group you have today. But I had some sense that perhaps you were having opportunities to attract some perhaps larger, more financially strong franchisees.

Can you say anything about sort of the trends, what you’re seeing, what the opportunities might be in the future?.

No. It’s a great question, Brooks. And that – you are absolutely right that we absolutely are seeing. First of all, we’re seeing more qualified candidates come to us and interested in acquiring a franchise, and we’re also seeing a more sophisticated, better-financed franchise prospect also come forward.

I think we mentioned in the last call that we did – for example, we have a couple of Planet Fitness franchisees, the multiunit operators, they are pretty built out in their own market. They want to continue to expand. They have overhead in place. They love that health and wellness category.

And so in a way, we’re a natural extension as they are – want to stay in the market that they’re serving, but they want to expand their overhead or leverage their overhead by adding additional brands to it.

And so we really have seen a number of health and wellness concepts or multiunit franchisees talk to us and – to actually buy multiple units with us. So we also are continually looking at refining and improving our whole lead generation strategy. You met Eric Simon.

He’s doing an outstanding job of working with our regional developers and really refining our whole lead generation strategy to make it more effective..

That’s great. Let me just ask one last one. I’m excited to hear about the Go Elite start-up strategy. I’m guessing, but I’m looking for confirmation, that perhaps the fast startup might result in a quicker to breakeven time.

Can you give us any detail on how that’s working with those Elite units?.

Absolutely, Brooks. And they’re starting really strong. As Peter mentioned in his remarks, the 2019 cohort is 200% above our historical ramp. So yes, with that comes a quicker time to breakeven. I think the challenge for us is to make sure they keep going and continue to grow their units..

And what that implies, if you’re hitting $30,000 sales in that first 2 months of operation, and we talk about on average, for a clinic, that breakeven, depending on most – the biggest variable will be their lease cost, but their breakeven is somewhere between $20,000 and $25,000.

And so if you have a clinic that’s breaking even at or doing $30,000 in sales by month two, that suggests that they’re breaking even in that time period. So it’s a really exciting space to be in..

That’s fantastic. Congratulations. You guys have a machine, and I love to watch it run..

Thank you very much for the support..

[Operator Instructions] Our next question comes from the line of Mike Malouf with Craig-Hallum..

Just a couple of more deeper ones. It’s interesting, I think, when we were talking at the Analyst Day about your focus and effort to raise the profile of the company and brand within the industry. And I’m just wondering if you could comment a little bit about how your partnership with schools is having an effect on that..

Well, it’s very much having an effect. And quite frankly, in the early years of The Joint – is that we didn’t really have that good reputation with the schools and chiropractic associations. I think part of that was driven by just a lack of understanding of our business model and how it operated.

What we’ve been doing is really trying to help educate the schools, help educate the associations about how we are helpful for the overall chiropractic community that we can provide jobs for these young doctors who were coming out of school, that there’s lot of challenges to the traditional chiropractic market as insurance takes over more and more of the delivery of health care, including chiropractic.

And so what you’re seeing when we made that first contribution to Sherman College, I think that opened up the eyes of a number of other schools that we could, in fact, be a partner for some of these schools. Palmer is the oldest, probably the most prestigious school out there, and that – we started with that relationship slowly.

We would – that we’re invited to attend their Career Days. We had spent some time together in December that they invited the senior management team out there to learn more about their operations and for them to learn more about us. That resulted in the donation that we made, as you saw probably in the press release last month.

And this is – we expect to continue to really drive and improve the relationships with these schools and associations. Right now, we are the largest online producer of content on chiropractic in the world.

And then as I said earlier in my remarks, one of the challenges chiropractic faces is just not enough people understand its value and efficacy and that we are – important for us, that can help the entire community of chiropractic benefit from people understanding how it can be beneficial to their lives..

That’s great.

And then with so many people coming in to your stores, certainly seeking health and wellness, and certainly, most of them on the cutting-edge of health and wellness, I’m wondering, have you come to any conclusions or thoughts with regards to selling other products besides just the actual chiropractic care that is offered in those stores, for instance, maybe anything from CBD oil to anything else that you could think of?.

Somebody was asking me to sell CBD oil and change our name to [Double Jointed]. So Michael, it’s a great question. And in the building of any retail system that I’ve been a part of, it’s a natural evolution that as you evolve, you look at line extensions and different services as the market itself changes.

So who we are and what we do today, of course, is going to change over time. But what I would tell you is as long as that we’re having these comps and as long as we have this just remarkable simplicity of model, is you want to be incredibly thoughtful when and what you would add to this platform.

And so it is certainly an opportunity out there and one that we look, that we scan – in fact, every day, I get approached by different opportunities, whether it’s orthotics or CBD oils or [indiscernible] or supplements because these are all traditional services and products that are associated with chiropractic.

And that – we will look at those very thoughtfully. But at this moment, with the comps that we’re experiencing and the simplicity of our model, we’re going to be very thoughtful before we would add to the complexity..

Our next question comes from the line of Anthony Vendetti with Maxim Group..

Most of my questions been answered. But I guess, Jake, you had mentioned when someone asked the question about the monthly is moving up in terms of the tiers that the current customers are grandfathered in.

So what I’m curious is when you say they’re grandfathered, are they grandfathered in for as long as they keep up their monthly? If they stop and then re-sign up, do the new rates kick back? Do the new rates kick in for them? Or are they grandfathered – for how long are they grandfathered for?.

Yes. They’re grandfathered for as long as they maintain their existing wellness plan. If they should drop that plan for any reason, when they come back to sign up, they will move to the higher-pricing tier. So what we usually see is a nice conversion opportunity when we roll these out, so people wanting to take advantage of that grandfathered rate.

Then we see that normalize over time. And then as we have attrition in our clinics and new patients signing up, we’ll see them come on to that higher rate..

So if you had to – and I know you have great metrics.

So if you had to look at your current customer base, how many of them are on the new rate versus ones that are grandfathered currently?.

Sure. So the – if you look at the existing customer base, the attrition rate for the grandfathered falls significantly, down to 3% or 4%. What we’ve seen with our test subject is that after about 7 months of time, you’ve got a pretty significant portion of your clinic that are – that’s on that higher rate.

So that’s just kind of some general benchmarks for you..

Okay. That’s helpful. Okay. So right now, you say you’ve opened 75 franchise licensees year-to-date.

Is that right?.

We’ve sold 75 new licenses to date..

And we’ve opened 29..

So you’ve sold 75.

Out of those 75 you sold, you’ve opened 29?.

No. It’s 32..

32? Okay..

I’m sorry..

And you have..

Yes. So we’ve sold 75. Those will go on to open, and then we’ve had 29 openings so far in the first half of the year..

In the first half, okay.

And the remainder should open up throughout the rest of this year, and some may spill into 2020, correct?.

Yes. So that’s the key. When you have a multiunit sales, we’re going to give them a little bit longer time to open that portfolio. The largest multiunit deal we did in the quarter, we actually sold a total of 10 licenses. So 1 franchisee. So we would say that the median time from franchise agreement signing to opening right now for us is about 9 months.

But for somebody that signed a multiunit deal, we’re going to give them a longer path. So we’ll give them that standard time to open the first one and then a series of time to kind of layer on their additional units. So I don’t think you can draw one for one.

We have a pretty defined waterfall that helps us with our guidance, but it’s tough when you have the multiunit deals because they do stretch out over time..

Okay. And then just circle back on the Go Elite program.

So can you just go through the tier and what the 3 tiers constitute in terms of – it’s based on the number of monthly visits, correct?.

So our Go Elite program has 2 benchmarks. The first is within their first 2 months of operation, we need them to do $30,000 cumulative of sales. And the second is they have to have 400 new patients..

Which is separate from the 3 tiers of our membership plan..

Yes. Yes. So maybe also talk about that.

So the membership plan has 3 tiers, and that’s based on number of monthly visits for the customer?.

No. No. Let me explain. What happens is that we – I think we said in the call, 80% of the sales of the clinic is membership-based. So if somebody signed up to be a member, and once I sign up for – to be a member, I pay a monthly fee, and I get 4 adjustments for that monthly fee.

And that monthly fee ranges, depending on the markets you’re in, between $59 a month, $69 a month and $79 a month. And that price range is – that price structure is really based on costs associated with that market, why one is $59 or one is $79.

But you get the exact same services in that membership, regardless of what that pricing structure is, depending on what markets you live in..

Okay. Got it.

And 80% of your customers are on one of those monthly plans?.

80% of the sales over the average clinic is generated from that membership..

From that monthly membership plan. Okay..

Correct..

And it just varies, [the place] on the market, from $59 to $79. Got it. Okay..

Exactly. But if you’re in the Phoenix market, everybody’s on the same membership base and have $69 a month. If you’re in [indiscernible] market, may be at a $79, it may be at a $59..

Got it.

And the increase that you implemented, that’s – those are the new rates? And did you say you started testing another increase?.

Well, what we said is that in terms of just across the board price increase, the last time that we did that was in 2016. And in 2016, we had the same tiered pricing. We had, at that point, $49, $59 and $69.

And what we did after testing is we went across the entire system and said, "Okay, you – your membership rate is going to go up $10." So if you were on the $49 plan, they went up to $59 and et cetera.

And that – and what we said in the call is that starting in actually last quarter – excuse me, in the winter of 2018, in very limited clinics, it’s not a price increase, but in certain markets where we looked at the overall market cost and we looked at what our rate was per month, is that we tested raising, just in that individual market, the price from $10 to – from $49 to $59, for example.

And that based on that test, we’ve expanded it to 2 new markets in Texas. And from the results, we’re seeing that it is not impacting our new patients coming in. It’s not impacting our conversion. It’s not impacting our attrition rate.

And so what we are believing is that there’s other markets that could be – we could be increased at about $10 based upon the market conditions that they’re already operating in. So it’s not a system-wide price increase across the network. It really is just looking at a refinement of what is the right pricing structure for that specific market..

Thank you. This concludes today’s question-and-answer session. I would now like to turn the call back to Peter Holt for closing remarks..

Well, thank you all for your interest. As you may know, we’ve been sharing patient testimonials on these calls. And today, I’d like to tell you the – a story about a young athlete that we recently met. Angela played Division I women’s soccer for Arizona State University.

And as an elite athlete, she’s done a lot of running and lifting, which has caused stress on her body. Further, she has a fused vertebrae that’s caused discomfort her whole life. According to Angela, she sought out chiropractic care as a part of her health care regime for the relief from her injuries.

Now she credits her flexibility and reduced tension in her body to her chiropractic wellness routine. Angela credits The Joint for providing the easy access to the care she wants, and she relies on our doctors with their continued chiropractic care and wellness education, which she finds so important to everyday health. Thank you. Stay well adjusted..

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