The Joint Corp. (JYNT) Earnings Call Transcript

Good day, and welcome to The Joint Corp. First Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to David Barnard of LHA Investor Relations. Please go ahead.

Thank you, Dave. Good afternoon, everyone. This is David Barnard of LHA Investor Relations. On the call today, President and CEO, Peter Holt, will review our first quarter 2023 performance metrics and provide an update on the business; CFO, Jake Singleton, will detail our financial results and guidance. Then Peter will close with a summary and open the call for questions. Please note we're using a slide presentation that can be found at https://ir.thejoint.com/events. Today, after the close of the market, The Joint Corporation issued its financial results for the quarter ended March 31, 2023. If you did 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 will 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. Factors that could contribute to these differences include, but are not limited to, our inability to identify and recruit enough qualified chiropractors and other personnel to staff our clinics, due in part to the nationwide labor shortage and an increase in operating expenses due to measures we may need to take to address such shortage; inflation exacerbated by COVID-19 and the current war in Ukraine, which has increased our costs and which otherwise could negatively impact our business; the potential for further disruption to our operations and the unpredictable impact on our business of the COVID-19 outbreak and outbreaks of other contagious diseases; our failure to develop or acquire company-owned or managed clinics as rapidly as we intend; our failure to profitably operate company-owned or managed clinics; short-selling strategies and negative opinions posted on the Internet, which could drive down the market price of our common stock and resulting class action lawsuits; our failure to remediate future material weaknesses in our internal control over financial reporting, which could negatively impact our ability to accurately report our financial results, prevent fraud or maintain investor confidence and other factors described in our filings with the SEC, including the section entitled Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 10, 2023, and subsequently filed current and quarterly reports. 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 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. 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 than GAAP measures alone. Reconciliation of net income to EBITDA and adjusted EBITDA is presented in the press release. The company defines EBITDA as net income or loss before net interest, tax expense, depreciation and amortization expenses. The company defines adjusted EBITDA as EBITDA before acquisition-related expenses, stock-based compensation expense, bargain purchase gain, net gain or loss on disposition or impairment and other income related to the employee retention credit. Management also includes commonly discussed performance metrics. System-wide sales include revenues at all clinics, whether operated by the company or by franchisees. While franchise sales are not recorded as revenues by the company, management believes the information is important in understanding the company's financial performance because these sales are the basis on which the company calculates and records royalty fees and are indicative of the financial health of the franchisee base. Comp sales include revenues from both company-owned or managed clinics and franchise clinics that in each case have been open at least 13 full months and exclude any clinics that are closed. Turning to Slide 3. It's now my pleasure to turn the call over to Peter Holt.

Thank you, David, and I welcome everybody to the call. As we noted in March, we entered 2023 with a fortified foundation to support our clinics as well as our long-term clinic expansion and financial growth. Today, I'm pleased to report on Q1 2023, we performed well during the continued economic uncertainty and expect our robust underlying clinic model and unit economics to thrive as markets improve. For those investors that are new to the company, The Joint is revolutionizing access to chiropractic care by providing affordable concierge-style membership-based services in convenient retail setting. Turning to Slide 4. Let's review our financial metrics for the first quarter of 2023 compared to first quarter 2022. System-wide sales grew 17%. Comp sales for clinics have been opened for at least 13 full months increased 8%. Revenue grew 27%. Adjusted EBITDA improved to $2 million. And on March 31, 2023, our unrestricted cash was $14.8 million compared to $9.7 million on December 31, 2022. Turning to Slide 5. I'll discuss our clinic metrics. During Q1 2023, we opened 33 clinics, 29 franchise and 4 greenfield. This compares to 31 clinics, 27 franchise and 4 greenfields in Q1 2022. Our greenfield strategy is to locate clinic sites where they'll be -- where they'll capture pent-up demand in new markets where they can rapidly build a solid presence. This quarter, we augmented existing clinic clusters in California, Georgia, Missouri and North Carolina. As previously stated, in 2023, we are focusing on supporting our existing greenfield clinic portfolio as it matures and moderating our pace of new greenfield openings. In the first quarter of 2023, we closed 1 franchise clinic, which will be relocated. That compares to closing 1 franchise clinic in the first quarter of 2022. Once again, our closure rate is one of the lowest in franchise community at less than 1%. In summary, our March 31, 2023, we had 870 clinics in operation, consisting of 740 franchise clinics and 130 company-owned or managed clinics. The portfolio mix remained 85% franchised clinics and 15% company-owned or managed clinics. At quarter end, we had 218 franchise licenses in active development, which is a solid pipeline for our future franchised clinic opening. Subsequent to quarter end, in April, we opened 1 greenfield clinic at Fort Dix in New Jersey. This is our fourth location opened in conjunction with the Army & Air Force Exchange Service. Turning to Slide 6. In Q1 2023, we sold 17 franchise licenses, which is the same number as Q4 2022 when compared to 22 licenses sold in Q1 2022 . This past quarter, existing franchisees bought approximately 59% of our new licenses. This means that even in uncertain environment, those that are intimately involved in our network are reinvesting in the brand. This is a powerful indicator of the strength of our business model, demonstrating the health and viability of our franchise system. On March 31, our RD count remained 18 with our aggregate 10-year minimum development schedule for the new RD territories established since 2017 at 626 clinics. Turning to Slide 7. Let's review our marketing efforts. New patient acquisition continues to be a focus. For Q1 of 2023, the average number of new patients per clinic was down approximately 7% from the same quarter a year ago. To further improve new patient leads and conversions, our marketing team has invested in pay channel maximization and new paid digital tactics as well as prioritizing nondigital approaches such as gorilla marketing. We've created multiple learning modules to effectively walk our franchisees through best practices in digital marketing, gorilla marketing, traditional awareness marketing and referrals. In February, we held our Annual Love The Joint and social media campaign in Giveaway, where 12 lucky winners received a gift of 1 year of free chiropractic care. During this promotion, we saw significant increases in our overall engagement in The Joint National Instagram account, where we gained almost 15,000 entries and comments and more than 20,000 likes and attracted over 13,000 new followers. In March, we held our new patient context. This event incentivized clinic teams to promote The Joint's $29 new patient offer via signage, referral cards and local business partnerships and community events. For March, the network increased new patients over 19% compared to the prior 3-month average. In terms of our digital efforts in March, we also launched a test to capture leads through a chat technology as well as leverage enhanced doctor of chiropractic profiles on an online medical sites as a new source for new patient leads. For the quarter, organic traffic to the site increased 14% year-over-year. As a part of our PR effort, we continue to focus on the education and benefits of chiropractic care and generate brand awareness about The Joint. Our PR strategies are reaching new highs. And in Q1 alone, we surpassed 1 billion in earned editorial impressions. And with that, Jake, I'll turn it over to you.

Thank you, Peter. Turning to Slide 8. I'll review the financial results for Q1 2023 compared to Q1 2022. System-wide sales for all clinics opened for any amount of time increased to $115.4 million, up 17%. System-wide comp sales for all clinics opened 13 months or more increased 8%. System-wide comp sales for mature clinics opened 48 months or more increased 1%. Revenue was $28.5 million, up $6 million or 27%. Company-owned or managed clinic revenue increased 36%, contributing $17.1 million. Revenue from franchise operations increased 15%, contributing $11.3 million. The increases represent continued growth in both the corporate portfolio and franchise base. Cost of revenues was $2.6 million, up 13% over the same period last year, reflecting the associated higher regional developer royalties and commissions. Selling and marketing expenses were $4.2 million, up 27% over the same period last year, driven by an increase in advertising fund expenditures from a larger franchise base, an increase in local marketing expenditures by the company-owned or managed clinics and the timing of our national marketing fund spend. Depreciation and amortization expenses increased $713,000, up 44% compared to the prior year period, primarily due to the increase in the number of greenfield clinics developed and franchise clinics acquired. G&A expenses were $19.9 million compared to $15.4 million, up 30%, reflecting the cost to support the increased clinic count, revenue growth and higher payroll to remain competitive in the tight labor market. Operating loss was $678,000 compared to a loss of $176,000 in Q1 2022, mostly driven by the previously mentioned higher depreciation and amortization expenses. Other income was $3.8 million, reflecting the receipt of employee retention credits compared to other expense of $16,000 in Q1 of 2022. Income tax expense, including the impact of the employee retention credits, was $842,000 compared to $13,000 in Q1 of 2022. Net income was $2.3 million or $0.16 per diluted share compared to a net loss of $206,000 or $0.01 per diluted share in Q1 of 2022. Adjusted EBITDA was $2 million compared to $1.8 million in the same period last year. Franchise clinic adjusted EBITDA increased 6% to $4.8 million. Company-owned or managed clinic adjusted EBITDA increased 68% to $1.6 million, reflecting the maturation of our clinics in the corporate greenfield portfolio as well as our concentrated effort to optimize labor. Corporate expense as a component of adjusted EBITDA was $4.4 million, up $671,000 or 15% higher than Q1 2022. On to a review of our balance sheet and cash flow. At March 31, 2023, our unrestricted cash was $14.8 million compared to $9.7 million at December 31, 2022. This reflects $6 million in cash flow from operations, which included the receipt of the employee retention credits of $3.9 million. These were net of $1.2 million of investment in opening greenfield clinics and upgrading existing clinics. Also, we continue to have access to additional cash through our line of credit with JPMorgan Chase. To date, we've drawn $2 million and have an additional $18 million available. On to Slide 9. We are reiterating our guidance for 2023. We continue to expect to grow revenue to between $123 million and $128 million compared to $101.9 million in 2022. We continue to expect adjusted EBITDA to be between $12.5 million and $14 million compared to $11.5 million in 2022. We continue to expect franchise clinic openings to be between 100 and 120 compared to 121 in 2022. Please note, historically, guidance for company-owned or managed clinic openings included a combination of both greenfields and acquisitions. While we continue to acquire previously franchised clinics, these transactions are opportunistic and are no longer included in our guidance. For greenfield clinic openings, we continue to expect to open between 8 and 12 compared to 16 in 2022. And with that, I'll turn the call back over to you, Peter.

Thanks, Jake. Turning to Slide 10. While managing today's uncertain economic conditions, including inflation and wage pressure, we remain focused on what we can control and continue to execute programs to improve performance and drive long-term growth. We continue to methodically implement our multiyear corporate initiatives. To forward to chiropractic dream, over the past several years, we've been increasing our educational outreach efforts with the associations and schools of chiropractic to drive awareness and support recruitment. As our relationships with these institutions continue to improve, these endeavors are being felt across the network nationwide. In fact, we have more interest than ever from doctors in these recent graduating classes, and we're attracting new doctors of chiropractic to The joint. To harness the power of our data, we've launched our business intelligence and analytical reporting tool, and we're shortly launching our automated marketing program. This will reach existing, lapsed and potential patients to ensure that we send the right message to the right patient at the right time. To accelerate the pace of our clinic growth, we remain focused on our franchise sales, in addition to opening greenfield clinics. As reported this quarter, we continued to increase the number of our clinics opened year-over-year. Our network is well positioned for expansion as the economy improves. Frankly, with only 16% of Americans using chiropractic care in the last 12 months and spending $19.5 billion on it annually, the chiropractic patient need is growing and our market opportunity is considerable. Based on our current patient demographics, we are approaching our near-term target of 1,000 clinics and are well positioned for our longer-term goal of 2,000 clinics. We would expand our network and potential base by developing rural, urban and possibly international clinic models. We will broaden our long-term market potential. We are committed to capturing a greater share in growing the overall market. And with that, Dave, I'm ready to begin the Q&A.

[Operator Instructions] Our first question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

I wanted to start by asking about the sales and marketing. It was up about $900,000 sequentially from Q4 and about that same amount on a year-over-year basis. You noted there was a change in the timing of the national marketing fund spend. I wanted to see if you could provide a little bit more detail on how -- on what that was and how it may impact the rest of the year, if there's any other kind of timing differences that we should expect looking forward?

Yes, Jeremy, great question. And I would say the majority of that is just the increase of the collections from the increased clinic count. There is a chunk of that, that is really just timing quarter-to-quarter, right? So it depends on the timing of certain campaigns or when we're pushing collateral out to the clinics. And so I would categorize that as just a slight front-loading in Q1, but we expect that to normalize as we continue on. So there's really no kind of onetime item to call out there. I think it's just a slight quarter-over-quarter timing variance.

Got it. Okay. And then I also wanted to just get a little bit more color on the net employee retention credits, which I believe was like $3.9 million. I think -- I don't know if that's related back to like FICA credits from COVID still, which is similar to what we've seen in the past with other businesses. But I wanted to just see if you could provide a little bit of color on that as well.

Sure, yes. And it is related to some of the Jobs Act credits that were made available. Our qualification period was for periods in the first 2 quarters of 2021. And so really, the timing of both the application and then the processing through the IRS. So we just happened to receive the funds in the first quarter of '23, which kind of triggered our particular recognition.

Got it. And if we back that out, that's about the EPS on a normalized basis would be like a $0.04 per share loss or so.

That's about right. Yes, it's the -- it's really that net $3.9 million. We recorded that in other income. So adjusted EBITDA neutral, but it does have that boost to net income.

Got it. And then last question I wanted to -- before I hop out of the queue, I wanted to just get an understanding in terms of what you're seeing for clinic performance, corporate versus franchise? It looked like you saw a nice little step forward here on the company-operated clinics like if we're thinking about it on a, let's call it, revenue per average clinic basis, whereas you saw maybe a little bit of a step down overall maybe in the franchisee performance, at least certainly in the royalties that you earned from that basis. I just wanted to get a sense in terms of what you're seeing company-operated versus franchise performance?

Yes. I think, in both cases, it's reflecting some of the youth within our system. So our corporate portfolio with the number of clinic additions we've made over the last 2 years, I think we're going to have a natural leg up on the overall system average just based on our younger greenfield clinics continuing their maturation. Again, when you're talking about overall growth, we added another 29 franchise units in the quarter. And so again, if you're using that end of quarter number as your final denominator there, that's going to kind of decrease the revenue on a per clinic basis. So we still posted same-store sales of 8% as a system. And again, not a huge disparity there between corporate and franchise performance. So we're still pleased with the organic growth of the unit. But as you look at the denominators and the number of new clinics we have coming into the system, I think you could get some fluctuation there on a revenue per clinic basis.

And what I'd add to that, Jeremy, is that historically, what's been interesting and unusual for a franchise system is that our corporate portfolio has operated parallel or equal to or slightly better than our franchise segment. And we saw that change a little bit in -- as we're coming into the end of '21 and that we made some corrections. And so if you look at kind of the overall performance of '22, particularly by the end of the year in '22, we got our corporate portfolio operating equal or better to our franchise portfolio. So we have seen kind of that dip that we went through. We made some changes in those operations, and we're now seeing that come back. And so when you look at some of the key metrics, whether we're talking about conversion or attrition, is that the corporate portfolio continues to do equal or better than our franchise community. The one area where I think that the franchisees continue to do better than corporate, which we're still focused on, is our new patient count and that we're seeing our franchisees have a higher new patient per clinic per month than the corporate portfolio at the moment.

Got it. That's great color. Just one more, if I could sneak in here. In terms of thinking about kind of the mature store comps, the -- you're seeing just like a little bit of degradation there. And I wanted to get a sense in terms of that price increase that you took last March, what percentage of your patients are on a legacy pricing plan at this point in time?

Yes, we continue to see about a 5% shift per quarter of our active members moving on to that new price point. I think, as I look at the legacy mix now, I think we're trending about 35% of our system is still on some legacy price point. The majority of those being on the pricing one tier ago, but because we have an existing current policy to grandfather in active members of their sign-up rate. We do have some that they're below that last year, but the majority are one tier ago are now on the higher price point.

Yes. And we've talked about that before. And that group that's been there for a long time, it's probably around 15% that we don't see that moving much over time.

Next question comes from Jeff Van Sinderen with B. Riley.

Congratulations. It's great to see the 8% comp. Multiple question here if you can bear with me. But I wanted to ask a little bit more on the patient retention, attrition, new patient add metrics. I guess any more color you can share around that? And what do you think will drive the new patient adds back up? And then maybe also, how are you faring in terms of the Google search and location elements that I know were -- there were some changes there. And then any change you're seeing in terms of influencing new patient adds, given the macro backdrop? And then would it make sense to promote more on price to get new patient adds? I know a lot there. I apologize.