The Joint Corp. (NASDAQ:JYNT) Q3 2023 Earnings Call Transcript

The Joint Corp. (NASDAQ:JYNT) Q3 2023 Earnings Call Transcript November 9, 2023

The Joint Corp. misses on earnings expectations. Reported EPS is $-0.05 EPS, expectations were $0.04.

Operator: Good day, and welcome to The Joint Corp. Third 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 Kirsten Chapman of LHA, Investor Relations. Please go ahead.

Kirsten Chapman : Thank you, Harmony, and thank you, everyone, for joining us this afternoon. This is Kirsten Chapman of LHA Investor Relations. Joining us on the call today are President and CEO, Peter Holt; and CFO, Jake Singleton. Please note that we are using a slide presentation that can be found at ir.thejoint.com/events. Today, after the close of the market, The Joint issued its operating metrics and financial results for the quarter ended September 30, 2023. If you do not 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 that today’s discussion includes forward-looking statements within the meaning of the safe harbor provisions in the Private Securities Litigation Reform Act of 1995.

All statements other than the statements of historical facts may be considered forward-looking statements. Although the company believes the expectations and assumptions reflected in these forward-looking statements are reasonable, it can make no assurances that such expectations or assumptions will prove to have been correct. Actual results may differ materially from those expressed or implied in forward-looking statements due to risks, various risks and uncertainties. As a result, we caution you against placing any undue reliance on these forward-looking statements. For a discussion of these risks and uncertainties that could cause actual results to differ from those expressed or implied in the forward-looking statements, please review the risk factors detailed in the company’s reports on the Forms 10-K and 10-Q as well as other reports that the company files from time to time with the SEC.

Finally, any forward-looking statements included in this conference call are made only as of the date of this call, and we do not undertake any obligation to revise our results or publicly release any updates to these forward-looking statements in light of new information or future results. Management also includes commonly discussed performance metrics. System-wide sales includes revenue 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 franchise base.

System-wide comp sales used in — from both the company and company-owned, managed and franchise clinics are those, in each case, have been open for at least 13 months and exclude any clinics that have been closed. The company also uses adjusted EBITDA and provides a reconciliation to GAAP in its press release and presentation. Turning to Slide 3. It’s my pleasure to turn the call over to Peter Holt. Please go ahead, sir.

Peter Holt : Thank you, Kirsten, and I welcome everybody to the call. During Q3 2023, we continue to execute our mission to improve quality of life through routine and affordable chiropractic care. The strength of our franchise concept remains strong as we continue to revolutionize access to chiropractic care by providing affordable, concierge-style, membership-based services in convenient retail settings. However, ongoing economic uncertainty and continued cost pressures have impacted our corporate clinic portfolio performance. After evaluating options for improvement, the Board has authorized management to initiate a plan to refranchise or sell the majority of our company-owned or managed clinics. Management intends to retain a portion of highly performing corporate clinics.

This refined strategy will leverage our greatest strength, our capacity to build the franchise to drive long-term growth, both for our franchisees and The Joint as a public company. We intend to use the clinic sales proceeds to support marketing and patient acquisition and to reinvest in our company through a possible acquisition of regional developer territories and potential stock repurchases. The reduction of corporate clinic portfolio will also facilitate our unallocated cost reduction efforts. Jake and I will elaborate more on these initiatives and our progress in a moment. Turning to Slide 4. I’ll review our operating financial highlights for the third quarter of 2023. System-wide sales grew to $119.3 million, increasing 8% compared to Q3 2022.

Comp sales for clinics that have been opened for at least 13 full months were flat at 0%. Revenue increased 11%, compared to Q3 2022. Adjusted EBITDA was $2.9 million for Q3 2023. At September 30, 2023, our unrestricted cash grew to $16 million, compared to $9.7 million on December 31, 2022. Turning to Slide 5, I’ll discuss our clinic metrics. During Q3 2023, we opened 26 clinics, 24 franchised and two greenfields. This compares to 38 clinics opened in Q3 2022, 33 franchised and five greenfield. During both Q3 ’23 and Q3 ’22, we closed two franchise clinics. With today’s foundation of over 900 clinics, our closure rate is less than 1%, and remains one of the lowest in the franchise community. At September 30, 2023, we had 914 clinics in operation, consisting of 778 franchise clinics, and 136 corporate-owned or managed clinics.

The portfolio mix remains 85% franchise clinics, and 15% company-owned or managed clinics. Regarding our corporate portfolio strategy. In September, we announced that we had earmarked about 10% of our underperforming clinics for sell, relocation or closure. Our team is executing well. Already eight clinics are in various stages of sales negotiations, two are sold in October, and in addition, two corporate clinics are about to be sold. As I mentioned at the beginning of the call, we’ve increased our goal to refranchise the majority of our corporate clinics. We expect to sell the [indiscernible] shares of them to existing franchisees, but we’ll also consider qualified franchisees new to The Joint. It’s important to note that we’ll be selling valuable assets and we’ll not be in rush negotiations to accelerate the process.

We’ll retain some corporate clinics due to their maturity and their strong performance, which we believe will yield benefits. For example, they’ll continue to be strong financial contributors, we can use them to test price adjustments, new membership plans and various ancillary products and services that we’re assessing for wider rollout of our network. Regarding our remaining greenfield pipeline, we have four greenfields in the process of being opened and will uphold our various obligations related to the leases and buildup. In some cases, we may complete the clinics grand opening and sell the clinic after a patient base is established. In others, we’ll transfer permits and contracts to a franchisee prior to the opening. Our regional developer strategy remains consistent.

We have demonstrated over the past several years that the natural progression of our territory development can lead to the reacquisition of certain RD regions. And we’ll continue to execute as the criteria is met. We do not plan to establish any additional RD territories. And as such, over time, we expect the RD share franchise royalty fees to decrease as we reacquire RD rights. We ended Q3 with an RD count of 17, and an aggregate 10-year minimum development schedule for RD territories established since 2017 is 590 clinics. Looking ahead, and most importantly, we maintain unwavering dedication to our franchise community. We’re focused on improving franchise clinic performance and unit economics. We continue to invest in tools to drive franchise growth and support our nationwide expansion.

At the quarter end, we had a solid pipeline for future franchise clinic openings, with 202 franchise licenses in active development. Turning to Slide 6. In Q3 2023, we sold 12 franchise licenses, the same numbers we sold in Q3 2022. This reflects the continued impact of higher interest rates, inflation, and strong employment rates, negatively influencing franchise sales. That said, existing franchisees who have enjoyed the advantages of The Joint clinics continue to reinvest, year-to-date comprising 58% of franchise license sales this year. Turning to Slide 7, we’ll review our marketing efforts. This quarter, we welcomed our new Chief Marketing Officer, Lori Abou Habib. She is an expert in digital marketing and building customer loyalty with extensive franchise experience.

Lori’s initial focus area has been to leverage the power of our data to understand our existing and prospective patients. We’re using our patient journey research and the wealth of patient data to craft distinct journeys for patients who have never seen a chiropractic before, patients who are familiar with the chiropractic care, and patients we have not seen recently. This research and strategy will inform message optimization and the customer experience from that initial search for a chiropractor through becoming and remaining a patient. In Q4, we will begin to apply these insights on our media buys and content on Meta, highlighting key themes that are most important to each of these patient segments. Additionally, Lori is focused on three main areas.

Number one, grow new leads and patients. We’re working diligently to increase the flow of new patients to our clinics by introducing new functionality, improving current processes, and mining our local trade areas for new patient growth. We’re working on projects to decrease friction for our new patients by improving the intake process, creating a sense of urgency by introducing first visit bookings, and optimizing our local clinic marketing. Number two, increasing lifetime patient value. In addition to getting new patients, we’re also taking a more nuanced approach to generating more revenue from our existing patient base. To enable this, we are working on projects like creating, a year ago, promotional calendar to drive same-store sales, increase content and leverage marketing automation to deliver the right message to the right audience at the right time.

And number three, growing brand equity. We have a strong brand with a rich story. By deepening the brand’s unique essence and meaning of leveraging our footprint, we can become synonymous with chiropractic care in a way that our competitors cannot. We’re working on our brand architecture to evolve our brand positioning and define brand essence to deepen our competitive advantage. And before I turn the call over to Jake, I’m delighted to welcome Jeff Graham, who will join the Board in January of 2024. He’s a long-term supporter. We’ve enjoyed productive conversations with Jeff and look forward to his contribution on how to make this company more effective. And with that, I’ll turn it over to you, Jake.

Jake Singleton : Thanks, Peter. Turning to Slide 8. I’ll review our clinic comps for Q3 2023 compared to Q3 2022. System-wide sales for all clinics opened for any amount of time increased to $119.3 million, up 8%. The System-wide comp sales for all clinics opened 13 months were flat at 0%. System-wide comp sales for mature clinics opened 48 months or more decreased 5%. This comp reflects fewer than anticipated new patients at some of our more mature clinics. Revenue was $29.5 million, up $3 million or 11%. Revenue from franchise operations increased 9%, contributing $11.6 million. Company-owned or managed clinic revenue increased 13%, contributing $17.9 million. The increases represent continued year-over-year growth in both the franchise base and the corporate portfolio.

Cost of revenues was $2.6 million, up 11% over the same period last year, reflecting the associated higher regional developer royalties and commissions. Selling and marketing expenses were $4.3 million, up 22% over the same period last year, driven by an increase in advertising fund expenditures from a larger franchise and corporate 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 $569,000, up 32% compared to the prior year period, primarily due to the increase in the number of greenfield developments and acquired clinics. G&A expenses were $20.2 million, compared to $17.8 million. The change reflects the cost to support the increased clinic count.

However, the year-over-year rate of increase slowed, it was 14% for Q3 ’23 over Q3 ’22, down from 39% from Q3 ’22, compared to Q3 ’21. Also, we have continued certain cost control initiatives such as hiring freezes, travel reductions, and the elimination of non-core projects. Loss on disposition or impairment was $905,000 compared to $264,000 in the third quarter of ’22. The increase includes those corporate clinics that were announced to be held for sale in September of 2023. Operating loss was $898,000 compared to operating income of $732,000 in the third quarter of ’22, reflecting the previously mentioned impairment charges. Income tax benefit was $188,000, compared to the benefit of $24,000 in the third quarter of ’22. Net loss was $716,000 or $0.05 per share, compared to net income of $731,000 or $0.05 per diluted share in the third quarter of ’22.

Adjusted EBITDA was $2.9 million compared to $3.1 million for the same period last year. Franchise clinic adjusted EBITDA was almost flat at $5.3 million. Company-owned or managed clinic-adjusted EBITDA increased 20% to $2 million. Corporate expense as a component of adjusted EBITDA was $4.5 million, approximately $0.5 million higher than Q3 2022, reflecting accounting and professional service costs related to the restatement. On to Slide 9. For the nine months ended September 30, 2023, compared to the same period in 2022, revenue was $87.1 million, up $13.5 million or 18%. Net income, including net employee retention credits and loss on disposition of impairment was $1.3 million or $0.09 per diluted share, compared to a net loss of $137,000 or a loss of $0.01 per share in the first nine months of 2022.

Adjusted EBITDA was $8.2 million, up $618,000 or 8%. On to a review of our balance sheet and cash flow. At September 30, 2023, our unrestricted cash was $16.1 million, compared to $9.7 million at December 31, 2022. This reflects $11.3 million in cash flow from operations, including the receipt of the employee retention credits of $4.8 million, and the net of $4.9 million of investment in clinic acquisitions, development of greenfield clinics, and improvements of existing clinics and corporate assets. Also, we continue to have access to additional cash through our line of credit with JPMorgan Chase. Today, we’ve drawn $2 million. To date, we’ve drawn $2 million and have an additional $18 million available. On to Slide 10 for a review of our guidance.

We are reaffirming all elements of our 2023 guidance. Revenue is expected to be between $115 million and $118 million, compared to $101.9 million in 2022. Adjusted EBITDA is expected to be between $11 million and $12.5 million, compared to $11.5 million in 2022. We continue to expect to open between 100 and 120 franchise clinics, compared to 121 in 2022, and between eight to 12 greenfield clinics compared to 16 in 2022. Looking ahead, as discussed, we will initiate our plan to refranchise the majority of our corporate portfolio clinics and retain a portion of high-performing clinics. We will implement this plan with a sense of priority and importance to improve the overall financial performance of the company with an emphasis of profitability.

Notably, this is a quality group of clinics that represents assets of value. We will negotiate determinedly and maintain the autonomy to sell at a suitable price. As such, predicting the timing of events will be difficult. As we think about the financial impacts of the refranchising efforts, please note the following. We continue to expect the gross sales for our entire system to grow. However, GAAP revenue will decrease as the corporate portfolio shifts from being recognized as 100% owned or managed to being recorded a 7% franchise royalty fees. As our cost of sales is primarily related to regional developer fees, we expect it to remain fairly static. We expect our sales and marketing expenses to decrease as we reduce the scale of our corporate portfolio.

Currently, our corporate clinics spend approximately $3,000 per month per clinic in local advertising. Regarding general and administrative expenses, we expect to see significant reductions in our clinic level, four-wall operating expenses, our outside-the-four-wall expenses, and our unallocated corporate overhead. These expenses will be reduced proportionately as we reduce the scale of our corporate portfolio. As such, the timing of these G&A reductions will be gradual and incremental. Overall, while we reduced our top-line revenue, we expect our reduction in G&A to expand our operating margins and increase profitability in the long run. Finally, it’s important to note that some of our underperforming clinic valuations may result in noncash impairment charges.

Conversely, the better clinic performs, it will create higher sales proceeds and the opportunity for gain on sale. And with that, I’ll turn the call back over to you, Peter.

Peter Holt : Thanks, Jake. We’re excited to execute our new strategic focus. By converting the majority of our corporate portfolio to franchise clinics, we’re taking clear action to strengthen the health of our franchise network to increase our cash flow to reinvest in the business and to innovate additional products and services on the clinical level, and to improve clinic level performance across the company. We believe these changes will enhance the value and performance of the company, whether from the perspective of a franchisee or a stockholder for the following reasons. Number one, the market opportunity continues to be large. According to IBIS, people in the U.S. spent $19.5 billion a year on chiropractic care, and our franchisees have barely scratched the surface, capturing only 2% market that — to date.

Two, the market is expanding. The drivers for chiropractic care, pain, Opioid, and obesity epidemic continue to persist. According to Kenley Insight, the industry five-year compounded annual growth rate is greater than 5%, and the joint gross sales have consistently outperformed that, delivering 12-year CAGR of 62%. Three, The Joint continues to expand the market. For example, in 2022, of the 845,000 people who opened the door to The Joint for the very first time that year, 35% had never seen a chiropractor before. Four, we have a clear first-to-market advantage. With over 900 clinics, we have greater presence in all other franchise chiropractic systems combined. Our national brand presence creates economies of scale, which sets the flywheel in motion that drives even greater brand recognition.

Five, our digital footprint leads the Internet. Today, The Joint is the largest online publisher for information about chiropractic in the industry, and we intend to leverage it even more to drive increased patient acquisition. Finally, our concept leads franchises and chiropractic care businesses, making The Joint a top choice for entrepreneurs. Our success is frequently recognized with accolades from Franchise Times, Franchise Business Review, Entrepreneur Magazine, FRANdata, and more. And with that, I’d like to thank our community of doctors, of chiropractic wellness coordinators, franchisees, regional developers and employees for their passion and dedication to The Joint. We could not be achieving the success that we are without their dedicated efforts.

And with that, Harmony, I’m ready to open up for Q&A.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from Jeff Van Sinderen from B. Riley, FBR. Please go ahead.

Richard Magnusen : This is Richard Magnusen in for Jeff Van Sinderen. Thank you, for taking a call. To start off, you gave us some detail regarding sort of about different cohorts and the comps. But what further detail can you give us about the trends among the different cohorts? And specifically, what are you seeing with the latest cohorts that might stand out?

Jake Singleton: Yes. Richard, I don’t think we’ll give any further disaggregated information. I think what we can say is, obviously, flat comps for the quarter is not where we want to be. We’ve seen some positive momentum as we start — as we start Q4. But the issues, especially as it’s relating to our mature clinic portfolio continue to be centered around our new patient headwinds. And that’s why we’ve dedicated a lot of our efforts in support of Lori and the initiatives that Peter spoke about on the call.

Richard Magnusen : Okay. And then what metrics are you seeing in retention and new member adds?

Peter Holt: Sure. What we’re seeing is, of course, you know the key three metrics that we focus on is new patient counts, attrition — or excuse me, conversion, so they join as a member, and then attrition. And that we historically have been doing great with our conversion numbers. And so, as we talked about before, a pre-COVID number, our total conversion was running 44% to 45%. So far this year, it’s running over 50% system-wide. When we look at our attrition rate, again, pre-COVID, that was probably running around 11% — around 13%. And today, that’s system-wide running around 11%, with the corporate portfolio, even less than that. So, the one metric that’s really been hit is that new patient count. And so, if you look at that new patient count from our highs in 2021 to 2022, it’s down by 14%.

And then if we look in ’23 year-to-date, we’re probably another 4% down quarter-to-quarter, if we just compare quarter ’23 to quarter ’22. So, we are seeing it kind of bottom out, anticipating that we’re moving to the other side of that new patient count. But that’s the key metric that we really want to focus on. The other thing that I mentioned is that we definitely recognize that we can take a much more nuanced approach to our existing patient base to make sure they stay with us longer. And when they do drop, to being sure that we’re getting them back in earlier because we know that on average, those patients who leave us, 25% of them will come back within the next six months. So that’s an important element that we’re really going to focus on.

Richard Magnusen : Okay. And then my last question is that, as the new CMO focuses on leveraging patient data, are you layering on new capabilities with your software system at the clinics? And then aside from the new marketing demands on the software, have you achieved most of what we believe you can or what the software can provide in its current form?

Peter Holt: Well, I’m going to answer that last question. And no, I don’t think that we’re anywhere near touched on the real capacity of our new IT platform to help drive clinic performance. As we’ve talked about on some of the earlier calls that it’s been slower than we anticipated, getting some of these bugs cleaned out and the challenges that’s created. But I think that we’ve made enormous inroads this year. And we really are now starting to focus on what — how do we leverage that resource or that asset. And so that we’re focusing on the creation of a patient portal, a mobile check-in, all the elements of being able to do that automated marketing to your patient base so that you can make sure they’re receiving the right message at the right time and where they are in their patient journey. So, I think we really have a lot of room to grow to continue to really leverage that asset of the — of our IT platform.

Jake Singleton: And the first follow-up question again?

Richard Magnusen : Yes, as the CMO focuses on levering to patient data, are you having to layer on new capabilities to that software to accommodate that demand?

Peter Holt: Yes. The short answer is yes. There is a program that we’re using, an inner bullet that does our automated marketing, and we’ve done that now with — on an e-mail basis. We’re moving it to text. And that she — we have actually done quite a bit of research on the patient journey as — earlier in this year, that Lori is able to really leverage and use that as a model or guide as she refines our new patient marketing strategy going forward.

Operator: Your next question comes from JP Wollam from ROTH MKM. Please go ahead.

George Kelly: If we could maybe just start, in terms of maybe really dialing in on some of the problems we’ve had with the new member growth. One, is there anything you can point to that, maybe said this is a problem for the industry rather than maybe a problem related to new member acquisition at The Joint? Just something to make sure that we know it’s not losing customers to other chiro brands, but rather maybe something going on with consumer health. And then as part of that, just anything to point out in terms of consumer spending? And maybe trade down to more 2 times a month visit and less membership or less four-wall plus kind of visiting customers? Anything to point out on your spending in health? Thank you.

Peter Holt: Sure. That’s a great question. And the way I would answer that is, if you look at our ideal patient, is that the ideal family income is running between 50,000 and 105,000. And so, when we look at — if you think about last year, what were we talking about, oh my gosh, the pending recession, the recession. Of course, we know that we’re not in a recession, but you still have 49% of the American people who are saying that they are in a recession. And so, I think if you look at our patient base, and you look at what’s going on for them as it relates to inflation, as it relates to higher interest rates, as it relates to higher mortgages or rents, is that they have, in fact, been impacted by some of these economic issues.

And I think that, that is very much the core of our patient base. One of the key attributes of The Joint is absolutely affordability. And so, I think that while we are not in a recession, let’s be very clear about that, but I think that our patient base is more impacted because that growth that we’ve been experiencing in the economy has not been evenly spread across the economy. So, I think that’s a part of it. We’re not really seeing any kind of indication that our new patient count is being drawn away by competitors. Quite frankly, where I sit here, with the 919 clinics open, I’m surprised by how little competition that we really have. Yes, there are some very small direct competitors that are absolutely mimicking our modeling — our model.

But they’re kind of localized in certain markets. And so, I don’t think it’s been a competitive issue that’s impacted our new patient counts.

George Kelly: Understood. Very helpful. And then maybe if we could just talk about the corporate-owned portfolio for a minute. I understand the not wanting to kind of put a timeline or cadence on it, but is there anything — just as we really start the process, any kind of number you have circled back in terms of size of the corporate portfolio you’d hold on to? And then just the other part of that is, can you expand on how the sale negotiations are going? Is its existing franchisees that are looking to take on an additional unit or what kind of buyers are out there?

Peter Holt: Sure. To answer the first part of that question is that, we made it very clear that we will be selling off the majority of our corporate portfolio. At the end of the quarter, we had 136 clinics. In September, we started — we made an announcement that we were going to look at kind of our bottom 10%, and that we would address either by closing those clinics, franchising those clinics or relocating, and that we’re well in that process. And so, as I said, we’ve sold two, we have two that are about to sell that we’ve closed two units. And so, what I would say is that, so far, in terms of who the buyers have been of that segment that we talked about in September has been existing franchisees. And when we go forward and think about who would be the typical buyer of this majority of clinics that we are going to be selling, again, we would absolutely expect it to be existing franchisees.