The Joint Corp. (NASDAQ:JYNT) Q4 2022 Earnings Call Transcript

The Joint Corp. (NASDAQ:JYNT) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good day, and welcome to The Joint Fourth Quarter 2022 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Mr. David Barnard, LHA Investor Relations. Please go ahead.

David Barnard: Thank you, Nick. Good afternoon, everyone. This is David Barnard of LHA Investor Relations. On the call today, President and CEO, Peter Holt, will review our fourth quarter and yearend 2022 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 are using a slide presentation that can be found at https://ir.thejoint.com under events. Today, after the close of the market, The Joint Corp. issued its financial results for the quarter ended December 31, 2022. If you 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 personal to staff our clinics, due in part to the nation-wide labor shortages 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 cost and which could otherwise negatively impact our business, the potential for future disruption to our operations and the unpredictable impact of 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 for its own strategies and negative opinions posted on the Internet, which could, which could drive down the market price for our common stock and result in 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, which is expected to be 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, bargain purchase gain, net gain or loss on disposition or impairment and stock-based compensation expenses. Management also includes commonly discussed performance metrics. System-wide sales include revenues at all clinics, whether operated by the company or by franchisees or 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 includes the 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 have closed. Turning to Slide 3; it is now my pleasure to turn the call over to Peter Holt.

Peter Holt: Thank you, David, and welcome to the call. I am delighted to speak with you today to review our strong close to 2022 and our solid positioning for long-term growth. Throughout 2022, we effectively managed economic challenges which accumulated and accelerated comps in the fourth quarter. This fortified our foundation as we entered 2023. For those investors who are new to our company, The Joint is revolutionizing access to chiropractic care by providing affordable, concierge style, membership-based service in convenient retail settings. Our robust underlying business model and unit economics are the basis for our long-term profitable growth and continue to fuel our clinic expansion. Turning to slide four; I’ll review our performance metrics that demonstrate the growth across the board.

During 2022, our doctors of chiropractic at The Joint performed 12.2 million adjustments up from $10.9 million in 2021. During the year, we treated 1.6 million unique patients up from 1.4 million in 2021. Of those treated 845,000 were new patients up from 807,000 in 2021. Now to review our financial metrics for 2022 compared to 2021, turning to slide five, system-wide sales grew to $435.3 million, increasing 21%. Our comp sales for clinics have been open for at least 13 full months, grew 9%. Revenue increased to 26%. Adjusted EBITDA was $11.5 million, and in December 31, 2022, our unrestricted cash was $9.7 million compared to $10.3 million at September 30, 2022. Turning to slide six, I’ll discuss our clinic metrics. During 2022, we opened a record 137 total clinics, 121 franchised and 16 greenfield.

This increased from 130 in 2021, which consisted of 110 franchised and 20 greenfield. During Q4 2022, we opened 34 clinics, 30 franchised, and four greenfield. This compares to 2021 with 43 clinics, 34 franchised and nine greenfield. Regarding franchise clinic closures, there was one during the fourth quarter for a total of five for the full year compared to three for the both fourth quarter and full year of 2021. Thus, our annual closure rate remains low, less than 1% and continues to lead the franchise community. In Q4, we acquired eight previously franchise clinics, six in Northern California and two in North Carolina, and sold a company managed clinic in California to a franchisee. For 2022, we acquired 16 clinics and sold two clinics for a net of 14, which compares to 12 acquisitions and no dispositions in 2021.

As noted, we opened four greenfields in the fourth quarter, bringing our total for 2022 to 16 compared to 20 in 2021, reflecting a heavy investment in greenfields over the past two years. In 2023, we plan to moderate the pace to allow greenfield clinic portfolio to mature. We strategically locate our greenfield clinics where they can capture pent-up demand and in new markets where we can rapidly build a solid presence. In 2022, we entered into Kansas City with four clinics and added to our Army and Air Force Exchange service, two locations, one in Texas and Florida, and augmented our existing clinic clusters in California, Arizona, Virginia. In summary, at December 31, 2022, we had 838 clinics in operation consisting of 712 franchise clinics and 126 company owned managed clinics.

The portfolio mix was 85% franchise clinics and 15% corporate clinics. At year end, we had 235 franchise licenses in active development. This metric continues to demonstrate the strong pipeline for franchise clinic openings. Since the beginning of 2023 and through today, we’ve opened two new greenfields in existing clusters of Georgia and North Carolina. Turning to slide seven, in Q4 2022, we sold 17 franchise licenses up from 12 in Q3 2022 and compared to 44 in Q4 2021. For 2022, we sold 75 licenses compared to the company record of 156 sold in 2021, which reflected the pent up demand related to COVID. That said, given the economic headwinds of 2022, we’re pleased with our 75 license sales, which is quite high compared to other franchise systems.

Further, approximately 60% of our franchise licenses were to existing franchisees reinvesting in the brand for 2022 up from 50% in 2019 through 2021. This demonstrates the health and viability of our franchise system and is a validation of our franchise belief in the strength of our business model. Regarding regional’s developers in 2022 — October 22, we repurchased the RD rights for Philadelphia. This put our RD count to 18 where remained at December 31, 2022. Throughout the year, RDs sold 67% of our franchise licenses and support 69% of our clinics. Our aggregate 10-year minimum development schedule for new RD territories established since 2017 was 626 clinics as of December 31. Turn to slide eight, our industry-leading franchise performance continues to be acknowledged.

For 2023, Entrepreneur Magazine named The Joint top franchise in the chiropractic service category and top 10% in the franchise 500. Franchise Business Review identified us as the top franchise for 2023 and one of the most profitable franchises and the top franchise for veterans, and for the eighth year running Franchise Times recognized The Joint as experienced rapid, yet a sustainable growth on its 2023 Fast and Serious list. Additionally, Fran Data, which provides franchise business intelligence is similar to a FICO score for consumers rated The Joint Fund score at 910 out of 950, compared to the average of 593. They also presented us with the Top Fund Award for the second year in a row. Turning to slide nine, let’s review our marketing efforts.

In Q4, we kicked off our promotion season with our new Give Thanks Give Back social campaign sweepstakes. This is our strongest social campaign in our history with over a 2,700% increase in engagements from our patients and followers. We leveraged the surge of the momentum surrounding this campaign and shortly thereafter launched our annual holiday promotions, both of which top last year’s performance. Compared to 2021, Back Friday grew 32% and end of year promotion increased 44%. We continue to enhance our media campaigns in a variety of our sophisticated digital marketing program. Digital Leaves grew to 62% of all new patients in 2022, a record high for The Joint, which further validates the importance of our digital program in patient journey to chiropractic.

In terms of our organic search engine traffic, we improved our website structure and responsiveness to optimize search engine readability in order to rank more favorably. As a result, we’re demonstrating year-over-year growth in our web traffic. Finally in 2022, utilizing our Public Relation efforts, we continue to educate and create awareness around the chiropractic care and its benefits, thereby building value and equity in the brand with almost 900 million earned media impressions throughout the year. Before I turn it over to Jake, I would like to introduce our new Chief Human Resource Officer, Krischelle Tennessen. In today’s competitive job market, recruiting, developing and retaining top talent is crucial. Krischelle’s nearly 30 years of experience in cross-functional focus and successful performance delivery will be instrumental in fostering our expansion and attracting the right people to join us in our mission to improve quality of life through routine and affordable chiropractic care.

And with that Jake, turn it over to you.

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Jake Singleton: Thank you, Peter. Turning to slide 10, I’ll review the financial results for Q4 2022 compared to Q4 of 2021. System-wide sales for all clinics open for any amount of time increased to $120.1 million, up 18%. System-wide comp sales for all clinics open 13 months or more were 8% up from 6% in Q3, bolstered by sequential improvements in both corporate and franchise clinics with corporate achieving low double digit comps. System-wide comp sales for mature clinics opened 48 months or more were 2%. Revenue was $27.8 million, up $5.7 million or 26%. Company-owned or managed clinic revenue increased 39% contributing $16.5 million. Our revenue from franchised operations increased 10%, contributing $11.3 million. The increases represent continued growth in both the corporate portfolio and the franchise base.

On March 01, 2022, we implemented a price increase in approximately 75% of our clinics. However, existing patient memberships were grandfathered at their original price. Therefore, the revenue impact from the price adjustment will be gradual and incremental. At December 31, 2022, about 56% of our active members were on the new price structure, reflecting improved attrition. Cost of revenues was $2.6 million, up 8% over the same period last year, reflecting the associated higher regional developer royalties and commissions. Selling and marketing expenses were $3.3 million up 13% over the same period last year, driven by an increase in advertising fund expenditures from a larger franchise base and an increase in local marketing expenditures by our company owned or managed clinics.

Depreciation and amortization expenses increased compared to the prior year period, primarily due to the continued greenfield development and acquired clinics. G&A expenses were $18.3 million compared to $14.9 million, up 23%, reflecting the cost total support total clinic and revenue growth and higher payroll to remain competitive in the tight labor market, partially offset by the fact that bonuses were not paid in 2022. Operating income was $1.3 million compared to $7,000 in Q4 2021. The improvement was driven by margin expansion in the franchises and lower legal expenses as compared to Q4 2021. This was partially offset by continued corporate margin compression, reflecting the newer greenfields and continued wage pressure. Income tax expense was $660,000 compared to $351,000 in Q4 2021.

Net income was $547,000 or $0.04 per diluted share compared to a net loss of $360,000 or $0.02 per diluted share in Q4 2021. Adjusted EBITDA was $4 million compared to $2.1 million for the same period last year. Franchise clinic adjusted EBITDA increased 20% to $6 million. Company owned or managed clinic adjusted EBITDA was $1.6 million flat compared to Q4 of last year, reflecting margin compression related to greenfield development, continued wage pressure and overhead investment outside of the clinic’s four walls. Corporate expense as a component of adjusted EBITDA loss was $3.6 million, improving $924,000 from Q4 2021. On to our balance sheet and cash flow review at December 31, 2022, our unrestricted cash was $9.7 million compared to $19.5 million at December 31, 2021.

This reflects our $20.9 million investment in the reacquisition of 16 previously franchise clinics and the rights to three regional developer territories as well as the development of 16 greenfield clinics. Cash flow from operations was $11.1 million, which supported our investments. We continue to have access to additional cash through our line of credit with JP Morgan. Today, we have drawn $2 million and have $18 million remaining available. On to slide 11, I’ll review our results for the full year of 2022 compared to 2021. System-wide sales for all clinics open for any amount of time increased 21%. System-wide comp sales for all clinics open 13 months or more were 9%. System wide. comp sales for mature clinics open 48 months or more were 4%.

Revenue increased 26% to $101.9 million, and adjusted EBITDA was $11.5 million compared to $12.6 million, reflecting the compression of earnings by the influx of 36 new greenfield clinics in the past two years and higher payroll expenses associated with the tight labor market. On to slide 12 for a review of our guidance for 2023, we expect to grow revenue to be between $123 million and $128 million compared to $101.9 million in 2022. We expect adjusted EBITDA to be between $12.5 million and $14 million compared to $11.5 million in 2022. This reflects our continued investment in people with higher expected labor costs to attract and retain doctors and team members. We expect franchise clinic openings to be between a 100 and 120 compared to 121 in 2022.

Historically, company-owned or managed clinic openings included a combination of both greenfield and acquisitions. We will continue to acquire previously franchise clinics. However, as these transactions are opportunistic, we will no longer include the acquired clinic estimate in our guidance. To provide greater clarity, the 2023 company owned or managed guidance includes greenfield clinic openings only. We plan to open between eight and 12 greenfield clinics compared to 16 in 2022. We’re approaching our near term target of a 1,000 clinics. Based on our current patient demographics, we are well on our way to our long-term goal of nearly 2,000 clinics. As we further develop our model with rural, urban and international clinics, we broaden our long-term market potential.

And what’s that? I’ll turn the call back over to you, Peter.

Peter Holt: Thanks, Jake. Turning to slide 13, approaching these milestones is quite an achievement. Has less than 3% of franchise systems have achieved more than a 1,000 units. Since 2016, we’ve been driving clinic expansion with transformational changes including an improved grand opening process, new standard operating procedures, additional digital marketing strategies, sustainable focused procurement, improved IT and more. Our efforts to manage economic headwinds in 2022 were fruitful as we close a year with improving our core KPI metrics such as conversion and attrition. While the macro economy still has uncertainty, the chiropractic care market has solid growth drivers, and The Joint has even more positive catalyst. In addition to The Joint detracting patients from other practitioners, 34% of our new patients in 2022 were completely new to chiropractic care.

This means The Joint continues to expand entire market for chiropractic care. In fact, our 12-year compounded annual growth rate of 62% dwarfs the industry’s CAGR of 4.3%, which is respectable on its own. Our growth is fueled by a combination of our patients referrals and our successful marketing programs. Digital marketing continues to be ever increasing growth driver with the majority of our new patients having interacted with one of our digital platforms. We believe they are also attracted younger population. Our patients come from all walks of life, and the median age is 37.6 years. This compares to the traditional chiropractic provider who typical patient demographic weighs heavily toward those using insurance who are older, female, and affluent.

The marked distinction is increasingly important because the younger generations don’t typically carry a stigma toward chiropractic and are proactively looking for more natural holistic ways to address their pain. To leverage these differences we will continue to invest in marketing that effectively reaches consumers of all aspects of their patient journey. In doing so, we expect to capture greater portions of that $19.5 billion spend on chiropractic care in the United States annually, as well as to continue to expand the market. Turning to slide 14, we intend to do this by continuing to execute our corporate initiatives. First, in forging the chiropractic dream in 2022, we increased our attractiveness by improving our employer branding, our social media engagement, our school partnerships and events, and our continuing education platform.

Looking ahead, we continue to focus on recruiting and retaining the finest doctors of chiropractic to fuel our growth. Regarding the harnessing the power of our data, we’ve increased the speed of our system updates, and launched the first version of our intelligent business intelligence and analytical reporting tool. Looking ahead, we plan to create an automated marketing program and later in the year launch a patient portal. Lastly, in exterior, in accelerating the pace of our clinic growth in 2022, we accomplished several milestones throughout the year. We entered new markets in opening clinics in Alaska, Montana, Washington, DC, and Kansas City, as well as signing leases for clinics in New York City. By December 31, 2022, we reached 838 clinic and operation.

Regarding their development, we’ve been testing proven concepts in smaller markets, pedestrian driven, highly urbanized sites, as well as evaluating expansion to Canada. Overall, we remained focused on the driving long-term growth and stakeholder value. And with that, Nick, I’m ready. I’m ready to begin the Q&A.

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Q&A Session

Operator: First question will be from Jeff Van Sinderen of B. Riley. Please go ahead.

Jeff Van Sinderen: Hi everyone and congratulations on a strong finish of the year. Just wanted to see if there’s anything you could tell us, I guess, about what you’re seeing so far in 2023 anything around retention, new patient ad metrics so far and then maybe if you could just touch on the corporate clinic performance that you saw in Q4 versus franchise clinic performance. And then also as kind of a dovetail to that, if you could just touch on maybe how you’re evolving marketing plan, it sounds like you’re really leaning into digital because you’re getting great traction there. Just any thoughts on that for 2023?

Peter Holt: Well Jeff, again, thank you for the compliments that was a lot of parts of that one question. And so speaking to, historically we don’t really talk about the upcoming quarter on our fourth quarter full year performance. But what we would say is that we are seeing that that continued momentum, as I mentioned in my call as we go, we finished the year and we’re seeing that momentum carry us into Q1 or at least into the first several weeks of this year. So that gives us, obviously a positive view of where we’re going. We also have to remember that in 2023, there’s just a lot of potential headwinds that none of us can anticipate, whether it’s inflation, whatever happens with the war in Ukraine, increasing rising of interest rates.

So there’s a lot of factors there that we’re trying to manage through as we did through 2022 without really knowing what, how it’s going to work. As it relates to the overall corporate performance, I’m going to turn that one over to you, Jake.

Jake Singleton: Yeah, I think as we think about corporate versus franchise, a lot of expansion in the 2022 period by the end of the fourth quarter our corporate performance had actually reached back to double digit comps. So we were really pleased with how that portfolio performed in the back half of the year. And again, looking for that momentum to continue for the full year, so total system was around 9% still predominantly dominated by those 700 plus franchise clinics. So, again, strong comp performance from the franchise base. But we were really pleased with our corporate clinic portfolio and especially how they performed around our two core promotions in the fourth quarter. And then your final first question on talking about digital marketing is absolutely we see that as only becoming more and more relevant and important in that whole lead generation process for new patients in our system, typically there’s three sources for new patients.

One is in probably most historically most important, and that’s referral. So that’s getting good service to our patients and our, and those patients been referring their friends and family to come to The Joint and we have probably around a 30% their friends and family to come to The Joint and we have probably around a 30% referral rate right now. System wise, as I mentioned on this, on the call, there’s, we can identify that 60% of those new patients are coming from our digital activity. Sometimes there’s a little bit of overlap, patient attribution is kind of tricky because we have all kinds of different ways that we’re approaching educating a consumer about The Joint, but we know we can identify that of that new patient count. At least 60% of them at one point touch one of our digital assets.