JOINT Corp Q3 FY2021 Earnings Call

Good day and thank you for joining us. Welcome to The Joint Corp Q3 2021 Financial Results Conference Call. All participants are currently in listen-only mode. After the presentations, we will have a question-and-answer session. I would now like to turn the call over to David Barnard from LHA Investor Relations. Please proceed.

Thank you, Lee. Good morning, everyone. This is David Barnard from LHA investor relations. On the call today, President and CEO Peter Holt will review our third quarter 2021 performance metrics and provide an update on the business. CFO Jake Singleton will detail our financial results and guidance, and Peter will close with a summary and open the call for questions. Please note we're using a slide presentation it can be found at https://ir.thejoint.com/events. Today after the close of market, The Joint Corporation issued its financial results for the quarter ended September 30, 2021. 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 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 the continuing impact of the COVID-19 outbreak on the economy and our operations, including temporary clinic closures, shortened business hours and reduced patient demand. 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, and our inability to identify and recruit enough qualified chiropractors and other personnel to staff our clinics, due in part to a nationwide labor shortage. Short selling strategies and negative opinions posted on the internet which could drive down the market price of our common stock and result in class action lawsuits, as well as the other factors described in risk factors in our annual report on Form-10K as filed with the SEC for the year ended December 31, 2020. As updated or revised for any material changes described in any subsequently filed quarterly reports on Form 10-Q or other SEC filings. We anticipate filing our September 30, 2021 10-Q on November 5. 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. Please note during the quarter ended September 30, 2021, the company identified an immaterial error in the calculation of deferred revenue related to wellness packages. Management assessed the materiality of the error and determined the impact on the company's condensed financial statements was not material. The December 31, 2020 balance sheet has been revised to correct the error as of January 01, 2020. 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. Turning to Slide 3, it is my pleasure to turn the call over to Peter Holt.

Thank you, David. And I welcome everybody to the call. During the third quarter, we continued to execute our long-standing strategy to build a joint brand by opening franchised and corporate-owned or managed clinics in retail settings. Additionally, we looked to opportunistically acquire creative franchise clinics and build new greenfield clinics that complement our corporate portfolio. As a result, we've advanced our revenue growth momentum. We continue to be on track with our goal of 1000 clinics in operation by the end of 2023. And we'll position our business for longer-term expansion well into the future. Recently, we received a great deal of interest from new investors. I'd like to welcome them and summarize our investment rationale. The Joint is revolutionizing access to chiropractic care. Located in convenient retail settings, our clinics provide concerto-style, membership-based services. Patients benefit from attractive pricing and convenient hours without the need for insurance or appointments. Our growth strategy is to build our brand, increase awareness of the efficacy of chiropractic care, deliver an exceptional patient experience and open more clinics. We're already the largest and most recognizable provider of chiropractic care in the country, and yet we only account for approximately 2% of this highly fragmented, nearly $18 billion chiropractic care market. As such, we have a significant opportunity to continue increasing our market share as we further refine and expand the market itself. Turning to Slide 4, I'll review a few highlights of our third quarter 2021 results. Later, Jake will discuss our financial results in detail. In Q3 2021, compared to Q3 2020, system-wide sales grew to $93.4 million, increasing 37%. Our comp sales for clinics that have been open for at least 13 full months grew to 27%. Revenue grew 36%. Adjusted EBITDA increased to $3.3 million, up 25%. At September 30, 2021, our unrestricted cash was $19.5 million, compared to $20.6 million at December 31, 2020. Turning to Slide 5. Let's review our portfolio. Regarding clinic expansion, during Q3, we opened 33 clinics, 28 franchised and five greenfield, up from a total of 21 opened and one closed in Q3 2020. This brings our nine-month total to 87 clinics opened, compared to 52 in the same period of 2020. Our clinic expansion strategy remains unchanged. We're accelerating our openings of new franchise clinics. And we're significantly increasing our corporate portfolio by strategically building greenfield clinics where we can open up new markets or enhance existing corporate clinic clusters and finally, by purchasing franchise clinics in strategic locations that will be accretive. During Q3, we opened five greenfield that extend our reach in Virginia, Southern California, and Arizona. Virginia also increases our foothold in the new established corporate clinic presence in the southeast region. That said, it's important to remember that when greenfields first open, they're expected to compress margins. As corporate clinics contribute 100% of the top and bottom lines, when mature, they have a greater financial economic benefit compared to franchise clinics for the company. We continue to have exceptionally low clinic closure rates of less than 1% annually. This quarter, once again, we did not have any clinics close compared to only one closure in Q3 2020. In summary, on September 30, 2021, we had 666 clinics in operation, consisting of 583 franchised and 83 company-owned or managed clinics. Our portfolio mix remained at 12% corporate clinics and 88% franchise. At quarter end, we also had 295 franchise licenses in active development. Reflecting the increased interest in the franchise system, this figure continues to grow and compares to 282 million at the end of June 30, 2021. After the quarter closed in October, we opened an additional greenfield in Arizona, bringing our total greenfield count to 12 for the year. On November 1, we acquired four previously franchised and strong-performing clinics in northern North Carolina, bringing our total corporate portfolio to 88 as of today. The acquisition was immediately accretive to the strengths of our corporate presence in the southwest region. The ability to create a formidable cluster in a new territory reinforces our decision to repurchase the regional developer territory at the beginning of the year. Turning to Slide 6. In Q3 2021, we sold 44 franchise licenses compared to 30 in Q3 2020. This brings our nine-month sales total to 232 compared to 65 franchise license sales in the same period in 2020. Our franchise concept continues to attract sophisticated well-capitalized franchisees. One such investment group, in which a board member holds a minority interest, owns three clinics which is less than 1% of our total clinic count. Please note that all franchisees follow the same rules and the same fee schedules, and as independently owned and operated businesses, keep their finances completely separate from that of The Joint Corp. During Q3, 82% of the franchise licenses were sold by our regional developers who continue to accelerate our growth. As noted previously, all franchisees sourced by an RD or a corporate sales rep must meet our high criteria to be selected and must participate in a thorough due diligence process prior to approval. To understand the health and viability of our franchise system, an important measurement to track is the number of franchise licenses sold to franchisees new to the concept compared to existing franchisees. Each year from 2018 through today, over 50% of our franchise license sales have been to existing franchisees reinvesting in the brand. This very healthy mix demonstrates the strength of our business model and provides positive validation for new candidates interested in the franchise. At September 30, 2021, our 21 RDs supported 70% of our clinics, and their territories covered 59% of the metropolitan statistical areas, or MSAs. Our aggregate 10-year minimum development schedule for new RD territories established since 2017 is 693 clinics. Keep in mind that a portion of this clinic count has already opened, but this still provides a large foundation to fuel our continued clinic expansion and sales growth. Turning to Slide 7, let's review our marketing efforts. In Q3, we launched a new educational campaign promoting the benefits of chiropractic care for kids during the back-to-school season. Our efforts relied heavily on our PR and social media content to reach parents and school-aged children with our message. We're pleased to say we generated over 230 million media impressions from that campaign. In Q4, our focus will be on our holiday promotions starting with our November Black Friday package sale, and then moving to our December year-end membership promotion. These direct marketing campaigns offer our patients a limited time opportunity to save on their chiropractic care. Finally, I'd like to congratulate Jason Greenwood, whom we just promoted to Chief Marketing Officer. Jason joined us almost four years ago and has been an instrumental driver of growth during his tenure. As a talented strategist, he's leveraged our unique market position and skills to build successful marketing programs and elevate our performance. Jason's efforts continue to enhance branding, build culture, attract key talent, generate leads and increase our new patient conversion. I look forward to his ongoing contribution as we begin to unleash the power of this new IT platform, particularly from a marketing perspective. Speaking of which, I'll turn to Slide 8 to review our initiative to improve our technology infrastructure. Axis 1.0, the first innovation of our new IT platform, was formally launched in July. Our goal was to migrate from our homegrown legacy system to a licensed scalable platform, which we accomplished successfully without major disruptions. Like any implementation of a system of this complexity and magnitude, we're currently addressing bugs and process improvements as we plan for the next phases of our technology roadmap. I want to pause and thank our franchisees and our clinic users for their enormous effort to help us through this transition and support their patients through this process. We look forward to introducing new innovations that will build on this platform and create increased value for our business. And with that, Jake, I'll turn it over to you.

Thank you, Peter. I'll review Q3 2021 compared to Q3 2020. Please remember, while the second quarter of 2020 was impacted by the pandemic, our swift actions enabled The Joint to rebound in the third and fourth quarters of 2020. As a result, full-year 2020 delivered our strongest financial performance for any year-to-date. We're very pleased that 2021 continues our growth momentum. For Q3 2021 compared to Q3 2020, system-wide sales for all clinics open for any amount of time increased to $93.4 million, up 37%. System-wide comp sales for all clinics open 13 months or more were 27%. System-wide comp sales for mature clinics open 48 months or more were 21%. Revenue was $21 million, up $5.6 million, or 36%. Company-owned or managed clinic revenue increased 38%, contributing $11.6 million. Franchised operations increased 34%, contributing $9.4 million. Cost of revenues was $2.3 million, up 34% over the same period last year, reflecting the increase in franchise clinics, and the associated higher regional developer royalties and commissions, as well as higher website hosting costs related to the new IT platform. Selling and marketing expenses were $2.9 million, up 56% over the same period last year. This reflects the larger number of franchised and company-owned or managed clinics, grand opening expenses for our new greenfield and the timing of the national marketing fund spending. Depreciation and amortization expenses increased for the third quarter of 2021 as compared to the prior-year period, primarily due to the amortization of reacquired development rights in December 2020 and January 2021, the amortization of intangibles related to the 2021 clinic acquisition and depreciation expenses associated with our Axis IT platform and greenfield development. G&A expenses were $12.8 million, compared to $9.4 million, up 36%. The increase was primarily due to an increase in payroll to remain competitive in the tight labor market, professional fees and IT expenses to support continued clinic count and revenue growth. We've opened nine greenfields since June and anticipate an increased pace of new greenfield openings. As such, we continue to expect G&A as a percentage of revenue to increase over the next several quarters. Operating income was $1.3 million, including the aforementioned depreciation and amortization from reacquired development rights, clinic acquisitions and greenfield development. This compares to $1.7 million in 2020. Income tax benefit was $614,000 compared to an expense of $76,000 in Q3 2020. The income tax benefit was primarily driven by the excess tax benefits from the exercise of stock options. Net income was $1.9 million, or $0.13 per diluted share, compared to $1.6 million or $0.11 per diluted share in Q3 2020. Adjusted EBITDA was $3.3 million, increasing 25% compared to the same period last year. Franchise clinic adjusted EBITDA increased 27% to $4.3 million. Company-owned or managed clinic adjusted EBITDA increased 43% to $2.8 million. Corporate expense as a component of adjusted EBITDA loss increased 40% to $3.8 million. On to Slide 10 for a review of our financial results for the nine months ended September 30, 2021, compared to the same period in 2020. Revenue was $58.8 million, up 41% compared to $41.6 million, operating income was $5.3 million, up 97% compared to $2.7 million, net income was $6.9 million, up 174% compared to $2.5 million and adjusted EBITDA was $10.5 million, up 95% compared to $5.4 million in the same period of 2020. On to our balance sheet and cash flow review. At September 30, 2021, our unrestricted cash was $19.5 million, compared to $18.5 million at June 30, 2021 and $20.6 million at December 31, 2020. During the first nine months of 2021, cash flow activities included $12.5 million provided by operating activities, which was offset by $11.2 million of investing activities, consisting of acquisitions, greenfield developments and IT capital expenditures, as well as $2 million of net cash used in financing activities, primarily driven by the repayment of the Paycheck Protection Program loan in March 2021. On to Slide 11, for a review of our guidance for the full-year of 2021. Based on the strength of our performance and our expectations for the fourth quarter, we're raising our 2021 guidance for franchise openings, revenue, and adjusted EBITDA. We now expect revenue to be between $80 million and $81 million. The updated midpoint reflects a 37% increase compared to 2020. We now expect adjusted EBITDA to be between $13 million and $14 million. Once again, please note these expected results include the impact of the increased number of greenfields that will be opened in Q4. The updated midpoint reflects a 48% increase compared to 2020. We now expect franchise clinic openings to be between 105 and 115. The updated midpoint reflects a 57% increase compared to 70% in 2020. We continue to expect company-owned or managed clinics, through a combination of both greenfield openings and franchise clinic purchases to be between 25 to 35. The updated midpoint is 7.5 times greater than the four we opened in 2020. And with that, I'll turn the call back over to you, Peter.

Thanks, Jake. Turning to Slide 12, I'm so very proud of our corporate staff and our entire community of franchisees, doctors and wellness coordinators. We've worked hard to foster a culture that is truly committed to our mission of improving quality of life. We continue to prioritize staff recruitment and retention. This is important now more than ever, given the macroeconomic labor shortage in the United States. Like others, we've experienced some challenges with attracting and retaining employees. But we've implemented a number of initiatives in this regard, including increasing the average salary for our doctors. Regarding our clinic expansion, we've already increased our 2021 clinic opening guidance twice this year. And we're on pace to meet the higher target as well as our 2023 year-end goal to open 1,000 new clinics, which is just a stepping stone to future development. Using only the demographics of our existing patient base and current MSA data, we've identified a minimum of 1,800 targeted clinic sites. The keyword to remember is minimum, as we have significant opportunities to exceed beyond these projections. One example of our expansion is on the Army & Air Force Exchange Service. Just last quarter, we announced our partnership with the exchange to bring chiropractic care on base to better serve members of the military community. Our initial plan included three clinics on Air Force bases in Arizona, Florida, and New Jersey. The exchange is so pleased with the initial progress and the early interest from service members that we've already started expansion plans for additional bases. This is just one element of the opportunity to tap into this nearly $18 billion market. Today, our annualized revenue represents approximately 2% of the market share, and we're optimistic about capturing additional share for the following reasons. First, chiropractic is still a fragmented market, with change accounting for just 4% of market share compared to the 12% in more developed dental professions. Second, the average clinic of The Joint significantly outperforms the average solo practitioner on both the top and bottom lines according to industry research. Third, we benefit from increasingly effective systems in marketing, operations, real estate, and technology as we continue to attract sophisticated franchisees who are accelerating our national footprint. Fourth, we know that only 50% of the U.S. population knows what chiropractic is, with over a quarter of our new patients being new to chiropractic itself is a strong validation of The Joint's leadership role in educating the consumer about the efficacy of chiropractic care. These efforts are growing the overall market. Finally, all this is further amplified by the fact that our patient base skews considerably younger than the traditional insurance-based providers. In fact, the vast majority of our net patient growth is derived from Millennial and Gen Z consumers; we have successfully tapped into the next wave of chiropractic patients. Our growth indicators continue to accelerate. These trends fuel our national footprint expansion as well as our confidence in our ability to drive long-term growth and stakeholder value. We're ready to begin the Q&A.

Thank you. Your first question comes from the line of Jeff Van Sinderen from B. Riley. Your line is open.

Hi, everyone. First, let me say terrific results. I guess one thing that I wanted to see if you would touch on, I know that you're still sort of in debugging mode or maybe at the end of debugging mode on the new software platform. Maybe you can speak a little bit more about the next steps, functionality components, and timeframe to layer on some of the capabilities that you're planning on that new platform?

Absolutely. Jeff, thanks for the kind words. Always a pleasure. And it's absolutely the right question. We truly believe that the increased technologies are really the foundation for our future. Everything is being more and more inspired by the technology that drives our business and how we make consumer choices. Right now, as you've heard us talk a lot, it's this lift and shift; we're just trying to get the bugs worked out. We're trying to move from our homegrown platform to this new, much more secure platform with licensed CRM. Some of the things that we're talking about from a patient's perspective are the creation of a mobile check-in, the creation of a patient portal, and the ability to do marketing targeted to the individual, leveraging the data we have about them. This is chiropractic care, which is a medical service, and we have an enormous amount of information on every one of our patients that can be used to understand consumer habits, and enhance our marketing efforts to them. Ultimately, we foresee the creation of a data warehouse that allows us to utilize this extraordinary value of the data we're collecting. But, this is going to take time. These are not Q1 initiatives. This is where we see ourselves going right now. We are continuing to focus on the stability of this new platform while laying out the future with a technology roadmap.

Okay, great. And then I'm just curious as a follow up, if you can just touch on any changes to your marketing and advertising promotional plans around the 2021 holiday season versus what you did in holiday 2020?

I think that what we've been finding is a greater response from our patients to these two promotions. As you know, we don't have a lot of promotions each year. These are our two major promotions that really drive our fourth-quarter performance. Jason and his team have taken best practices across the network. They're ensuring that we have 100% participation in the program. They have increased some of the tools that we're using to market the program. We have dedicated additional dollars from a media side to support these two initiatives. Therefore, we are entering this period with an expectation that we will see a consolidated performance of these promotions compared to what we did last year.

Excellent. Thanks for taking my questions and continued success.

Thank you.

And your next question comes from the line of Brooks O'Neil from Lake Street Capital. Your line is now open.

Hi, guys. This is Charles Spangler filling in for Brooks, and thanks for taking my question. One question I have is, are you seeing any issues with opening new clinics, like any supply chain issues, or staffing shortages, or anything of that nature?

Yes, as it relates to supply chain, as you know, the clinics are relatively simple built out. So we haven't experienced anything in terms of the supply side. As we look at the real estate side, we continue to target very high traffic areas; those retail leases that we target are still in demand. So we're working through that. The tight labor market is a challenge for everybody out there. That's why we're dedicating a significant amount of time and resources to the recruitment and retention of our doctors. But outside of those two things, we haven't seen much disruption.

Thank you. And one follow-up I have is you spoke about expansion plans to military bases, and with the promising responses you've been getting, what can we expect for the rest of the year and next year regarding expansion?

Well, we originally announced last quarter that we signed an agreement with the Army and Air Force Exchange to place three clinics on base. They have 3,500 bases around the world, not that we would be putting a clinic on every one of those bases. But we're seeing more interest from both military personnel and administration in the power and efficacy of chiropractic care. So there's a growing demand for chiropractic services within the military. We've already contracted for the three bases, and we are in discussions to increase that number to a number of bases going forward. We haven't given a final amount, but we would expect to have at least one or two of those bases open by year-end from the three we've already contracted and will continue to accelerate growth as we work with the Army to get these clinics open.

Thank you. And congrats on the great quarter.

Thank you very much.

Thank you. Your next question comes from the line of Ryan Kimbrel from Craig-Hallum. Your line is now open.

Hey guys, I'm glad to be here. I also want to extend my congratulations on the great performance this quarter. I want to ask what you've observed in terms of customer behavior. The Joint has clearly been a popular choice for consumers during the pandemic. Now that people are starting to look beyond the pandemic, have you noticed any changes in behavior, or have discretionary dollars shifted elsewhere?

Yes, Ryan, great question. And thanks for the remarks. As far as consumer behavior, looking at some of our KPIs, we're seeing great strength in our new patient attraction. We continue to have one of the strongest years we've seen regarding attracting new patients. On top of that, we're seeing strength in our conversion metrics, meaning that we're converting them onto the subscription or wellness package side. These are two really strong indicators. Looking at patient interest in our model, I think we continue to be incredibly well positioned as it relates to being in the health and wellness space, attracting interest from millennials, which is our highest demographic base. So we're seeing great strength there. I don't know, Peter, if you'd like to add anything?

Absolutely. Ryan, look at the comps. That is the greatest exercise to look at what impact you're having in terms of growth. And you know that posting 27% comp. Now, compare that to 53% in Q2 2020, and it feels like, oh my gosh, what's going on. Any retail concept posting consistent growth of 20% or more comps suggests that you've got a lot of happy customers. Our existing patient base is coming in more often, and as Jake was saying, we're seeing more new patients open that door for the very first time.

Okay, and then if I can touch on what you just commented on, Peter. You guys lapped up 15% comp fairly easily in Q1, and the same could be said from the 12% here in Q3. Can you tell us how you're thinking about Q4 and maybe the first half of next year, if you tell that far ahead?

Well, we don't guide on comps. So I don't have an exact number to give you. I'd say we've really seen your momentum pick up; we were impacted by the pandemic. If you look at 2020, we did have 15% in Q1, which was really punctured by the two weeks of COVID. Then in Q2, that was our worst quarter, the nadir of the pandemic, when no one knew what to expect, and our comps were negative for the first time at 6%. We saw them come back up to 12% in Q3 and 16% in Q4. Q1 comps were 21%. Now Q2 2021 was impacted by the low level of last year, but still 33% comp says to you that the momentum is back. We're settling down a little to that 27% comps for this quarter. Could I project that going forward? I think that's probably high. But I would say that we're continuing to see the momentum driving the growth of this organization.

All right, thank you. Congrats again, guys.

Thanks a lot.

Thank you. Your next question comes from Matt Bullock from Maxim Group. Your line is now open.

Hi, thanks for taking my questions and congrats on the great quarter. I think you mentioned that right now you maintain the 12% corporate clinics and then 88% franchise clinics. I was hoping you could comment on whether or not you expect this mix to shift as you accelerate some of these greenfield openings or if the franchise openings are just happening too rapidly. Also, if you could just comment on what you see as your ideal ratio once you reach that 1,000 clinics mark and beyond?

Yes, Matt, that's a great question. You're right. I think you had both sides of it. We are going to continue to accelerate our corporate openings, but shifting the mix will be hard to keep pace with those franchise openings. We continue to set the bar that relates to continued interest in this model. Our franchise sales have set another record for this year. Given the strength, I look at how I'm going to shift that mix, you might see a short-term uptick, but at the end of the day, the franchisees will be opening them just as fast. We'd love to see that momentum. As for an ideal mix, we haven't provided forward guidance. What we know is that based on unit economics, it makes sense for us to continue to develop these units alongside our franchisees. So we'll continue to stay true to our dual model, expanding both our corporate portfolio and the franchise model. We'll see where that goes, but both strategies are continued for us.

Excellent, thank you. I'll hop back into the queue.

Thank you. There are no further questions at this time. Presenters, please proceed.

Thank you, Lee. Thank you all for your time today. We're honored to be recognized last week by Fortune 100 Fastest Growing Companies, ranking us as number three. Through the end of the year, we'll present at the Craig-Hallum Virtual Alpha Select Conference, the D.A. Davidson Annual Holiday Beauty and Wellness Bus Tour, and the Roth Deer Valley Conference. Given how much we talked about our doctors of chiropractic today, I want to share a story relayed to me by a D.C. who has recently joined our ranks. I’ll paraphrase what he said: I’ve been a Doctor of Chiropractic for 10 years, I founded my independent clinic in Pennsylvania and dedicated myself to my patients and my business. It took me seven years to build my practice to a comfortable level, and I was proud, but it took hard work and time which threw my work-life balance out of alignment, pun intended. Recently, my wife was offered a great opportunity in Atlanta, and we decided to move. I love being a Chiropractor, but I didn’t want to make the same sacrifices that it takes to build a successful practice. I interviewed at many clinics and chose The Joint due to the care and support they provide for both patients and doctors. Now, I’m the lead doctor at The Joint clinic, which enables me to do my best work while maintaining a home life and vacation. I’m grateful for the opportunity that The Joint has given to me and my family. Thank you and stay well adjusted.

Ladies and gentlemen, that concludes The Joint Corp Q3 2021 financial results conference call. You may now disconnect. Thank you for your participation.