JOINT Corp Q1 FY2022 Earnings Call

Thank you, Alexander. Good afternoon, everyone. This is David Barnard with LHA Investor Relations. On the call today, President and CEO, Peter Holt, will review the first quarter 2022 performance metrics and provide an update of 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/events. Today, after the close of the market, The Joint Corp. issued its financial results for the quarter ended March 31, 2022. 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; inflation, exacerbated by COVID-19 and the current war in Ukraine; 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; our inability to identify and recruit enough qualified chiropractors and other personnel to staff our clinics, due in part to the 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; our failure to remediate the current or future material weaknesses and internal controls of our 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 included in the section under Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 14, 2022 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 the 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. They 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 first quarter of 2022, we continued to drive growth of our retail-based chiropractic clinic concept. We opened new franchise and company-owned or managed clinics bringing the total to 736 at the end of March 31, 2022 with our corporate portfolio reaching the 100 clinic milestone. In addition year-to-date, we've acquired two regional developer territories, which support our corporate clinic growth strategy. Throughout the year to advance our growth, we intend to execute on three enterprise initiatives, forging the chiropractic dream by offering the best career path for chiropractic and the doctors of chiropractic; harnessing the power of our data by leveraging our new CRM platform; and accelerating the pace of clinic growth through continuous improvement of our comprehensive franchise sales and clinic opening strategy. Guided by this strategic plan of action, we believe that we're well positioned to achieve our goal of 1,000 clinics in operation by the end of 2023, creating the foundation for continued future growth. Before I go into greater detail, I'd like to welcome our new investors and summarize our investment rationale. The Joint is revolutionizing access to chiropractic care. Located in convenient retail settings, our clinics provide concierge-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, most recognizable provider of chiropractic care in this country. And yet we account for approximately 2% of this highly fragmented, nearly $18 billion chiropractic market. As such, we have a significant opportunity to continue to increase our market share as we further refine and expand the market itself. Turning to Slide 4, I'll review our financial highlights; later Jake will discuss the results in detail. For the first quarter of 2022, compared to the first quarter of 2021, system-wide sales grew to $98.8 million, increasing by 27%. Our comp sales for clinics that have been open for at least 13 full months grew by 15%. Revenue increased by 28%. Adjusted EBITDA was $1.8 million, reflecting macroeconomic conditions as well as expected margin compression from the recent corporate greenfield openings. And as of March 31, 2022, our unrestricted cash was $18.3 million compared to $19.5 million at December 31, 2021. Turning to Slide 5, let's review our portfolio. Regarding the clinic expansion, during Q1 2022, we opened 31 clinics, which is up from 13 clinics in Q1 2021. Of the 31 opened this quarter, four were greenfield clinics and 27 were franchise clinics, which is the highest number of franchise clinics opened in any given first quarter. Also during Q1, one franchise closed compared to none last year in the same period. The Joint continues to have exceptionally low closure rates of less than 1% annually. Three of our greenfield clinic openings in Arizona, California, and New Mexico reinforced our strategy for enlarging our presence in corporate clusters. Our fourth greenfield clinic opened at MacDill Air Force Base in Tampa, Florida, which is the second clinic opened as a part of our agreement with the Army & Air Force Exchange Services to install our clinics on a military base and provide chiropractic care to our members of the military and their families. In summary, as of March 31, 2022, we had 736 clinics in operation consisting of 636 franchise clinics and 100 company-owned or managed clinics, while maintaining the same portfolio mix compared to December 31, with 14% corporate clinics and 86% franchise clinics. At the end of the quarter, we also had 278 licenses in active development, similar to the 283 at December 31, 2021. This metric continues to demonstrate the strong pipeline for franchise clinic openings and reflects both the accelerated number of franchise openings as well as the ongoing increased interest in our franchise system.

Thank you, Peter. And turning to Slide 9. Before I review the quarterly financials, I'd like to close the discussion on 2021 and review the impact of the changing market conditions in 2022. Regarding the 2021 material weaknesses related to our internal controls, we have begun the process of remediation. Internal controls have been designed and implemented. They will be tested for operational effectiveness over the next couple of quarters, and we expect the process to be concluded by the end of 2022. We, like the rest of the country, have been impacted by the larger macroeconomic issues, such as inflation, rising interest rates, and the tight labor market. These dynamics have contributed to higher turnover and rising labor costs. While we cannot control all of these issues, we have taken steps to be an employer of choice. As discussed in Q4, we raised the starting and average salary of our doctors of chiropractic or DCs. Regarding our wellness coordinators, over the past year, we have increased the complexity of their job responsibilities, which has led to increased turnover. In addition to the DCs and WCs, we had significant turnover in our field support. As such, in Q1, we redefined the roles and started adjusting their compensation accordingly. During Q1, our new clinic opening ramps continued to outpace historical averages. However, based on external macro factors, both build-out and operating costs have increased. In addition, the speed and magnitude of the accelerated greenfield openings and acquisitions warranted additional resources to manage this increased activity. To improve our corporate portfolio oversight, we've added operational support outside the four walls of the clinics and expect to bring the corporate portfolio back to its strong trajectory. Regarding new patients at existing clinics, we encountered two challenges during the quarter. As Peter noted, Google's changes to their online search algorithm had a negative impact on our digital marketing and consequently our new patient acquisition in Q1. We've implemented modifications that we believe will address the situation. Further, another COVID strain combined with continued labor pressures caused some temporary clinic closures. The temporary closures may have also impacted new patient counts for the quarter. That said, our expansion strategy continues. As noted in Q1, we opened a record number of franchise clinics and four more greenfield clinics, in addition to the 14 in the second half of 2021. With 18 recent greenfield openings increasing the company-owned or managed portfolio to 100 clinics, and the previously outlined macroeconomic factors, it was identified that additional resources would be necessary to operate a portfolio of that size and continue development at the current pace. These additional expenditures, as well as continued labor pressures, contributed to the corporate clinic performance in Q1 2021. Even with this near-term effect, we're confident that these changes will allow us to appropriately manage the portfolio back to the same long-term profitability of this sound business model.

Thanks, Jake. Turning to Slide 11, our growth strategy is to enlarge our presence by accelerating the opening of franchise clinics. We'll also continue to open corporate clinics in existing clinic clusters by strategically opening greenfield and opportunistically acquiring previously franchised clinics. In 2022, to support this effort, we are focusing on three enterprise initiatives. During the first quarter, we've made progress. Regarding forging the chiropractic dream, we've revamped our recruitment marketing materials and enhanced our messaging to better connect with candidates to become DCs. With the easing of COVID restrictions, we were able to participate in five live chiropractic industry and university DC recruitment events. And we remain focused on developing new programs aimed at chiropractic students who are the future of the profession, along with the continuing education opportunities that appeal to established DCS. Regarding harnessing the power of our data while remaining critically focused on improving and enhancing our access platform, we're excited to launch our enterprise data warehouse initiative to enable more real-time self-serve reporting capabilities for corporate office and field, making our data more accessible and actionable by all decision makers. As we look to 2023, our near-term goal is set to open 1,000 clinics by then, and this is just the tipping point. Already, our analysis comparing our actual patient demographics to MSAs across the U.S. indicates that we have potential for almost 2,000 clinics, and this does not include the opportunities that we can create by expanding our business model to rural, urban, micro, military, and even international locations. I'm confident in our ability to drive long-term growth and stakeholder value. Alexander, I'm ready to begin the Q&A.

Thank you. We have your first question from Jeremy Hamblin with Craig-Hallum Capital. Your line is open.

Thanks. I wanted to just get into the understanding of the cadence of the quarter. Obviously, you've seen a pretty significant change in the trends in inbound traffic, which sounds like some of it might be struggles with having enough doctors, but it probably is more than that. So I wanted to get – first, how did January versus February versus March versus April look? And then in terms of whether or not the slowdown in trends is more attributable to, let's say, an overall slowdown in retail traffic, given your leverage to power centers and retail centers. How much of an impact from the price increases that was taken on March 1? I wanted to just get a better understanding of what you think has transpired here?

Well, Jeremy, you've got about 15 questions packed into that question, and there's a couple of things there. And you're right; as we reflect on Q1 performance, we did discuss the challenges in the labor market, but quite frankly, that was more related to our WCs and infill training. I think that the increase we had on the DCs last fall has really helped us to retain the doctors that we have. So if I look at our turnover rate for the last three months in Q1 and compare that to the turnover rate of Q1 2021, it's 50% better. So this quarter was like 26% turnover for our doctors compared to over 52% in Q1 2021. So I think the changes we made last fall on the doctors are really helping. Now listen, our whole concept rests on doctors, and we know that we constantly have to be focused on recruiting and retaining the best doctors, and that's why that's one of our enterprise initiatives. But I think when I look at Q1 performance, we saw a significant turnover in our WCs and then in that field that supports those now 100 clinics. And I believe that impacted our overall performance of the portfolio. We did see a little bit of a softening of our new patient count, which is of course the fuel of the business. And as we talked about on the call, I think that was directly related to the algorithmic changes that Google made. We have an incredibly sophisticated digital marketing campaign. And as I mentioned in my comments, we’ve tried to understand the attribution of those new patients. At some point in that process, 63% of them have been touched by our digital marketing campaign. So when you have those significant changes made to those algorithms that were drawing people into the clinic, that had some impact for us in Q1. Now we're making some big changes in trying to address the way we are managing our SEO strategy that we believe will offset those changes that Google made in the algorithmic formula. I think you're right; like so many service sector concepts out in the market today are, this macro environment has indeed impacted us as well. And it's hard to kind of measure exactly what that is, but I think there is a concern about the war in Ukraine, and inflation is higher than it's been in 40 years. That kind of consumer confidence does give us all pause. I think that we've shown ourselves in that short period during the pandemic that we are a very resilient concept and we expect that to continue to be true, but it's factors that we're all in this retail environment, trying to understand and adapt to. I don’t know, Jake, if you have anything more to add to that?

No, I think you covered a lot of the points.

Well, I think my first question was actually pretty simple, with the cadence of the 15% system-wide comps that you posted in the quarter. I wanted to see if you could shed a little more light on the cadence of that because my sense is that things probably really slowed in February and March. And I want to get a sense of how that's compared to April as well. But any color you could share there would be greatly appreciated.

Yes. I mean it kind of depends on the KPIs that we're looking at. As I look at new patient interest, the waiting months for us were actually January and March. And I think those could be different factors potentially. We had a large spike of the Omicron variant in January, which could have impacted that. In March, I think we were starting to see some of the real impacts of the search engine changes. February was relatively on par year-over-year. So, as we look at that, as I consider comps, I think we started the year with a headwind. Our January results were lighter, and we've kind of slowly made up some ground. In the overall system, our corporate clinics kind of did the opposite in terms of experiencing some of the headwinds. So I think there were different factors contributing in terms of cadence depending on which metric you look at.

Okay. And last one for me, because I'm not quite sure we're getting at the root of it. But in terms of your guidance for the year, the lower guidance of $4 million top line at the midpoint, is that – it looks like that's basically assuming the performance that you had in Q1 kind of translate through the rest of the year without much improvement nor decline. Is that a pretty fair assumption?

Yes. We have a lot of consistency in terms of the increasing performance throughout the year, right? We've continued to post strong organic comps, 15% for the year so far quarter-to-date. And as we look at some of the uncertainties out there, we certainly factored in those elements as we look at forward guidance for the full year. And so we reaffirmed our clinic opening guidance, which is a slight acceleration in terms of pace. But there are those macro uncertainties that I believe we have to acknowledge. So all of those have been factored into the full year 2022 estimates.

Good afternoon, guys. I'm going to try to keep it as simple as I can. What are your feelings about the slowdown in the performance of the corporate stores and what do you think the key to getting those back on track are?

Brooks, an excellent question, and it's really the things we've been talking about. I think that there are a couple of factors that impacted the slowdown in particular corporate clinic performance, and probably the most significant one was the higher turnover than expected with our WCs and our field support. When you have that turnover and those are the people who are driving that line performance, and that W.C. is essential in the clinic. There's only two people in the clinic typically, so you have that WC and a DC, and they play a significant role. While we had been really focused on making sure we were taking care of our doctors, I don't think we paid enough attention to these other two levels. That's why we have added additional resources, we've changed the onboarding process, and we're doing a home mentoring program. I absolutely believe that with those changes, we can pull that performance of our corporate portfolio back up to the high standard that it's had. I think that now at 100 corporate units in operation, that's a lot. There's probably a little growing pain there as well, and we're learning from that or making those adaptations so that we ensure that we absolutely continue that trajectory of improved performance. So I think, quite frankly, those are the key issues that I would discuss.

Yes. We ended the quarter with $18 million of unrestricted cash. We also re-upped the revolver with JPMorgan, which really expanded that line up to $20 million. Of which, right now, we've only pulled down $2 million. So as I look at overall liquidity, I'm confident that we still have the operational cash flow and the additional resources on hand. So I don't envision us having to go that route.

Hi everyone. Just wanted to follow up. Jake, did you say that the – I think you mentioned quarter-to-date performance, did you say it was continuing comps at up 15%? I wasn't clear on that.

Yes. I was just mentioning our comps for the first quarter were 15%.

Okay. I thought you were saying quarter-to-date for Q2.

No, no, no. For the first three months, our comps were 15%.

Right, okay. All right, fair enough on that. And I'm assuming you probably don't want to give any color on comps for April or any guide on where comps might be for Q2?

No, not at this time. Sure. We've done four in the first quarter, three of which were within existing clusters, and then we had the Air Force location. As we mentioned, the top-line ramps look good. Our clinics continue to start strong. We have a very strong grand opening program that's in place. So we're continuing to see the traction on the top line. I think where the headwinds are now from an overall time to break even are just the operating costs are increasing. And so while they're still ramping on the top line well, I've got additional payroll costs, and payroll in our model is such a significant piece of that, and you've got significant wage pressures that's going to increase your time to break even. But on the top line, our clinics continue to outperform historical averages and are on pace with some of our previous cohorts. So the top line looks good and it's just our cost structure is increasing.

No, I was just going to add. One of the offsetting things that we discussed was also the price increase, which was used to offset some of the increasing costs to operate the business both for corporate and franchises. Again, that's going to be incremental and coming on in an impact that only affects new patients, but we believe that that's another tool we have to help us overcome some of the challenges with this increasing cost of the model.

Well, and that's another point I wanted to ask you about. Just I guess how are you approaching price increases? At this point, what are you seeing? Is there a pushback at all from new patients? I guess it may be early to really have a gauge on that. I guess just trying to understand how those are being received and plans going forward on price increases where you haven't implemented them, where you might, or just how you're thinking about that with a consumer backdrop of inflation, etc.?

Sure. I mean with the price increase going into effect March 1, I think the answer as of now is that it's probably still a little early to tell. Obviously, we're carefully monitoring KPIs. Our conversion in the first quarter was down a tick, but I don't know that we can attribute that fully to the price increase. Again, when you have so much turnover at your wellness coordinator level, they're a key component to that process and that sales cycle. And when you have a turnover at those ranks, you would expect an impact there to that core KPI. As far as the pre-buy or anything we're seeing in continuing KPIs, we're not seeing a ton of softness there. So I think so far, everything we're seeing is pretty similar to our previous price increases, but I think it's a little early to tell the full effects.

But promising. I mean just in the one month of that price increase that we can see is that, as Jake is saying, nothing is outstanding. Nothing is sitting and saying, wait a minute, the consumer is pushing back on the price. I think that poor consumer is experiencing price increases about just anything that they touch these days. Jeff, listen, the whole franchise model is based upon financing. And so anytime that you can improve the financing access to your franchisees, it's only going to benefit the system and the franchisee. And so while we do not provide any direct franchising – excuse me, any direct financing to a franchisee, we're continually working with third-party providers out there and engaging with them so that we get kind of pre-approved as a concept. And just given the strong unit economics that we have, the lending institutions really like The Joint as someone to lend to. And in fact, Brand Data just came out with – every year, they have an award that they give, it's called FranFund, and that we were awarded now two years in a row just given the strong financials that we have that provide the opportunity for lending compared to all the other franchisors out there. So we have strong unit economics; they are attractive to the lenders. We are continually looking at ways to ensure that capital is available to our franchisees for further investment. And as we've discussed in the past, if you look at general trends from 2018 to today, 52% of our system-wide sales were to new franchisees; new to The Joint, but 48% of them were to existing franchisees. It’s the existing franchisees who believe in the system, that understand the business model that you absolutely want to make sure that they are able to access capital to expand.

Yes, the only thing I would add to that is a pool of funds that we're looking at is what we're calling a fund to really help the doctors of chiropractic secure financing and so giving them a path to ownership within this model and looking for institutional partners to partner with us really to help them. So again just looking at ways to continue the career progression for our chiropractors.

Okay. And if I could just squeeze in one more just on that. As you're thinking about higher rates out there, I mean for anybody who is borrowing to open more franchises, are you thinking that there may be a slowdown in new franchises opened because of the higher interest rates in association with opening franchises?

Jeff, it's certainly possible, I mean because – okay, I've been at this franchise business for 35 years, so that means that I have – I wasn't here 40 years ago when we were dealing with this massive inflation and how that impacted franchise sales. But I think your sense is right, is that as the cost of borrowing goes up, whether you're trying to borrow for a house or borrow for a business, it becomes more expensive. That window closes a little bit on those who are able to be in that market. I think that this certainly will have an impact on franchisers across the board.

Yes. The only thing I would add to that is I think a mitigating factor for us is just the overall cost to build, right? When you're looking at a build-out cost in our model of call it $200,000 compared to other concepts, that's relatively lesser. So as I think about the overall impacts of interest rates on lending and what they might need to acquire to invest within our concept, the simplicity and the size of our build-outs will be a potential mitigating factor to that.

Absolutely.

Hi, this is Matt on for Anthony Vendetti. Thanks for taking my questions. I was hoping if you could comment on any trends you may be noticing in terms of patients not renewing memberships or canceling memberships? Are you getting the general sense that budgets are tightening? And then I think you mentioned that you're exploring the feasibility of expanding into Canada. If you could just comment a little bit further on that in terms of what that would look like and the timing. Thanks.

Sure. Great talking with you, Matt. As we look at the key metrics of the business, they really are new patient counts, that conversion rate, and then attrition. What I can tell you in the first three months of our business is we saw, as we talked about on the call, a drop in our new patient count. We attribute that to the changes in the algorithms of Google, and that's a huge piece to our new patient development. I mean we still got – there's other sources for new patients, one of them is referral, and so if you just get good service, it’s very often you're going to tell friends and family, and that’s a significant portion of our new patients. But the digital marketing campaign is increasingly more important. The second metric we're looking at is our conversion rate, and again, as Jake had mentioned, we're seeing a little drop in that. And so that's just more people not – they may come in, they try the service, and they're just not buying that membership. The one metric that we're seeing improve is that our attrition rate has improved, not massively, but it's definitely shown a reasonable improvement by saying our patients are staying with us longer. So those are the three metrics we've watched and the impact we've seen through Q1. Your question about Canada: we believe Canada can be potentially a really good market for us. With what we know as we consider international expansion is that we wouldn't even consider a country that doesn't already have a strong chiropractic tradition, just because obviously, just think about the resources required to educate a consumer who has no expertise, experience, or knowledge of chiropractic, and we're coming in and saying, here's our revolution of access. But when you look at the Canadian market, it does have a strong tradition for chiropractic usage. Interestingly enough, the national health care system there does not cover chiropractic care. We look at our base of members in this country, and quite frankly, the largest portion of those from outside the United States are from Canada. That’s not too surprising, but it just again gives us confidence that there is an opportunity to open up in the Canadian market. We've done some additional research. We're looking at just some of the issues around patient privacy and those that are managing the system and providing services in a medical environment. So, we're just doing that due diligence to ensure that our model is functional in that market. And there are other markets that we can consider that also have a strong chiropractic tradition, like Mexico, but obviously Canada is the most likely market for us to explore seriously. Thank you, Alexander. And thank you all for your time today. Next week we're hosting our National Franchise Conference, and we're so excited to be in person for the first time in three years. The event includes general sessions, workshops, and a trade show, all focusing on the improvement of our running of our businesses, and as we acknowledge and celebrate the remarkable performance of our franchise community. We're inviting you all to our offices in Scottsdale on May 26 for our Annual General Meeting of Shareholders, and we plan to present at the B. Riley, Craig-Hallum, Oppenheimer, and Stifel conferences in May and June of this year. And today I'm going to close with comments from a fairly new patient. Tracy, a 53-year-old flight attendant who describes herself as a short person, has said lifting bags into the overhead compartment strains her upper back and shoulders. Tracy finds The Joint drop-in convenience very valuable, especially with her frequently changing schedule. More importantly, she thinks our chiropractors are the best she's seen. Tracy notes that visiting The Joint not only adjusts my spine, but it also adjusts my attitude. I feel better. I feel like I'm aligned. It helps me make healthy choices for the rest of the day. It’s just the time I spend on myself. I love that place. Thank you and stay well adjusted.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.