Good day, and welcome to The Joint Group Corp. First Quarter 2024 Financial Results Conference Call. Please note, this event is being recorded.

Thank you, Kaley. Good afternoon, everyone. This is David Barnard of LHA Investor Relations. Joining us on the call today are President and CEO, Peter Holt, and CFO, Jake Singleton. Please note, we're using a slide presentation that can be found at https://ir.thejoint.com under Events. Today, after the close of market, The Joint Corp. issued its results for the quarter ended March 31, 2024. If you do not already have a copy of the 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 of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts may be considered forward-looking statements. Although the company believes that 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 various risks and uncertainties. As a result, we caution you against placing undue reliance on these forward-looking statements. For a discussion of the 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 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 earnings call are made only as of the date of this call, and we do not take any obligation 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, which includes contract termination costs associated with reacquired regional developer rights, stock-based compensation, bargain purchase gain, net gain or loss on disposition or impairment, costs related to restatement filings, restructuring costs and other income related to the employee retention credit. Management also includes commonly discussed performance metrics. System-wide sales include revenues at all clinics, whether operated by the company or by franchisees. While franchise sales are not recorded as revenues by the company, management believes the information is important in understanding the company's financial performance because these sales are the basis on which the company calculates and records royalty fees and are indicative of the financial health of the franchisee base. System-wide comp sales include the revenues from both company-owned or managed clinics and franchised 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's my pleasure to turn the call over to Peter Holt.

Thank you, David, and I welcome everybody to the call. The Joint is revolutionizing access to chiropractic care by providing affordable concierge-style membership-based services in convenient retail settings. We began 2024 with a vision to be the champions of chiropractic and we focused on increasing new patient counts, improving existing patient engagement and positioning to refranchise the vast majority of our corporate portfolio. And we're making solid progress. Additionally, during the first quarter, we grew revenue, improved the bottom line and tripled our franchise sales sequentially. Turning to Slide 4, I'll review the first quarter of 2024 compared to the same period of 2023. System-wide sales grew to $126.3 million, increasing 9%. System-wide comp sales for clinics that have been open for at least a full 13 months increased 3%. Revenue increased 5%. Adjusted EBITDA was $3.5 million for Q1 2024, up 74% over the same period last year. On March 31, 2024, our unrestricted cash was $18.7 million compared to $18.2 million at December 31, 2023. Turning to Slide 5, I'll discuss our clinic metrics. We opened 23 franchised clinics and closed 4 in the first quarter of 2024 compared to 29 franchised clinics opened and 1 closed in the first quarter of 2023. At March 31, 2024, our total clinic count reached 954 units, consisting of 819 franchised and 135 corporate, up from 935 opened clinics, 800 of which were franchised at the end of the year 2023. The clinic portfolio mix remains 86% franchised and 14% company-owned or managed and although it's expected to shift during the year as we execute our refranchising strategy. Turning to Slide 6, we're focused on refranchising strategy as our primary initiative in 2024. As discussed, we received over 100 requests for information and have been vetting the opportunities to identify the most effective franchisees. We're going through a structured process to continue to conduct negotiations with multiple qualified franchisees in regards to the sales of our corporate clinics. There's been a strong interest in larger transactions. As these are more complex, we've identified an investment bank specializing in refranchising to help us. Working together, we expect to ensure we refranchise to the best of our franchisees, accelerate the process and create value for all of our stakeholders. We are well on our way, generating capital to be reinvested in brand marketing, research and development territory acquisitions and/or stock repurchases, among other options. Turning to Slide 7, I'll review our franchise license sales. During Q1, we sold 15 franchise licenses compared to 17 in Q1 2023. Of the licenses sold, 87% of the franchisees were new to The Joint, which reflects investment and validation of our franchise concept. Q1 2024 tripled sales compared to Q4 2023, a solid increase given the ongoing high interest rates, inflation and strong employment. I do want to note that franchise sales may also be impacted by our refranchising strategy. On March 31, 2024, we had 166 franchise licenses in active development as well as 17 regional developers with an aggregate 10-year minimum development schedule for 674 clinics. We do not plan to establish any new additional regional territories and will consider opportunities to acquire territories as the regional developer territories mature. Turning to Slide 8, I'll review our marketing efforts. In Q1, we conducted our annual patient survey, which provided great insights into our brand perception. We're proud of the results of the survey and remain committed to doing even better. First, The Joint continues to demonstrate our ability to grow the market with 36% of our patients being new to chiropractic in 2023. Next, patients gave The Joint a strong Net Promoter Score of 64% and an amazing 92% of patients with prior chiropractic experience rated The Joint as better or equal to the previous care they'd received. Additionally, research led us to redirect some of our marketing resources from older campaigns to new social media influencer efforts. With strong positive perception from consumers, new and existing patients, our data indicates that the biggest opportunity is to drive awareness of chiropractic care in general and consideration of The Joint in particular. In light of this data, we've made a strategic decision to forgo our in-clinic new patient contest this past March to invest in driving consideration in April through evolving our go-to-market approach at all levels of the marketing funnel. At the top of the funnel, we've introduced social media influencers last month. Our lineup features both health and wellness as well as athlete influencers, including Chari Hawkins, U.S. track and field Olympian. We're partnering with these influencers to reach their broad audiences as well as to showcase the benefits of chiropractic care in a relevant way. In addition, several co-ops will feature regional influencers to support the national campaign, driving consideration in their local market by leveraging relevant personalities. We're also testing a variety of new promotions, channels and tactics in our co-ops to better optimize our promotions and media mix based upon the market and the patient base. In Q1, we continued testing digital initiatives with our patient experience roadmap. We're seeing success in driving new patients in our initial visit bookings test by providing the opportunity for new patients to book an appointment to complete their initial exam visit. Patients who have participated indicated that the booking was a positive experience and important to their choosing The Joint. We've also made progress replacing our patient paper intake forms with an enhanced digital intake process, and are now in the next phase of rollout before the next phase of testing before our rollout. Finally, the team is hard at work creating stronger local store marketing tools, working with the development team and leveraging the wealth of data that we have about our patients, we're implementing a clinic segmentation strategy to provide more effective local store marketing programs. And with that, Jake, I'll turn it over to you.

Thanks, Peter. And let's turn to Slide 9. I'll review our clinic comps for Q1 2024 compared to Q1 2023. System-wide sales for all clinics opened for any amount of time increased to $126.3 million, up 9%. System-wide comp sales for all clinics opened 13 months increased 3%. System-wide comp sales for mature clinics opened 48 months or more decreased 3%. Revenue was $29.7 million, up $1.4 million or 5%. Revenue from franchise operations increased 9%, contributing $12.2 million. Company-owned or managed clinic revenue increased 2%, contributing $17.5 million. The increases represent continued year-over-year growth in both the franchise base and the corporate portfolio. Cost of revenues were $2.7 million, up 10% over the same period last year, reflecting the associated higher regional developer royalties and commissions. Selling and marketing expenses were $3.9 million, down 7% year-over-year, reflecting the timing of the advertising spend. Depreciation and amortization expenses decreased by $811,000 or 37% compared to the prior year period, reflecting the accounting for corporate clinics that are being held for sale as part of the refranchising efforts. G&A expenses were $20.3 million, up only 1% compared to the same period last year, reflecting the lower rent for corporate clinics held for sale as well as the continued cost control initiatives offsetting the majority of increased expense to support more clinics. Loss on disposition or impairment was $362,000 related to the ongoing quarterly impairment analysis of clinics held for sale as part of the refranchising efforts. This compared to $65,000 in Q1 2023. Operating income was $1.1 million compared to an operating loss of $653,000 in Q1 2023. Other income was $35,000 compared to $3.8 million in Q1 '23, which reflected the receipt of employee retention credits in the year-ago period. Income tax expense was $179,000 compared to $841,000 in Q1 '23. Net income was $947,000 or $0.06 per diluted share compared to net income of $2.3 million, including the aforementioned employee retention credits received in Q1 2023 or $0.16 per diluted share. Adjusted EBITDA was $3.5 million, up 74% from $2 million in Q1 2023. Franchised clinic adjusted EBITDA was up 15% at $5.6 million. Company-owned or managed clinic adjusted EBITDA, reflecting the aforementioned accounting for rent expenses related to the clinics held for sale, increased 94% to $3.1 million. Corporate expense as a component of adjusted EBITDA was $5.1 million, $738,000 higher than Q1 '23 related to higher legal and accounting and greater professional services related to our refranchising efforts and IT maintenance. On to a review of our balance sheet and cash flow. At March 31, 2024, our unrestricted cash was $18.7 million compared to $18.2 million at December 31, 2023. Cash flow from operations was partially offset by the $2 million repayment of the line of credit to JPMorgan Chase. Through this facility, we retained immediate access to $20 million through February 2027. On to Slide 10. We are reiterating all elements of our guidance. System-wide sales are expected to be between $530 million and $545 million compared to $488 million in 2023. System-wide comp sales for all clinics opened 13 months or more are expected to increase in the mid-single digits compared to an increase of 4% in 2023. New franchised clinic openings, excluding the impact of refranchised clinics, are expected to be between 60 and 75 compared to 104 in 2023, the difference reflecting the impact of our refranchising efforts. And with that, I'll turn the call back over to you, Peter.

Thanks, Jake. Turning to Slide 11. At this point, The Joint, we're committed to continually improving our brand, our people and our performance to truly be the champions of chiropractic care. As I discussed earlier, our revitalized co-ops and digital marketing programs are positioned to drive brand awareness as well as enhance our performance by furthering our objectives to increase new patient counts and improve existing patient engagement. Additionally, we continue to identify potential adjunct products and services that patients want and have a viable business case. Our goal is to build brand equity and generate incremental revenue streams for all of our clinics. Regarding people, one of the ways in which we support our existing team of doctors at chiropractic is by providing continuing education. We also empower the next generation of DCs in a variety of ways. As a part of our ongoing effort to educate the chiropractic community about the advantages of The Joint offers patients, we've increased our interactions with chiropractic universities. In addition to participating in job fairs, we support the schools with scholarships and donations to key chiropractic colleges such as Life, Palmer, Parker, Sherman, Texas Chiropractic College, and Life West. Additionally, last month, we announced our first endowment, The Joint Chiropractic Endowed Scholarship for Logan University. This is another way to support the profession and the greater community, enhancing our relationships with the schools, investing in the future of graduating doctors of chiropractic and fueling the growth of our future pool of DCs. The $0.25 million endowed scholarship will provide much-needed tuition assistance for generations of students awarding $10,000 annually to a student who demonstrates academic achievement and a passion for chiropractic and quality patient care. We also have our preceptorship program. We found that most chiropractic students and new graduates want to learn more about owning and operating a practice. We developed a learning path that combines real patient and business experience while students are building their clinical skills. The program has two components: patient care completed under the supervision of joint preceptors in the clinics and 18 online training modules covering advanced clinical business and self-development topics such as goal setting, business planning, and creating enhanced patient experiences. These classes are presented by joint subject matter experts as well as clinical experts in the chiropractic field. In summary, in 2024, we stay focused on the refranchising of our corporate portfolio, fostering our strong franchise base, improving clinic economics, and increasing productivity. Before I begin questions, I'd like to invite you to meet with us at the B. Riley 24th Annual Institutional Investor Conference later this month and the Oppenheimer 24th Annual Consumer Growth and E-Commerce Conference in June. And with that, Kaley, I'm ready to begin the Q&A.

Your first question comes from George Kelly with ROTH.

So maybe if we could start on comp growth, a couple of questions on that topic. I was curious what you've seen so far in Q2. And then secondly, what gives you confidence that you can achieve a mid-single-digit percent comp growth rate in that you mentioned as your target for this fiscal year?

Sure. To address your first question, we typically do not comment extensively on future clinics, but we experienced a 3% decrease in Q1. We remain cautiously optimistic about our performance in 2024 and are seeing continued improvement in that figure as we look ahead. Our expectations reflect this positive outlook. Regarding your second question about why we have this confidence, it stems from our ongoing focus on addressing the new patient count drop, which has been our biggest challenge over the past couple of years. We have implemented effective programs aimed at attracting new patients. In terms of our key metrics—new patient count, conversion rates, and attrition—we are seeing favorable outcomes in both conversion and retention, with patients staying with us longer. Although our new patient count for Q1 was down 3% from last year, this was influenced by the unique circumstances of March, which had five Sundays, including Easter, and we did not run our new patient promotion this year as we did last year. However, I am optimistic about the initiatives we have in place and our influencers, and I believe we will see an improvement in the new patient count, which is critical for our comparisons.

Okay. That's helpful. Peter, you mentioned in your prepared remarks that you are assessing different products or services that might work with the model. In the past, you've spoken about potentially adjusting pricing for some of your oldest legacy members who are at a much lower price point. I'm curious if either of those initiatives are included in that mid-single-digit comp guidance. If they are not, are there other things you might implement later this year?

The answer is yes that we could get some of them put in place this year, probably towards the end of the year because if we're talking about any kind of changing our grandfathering policy or any price increases, there's going to be some testing involved with that before we were to implement a program like that, but that is possible. And the same with the idea of any kind of ancillary products or services that we would add to the clinics. And we certainly are looking for ways to do that. We want to be very thoughtful about that. We want to make sure that what we're adding is accretive to the bottom line and not creating complexity in the business model that is not necessary. So we're still in those early stages of identifying the different programs that we can put in place to increase those sales through those additional products and services. So more to come on that as we've designed our kind of a committee that's looking through that to help us make those good decisions. And the final part of that answer is, no, our guidance on the comp did not include or take into account any change in the pricing structure or additional products or services that would be sold in the clinic in 2024.

Your next question comes from Anthony Vendetti with Maxim Group.

I have a couple of quick questions. The same-store sales at 13 months for the clinics are up around 3%, but those that have been open for about 4 years are down. What do you think is causing that? Is it a leveling off? Also, could you provide some insight into the closures? This quarter, there were 4 closures, while last year there was just 1. Do you take a look at revenue trends and profitability for the clinics that are down before deciding on closures? I have a few follow-up questions as well.

Sure. To address the closures, we did have some foreclosures this year. For a system of nearly 1,000 units, having four closures in a single quarter is still remarkably low. As the system matures, market dynamics can lead to changes where a clinic may lose an anchor or face demographic shifts that make it unsustainable to remain open. Occasionally, personal circumstances may also lead a franchisee to close a clinic. I am not overly concerned about comparing one unit closed in Q1 2023 to the four closures in Q1 2024, but we do monitor this closely. Additionally, we consider both top-line revenue and clinic profitability in our analysis. It’s crucial for us to continuously explore ways to enhance profitability since unit economics is vital in franchising. We focus on two main strategies to influence this: increasing revenue and reducing costs. Currently, one of the challenges impacting our margins is the rising cost of labor, particularly for our doctors, which has lowered our margins. In March 2022, we instituted a price increase to address these labor costs. We are also looking for ways to streamline the clinic experience. While we've concentrated on attracting new patients, we are now recognizing the importance of retaining existing patients and re-engaging those who have lapsed. Our data shows that if an average patient stays with us for about 6 months and then drops off, there's a 25% chance they will return within the next 6 months due to recurring issues. We believe there are opportunities to leverage marketing materials and automated programs to influence patient retention and encourage prompt returns.

Okay. Just on the 48 months, Peter, how many of your clinics are 4 years or older? And then in aggregate, I guess, they're down 3% in terms of the revenue. What do you attribute that to?

I believe part of the issue is the maturation of the system. Specifically, I would attribute it to the new patient counts in more established clinics. These clinics have already attracted most of the core patients in their areas, making it more challenging to bring in new patients. This is likely why we're seeing a decline in clinics that have been open for over 48 months compared to those that have been open for less time. This is the primary factor I would consider at the moment. What are your thoughts, Jake?

Yes. I would say, as you think about '23, we did a 4% comp for the full year and the mature stores did negative 1%. So you had a 5% spread there. Because of rounding, it was a 6% spread here in Q1. But I think I would just point to, because we're on a fiscal calendar, March just having the Sundays with Easter and us not rolling over what was a longstanding new patient contest and allocating those dollars to some marketing efforts in the April-May time frame, I think, had an impact on that March period, in particular, that drove down the comp for the quarter. But the spread was relatively close.

Okay. That's helpful. And then just lastly, very big picture. Obviously, we saw Starbucks come in very light in terms of sales and they were saying the occasional customer has not frequented Starbucks as often as they used to. Do you think the economy in general is having some negative impact in terms of getting new patients to come in the door? Maybe just to the extent that you're able to measure that, is that something you're seeing? Because it's not just Starbucks, we're seeing that across other franchises as well this quarter.

Yes, I believe it's a significant issue. If we look back at fourth quarter GDP growth, it was around 4.3%, and now this quarter it's about 2.3%. We're not in a recession, that's clear, but half of Americans feel the effects of rising costs. Many are noticing higher grocery bills, increased gas prices, and more expensive credit card and mortgage interest rates. Rents are also going up. The average income of our patient demographic ranges from $50,000 to $105,000, and this group is indeed affected by these rising costs, leading to uncertainty about the economy. This may contribute to our lower patient count, as people are choosing to rely on over-the-counter solutions instead of seeking medical care. However, those who do come in are converting more effectively and remaining longer as members. There is still significant value in the services we provide, but the current economic uncertainty does impact our patient demographics.

That's very helpful. Sure. That makes sense.

Your next question comes from CJ Dipollino with Craig-Hallum Group.

I'm on for Jeremy Hamblin. Had a couple of questions for you. Wanted to start with the refranchising effort. It seems like you're still fairly early in the process, but just curious if you have a timeline on when we can start to see those transactions go through. And anything you can share on kind of expected deal economics would be really helpful.

Sure, we are deep into the process, and as I mentioned earlier, there’s significant interest from our franchisees. We've also invited franchisees from outside The Joint to participate. We are considering hiring an investment banker who specializes in refranchising. This is not a fire sale; we are not just looking to offload these assets. They are valuable, and we want to transfer them to franchisees who can manage them effectively. We are going through a structured process to ensure they go to the right franchisees. We are also taking into account the interest we’ve received from groups outside our franchise community, particularly those interested in larger territories for our clinics. We have 135 corporate clinics, and most of them are set to be sold. There are genuine opportunities here, although these transactions will require more due diligence and will take more time. We are encouraged by the interest in our refranchising effort and want to expedite this process, as uncertainty can affect the operation of these units. Staff may be uncertain about their job security if they are aware of these transitions. We expect that most employees will be retained by the new owners, but we aim to minimize the uncertainty during this transition. Jake, do you have anything to add?

I think there was a part of the question there on valuation. And we are in active negotiations, so probably don't want to give too much out there. But we've done historical look-back analysis. We were purchasers of clinics for a lot of years, and we also see all the franchisee-to-franchisee transfers that happen within our system because we do hold that right of first refusal. So we have a pretty good sense for historical multiples of EBITDA that these trade for. And we'll continue to partner with the right groups that can maximize that value and generate the proceeds that these quality assets deserve.

Okay. Understood. And then moving on to the P&L. It looks like general and administrative was up year-over-year on an absolute basis. Just curious how you guys are thinking about G&A moving forward and if we should expect more absolute increases year-over-year.

Yes. I think Q1 last year was $20 million, I think it was $20.3 million for this quarter, so up slightly. We did have some accounting and legal and professional service costs associated with some of the refranchising effort. We do have a year's worth of additional head count that's rolling over on a 100-plus unit increased base. I think the critical piece of that question is, we understand that for the refranchising strategy to work, we have to be critically focused on cutting the necessary G&A to reach those profitability targets that we have. So that will be something we consistently monitor. As you gleaned from the call, we have not executed through March 31 a ton of those deals yet and you'll expect to see that G&A begin to taper as we continue our progress through that refranchising effort. So it will really be dependent on when the refranchising transactions, how large they are and then we'll be able to shed the associated G&A, but that will be a critical focus of management as we continue this process.

Okay. Cool. And then one more. The FAST Act was implemented about a month ago. I'm curious, especially regarding the California stores, if you've noticed any attrition in labor, with some of the lower-paying jobs possibly moving to other opportunities.

Yes. I think from our perspective, that had been rumored for a long time. So I think we started to see the wage pressures on that certainly before the bill was officially executed. We haven't seen really an uptick in turnover as it relates to our roles and knowing that they now have a competitive benchmark out there for some other QSR-type concepts. It's something that we'll continue to monitor, but we haven't really felt a direct and immediate impact so far as it relates to our wage levels because I think we had largely absorbed a lot of that pressure leading up to the actual finalization. Peter Holt: And internally, it's impacting the market, but specifically the QSR.

That does conclude our question-and-answer session. I would like to turn the conference back over to Peter for any closing remarks.

Thank you, Kaley, and thank you all for attending the call. Today, I'd like to share a note from our VP of Chiropractic and Compliance he'd received from a prior student who went through a preceptorship program at The Joint and is now a full-time employee. And I'm quoting, 'My preceptorship with The Joint chiropractic was an enriching experience that provided me the invaluable hands-on practice and deepened my understanding of patient care. The mentorship I received was top-notch with so many different doctors providing helpful input in my technique and flow. The opportunity to work with a diverse patient population allowed me to hone my adjusting skills and tailor my treatment plans to individual needs. This preceptorship bolstered my confidence in my chiropractic ability and reinforced my commitment to this healing profession.' And we're so pleased to have had that doctor join our team. Thank you, and stay well.

That does conclude our conference for today. Thank you for participating. You may now disconnect.