Good afternoon, everyone, and welcome to The Joint Corp. Fourth Quarter and Full Year 2023 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Kirsten Chapman with LHA Investor Relations, The Division of Alliance Advisors. Please go ahead.

Thank you, Jamie. Good afternoon, everyone. This is Kirsten Chapman of LHA Investor Relations, The Division of Alliance Advisors. Joining us on the call today are President and CEO, Peter Holt; and CFO, Jake Singleton. Please note, we are using a slide presentation that can be found at ir.thejoint.com/events. Today, after the market close, The Joint issued its results for the quarter and year ended December 31, 2023. You can find that press release on 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 fact, 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 the 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 the company files from time to time with the SEC. Finally, any forward-looking statements included in this call are made only as of the date of this call, and we do not undertake any obligation to revise our results or publicly release any updates to the forward-looking statements in light of any new information or future events. Management uses EBITDA and adjusted EBITDA, which…

Thank you, Kirsten, and I welcome everybody to the call. As we review 2023, I'd like to begin by acknowledging how proud I am of our whole team, our doctors, wellness coordinators, corporate employees, franchisees and regional developers for their steadfast commitment to supporting our patients. In a market of ongoing uncertainty among our patient demographic, we delivered growth in system-wide sales, revenue, adjusted EBITDA, the number of new patients, and the number of patients treated. Also, we improved our patient conversion and existing patient attrition rates. I'm even more impressed as they embraced our enhanced marketing strategies targeted to increasing new patient count and improving existing patient engagement. Our efforts are beginning to gain traction, and we're augmented by our year-end campaign. The Joint is revolutionizing access to chiropractic care by providing a portable, concierge-style, membership-based services in convenient retail settings. And this franchise concept remains strong. In fact, there has been significant interest in our refranchising strategy as we announced at the end of last year. We put a thoughtful process in place to ensure that we are getting these clinics into the hands of our franchisees who can most effectively run them. As we move into 2024, we’ve renewed our mission to improve quality of life through routine and affordable chiropractic care, and we’ve advanced our vision to be the champion of chiropractic. Jake and I will elaborate. But first, I’d like to review our 2023 operating metrics. During the year, the doctors of chiropractic at The Joint performed 13.6 million adjustments, up from 12.2 million patient visits in 2022. We treated 1.75 million unique patients, up from 1.6 million in 2022. And of those treated, over 932,000 were – new patients, up from approximately 845,000 in 2022. Of our new patients, 36% or approximately 336,000 people…

Thanks, Peter. Let's turn to Slide 10. I'll review our clinic comps for Q4 2023 compared to Q4 2022. System-wide sales for all clinics opened for any amount of time increased to $133.1 million, up 11%. System-wide comp sales for all clinics opened 13 months increased 5%. System-wide comp sales for mature clinics open 48 months or more decreased 1%. Revenue was $30.6 million, up $2.9 million or 11%. Revenue from franchised operations increased 14%, contributing $12.7 million. Company-owned or managed clinic revenue increased 9%, contributing $17.9 million. The increases represent continued year-over-year growth in both the franchise base and the corporate portfolio. Cost of revenues was $2.9 million, up 16% over the same period last year, reflecting the associated higher regional developer royalties and commissions. Selling and marketing expenses were $3.4 million, up 2% year-over-year and down 22% compared to Q3 2023. This reflects our Q4 cost management efforts to offset selling and marketing spending earlier in the year. Depreciation and amortization expenses decreased $379,000 or 18% compared to the prior year period, reflecting the corporate clinics that are being held for sale as part of the refranchising efforts. General and administrative expenses were $21.3 million compared to $18.3 million, reflecting the cost to support the increased clinic count. These were partially offset by cost control initiatives such as hiring freezes, travel reductions and the elimination of non-core projects. Loss on disposition or impairment was $1.5 million compared to $50,000 in Q4 2022. The increase is related to our refranchising efforts, which include those additional corporate clinics that were announced to be held for sale in November of 2023. Operating loss was $147,000 compared to operating income of $1.5 million in Q4 2022, reflecting the aforementioned impairment charges. During Q4, we recorded a non-cash valuation allowance of $10.8 million…

Thank you, Jake. As I noted on the onset of this call, we’ve expanded our vision to be the champion of chiropractic care by providing consumers expanding access to chiropractic services that meets the demands and improves their health. Our strategic pillars are our brand, our people and our performance. To elevate our brand equity and drive awareness, we’ll strive to increase our active patient count by improving the intake process, by testing, booking new visit, patient initial visits and by optimizing local clinic marketing. We plan to lengthen the time patients stay engaged with the Joint and to reactivate lapsed patients by leveraging new content, automated messaging and additional promotions. Also, we intend to employ new media campaigns to increase our new patient leads. Our goal is to ensure we assemble and retain the strongest team. We are continually building our lead pipelines for our doctors of chiropractic to share with our whole franchise system by cultivating professional relationships and mentoring programs. We’re evaluating and recommending enhanced incentives and benefits, including creating the Joint’s first continuing education platform for our doctors. Additionally, we’re employing programs that better align staff with our patient experience vision. These initiatives are being implemented to improve our performance. We expect to drive total system sales by increasing new patient counts and optimizing sales per patient. Additionally, we’re evaluating the line extensions in ancillary products. Ultimately, we expect to foster our strong franchise base, improve unit economics, increase productivity and expand margins at the clinic and company level. Finally, The Joint is consistently recognized for our excellence. Most recently, Entrepreneur Magazine ranked the Joint number one franchise in chiropractic services, number 61 for veterans, and number 83 out of the top 500 franchise systems in the United States. Before we begin questions, I’d like to invite you to meet us at the ROTH Annual Growth Conference later this month in Orange County. And with that, Jamie, I’m ready to take the Q&A.

Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] And our first question today comes from George Kelly from Roth MKM. Please go ahead with your question.

Hey everybody. Thanks for taking my questions. Maybe I’ll start with trying to just get a feel for the process, the refranchising process underway. And there was a comment, I think, in your prepared remarks and it’s in the slide deck as well, just about how you’re sort of broadening the scope of potential buyers of those businesses. And I’m just curious, is it fair to interpret that as like the initial interest has maybe lacked your previous expectation? Or how should I interpret that comment in the presentation? And then the second part of the question, same topic is, do you have a better sense of timing when this process should be complete? Are you comfortable? Should it be a year-end thing? Or could this be several years?

Hey George, two great questions. To answer your first question is that, somehow, by the idea of broadening the people that could potentially be interested in our franchise clinics that we’re selling a reflection of lower interest and expected of our franchise community, absolutely not. What we’ve also recognized is the most important thing for us to get these clinics not just off our balance sheet – off our books, but to get them in the hands of franchisees who can most effectively run them. And we recognize that it makes sense at the same time as working closely with the interest in our franchisees in terms of acquiring some of these clusters that we’ve created, but to also be open to some other alternatives. And so that was really the purpose there. It’s just to broaden the scope of what we’re looking for to make sure that we’re getting the best franchisees in the system. Your second question was getting a better sense of the timing of it. And I would say that we’re still a little early in the process. As I said, we’ve got all of our systems in place, we’ve done the clustering, we’re in our conversations with our franchisees. So I don’t have an exact timeline to give you, but I would expect, let’s say we should see a significant amount of this clinic sold by this year, but I would expect it to also go into 2025.

Okay. Thanks. And then just one other question for you. Wondering if you could – I appreciate the guidance you gave. That’s helpful, just those key metrics for the year. But curious if you could just maybe give a little more on what you’ve seen so far in this year, just in the couple of months on same-store sales growth. And has it improved from what you just reported in Q4, or is it kind of consistent? Just any observations there would be helpful. And that’s all I had. Thank you.

Typically, George, we do not guide outside of quarters. But as we look in the first two months of 2024, I would say, we’re – and I kind of referenced in the call, is that we’re kind of seeing a turn in the corner in our new patient counts. And so I think that we’re seeing some improvement as we look forward for this year and beyond.

That’s great. Thank you.

And our next question comes from Ryan Meyers from Lake Street Capital. Please go ahead with your question.

Hey guys, thanks for taking my questions. It’s a little bit of a follow up to the last question. But as I look through the slide deck, it looks like the more mature clinics, ones greater – open greater than 48 months, saw a slight decline in same-store sales. Just wondering if you could maybe unpack that a little bit or if there’s any more commentary you can provide there.

Yeah. Consistent result to last quarter, Ryan, we have seen that trend for the last couple of quarters, and I think that’s why you see the continued emphasis on our marketing efforts, not only trying to show the rebound in those new patient prospects, but also increasing our focus on our lapsed or and try to increase engagement of our existing patient base. As clinics mature and your markets become more dense, you have a greater amount of prospects in order to kind of refill the bucket, if you will, from an attrition standpoint. So it has to remain a critical focus of ours. And I think you heard that in terms of our renewed interest and focus in some of those marketing initiatives.

Got it. And then just kind of as a brief follow-up to that question, obviously, the marketing strategy remains kind of a priority, like you just mentioned, as this has been a newer initiative. How have you seen some of those results pay off? And are you seeing positive trends there?

Absolutely. As we’ve talked about it, the one key metric – we look at three key metrics for our business: patient counts, conversion and attrition. And the one metric that we’ve had the most challenge within certainly in 2023, and as I said, we’re improving, the new patient count. And if we look at our new patient count for the full year of 2023, we were 6% below where we were in 2022. In 2022 compared to 2021, it was 14%. So we had an improvement from a negative 6% in 2022. In the last four months, our new patient counts are flat. So if we look at 2023, we had 86 new patients per clinic per month compared to 91 in 2022. So we are seeing a flattening of that curve, I think we’ll see that continue to improve in some of the marketing programs that our new CMO is putting in place really start taking effect. We’re also really looking more at a focus in a way we hadn’t done before, not just simply at new patients, but focusing on making sure that we keep those patients with us for a longer period. Right now, the average patient that stays as a member, a little over six months. And so Lori is putting in new programs that will help extend that period. And the final part of that is we’re also really focused on our lapsed patients because what we know is when those patients come, they stay with us roughly with that six months, very often, their pain [ph] goes away, so they – and their membership, but we can see about 25% of them will come back in the next six months. And so we’ve got programs that are being designed to really focus on that lapsed to patient to make sure that we’re bringing them in sooner than they otherwise would. So I think we have some real opportunities there to develop in 2024.

Got it. That’s helpful. Thank you for taking my questions.

Our next question comes from Jeff Van Sinderen from B. Riley. Please go ahead with your question.

Hi everyone. I realize some of these questions may be a little tough due to the refranchising efforts, but all things considered, how many new licenses do you think you would sell or expect to sell this year? Maybe a targeted range there would be helpful.

Hey Jeff, thanks for the question, and that we do not guide on franchise sales, as you know. And we talked about – let’s say, we had 55 sales for the full year 2023. We know that some of the things that impacted those new sales is the economic environment, the higher interest rates, just the high employment, because there’s always been kind of a relationship between unemployment and growth in franchise sales. And so there’s a lot of factors there that had impacted where we were in 2023 compared to 2022. 2022, we’ve sold 75 licenses. And so when we say that we’re expecting there to be an impact on new license sales in 2024, and we had 55 in 2023, you kind of triangulate kind of where we expect that to be. And so that’s kind of the way I would look at it.

Okay. That’s helpful. And then sort of along the same lines of guidance. And again, I realize this is a little bit of a moving target, but based on the refranchised cadence or work that you’re doing there so far at the interest levels, and I know you said it will continue into 2025, but is there a way you can help us understand? I mean, I know you gave the system-wide sales, but just – I guess, maybe try to get to a reported sales line decline rate for FY 2024, just maybe order of magnitude there. Any help you can give us there?

Yes. I mean, that’s the tough part, Jeff. The GAAP revenues are going to move from being 100% recognized for a corporate location to a royalty stream as we execute the transactions. And so the depth and the breadth of that GAAP revenue decline will really be predicated on the pace and the size of some of these early transactions, which made it a really hard thing to determine from a guidance perspective for 2024. And so that's why you saw us change the guidance metrics to overall sales figures, because that's where we have the predictability now. So we're not going to put out a target from a GAAP revenue basis because it's really so predicated on the timing of those transactions.

Okay. Fair enough. Go ahead, sorry.

Once we finish this, I think we can get back to, at least for us, the traditional metrics that we guide on. But there's just too much uncertainty in terms of how this unfolds to be able to give you relevant guidance right now on EBITDA and revenue.

Understood. And then if we could shift the marketing for a minute, and I know you spoke to that, but I'm just wondering, is there any other color you can give us in terms of, to the degree that you want to, how you're shifting the marketing? I know you mentioned maybe new channels and just any other color you can give us there?

Sure. And I think it's really exciting to just see, of course, we have a strong CMO that's come into play. She was the CMO over at SONIC, so she brings fresh eyes, she brings fresh programs and quite frankly, different disciplines. So one of the first things she's done is to go in and do an audit of all of our media buys to make sure that we're getting them the full power of them. We'll be doing some RFPs on just some of those key vendors in marketing to make sure that we're working with a partner that can most effectively support our business, that she's designed some new programs that she's putting out there where we are going to be working more with influencers. I think she's really focused on the power of our co-ops. We have a lot of these great clusters, and when they put their funds together, that you can put an impact in that market that, quite frankly, is uncompetable compared to anybody else. All those independents in that local market, because if you have 30 or 40 units all contributing to that local marketing spend, what you can spend that on is very different than if you're a sole practitioner trying to market to your clinic. So I think there's a lot of some really exciting things that will be coming down the pike, and we'll get more details as we go forward. And I also think it's just that focus on our lapsed patients and focusing on making the patient experience better so that we can keep that patient longer could have huge implications for us. I mean, if you think about the last seven or eight years, we've always been so focused on new patients and really haven't spent the time we could have on that lapsed and on trying to extend the time for that patient to stay with us. So there's some real opportunities, I think, to really focus on, quite frankly, the improvement of the bottom line. What you should be hearing is we are highly focused on improving unit economics on that clinic level. We know we've had some challenges with higher costs on labor over the last several years. We know we've had some issues with new patients. And so it's really incumbent upon us as a franchisor to stay laser like focus on improving those unit economics for our franchisee and of course, our corporate units as well.

Okay, appreciate you taking my questions and best of luck.

Thank you very much.

And our next question comes from CJ Dipollino from Craig-Hallum Capital. Please go ahead with your question.

Hey, guys, CJ Dipollino on for Jeremy Hamblin. Wanted to ask a quick question about sales and marketing. Looks like it was down about 1 million sequentially from Q3 to Q4. Could you give a little color on that drop and then maybe how we should think about it into the New Year?

Sure. I think you'll see that normalized. As we tried to put it in the commentary a little bit through the first three quarters of 2023, we were running a little bit hot in terms of our overall plan spend for the year in sales and marketing. So Q4, you just saw some of that normalize. As we think about our national marketing fund, the goal is to really spend that entire pool each period. And so when you've kind of accelerated some of your expenses into the earlier parts of the year, you kind of see a natural step back in Q4. So really, I think you're just seeing the timing of that play out quarter-to-quarter through 2023. So as we get back into 2024, I think you'll see that normalize again into the quarter-by-quarter cadence. Where that typically falls as Q2 and Q3 are usually a little bit heavier, Q1 and Q4 are a little bit lighter.

I think it's also important to always remember is that the bulk of the marketing that takes place in the franchise system. And certainly in our case, is that local store marketing, which is completely off our P&L. And so yes, we have NMF that runs through the P&L, but it's really that local store marketing that each of those franchisees are spending, on average, $3,000 or more a month, is where you're seeing the real spend in our franchisees as it relates to marketing.

Okay. Very helpful. And then just one more on the P&L. Thinking about G&A moving forward, it looks like in 2022, 2023, it jumped up to about 69%, 70% of sales. How would you think about that moving forward in 2024?

Yes. Again, I think the overall, with the refranchising strategy we expect to see the overall G&A burden reduce considerably for the consolidated organization. Again, the timing of when we can start to reduce that G&A is really predicated on the timing of those refranchising transactions. So as we move through 2024 and 2025 and we begin to execute on the refranchising, all of the clinic level G&A costs will come off the books and then we'll begin to curtail the outside the 4-wall overhead as well as the corporate unallocated overhead we expect those to reduce as we move through. And that's really the critical focus of management, understanding that for that strategy to work we'll have to curtail the G&A expenses accordingly, and we'll stay focused on that.

Okay. Very helpful. Thanks guys and best of luck.

Thank you very much.

And our final question today comes from Thomas McGovern from Maxim Group. Please go ahead with your question.

Hey guys. So real quick, I wanted to touch back on some of that employee retention. So based on my industry research, I've seen a lot of Articles suggesting that there is going to be a fairly considerable reduction in skilled medical professionals over the coming years. So maybe if you could just go into a little bit more color on some of your plans to keep doing attractive and keep that retention rate high?

No. It's a great question. There's no question because our doctors are at the core of our business. Without doctors in chiropractic, we have no business because that's obviously the core of what we do. And that we are very much focused on working with the schools and working with associations to make them aware of The Joint, and why we are a good place for them to either become a franchisee if they have the resources or come and work for us. If you just look at the overall market, doctors of chiropractic there's 16 accredited schools in the United States today that graduate doctors of chiropractic. It's usually about a 3.5-year program, and those 16 schools graduate roughly between 2,400 and 2,500 doctors a year. If we come back to The Joint with our 935 clinics at the end of the year, we had a little over 3,000 doctors who are under the umbrella of The Joint, either full or part time. And so that does suggest to us. In addition to that, there's 40,000 or actually, there's 70,000 licensed practitioners in the United States today and they have to register – they have to license with the state they want to practice. Not all of them are practicing. So we know there's roughly about 40,000 that are active. And so that if you look at it from the broader scope, is that there are enough doctors to fill the growth of The Joint in the United States today, absolutely. But are there the doctors where we want them and the high-quality doctors, making sure that they stay with us, not just being recruited? So this is a hugely important effort for us, it's to maintain to recruit and retain the best doctors in the world. But I think its incumbent upon us to create those environments where they want to come work with us and they stay with us, as opposed to there's just theoretically not enough licensed doctors to fulfill our growth.

Appreciate that color. That’s very helpful. Okay. So last thing, you guys mentioned on the call that your portfolio mix reduced slightly, 14% of total clinics are company-owned versus 15% in 2022. You also mentioned that you expect that to – logically, that's going to – that's going to shift more dramatically as you guys move through this refranchising initiative. I was just wondering if you guys have maybe a targeted portfolio mix? Or when the dust settles, where you guys expect the company-owned to come in as a percent of total clinics opened? Thanks.

We haven't, in any way, guided on an expected percentage. But what's very clear is we've said the majority of our corporate portfolio, we expect to refranchise. And so if we ended last year with 135, I would say, by majority, we're talking about more than 51%. We don't have a final number, but it's going to be the vast majority of those corporate units will, in fact, ultimately be refranchised. So you can see that, that number is going to be pretty significantly lower than where it is today at 14%.

Understood. I appreciate you guys taking the time to answer my questions.

Thank you.

And ladies and gentlemen, at this time, I'd like to turn the floor back over to management for any closing remarks.

Thanks, Jamie. In February, we ran our annual Love The Joint campaign, during which our patients share their comments of The Joint on our social media. We received thousands of posts each week. So it's hard to pick the best, but I'll read a few that highlight our patient value proposition. Casey noted, "If I missed a session, I feel terrible. My life revolves around The Joint now. It's helped me so much with my headache, I sleep better, I feel better mentally and physically. My doctor is incredibly helpful in sending me home with stretches to do and ways to treat my body better. I couldn't imagine my life without The Joint now." Julie said, "I like that no matter where you travel, the chances are that The Joint will be there as well. Listen, I've been a member for six years, and I don't know how I'd manage my health wise financially without The Joint. I'm 69 [ph] years old, on a fixed budget, and being a member has totally improved my body. I'm certain, it save me money and I have the – and I'll continue to promote The Joint. There is nothing like The Joint. Whoever thought of this and made it happen, I thank you." And finally, Caleb reported, "The staff of my local The Joint chiropractic facility are fantastic. They've always made me feel welcome and focused on the problems that I need them to. They've been a great help in my healing journey as a disabled veteran." Thank you, and stay well adjusted.

Ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.