The Joint Corp - Earnings Call - Q4 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to The Joint Corp. Q4 twenty twenty Financial Results Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mariah Shelton of LHT Investor Relations. Thank you. Please go ahead, madam.

Speaker 1

Thank you, Justin. Good afternoon, everyone. This is Mariah Shelton of LHA Investor Relations. On the call today, President and CEO, Peter Holt, will review our year end and fourth quarter twenty twenty performance metrics and provide an update on the business. CFO, Jake Singleton, will detail our financial results.

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 ir.thejoint.com/events. Today, after the close of the market, The Joint Corp. Issued its financial results for the year and quarter ended 12/31/2020. 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 two, please be advised today's discussion includes forward looking statements, including statements concerning our strategy, future operations, future financial performance, 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-nineteen 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 the other factors described in Risk Factors in our Annual Report on Form 10 ks as filed with the SEC for the year ended 12/31/2019, as updated for any material changes described in any subsequently filed quarterly reports on Form 10 Q as they may be revised or updated in our subsequent filings.

We anticipate filing our 12/31/2030 ks on March 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 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. 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 three.

And it is my pleasure to turn the call over to Peter Holt.

Speaker 2

Thank you, Mariah, and I welcome everybody to the call. I'm delighted to speak with you today to review our company's performance in a year like no other. Our operational success is managing the impact of the pandemic on our business, supported by our clinic staff treating our patients throughout this unpredictable environment resulted in our strong financial performance and further validates the opportunity before us. I've said it before when reflecting upon 2020 and I do so now. Today, I am so grateful for our entire system, our doctors, wellness coordinators, franchisees, regional developers, corporate staff for their dedication to our mission of improving quality of life of our patients.

This pandemic has shown chiropractic care truly is an essential healthcare service to our patients. The Joyner is revolutionizing access to chiropractic care. Located in convenient retail settings, we provide concierge style membership based services without the need for insurance or appointments with attractive pricing and convenient hours. Our growth strategy is to build our brand, increase awareness of the efficacy of chiropractic care, attract new patients and open more clinics. We're already the largest, most recognizable provider of chiropractic care in the country.

Given the high level of fragmentation of the chiropractic industry, we have a significant opportunity to continue to increase our market share as we redefine and expand the market itself. Our core concept has remained steadfast. In adapting to the pandemic, the primary change we made to our operational practices was to increase sanitization and cleanliness procedures. This compares favorably to many other retail concepts that need to reinvent their business models just to survive. While we experienced that initial negative financial impact in the second quarter of twenty twenty, our resilient business model management enabled us to quickly rebound.

During the year, once again, we increased our productivity, resulting in improved clinic performance and greater company profitability. As a result, our adjusted EBITDA positive for the third consecutive year exceeded our plan and further strengthened our foundation. With our growth momentum reignited, we're optimistic about 2021. Turning to Slide four, I'll review the performance metrics for the full year of 2020. The total number of adjustments performed during the year reached 8,300,000, up from 7,700,000 in 2019.

The total number of unique patients treated reached one point one million, up from nine hundred and ninety eight thousand in 2019. Five hundred and eighty four thousand patients opened the door to The Joint for the very first time, relatively flat compared to the five hundred and eighty five thousand in 2019. Twenty seven percent of our new patients had never been to a chiropractor before, up from twenty six percent in 2019. Eighty five percent of the system wide gross sales came from monthly memberships, up from 80% in 2019. We opened 70 new franchise clinics, nearly equal to the 71 new franchise clinics opened in 2019.

And we sold 121 franchise licenses pretty darn close to the 126 sold in 2019. We believe that achieving this level of performance in the 2020 environment is a powerful indicator of the positive long term outlook for our business. Turning to slide five, while Jake will discuss our financial results in greater detail in a moment, I'll provide highlights to our strong fourth quarter results. System wide sales increased 24% compared to fourth quarter last year. Our comp sales for clinics that have been open for at least thirteen full months grew 16% compared to the same period 2019.

Revenue grew 23 compared to fourth quarter twenty nineteen, bringing the full year revenue to $58,700,000 Adjusted EBITDA increased to $3,700,000 topping Q3 twenty twenty and making it the strongest quarter in the company's history. Full year 2020 adjusted EBITDA rose to 9,100,000.0 up 47% from 2019. At 12/31/2020, our unrestricted cash reached $20,600,000 compared to the $18,300,000 at 09/30/2020, driven primarily from an increase in cash flow from operations. Turning to slide six, let's review our portfolio. During the fourth quarter, we opened up 21 new franchise clinics and no greenfields, slightly off the pace from the 25 opened in Q4 twenty nineteen, which is one of our most active quarters in clinic openings in our history.

Also during the quarter, we closed two franchise clinics and acquired one franchise clinic. For the full year 2020, we opened 70 franchise clinics and three greenfields compared to 71 franchised and five greenfield clinics in 2019. While our pre COVID-nineteen guidance for the year was originally higher for franchise openings, we believe a flat number of openings in this environment is a win. In 2020, we closed seven franchise clinics and acquired one franchise clinic compared to the four closures and eight acquisitions in 2019. Despite the pandemic, we continue to experience an unusually low closure rate of 1.2% in 2020.

At 12/31/2020, we had five seventy nine clinics in operation consisting of five fifteen franchise clinics and 64 company owned or managed clinics maintaining a mix of 89% franchise and 11% corporate. At year end, we had two fifty three franchise agreements in some level of development. This compares to the two zero four at December 3139 and is reflective of the increased interest in our franchise system. Turning to slide seven. In the fourth quarter twenty twenty, the year of the pandemic, we achieved the highest number of quarterly franchise license sales as a public company.

We sold 56, up from 30 in the third quarter and 23 in fourth quarter twenty nineteen. For the full year 2020, we sold 121 new franchise licenses, only a handful less than the previous annual high set last year at 126 licenses sold. Frankly, for any franchise system to be selling licenses in a business climate is exceptional. And we're proud of our sales team and their dedication to attracting great franchise candidates. Frequently, comment I that franchising is a nationwide brand building exercise.

In a small box retail environment, our storefronts are our most effective way to build our brand. And we have and will continue to use regional developers or RDs to extend our reach and accelerate our brand building, particularly in new markets. They've been integral to our franchise sales growth since 2017. They've been responsible for 81% of our franchise sales. With RDs, we entered into a ten year agreement to sell and support a minimum number of franchise clinics in a territory and can negotiate extensions to that territory as appropriate.

Typically, the minimum development schedule is front loaded. When markets reach maturity, it's not unusual for the franchisor to repurchase the RD rights. Recently, we did so in two well run mature markets, North Carolina on 12/31/2020 and Georgia on 01/01/2021. These transactions totaled $2,400,000 As a result, 69 franchise clinics and 37 signed franchise license agreements for unopened clinics shifted from management by RDs to corporate management, thereby eliminating the payments made to these RDs for franchise sales commissions and royalties of 3% on the gross sales for their clinics. The transactions are immediately accretive and expand our margin contribution.

At 12/31/2020, four nineteen of our clinics or 72% were supported by our 22 RDs, which covered 61% of the Metropolitan Statistical Areas or MSAs at 12/31/2020. On 01/01/2021, we reduced that to three seventy eight or 65% of our clinics that were supported now by 20 RDs. We'll continue to evaluate new RD opportunities. Recently, we expanded the RD for the Wisconsin region to include a portion of Michigan. Today, our aggregate ten year minimum development schedule is for RD territories established since 2017 comes to four seventy five clinics.

This large foundation of clinic commitment bodes well for our continued clinic expansion and sales growth. We're investing in the future and plan to expand our entire portfolio between franchise and corporate units well over 100 units in 2021. Our strong license sales set the stage for increased future franchise clinic opening as we remain committed to achieving our goal of opening 1,000 clinics by the end of twenty twenty three, resulting in increased revenue, scale and brand recognition. Turning to Slide eight, let's review our franchise system for a moment. Strengthening our franchisee relationship is a long standing priority for The Joint and I'm pleased to report that we continue to make positive inroads.

According to Franchise Business Review, an independent organization we've engaged to conduct our franchisee satisfaction surveys most recently in October 2020, The Joint has achieved a Franchise Satisfaction Index or FSI of 75%. This is up from 65% in November 2018 and fifty eight percent in April. An FSI score represents the weighted sum of positive responses and discounts the negative responses. FSI ratings allow a franchisor to benchmark their franchisees' satisfaction against various industry sectors. We scored in the top tier validating our continued efforts to improve our relationships with our franchisees.

Turning to Slide nine, let's turn our attention to marketing. In Q4, we launched our annual holiday promotions, our Black Friday Pack and Sale and our year end membership promotion. With our clinic teams highly engaged and using our best promotional best practices resulted in both promotions exceeding our previous record. Black Friday sales per clinic were up 98% over prior year. And our year end sales per clinic grew 42% over prior year.

Clearly, our patients responded enthusiastically to these limited time opportunities to save even more on CarpathoCare. Sales growth and clinic expansion have increased the flow of dollars into our national marketing fund. And we're using these resources to invest in new strategic partnerships to fuel our growth. In 2020, we began working with a new public relations firm to build our national profile and grow awareness of chiropractic. In 2021, we've launched two new additional partnerships with media and creative agencies to elevate our brand advertising, and we look forward to releasing a new national campaign in Q2 of this year.

Finally, the many useful patient profile insights from our most recent annual independently conducted survey, I'd like to highlight according to this survey, twenty seven percent of the patients who visited our clinics in 2020 had no previous experience with chiropractic care. In 2013, this number was only fourteen percent, nearly doubling our first time users demonstrates The Joint's growing ability to reach an increasing number of American consumers who have yet to benefit from chiropractic care. Turning to Slide 10, let's review AXIS, our new IT platform. AXIS is our most important initiative in 2021. It will provide an improved point of purchase system, financial systems, business intelligence, marketing automation and patient feedback capabilities among many other features.

In Q2 twenty twenty, we had to pause our efforts to implement Access to focus on helping our franchise community respond to the impact of the pandemic. In the fall, we reengaged the AXIS project. At present, we're finalizing the user interface testing programs as well as end user and clinic certification processes necessary for launching the platform. It's essential that that new platform be fully tested and that every franchisee is prepared and trained for the acceptance of the new system. As we complete this crucial project, we will not jeopardize it by rushing or shortcutting the process to meet an artificial timeline.

Currently, we plan to begin the formal rollout in early summer. And with that, Jake, I'll turn it over to you.

Speaker 3

Thank you, Peter. Turning to Slide 11, comparing fourth quarter twenty twenty to fourth quarter twenty nineteen. System wide sales for all clinics opened for any amount of time increased to $77,600,000 up 24% year over year. System wide comp sales for all clinics opened thirteen months or more were 16% compared to 26% in the prior year. System wide comp sales for mature clinics opened forty eight months or more were 10% compared to 19% in the prior year.

Revenue was $17,000,000 up $3,200,000 or 23%. Company owned or managed clinics contributed revenue of $9,200,000 increasing 22% from the same period a year ago. Franchise operations contributed $7,800,000 up 24% compared to the same period last year. Increased revenue for both categories is due to the greater number of clinics and continued organic growth. Cost of revenues was $1,900,000 up 19% over the same period last year, reflecting the increase in franchises resulting in higher regional developer royalties and commissions.

Selling and marketing expenses were $2,100,000 up 15% over the same period last year, reflecting the timing of the advertising spend in the fourth quarter. General and administrative expenses were $9,500,000 compared to $8,500,000 The $1,000,000 increase was primarily due to higher payroll and related expenses to support revenue growth and a greater number of clinics. We had record operating income of $2,800,000 compared to $1,300,000 in 2019. We recorded a net tax benefit of $7,900,000 compared to a tax expense of $33,000 in 2019. This was driven by the reversal of the valuation allowance on our deferred tax assets of $8,900,000 Net income including the benefit from the reversal of the tax valuation allowance was $10,600,000 or $0.72 per diluted share compared to $1,300,000 or $09 per diluted share in the fourth quarter of twenty nineteen.

We delivered record total adjusted EBITDA of $3,700,000 which increased 74% compared to the same period last year. Franchise clinic adjusted EBITDA increased 23% to $3,800,000 Company owned or managed clinic adjusted EBITDA increased 49% to $2,500,000 Corporate expense as a component of adjusted EBITDA decreased 1% to $2,600,000 reflecting our cost control efforts. Turning to Slide 12, I will now compare the full year 2020 to 2019. Gross sales for all clinics open for any amount of time grew 18% to $260,000,000 System wide comp sales for all clinics opened thirteen months or more increased 9%. And significantly system wide comp sales for mature clinics opened forty eight months or more, which now represents three fifty two clinics, increased 5%, which which is remarkable in today's retail environment.

Revenue increased by 21% to $58,700,000 meeting our guidance. Operating income was $5,500,000 compared to $3,400,000 in 2019. Net income including the previously mentioned $8,900,000 benefit from the reversal of the tax valuation allowance was $13,200,000 or $0.90 per diluted share compared to $3,300,000 or $0.23 per diluted share in 2019. Adjusted EBITDA increased 47% to $9,100,000 exceeding our guidance. At 12/31/2020, we had $20,600,000 of unrestricted cash.

This compares to $8,500,000 at December 3139. During the year, cash inflows from operating activities were $11,200,000 Cash inflows from financing activities were $5,600,000 which were partially offset by $4,600,000 in investing activities, including $1,000,000 for the December RD territory repurchase, the balance for capital expenditures related to IT and corporate clinic development. Subsequent to year end, the company repaid the PPP loan of $2,700,000 which will be reflected on the 03/31/2021 balance sheet. On to Slide 13 to review guidance. For 2021, we expect revenue to be between 73,000,000 and $77,000,000 compared to $58,700,000 in 2020.

Adjusted EBITDA to be between 10,500,000.0 and $12,000,000 compared to $9,100,000 in 2020 franchise clinic openings to be between 8,100 compared to 70 in 2020 and company owned or managed clinics through a combination of both greenfields and acquisitions to increase between twenty and thirty compared to four in 2020. Following our strategic plan, we expect the majority of these to be greenfields. This will be complemented by acquisitions, which continue to be opportunistic. There's pent up demand that will fuel openings in 2021. This is evidenced by the two fifty three franchise licenses in development at the end of twenty twenty.

We're investing in our future and expect the entire portfolio of clinics to increase by over 100 units. Therefore, we continue to believe we'll achieve our goal of opening 1,000 clinics by the end of twenty twenty three. I will turn the call back over to you, Peter.

Speaker 2

Thanks, Jake. And as Jake just said, we are investing in our future and our drive to 1,000 clinics. And we believe this is just the first milestone of many as we bring chiropractic care into the mainstream. Looking at our long term potential, we have a first mover advantage that we'll continue to leverage to create additional opportunities for expanded growth. For example, we can evaluate potential extensions such as ancillary products and services, expand in nontraditional settings including military bases or store in store concepts, and finally international expansion in those markets that already have a strong chiropractic acceptance.

It's important to understand what are the today's market drivers that fuel our growth. First, there's a great opportunity to capture more market share as $90,000,000,000 is spent annually in The United States on back pain and of that $16,000,000,000 is spent specifically on chiropractic care. Next, the fragmented market of approximately 41,000 practitioners yields opportunity to gain market share as the power of our size creates synergies in marketing, operations and IT. This has happened in other healthcare sectors such as dentistry. Today, service organizations represent 12% of the dentistry field.

We estimate that today all change in chiropractic care account for roughly 3% of the market share, including The Joint, which accounts for around 1%. Finally, our specific business model continues to expand faster when compared to the chiropractic market as a whole. By making chiropractic care available to a broader consumer market in an accessible and convenient retail setting, we're revolutionizing access and demonstrating the power and efficacy of chiropractic care, which results in attracting new clients. As mentioned, in 2020, twenty seven percent of our patients were new to chiropractic. They'd never visited before they visited The Joint.

They'd never seen a chiropractor. We're not just taking existing market share, but most importantly, we're expanding the market. This is why we significantly outpaced our industry. While the chiropractic care market is expected to grow at a 1.4 CAGR over the next five years, The Joint delivered a ten year CAGR of 70%. Our rapid growth is illustrated by our four year stat comp sales even with the pandemic, which was now a remarkable 80%.

Our strong performance has been recognized. Recently, The Joint was named or increased its ranking on three important lists. The Forbes 2021 America's Best Small Companies list named The Joint number 13 out of 100 companies that have market values between $300,000,000 and $2,000,000,000 positive sales growth over the last twelve months and a share price of at least $5 The Franchise Times Fast and Serious list 2021 evaluated the smartest growing franchise brands with The Joint moving up number 17 of 17 spots compared to last year's ranking. The Franchise Times created a formula to identify fast growing franchise systems that have the staying power as an antidote to multiple other rankings that include too many one year wonders. And finally, Entrepreneurs 2021 Franchise 500 moved The Joint up 20 spots compared to last year's rankings to number 58.

The key factors in entrepreneurs' evaluation include cost and fees, size and growth, support, brand strength and financial strength and stability. I've said it before, while we cannot predict the ultimate end of the pandemic, what we've experienced is our patients have continued to rely on chiropractic care as essential to their health and our doctors have continued to treat their needs. Once again, I'd like to close by expressing my deepest appreciation to all of the chiropractic team, the joint chiropractic teams who've continued to selflessly serve during this pandemic. Their dedication to our mission is humbling. It's remarkable that in 2020, we delivered the performance we did including record breaking quarterly franchise license sales and record annual adjusted EBITDA.

To our franchise community, our RDs, our corporate team and the joint colleagues across the country, I thank you. You're truly making a difference in all the lives that you touch. Justin, I'm ready to begin the Q

Speaker 0

And our first question comes from Jeff Van Sinderen from B. Riley. Your line is now open.

Speaker 4

Hi everyone. First, let me say congratulations on a terrific year despite COVID. Really kind of a multipart question here. Any more color you can add on what you're experiencing in areas that are more reopened in The U. S.

Such as maybe Texas versus areas that are not especially reopened? And I guess how does that influence your thinking about how business could trend as The U. S. Does fully reopen and the pandemic fades? And then I guess how are you thinking about kind of the pandemic fading into the rearview mirror given that you added a lot of new customers that were due to chiro care?

Do you think that might accelerate as the pandemic fear fades?

Speaker 2

Hey, Jeff, thank you very much for the congrats and great questions. And to give a little color on the kind of the regional impact of the pandemic as we look across the country. And I think what I'm most struck by is we have not seen any real clear geographical impacts, whether the markets open and we talked about this in earlier calls where we're looking at comps in California compared to the Texas markets or the Florida market is that there's nothing that really stands out other than perhaps Colorado where we have had that significant situation where with the directive of the Colorado Governor is that our clinics were closed there for thirty seven days. They were allowed to reopen but they now have to take appointments as opposed to walk in. So there's still some impact there.

But outside of an example like that, what we've been seeing is really a consistent performance across the country. And then when you the second part of your question is how do we think about this in terms of did that pandemic open up people to try chiropractic that maybe didn't before? And what do we see kind of as we go through this? Whenever we get to this new normal when the pandemic's over, I would say is that this really ties to our whole plan of that what we're doing is truly introducing people to the power and efficacy of chiropractic. And what we find is when people do come in, they use those services for that first time is that they come back.

And you see that in our comps, you see that in our growth. How do we choose our medical services? Through referrals. And so you've had a great experience with a chiropractor. You tell your friends and family who are in pain.

We know pain is only increasing in this country. And we also know that people are less and less enthusiastic about using opioids or surgery as a way to address that pain. So we think that as more and more people utilize the chiropractic services that we're continually making more accessible, that we'll continue to see the strong growth that we've experienced over the last four or five years.

Speaker 4

Okay, great. And then if I could squeeze in one more here. Just wondering latest trends that you're seeing around chiropractors operating independently, those independent practitioners, how they're doing as far as staying in business or exiting the business and then kind of the availability and quality of doctors that you're seeing out there that might be inclined to join The Joint platform?

Speaker 2

Well, I think in terms of any real trends on the independent practitioners, which defines the industry, is it's more anecdotal. And I know that like any of these independently fragmented markets, whether it is in chiropractic or hair care or frozen desserts, is that trying to operate in a pandemic environment by yourself is incredibly difficult. And I think that one of the reasons we've been so effective in response to the pandemic is because of the power of working as a team, with our franchisees collectively working together, sharing experiences, pooling dollars in coops across the country to educate consumers about The Joint. And so it's just hard to imagine how so many of those you see businesses all over the country that are closed and probably won't open, especially in the QSR industry. And I think chiropractic has been equally impacted by it.

But I don't have a study or data other than more anecdotal to tell you what the exact number is. But what we all know is it's just really tough to be out there if you don't have some kind of support in this kind of environment. And I think as you're touching upon the status of doctors, there's no question this is essential for our growth. We have a very simple model and it rests on our doctors. And I would say is that we have seen an increasing number of doctors apply and work for us or include or interested in buying a franchise from us.

And so I think part of that is the pressure that's on the overall industry and that we are continually improving an opportunity for them to find a secure and safe place to work. And so I would expect that to continue. I'll tell you that is absolutely a strategic initiative on our part is to continue to improve our ability to attract and retain doctors at the heart of our organization.

Speaker 4

Okay. And overall, do you feel like when you think about all those things, do you feel like the quality of the doctors you are attracting is improving?

Speaker 2

I do. I think we are not done. I think we can continue to make inroads. We've spent a lot of time on working with our doctors and helping them to truly understand our business model and how to be more effective in patient care. Obviously, I'm not a doctor in chiropractic.

I can't tell a doctor how to practice but we can certainly share with them the best practices associated with working in a clinic in business model. And that's what we focus on and let them of course operate as a doctor.

Speaker 4

Okay, good to hear. Thanks for taking my questions. I'll take the rest offline.

Speaker 0

And our next question comes from Linda Bolton Weiser from D. A. Davidson. Your line is now open.

Speaker 5

Hi, congratulations on great results. So I was curious, you know, in looking at your long term target for 1,000 clinics going out a couple years, that would average out to at least having to open 140 per year. And so your guidance for 100 to 130 new clinics in 2021 is slightly below that. So is that because this is just the period immediately following COVID and you expect the number to ramp even more in 2022 and 2023? Or are you just kind of being conservative in the guidance that you're giving?

Speaker 2

Linda, great to talk with you and thank you for that question. And I would say that you're absolutely right when you do the math, we've got to be opening up 140 clinics in the next three years to hit the thousand. What I would tell you is that in other franchise systems where I've seen this is that when you are really working with a concept that has legs, has a market that is only increasing as you really do see that acceleration from year over year over year. So I wouldn't expect our growth to be linear in the sense, okay, take those numbers divided by three and say 140. We just said that we're expecting to open up over 100 units in 2021.

I would expect that to be increasing as a percentage in total number of units opened in 2022 and further increasing in 2023 to get to that 1,000 units. We're not arguing that it's going to be a lot of work to get to 1,000 units. It's it's a strong goal. That we're sitting here with five seventy nine units and so we know we have a lot of work in front of us. But I think that we have a concept that's only becoming more relevant to the consumer.

We have an RD system that's only actively more successful in their performance. We have a concept that's attracting more and more sophisticated franchisees and that as you get and it's kind of interesting in a franchise model is that your best franchise candidates typically come from your own clinics or your own stores, your customers. They're in love with the concept so much, not only do they like the service or product, they want to buy that franchise. And so as you open more clinics, you have more of those high quality leads that leads to close. So I think that there is a momentum that builds up and obviously we believe that we're going to be able to accomplish that or we would pull back on that goal.

Speaker 5

Great, thanks. And then can you given that you expect such a pickup in greenfield openings in 2021, can you kind of remind us about what the capital expenditure is per greenfield clinic? And then do you have a CapEx guidance for 2021?

Speaker 3

Sure. We haven't given CapEx guidance for 2021. What we said is that we expect to expand the portfolio by 2020 to '30 and then the majority of those will be greenfield units, right, marching towards that growth goal. From an economic perspective, you know, typically the build out cost and again, we're targeting, you know, square footage in the range of, you know, 1,000 to 1,200 square feet. The build out cost is relatively simple and we would estimate that to be around $180,000 you know, depending on your market.

California markets might be a little bit more for example. But that's kind of your build out cost. And then you've got some working capital losses as they march through that time to breakeven.

Speaker 5

Great. Thanks. And then does your guidance for 2021 bake in a certain same store sales growth number that you can share with us?

Speaker 3

We haven't provided that. We do expect continued organic growth. So when you look at the overall ranges, the top end of that range is a 30% increase on the top line. And that will be a complement of both unit growth and organic growth. But we haven't specifically broke out the comp figure of that.

Speaker 5

Okay. And just finally, know, given the challenges of the COVID year and having to slightly change your operating procedures in the clinics, is there anything about COVID that actually kind of gave you new learnings at the clinic level that you think will actually help your operating procedures on a kind of permanent basis going forward?

Speaker 2

I think absolutely. And I think it really applies to all levels of our business, not just in the clinic. In the clinic level, itself, I think these enhanced sanitization cleanliness procedures are really powerful and then we'll continue to utilize them. Now right now we're requiring the entire system if you're in our clinic, we're not depending on the jurisdictions of the state, we're not requiring patients to be in a mask if the jurisdiction they're operating in doesn't. But we do require regardless of what the local or state directors are to all of our doctors and wellness quarters to use a mask.

Do I expect that to continue on going forward? No. I think that we would love to get away from that. But I think that there are in fact other procedures that really focus on that cleanliness and that sanitization that we'll continue to use for the rest of the business. I think if you pull up a little bit and just look at the whole way in which a franchise system operates, one of the ways that we addressed the pandemic was incredibly enhanced level of communication.

We were ending up with almost weekly system wide calls, webinars on every topic you could imagine, that increased written communication all focused on safety and protection of our clinics and our patients. And so many of those increased forms of communication will continue to utilize. We recognize the power and importance of that and that will only I think continue to enhance our ability to work well with our franchise community as we become more effective in the way we communicate. There's a number of other things that I would talk to you about that I think is transformative in how we will be a stronger company having gone through this pandemic.

Speaker 3

Yeah. The only things I would layer on there, Linda, would be maybe on the marketing side. We we had to step back and really look at, our grand opening process, and how to navigate that. It used to if you remember, it used to be, you know, you would have kind of a grand opening weekend, and you'd have, you know, all kinds of additional staffing and kind of a large rush of patients, you know, interested in that new store opening. Well, in COVID, we had to spread that out, and we realized, that there was actually some benefit there.

So we stepped back and really redesigned what was already a successful program in terms of our grand opening marketing. And we're going to have kind of a much longer introductory period as it relates to attracting those new patients and that new patient offer. So we look at those types of things to where, you know, it allowed us to kind of step back and retool things because we had to because of COVID, but actually seeing the success. And we also had a new patient promotion that we ran, in the middle of the summer which garnered a lot of, which garnered a lot of interest. So, you know, do we bring that type of promotion back in the 2021 cycle?

So those are ongoing discussions, but those are two kind of concrete examples where, you know, things that we had to change because of COVID, you know, may result in some lasting impression.

Speaker 5

Great. Thank you very much.

Speaker 6

Thanks, Landa. Thank you, Linda.

Speaker 0

And thank you. And our next question comes from Brooks O'Neil from Lake Street Capital Markets.

Speaker 6

Question. Can

Speaker 4

you just talk a little bit about what you see as the primary challenges to accelerating company store growth and how you plan to deal with those challenges? Thanks a lot.

Speaker 3

Sure. Thanks Brooks and we appreciate it. Yes, if you think about the numbers, we added four corporate clinics last year, and we've now guided to between twenty and thirty. So that will not come without some unique challenges. And we've had to step back and think through the resources.

So the one thing that we won't do is be under resourced as we try to navigate that level of growth. And so we've redesigned our outside the four wall kind of field overhead structure, to allow us to scale and we're actually looking at new markets. Traditionally, we've been more of an infill type strategy as it relates to greenfield growth trying to cluster that around our existing infrastructure. But we're going to embark in some new territory in 2021. So we need to think through that as well.

But really it's the pace, and it's the geography that come to mind.

Speaker 2

No. I think that's right, Jake. And I think, what's really nice, Brooks, is we've learned a lot. That that this isn't the first time where this company has tried to accelerate growth of its corporate units. We we obviously started that back in 1516 and, learned some painful lessons.

But guess what? We learned those lessons. And I think as Jake is saying that we're being very thoughtful and making sure that as we go forward and accelerate the growth of our greenfields is that we're going to make sure that it is resourced appropriately. You have always the same limitations or concerns just whether it's a franchise or a corporate clinic, there enough doctors? Are there good sites?

Are we getting good sites at a price that makes sense for our model? And so that we have the normal issues that would face any fast growing company in a small box retail environment. But we feel we have a remarkably talented team who can really make sure that we aren't stumbling too hard and learning from our mistakes and are able to achieve the goals that we're setting out for ourselves. You know that going out there and saying we're going open up a thousand units is a big goal and it's going to require everybody in this company focused on making sure we achieve it and our franchisees and our regional developers and our doctors. There's a lot of pieces moving there but we feel that we absolutely can get there.

Speaker 4

That's fantastic. Thanks a lot and keep up all the great work.

Speaker 6

Thank you very much.

Speaker 0

Our next question comes from Jeremy Hamblin from Craig Hallum Capital. Your line is now open.

Speaker 6

Thanks guys. I'll add my congratulations on a truly impressive year really in any environment but let alone COVID. I wanted to just follow-up on the development of company operated clinics. The first question is, can you provide some CapEx guidance for 2021? And number two is whether or not you've seen any changes or anticipate any changes in terms of the cost per new unit, kind of the upstart costs of the company operated clinics and what you expect for kind of the four wall loss in year one?

Speaker 3

Sure. The first part of the question was around CapEx guidance. Again, we haven't provided any forward looking information, but we can do some back of the napkin calculations. Again, we've guided to expand that portfolio by 20 to 30 units and you're looking at a build out cost of around 180,000 to, you know, a little over 200,000, maybe in some of the more expensive markets. So however many greenfields you're estimating, that would be your kind of CapEx investment at the greenfield level.

In addition to that, you know, opportunistically, we do look at acquiring franchise units back. The CapEx investment would be based on valuation. You know, the stronger performing unit would warrant a higher investment dollar amount, but it's hard to estimate those. And then lastly, we're continuing to roll out the access IT project And with that comes a lot of capitalized expenditures, in the form of that IT project. So those are going be your largest buckets.

Again, we haven't provided a number on that, but that's kind of some of the larger drivers of CapEx in 2021, the largest of which being those greenfield units coming on board. The second part of your question was ultimately asking about the four wall impact. I think the simplest way to think about that is we have those greenfield units come through, is really, you know, if they're riding out through the through the early part, you know, we talk about our time to breakeven. So you've got your CapEx investments and you've got those working capital losses. So we said that the units are breaking even, you know, somewhere in that six to nine month time frame.

And so, you know, as you begin to ramp while we have improved the grand opening process and we've improved on that grand you know, that time to break even, you still have working capital losses. You've got grand opening marketing costs. You've got to hire and train a doctor before you have your doors open. So in its simplest form, you're looking at probably 100,000 of loss on an adjusted EBITDA basis for each one of those greenfields as you're kind of working through all those upfront costs. So that's kind of a simplified way to think through that.

Speaker 2

And there was a there was a third question that was snuck in there and that was really what's the trends moving in terms of build out costs. And I'd say that we're seeing some trends a little bit change by market. So for example, in California, as Jake was referencing, we're seeing cost of the overall build up higher than for example some of the other markets like Arizona. I think everybody is kind of anticipating that we should be seeing some softness in the real estate side of this, which is a significant cost associated with the build with the operating of these clinics. I'm not going to say we've seen a lot of that because the type of units or the locations we're going into are still that A1 small box retail space and there's still a lot of competition around that.

There's certainly a lot of units out there in developments are struggling or losing their anchor and they'll give you that. But we don't wanna be there either. So I think that we are continually value engineering the actual build up cost itself and looking at ways that we can reduce the cost and still maintain the quality of our build up. And so it's kind of a I think that as a trend, we're not except for specific markets like California, we're expecting the overall cost to kind of stay relatively flat and we'll still watch what's going on with the real estate.

Speaker 6

Great. And kind of related to the CapEx question that you were getting into the investments in access, so this is part of where I was going. In terms of thinking about that investment, which I wanted to see if you had a sense of whether you expect the implementation of that system to result in a bump in your average revenue per location, part one to the question. Part two is whether or not you know, you would potentially take a higher, you know, charge from franchisees once that system's in place.

Speaker 3

Sure. The first part is would we expect a bump? So, you know, I think the important part is to realize that, you know, first, we're moving from a, you know, antiquated kinda homegrown, proprietary platform and we're moving to a third party SaaS application with the initial phase of that rolled out kind of what we categorize as what's called the lift and shift. Right? Bringing all that existing functionality onto the new CRM platform.

And so we're not gonna have that rolled out until the summertime. So, you know, if the initial phase is a lift and shift, you know, it's really the second phase where I think you're gonna see those increases on the top line. And those will be driven by the implementation of marketing automation tools, our patient portal, mobile check-in with our mobile app. All those types of things that will be functionality in the secondary phase of the project, those will be the incremental drivers of the top line revenue. So I don't think 2021 will see that immediate lift.

Speaker 2

No. Jake, I couldn't agree more. Then just because we know right now, the essential thing is to do this lift and shift. Get off this homegrown platform to a world class platform that we can really unleash the power of the information that resides in our system. But in the beginning, that's gonna come down the road and that's why we're making that investment.

But right now, just the lift and shift is taking what we currently have and putting in a format that we can then use real power of that CRM model that, ultimately Jake was referencing the different opportunities.

Speaker 3

Yeah. And then the second part, Jeremy, was do we expect to to charge more for the IT fees? We do not. Those are all outlined in their respective franchise agreements. We did go through an ITC increase in the 2019 time frame and really try to be anticipatory, you know, understanding that there's a greater technology cost.

You know, there is a cost to innovate and we have to keep up on the technology front. So we try to be proactive with that and we work through that with our franchise base, but we do not anticipate, any increases in the near term.

Speaker 6

Sounds like a great opportunity for 2022. Last question for me. Just in terms of thinking about your customer base and the stickiness of your customer base, if you were to flash back to your customers your customer base from a year ago, what percentage of those customers have come in for an adjustment in the past three months? Do you happen to have like a range that you'd be able to share with us on that?

Speaker 3

Let make sure I'm understanding the can you rephrase the question, Jeremy? How many of our customers have come in the last

Speaker 6

Yes. So if you were to flashback to your the customers that came into a joint location in Q4 of twenty nineteen, what percentage of those customers came back for at least one visit, let's say, in Q4 twenty twenty?

Speaker 2

It's going to be more anecdotal, Jeremy, than actually having the data. And when we look at the data historically, what we would tell you is that because you got to look at this in a couple of different ways is that when and one of the comments that we made in this in our initial remarks is in 2020, we saw a significant increase in the total number of memberships as a percentage of sales of the clinics than compared to 2019. So in 2019, was roughly 80% of all sales were a membership and in 2020, it was 85%. So what that's telling you is that we have those patients that are coming in are in fact staying on as a member longer, so I'd say that's increasing. If we look at 2020, the metric most impacted negatively by the pandemic was our new patient count.

And that kind of makes sense to me because what we're seeing is that if you're in the middle of a pandemic and you're in pain and you don't want to go out there because you're rightfully so concerned, is that you've got to be in a lot of pain to be able to be opening that door to join to a chiropractic clinic for the first time. What we've also found is those clinics who actually do make that journey are converting and joining as a member at a higher rate we've ever seen in the history of the company. Some of the metrics that I would also tell you is that we're seeing because we have really two three major metrics that we're looking at is one, would say new members. Secondly, we look at conversion. How many of those converted to a membership?

And then third, what's our attrition rate? How many drop out? And I'd say that we've seen during the 2020 is our attrition rate actually has flattened or improved as an overall system. So we're seeing people stay with us. We're seeing people convert faster.

And the big challenge we're seeing is just getting those new patients in the door. Now we found a lot of success as Jake was referencing earlier about that promotion in the summer where we're doing a free adjustment for any new patient. Is that something that we see some opportunities going forward? Absolutely. But I would say that in the more broader term is our existing patient base is stickier to us and we need to continue to focus on bringing those new patients in for the first time.

Thanks for taking all

Speaker 3

my questions

Speaker 6

guys. Fantastic. Great job. Thank you.

Speaker 0

Thank you. And our next question comes from Michael Zabran from ROTH Capital. Your line is now open.

Speaker 3

Hey everyone. This is Michael Zabran from Roth Capital on for Dave Vane. Thanks for taking my questions. I just have two for you. So as we roll forward our model a few years, the company begins to accumulate a fair amount of cash with almost no leverage.

Assuming you keep the same balance of corporate owned clinics versus franchise, is there a longer term thought on the return of capital to shareholders? Yes. It's a highly cash flow generative model. You can see in 2020, did open $2,000,000 in operational cash flow on, you know, a balance of, you know, call it 500 something units. So as you roll that number forward, there is a lot lot of cash flow opportunity in those out years.

What I will tell you is that right now, we have a very clear strategic plan to increase our our scale and our size. So right now, all the investing activities that you'll see will be in the form of growth and supporting that growth in our infrastructure. At some point in the future, we will have to make those decisions. But right now, we're very focused on increasing the unit count, reaching that goal of 1,000 units by the end of twenty twenty three. And then we will, you know, take care of some of those additional cash issues a little bit later down the line.

Speaker 6

Great. Thank

Speaker 3

you. Last one, are there any updates regarding store within a store concepts, particularly as we exit COVID and benefit from the more traditional retail foot traffic? And can we get a sense as to the CapEx and return dynamic differences versus the traditional store opening economics?

Speaker 2

I'm going to answer the second part of your question first and the answer is we don't have the data to answer that question. We've had very limited store in store concepts, when we're talking about actuals, we've had one, which was we put The Joint in an existing concept called Relax It Back. And then we had a second one where we took The Joint and put it in an airport inside of Express Spa. I would tell you the one clinic that we have closed, that's still closed since the pandemic is in fact in the airport in Austin, Texas. And so we have very limited experience in terms of what is the true economic difference of performance of these non traditional growth versus our traditional clinic.

I would say that we do see this as an area of great opportunities. You can kind of just expand what does that look like whether it's a military base or whether it's a large chain of retail concepts out there that has room to put a small joint inside their business. I think that there is huge opportunity to explore. We are still primarily focused on the core of traditional clinic but we absolutely will continue to invest and look at these other opportunities as we go forward.

Speaker 3

Thank you, guys.

Speaker 0

Thank you. And our next question comes from Anthony Vandetti from Maxim. Your line is now open.

Speaker 7

Thanks. Just two questions. One on the marketing campaign, what's the expected ramp in the dollars and how should we look at how those dollars will be spent? And then I just have a follow-up on the clinics.

Speaker 3

Yes. So when you think through marketing, you will see an increase in scale, in terms of keeping in mind that 2% of all gross sales go into our national marketing fund. So as our gross sales continue to scale, our national marketing fund will scale with it, because it's a percentage of those sales. And so with those increased dollars, you know, those will be used on on national and regional campaigns, and will be focused largely in the areas that we have those dollars channeled to now. There's a great deal of it heading into the digital space and we just mentioned in the script that we'll continue to roll out a new national ad campaign and growing in sophistication.

So we would expect those to scale. The other way you're going to see sales marketing dollar scale, is with clinic growth, specifically in our corporate clinics. So as we add, corporate clinics, you know, we have a kind of a per month, per clinic spend that we have. So you'll see those two lines, continue to increase in the year. So as we look at, how that leverages the National Marketing Fund scales directly with our gross sales and we're always mindful in terms of the per clinic spend on the corporate basis to make sure that we're getting the biggest bang for our buck there.

So you will see that dollar pool increase in size, but we're always focused on leverage as well.

Speaker 7

Okay. And then just lastly, if I go back, I guess, three or four years ago, there was a thought that, you know, maybe if you got to 1,700, 1,800 or so clinics that, you know, in certain markets, you would start to hit hit saturation. Is that still a a number you think is is is sort of the plateau number in in terms of a total number of new clinics where you start hitting saturation in some markets? Or has that number been adjusted as you've looked at how the markets have evolved since then?

Speaker 2

I would say absolutely dependent upon how the market continues to grow Anthony that if you look at that and some of the stats we just gave, okay, when we first did that survey of is this your first time to ever see a chiropractor, it was 13%. Last year, it was 27%. So what we're doing is not just simply taking market share, what we're doing is building market. When you go back to where that 1,800 number came from and that wasn't just okay if there's 41,000 practitioners out there, mean, why can't we do 1,800? Is that what we did is take this incredible database we have of our patients and looked at the demographic and psychographic elements of where our current footprint is and then went out and said, okay, how many additional points of distribution replicate that footprint?

And that's where that 1,800 plus comes from. What's interesting is we see in some of our more dense markets like here in Arizona, we have these franchisees who are literally splitting their own protected territory adding a clinic and increasing the value of both those clinics very, very quickly. And so we're seeing some self cannibalization because again, the market itself is expanding so quickly as we bring these joints into that market. So what is the top of how many units we could have in this country? It's a great question.

I think it will continue to expand over time as we watch the market expand and you can create more and more density as it relates to this concept.

Speaker 7

Okay, very helpful. Thanks very much.

Speaker 2

Thank you.

Speaker 0

Thank you. And I would now like to turn the call back over to Peter Holt, CEO, for closing remarks.

Speaker 2

Thank you very much, Justin. I really thank you all for your time today. And as a note, we plan to participate virtually later this month in the D. A. Davidson Growth and Consumer Conference and the ROTH Annual Conference.

And we've heard so many patient stories relaying their personal stories on how The Joint has helped them during the pandemic. And I wanna just share a couple of them with you. An ICU nurse from Arizona wrote, and I quote, COVID hit us hard and really took a toll on my back. My patients are typically on a ventilator and sedated mean they don't move on their own. They require a lot of turning which can take a toll on your back.

So I started seeing chiropractic care. It's made my mobility so much better over the last couple of months and I'll continue to go. A breast cancer survivor and a yoga instructor from Texas reports, seeing my doctor once a week has helped me maintain the release and balance I need to fill in my spine. Regular visits, especially during COVID has been a light. I'm so grateful for the service and the attention that I get from every adjustment.

And finally, a COVID long hauler from Nevada noted, I contracted COVID-nineteen in March 2020 and have been suffering ever since with severe pain covering my entire rib cage, sternum, back, and neck. This pain radiates from my head and all over which is quite debilitating. During intense flare ups, my shortness of breath will completely knock me out and I'm unable to work or even go up the stairs in my home. A friend recommended that I try the joint and I couldn't be happier. My weekly visits enabled the doctor to assess my misaligned ribs and sore neck and work everything out gently and comfortably.

I'm so grateful for my doctor in The Joint. I've not had a headache in weeks and I've now been able to work continuously without having to take off since I've joined The Joint. Thank you all. Stay well adjusted.

Speaker 0

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