Well, good afternoon. Thank you all for joining us. This is day two of our 24th annual Oppenheimer Consumer Growth and E-Commerce Conference. My name is Brian Nagel. I work at Oppenheimer as the Senior Equity Research Analyst covering consumer growth and e-commerce. Again, thank you all for tuning in here. I'm very pleased to introduce our next presenting company, The Joint Corp., and two of the company's senior executives, CEO Peter Holt and CFO Jake Singleton. Gentlemen, thank you for joining us.
Brian, the pleasure is ours.
We're going to structure this as an informal fireside chat with me asking questions and the executives from The Joint answering those questions. To the extent there are questions from the audience, just send them through the chat and I'll be happy to work them into our conversation.
Great.
So I thought, gentlemen, given you're still somewhat of a new story to a lot of investors, maybe we just start with a description of your business and who you are, who are your customers, how you go to market, that type of idea.
Absolutely. The Joint Chiropractic actually got started in 1999 with a doctor of chiropractic who had this wonderful idea. He wanted to take chiropractic to the masses. He wanted to make it affordable, accessible, no appointment, no insurance. And so he opened up his retail concept and it was an unbelievable success. And so what happens so often in those retail settings where your customers are coming in, they love the product or service, they start asking, "Hey, are you franchised?" And so Dr. Gerretzen started franchising. We started in 1999, started franchising in 2003. And while he was a great doctor with this brilliant idea, he really wasn't understanding the full model of franchising.
So fast forward in 2010, these two brothers saw one of his units operating in Austin, Texas, and said, "This is what I've been looking for." And so they took the concept, bought it from him for. It was actually nearly a bankruptcy because he wasn't understanding the model of franchising. The Joint Corp. was formed, which is the company we work with. And when that was formed, there were 8 franchisees that came into the network. 1999, 2010, 8 units, that's not franchise. So when we went public in November of 2014, we had 242 units in operation. Now that's franchising. And today we're hitting nearly 1,000. So that's when you really truly understand the model of franchising. That's when you can get that accelerated growth, especially if you have a concept that's incredibly sound and has a future going forward.
So today, if you really think about the concept, is that we're not revolutionizing chiropractic care itself. It's been around for 127 years. Our revolution is access by making it affordable, by making it accessible, making it easy to trial. So there you are in your local supermarket, strip mall, or daily use center, as Jake likes to call it, is that you're getting your frozen yogurt, picking up your dry cleaning. Oh my gosh, there's The Joint. That's not cannabis, that's chiropractic. I'll go in. And in that place, last year we had 932,000 people open the door to The Joint for the very first time. That's our new patient count. Now what gets me most excited about that number is 36% of them had never been to a chiropractor before.
By our model, by introducing people to the concept of chiropractic in this really easy setting, it feels like it's safe, it's not expensive, that we literally are creating market share. I think that's the real opportunity in front of us.
That's perfect, Peter. So who is your target customer then?
That's such a great question. I'm going to back up a little bit and say, okay, chiropractic industry is about a $20 billion industry. And if you look at who's using chiropractic in America today, the demographics are really clear. Number one, it skews heavily female. Number two, it skews heavily insurance. And number three, it skews heavily old. So that's who's making up the bulk of that $20 billion industry. So when we come to The Joint and look at, okay, who is our customer? We had 1.7 million people last year come into The Joint where they joined as a member or just came one time. And if you look at that, 45% of them were millennial. 19% were Gen Z. And Gen Z is our fastest growing segment of that population. The median age is 37.6 years old. And it skews almost evenly male-female.
So these are younger people who don't have the stigma associated with chiropractic that are looking for that natural, more holistic way to get out of pain and finding a Joint. And that's what's so interesting. And again, if you're a baby boomer like myself and you're looking for a medical service or a chiropractor or a dentist, what do I do? I go talk to my friends and family and say, "Who's your dentist? Who's your doctor? Who's your medical provider?" Well, the millennial and younger generations, they're not going to friends and family for validation. They're going to Dr. Google. It's an online process. They're going searching pain, close to home, chiropractic. And in that process, they're doing the same validation, but it's a completely online process. So if you're not online, you're missing it.
I think that's one of the reasons we've been able to see such a young group of people who make up our patient base because it's that online presence that really helps us make sure that when they're in pain and looking for medical, looking for pain relief, they can find us.
What's the typical duration of a relationship with one of your customers?
It's another great question. If you look at our customers, first of all, 85% of the sales of the clinic is membership. So let's say that typically back pain is one of the most traditional reasons people come in. 84% or 90% of people in this country will experience back pain at some point. So let's say that you go in and you've got that back pain. And so you're going to see the doctor and he's going to do a consultation, examination, and give you probably an adjustment. And in that process, it's about a 20-minute experience. And let's say it is that lower back pain. He's going to say, "Peter, I probably need to see you 2x or 3x over the next several weeks." And then I'll go talk to the wellness coordinator. The wellness coordinator will say, "I was based on the doctor's recommendation.
You should join as a member." And I do. And in fact, 85% of the sales of our clinics are that membership-based model. And in that membership, the average membership pays $79 a month. And I get four adjustments in that month period. And if I need additional adjustments, I pay $10. If I don't use my adjustments, they don't roll over. It's a use it or lose it. And then you have four more adjustments the following month. Now, what we've seen is the average patient stays with us a little more than six months. They probably use us for about 2.7 x per month. And they stay with us for that six-month period. And then they drop. And so the metrics we're always focused on in our model here is our new patient count, our conversion to membership, and then attrition. How often do they drop?
When do they drop? What we've seen is that with that attrition rate is that those patients who drop, we see 25% of them will be back in the clinic within the next six months because their pain comes back. You see kind of a cycling or a recycling that takes place in our model.
You discussed for a bit, again, for people may be less familiar with the model and the offering, just the dynamic which happened through the pandemic and then post-pandemic. I mean, how did your customers use your service differently through over that timeframe?
Well, again, it's kind of funny. If you get your head back into where we were in March of 2020, everybody was scared to death. Nobody knew what was going to happen as the whole world shut down. And we didn't even, if you look at some of the models that Jake was running in terms of expectations, there were some pretty terrifying numbers there. But we were an essential service. So we stayed open. Our doctors stayed open. But most importantly, our patients showed up. So even when we were in the middle of the pandemic, we continued to see our patients come in. And so if you look at our numbers in 2021, it was the height of the numbers we ever hit. We had our highest number of new patient counts. We had the highest number of sales of our franchise units.
Every metric that we used to measure ourselves was record-breaking. It was reflected in the stock at the time. Obviously, we've had this correction. During the pandemic, we absolutely thrived. If you look at 2021, our comps were 29% for that year. I think what we didn't realize then is just how impactful that stimulus money was to our patient base. So again, Brian, if you look at who is our patient, the average income is between $50,000-$105,000. This is a financially sensitive patient base. When they're paying that $79 a month on their credit card, they're not looking at that and saying, "Oh, whatever. If I use it, I use it. If I don't, I don't." That's a significant portion of what their costs are. They're looking at that very carefully.
So I think as we've seen some of that headwinds post the pandemic, and you're seeing kind of the economic uncertainty, the increase in inflation, the increase in cost of living at the grocery store, the gas station, is that that's our customer. In fact, they have been sensitive. They are sensitive to that economic headwind. So we've seen a falloff in our new patient counts really in 2022, 2023. It's coming back up. But I think that's a direct reflection of who's our patient base and some of the economic uncertainty that they themselves are feeling.
To be clear, that consumer then, like you're saying, it's generally speaking a lower-income consumer that's more budget constrained. But they're not finding it. They're not able to find a less expensive alternative to The Joint, correct?
Correct. We are the value proposition without question. And so, but I think what's happening, and we've always talked about, The Joint has never gone through recession. So we started in 2010 as a Joint Corp. And so we've always thought that if a recession hit, that we would be more resilient than some of these other much more discretionary spends like a frozen yogurt and a cup of coffee. But as we all know, we haven't gone through a recession. And our thoughts were if we didn't have a recession, those people in the top of that funnel that are paying that $75 or $150 for that adjustment, and when they look at us, they look, "You guys are too cheap. My son's not going to get a $29 adjustment.
He needs to have a $75 adjustment." But in that recessionary period, if they truly are tightening their belts, you're expecting them, "Well, you know how bad can a $29 adjustment be?" But we haven't had that. But what we have had is that lower level who is feeling that pinch with inflation and all the other things we just talked about. And so I think what they're doing is staying home or using over-the-counter medicine. And that's also, I think, reflective of kind of our drop in new patient counts. If you look at new patient counts from 2021 to 2022, it dropped 14%. If you look at for 2022 to 2023, it was still dropping, dropped about 7% for the full year, flattened out the last year. And we're starting to see some kind of steadying and moving in the right direction.
We just hired a new CMO, actually from Sonic Drive-In, who has been now with us for about seven months, I think, just really doing a great job of really looking at especially our digital marketing campaign and revitalizing and focusing on bringing those new patients back into the clinic.
Peter, thanks for the question. I was going to ask, you talked about the potential uptrends. We're starting to see that. You would attribute most of that then to the improved marketing?
I think it's definitely associated with improved marketing. I think there's also kind of the inflation is getting down. We haven't seen interest rates drop or the Fed hasn't dropped rates, but it feels like there's an easing off of that intense pressure when we're experiencing 9% inflation. And that is our customers. When they're going to the grocery store, they're paying for gas or they're paying their credit card interest rate, they're getting hammered. And I think that is easing off a little bit, but it's still there. So we're cautiously optimistic as we think through 2024 and the impact that where the economy is going to go and impact that has on our business.
So you mentioned at the start just the size of the company. So I guess where are we growing? So kind of where you are now to where you expect to go from a unit perspective. Is it predominantly franchises? And is franchising the primary growth vehicle for the company?
The short answer is it absolutely is. Now, when we went public back in 2014, one of the reasons that we went public was to add a portfolio of corporate units to the mix because we were a pure franchise play up until 2014. With the IPO and then the secondary round, about $30 million was raised, and we created a portfolio of corporate units. We ran into some challenges in the process of that. We overcame that. So when we came out of 2021, we really started doubling down on the size of our corporate portfolio. Today, we're about an 86%-14% mix. So 14% of the system is corporately owner-managed. And that's equal to about 134 units. And so, but the market has changed since we started down that path of really doubling down on the size of our corporate portfolio.
Back in November of last year, we decided that we were going to pull back from our corporate unit portfolio and refranchise that and really focus on the strengths of the organization as we are today. That'll be a pure franchise model.
Just to be clear, you're taking units that were corporate-owned and franchising them?
Right. And precisely. We're selling them to our franchisees or to, well, we're selling them to franchisees, whether they're existing franchisees or franchisees that are new to The Joint.
So Jake, you want to talk about the financial implications of that? I mean, as investors, we should be thinking about this shift in the financial implications?
Absolutely. Yeah. The key is really maybe to walk down the P&L. I think what you're going to see is a trade-off. Right now, we get 100% pass-through of the gross sales of our corporate units. As we flip those to franchisees, instead of receiving the full pass-through of the revenues, we're only going to be receiving the franchise royalties and fee structure behind that. So you're going to see a step back in the overall GAAP revenues. But really where the math works at the end of the day is we'll be able to shed a very significant amount of cost. If you think about it today, we've got over 800 employees for those 135+ clinics, including our corporate staff. At the end, you have maybe 115-120 employees for a pure-play franchise. So you're losing all of the line-level cost.
You're losing all of the outside-the-four-wall cost to run that corporate segment. Our four-wall margins last year were 19%, but the total operating unit did an 11% margin. So we were losing 8% in that outside-the-four-wall cost alone last year, which I think in gross dollars was around $5.5 million. So we're shedding all the line-level costs. We're shedding all the outside-the-four-wall cost. And then there's a portion of our unallocated G&A that should be able to scale back with us as well. And so while there will be a small incremental cost to directly service those new franchise units, it's infinitely smaller than what it costs to support them directly.
So as I think about, as we get to the other side of this, yes, we will have lower gross revenue dollars, but we anticipate having higher gross earnings and certainly a better margin profile as we move to that asset-light, high-margin franchise operation.
So how long does this transition take?
Yeah, that's a great question. We've recently brought on Capstone Partners. What we saw is originally we were targeting our existing franchisees. I think in this interest rate environment, doing some of those larger deals was going to be a little bit harder for them. But what we also saw was this robust appetite from outside parties interested in larger clusters of clinics. And so that kind of caused us to step back and bring on Capstone to help us think through the process. So right now, they're kind of in the midst of finalizing their due diligence and the final creation of the CIM.
I think bringing them on and going through the structured marketing process, I think will actually end up being an accelerant to our process because I think we have the potential to target some larger-scale investors into the model, multi-unit multi-brand operators that are comfortable running multi-unit portfolios, maybe in a different vertical, but could easily make the crossover to health and wellness. So we're really excited about that momentum. We have been knocking off deals along the way, but I think once we get Capstone up to speed, I think that could really be an accelerant. So we're looking for some significant traction in the second half of 2024.
The point to remember.
Go ahead, Peter. Sorry.
I'm sorry, but the point to remember here, this isn't a fire sale. This isn't like, "Oh my gosh, I've got to get these clinics off my books because they're just so unprofitable." This is a pretty valuable asset for us, and it's so important to make sure that we get these units in the hands of those franchisees who can most effectively run them. Otherwise, they've just created problems. And so we're really excited to have Capstone as a part of this and really drive that process for us. But these are valuable assets.
To be clear, when the process is done, you'll be a complete franchisee model at that point.
We haven't said that directly. Publicly, we've said the vast majority of our system will be refranchised. Whether we held on to a small concentric geography of clinics is still to be determined, but for all practical purposes, it's the vast majority.
Because strategically, as you think about this as the business model is transforming, Jake, exactly what you're saying, it lends to a much more profitable model, right? But strategically, what's the advantage of having company-operated stores?
Well, I've been building and managing franchise systems for a long time. I've seen these concepts that they would never touch a corporate portfolio. They wouldn't have a bunch of corporate portfolios. Brian, it always relates to one thing, profitability. If the units are really profitable and easy to run, then the corporate franchisor is like, "Hey, let's have more of those." If circumstances change or there's other issues that are affecting it, they're like, "You know what? This model makes more sense as a pure franchise plan." When I was working at Mail Boxes Etc., the UPS Store today, they never had an intention to create a portfolio of corporate units. It just made no sense in terms of their ability to be profitable at that stage of their development to consider that.
In our case, it's really some of the market conditions strategically had changed. We saw an increase in the labor market, so our margins were being impacted by labor, and the doctor is the biggest cost in the clinic itself. That was this economic headwinds that we're talking about has impacted it. And so when we look at that and think, you know, strategically, it probably makes a lot more sense. It's less risk to put this back in the hands of our franchisees. And you over time watch franchisors, that strategy changes over time. And so that's kind of where we are today in terms of what we believe is the best way to run this company and create value.
Just talk about who's your typical franchisee?
Of the roughly 820 franchise entities that we have, that a third of them are the doctor of chiropractic themselves. 2/3 are hiring the doctor. We have a lot of multi-unit operation in the business, but we also have single operators. So 38% of those units are in the hands of a single operator. We have a couple of outliers. We have one franchisee that has over 65 units in four states. We have a second one that has over almost 40 or a little over 40 in two states. And it drops off pretty quickly after that. So you'll see a combination of some pretty sophisticated multi-unit operators as well as those independent practitioners who are using The Joint as a way of building their careers.
We've talked in the past about your efforts to basically train or educate chiropractors. Maybe you want to talk about that, that being a key competitive advantage for your model.
Well, and what I'd say, I'll answer a little different way that I'd say is I get asked the question, "Okay, what's?" I think this is the number one question investors like to ask a CEO. What keeps you awake at night? And I'm telling you, everything keeps me awake at night. I can go through a whole list of things that I worry about. But if you really look at it in a broader sense, the biggest challenge, the biggest opportunity for this organization is nobody understands chiropractic. And that it's just the numbers out there. 50% of the American people don't even know what the word means. 30% are just scared to death. According to the Gallup-Palmer study, 16% of the U.S. adults have used chiropractic in the last 16 months.
And so our real opportunity, and this is why this is such a powerful model, is because by putting it in that retail setting, making it affordable, making it accessible, making it easy to trial, that we can literally create a market. And it's by a 1:1 person. So that's why in a small box retail environment, the most powerful tool we have to educate the consumer about our service is our storefronts. That's why we're so focused on getting to those 1,000 units and beyond because we're not Procter & Gamble. We're not sitting here with $75 million to get you to change your toothpaste. What we have is that small box where people shop and get their haircut, go to the grocery store.
When they're there, what you want to do is make sure that you're educating that consumer that lives, works, and travels in that 5-15-minute radius around that box that you're there when they need your product or service. And so that's the key for us is to be able to open up clinics, educate consumers because in the end, Brian, what absolutely drives this business more than anything else is chiropractic works. It's just not enough people understand that.
Is that something we talked a moment ago about marketing? Is that message? Are you working to drive that bigger branding message?
Absolutely. And the bigger that national media fund grows, the more opportunities we have to deploy that. Even today, we're the largest online publisher of chiropractic information in the world. And if you look at the way new patients come into any medical profession, it's typically through referral. And that's true for us as well. So if you look at the three sources of new patients for The Joint, 30% of them are generated directly from referral. A patient had a great experience. They share with their friends and family. You've got to go see my doctor. And the cost of that is great service and ask for the referral. But as we talked about earlier, the younger generations, they're online. That's where they're doing all their consumer decision-making.
So, 61% of those 932,000 people who showed up last year contacted us and touched us at one point digitally. Now, it's always a little tricky with patient attribution because was it the TV ad, was it the coupon drop, was it what you went online and saw? So there's a number of touch points that you're going to have. But what we do know is that digital strategy, both paid and organic search, is essential for reaching the core customer base to come into The Joint. So we spend a lot of time and energy specifically on that activity, on that space. Finally, the third source for us is what I'm going to just call that guerrilla marketing. That's the sign-thrower. That's the coupon drop.
It's the outreach to the gym or the school or the hospital because you're just having to educate those people that you're there. And so that's the real source. And so as we continue to educate people about the efficacy of chiropractic, they tell their friends, it grows. And ultimately, I think we can hit a tipping point. So when it's right now, let's say it's 16%, when it's 18%, 22%, 24%, I think you're going to see this explosion in chiropractic care because it works.
Now, going back to the question I asked about the pandemic and the boost you got to your business, at least in the earlier stages of the pandemic, are those customers? Did you have customers that came and left? Or are you starting to see those customers now come back? I mean, is that, I guess, the question I'm asking, the customers that were using or using more frequently The Joint during the pandemic, are they a source of potential incremental revenue going forward?
The short answer is yes. There is a real recycling in our business, as we said before. Okay, if you join as a member for six months, we know that 25% of them will be back within the next six months because their paying comes back. And so if you look at the way our model works, you can be a new patient one time. Even though that, okay, you join, you were a member, you dropped your membership, and then you came back, you're not going to be treated as a new patient. It's not ever in our new patient count. I think we do see a lot of that recycling of when our patients do come back. You know, I was, for years, have been every year shutting the company down. All the corporate staff was out and works in a clinic.
This was a couple of years ago. So I was working in one of our busy clinics outside of Phoenix. 95 people came through the door that day. During that period, I just was sitting next to our wellness coordinator, kind of watching and observing and talking with the staff and the people and the patients. That 5 people came in to end their membership. So I'm sitting there, I have an opportunity. Why? Why are you joining your membership? 100% of those 5 cases, now that's still anecdotal, but I think it's still representative, is that it was a pocketbook issue. They appreciate the service, they love what we're doing, but that $79 a month counted. So they had other things they wanted to spend it on until that pay came back.
I think that's very much a part of our recycling. So yes, even in that pool of those new patients who came in who are watching their spending of money, do they have the opportunity? Are we seeing some of them come back? Absolutely. In fact, what I'd say to you is we've realized that that's one of the opportunities we have that we have underutilized as a system because we've been focused more on that new patient count and recognizing we can do more with our lapsed patients to try to bring them back in or bring them back in earlier.
With our CMO, that's one of the big projects that she's been working on, especially with the digital marketings that you can do today where you now understand the patient's journey and you can automated mark our contacts to them through marketing specifically to where they are to encourage them to come back in. And so I think we're going to see some real benefits to that focus on our lapsed patients, not just our new patients, and then also focusing on existing patients and helping them make sure, working with them to make sure they stay with us longer. Just simply because once you're a member, okay, we don't really spend a lot of time kind of nurturing you. You're coming to use your adjustments. But as an organization, I know we can do more.
That's another focus that we have from a marketing perspective is to just bring greater value to our existing members to encourage them to stay longer.
Our time is quickly winding down here. But Jake, I just want to lob one out to you. I mean, maybe just talk about, we spent a lot of time talking about the strategy. It's been great. I mean, from a capital perspective, I mean, is there anything we should know just from a capital perspective for the company?
Yeah, I think we're in one of our greater positions of strength than we've been in years. I mean, if you think about our balance sheet, we currently have no debt, single class of stock, $20 million of cash on the balance sheet. So our existing position is strong. We also have an additional line with JP Morgan, so we can tap into another $20 million of liquidity with them. We have that line through 2027. And then on top of that, you have to think about the potential proceeds that we could generate from the refranchising effort. We've done a look-back study and as a multiple of EBITDA, our clinics in our system, whether it's us or our franchisee to franchisee have transacted somewhere in the 3x-5x range of EBITDA, which for our portfolio could mean proceeds anywhere from $20 million-$40 million.
So you add all those things up, and I think we've got some really great opportunity, excuse me, ahead of us. And I think those capital allocation decisions as we move forward will be critical to the story.
Well, guys, is there anything we did not talk about that we should have talked about here?
No, Brian, I think you have a good understanding of the business. I think what's really clear is the fundamentals are there, the opportunities in front of us to continue to grow. Yes, we're not experiencing the comps that we had as we only were running at 25% a year. But I think that's a reflection just of some of this short-term period we're facing with this economic uncertainty. But the real epidemic of this country is pain. It's not going away, and people are looking for more natural, holistic ways to get out of pain, which only bodes well for the future of this company.
Well, Jem, I appreciate the time as always. Thank you for joining our conference and best of luck here.
Thank you so much. Appreciate the time.