Dentalcorp Holdings Ltd. (DNTL) Earnings Call Transcript & Summary

Good morning, everyone. My name is Scott Fletcher, and I'm a research analyst that covers health care and health technology at CIBC. It's my pleasure to be with you here today for the CIBC Eastern Institutional Investor Conference being brought to you virtually. Our next presenting company this morning is dentalcorp, and joining us from the company is Graham Rosenberg, Founder and CEO. dentalcorp is Canada's largest network of dental practices with over 430 practices and locations across the country. dentalcorp joined the public markets in May, raising $950 million and was the largest health care IPO on the TSX. Today's presentation is structured as a fireside chat, and we'd like to encourage you to submit questions throughout the presentation. [Operator Instructions] Good morning, Graham. Thanks for joining us.

Good morning. Thank you for having me. Pleasure to be here.

So to start our conversation off, I thought it might be helpful for people that are newer to the story, if you could maybe give us an overview of the business and what specifically makes the dentalcorp approach so successful.

Absolutely. Thank you. So great being here again. I just started dentalcorp 10 years ago with the vision to revolutionize the business of dentistry in Canada, and we've evolved into a real health care company since then, with an ambition to be Canada's most trusted health care network. 10 years ago, set out to really align our interest with dentists that we were acquiring and partnering with, supporting their growth ambitions and supporting them with all the things that they weren't particularly good at nor particularly desirous of continuing to do in their careers. And so on that premise built a business that today is $1.1 billion approximately of pro forma revenue and about $206 million of EBITDA, as you said, 430 locations across the country. And what really differentiated us is our acquisition program via which we've steadily, year in and year out, acquired between $35 million and $40 million a year of EBITDA. The significant corporate infrastructure that we've created over the last 10 years and with significant investments over the last 3 years, which will allow us to double or even triple from here on in. Our infrastructure includes finance people, operations people, technology people, marketing people, people managing the talent cycle, everything from recruiting, training and development, and day-to-day HR management for our 7,000 people and 430 locations across the country. Our acquisition model has consistently driven strong returns on invested capital. It's a model that's built around a strong alignment of interest with our dentists that we acquire. When we acquired a practice, generally, roughly $2 million plus of revenues, about $450,000 to $500,000 of EBITDA. At least 2 dentists that we can manage succession risk in case somebody -- one of our partners has issues or stops the proverbial bus. We signed people up to a 5-year contract. We align them by giving them at least anywhere between 15% and 20% in dentalcorp equity to align the interest at the dentalcorp level. And they've been wonderful ambassadors of our business, supporting our business development agenda, lots of collaboration with best practices both clinically and operationally across the network. And then at the practice level, the folks we acquire have a profit sharing to the upside. They generally accrue 20% of the upside in the EBITDA performance of which we acquire the practices on an annual basis. But we also have some downside protection as well. So the first 10% of the downside is the responsibility of the dentist. And so we believe that it's that alignment of interest, our execution over the last 10 years, which we believe has been second to none, that has put us in a dominant position in the Canadian dental market. Again, 430-plus locations, we own about 3% of the market. We're twice the size of the next 2 largest players combined. We've been in business 10 years, they've been in business about 35 years. And we see a wonderful opportunity to continue to drive 15%-plus returns on our invested capital, 3% to 4.5% plus organic growth and continue to grow at double digits for the long term in a market that's only 5% penetrated compared to our U.S. counterpart, which is around 20% consolidated. So those are the headlines on the business.

Yes, that's a really helpful overview. Thanks. So next, I want to dig into what maybe a typical dentalcorp practice looks like. Is there a location, a practice size, a patient demographic that makes a practice more attractive for an acquisition?

Yes, absolutely. So as listed today, just headline, we basically are located within 75% of the Canadian population within 15 to 20 kilometers of any one of our stores. So we typically look for areas where when we're making acquisitions, we're really focusing on talent. If talent turns over, can we go out and acquire the best talent in the industry, everything from associate dentists working on the practice, hygienist, dental assistants and so on. Talent is always a challenge in businesses that are driven by people. We think we have a better mouse trap and a better employee value proposition, but we're not going to go buy practices in areas where it's difficult to attract the best talent in the industry. That's the first [ provisor ]. Our second [ provisor ] is reputation of the dentists that we are acquiring, and their practice, we do a lot of work around that. And then when you looked at the numbers, every general practice has about $2 million to $2.5 million of revenue, and for average location, $450,000 to $500,000 of EBITDA, so 22% to 24% margins at the EBITDA level. We make sure that when we acquire them, they have all the technology in place to continue to deliver on the value-add services that we can provide both clinically and in terms of back office. And typical practice has about 20 people working in it, so usually 2 to 4 dentists, 3 to 4 hygienists, some dental assistants obviously support the dentists, practice managers and then a bunch of administrative staff. So that's the headline. Low CapEx in the business, probably about $30,000 per clinic on a maintenance CapEx basis, so really high free cash flow to the equity when we acquire and continue to run these businesses.

All right. That's another great overview. So obviously, you had -- you have this large network of now over 430 practices. Can you speak a little bit to how scale has become an advantage when it comes to both optimizing talent and for patient flow?

Yes, definitely. So scale has allowed us to make the appropriate investments in both the patient journey, both in terms of their patient experience inside the clinic as well as our clinical agenda. So our scale has also allowed us to drive better margins through significant purchasing efficiencies and some labor efficiencies at the practice level as well. And then finally, our employee value proposition has really been fine-tuned over the last 10 years. Obviously, the market for talent, especially now through the COVID period and the post COVID period is challenging. We believe that our employee value proposition and our scale vis-a-vis training and the whole talent management agenda has put us in a position where we can outperform our competition. And our competition is the dentists across the street from our 430 locations. So our dentists across the street have a $50 million a year corporate infrastructure. That's what we've invested in, we'll continue to invest in on an annual basis, so there's a lot of scalability there when we talk about margin expansion. But that's the benefit that a dentist has. Every dentist has a cloud of our 200-plus people at our corporate offices, our technology stack and our purchasing and scale efficiencies brought to bear on their individual location. And their competition is dentists in 5- to 10-kilometer radius. On the talent side, we invest a lot in training and development. We have our institute called DC Institute, and that has proven to be a real value add in particular on the provider side. Dentists and hygienists, training them, optimizing their skills to provide more value-add services to patients. On the patient side, we've created and we really invested a lot of time during the COVID period. During COVID, we were shut down. We were basically running at about 5% of 2019 revenues in the midst of the depths of the pandemic. We made a decision to take the time to invest heavily in technology, really digitize the patient journey, and we've done exactly that. So we've created a portal in that patient acquisition portal called hellodent. It allows us to acquire patients digitally, and it is new to the Canadian dental market, and we started -- we're getting some real traction out of that 2,500 to 3,000 bookings a month. You can go online, search for dentists near you, hellodent pops up, click through straight to the practice and book your appointment. We're also from a patient perspective able to, with our scale and also for people as well, we keep people in the network and create this network effect. And so when you look at our revenues, 87% of our revenues repeat every year. But the 17% that doesn't is primarily because those patients have moved somewhere. As an individual practitioner, your patients move, either they move out of city or to a different part of city or out of province, they're gone. For us, with our reach, and I spoke earlier about our 75% reach of 2 Canadians within -- say, we reach 75% of Canadians within 10- to 20-kilometers of any one of our clinics. And we have an ability of leveraging data, leveraging digital, including hellodent to recapture those patients inside network and mitigate our attrition. So not only do we drive more patients top of funnel through our marketing teams and our marketing programs and our technologies, but we capture them bottom of funnel. And in that way, we're able to grow our patient base at a disproportionately higher rate, 1% to 2% a year, more than the individual practitioner can. And so that's the value of the network.

Okay. There's a lot of good facts to them. I'm probably going to come back to some of those as we go on. But first, I want to touch on something on something...

You may not [indiscernible].

We'll see. One of the items you touched on was margin expansion, post acquisition. I'm wondering if you can maybe give us sort of a -- maybe a little bit more detail on how you drive that margin expansion post practice acquisition.

Absolutely. So when we acquire a practice, that $2 million of revenues, keep the number simple and say $400,000, $500,000 -- $400,000 of EBITDA. We're able to expand those margins, which generally when we acquire a practice, around 22% to 23%, we're able to expand them by between 10% and 15% not of revenues but expand the margins. So call it 1% to 1.5%, which has a 5% to 10% to 15% accretion to EBITDA out of the gate in that first year of earning them. We'll do that primarily by driving cost efficiencies. We obviously have a national program with a bunch of larger distributors. We started to actually go manufacture direct as well, looking at private label for everything that goes into delivering a patient visit. So everything from gloves, bibs, amalgams, things that go into patient's mouth, that are used for every visit. We call them consumables. Generally we warrant an average practice about 7% to 7.5% of revenues from when we acquire them. We were able to reduce those down to around 5%, 5.5%. So significant uptick there on the purchasing side of things. And then leveraging technology. We have a lot of technology automation that leverages algorithms, that drives the patient recall and then patient engagement. So it relieves the front office people at a practice to do other things to add value to the business. And so we see some labor efficiencies as well after about 6 to 12 months. And then after that, practices come on to our organic growth programs, where we drive that 3% to 4.5% uplift beyond that. So out of the gate, I'd say 5% to 15%, closer to 10% to 15% EBITDA expansion through margin expansion because of cost efficiencies and some labor efficiencies as well.

Great. And now on the flip side -- or on the top of the income statement, you mentioned an organic growth program post acquisition. So I think that there's some really interesting initiatives that the company tracks to there, so if you could maybe dig into that as well it would be really helpful.

Yes, definitely. And our scale has supported an organic growth agenda that continues to increase in -- it is called size of pie, certainly over the last 18 to 24 months. So historically, we've driven around 3% to 3.5% organic growth on the top line, which obviously drops through to the EBITDA level. 3% to 3.5% organic growth in an industry that's otherwise very steady and has grown through recessions and demonstrated resiliency year in and year out for the last 30-plus years. That growth, that base level of growth comes from around 1.5% to 2% price increases every year and around 1.5% to 2% of volume increases every year. How do we drive volume? We drive volume by marketing to patients, capturing more patients top of funnel, retaining in bottom of funnel, which I spoke about earlier. That network effect, how do we capture those movers and the majority of our patients moving? And also increasing the customer service because some patients, because they're not having a great experience, and so we work on that. But there's another area that we've opened up as well, and it's been technology that has been a catalyst for this as well as the demand side of things. And what I'm talking about at the moment is orthodontics. Typically, until about 24 months ago or 18, 24 months ago, if you went to a dentalcorp practice, about 95% plus of our practices or our general practitioner practices, they would send you -- if you need orthodontics treatment, for example, they'd send you to an orthodontist. Clearer line of therapies has been a major advent in dental technology over the last 10 years. You probably -- many of you have probably heard of Invisalign. More and more adults looking to advance their aesthetics, improve their smiles, clear up some malocclusion in their teeth, so crooked teeth and so on, and jaws that are out of sync, and are turning to Invisalign. And so about 18 months ago, we began in earnest to invest in the technologies in every one of our 430 clinics to allow our general practitioners to do that kind of work on the basis that, look, yes, the outcome is going to be more money, but your patients are looking for a one-stop shop. Patients are increasingly sophisticated and, obviously, that headline demand equation that I spoke about. So we made the investments. We've invested significantly in training of about 160 of our practices so far. We think we'll have the remaining -- the remainder of the 430 done by the end of, I'd say, 12 to 24 months out. And we've seen a $30 million uptick in revenues just from those 160 clinics. We think that can be closer to $50 million to $60 million, and then when you attribute that to the rest of the network, we're looking at $100 million to $150 million plus opportunity in orthodontic insourcing across the network over the next 24 to 36 months. And we see that as a wonderful opportunity to augment our organic growth, which, again, was steady around 3% to 3.5% to around the 4.5-plus percent range going forward. Implants is another area we focus on. Aging population losing their dentition. They want a permanent solution, they don't want dentures. Implants is opportunity for that, and that's the next area that we'll begin to focus on next year and while we continue to complete the orthodontic training and insourcing.