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

Hi. It's David Newman from Desjardins, and I'm the diversified industries analyst. And today, we have dentalcorp, the first up in our first time at our conference, led by Graham Rosenberg, CEO and Chairman. While we do not currently cover the stock, we find it extremely interesting. I'll let Graham tell you about his business. So I won't give you my paraphrase version of it. But welcome, Graham. Thank you for joining us. I will hand over to you to kick out some opening comments, and then we'll jump into a fireside chat, unless you have some opening comments you wanted to dig into?

No, other than to say thank you very much for hosting us. I'm excited to be here. We're looking forward to chatting about our story. Just by way of background, dentalcorp is the largest provider of essential cash-pay consumer health care in Canada. We have a vision to be the most trusted health care network in the Canadian market. We have a high-growth platform with clear competitive modes. We've driven double-digit growth every year in our history, and that continues this year as well on a quarter-over-quarter and year-to-date basis. with the sector leader in dental, which is an $18 billion industry, growing at about 2% a year. It's a highly recurring nondiscretionary staple in health care, about the 87% plus of Canadians with events at least once a year. Our growth is driven by reputable acquisition program, which drives really attractive economics at scale adding -- we had about $40 million of EBITDA per annum, which equates to around $200 million of revenue and drive 15% plus returns on invested capital. So we're not so focused on multiples, but we're more focused on can we drive mid- to high double-digit returns on our invested capital on an unlevered basis. And we have proprietary technologies and playbooks, which we'll talk about through the presentation, hopefully and through our charts, which drive attractive organic growth at the revenue level of 3.5% to 4.5% plus and a consequential drop through to the EBITDA level on a same-store basis. So we're really excited to be here, and I look forward to chatting more, David.

Excellent. Thanks, Graham. So just digging right into the performance today, the IPO was up $14. The stock has appreciated despite the significant sell-off in the health care industry in general. So you've held in really, really well. You're now, I think, on a trailing basis, over $1 billion in revenue and $211 million in trailing 12-month EBITDA. So maybe just give us your report card and the outlook right now. And I think you've got 445 practices as of the end of the Q.

That's correct. So I would be remiss as a health care to say that my stock is fairly valued. We don't think it is. So yes, we're up, and we feel good about that, but not good enough yet. What we're really proud of is the value drivers that drive value in this business which include acquisitive growth and margin expansion, all tick the box despite a very challenging environment, including into Q3, with continued regulatory restrictions across the board pretty much in all of our provinces, which have about a 10% impact on the hygiene side of our business, which is a recurring higher margin side of the business, which is about 30% of our business overall. So despite all of that, we've had strong sequential growth in our quarters since being public. We've driven strong same-store growth over 2020, 3.5% plus in Q3 and positive over 2019, a lot of that underpinned by our insourcing agenda, where we look to provide not only gone up price and volume increases in patient business, but also underpinned by our insourcing agenda, whereby we work with our practices, 99% -- 92% to 93% plus of which are general petitioner practices to provide more and offer more services to their patients, again underpinned by patient demand for one-stop shop. Through to the end of Q3, our acquisitive growth agenda has been ahead of expectations. Our margin expansion through really aggressive cost management and our ability to scale our corporate infrastructure has to take the box ahead of expectations. And overall, we're in line with revenue and ahead in the EBITDA margins. So we feel really good about the control we have over our business in a challenging environment and our ability to continue to drive growth with strong results coming out of Q3 and into Q4.

It's very rare in this country that we have these quality compounders that could be in the same bucket. Thinking about it around 200 practices of not mistaken since we're on April 2018 and 15 in most recent quarter. And yet, you still only have 3% of the market, and that's extremely fragmented. Maybe just talk about what you're seeing out there in terms of opportunities and what you're paying or multiples creeping up, just kind of the dynamics of the M&A market.

Perfect. So I'll frame it up to you by saying that the market is an $18 billion market. There's about 14,500 practices across the country, ranging from sole practitioners to multi-providers. We have multiple dentists in all of our practices at least 2 or more coupled with hygienist to support that recurring revenue stream. The market grows at about 2% per annum. We believe we can double our EBITDA and our share over the next 4 years and change. We have a very strong acquisitive growth agenda. We have roughly -- as we sit to then, we look at our pipeline, 140 plus deals in advanced stages of negotiation, and that includes multiple location deals, not only 1 or 2 locations. When we look at multiples, multiples for our single and maybe 2 to 3 location practices have been fairly consistent over the last 3 years in the high 7s, low 8s, as multiple of EBITDA. We will immediately increase that EBITDA by about 10% to 15% through cost reductions on the supply side, labor efficiencies driven by our technology stack and revenue growth in year 1 through our in-sourcing agenda. So we feel good. And we always relate back to can we drive sustained 15% plus returns on invested capital on an unlevered basis. And larger acquisitions, and there's a lot of platforms out there. We think there's about 80 to 100 platforms with 3 to 5 plus locations in them. We like those. We can garner some real cost savings and efficiencies by acquiring them in because we can get rid of the small layer of management that they've put in place and those come at higher multiples, sometimes high single digits, low double digits. And so more and more of those are coming to the table. We have a very robust pipeline, like I said, 140-plus deals in advanced stages of discussions. We had a very strong Q3. And our pipeline has never been stronger, so we feel good about that. And again, it's all about -- it depends on investing capital driven by cost management, cost savings and growth.

Go ahead, go ahead, Graham.

No, go ahead.

Are you seeing the PE firms have obviously with the 123 dentists and Ultima and guys like that, any change in the competitive landscape? And when a dentist sells to you, what are the factors that they consider in selling to you?

Right. So few ways to skin the cat there. So let me say that these businesses either didn't exist or weren't very active until we shot up 10 years ago. We believe we came to the market with it, and we've always been private equity owned. That's we were -- me and a few friends and family owned the business when I started in 2011 and then in 2014, we did our first private equity deal with 2 Canadian private equity firms. And then in 2018, we partnered with L Catterton out of the U.S. So I don't look at much about private equity. I say that we have a better model for dentists looking to join our business, and I'll tell you why a little bit later. We have real rigor around the structural integrity of our acquisition program. We've had the same acquisition program with the same structure and the same key features around alignment of interest on the growth of the practices after we acquire them. The preferred return that we get out of the practices when we're acquiring some downside protection built into the structure and the alignment of interest at the dentalcorp through the issuance of equity. We've never wavered from that for 10 years. Some of the other players will do whatever they can to get a deal done. We believe that, that structural integrity really favors investors and the stakeholders in our business because it has consistency. Can't just know what they're getting. We keep it really simple. And it also leads to our ability to drive an automated integration process. Our whole integration process is digitally driven. We can do as much as $10 million to $20 million of acquired EBITDA in the quarter if we had to. And our breadth of relationships and the business development team that we've built out over the last 4 to 5 years, which is about 12 people strong from [indiscernible] where we really build relationships with dentists, and it's a true partnership. We don't just find practices off for sale. So obviously, being public gives us a liquid stock. So when we do issue that equity in dentalcorp to create that alignment of interest, we have a liquid currency and we issued that on all deals to drive alignment at the dentalcorp level, what we think actual the cost of capital certainly does support a more aggressive acquisitive growth agenda and gives better incremental returns on investing capital to our investors.

Excellent. Now switching gears over organic growth in orthodontics. You've been well recognized through acquisition efforts, but you've also done an excellent job of driving organic growth. And I'm thinking pricing, volume mix and also orthodontics, implants, technology in Loblaw -- or we can talk about Loblaw in a second, but maybe just talk about organic growth as it relates to your orthodontics on what you're doing there and maybe what stage you are in terms of the rollout overall and all that.

Definitely. Thank you. So we've averaged around 3.5% organic growth, including same-store comps in our history. And all of that has come through from a combination of price and volume. But what we've done is begin to drive what we call an in-sourcing agenda. And we're starting to see real value come out of that and real growth come out of that. And it really starts with the demand side of things where the patients are increasingly looking for a one-stop shop. They're becoming increasingly sophisticated around customer service and a real digital journey through the piece, including at their dental practice. And there are a few trends that are playing into this in-sourcing agenda. One is on the orthodontic side, where we've started with a very robust program. We implemented it in about 30% of our practices over the last 15 months. We're running at around $30 million of incremental revenue just from those 30% of practices, and we expect the remaining practices to be implemented over the next 24 months and change. What's really driving that is on the patient side, a demand for more cosmetic services, folks in their late teens and adults as well historically didn't want to have wire and brackets in their mouth but the advent of [indiscernible] therapies, that's created a real demand on the patient side. And on the supply side, that technology is relatively simple to use, certainly when compared to wire and brackets, which requires a lot more art than science from the orthodontists. And so these GPs, these general practitioner dentists, are able to add those to their cohorts of service offerings to patients. And so again, with the proper training agendas, which ramp in place, the proper rollout agenda, which we have in place and our technology, which we've invested in all of our practices, this cohort of 30% of our practice is already running at around $30 million a year. On a run rate basis, we think we can get to $30 million just from those to add another $100 million from the remaining 70% of our practices over the next 24 to 36 months. We feel really good about that. At the same time, implants is another big area of growth for us, which we're starting to invest in playbooks again, to drive growth in our active business similar type of all at orthodontics. A little more complicated on the supply side, a little bit more surgical in nature but with an aging population looking to replace the potentiation with permanency, not vectors, we see a wonderful opportunity for implants to play an important in our growth going forward.

What's the cost that you incur in terms of setting a practice for ortho?

Look, we have a training and development team as part of our Institute. We've created our own institute for DC Institute, and DC Institute is a continuing education platform, which we provide both in-person and digital considering education, all of our actions across the country of about 1,300 dentists across the country. We're also supporting the training agenda for in-sourcing of orthodontics, along with our central operations folks. And so we've been able to scale that without much incremental costs. We've made the technology investments. And so it's all very scalable from here on in.

So massive contribution margin here on the back of this.

Yes, we figure about 35% to 40% where we orthodontic dollar average case is about $5,500, which is paid over 18 months, which is the average life of the treatment.