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

[indiscernible] everyone, and thank you for joining us for this session of the BofA Healthcare Conference. Mike Cherny, the healthcare tech distribution analyst at BofA. It's my pleasure to have with us dentalcorp. Graham Rosenberg, CEO; Nate Tchaplia, a name I always attempt to pronounce the right way, CFO. Do we have music? It's okay. Nate Tchaplia, who's the CFO. dentalcorp is a recent IPO in the large Canadian dental service organization. And so I'm thrilled to have them here to tell the story, which is certainly a unique one.

Maybe because you are a newer company of the market, just give everyone a sense of who you are and what makes you differentiated as a Canadian dental service organization.

Got it. So good morning, everyone. We are Canada's largest and only national provider of dental care. We're a $1.2 billion revenue company with $236 million of EBITDA as of today on a pro forma basis, adjusting for acquisitions. What makes us unique is that we operate in a market that's highly fragmented. Only 5% of the market in Canada is consolidated. The Canadian market also offers a really constructive backdrop for dentistry. And it's a cash pay-type industry in that there are no commercial payers. Our revenue cycle management is very simple. Patients come to the dentists, they pay cash at the time of service. And if they do have some kind of insurance, which is generally provided by their employers, they will go and collect on their own from their employer, and the employee will reimburse. So we have no reimbursement risk in that regard. We have no bad debts. And so that makes it different to the U.S. dynamic. The Canadian industry is an $18 billion industry. It's grown steadily through the decades over the last 30-plus years. It's actually grown as well through both recessionary markets -- with recessionary cycles and inflationary cycles. In fact, growth in dentistry's outpaced CPI by 2%, 3% on a consistent basis through cycles. And so we feel really good about the market backdrop today and the macros today in terms of our ability to perform. And outperformance over the last couple of quarters in an inflationary context has been very good despite, obviously, the backdrop from COVID. So we feel really good about the business. We like the industry in Canada. Again, highly fragmented, cash pay and wide open for consolidation and continued organic growth.

And I know another element, just to really start high level of the Canadian dental market as I've gotten to learn more about it since our first interaction was the dynamic of how it plays into the role of hygiene. It feels to me, and maybe this is anecdotal, but the average Canadian individual relative to the average American individual tends to take a much more proactive approach to dental care. Can you just give a sense of what the average interaction is of a Canadian with the dental market -- with their dentist in a given year?

Yes, definitely. So there is a big difference there. Canadians are -- Canadians have the highest dental IQ pretty much on the planet in terms of their focus on their oral health, and they understand the import of it to their overall wellness. And while being -- 90% of Canadians' kid go -- kids go to the dentist on an annual basis, 85% of Canadians visit the dentist at least once a year. Our patients visit us approximately 2.5x a year, and that's underpinned by the strength of our hygiene program. So there's a real focus on preventative care. When we acquire a practice, they're generating around 2.3 visits per patient. We're able to increase that to 2.5 to sometimes 2.6x by increasing those hygiene protocols, getting them coming back that incremental visit on a per annum basis. So the average Canadian visits their dentists -- so certainly outpatients visit us 2.5 to 2.6x a year. It's around 2 to 2.5 hygiene visits and then go dental checkup plus any restorative care that's required from your dentist. So really, really strong base. Our revenues are in a normal market running around 30% to 35% hygiene. We're at about 28% today of our revenues and continues to increase as we come out of COVID. And we feel that we will get back to those 30% to -- that 30% to 35% range over the next 12 months, 12 to 18 months max.

And...

And also, sorry, a much higher-margin business. Dentistry is a 40% margin business. Hygiene is a 60% margin business. And so as we continue to see more hygiene come back and the imbalance that COVID created come back, we started seeing it in Q4, Q1 as well despite Omicron. We're seeing it in early Q2, and we've seen it sequentially over the last 5 months since January, hygiene coming back. And so that should be -- that will generate through the balance of the year, strengthen our margins. And we should move over the next 12 to 24 months back to 18% to 20%-plus EBITDA margins on that basis.

Perfect. And maybe also to take a step back and talk about being the only national provider, but you're more than just your traditional office practice. One of the things I know that I've always found appealing is your tech stack, the fact that you make a practice more technologically efficient when you bring them into your fold. So maybe just give us a sense on the underpinnings of that tech stack and how it developed and how it's evolved over time. So the amount of touch points you have for a new practice coming into the...

So that's a great question. So our tech stack, we're very proud of our tech stack. It is unique. It starts with dc engage. dc engage is a proprietary platform that we've made significant investment in. And what it does is really controls and provides oversight to the overall patient relationship. So everything from how we engage with patients online, that online experience where they can go online, search for dentists, find a practice near them, which are our practices. We also have an endorser brand, which supports that. So it's that experience from their online journey until they come into our practice. And it also works to optimize our recall programs, our reactivation programs to get those patients coming back more often. So it's a holistic relationship with the patient, which is driven by dc engage. We also have technologies, which drive supply cost reductions through our portals there, our labor management portals. And then our playbooks were driving growth, a lot of which is focused on in-sourcing. So the average practice we buy has at least 2 dentists in it plus, obviously, hygiene. They generally -- we call them drill-and-fill type practices. They're focused on preventative care, restorative care. And we bring a mindset to them and playbooks and the technology required to drive an in-sourcing agenda. So instead of referring out specialty procedures, primarily orthodontics, which is increasing demand for implants and so on, we're training our dentists to do that. And we have a large uptake in that. And so it's not only our technology stacks which drive those holistic patient relationships and drive those recurring themes, but also purchasing, labor management and our playbooks for revenue growth.

And on average, when you acquire a practice, when you bring them into your fold, how long does it take for them to get to the average -- efficiency average throughput of a typical practice? And maybe along those same lines, give us the characteristics of what you're looking for when you're going through the business development process on a practice, the types of practices that you most aptly look to acquire?

Right. So I'll let Nate talk about business development here, oversees all of our business development, and he's built our national business development team. But when we acquire a practice, we're able to increase their EBITDA margins by between 10% and 15% out of the gate, so within 30 days through supply savings and some labor efficiencies as well in the administrative side, which is supported by a technology stack. So more efficient practice operations reduce some administration and supplies out of the gate. So you can see those margins expand from -- I'd say we get an EBITDA lift of between 5% and 10% out of the gate, and margins expand 10% to 15%. So that's a consequential increase. In terms of business development, I'll let Nate talk about our comprehensive business development approach to the market. We're the largest acquirer in Canada. And we're certainly, I'd say, top 2 or 3 in the U.S. in terms of health care consolidation. We're running at about $50 million a year of acquired EBITDA. And so, Nate, why don't you talk about...

Yes. So from a qualitative perspective, we are the only national platform in Canada. We're located in all primary market, secondary and certain tertiary markets. So from a geographic perspective, what we look to is ensuring that we're finding locations with strong demographics and strong growth profiles. The average age of our dentist is in the late 40s, early 50s, so by no means anywhere close to retirement and have 15- to 20-year continued runways for growth. They look to us to support them and really relieving that administrative burden and providing them the playbooks for continued growth so they can focus on their patients. The footprint of our practice is generally A-plus operatories, multiple dentists, multiple hygienists and really that diversified base of providers, which really allows for the integration and the optimization of those practices.

And just to add to that, our integration playbook is fully digitized. We acquired $25 million and change, about 60-plus locations in Q1 alone. They're fully integrated. They're already optimized, and they're on their way to deploying our playbooks for in-sourcing and growth and obviously, our technology stack. So we move pretty quickly through the piece. And we've built our national business development platform of about 15 people that build relationships from the ground up. So we have a significant pipeline of deals, 745-plus deals in the pipeline at the end of Q1, 200 in more advanced stages of negotiation. And we feel really good about building those relationships. We don't buy deals from brokers. It's all proprietary relationships that we've built up through the years that we're now seeing the benefit of.

And then -- and from a financial profile, average practice is in that $2.4 million to $2.5 million revenue range, roughly $0.5 million of EBITDA. And when we look to partner with these individuals, we enter into long-term contracts, which is quite different from the U.S. landscape where they continue with us from a 5- to 7-year fixed term. And there's an alignment model. In every single one of our partnerships since day 1, there's been a component where they received that purchase price and a combination of both cash as well as equity at dentalcorp. And they continue to participate in the growth of the practice level. So what's been core to our success since day 1 is that alignment, both at the top level as well as in the practice.

Certainly fascinating that you just announced passing 500 practices. And Graham, you have over 200 in advanced discussions. And so maybe that gets back to the results from Tuesday, Tuesday, I think, I'll check the time, put out really strong results, especially as the backdrop of COVID restrictions, but I'll talk about the M&A side. You've been fairly steady in terms of the amount of practices you acquired yet had a very robust quarter this quarter. Is there anything unique about the timing of why so many of these deals that you've had in multiyear engagements, most of your developments came to fruition this quarter?

Yes. I think it's a combination of during that COVID period, these dentists -- and especially we completed a significant number of mid-market platform acquisitions. They've been focused on their business dealing with some operational issues, whereby they didn't have that mental capacity or that time to really think about what's that next step in life. There was an increase in a reduction in the regulatory restrictions in operations last year and our ability to really engage. And our business development team really focuses on building those proprietary relationships. We don't participate in auctions. We don't deal with brokers. And those in-person engagements and those relationships really what drives our continued acquisitions. In addition to that, going public last year has helped us really build that trust with the marketplace and has really allowed us to accelerate our closing opportunities. And as part of, again, our alignment mechanism where they're receiving the equity, now that ability to receive that public equity and participate in that growth has helped us really advance our M&A agenda.

And thinking about the quarter specifically, you touched a bit about the Omicron impact. You have the dual whammy of patient cancellations because people get COVID. And then like we lost provider days because your dentist, your hygienist get COVID. That being said, you've been very helpful and transparent in allowing this -- Wall Street to understand the difference between same-store growth and same-store growth ex COVID, which has been at a very steady pace. So maybe can you just -- as we hopefully -- hopefully, this is the last of the big waves, but give us a sense on where COVID has really impacted the same-store growth and how stability has shown through against the backdrop of what otherwise has been macro challenges that you could not control.

Yes. So look, the impact of that same-store delta is about $25 million of revenue and somewhere around $8 million of EBITDA in the quarter. We did deliver $280 million of revenue and $50 million of EBITDA. So we still had a great quarter. It's the resilience of the business and the resilience of the broader dental industry in the Canadian context. Through all the waves of COVID, we've seen a significant bounce back from -- driven by pent-up demand for the period of time where we had either a shutdown or lost provider days, whatever the case may be. We're seeing that come through in -- we saw that come through in March, April. We're seeing it come through in May with very strong sort of comps. We'll make it up through the balance of the year. But obviously, January and the first part of February was very tough. It was tough across North America with provider -- then our providers weren't immune neither were our patients immune from the impact of Omicron, which impacted somewhere around 1 in 4 to 1 -- 1 in 3 to 1 in 4 Canadians. So we're seeing a bounce back from that. We'll clean up the quarter through the balance of the year. We'll still hit off our -- we'll still achieve or exceed analyst consensus around our 2022 numbers. And we feel really good about the business for this quarter and beyond.

Yes. I think what's also very important to note is the period had some interesting anomalies. In 2021, the spring break holiday was actually moved to April. So when we were comping Q1 '22 over to Q1 '21, there was a vacation impact, which we didn't adjust for, but ultimately did have an impact on that growth. And what, again, is demonstrating the resiliency and the quick bounce back as we move into April and into May, we're seeing that our unadjusted same-store sales growth is now trending at the same pacing as the adjusted when you take into consideration the lost provider days and lost patient days.

You mentioned, Graham, earlier the dynamics of hygiene, right, versus typical run rate. You're running to about -- hoping to catch up. That being said, other pieces like on the specialty side have to be offset [indiscernible].

Yes.

How have you thought about the dynamic of the patients who are still, no matter what, making sure they walk in the door to get some of those higher need either emergency or specialty services that have to play [indiscernible]?

So over the last 12 months, we've definitely seen a big chunk of that restorative work and that specialty work come through offsetting some of the hygiene impact. We're now seeing hygiene come back. But we don't expect those specialty services and the specialty cases to drop off. Our teams have done a really good job at driving our in-sourcing agenda that I spoke about earlier. On the orthodontics side, [ from a standing side ] about 18 months ago, we're running at about $50 million of revenue from in-sourcing clear aligner therapies, primarily using Invisalign. We're seeing that tick up. We've actually doubled the number of clinics within which we're providing those services. We're sitting at about 1/3 of our network. We'll deliver those services into 100% of our network over the next 24 to 30 months. And we'll obviously catch up as we continue to acquire. So we don't see or foresee any reduction in those specialty services. And in those cases, we're starting to focus on implants as well, addressing an aging population dynamic. Obviously, the orthodontics side addresses the aesthetic need that has come out of COVID and the demand side of that. So we feel really good about that. And we think hygiene will be just be additive, not substitutive for those more specialized procedures.

And along those lines relative to orthodontics, it seems like this is a global phenomenon, GPs to do higher-value orthodontic work.

Yes.