Pacific Smiles Group Ltd
ASX:PSQ
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Pacific Smiles Group Ltd
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Ladies and gentlemen, thank you for standing by, and welcome to Pacific Smiles Group full year results briefing. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Phil McKenzie, Chief Executive Officer and Managing Director. Thank you. Please go ahead.
Good morning, everyone, and thank you for joining us for the Pacific Smiles Full Year Results Presentation. As noted, I'm Phil McKenzie, the Chief Executive and Managing Director. And with me is Allanna Ryan, Chief Financial Officer.Today, we will be taking you through the presentation that we posted on the ASX earlier this morning. I'm delighted to be updating you today on the performance for the full year of financial year '19. You will no doubt remember that I joined the company in the final days of October 2018, and it's been a positive, busy time as we commenced this new era for PSG. I'm very pleased to be leading the group as we continue the Pacific Smiles growth story.And so on to the presentation. I will start by summarizing the highlights of our results for the 12 months to 30 June 2019. I'll then provide a business overview and update before Allanna discusses our financial results in more detail. I'll then finish today by sharing insights into our future plans and outlook. And we will of course be happy to take questions from investors and analysts at the end of the presentation.Let's move to Slide 5, which lists the key financial highlights for the 12 months to 30 June 2019. The key features of the results are as follows. Patient fees across the Pacific Smiles Dental Centre network of $187.4 million is up 13.9% on the prior year. The same center patient fees grew 8.6% for the year, which is up 350 basis points from the prior year. EBITDA, underlying, of $22.8 million was up 6% on the prior year result. Full year underlying NPAT was $8.9 million, which is down 3.5% on the prior year result. Underlying earnings per share of $0.058 was down 4.9%. We have declared a final dividend of $0.035 per share fully franked, bringing the full year dividend to 8 point -- $0.058 per share. This compares to $0.061 per share in the prior year. Trading built steadily through the year, and we were pleased with our consistency and operational execution, which helped maintain healthy patient volumes outside the peak periods of May/June and November/December. The targeted database marketing for existing centers and the well-executed local community activities for our new center openings is positively increasing outpatient volume.Now to Slide 6 to briefly recap the operational highlights for the full year. In FY '19, we added 10 new dental centers, growing our network of dental centers to a total of 89. We ended the year with 545 dentists, representing a growth of 17% on the prior year. And we now have 1,185 employees as we continue to scale and develop the organization in line with the rollout of our new dental centers. Our new centers contain at least 2 commissioned chairs from opening with the capacity for 2 or more surgeries in the future as the patient demand continues to grow. The dental chairs in the new centers plus additional commissioned chairs in existing centers increased the total number of commissioned chairs to 351, representing a 13.6% growth.Along with that growth, our continued focus on creating a perfect patient experience is reflected in the Net Promoter Score remaining above 80. We're extremely proud of our consistently high Net Promoter Scores. The provision of a perfect patient experience for each and every patient at every attendance is paramount. The emphasis on our employee development and the support of our continuous learning for the dentists is a testament to this priority.I'll now hand to Allanna for a review of our financial results in detail.
Thanks, Phil.Turning now to Slide 6 (sic) [ Slide 8 ] , we can see that since FY '08, the company has delivered significant growth, growing from 17 dental centers to 89 centers today, more than doubling the number of centers in the last 5 years. Over that time, we have delivered annual growth rates of 15% and 16% on patient fees and underlying EBITDA, respectively, as we continue to achieve market share growth. On Slide 9, we show our summary income statement for FY '19 and the comparable period. FY '19 results are expressed on an underlying basis, which excludes a number of one-off items. A detailed reconciliation of underlying statutory figures is included in the appendix to the presentation. Also included in the appendix is information on impact of the new leasing standard, AASB 16 Leases, which is effective for the FY '20 reporting period. While the new accounting standard is expected to impact a number of items on our income statement and balance sheet going forward, the overall impact on net profit is minimal and 0 impact on cash flow.We continue to see strong top line growth with revenue up 16.9% to $122.2 million. The majority of the revenue is generated from the service fees Pacific Smiles received in return for the dentists practicing in our centers. Our dentists generated a total of $187.4 million in patient fees in FY '19, which was up 13.9% on the prior year. Same center patient fees was strong in FY '19 at 8.6% in the year, up on 5.1% growth in FY '18. Same centers saw growth from the less mature centers as part of their expected ramp-up. The flow through to EBITDA was however reduced given the growth in patient fees which was driven by volume, offset by lower average fee per appointment.Growth through volume comes with additional variable costs, being employee and consumable costs. Underlying EBITDA grew 6% to $22.8 million, slightly above the guidance provided at the interim result of approximately 5% growth. While top line growth was strong, EBITDA was negatively impacted by the following items. Firstly, slightly lower-than-expected fee per appointment in the year had a $400,000 impact. This was driven by a number of factors, including service mix that can be driven by either the patient's propensity to take up high-value treatment plans and also the skills mix within the dentist group. Secondly, higher-than-expected telecommunications infrastructure and connectivity expenditure of $700,000. We worked closely with our IT providers in the second half of the year, and we'll be able to deliver improved service and functionality as well as cost efficiencies going forward.It is worth noting that in the second half of FY '19, we grew EBITDA by 9.6% half-on-half, reflecting a relatively strong finish to the financial year. High depreciation cost associated with the rollout strategy of new centers resulted in the underlying NPAT decreasing by 3.5% to $8.9 million. Depreciation and amortization continued to step up significantly due to the rollout acceleration in prior years and is impacted year-on-year by the timing of when new centers open.I will now turn to Slide 10. Slide 10 shows the breakdown of the key drivers of EBITDA growth in FY '19. Same centers were strong contributors with $3.2 million growth in the year. However, this was lower than what we expected, as I stated, for reasons mentioned on the previous slide. We are pleased with the results generated from the FY '18 new centers. It is important to note that the EBITDA contribution is impacted by the timing of the individual center openings as they move from loss to profit over the first 12 months of operation.During the year, 10 new centers were opened with 7 opened in the last 4 months of the year. Overall, they reduced EBITDA by $600,000. We are pleased with the performance of the centers opened in FY '19, which Phil will provide some specific examples later on in the presentation. Both field support and corporate costs increased due to additional positions to support the growth of our network and increased investment in learning and development for our employees and to support dentists.Turning now to Slide 11. Slide 11 shows the breakdown of the key drivers of the EBITDA margin for FY '19. The EBITDA to patient fee margin declined from 13.1% to 12.2% during the year. Same center margins expanded by 20 basis points, reflecting efficiencies achieved through high chair utilization and margin expansion as centers ramp to maturity and leverage fixed cost base. These were partly offset by lower-than-expected fees per appointment.There were 3 main contributors to the decline in margin. Firstly, the center mix effect is driven by an increased proportion of fees coming from centers opened in the last 3 years which generate lower margins than mature centers. Centers opened from 2011 to 2017 grew 45.9% of same center patient fees in FY '19, up from 40.9% in FY '18. Our acceleration of the rollout of new dental centers in the past few years has a net dilutive impact on margin in the short term.Secondly, the higher impact of telecommunication costs, which we've already discussed. And finally, corporate costs increased 20 basis points as we continue to support the growth of the business.Turning now to Slide 12. We have continued to generate strong positive cash flows from operating activities. Statutory operating cash flow was $21 million compared to the prior corresponding period of $17.4 million. Net capital expenditure was $16.5 million for the year, of which $9.3 million related to expenditure on new centers. In addition, we incurred $1.8 million of capital expenditure to upgrade the North Parramatta dental center and relocate our Drysdale Dental Center. Other key areas of expenditure included 23 additional surgeries in existing centers, bulk purchase of dental chairs, equipment replacement, IT systems and an automated infection control system. The Board has declared a fully franked final dividend of $0.035 per share, which is payable in October. The balance sheet reflects a well-funded position. We expect to be able to continue to fund our growth plans from strong operating cash flow and modest debt after allowing for a dividend payout ratio of 70% to 100% of NPAT. Property, plant and equipment increased, reflecting the investment in new centers. Likewise, borrowing increased to fund these centers.I will now hand back over to Phil to discuss the business overview and outlook.
Thanks, Allanna. On Slide 14, I'll commence our business overview with an update on our True Purpose facts. Our True Purpose facts at Pacific Smiles is -- our true purpose at Pacific Smiles is to improve the oral health of all Australians to world's best. This is the lens through which we align our people collectively with a clear and simple intent, for each of us to better understand our role in the organization and pursuit of delivering an exceptional patient experience is critical.The True Purpose isn't so much what drives us, but rather what binds us and enables our people to make the right decision with confidence regardless of their role or location in an organization that is growing quickly and spread across a large geography.Our True Purpose facts are impressive. We continue as the major sponsor for the Australian Dental Health Foundation, an important charity that facilitates the provision of free dental services from dentists all around Australia to the most vulnerable in our societies. Our staff and dentists respond positively to this initiative, and this is reflected in their motivation and focus on patient care, a focus that has resulted in more than 80% of our patients surveyed scoring us a 9 or a 10 out of 10.With 10 more convenient, high-quality dental centers opened during the year, there were approximately 770,000 appointments provided, of which 135,000 were new patients and almost 40,000 were patients supported by government funding. It is important to note that many Australians attend a dentist either sporadically or not at all. We believe there's a compelling opportunity to make high-quality preventative dentistry more accessible for all Australians, and this continues to guide our vision for the next 5 years and beyond.On Slide 15, our original goal of 250 dental centers remains unchanged. And now, we further define this with a subset of not less than 800 chairs and the intended market share of not less than 5%. This refinement speaks to our focus on the performance drivers of chair utilization and patient volume. With our way firmly established under our True Purpose, we have simplified our strategic priority to 3 areas: network growth, culture and operational excellence. This refinement allows the whole Pacific Smiles team to easily identify what we're working on and how they contribute.Under network growth, we will continue to add new dental centers by selecting the right sites, engaging the best dentists and employing excellent staff with the focus of reducing the time to profitability. At the same time, we'll continually improve the operating performance of our existing centers by increasing the range of service -- services, optimizing opening hours and commissioning existing surgeries all the while seeking efficiencies through technology and innovation. We are focused more than ever on culture as a competitive advantage. And I'll expand later on what we're doing to drive this pillar.Operational excellence is fundamental to margin expansion. Patient supply/demand matching to maximize dentist productivity, IT fitness and capability, our ongoing cost review program and a continuous process and system optimization. Enabling patient choice with multiple payment options is all part of a better PSG. Our success is ultimately dependent on delivering a perfect patient experience, which requires the attraction and retention of high-caliber dentists, employees with a high-quality care mindset, and all of this underpinned by effective and efficient operations. We will continue to build upon our success with an ongoing commitment to expansion and growth.Slide 16 details the performance growth from existing centers. A significant proportion of our portfolio is immature with 36% of our centers being less than 3 years old. This assists us in achieving solid same center growth rates. Our same center patient fee growth has averaged 5.3% per annum over the 5 years to 30 June 2019. While a notable step-up in FY '19, our centers generally showed sustained growth over multiple years and growth above our network average for 3 to 5 years plus. Growth in existing centers is evolving with intelligent marketing initiatives to attract both new patients and to continually reengage existing patients with the commitment of a superior patient in-center experience and between appointments to generate repeat attendances and create positive word-of-mouth.Over time, the range of clinical services is being expanded by the engagement of more practitioners and through the facilitation of training and development.As patient demand builds and the clinical services are expanded, additional services are activated with modest additional capital expenditure and/or hours of opening can be extended. Currently, 80% of our available surgeries are commissioned, and we have further 88 chairs to commission to meet future demand as we continue to grow our market share. Our continued strategic collaboration with product health insurers attracts more patients and helps to make professional oral care accessible and affordable.Now onto Slide 17, which displays the success factors when it comes to new center openings. We hone and enhance every element of our successful formula for dental center rollout. Selection of shopping centers, identification of preferred tenancy locations, design excellence, construction quality, recruitment and team building, the preopening marketing, patient care and customer service. By way of example, Keysborough, which recently opened in Victoria, achieved profitability by trading month 6. And on its current chair utilization statistics, we'll be moving to commission an additional surgery before its first 12 months are up. In the same vein, our new PSD Aspley Center in Queensland achieved profitability in just 3 months. The center too is accelerating its planned time frame to commissioning additional surgeries. These are important indicators of our improving execution in new centers.Slide 18, we provide data on new center economics. We show the average performance of centers opened from July 2013 to June 2018 in their first 3 years as well as the median performance of all centers opened for more than 5 years in FY '19.New centers typically make a loss in their first year of operation. Group profitability is impacted by the year 1 losses of each cohort of new centers. However, as shown by the table on this slide, centers typically make a positive contribution in year 2 and achieve a center EBITDA to patient fees margin of 10%. Group medians for all centers open for more than 5 years show that a typical center generates approximately $2.5 million in patient fees and around $0.5 million in EBITDA for a center EBITDA to patient fees margin in excess of 20%. Our experience is that centers take many years to reach maturity and continue to show margin expansion over an extended time period.Turning to Slide 19, which shares our Pacific Smiles Way. We understand that culture is what sets the foundation for performance. It is the framework for our people to operate within that makes us specifically PSG. The facets of unify, adapt and play to win were developed by the leaders and representatives from across the whole organization. These 3 straightforward modes that combine and intersect to become our way. In unify, by being purposeful, building trust and operating with vulnerability, establishes how we operate best together. Adapting, by being curious, committing to learning and self growth, is everyone's responsibility. And playing to win combines being present in the right place, being generous as a person and operating with humility, we facilitate the delivery of great results.With the development of a learning academy and the investment of developing leadership capability, we're establishing success for today in preparation for our future growth ambitions.Slide 20 highlights a few of the significant things we've done operationally in the last 12 months. So as I said, we've launched our Business Improvement Office to deliver cost, systems and process efficiencies. Including telecommunications savings previously called out, we have identified $1.5 million of annualized savings from this initiative. The cost savings have allowed us to get more for less with cheaper but better telco infrastructure and setting us up to cater for innovations like oral scanners and 3D printers.The majority of our dental centers both for PSD and nib are NSQHS accredited with all centers in the process to be completed in the first half of FY '20. This will provide us with an independent assurance of our clinical and sterilization standards. We also rallied strongly to open 7 centers in just 6 -- in just 4 months, and we showed we could generate excellent performance with an accelerated opening cadence. Our center teams have improved utilization of chairs by 12% in this financial year. And we have enhanced payment options by partnering with successful organizations like Afterpay. But arguably and most importantly, although no one will ever see it, we've completed our investment program in LisaSafe, which is the process automation and assurance for sterilization in our centers.Turning to Slide 21. Dentists, in our model, are our customers. Within the dental service organization model, we appeal to them through the professional and lifestyle benefits of practicing from our modern centers and the provision of training and development opportunities for skills enhancement. The access to training and development initiatives for dentists have been enhanced with technology and our own growing internal expertise to provide a real value-add to the dentist and to the patients they serve. We have renewed the organization's focus on making the dentist our priority and as our primary customer. This has had the effect of improving our rolling dentist retention rate from 85% to 90%. The importance of this cannot be underestimated as all the associated benefits of increased tenure play out for the benefit of the patient, the dentist and Pacific Smiles as a whole.The value proposition for the dentist that choose PSG is constructed with a dentist and private practice mindset that is professionally supported and able to do their finest work. The central tenets of clinical sovereignty, quality facilities with state-of-the-art sterilization, well-trained staff, accredited dental centers, a formal established Dental Advisory Committee, all with the underlying focus on affordability with various payment channels for the patient and always building strong patient demand. These things done the PSG way are what sets us apart and makes the service and facilities [ bring on ] PSG a unique and highly productive experience that we're all incredibly proud of.Turning now to Slide 22 for the outlook. Pacific Smiles provides the following for FY '20 excluding the impacts of AASB 16 Leases. Same center patient fees growth in the high single digits. Same center fee growth is approximately 12.2% for the first 7 weeks of FY '20. Opening of at least 7 to 10 new dental centers in FY '20 with 5 already committed. EBITDA for FY '20 is expected to be between 6% to 12% up on the prior year. And the FY '20 dividend payout ratio expected to be in the range of 70% to 100% of NPAT.In closing, on behalf of the executive leadership team, I want to say thank you to all the Pacific Smiles teams, whether they're the field-based leaders, the dedicated folks out in center operations or those equally dedicated people working in our support center, your efforts and energy is incredibly important and very much appreciated. At the same time, to the dentists who practice at Pacific Smiles, I'd also like to say thank you. The trust and respect you give us by choosing to operate your practice in our network is what drives our commitment to growth and the delivery of our True Purpose. The future for Pacific Smiles is indeed bright.I'll now hand back to the conference operator for any questions.
[Operator Instructions] Your first question comes from the line of Shane Storey from Wilsons.
Guys, just looking at the patient fee growth. It was a record in '19. And just given that, that was achieved in the context of what we sort of understand to be a fairly subdued sort of environment, I just wondered what are the key levers in having achieved that this year. And I also note that you're guiding to a similar number this year. I mean, how many you've commissioned chairs and did that play a role this year?
Shane, thank you. Yes, absolutely. All of the things that we have just listed in the presentation. But primarily, simplifying the focus at an operational level, driving the mechanics around utilization relative to chairs, the marketing activity to put increased patient volume in through the centers and the addition of new dentists has really allowed us to build the result that we've got.
Just turning just briefly to the guidance. There's a reasonably generous range there of 6% to 12%. I'm interested to note 2 aspects of that. First is do you think you've got -- if we look at the second half margin in isolation, do you think we've got the cost structure that's stable in terms of that [indiscernible] margin? And then the second question that I have is, I also noticed there's maybe a slight diminishing in the rate at which you're planning to roll centers out. Is it also a function that you might see less of that dilution in FY '20?
Fair questions. Let me take the first one in terms of stability of cost. We do believe that we've got an improved cadence on cost. Overall expectation is that we don't continue to grow other than as a function of adding additional centers. And the broad guidance is as a function of obviously having started strongly, and we'll continue to refine that as we go through the AGM and get more of a cadence on a year and an understanding of what to expect. But we remain positive. With regard to the 7 to 10 guidance on centers, what we are attempting to display here is that we're seeking to be wise and effective with 91 centers now operating as of mid-August. We've got a lot of information now as to what makes things work. So we're being incredibly thoughtful and practical with where we take centers. So we've guided to 7 to 10. But that's not to say if we had better options that we wouldn't be in a position to do more. So we're attempting to demonstrate pragmatism.
Final question is really just around balance sheet. Noting that you've maintained a fairly high payout ratio this year and guiding to the same sort of level this year, would we expect to see debt increase sort of modestly over the course of FY '20?
Yes. That'd be a fair comment, Shane. We're expecting to step up a little bit in debt as we set to -- as we start to fund that center rollout.
Your next question comes from the line of Tanushree Jain from Bell Potter Securities.
Phil and Allanna, just a few from me. I noticed you haven't given any guidance on patient fees growth this time around. Is there any particular reason for that?
Well, we've attempted to give the -- what we feel is the strongest indicator, which is the same center patient fees and representing the high single-digit growth year-over-year.
The patient fee growth is obviously a factor. The total will be a factor of how many new centers we roll out. And given that we've sort of given a range of 7 to 10, we're sort of more comfortable to focus on the same center patient fee growth as the driver, and we will refine that as we get closer to the AGM.
All right. Okay. And just on your direct expenses, I did notice a step-up there from the previous period. Was there any particular thing driving that?
Yes. Tanu, that's -- when we say that moved from half-to-half and year-to-year, it's really related to the mix of dentists we have. So we had to hire sort of locum dentists, and what that does is there's additional cost that we incur because they are going to affect employee dentists, so we see that move from time to time.
All right. Okay. And then in terms of adding, I guess, more chairs in existing centers, I think FY '19 was by far one of the biggest years we've seen from that point. Is that something -- those 23 chairs, is that the kind of number we are looking for, for going forward?
Yes, it is in part. We have a series of metrics that we work through with the operations team to define when a center is ready relative to utilization for an additional chair. We like this approach because it contributes to the growth of that particular center at a lower overall capital expense. And it's certainly part of our ongoing initiative to make sure that with the availability of a further 88 chairs that we start to optimize more and more in that space.
All right. And then I guess just the last one for me, in terms of, I guess, looking at adding more chairs in existing centers and we are now talking about 7 to 10 new centers being open versus I guess the previous guidance of 10 new centers, do you have a more concrete plan around when we might see some margin expansion coming through?
Tanu, as we've always said in previous calls, we're committed to margin growth in the long term. And the presentation obviously backed that up, when you look at what a center greater than 5 years can contribute, which is a plus 20% margin. And we called out what corporate costs look like, so that's around [indiscernible] So that gives you a guide that -- where we think long term this business can be is around 15%. As for guidance for FY '20, we are not guiding to margin growth in the short term. We expect it's going to be thereabout flattish for the year ahead.
[Operator Instructions] There's no more question at this time. I would now like to hand the conference back to Mr. Phil McKenzie. Please continue.
Just want to thank everyone for their time today and wishing you all the best.
Thank you, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.