dentalcorp Holdings Ltd
TSX:DNTL
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dentalcorp Holdings Ltd
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Good morning, and welcome to dentalcorp Second Quarter 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Mr. Nate Tchaplia, Chief Financial Officer of dentalcorp. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Welcome to the dentalcorp Second Quarter 2022 Results Conference Call. I'm joined here by Graham Rosenberg, our CEO; and Guy Amini, our President.
Before we start, we'd like to remind you all that amount discussed on this call are denominated in Canadian dollars, unless otherwise indicated.
Please note that statements made during this call may include forward-looking statements and information and future oriented financial information regarding dentalcorp and its business, and disclosure regarding possible events, conditions, or results are based on information currently available to management, which indicate management's expectation of future growth, results of operations, business performance, business prospects, and opportunities.
Such statements are made as the date hereof and dentalcorp assumes no obligation to update or revise them to reflect events, disclosures, or circumstances, except as required by applicable securities law. Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results. A number of these risks and uncertainties could cause results to differ materially from results discussed today. Given these risks and uncertainties, one should not place undue reliance on these statements and information. Please refer to the forward-looking statements and information and future oriented financial information section of our public filings including without limitations, our MD&A and our earnings press release issued today for additional information.
For those of you who have dialed into the call, the company has prepared a series of slides to complement our prepared remarks. These slides are available on the Investor Relations section of our website, in the Events and Presentation section.
I'll now turn the call over to our Chief Executive Officer, Graham Rosenberg, for opening remarks. Graham?
Good morning, everyone. We are pleased to be with you today to review dentalcorp's recent developments as well as our financial and operating results for the 3 and 6 months ended June 30, 2022.
On today's call, I'm going to share a number of those developments with you, and then I will then hand the call back over to Nate, who will discuss our financial results in detail for the reporting period, after which I will provide forward-looking remarks about how our business is trending.
We continue to reinforce our leading position as Canada's largest network of dental practices with 526 practices earned at the end of the second quarter. We remain well positioned to continue our track record of double-digit compound growth rates as we leverage our strong financial profile and proven business model to realize on our vision to be the most trusted platform in the $18 billion Canadian dental industry.
Moving on to Slide 4. Despite ongoing headwinds imposed by the COVID pandemic on our industry, our business performed well given the essential nature of dental services in the Canadian market.
On Slide 5, you'll see that we completed the second quarter ended June 30, 2022 with approximately $1.3 billion of LTM pro forma revenue and $246 million of pro forma adjusted EBITDA. We're well supported by healthy same-practice revenue growth of 3.1%. All of this has been made possible by our deep and diverse network of 1,650-plus dentists, 1,950-plus hygienist and 4,750-plus supporting team members across the country from coast to coast. These individuals continue to deliver the highest standards of care during the reporting period, with our health care professionals supporting more than 1.7 million active patients and managing more than 4.5 million patient visits annually.
On Slide 6, you will see that we remain disciplined in our approach to growth, and we intend to continue growing our business organically through accretive M&A and by driving overall business efficiencies and operating leverage over the medium to long term, including through expansion into other geographies and verticals which advance the health, wellbeing, and vitality of North Americans.
Accordingly, and in the context of the current macro environment, we believe that dentalcorp's highly variable cost structure, solid operating margins, low maintenance CapEx, strong free cash flow generation, and a sizeable and actionable acquisition pipeline validates our confidence in continuing to deliver double digit revenue and adjusted EBITDA growth over both the near and long term.
On Slide 7, you will see that our business continues to convert a high percentage of EBITDA into free cash flow, and without acquisitions, has the potential to drive our leverage down by 0.5 turn per annum to the mid 1s over the medium term. So drive our leverage down by 0.5 as a multiple of debt to EBITDA per annum to a leverage multiple in the mid to high 1s over the medium term. And this affords us the opportunity to allocate capital to acquisitions in a judicious manner on an ongoing basis.
Combining this with our expected acquisition pacing, we will de-lever our business by between a 0.25x and 0.3x per annum, and operate in the high 2s to mid 3s over the same period, in line with our expectations at the time of IPO.
Turning now to Slide 8. I am pleased to report that our business again delivered robust growth with second quarter 2022 revenue of $327 million, up 25% over the same quarter last year, and adjusted EBITDA of $60 million, up 22% over the same quarter last year, with adjusted EBITDA margins coming in at 18.3%.
We are also encouraged that Same Practice revenue growth was approximately 3.1% for the quarter on an unadjusted basis, which is in line with historical norms for our business. Our insourcing efforts continue to deliver results, with 250 practices in our orthodontic acceleration program, up 40% from 178 at the end of the second quarter last year.
We achieved these results in a macroeconomic environment that continues to be challenging and impacted by COVID, inflation, and rising interest rates.
During the quarter, restrictions around hygiene furlough times remained, dental practitioners were off sick and patients canceled appointments at a greater rate than they would have before the pandemic. Despite all of this, our acquisitive growth program again delivered solid results. We completed 11 acquisitions in the quarter comprised of 28 locations, which are expected to represent approximately $16 million in 2022 pro forma adjusted EBITDA. We believe this acquisition pacing firmly entrenches dentalcorp's position as the acquirer of choice for Canada's leading practice owners.
I want to stress that this is not something that has happened overnight. Since our inception in 2011, we have made significant investments in our business development team and our streamlined integration capabilities. More importantly, we have developed and nurtured deep relationships across the Canadian dental industry as the trusted partner from coast to coast.
The outcome of all of this was another strong quarter of adjusted free cash flow of approximately $42 million, more than double the same period last year. After the quarter, we also signed a partnership with Envista to expand dental implant services across Canada. As part of this new agreement, Nobel Biocare, part of the investor portfolio and a world leader in the field of innovative implant-based dental restorations, is providing the dentalcorp network with a comprehensive training program and suite of services that includes dedicated support, clinical education and mentorship, and operatory guidance at a level unmatched in the Canadian market. We are very excited about this partnership. We look forward to forging it along with our dental practitioners across the country to continue to deliver exceptional patient care. This partnership will provide our network of over 1,650 dentists with the framework, playbook, and right mix of training and educational support, enabling dentalcorp practices to expand the best-in-class suite of services we offer to our patients.
I will now pass the call over to Nate, who will walk us through the details of our financial results, and then I will share some closing remarks before we open the call for questions. Nate?
Thank you, Graham. We believe that our second quarter results highlight our ability to continue to grow in a challenging macro environment, even one that features high inflation, increasing rates, and the lasting effects of the pandemic. We also believe that our results demonstrate the overall consistency of dentalcorp business.
Turning to Slide 9. Revenue for the 3-month period ended June 30, 2022 was $327 million compared to $261 million for the corresponding period last year, representing an increase of approximately 25%. The increase is attributable to our strong acquisitive and organic growth, including a positive contribution from orthodontic in-sourcing with 250 practices in the Ortho Acceleration Program versus 178 at the end of our second quarter last year.
As you can see, we reported second quarter adjusted EBITDA of approximately $60 million compared to $49 million in the same quarter last year and reported second quarter adjusted EBITDA margins of 18.3%.
Despite being adversely impacted by regulatory requirements, lost provider days and patient cancellations from COVID, Same Practice revenue growth was a robust 3.1%. Looking ahead, we continue to be optimistic about our ability to grow the business through acquisitions and organically. With respect to M&A, we completed the acquisition of 28 practice locations with $16 million of pro forma adjusted EBITDA.
Turning to Slide 10. You can see that our net leverage and liquidity as of June 30, 2022, on a net debt basis, we were approximately 4.2x levered at the end of the second quarter. We ended the quarter with liquidity of $441 million, comprised of $152 million in cash and $289 million in debt capacity under our $1.3 billion senior debt facilities, of which approximately $1 billion was drawn at the quarter end. Second quarter and year-to-date adjusted free cash flow was $42 million and $82 million, respectively, which supports our strong balance sheet position.
Looking ahead, we believe that we'll have ample financial resources to support our overall growth goals regardless of the pacing while maintaining a strong balance sheet. We have built in the flexibility to do what's right for our business and our stakeholders in the near and long term. Overall, we are very pleased with our second quarter 2022 results. We closed accretive acquisitions, continue to develop our pipeline, increased organic growth, in part through in-sourcing efforts, and realized an ongoing operating efficiencies.
With that, I will turn the call over to Graham to provide some closing remarks. Graham?
Thanks, Nate. Turning to Slide 11. There are a number of factors that we believe will be strong tailwinds for our business going forward. Dentistry's resiliency as a highly recurring essential health care service is reflected in the sequential Same Practice revenue growth we experienced in the second quarter of 2022. When combining the strength of our organic growth and our acquisition program, we expect to deliver double-digit revenue and EBITDA growth in the third quarter 2022 over the third quarter 2021. Dentalcorp continues to reinforce its position as the acquirer of choice for leading dentists with a demonstrated ability to add value to acquire dental practices and the premier provider of patient care to Canadians.
At the end of the second quarter 2022, we had 730-plus total acquisition opportunities in our pipeline and 200-plus opportunities in more advanced stages of negotiation. Over the medium term to long term, we believe we have built a business that has the potential to generate 3% plus Same Practice revenue growth, 10% to 15% increase in practice level EBITDA on acquired practices, $35 million plus per annum of acquisitions, and strong free cash flow generation with deleveraging of our business over the medium term to the high 2s to low to mid 3s.
We take great pride in our position as the industry leader. We have the unique privilege of a homegrown vision and culture that binds us all. Our unified voice, clear strategy and transparent leadership structure position us well to achieve our vision of becoming North America's most trusted health care network.
I'd like to thank you all for taking the time to join our call today. That concludes the formal part of our presentation, and I would like to open the call to questions. Operator?
[Operator Instructions] Your first question comes from Michael Cherny from Bank of America.
[indiscernible] for Mike. Congrats on the quarter. Just hoping you could talk a little bit more about the trends that you're seeing volume-wise? Have you seen more normalization of pre-COVID levels or how are you thinking about that? And then any key indicators for utilization being returning to normalized volumes?
As Graham alluded to on the call, certainly a better quarter as it relates to getting patients back in, and in particular, getting them back in for their hygiene visits. As Graham also alluded to, there continues to be ongoing pandemic-related challenges, both as it relates to patient cancellations as well as, again, practitioners contracting COVID and having to take the 3- to 5-day period off, depending on the personal circumstance. So that continues to present itself, albeit to ever, ever decreasing degrees. That's certainly not limited yet.
We have the good news in tailwind of easing restrictions, albeit not entirely eliminated, easing restrictions from a regulatory perspective. And so we do expect in the short term, some of that continued, call it, cross wins as it relates to volume from our perspective. Trends continue to be favorable as they were from the beginning of the year, or compared to the beginning of the year.
And then just a second question. Could you talk about any pressures or changes that you're seeing in the business as it relates to the supply chain? Any inflation or wage pressure?
I can speak to the supply chain. So we have wonderful partners on the vendor and distribution side that we have long-term contracts with that maintain pricing. We continue to evaluate those relationships and those agreements to ensure that we're able to continue to provide the best service and best pricing to our partner practices. Of course, in a changing environment, we'll continue to review that very judiciously. On the wage side, Guy, why don't I turn that one over to you.
Thanks, Nate. A similar story to what we had committed on prior calls and probably consistent with most industries. Well, there continues to be shortages and challenges, particularly in health care, certainly something that we're contending with. But again, I think the results will speak to our ability to manage those in line with, again, what we've been committed as we should expect from a results perspective.
We continue to pride ourselves in our ability to create a great platform for practitioners and better ourselves of the ability to keep and attract those practitioners and have a comprehensive approach to how we incentivize and award them. And so that allows us to be a little bit more balanced as it relates to the cost side, and again, allow us to do our best in the short-term challenges that we're facing from labor perspective to preserve our margin profile as it is.
And your next question comes from Wissink from Jefferies.
We'd like to hear a little bit more about the pacing through the quarter. Any distinct changes in the business from April-May to June? And any comment on the quarter-to-date trend? And then maybe if you could, Nate, just give us some sense of any unusual comparisons in the back half as we build our model.
Yes. So the pacing on the acquisition side was quite a normal distribution throughout the quarter. As far as organic growth, again, through -- if we compare from Q1 onwards, we had sequential growth through the period and consistent growth throughout the quarter. As it relates to the back half of the year on the acquisitions, consistent with our messaging throughout the last number of quarters, we, of course, had a very strong Q1 as it related to acquisitive growth, which was followed by a strong Q2, but obviously not to the same extent as Q1. And we will continue to return our pacing on acquisitions back to a normal level of $35 million plus and acquired EBITDA through the back half and into 2023.
As it relates to, again, the continued pacing and growth, on the organic side, still early days in Q3, but remain optimistic.
And one more if I could. Just so intrigued by the implant announcement. Could you talk a little bit about how many practices you think you could deploy that opportunity to? And maybe give us some sense of what the uptake ramp or educational ramp looks like.
Guy here, let me jump in there. We're incredibly excited. Obviously, being able to provide the Canadian dental patient base with implant treatment. It's high value add to our patient base. It's certainly a growing, fast-growing area of treatment that Canadians are increasingly demanding, whether it's because of eroding dentition or simply an aging population, we see a ton of demand, a ton of growth and a ton of value that we can bring to our patient base by being able to offer it.
We do want to properly and appropriately manage expectations around timing for this. The strength of our Ortho Acceleration Program is in large part driven by our ability to deploy our training programs, our playbooks. But if you think of clear aligner therapy, obviously, from a practitioner perspective and technology perspective, it's a little less invasive, it's nonsurgical with the implant treatment. It is a more intensive procedure and one that we want to make sure that, again, we're well positioned to deliver great care to patients. And so we will be more methodical as necessary to ensure that the practitioners and supporting team members are best positioned to deliver great care, which means more intensive training, a lot of live training in partnership with, again, Envista, through Novel Biocare as well as our own network of leading implant providers that are existing within our network.
We expect it to be a little bit of a slower ramp than Ortho Acceleration Program. That's something that we certainly begin in the back half of this year and really start driving the training regimen through 2023. It'll be involved -- it will involve, again, live surgical training, virtual training as well. We'll have partnerships with training institutions both in Canada as well as North America more broadly, because again, we want to make sure that our practitioners are best positioned to deliver what is, again, a high demand treatment offering, but to do so in a qualified, competent, and confident way.
So again, I wouldn't expect there to be meaningful penetration to the network this year, but through 2023 as we continue to, again, position our practitioners to be able to provide the care. We feel pretty good about it.
And your next question comes from Daryl Young with TD Securities.
First question for me is just around the M&A landscape, given some larger consolidation that's happened recently, and if you think there will be any impact valuations for the multi-practice locations or really any change to the landscape as a result of this larger deal?
Yes. So it's Graham here. Look, the transaction certainly is encouraging for us in terms of the validation that it brings to the industry in Canada. We obviously know KKR very well, and their investment in the Canadian dental industry speaks volumes to the underlying strength of the industry, especially when you factor in the price paid, which at a high teens multiple is a high-water mark for dental consolidators in North America.
Just for some color, we obviously know and have had the opportunity to meaningfully get to know 123 and Altima and Lapointe over the years. Deals like this are very complicated, and we are confident in a decision that we made to remain disciplined in our approach to acquisitions and who we partner with, which better accelerates our growth trajectory.
The industry has certainly been characterized by our leadership despite the fact that 123 and Altima have been in the game for 30-odd years. We became the largest in Canada in 2013 and haven't looked back. They're now both off the table. Altima's off the table. They don't have to bulk up for deals anymore. And so we believe that we will continue to acquire leading practices at attractive multiples, particularly without the pressure of having multiple consolidators of scale at the table.
So overall, we feel that we'll benefit from more favorable competitive dynamics for acquisitions. We also remain the largest by meaningful margin and believe that our transparent leadership structure and clear value proposition positions us well to continue to realize on that strategy. For a little bit more color, Nate, do you want to add anything there?
No, I think that summarizes it really well. Again, we've continued to manage a very strong pipeline over the last number of quarters and continue to feel really good about the opportunities before us. And again, had 2 really strong outperforming quarters on acquisition that were underpinned by a number of mid-market opportunities, and now we'll continue to execute on our M&A program consistent again with that $35 million plus in acquired EBITDA on a 12-month rolling basis.
Your next question comes from Scott Fletcher from CIBC.
I know this might be a simplistic way to look at it, but the average EBITDA per acquired practice has sort of has declined in the last 2 quarters with the larger networks that you're bringing on, while the multiple that you're paying has creeped up. Can you dig into that dynamic a little bit and if you see it changing in the back half of the year or into 2023?
I believe the question last quarter they asked was the number -- the average EBITDA was actually higher. And again, when you're looking at a small sample size of acquisitions, whether it was 28 practice locations this quarter or a slightly larger number in Q1, that sample isn't large enough to draw the comparison. Across our 526 location average is in, again, the mid 4s to 5s, 100s on an EBITDA basis. That will continue to be, again, as we look forward to continuing to grow the business. That average is what we see in the marketplace. But again, in any small grouping, you will see some variation.
And then second question is on pent-up demand. And in the past, you've sort of said that with the weaker Q1, you were still expecting to get to that typical 2.3 to 2.5 patient visits per year number. Now that we're into August, are you seeing that play out as expected?
Let me jump in here. Look, I think, again, what we saw in Q2, particularly coming out of the challenging first quarter was favorable and encouraging rebound in our Hygiene visits, critical for having individuals come back for preventative care. The benefit of having a strong rebound in Hygiene is also that it's critical to identification of treatment needs for patients that go beyond just preventative care and having that rebound again gives us confidence that we'll continue to track towards something that resembles more sort of a pre-pandemic level of volume and frequency.
And so that continues to be a trend that we are encouraged by. Again, as Graham mentioned, despite ongoing challenges, having a strong rebound through that quarter on the nature of the business and what we know it means for sort of future treatment needs within our patient base and beyond, gives us positive sentiment going forward.
Your next question comes from Stephen MacLeod from BMO.
I just had a couple of things I wanted to follow-up on. Can you just talk a little bit about the status of the non-infection related COVID impacts in the quarter? So the regulatory backdrop and if those restrictions on follow times have changed at all or what you expect?
Again, let me jump in. We have had a recent announcement in Ontario, which obviously the largest province and the largest regulator that have significantly eliminated, albeit not entirely eliminated restrictions or requirements around furlough times. There continue to be some COVID-related requirements and restrictions that will persist as long as there was a pronounced persistence of the pandemic itself, which obviously continues to be. So again, we are encouraged by the extremely recent rule change, albeit it's still not a return to pre-pandemic restrictions and requirements on delivery dental services.
So again, a positive change from our perspective and encouraging from a go-forward perspective, but certainly still a degree of existing and ongoing requirements that we will contend with.
Okay. And is there any view or expectation on when things might look more normal from a regulatory perspective?
Look, hard for us to say what the regulatory bodies are always going to do, their view and their part to ensure protection of the public in this unprecedented environment, which continues to be somewhat challenging to navigate from a host of different perspectives. It's difficult to say when they reach to that point. Again, as both the industry itself and the country more broadly continues to find ways to understand and then navigate, well, it certainly is not something that's going to go away at all. It's only something that we have to live to contend with. I'm sure they'll continue to find the right balance on normalizing our approach to provide dental care with a dynamic that certainly seems to be something that we just have to live with.
So they'll find their time when they feel it's in the best interest for public to do so. We'll continue to make sure that from our perspective as an organization, just follow those requirements, particularly to those restrictions, but we position our practices to deliver great care and health, and safety environment for our patients, and that's something we'll have to contend with.
And then just with respect to the acquisition pipeline. I know you cited the number of opportunities you have in the pipeline, a number of that are in advance. Has the pipeline accelerated at all or potentially decelerated in either direction? And then secondly, what are you hearing from -- through some of your negotiations with respect to the competitive merger that happened? Are people holding out? Or are they delaying or extending the negotiation process? Just curious if you've seen anything like that?
So on the pipeline point, it's meaningfully consistent with how it has been over the last number of quarters. I wouldn't say it's accelerating or decelerating. Conversations continue to remain strong, and the number of acquisition targets that we have in more advanced stages continues to be in that 200-plus range.
As it relates to the merger, I think people are trying to digest what has gone on. As Graham mentioned, it was a very complicated deal with a number of different parties that obviously have different offerings, different cultures, and there is a clear path as to what that partnership opportunity is going forward.
So I'd say that as we continue our conversations, our greatest competitor continues to be the partner dentists continuing to do what they do independently because, again, the offering that we provide is unmatched in the industry. The relationships that we build continue to underpin our success and has been the case since our founding in 2011.
Next question will be from Tania Armstrong at Canaccord.
Just a follow-up on the Envista partnership. I know you noted that the ramp will be a little bit slower, but I'm wondering how big this opportunity could be? I know the Orthodontics Accelerator Program can be -- has been rolled out to several of your clinics and ultimately can be rolled out to your whole network. Could implants be as big? Or are there certain partners that just would not want to be trained on that?
Let me sort of separate those 2 out because certainly, I think both of those relates to Clear Aligner therapy implants, or frankly any other clinical procedure. It is very important for the clinician to want to do it, to feel competent and confident to do it. Thankfully, as we've shown with our Ortho Acceleration Program, giving our clinicians the competency and the confidence to pursue treatment, that positions them to deliver more comprehensive care to their patients is something we've proven we can do. That credibility goes a long way.
These sorts of programs, it's instrumental to have leading key opinion leaders and extremely established practitioners part of the training program. We have that in our network today, frankly, coast to coast. So we're fairly confident in our ability to provide platform that delivers the confidence and competency for our clinicians to feel comfortable, and eager to take this up.
Do we think it's as big as Clear Aligner therapy? Here's what we know. One, from a growing demand perspective, again, with the aging Canadian population, frankly, more and more individuals seeing value and investing in oral health and investing in their oral care wellbeing. Demand for implant is growing rapidly. Gone are the days where people want dentures. And so if you look at the growth of implant treatment globally, Canada is lagging, but quickly catching up in terms of demand. If you look at the penetration of implants in our network, we're probably underrepresented. So we do view it as a massive opportunity to pass it to what our patients are looking for.
In dollar value, is it sort of in that ballpark of Clear Aligner therapy? Absolutely. But again, the ramp-up is a little slower just given the nature of the treatment and the importance of making sure that our practitioners are, again, confident and competent to deliver it. So we do see it as sort of in the same ballpark of opportunity, just given what we know the demand to be, given what we know our patient base is looking for. And we just want to be, again, methodical and execute at a high level to make sure that, again, our practitioners are best positioned to deliver good quality care.
Excellent. That's very helpful. And then just secondly, can you remind me what the legal settlement was this quarter? I noticed it impacted your cost of sales and your SG&A a little bit.
Yes, that was a one-time gain. And in our adjusted EBITDA figures, our adjusted net income figures, and our adjusted free cash flow figures, we're actually reducing the impact from that one-time gain. So it would have no impact on the numbers reported.
Next question is from Sahil Dhingra at RBC.
This is Sahil Dhingra for Doug Miehm. So my first question is on gross margins, they declined quarter-on-quarter. Is it due to some one-time impact? Or are there inflationary pressures that you are witnessing?
Sorry, you just cut out there for me. Do you mind repeating that question, please?
Yes, sure. So my first question is on gross margin decline in the quarter, Q-on-Q, quarter-on-quarter versus Q1. So is it due to the inflationary environment? Or are there any one-time items in there?
Yes. So there's no one-time items as far as inflationary environment. Again, given our long-term relationships and fixed pricing with our largest suppliers, there is no significant impact there. It really comes down to revenue mix and the type of services provided. And obviously, quarter-on-quarter, there will be variations there. So nothing of note here to discuss.
And then on the acquisitions, as the acquisition base slows down in the second half, should we also expect the multiple to drop versus what you paid in Q1 and Q2?
I would say the mix of our transactions in Q1 and Q2 was more heavily weighted toward the number of mid-market platforms that we acquired, which did have a slightly higher valuation, again, in the high single digits, low doubles. There'll be a lower number of those mid-market opportunities in the back half. So I would continue to expect multiples to be consistent but slightly lower.
And just last one for me. Last year, we saw some seasonality in Q3 related to practitioners taking vacations. Do you expect similar trends this time around?
I would say Q3, in general, from a seasonal perspective is a quarter which is lower than Q2 if you compare historically with number of trading days given the summer vacations and the statutory holidays that do take place as well as the general, call it, summer slowdown on a normal basis with vacations and time away. The seasonality that was experienced in 2021 was exacerbated by, of course, the opening of travel and the reduction in certain restrictions around travel and movement. But in general, Q3, when looking over Q2 from a seasonal basis, is a lower quarter.
Next question from Gary Ho at Desjardins Capital Markets.
First question, just going back to the furlough time restriction lifted in Ontario. How quickly can your practitioners utilization kind of ramp back up, assuming there's no additional costs associated with it and all the benefits should flow through to the bottom line? I guess we should think that that's additive to your same-store sales number?
Gary, it's Guy here. I'll just sort of clarify. They've significantly reduced requirements for furlough time in most circumstances, but obviously, there's still ongoing, I guess, restrictions and requirements that are pandemic-related, including as required by the [ Ontario College ]. Just an important point of clarification there.
Again, our priority is going to always continue to be ensuring the safety of our patients, and we'll continue to make sure that our protocols reflect best practice in that regard. And so in today's environment, we'll continue to be vigilant around making sure that the environment our patients come to see us, is a safe one and that our staff are protected as well. And so again, we'll continue to take this methodically as it relates to protocols that we have in place in our practice. And so whether or not, there's sort of black and white restrictions requirements, working to be -- restrictions and requirements, we'll make sure that we approach, doing what's right for our patients and our practitioners. But again, I think the news is good news. It shows a continued normalization of operating dynamics and we'll continue to benefit from that in the perhaps beyond the short term, but certainly in the medium to long term.
And then my second question. High 2s, low 3s leverage, medium term, your consolidator peers operate at much higher debt levels. And obviously, higher leverage could juice up returns, but negative in a rising rate environment. I just want to pick your brain on how you think about the disconnect between bringing the leverage down versus your peers and your business model. It's fairly resistant on the cash flow and should support it.
Sorry, you're talking about our private peers?
Sorry?
You're talking about our private market peers?
Yes.
Yes. They operate at a higher leverage. We like where our leverage is. We'd like to see it lower. It will come down. It's all in accordance with plans at time of IPO. There's certainly no exceptions. We feel good about leverage in the mid- to high 2s to low 3s over the medium term as per what we guided at time of IPO. We think it's the right structure for a company, certainly in the public markets. And the strength of the business and the resiliency of the business and the high free cash flow nature of the business for our peers, particularly in the U.S., that do have high leverage in the 6s, 7s and some of them 8s, which warrants it, is great.
It's good when you're private, but we have the strength of our cash flow. We obviously have a stronger balance sheet, and you've seen that come through in the free cash flow generation of the business.
So we're quite comfortable there, and we think we can generate tons of returns for the equity that public investors are looking for and that we were looking for internally and net free cash flow growth per share on a sustained basis as we drive shareholder value.
And just to jump in there again, from a private context, consolidation dental industry operate at a significantly higher leverage than we do today. And ultimately, when we were private, we did as well. And that's really driven by the resiliency of the dental sector, the strong free cash flow conversion and ultimately, the success of our business model.
Today, obviously, in the public markets, we de-levered significantly on the IPO, and we'll continue to do so over the medium to long term. We're operating in the low 4s today.
And as noted, we'll continue to de-lever in the medium term with an acquisitive pacing of $35 million plus to the low to mid 3s. But what's important to note is if you remove our acquisitions, the cash flow generation from the business will bring us into the mid 1s in that same period of time. So again, private peers much more highly leveraged than us, but we'll continue to remain diligent and drive a strong balance sheet position over the medium and long term.
We've captured it for you there. Again, just to reiterate and summarize and just package it up properly. Base business generates significant free cash flow, as you see, which will de-lever to the low 1s. We're going to redeploy that capital on our business on a sustained basis, those 3s, high 2s. But yes, in the private context, people are very comfortable with leverage double that, pretty much closely double that given the nature of the underlying business. And we obviously think that we're a top performer and could warrant that in a private context but not in the public. So that's where we're at.
Next question from Endri Leno at National Bank.
I'll continue on the debt one, but perhaps from a slightly different angle. It seems like you've increased your facilities quite a bit after the quarter. So I was wondering if you can help me reconcile that. On one side, I mean, I hear you guys saying that there is no change in the pipeline in your statements before. On the other hand, Graham opening remarks, he said that you're looking at potential geographical expansion, if not other verticals. So I was wondering if you can help me reconcile like why did you increase your debt facility so much? And is there something to look out for.
So from a facility perspective, we're still operating under the same agreement that we entered in during the time of IPO when we brought back our debt from the U.S. markets to the Canadian private banks. The upsizing is completely undrawn and provides us dry powder to be, again, opportunistic. And an environment having capital available is always a good thing. It doesn't mean that we're going to use it. So again, just an upsizing of our undrawn facilities. The acquisition pacing and our strategy that has been communicated over the last 6 quarters continues to remain consistent, and this is just ultimately an ability for us to shore up availability.
The other one, I'll just go back to the margins. In terms of that -- yes, the gross margin was down quarter-over-quarter, but it was up year-over-year. The reverse was with the EBITDA margin, down year-over-year, but up sequentially. Just kind of wondering like what are those movements? Is that for the gross margins? Is it kind of just normal business? What about EBITDA margin? And what kind of margin bands should we look at for modeling purposes?
So I think from a margin perspective, over the last 2 years have, of course, they haven't been normal operating environments. So there's an elevation through the period as it relates to the consumable costs. There's been impacts to labor as a result of scheduling and efficiencies as you go quarter-over-quarter depending on the impacts of cancellations, both on the provider side as well as the patient side.
So there hasn't been, call it, a level of normalcy and consistency that we've been able to enjoy quarter-over-quarter. Hopefully, that time will come. But that's really what's driving the margin, the slight margin deviation period-over-period. But again, Q2 '22 over Q1 '22 is a positive and the trend is our friend. As it relates to the long-term margin and how to think about it, we continue to invest in our business to be able to support the ongoing double-digit growth that, again, we've delivered year in and year out. When you look at our LTM pro forma EBITDA margins, it's in the low 19s when compared to our in-quarter adjusted EBITDA margins in the low 18s, and that's really showing the cash flow generation, the EBITDA generation of the business, assuming all the acquisitions were owned at the start of the period.
And if we stopped acquiring, ultimately we would grow into that margin theoretically. So when you look to the normalization of costs on consumables as protective equipment continues to become lesser and lesser used from a volume perspective as well as pricing normalization, as you look to the normalization of staffing as well as patient cancellations and the continued growth and operating leverage on our corporate, from a margin perspective, consistent throughout '22. And again, we look to have a margin expansion '23 forward.
And if I may squeeze one more. On the dental care reform, I mean we've seen some reports that the federal government, I guess doesn't have any idea what they're going to do. But they're considering sort of a GAAP measure of getting direct cash transfer. Any color on what that might imply for the industry and dentalcorp if it were to be a direct cash transfer option?
Look, I don't think we were surprised by that announcement. There's always a degree of skepticism that in a matter of months, they could put something together, particularly, again, given that every province has existing programs in place and to varying degrees, frankly, do a pretty good job of addressing access to care needs. I'll take your question specifically and then add some sort of more broader color at the end.
It's tough to say, although we don't think it's going to have much of an impact at all. Again, just given the way the program will be administered, the GAAP measures you alluded to, the types of patients that it technically will target, and if you look at across our existing patient base, I don't think it will have any impact at all. It's relatively muted, I'd say both short to medium term in that respect.
How does the program ultimately looks? Again, the significant question marks remain. The dental industry itself continues to have a significant amount of questions that would go unanswered. I think to a degree, there's -- it's a little perplexing, if we could say that government's focus is on spending billions of dollars on sort of trying to shore up access to oral care. We've said this in the past, access to oral care rates in Canada are amongst the highest, if not the highest in the world. And particularly amongst children, 90% of kids see a dentist every year in Canada. If you look at oral health care outcomes in Canada, again, we are leading in the world in that regard. But when you juxtapose that to a health care system more broadly, that's certainly showing cracks, if not crumbling. We've all seen the headlines of emergency rooms being closed because lack of resources.
There is a degree of confusion, I think, on the industry professions part that billions of taxpayer dollars are going to be spent on, again, addressing what isn't, and sort of what the data suggests, an access to oral care problem in Canada. But again, government will prioritize, the government wants to prioritize from our perspective. We're going to continue to be positioned to address the needs of the Canadian patient base. These programs, however they ultimately look, will simply be additive to existing programs in place that we contend with today. So we don't see any meaningful impact on the business.
Next question will be from Justin Keywood at Stifel.
On the acquisitions in the quarter, the 28 practices, I noticed there is what seems to be a higher proportion of equity used versus cash to purchase those practices. And if this is a change in dentalcorp's approach, given the public vehicle now in place, and perhaps that's an advantage over the private competitors as there's a clear liquidity option with the public shares?
One of the main thesis points behind us going public was to have that liquidity in order to be able to align our partner dentists during the transactions. That's something that we've had as a consistent deal offering and deal structure since the very first deal that was completed in 2011 and will continue to be a focus and main point in all of our deal structures.
As it relates to the mix, if you look at the Q1 mix, roughly 70% to 72% was paid in cash with the corresponding amount in equity, and that is consistent in Q2 as well. Again, there was a higher number of mid-market opportunities and platforms that we partnered with over the last number of quarters. And with those, there's some unique structuring that does take place. But again, this is not a departure. This is a consistent split and a consistent structure that we've offered since day one.
Thank you. Mr. Rosenberg, at this time, we have no further questions. Please proceed.
Thank you, everyone, for taking the time on the call today. Great dialogue. We look forward to chatting again. I think we'll be talking to some of you through the balance of the day, and obviously, for our Q3 results, sometime in November. Enjoy the rest of the summer and look forward to being in touch. Thanks.
Thank you. Ladies and gentlemen, this does conclude your conference call for today. Thank you for attending. And at this time, we ask that you please disconnect your lines.