dentalcorp Holdings Ltd
TSX:DNTL
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
5.44
10.33
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
dentalcorp Holdings Ltd
You don't have any saved screeners yet
Good morning, and welcome to dentalcorp's Third Quarter 2021 Results Conference Call. [Operator Instructions] At this time, I'd like to turn the conference call over to Nate Tchaplia, Chief Financial Officer of dentalcorp. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to the dentalcorp's third quarter results conference call. Before we start, we would like to remind you that all amounts discussed on this call are denominated in Canadian dollars, unless otherwise indicated. Please note that the 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 that are based on information currently available to management, which indicate management's expectation of future growth, results of operations, business performance, and 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 laws. 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 the 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 without limitation, 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 Presentations section. I'll now turn the call over to our Chief Executive Officer, Graham Rosenberg for his opening remarks. Graham?
Thanks, Nate, and good morning, everyone. We are pleased to be with you today to review recent developments at dentalcorp as well as our financial and operating results for the 3 and 9-month periods ended September 30, 2021. For today's call, I'm going to share a number of those developments with you, and I'll hand the call 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 and then we'll open up for questions. And we're also joined by Guy Amini, our President, today. As a reminder about the business, and as you can see on Slide 3, dentalcorp is the country's largest provider of essential cash-pay consumer healthcare with the goal to become Canada's most trusted healthcare network. We are committed to delivering the best patient experience and clinical outcomes through our network of leading professionals empowered by our unique technology, know-how and scale. Turning to Slide 4, you will see that dentalcorp continues to be the clear market leader with the only national platform in the $18 billion Canadian dental industry. Dentistry is a highly recurring, nondiscretionary cash-pay service insulated from economic cycles and disintermediation by technology. And we believe that we are well positioned to continue our growth by leveraging our repeatable practice acquisition program and our proprietary digital assets and playbooks. Turning to Slide 5. A number of key metrics support our continued confidence in our business. We've achieved double-digit growth every year in our history. More recently, dentalcorp has generated approximately $1.1 billion of pro forma revenue and $211 million of pro forma adjusted EBITDA, both for the 12-month period ending September 30, 2021, and all supported by our strong returns on invested capital, high margins, low CapEx and working capital requirements. And all of this has been made possible by our deep and diverse network of 1,300-plus dentists, 1,600-plus dental hygienists and 4,200-plus supporting team members. These high-quality professionals support more than 1.6 million active patients and manage more than 4 million annual patient visits. Turning to Slide 6. We are confident that our multilayer growth strategy charts a course for a very bright future for dentalcorp. As we have historically, we intend to grow the business organically through continued M&A by driving greater efficiencies at both the practice and corporate level and on a longer-term basis through expansion into other verticals, which advance the health, well-being and vitality of our 1.6 million plus patients nationwide and Canadians more broadly.Moving on to Slide 7. You can see our strategy's impact on our third quarter 2021 results. The company generated third quarter 2021 revenue of $250 million, up 22% over the same quarter last year and adjusted EBITDA of $46 million, up 40% over the same quarter last year. This marks the 10th straight year that we have achieved double-digit growth across the board since our founding in September 2011. And we generated third quarter 2021 adjusted EBITDA margins of 18.5%, up 2.6% from the third quarter of 2020. Same practice sales growth for the third quarter of 2021 increased by 3.5% compared to the third quarter of 2020. And all elements of our insourcing efforts continued to track above our expectations as demonstrated by our orthodontic acceleration program being offered within 190 practices at the end of the third quarter of 2021 versus 134 at the end of the third quarter of last year. With respect to M&A, during the third quarter, we acquired 15 dental practices for a total consideration of $74 million, which are burgeoning to contribute $11 million in annual EBITDA. As of September 30, 2021, the company owned 445 dental practices in Canada compared to 374 at September 30, 2020. Our M&A results have exceeded our expectations for the first 9 months of 2021. And looking ahead, our pipeline continues to expand with more than 670 prospective opportunities and more than 140 of those currently in more advanced stages of discussions. Overall, our quarterly and year-to-date financial results demonstrate the strength in our business. And despite the adverse impact from ongoing COVID restrictions and variant outbreaks in many of our key markets, we anticipate that the sequential monthly revenue growth we realized in the third quarter of 2021 will continue through the balance of this year and into fiscal 2022. I will now pass the call over to Nate, who will walk us through the details of our financial results, and then I'll share some closing remarks before we open up for questions. Nate?
Thank you, Graham. During our third quarter, transitory crosswinds had an adverse impact on our performance. These included ongoing COVID-19 restrictions and variant outbreaks, dental regulatory restrictions that continued to create downward pressure on our business, and patient visits and practitioner availability being adversely impacted by these groups taking an outsized amount of holidays when compared to last year during the reported period. Turning to Slide 8. Revenue for the 3-month period ended September 30, 2021, was $250 million compared to $205 million for the 3-month period ended September 30, 2020, representing an increase of 22%. The quarter-over-quarter increase is attributable to more stringent pandemic restrictions in 2020; our strong acquisitive growth throughout 2021, which continued to gather momentum throughout our third quarter; organic growth, including positive contribution from our orthodontics insourcing with 190 practices in the ortho acceleration program versus 134 at the end of the third quarter last year; and same practice sales growth of 3.5%, up over the third quarter of 2020. As you can see, we reported third quarter adjusted EBITDA of $46 million compared to $33 million in the third quarter of 2020. And we reported third quarter adjusted EBITDA margins of 18.5%, up from 16.1% in the third quarter of 2020. Turning to Slide 9. You can see our net leverage and liquidity as of September 30, 2021. On a net debt basis, we are approximately 4x levered at the end of the third quarter. We ended the third quarter 2021 with liquidity of $592 million, comprised of $192 million in cash and $400 million in debt capacity under our $1.3 billion senior debt facility, of which $900 million was drawn at quarter end. Looking ahead, we believe we'll have ample liquidity to support our acquisitive growth goals, while maintaining a strong balance sheet. We'll also continue to evaluate scenarios to fortify our balance sheet if opportunities align with our long-term strategy. Overall, we are very pleased with our third quarter 2021 results. Despite the transitory crosswinds, factors that are largely within our control, including closing accretive acquisitions, expanding our pipeline, increasing organic growth through our insourcing efforts, and realizing ongoing operating efficiencies all met or exceeded our expectations. With that, I'll turn the call back to Graham to provide some closing remarks. Graham?
Thanks, Nate. This is a very exciting time for dentalcorp. I am pleased to report that our momentum has continued subsequent to quarter end with our announcements that effective at the close of trading on November 30, 2021, our subordinate voting shares will be added to the MSCI Canada Small-cap Index. This is a significant accomplishment for dentalcorp and is a credit to the hard work and dedication of our employees who have collectively helped the company execute its strategy. We are also on track to launch Phase 1 of our partnership with Loblaw Companies Limited in the first quarter of 2022. As we announced last quarter, the partnership will see dentalcorp as the exclusive provider of dental health services and oral care education for PC Health app users, affording them access to dentalcorp's network of dental practices and the opportunity to earn PC Optimum points. In the near term, we are confident in our ability to achieve additional growth above our third quarter results as we continue to execute our strategy and benefit from a return to normal on organic growth and margin expansion. And finally, as you can see on Slide 10, as pressures from the pandemic abate and operating restrictions ease, we anticipate continued strong performance on a long-term basis as we focus on our core growth strategies of driving organic growth, including through insourcing initiatives, acquisitive growth, which is on pace to exceed our expectations for fiscal 2021, and with 2022 looking increasingly robust, supported by our strong M&A pipeline and finally, realizing operating efficiencies at practices and at a corporate level.That concludes the formal part of our presentation. And before we open up to questions, I would like to thank our dentalcorp team, 7,000 strong, for all of your contribution so far this year at times in challenging circumstances. We are one of Canada's best managed companies for a reason, and it's humbling to see the profound impact your efforts are making on our business and in the lives of our patients from coast to coast. Thank you for your time, and we will now open up the call to questions. Operator?
[Operator Instructions] One moment for your first question. Your first question comes from Doug Miehm with RBC Capital Markets.
Just a quick question with respect to the outlook. I'd like to delve a little deeper into that. You mentioned that we should continue to see sequential monthly growth that we saw in the third quarter. But could you flush that out a little bit more and give us a bit more detail in terms of actual numbers?
Yes. So from a numeric perspective, I think if we talk qualitatively about what we experienced for the quarter, July and August, as we discussed, we're impacted by outsized travel as well as COVID and the variant outbreaks. So we saw August performed better than July. We saw September perform better than August, and we are seeing and confident that, that performance will continue. So throughout the balance of the year, the 3.5% same-store sales growth that you see here should be met or exceeded.
Okay. Perfect.
And then on acquisitions, we feel confident in handily beating expectations for 2021, and we're feeling really good about 2022.
Okay. That's good. And then just a follow-up with respect to the acquisition pipeline. Do you think there's any multiple creep going on right now with respect to what you're paying? I know that it looks like on an IFRS basis, you're up about 0.2 of a multiple. Is that just normal volatility? Or could we actually see the multiple starting to move higher over the next while?
At the moment, we're experiencing normal volatility. We are in the fortunate position of seeing our pipeline and some of our signed deals include larger acquisitions, call it $1 million plus EBITDA acquisitions either through one clinical multiple clinics. Those are going to be acquired at higher than the average, 7x and change, multiples just because of their scale and because of the way their management has been professionalized over time and the underpinnings of growth available to us. And so at the end of the day, and as we discussed at the time of the IPO, as long as we continue to believe that and our confidence in realizing those 15% plus returns on invested capital, which we can from some of those larger deals, we're satisfied if multiples are up a bit on those acquisitions. So depending on which quarter those fall in, you may see a blended aggregate being up. But in the normal course, we think we're steady in the range that we've articulated for Q3 and Q2.
Your next question comes from Daryl Young with TD Securities.
Just following up on the same-store sales growth. I'd like to just dig in a little bit on the ortho insourcing. Specifically, you're doing a great job of rolling out the program across a greater number of practices. But I'm just curious, the practices that I would say are more mature in terms of the ortho insourcing, what kind of acceleration of revenue from ortho are you seeing in those practices? I'm just trying to get maybe a sense of what could happen a few years down the road as they're all rolled out.
In terms of dollar quantum or on a per store basis, what that incremental revenue could be?
I guess, whichever you're willing to share, but what I guess I'm just trying to get a sense of is, you get the ortho program into a practice on day 1, and then what does it do over the course of a year or 2 as your dentists become more familiar with administering it.
Yes. So I think if we look at the economics of what orthodontics looks like, and we can use a rough range of, call it, $5,000 to $6,000 per case and take it. From an initial practice that's going through the program that's not doing any cases whatsoever, then they become proficient, the teams get trained up, and they can begin in the early stages doing 2 cases a month, right? So it'll take 24 cases on an annual basis, take the bottom end of that range of $120,000 per year of incremental revenue driven from the orthodontics. Our average practice is generating roughly $2.4 million of revenue. So it's roughly 5% of incremental revenue growth that can be driven from the orthodontic acceleration program as earlier stage. There's upside opportunity for that as they continue to become more comfortable and get further training above that 5% level.
I just want to add one dynamic that's worth mentioning. It's not a static or finite base. Practices do add 10% to 15% of their patient base annually in new patients. And one of the benefits of the program and the offering is the ability to market directly to patients about the offering; one, increasing your ability to acquire new patients and two, continuing to replenish the pool of available candidates for the treatment. And so that's steady state of 2 to 4 plus cases per month once the practice is up and running. We don't see it being exhausted once you go through your existing patient base?
Got it. And then just one more question in terms of same-store sales growth. Relative to the 2019 levels, would you have seen growth this quarter?
Yes, we're positive to 2019.
Your next question comes from Steph Wissink with Jefferies.
We wanted to unpack the guidance additionally. I think following your track line now around sequential growth, and I think, Nate, you might have mentioned 3.5% is a good baseline to use for same practice. How should we think about the seasonality effect? I think the model that we had assumed some degree of seasonality in it with the fourth quarter being a larger quarter, the 2 middle quarters being kind of in the midpoint, and the first quarter being smaller. So talk a little bit about how we should think about that going forward? And then my second question is on the EBITDA. It came in so much stronger than we had expected. It looks like the margins have taken a structural step-up. So I wanted to get some sense on how you're feeling about sustainability behind some of the margin drivers. And if this is a new run rate we should start to anticipate on a go-forward basis?
Yes. Thanks, Stephanie. From a seasonality perspective, there is some general seasonality in the business. Of course, it was impacted by the macro factors that were taking place across the country, again, outsized travel, COVID and the variant outbreaks, which impacted our general cadence. As far as Q4, generally, again, given the holiday season, there generally is a stronger performance in Q4 versus Q3 as far as generation. But again, we're cautiously optimistic as we continue throughout the balance of the year given the macro environment that we continue to work in.From a margin perspective, we did take a strong initiative to manage our labor throughout this period, again, understanding the macro impacts from the outsized vacation from the patient base as well as the provider base to ensure that we were able to continue to effectively balance our margins and performance of the business. From a PPE perspective, the protective equipment, we have seen the cost and volumes of that line of expenses continue to normalize as we continue throughout the year, albeit during the earlier parts, where COVID was more rampant, there was increased use and volumes of the PPE.
And just as a follow-up to that, as we think about adjusted EBITDA margins going forward, I think we had a nice ramp building out in several years, but you're already running 2 years ahead of where we would have had you modeled. Are there any investments that were planned for '21 that maybe were deferred? I just want to be really conscious of if the EBITDA margins were to come down in the medium term, it's really because of the pushout of some of the expenses that would have occurred, but didn't. I just want to be eyes wide open about that if we could.
Yes, absolutely. There's no investments that were deferred in 2021. From a margin perspective, the way that I would think about it on an adjusted EBITDA basis is 18% plus in the near to medium term.
Your next question comes from Stephen MacLeod with BMO.
Just a couple of follow-up questions. When you think about your Q3 same practice revenue growth, you talked a little bit about the holiday impact and COVID-19 restrictions. Is there any way to sort of quantify potentially how much those factors weighed on same practice revenue growth in the quarter?
Yes. So from a provider perspective, it would be in the range of $3.5 million to $5 million of revenue we quantified, as well as from the patient base, that's a factor that, frankly, is unquantifiable, but I think from a qualitative perspective and looking at the announcements made by the airline carriers, there was outsized travel during that early part of the summer, which was the greatest amount of travel since the beginning of the pandemic, and we saw that come through in our numbers as well. So $5-plus million total, taking into consideration both providers and patient vacations.
Okay. That's helpful. And then with respect to PPE restrictions and things like that, increased costs, more downtime or more cleaning time between patients. Is that something that you've seen abate a little bit in Q4? And how would you expect that to evolve into 2022?
It's Guy here. Thanks for the question. We do see the costs coming down. Restrictions albeit still exist as it relates to both usage, which drives obviously the volume of consumption of those cost drivers as well as restrictions on fallow times, which limit throughput of our clinics artificially, we see those persisting through the balance of the quarter and probably into early in the New Year, albeit not long term beyond that. From a cost perspective, we do believe the median cost on the PPE side of the business should normalize around 4% as soon as, again, COVID restrictions continue to ease, which we're expecting to do in the New Year, and as usage continues to return down to normal levels, it should get you down to that 4% of revenue levels.
Okay. That's great. And then maybe just finally, hellodent, I was wondering if you could just give an update as to sort of how that rollout is impacting your patient growth and your ability to secure new patients.
Sure. Just to clarify, do you mean more generally or is it in concert with the Loblaw partnership?
I meant more generally, but since you brought it up, I'd love to hear it in concert with the Loblaw partnership too.
I figured someone would ask that question in any event. We continue to see great traction with hellodent. And that's, again, before we continue to implement additional layers of both content and capability on the platform. From a revenue perspective, it increased meaningfully in terms of revenue attributable to patients through the platform Q3 over Q2. We continue to see growth not just in visits, but in bookings, so our conversion rate continues to remain strong despite us pouring more marketing dollars into the platform. And again, as Graham mentioned at the top of the call, we are on track and frankly, slightly ahead of schedule on the launch of the partnership with Loblaw, and so should see some accretive volumes coming through that platform in Q1 absolutely. And so the headline, there is continued strength. We do have some additional capabilities we want to layer into the platform and its ability to attract new patients and drive consults, not just on your general dentistry work, but also leveraging hellodent to amplify our ortho acceleration program through speaking to patients about the opportunity to find an Invisalign provider near them and expect it to continue to drive outsized volumes through the platform.
Okay. That's great color. Thanks, Guy. Thanks, Nate. Thanks, Graham. Appreciate it.
Your next question comes from Scott Fletcher with CIBC.
Just a couple of clarifying questions for me. You mentioned the potential impact of larger acquisitions. And it looks like the average EBITDA per acquired practice was up in the quarter. Does that mean that there were some larger practices or maybe a network in the quarter?
No. So there was nothing meaningfully larger, and there was no networks acquired within the quarter. Again, just to reiterate Graham's statement earlier as far as how we look at valuations that are taking place consistent with what we communicated at the time of the IPO. However, again, our pipeline is continuing to build at a significant pace. We are targeting larger groups and larger stand-alone locations where we can drive further growth. And those opportunities do come in at a slightly higher valuation. But again, we're able to underpin them with that 15-plus percent return on invested capital.
Okay. And second follow-up on the cost side. Just wondering in sort of the general inflation environment we're in right now, if you're seeing that has any additional pressures on some of the input costs that are maybe offsetting the tapering of the previous pandemic inflation that you're seeing?
It's Graham here. So we are seeing some pressure for sure. It is a very tight labor market up here for all kinds of service industries, in particular, healthcare. In Q3, and Guy alluded to this earlier, we actually made a decision to keep people in place despite lower volumes on the hygiene side because we do expect them to come back. And so we basically bought ourselves some insurance by keeping people in place. It cost us a little bit more, but we felt that was the right decision, and we're starting to see the benefits of that early in Q4. Wage inflation for sure, in particular, on the hygiene and dental assisting side, where that labor market is quite tight. But we think that we will be able to offset those plus some with a positive drop-through to margins going into next year as we realize price increases and volumes start to come back and drive more operating efficiencies.
There are no further questions at this time. Please proceed.
Great. Thank you. So if there are no further questions, I want to thank everybody for their time today on the call. I appreciate the questions and look forward to reporting again in a couple of months' time on Q4. We feel good about the business acquisitively, we feel good about the business organically, and we're looking forward to a continued strong results going into Q4 and into 2022. So appreciate it, and I wish you all happy holidays, I know it's already that time, and look forward to chatting with each of you soon individually. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.