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spk00: Ladies and gentlemen, good morning and welcome to Dental Corps' first quarter 2023 results conference call. Please note that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key and the number one on your telephone keypad. If you would like to withdraw your question, please press star one once again. I would now like to turn the call over to Mr. Nate Chapulia, Chief Financial Officer of Dental Corps. Please go ahead, sir.
spk11: Thank you, operator, and good morning, everyone. Welcome to the Dental Corps First Quarter 2023 Results Conference Call. I'm joined here by Graham Rosenberg, our CEO, and Guy Meany, our president. Before we start, we would like to remind you all that 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 Dental Corp 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, business prospects, and opportunities. Such statements are made as the date hereof, and Dental Corp 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 cause results that 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. Without limitations, our MD&A and our earnings press release issue 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 and the events and presentations section. I'll now turn the call over to our Chief Executive Officer, Graham Rosenberg, for opening remarks. Graham?
spk09: Thanks, Nate, and good morning, everyone. We're pleased to be here with you today to review Dental Corps' recent developments, as well as our financial and operating results for the three months ended March 31, 2023. For today's call, I'm going to share a number of those developments with you, and I will then hand the call over to Nate. who will discuss our financial results in detail, after which I will provide forward-looking remarks about how our business is trending. As a reminder, Dental Corp operates in a highly recurring essential healthcare industry that is cash pay, resilient through economic cycles, and insulated from disintermediation by technologies. Importantly, dental expenditures have experienced strong relative growth during periods of higher-than-average inflation. Accordingly, And in the context of the current macro environment, we believe that Dental Corp's favorable cost structure, high margins, low commodity risk, and minimal capital expenditures provide support for the company's continued delivery of balanced, double-digit growth in the $18 billion Canadian dental industry. Our confidence in the business is validated by our first quarter 2023 results and strong outlook for the second quarter and the remainder of the year. I am delighted with our results this quarter, during which we delivered record performance across the board. As you can see on slide three, this performance has been made possible by our deep and diverse network of 1,800 plus dentists, 2,400 plus dental hygienists, and 5,500 plus auxiliary dental health professionals across the country from coast to coast. Our healthcare professionals continue to deliver the highest standard of care during the reporting period, supporting more than 2 million active patients and managing more than 5 million patient visits annually. You'll see that we completed our first quarter in March 31, 2023, with approximately $1.4 billion of LTM pro forma revenue and $260 million of pro forma adjusted EBITDA for the same LTM period. Moving on to slide four. you'll see that we continued with our balanced approach to drive sustainable double-digit growth, and we intend to continue growing our business organically through a creative M&A and by driving overall business efficiencies and operating leverage over the medium to long term. This is a program that we have finely tuned over the past decade, and we believe that we are able to adapt to any short or longer-term shifts in the broader economy. With respect to M&A, We continue to leverage our leadership position in the Canadian dental industry by acquiring six practices in the first quarter for a total consideration of $35 million. These practices are expected to generate $5.5 million of pro forma adjusted EBITDA. During the quarter, and as part of our program to rationalize certain non-core standalone specialty practices, we completed the sale of 13 standalone orthodontic practices. We anticipate that the sale of these assets will have a positive impact on overall adjusted EBITDA margins allowing us to allocate resources to higher growth areas of our business. We are also encouraged that in the first quarter and so far in the second quarter that practice valuations are beginning to decline in Canada and as access to financing tightens for many buyers across the industry. We remain well positioned as a partner of choice and a capitalized partner, well capitalized partner, for independent dentists and will continue to be judicious about the practices we require. On slide five, you'll see that we continue to convert a high percentage of our EBITDA into free cash flow and without acquisitions have the potential to drive our leverage down by a quarter to a half term per annum to the mid to high ones over the medium term. On slide six, I'm pleased to report that our business once again delivered double digit growth with first quarter 2023 revenue of $358 million, up 28% over the same period in 2022, and adjusted EBITDA of almost $66 million, up 31% over the same quarter last year, with adjusted EBITDA margins coming in at 18.3%. We are very encouraged that same practice revenue growth was approximately 8.5% for the quarter, driven by a robust rebound in patient visits and a contribution of fee guide increases all of which generated 11.2% same practice EBITDA growth. During the quarter, we also delivered 19.3% growth in the EBITDA of acquisitions completed in 2022 over their comparable performance, driven by our purchasing efficiencies and the rigor of our integration program, including the implementation of our robust technology stack. The outcome of all of this was a strong adjusted free cash flow for the quarter of approximately $33 million compared to $30 million in the first quarter of 2022, despite increased financing costs driven by historical rate increases in the last 12 months. 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 to questions. Nate?
spk11: Thank you, Graham. We believe that our first quarter results demonstrate the strength of our underlying business. On slide 7, revenue for the three-month period ended March 31, 2023 was $358.3 million, compared to $280.2 million for the corresponding period last year, representing an increase of approximately 28%. This increase is attributable to our strong acquisitive and organic growth, including a positive contribution from orthodontic insourcing. As you can see, we reported first quarter adjusted EBITDA of approximately $65.6 million compared to $50.1 million in the same quarter last year and reported first quarter adjusted EBITDA margins of 18.3%. Same practice revenue growth was 8.5% over the same period in 2022. Looking forward, we continue to be optimistic about our ability to grow our business through acquisitions and organically. With respect to M&A, we completed the acquisition of six practices in the quarter, expected to generate $5.3 million in pro forma adjusted EBITDA. Turning to slide eight, you can see that our net leverage and liquidity as of March 31st, 2023. On a net debt basis, we were approximately 4.4 times levered at the end of the first quarter, down from 4.5 times at the end of 2022, delivering on our commitment to deleveraging. We ended the first quarter 2023 with liquidity of $785 million, comprised of $111 million in cash and $674 million in undrawn debt capacity under the senior debt facilities. For the first quarter in the last 12 months, adjusted free cash flow was $33 and $131 million respectively, supporting our strong balance sheet position. We also locked in a significant portion of our debt costs in the quarter by executing an additional $300 million of interest rate swaps. Approximately 75% of our bank debt exposure, or $800 million, is now carrying a fixed CDOR rate plus margin for an all-in cost of approximately 6.4%. The remaining quarter of our senior debt facilities remain on a variable rate. Overall, we are very pleased with our first quarter 2023 results. We increased organic growth in part through our insourcing efforts, creating ongoing operating efficiencies, close accretive acquisitions, and continue to develop our acquisition pipeline. With that, I'll turn the call over to Graham to provide some closing remarks. Graham?
spk09: Thanks, Nate. Turning to slide nine. We remain highly confident about our business prospects going forward. Fiscal 2023 is off to a very strong start, with second quarter revenues expected to grow by 9.5% to 10.5%. Over the same period last year, with same practice revenue growth of 5% to 6%, driven by robust patient visits and contribution from fee guide increases. During the second quarter of 2023, We expect to acquire approximately $4 to $5 million in pro forma adjusted EBITDA after rent at acquisition multiples consistent with the first quarter. We expect adjusted EBITDA margins to remain consistent over the same period last year with solid practice-level performance offsetting the significant investments we have made in our marketing and talent teams and the upgrade to our core information technology systems. We once again expect to deliver double-digit revenue and adjusted EBITDA growth for the year with corresponding practice margin expansion. while generating strong free cash flow and deleveraging of the business through our balanced approach to growth. With respect to our strategic review process, the Special Committee conducted an extensive review and evaluation of several alternatives available to the company. The Special Committee provided its final report to the Board on May 11, 2023, and based on the company's strong outlook and prospects for future growth, as well as the fact that none of the alternatives proposed by third parties reflected the fair value of the company, it was recommended that it would be in the best interest of the company, giving due regard to the interests of the company's shareholders and other stakeholders to continue to pursue its existing business strategy, which contemplates the achievement of balanced growth through organic, acquisitive, and balance sheet delivery initiatives under the leadership of the company's existing senior management team. Today, we also announced acceptance by the TSAC's of Dental Corp's notice of intention to make a formal cost issue, a normal cost issue of it. Pursuant to the NCIB, Dental Corp intends to purchase for cancellation up to 3.5 million subordinate voting shares in the capital of the company representing approximately 2% of Dental Corp's issued and outstanding subordinate voting shares as at May 12, 2023. We believe that the market price of our shares do not, from time to time, reflect the underlying value of our business and growth prospects. And in the right conditions, we believe that the repurchase of our shares under a share buyback program could be opportunistic and an appropriate and desirable use of our available cash. The decision to repurchase any of our shares will be measured against our other organic and inorganic growth opportunities and leverage guidelines and our overall objective of creating long-term value for all of our stakeholders. 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?
spk00: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up question. We will pause for just a moment to compile the Q&A roster. And we will take our first question from Michael Cherney with Bank of America. Your line is open.
spk10: Good morning. Congratulations on the strong quarter. Maybe, Graham, if we could dive in on the valuation on M&A. I think you took a very prudent approach pulling back on some of the deals given the financing environment. That being said, it was a push and pull in the fact that eventually valuations were going to come through. especially as we move forward, what are you expecting to see from ongoing changes to valuations and how does that impact that debate of growing, but growing prudently given the current financing environment?
spk09: Right. That's a great question. So look, we have stated our desire to continue to grow through a balanced approach across both organic and inorganic initiatives. We are pleased to see that acquisition multiples have come down 27% over last year. I think, you know, we continue to evaluate against the returns on invested capital that we're able to drive from our acquisition activity. You saw that despite higher multiples last year, we were able to drive close to 20% increases in EBITDA over the comparable period. for acquisitions we completed last year. And, you know, we continue to feel good about our ability to drive strong returns on invested capital through our Playbooks for Growth technology stack and the strength of our integration platform when we make those acquisitions. So, again, you know, a balanced approach. We feel that, you know, $5 million plus a quarter for now is the right number. and we have the ability to flex up and increase. Apropos, last year we acquired close to $50 million of EBITDA. $55 million. Nate's correcting me. Apologies. $55 million of EBITDA through the year and integrated it flawlessly and were able to generate those strong results, you know, 20% up again over their comp results from last year. So we'll continue to evaluate those opportunities in the context of you know, the overall macros, our cost of capital, and our other uses of cash.
spk10: And thanks. And then just thinking about the strategic review, obviously, anytime a company goes through that, you think through everything. As you go forward with the consistent strategy, anything that you plan to change on the operational side that came out of the strategic review, any other learnings that you had that allow you to establish the go-forward pathway as the strong standalone company you are?
spk09: No, it's pretty much status quo. We did note that we sold certain standalone specialty practices, primarily orthodontic practices in the quarter, and we will continue to refine our strategy to focus primarily on general practices where we have the right resources, playbooks for growth, and obviously represents a substantial majority of our business.
spk00: We'll take our next question from Sahil Dhingra with Royal Bank of Canada. Your line is open.
spk06: Thanks for taking my question. This is Sahil for . My first question is on the orthodontic clinics that you have decided to divest, what was the rationale behind that and how much revenue were they contributing on the pro forma basis?
spk11: Yeah, so the purpose of the divestiture was really just, as Graham mentioned, to focus on the core business, which is really supported by our general practices. The divestiture ultimately, again, drives accretion in our margin and allows us to focus our resources on our general practice, which, again, is 95% plus of our overall business. As far as the revenue contribution of those practices, that's not something that we have disclosed.
spk06: Okay, and then my second question is on the capital allocation. How would you prioritize between deleveraging and what's the share buyback that you have announced today?
spk11: If you look at the quantum of the shares, so roughly 3.5 million shares, that are under the NCIB and the volume in which that we would potentially acquire over a period of time, it would be a nominal impact to our overall leverage and have a nominal impact to our ability to continue to execute both on our organic and inorganic growth strategies.
spk00: And we'll take our next question from Stephen McLeod with BMO Capital Markets. Your line is open.
spk04: Thank you. Good morning, guys. Just on the strategic review, just wondering if you were able to give any color around sort of some of the other alternatives that you reviewed and why they didn't work.
spk09: We looked at every option that you would expect. It was a comprehensive review across the board and have concluded that based on the outlook for the business, the strong performance in Q1, positive outlook for Q2 and the rest of the year and beyond, and the fact that most of the views that we had expressed last year around which way the market was going to move, business performance in a clean quarter and a clean operating environment versus where we were over the last two years since going public. and the performance of business coming through, we decided to maintain status quo and continue to pursue our strategy of growth in a balanced way.
spk04: Okay, thank you. And then maybe just secondly, can you talk a little bit about your margin outlook on a consolidated basis for the full year? I know you talked about practice level margins increasing, but You also noted some infrastructure investments. So just trying to get a handle on sort of where you expect reported consolidated margins to be maybe this year and then over the long term where you expect them to trend towards.
spk11: Yeah, it's a good question. As far as the second quarter outlook on margin, we noted that consolidated margin would remain consistent with what we saw in the prior year. Again, priority was roughly 18.2, 18.3%, so really consistent with what we've seen over the last couple of quarters here, with the expectation that that's going to continue through the balance of 2023. with continued slight margin expansion as we roll through and start getting the benefit of the operating leverage on the significant investments that we've been making in our corporate infrastructure, specifically, again, our marketing teams and strategies, as well as the significant investments in our underlying technologies and systems.
spk00: We will take our next question from Daryl Young with TD Cowen Securities. Your line is open.
spk03: Hey, good morning, everyone. First question just around the ortho asset sale. I wanted to clarify that that has no implications for your Invisalign program. The Invisalign program would be on the general dentist network.
spk09: No, it does not. We have a very healthy and robust program of insourcing, including beginning with our implant programs, and it has no impact whatsoever.
spk11: And just to build on that, with the focus on our general practices and specifically the insourcing, again, of the orthodontic acceleration programs and the implant programs that we're working on today, that is the core focus, where the standalone specialty practices obviously were not core to our go-forward strategy. So no impact.
spk03: Got it. And then just in terms of the current rate environment, Does this open the door potentially for maybe a shift to organic build-out of practices as opposed to acquisition or would there be any focus on that or expanding existing practices through new exam facilities?
spk11: It's a great question. Given obviously the significant white space that still remains in the Canadian market with the consolidation only called in roughly that 6% to 7% range. Our acquisitive strategy, we remain quite bullish on it and continue to remain very bullish on it with 2023 to experience called 20 to 25 million of acquired equity. And again, we feel really good about that in the long term as well. As far as a de novo build-out strategy, that's something that, of course, we... we do continue to explore and continue to build that capability and could be an arm or an additional arm of growth for us that we haven't seen to date.
spk00: We'll take our next question from Gary Ho with Desjardins Capital Markets. Your line is open.
spk07: Thanks. Good morning. My first question for Graham, to the extent that you can comment on it on the strategic review, were most of the interested parties maybe looking to participate in buying a stake in the company? So, Al Catterton, yourself, kind of rolling your stake, or were there kind of larger players that could buy the entire franchise? We considered all options and can't get into specific detail. Okay. No, that's fair. And then the second... Sorry, the second question, just on the new same store adjusted EBITDA growth that did outpace the same store sales growth. That's good to see. Should we expect that looking out and see continued EBITDA margin expansion as a result?
spk11: If we look to the economics of a dental practice, roughly 75% of the costs in a dental practice are variable. So what we're seeing here is given the strong organic growth performance, we're seeing the leverage on the fixed cost base, which we were very pleased to see. As we continue to grow the practices from a top line perspective, yes, expectation is to continue to see margin expansion at the practice level. Of course, that supports our continued growth and investment and our corporate infrastructure, which we'll see the operating leverage start to come through the balance of 2023 and into 2024.
spk00: We'll take our next question from Justin Keywood with Stifel. Your line is open.
spk12: Hi, good morning. Thanks for taking my call. Just on the strategic review concluding, I'm wondering if this perhaps eliminates a bit of an overhang for M&A in acquiring new practices. If that was a consideration at all for selling dentists given that the ownership may have been changing hands.
spk11: You know, I think as far as the impact on selling dentists, it's not something that we experience in our discussions really since the beginning of the strategic review. We obviously operated over the last 11 years. under many different ownership structures and capital structures and have been able to successfully execute on both, again, our organic and inorganic strategies. So no real impact expected from either positive or negative from the conclusion of the strategic review. Ultimately, it's business as usual and continue to execute upon our $20 million to $25 million of equality, but that is it.
spk12: Understood. And then just a clarification on the NCIB, I think in the opening remarks it alluded to some discretion on when to utilize, but within the NCIB language there's also an automated feature. So just hoping to clarify if it is automated or if it is by discretion for dental.
spk11: It's both automated as well as by discretion, depending on the period in which it is being used. So if it's in a blackout period, then the automated feature would come in.
spk00: We'll take our next question from Andrew Lino with National Bank Financial. Your line is open.
spk08: Hi, good morning. Thanks for taking my questions. I'm going to leave the strategic review alone and ask a different kind of questions. But earlier recently, there were some, the federal government in Canada, they introduced a new dental plan and several industry bodies expect new patients following the implementation. So I was wondering if you can talk a little bit about it, like what are your thoughts on this? And I might have a follow up depending on how you answer.
spk01: can you just repeat the last half of that question are you just one on general thoughts on the dental benefit program yeah i mean there are new if you look at the canadian dental association and the federal government as well i mean they expect new patient influx just kind of how do your views kind of square against those expectations yeah i think the number they quote is about nine million canadians um so as as as we've stated in the past about 75 percent of canadians have Dental benefits, primarily employer-sponsored, you know, 85-plus percent of Canadians see the dentist at least once a year. So as a country, our population is extremely compliant and avid, you know, visitors to the dentist. So I think that number is probably a little overstated. I think that number is just based on those who don't have employer-sponsored dental benefits and they're assuming all of them. don't see the dentist today. I think a good chunk of Canadians, whether or not they've got benefits from an employer, will still see a dentist given its essential nature of care. I think those who would avail themselves of the program are probably in more predominantly at-risk communities, both geographically and socioeconomically. And so it'll be interesting to see just how often or to what degree utilization is increased. As we've stated also in the past, every province today has dental benefits subsidy programs for at-risk uh you know low-income children senior communities and you don't see extremely high utilization for a myriad of complicated reasons so again i think the estimates are probably overstated but from our perspective the more canadians you can access oral care the better for everyone particularly those who don't have access today you know we're encouraged by the support the government is putting into this program but what we've stressed including in our discussions with those who are architects of the program is the need for government to ensure that we've got sufficient amount of dental professionals to take on what will likely be more patients seeing the dentist over the next several years and they've committed obviously to addressing that as they always obviously need to address just broader broader health care professional needs that we have here in the country so all to say is where our expectations are probably a little bit more muted but generally we're encouraged to see more Canadians be able to see the dentist.
spk08: That's great. Thanks, Faye. And my other question is that flipping through the presentation, there's a stated target of same practice growth of 4 plus percent. I was just wondering if you can talk a little bit about that in that if we're expecting price increases this year at 4% and likely somewhere in that range next year, can you help me kind of bridge to volume growth if we're looking at only 4% plus for overall same practice? Thanks.
spk11: Yeah, I know, of course. So it's really the movement over the last couple of years at the time of IPO, what our expectation was a 3% plus. Obviously, given the environment that we're in today and the fee guide increases as well as the volume increases that have returned, our expectations are have increased to that 4% plus range. So if we think about it, again, don't have a crystal ball as far as what the future holds, but ultimately can expect that 4% plus to break down roughly one third between price, one third between increased volume, and an additional third that's going to be driven by our insourcing initiatives, specifically our orthodontic acceleration program, as well as the rollout of our implant and sourcing programs, which we expect to start seeing by the end of the year.
spk00: We'll take our next question from Tanya Armstrong-Whitworth with Canaccord Genuity. Your line is open.
spk05: Good morning, gentlemen. On the competitive landscape, now that it's been some time since the ultimate 1-2-3 dental merger was announced, are we seeing more competition from that player yet?
spk11: No, we aren't seeing any more competition, frankly, again. As far as the market, it continues to be, again, highly fragmented. We continue to have the ability to execute upon the acquisitions that we feel to be most opportune and have seen no change and no impact from that merger.
spk05: Okay. And then a quick follow-up. Who are the buyers of these standalone specialty practices when you're selling them? Are they your competitors or are they someone completely different in the field?
spk11: They're not competitors, but we obviously can't disclose who we sell them to.
spk00: And we'll take our next question from Douglas Meem with RBC Capital Markets. Your line is open.
spk02: Yeah, thanks. I joined a little late. I guess my first question is on these ortho sales. recommended I believe as part of the strategic review. Can you at least tell us if the multiple that was paid by the buyers was above or below or in the range of where you're buying practices right now?
spk01: Just to clarify, the sale of those non-core standalone specialty orthodontic practices were unrelated to the strategic review. So there's no correlation there. And no, we're not going to disclose the multiple.
spk02: Okay. And the second question is maybe for Graham. Just as we think about this process, did the nature of the discussions change from the point that you announced the strategic review to when it actually ended given what was happening in the broader markets? And why do you think there was such a big disconnect at the end of the day between what you think the company is worth and what these various alternatives were contemplating?
spk09: Look, I don't want to get into too much specificity, but as you know, the financing market overall had a significant deterioration from November through to today. And that along with other factors, you know, clearly not our performance given the strength of Q1 and the outlook for Q2, et cetera. It was more extraneous factors that may have impacted it, but I can't get into more specifics. But you do know, and you obviously, you do know that the financing market has significantly deteriorated over the last six months.
spk00: And there are no further questions at this time. I will now turn the call back to Mr. Graham Rosenberg for closing remarks.
spk09: Thanks, operator. Appreciate everybody being on the call. We're delighted with the strength of Q1 and the outlook for Q2, which we see continuing into Q2 and beyond for the rest of the year. We continue to execute on a balanced approach to growth, both organically, acquisitively, and balance sheet optimization by deleveraging.
spk00: and um look forward to reporting on our results at the end of next quarter and ladies and gentlemen this concludes today's conference call we thank you for your participation you may now disconnect
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