Fourth annual TD Cowen Healthcare Conference. My name is David Kwan. I'm one of the TD Cowen analysts that's based in Canada. With me, I've got the senior management team from dentalcorp, the largest dental services organization in Canada, with over 500 dental locations across the country. I'd like to welcome Chairman and CEO Graham Rosenberg, and CFO Nate Tchaplia. Gentlemen, first off, I think some people here might be new to the story, so maybe if you can just give us an overview of the company. Sure. dentalcorp is, as David said, the largest provider of dental care services in Canada. We operate in a CAD 20 billion market. The market's only 6% consolidated. We have about 3% and change of the market, as compared to the US market, which is 25%-30% consolidated. Canada was a little bit slow to the mark, and we certainly were a catalyst for growing the market and driving consolidation. We acquire practices that have circa 2-2.5 million dollars of revenue, four- to five-hundred thousand dollars of EBITDA, integrate them into our systems in our back office. Drive growth through driving patient volumes, growth in patients, and driving price and revenue per visit, by insourcing services and providing more comprehensive services than those practices were doing previously. Our headline growth for the long term is gonna continue to be double digits on both revenue and EBITDA, and free cash flow per share, most importantly, to us, that is. That's driven both by acquisitions and by organic growth, margin expansion, and just consistent repeatability and implementation of our playbooks for growth. Want to add anything, Nate? No, I think that covers it all. Thanks, thanks, guys. So you talked about the Canadian and the U.S. market, for example, one of the things was how much of the market has been consolidated. Can you maybe talk about some of the other key differences that you see, whether it's, you know, structure, the payment structure, for example? Right ... stuff like that? So the main structural difference between Canada and the U.S. is that the Canadian market is 100% cash-pay-at-time-of-service. So our contract and our commercial relationship is with our patients direct. Our patients do have insurance, but it's generally provided to them by their employer, so their employer-sponsored healthcare plans, which cover pharmaceuticals and physiotherapy, psychotherapy, and so on, and optical, but dental is included in that. So roughly 60% of our revenue is covered by insurance indirectly to the patients; the rest is out-of-pocket to the patients. But as far as we're concerned, when a patient visits our practices, it's 100% cash-pay-at-time-of-service. And so that's a big differentiator between us and the U.S., whereas in the U.S., commercial relationships are generally with the HMOs and the insurance companies, and then you get, you know, you get in-network, and you're sent, you send patients accordingly, all your patients are part of a network. So we have none of that. It's all cash-pay-at-time-of-service, which we believe makes it a very attractive market, apropos taking your pet to the vet in the U.S. I think another difference is maybe the activity of private equity in the space. It's been, I think, a lot more active in the U.S. than in Canada. Why do you think that is? And maybe do you see private equity getting more active in the Canadian market in the coming years? Yeah. So look, as I said earlier, the American, the U.S. market is a lot more mature. Consolidation has been going on in the market for at least the last 30 years. In Canada, it's definitely more recent. We came on the scene 12 years ago. Within 2.5 years, we had private equity investors. We then did a recap 4 years later with new private equity investors out of the U.S. And there's a couple other players that attracted private equity money since then. So it's a maturation of the market and scale- Mm ... which has obviously caused U.S. private equity to be more interested in the U.S. market. But they are particularly interested in Canada now, given our success and given the growth opportunities and the underpenetrated market. Right. And you talked a little bit about it, about one, if you want to call it, competitor. Yeah ... in the marketplace. Can you talk about the competitive dynamics that you're seeing in the marketplace? Yeah, look. We are not. We have no hindrance from them in terms of hitting our annual acquisition program targets, whatever they may be. We've continued since day one, when I founded the company 12 years ago, continued to garner a disproportionate share of the acquisitive growth or acquisitions that were available, not necessarily to trade between dentists, which the majority of practices are, that come up for sale every year are traded between dentists. But as a consolidator, we've always been able to attract our disproportionate share of deals, and that's because of the consistency and the ease of use of our value proposition to those vending dentists. Can you talk about the nature of the M&A market in Canada? Yeah. Like, roughly say, how many dental practices would be coming up? How many would you kinda know about- Yeah ... and from that standpoint? Thanks. Yeah. Yeah. As far as the direct number, very difficult to say. What we can comment on is exactly what Graham outlined, is the plurality of deals do take place from individual dentist to another dentist. But we do see, and we do have relationships across the country in every single major market, where our business development team have boots on the ground, really educating the dentists as well as the local market participants on who we are, what we do, and why partnership would make sense for them. So I would say that we do have access to and visibility to all deals and all partnerships that would be of interest to us. And one thing to note as well is as far as the size dynamics, I think you'd be hard-pressed to find another industry that's CAD 20 billion+ in size, where you have the market leader having such a dominant position on the rest, being 50% larger than the number two, and frankly, larger than the next 10 competitors on a combined basis. Which is why, from a private equity perspective, we do have that leadership position, and we continue to grow it year in and year out. What would you say are some of the key drivers from an M&A perspective? Like, why would a dentist decide to sell? I think you kind of talked about it, but, like, what differentiates you from, say, like, 123D entists. Yeah ... kind of your other key competitor in the market? Absolutely. So if we look at what is our target, our target audience, the dentist that joins our network is in their mid-forties. They have a very long, long, long career ahead of them, continuing to work with us and building the practice. We focus on primary and secondary markets with retail-style environments, where we're able to continue to grow those practices. Why do they join us? It's really the investments we've made in our infrastructure to really relieve them of that administrative burden, to provide them with the playbooks for a continued growth and help them focus on what they do best. That is really the investments we've made in our people, our technologies, and our know-how, and that's really what separates us from the rest, is our continued development, our continued investment, and continued growth. That has been really developed over the last number of years, and as we look forward into 2024 and beyond, we're gonna start seeing the significant benefits and leverage on the technological investments that we've made. Cool. Great. I mean, are there any questions in the room? In terms of still, so I guess, sticking on the M&A front, can you talk about maybe what you're seeing in the market? And, you know, we've seen some pretty big swings in the valuation multiples that you guys have paid and, and what's been paid out in the market over the last few years. Can you talk about that dynamic, what, what's happened there? Absolutely. So as we know, and discussed, most of the practices and most of the transactions do take place dentist to dentist. They're highly reliant on the professional lending groups across the banking system in the Canadian market. As such, when interest rates have gone up, that has had an impact on their ability to access financing and access financing at the levels that has been available in the past. The dentist acquirers now being asked for equity participation, and the math from a valuation perspective didn't work out as it did in the past. What ultimately has happened is we've seen a decline in valuation and a slight decline on the demand side from the purchaser, which ultimately we have been the beneficiary of. But from a valuation perspective, we're consistent today to where we were on a pre-COVID basis, and that is where we believe those valuations will be in 2024 and beyond. But I think it's important to note that, you know, when we started the business, well, 12 years ago, valuations were in the 5x range on an EBITDA basis. Today, they're in the 7x range. But it's important to note that we've continued to target a 15%-18%+ return on invested capital when we make an acquisition, like naked without leverage. We have improved our playbooks, our integration, our ability to garner synergies, and our ability to drive growth in year one, post-acquisition. And so our ability, even at a higher multiple, you know, 40% higher than, say, 10 years ago- Right ... but our ability to drive those higher returns, our returns on invested capital at the end of year one and onward are higher today than they were back then. Right. Because we have the playbooks, because we have the scale, and we're able to bring, not only purchasing synergies to bear, but labor efficiencies, patient engagement, driving more throughput at the patient level and impact, so. That kind of ties into my next question, Graham. So you—I think you talked about kind of the average size of the acquisition that you made, you know, roughly CAD 2.5 million. And as it relates to post-acquisition, can you talk about some of the things that you do to bring that multiple down? I know one thing that you've talked about with me and others is, like, for example, looking consumable side- Yeah ... like some of the low-hanging fruit, but also, you know, over the next few years, some of the stuff doesn't happen right away. You know, can you talk about what do you do post-acquisition? Yeah. So, like, so day one, we're able to drive savings on the supply side, and lower the overall cost of operating by somewhere between 10% and 15%, from an EBITDA margin perspective, okay? So if our EBITDA margins would require around 22%, we're able to expand them to 24% and change out of the gate, just on purchasing and getting some back-office efficiencies in terms of, you know, our accounting, dealing with all the legal, and just some headcount management. And then on the way through, really driving more visits per patient, growing the patient base- Mm-hmm ... taking price, and providing more comprehensive services. So patients today, as opposed to even 10 years ago, patients want a one-stop shop. They want comprehensive care taken, you know, on their behalf by their dentist. They don't want to be sent from one specialist to the other. Mm-hmm. They want their dentist to do basic stuff, including orthodontic treatments, implant treatments, which have been a beneficiary of both technology advancements, where general dentists can do that kind of work, whereas before, many years ago, only orthodontists could. So Clear aligner therapy is leveraging technology scanners to be able to provide those services. ... particularly for the late teens and adult population. Mm-hmm. Then on aging population basis and technology, again, implants, right? So things like that have become what fillings and crowns and bridges were 20 years ago. Right. We're training our dentists to be able to provide that more comprehensive treatment, driving more patient satisfaction. So when you look at our numbers, the average patient visits a practice somewhere around 2.1 times a year before we partner with them. After we partner with them, we're in the 2.3-2.4 times range. So that's almost a 20% lift. Yeah. Okay, 15%-20% lift, plus savings on supplies, plus providing more comprehensive services and adding more patients through our marketing protocols- Mm. and playbook for growth. So that's how we drive it. Can you talk about you kind of touched on it, like your partnership with Align on, on Invisalign? Yep ... for the clear aligners, the dental implants, I think are two of the key opportunities that you guys have identified from an insourcing perspective. Can you talk about where you are right now with those opportunities and where you see them to go as an overall component of your business in the next, say, 3-5 years? Yep. As far as Invisalign, it's a program that we've been rolling out for the last number of years. We're in approximately 300 locations in our network. But what's important to note is, of those 300 locations, not all of them have had multiple years under their belt. They've just been coming in over the last, call it 12+ months. Meaning that there's significant opportunity and continued lift, continued upskilling and training, and ensuring that they're going to be able to provide again those services to the patients. The rollout of the technology and the scanning technology has been put across all of our practices. So as far as the capital spend, that's all, that's all been completed. From a total market size and what we're seeing from the Invisalign, we're run rating at approximately CAD 40 million-CAD 50 million a year of incremental revenue provided from that clear aligner therapy. From a market sizing, if you look at Align, they say roughly 30% of the population is eligible for some type of clear aligner therapy. If you look at our total number of patients, 2 million+ patients, that is a very sizable opportunity for us as we continue to grow. The implant insourcing program is in its infancy. We've run a number of pilot cohorts where the surgical training as well as the structural changes in the practice have been put through. Really, really happy with where things are at, but this is a little bit of a longer, a longer project. The surgery and implant placement is a lot more hands-on. It is surgery versus driven by the algorithms as well as the technology from Align. So something that will take a little bit more time, but something, if you look at the tailwinds of the aging population in Canada, and frankly, across North America, a very significant opportunity and, and what will be the standard of care. I guess on the dental implant side, you had an announcement last week, you had a change on the board, bringing in Kevin Mosher. Can you maybe talk about what he might be able to bring to you guys as you look to grow that part of your business? Yeah, look, he's going to certainly bring mentorship and, you know, work closely with us on the protocols that were so successful at ClearChoice, which is the largest provider of implants in North America, right? And we think he can be a really value add there as an industry veteran. That's great. You kind of talked about this on the organic growth side—some of the stuff that you do, whether, for example, on the insourcing. Another key component of that is the dental fee guide increases. We obviously, I think, just got them for 2024. Can you maybe talk about how you look at organic growth going forward, and maybe looking even at the past year? Obviously, it was quite elevated, so how you see those dynamics, you know, how they played over the last year in particular, but kind of going forward as well. Yeah. So if we look at the dental fee guide in Canada, which is a significant benefit to our industry. Look back 30+ years, and you're going to draw a line of CPI inflation, you're going to draw a line of the dental fee guide increases on an annual basis, and they're in lockstep with one another. The only difference is there's a bit of a year lag, and the dental fee guide in one year is always set with reference to the prior year's inflation. So looking at 2023 in the rearview here, 2022 is obviously a very significant inflation year. So we benefited from an outsized price increase beyond the, call it, 1.5%-2%, that historically has been the rate of increase. If we look at 2024, CPI has been in and around the range of 3.1%-3.2%. The expectation and what we received is a fee guide increase in and around that level. But what we're able to drive from an organic growth perspective is that incremental lift, and what we've been talking about as far as the insourcing initiatives and driving the additional volumes, that all makes up an additional, call it, roughly 100 basis points. So as we look to 2024 and beyond, how we're looking at the business and how we're modeling the business is in that 4%+ range, which is approximately, again, that 3% price plus that incremental 100 basis points of all of that incremental value we're able to drive. Thanks, Nate. The Canadian government is kinda soon to be rolling out the new federal dental programs targeting lower-income Canadians and I think seniors as well who don't have access to dental coverage. Can you maybe talk about some of the details that you've seen, including kind of pricing, reimbursement, and overall, just how you see that impacting your business? So- ... There are. We think it's net neutral to our business. There are a lot of folks that don't have any kind of coverage, that are retired, so they don't have that health insurance from their employers, and they're 100% out-of-pocket. So we see it as a catalyst for some of those, many of those to receive dental care. We think we're very well positioned, given that the coverage of our practices is within 18 kilometers of 80% of the Canadian population, right? So we've got really nice coverage. We think we'll be able to attract more than our fair share. At the same time, there are some folks that have, you know, employer-sponsored coverage that are under CAD 90,000 of income, which is the current baseline. So some of those may choose to revert to the plan, or the employers may decide to cut back for those folks their insurance coverage. So that'll be a bit of a hurt, but we think net-net, we're gonna be neutral to positive. Remember, this is a reimbursement for services, and we're able to charge full fees for those services. And those folks, just like they get reimbursed under their current employer-sponsored plans, will get reimbursed by the government. Right. So, through the same mechanisms, one of the insurance companies in Canada is acting as an intermediary and as an administrator of that plan. So nothing changes from a payments perspective, from a point-of-sale perspective. It's all just pretty straightforward. So we think it's an opportunity, not necessarily a threat for us. Right. Are there any questions? Do you want to add any color? No. So- Are there any questions in the audience? Okay. Maybe some more, some questions here for Nate, more financial related. Just EBITDA margins. Oh, you want more, Graham? I can count. Okay. I'll let you either of you can answer these questions. Okay. Nate, just looks like he was itching to get some more speaking time. Just EBITDA margins have been flattish for the last couple of years here, I think primarily due to cost inflation, as well as some growth investments that you guys have been undertaking, particularly in head office. So can you maybe provide some more details on those two dynamics and how you see margins progressing in the coming years? Yeah, absolutely. So if we go back to the fee guide and price setting. So 2023, we had one fee guide increase, which compensated for the significant inflation we received in 2022. And now in 2024, we're going to be receiving an outsized increase for the inflation that we experienced in 2023. So ultimately, we've had two years of significant inflation, and now we're catching up to the two years of inflationary price increase. So there's a bit of a lag. So now that the inflation curve is flattening out and price is equal to inflation, we're gonna now start seeing some margin expansion come through at the practice level over the last two years of cost increases. As you noted, there's also our corporate infrastructure spend. We've made significant investments over the last number of years in our technology systems, as well as our teams, which we're now going to start seeing flatten out, whereby the inflationary or the cost increase on our corporate infrastructure will be inflationary and less than the total growth of the business. So if we look forward, expecting over the next, call it, 3+ years, if we split the two, roughly call it 100 basis points of margin expansion, that will come out of the leverage on our corporate infrastructure, with another roughly 50 basis points of leverage that we're going to be able to garner from the margin expansion from the practice level. Can you talk about maybe some of those investments that you made in the corporate office? I think there was a lot of IT-related investments. Yeah. And how you—like, looking forward, you know, when should we—how should we think about the growth of the cost base? Like, you know, is it more inflation-based related? You know, how much more do you think you can grow based on a lot of the investments that you made so far today- We can- Before we see further disruptions. ... We can double the business without any material investment in our corporate infrastructure, right? Which drives some of the margin that Nate speaks, spoke about. We don't foresee much other than, you know, a little bit of wage inflation as we go through the piece. Maybe some minor non-wage costs here and there, but we're done with our corporate spend. So the increase in corporate spend is primarily technology systems, and some training to support a doubling of the business from where we are today. For those of you who are new to the story, we generate around CAD 1.5 billion of revenue, CAD 260 million in IFRS, but that was about CAD 230 million GAAP round numbers. We expect to double that over the next 4-5 years, just in the Canadian market. That doesn't assume any kind of expansion, either, you know, into the U.S. one day, maybe, or into other private pay verticals in the Canadian healthcare space. Right. Last week, we talked a little bit about this, but you made some management and board changes, including the departure of President Guy Amini. Yep. Can you provide some more details as to the moves there and how you see that impacting your business going forward? So, we've been discussing with Guy the Guy move over the last six and change months. It was mutual. Guy's moved on to do other things, and we have been working over the last six months on integrating roles with me and Nate assuming his responsibilities. Right. Okay. And then at the board level, the decision. Catterton has three nominees to the board. Catterton's our main private equity partner. So when we went public, they negotiated for three nominees. Gino Volpacchio, who ran PetVet, which is one of the largest veterinary consolidation, sorry, in the US, has moved off the board, and Kevin Mosher is replacing. Right. Okay, Bringing on more, you know, dental and industry-relevant expertise to the board. Yeah, definitely seemed there was maybe some strengthening. Mm-hmm. of the board in particular. Absolutely. Capital allocation, obviously, M&A is a top priority for you guys. Yep. Can you talk about how you see that going forward? Last year was kind of maybe, I think, at the low end of your target range for M&A. How do you see that progress, you know, that cadence playing out over the next couple of years? And how do you balance that off of, you know, maybe you have a share buyback in place and other options from a capital perspective? Yeah. Look, our ambition is to achieve self-sufficiency, including funding acquisitions, within the next 18 months. It's about 6-12 months behind where we said we'd be at time of IPO, but that's because our acquisitive growth activity has been a lot higher than we said at time of IPO. We expect to do CAD 30 million+ of acquired EBITDA on average annually over any 3-year period. First year out of IPO, we did about CAD 50 million, then we did CAD 40 million last year. Or this, in 2023, I think the street's expecting us to come in around CAD 20 million. Is that right? This is on a GAAP basis. This year we'll do, you know, CAD 20 million-CAD 25 million plus, and we'll continue to grow, again, at that CAD 30 million on average per annum rate, for the long term. There's lots of opportunity in the market that we wanna operate, with a balanced capital structure and, you know, use our free cash flow to both delever but also fund all of our activities, including acquisitions. Right. And- I think what's important to note as far as our capital structure, as well as... We did readjust our debt package. Mm-hmm. We are 100% locked in fixed rates through to the end of May 2026, paying a roughly 6-6.5% rate. So as far as capital availability, our consistency of interest cost is something that we feel really good about. As far as market position as being the acquirer of choice, that gives us a significant lead on the rest. You took one of my questions. I was gonna ask something on the leverage side. You know, in terms of how do you see your leverage levels? It's, I think, roughly 4.3 or 4.4x in last quarter. Correct. We'll see shortly with your December quarter. You obviously had decreased. You talked about the credit facility. Obviously, you were paying some standby fees, so at least you saved some money there, and you get to stick to free cash flow self-sufficiency. Yep ... for your M&A program. How do you see that leverage profile over the next three to five years? Well, today, leverage is down, come down from around 1x a quarter, for the long term. Maybe accelerate a little bit in the latter years. Again, cash flow self-sufficiency in the next 12-18 months. I think it's really important to note, though, that, given the credit facility that was put in place and the hedging we have, our interest coverage on an EBITDA basis... And remember, our EBITDA is 100% cash. We convert 100% of our revenues into cash within 15 days. Everything else is obviously cash. Right? Sorry, EBITDA is true cash. No big receivables, no working capital, you know, just clean, clean cash, is close to 300%. Yeah. By the end of this year, it'll be close to 400%. You know, yes, leverage is a number. Mm-hmm. But we're not particularly fussed about where our leverage is at today. It's gonna naturally delever by 0.1 plus 0.25, and we're gonna be cash flow self-sufficient in the next 12-18 months. Right. Right. And- At a growth trajectory of double digits every year, both in revenue, EBITDA, and free cash flow per share. And maybe ties, looking at the time, ties into my last question. You know, looking at your growth, how long do you think you can sustain your double-digit growth pace? Looking at the runway, you've got lots of runway in Canada. We're in the U.S. right now. One of the questions I get is, you know, how long, how long will dentalcorp stay in Canada? Will they look to expand abroad? So maybe talk about any interest in expanding into other geographic regions. Look, anything's possible, both in terms of geography and in terms of other private pay healthcare verticals, but we will not do anything which will detract from our being able to execute on a Canadian value and growth story. Which again, is double-digit growth for the long term, like any reasonable forecast period, three to five years. We have no reason to believe that we can't grow double digits for that, for that duration. That's great. Well, thank you very much, Graham and Nate- Thanks, David ... for joining us. Appreciate it. Thank you. Thank you for joining us, in this session. Thank you. Thanks.