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Birner Dental Management Services (NASDAQ:BDMS)

Q4 2012 Earnings Call

March 29, 2013 11:00 am ET

Executives

Dennis N. Genty - Co-Founder, Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Frederic W. J. Birner - Co-Founder, Chairman of the Board and Chief Executive Officer

Analysts

Rimmy Malhotra - Gratio Capital

Marshall Schutt

Operator

Good day, and welcome to the Birner Dental Management Services 2012 Fourth Quarter and Year-end Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chief Financial Officer, Mr. Dennis Genty. Please go ahead, sir.

Dennis N. Genty

Thank you, and thank you, ladies and gentlemen, for standing by and attending our call. If I may, I'd like to take a brief moment to read our Safe Harbor statement.

Pursuant to the Safe Harbor provisions of the Private Securities Litigation Act of 1995, the company notes that statements contained in this conference call that are not based on historical facts are forward-looking statements and, as such, are subject to uncertainties and risks that could cause actual results to differ materially from those projected or implied by such statements. These risks and uncertainties include, but are not limited to, the risk that the actual results for the 12 months may differ from results currently reported; risks associated with implementation of adding incremental dentists; regulatory constraints; changes in laws or regulations concerning the practice of dentistry or dental practice management companies; the availability of suitable locations within its markets; changes in the company's operating or expansion strategy; failure to consummate or successfully integrate proposed developments or acquisitions of dental offices; the ability of the company to manage effectively an increasing number of dental offices; the general economy of the United States and specific markets in which the company's dental offices are located or are proposed to be located; trends in the health care industry, dental care and managed care industries, as well as risk factors as may be identified from time to time in the company's filings with the Securities and Exchange Commission or in the company press releases.

At this time, the company will present a summation of its financial performance for the period stated, followed by a question-and-answer session. Your speaker for today is Fred Birner, CEO and Chairman of Birner Dental Management Services. Good morning, Fred.

Frederic W. J. Birner

Good morning, and thank you, Dennis, and thank you all for joining us. I'm going to go through the fourth quarter results first, and then move on to year-end.

Revenues for the fourth quarter were approximately $14.7 million, up about $0.5 million or about 4%. Our adjusted EBITDA was up to a little over $900,000 or up about 15%. Our net income was down significantly from the prior period in '11 to a negative $27,000. But I think as we described in the release, it was the prior period's numbers were positively affected by some adjustments related to some practice acquisition that we made. Our earnings per share for the fourth quarter was a negative $0.01.

For year-end, our revenues were $62.4 million, down approximately 1.2%. Adjusted EBITDA was approximately $5 million or about 2.4%. Net income was $807,000, down significantly from the prior year, also very much affected by the adjustments that we talked about just a minute ago. Earnings per share was $0.44 in the 2012 period versus $0.85 in the prior period.

I think of significance in this press release, we announced the conversion of the Vantage Dental Implant Center to a regular specialty center, which is well underway at this point. During the course of last year, we lost $1.1 million at Vantage.

We opened 2 new de novo offices during the course of the year, 1 in Tucson and 1 in Boulder, Colorado. We signed a new lease for a new office facility in Loveland, Colorado, that we anticipate opening in the third quarter this year. We are negotiating in a number of other leases for new facilities as well.

Our capital expenditures for the year ended 2012 were approximately $4.2 million. We repurchased about 38,000 shares of stock for approximately $600,000 and paid dividends in 2012 of $1.6 million.

I guess on the positive side of last year. The first 2 quarters were pretty rough from a revenue standpoint. I think there was still some -- just some general weakness in the economy, and we really started seeing that turn around in the fourth quarter. And saw a decent revenue increase, we're seeing that continuing into this year. And we're hopeful, now that we have Vantage behind us, that we're going to see some significantly improved results.

With that, I'll turn it over to question-and-answer.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Rimmy Malhotra.

Rimmy Malhotra - Gratio Capital

Just my first question is -- and then don't take this as a criticism, but regarding Vantage, look, I'm glad you did the experiment. It didn't work out as everybody hoped. What do you think you sort of learned from it, and how does that sort of affect the business going forward? And then obviously, in all my questions, in terms of the remodels, it sounds like there was a significant amount of CapEx going forward. Are you done with the remodels, or should we expect to see more of them? The next question is in terms of the cash that the business produces this year, how do you think that is allocated? Is that growth CapEx, paying down the debt, et cetera?

Frederic W. J. Birner

Well, I guess from a -- maybe starting with the last one, I think our priorities are continuing to -- I mean, we're looking for new facilities, so that's a very high priority. We will continue to spend money on upgrading offices and continue to convert offices to digital radiography. We think it's very important. As it relates to -- Rimmy, what was your -- what was the middle question that you asked? I'm sorry.

Rimmy Malhotra - Gratio Capital

Yes, well, I think you answered 2 and 3 sort of together, which was what were the CapEx plans going forward. But I'll ask a follow-up question, just related to that, which is, do you think that the bank's debt line all will stay roughly where it is, or should we see it increase to fund sort of the expansion and retrofits?

Frederic W. J. Birner

I don't know -- it'll be an interesting thing to see, sans Vantage here, kind of what happens with our internal cash flow. I mean, it's been a pretty significant drain in the last 2 years. And so it's a little tough to call that one. But we're watching things closely. I'm really -- I mean, we're very excited about the business right now. We're really seeing a pretty significant uptick in our daily revenue averages, and we think that's going to translate into some pretty interesting going forward numbers. And I think it will build momentum through the quarters during the course of this year. So...

Rimmy Malhotra - Gratio Capital

No, understood. Understood. So philosophically, I mean, without holding you to a certain number, it's -- and I don't want to put words in your mouth, but -- so regarding the debt line, you're conservative by sort of history, but there's compelling opportunities. And if they warrant you, you're comfortable increasing the debt line. Is that an accurate statement?

Frederic W. J. Birner

Absolutely. I think you can just -- last year was not a particularly good year. It was pretty weak in the first 2 quarters. And as I said, there was a significant drain on cash from Vantage. When you start taking all those things into account, and a $5 million EBITDA starts looking like a significantly greater number than that, and we're not talking about debt that's vastly in excess, [indiscernible] sometimes EBITDA. We think it's conservative, and we think we're doing the right things to build the business for the long term here. As far as what we learned from Vantage, I guess, we always viewed it as a -- I don't know that we viewed it as a high-risk, but we viewed it as a discrete project that could be jettisoned from the business if it didn't workout, which is what we're in the process of doing, there is some ongoing follow-up with that. It's going to mildly affect the first 2 quarters but not significantly. And I guess what -- I don't know that we learned anything from it, other than timing is everything. I think the major issue with Vantage is the service that we wanted to provide, the All-on-4, is a wonderful service. I think it can truly change people's lives. We missed the mark a little bit on people's ability to get these things financed. They are very -- it's very expensive, and we were -- and you're talking $30,000 to $50,000 to get 2 sets of new teeth in. And prior to, I don't know, 2008, 2009, it was pretty easy for people to get credit if they owned a home. We entered the market a little bit too late for that, when it was almost impossible for individuals to get credit, and I think that was really what -- some of that shift, but that's what I can tell you.

Rimmy Malhotra - Gratio Capital

Understood. I'll assume there is not many other folks on the call, so I'll keep going with a couple of questions. So another is with the de novos that you've opened up. At least some of them look like they've been around for 5, 6 months. Are you happy at least with the way those are ramping?

Frederic W. J. Birner

I'll let Dennis answer that one, but yes, I think so.

Dennis N. Genty

The 2 de novos, well, the 1 that opened up in the Boulder market, I mean, we had it opened very, very late December, so we're really only 3 months into that. And it is ramping, but that one is still a little bit early to tell. The Tucson one is, I would say, performing as expected, as we would expect for a de novo that's 6 months into its life.

Rimmy Malhotra - Gratio Capital

Got it. And then I guess, I think previously, you've indicated -- the team has indicated that one of the biggest challenges is recruiting new dentists and retaining dentists. Do you still think that's true, or has that changed at all?

Frederic W. J. Birner

It's always true. I think we are -- we've added some additional personnel in that area. I think we're doing a very good job. Our dentist count is up. But it's always hard to recruit good people. I think that right now we're in a really nice position, which is one of the things that's driving incrementally better revenues right now, I think, as well so -- but that's never going to be any easy. I mean, that's probably always going to remain the toughest aspect of this business. So...

Rimmy Malhotra - Gratio Capital

Got it. One -- my final question is -- I've been in the stock for 10-plus years, and I'm as excited as ever. And I would -- in the past, you guys have aggressively bought the stock, and it's been a huge value creator, and I would just urge you to definitely always look at the expansion opportunities versus the stock because I think it's very compelling, and it could be very accretive to the story going forward. But with that, I'll sign off, and I'm still very committed and very excited.

Frederic W. J. Birner

Well, we're -- I mean, we're very committed to -- and then we kind of started this 2 years ago. I mean, we've kind of refocused on training our personnel, and not that we didn't in the past, but we really think that we're the dominant player, at least here in Colorado and down in New Mexico. And the whole company is very focused on becoming the gold standard in our business and in these markets. And also, hopefully, we'll get to the point where we're comfortable expanding in the Phoenix market a little bit. And so we're spending a lot of money doing -- upgrading offices, upgrading personnel, upgrading the way patients are treated. We've done a lot with upgrading our website in terms of getting into the social media arena, and all this has added incremental costs to what we're doing. But I guess what we feel like we're doing, and we're starting to see it pay off, is really building the groundwork for the future of this organization, and that's -- so anyway [ph].

Rimmy Malhotra - Gratio Capital

That's great. And as a shareholder, I'm totally supportive.

Frederic W. J. Birner

Okay. Well, thank you.

Operator

[Operator Instructions] And we'll go next to Marshall Schutt with Schutt Capital Management.

Marshall Schutt

I was wondering if you could provide a little bit of a breakdown of how the $4.2 million of CapEx was spent last year.

Frederic W. J. Birner

Dennis?

Dennis N. Genty

Yes, roughly $1 million of it is on the 2 de novos, $2 million on the 4 remodels and about $0.5 million on the 4 digital radiography conversions.

Marshall Schutt

Okay, great. And I was wondering if you could give me a little bit of a big picture kind of timeline on a de novo development, including sort of the capital that you typically need to lay out to do that. It sounds like you spent about $0.5 million a piece last year on the de novo offices. But just how you view what the typical capital commitment is, and then how long to open an office, and then how long passes before the office sort of gets to its maturity as far as volumes and profitability.

Frederic W. J. Birner

Dennis, do you want do -- $0.5 million is a good number, but go ahead, Dennis.

Dennis N. Genty

Yes, $0.5 million is a very good number to use in terms of capital commitment. The process to get from -- once the site has been identified, it probably takes close to 6 months between leasing and build out, kind of in that neighborhood. And then it's a ramp from there once it gets opened, and I can tell you, it varies all over the place. I mean, we've had de novo offices that are cash flow breakeven within 3 months and can reach near maturity with -- inside of 12 months. That is -- that's a top-performing one. We opened one in 2009 down in New Mexico that looks like that. But I would say, on average, you're looking at probably close to 12 months before you reach cash flow breakeven and another 12 months after that to reach kind of what you'd call a mature level of performance, okay?

Marshall Schutt

Okay. Good. That's helpful. If you looked across your office base, would you see a wide variety of profitability across the offices or would be taking an average number of your pretax -- or taking your pretax profit and averaging about the number of offices give you a pretty good idea of what each office produces from a profitability standpoint?

Frederic W. J. Birner

I would say that wouldn't be a good way to do it. I mean, there's a number of factors here. One is the size of the offices differ, particularly when we're offering specialty care. I mean, you can have an office that is kind of at capacity at 80,000 a month or even less than that, and a large specialty facility might be 300,000 a month or even greater than that. The other thing is it's very dentist-dependent, and we do have turnover, like everybody else in our business. And if you have somebody that is a good dentist, and I'm not talking about from a clinical standpoint, I'm now talking about somebody that functions well within our network and is earning a lot of money themselves, which -- because of the way we're aligned means we're earning a lot of money, that works. If that person happens to leave for whatever reason, and you get somebody in there that's a lesser performer, you're going to feel the effects. So we're constantly balancing all of that as well, and that is a factor. And it can work to the opposite direction. You can have an underperformer that we find a replacement for, and boom, the office instantly takes off. So if we -- this would be a very easy business if we could snap our fingers and have exactly the right person at the right time, but it's not, and so we're managing all that.

Marshall Schutt

Sure. And the people issues are always challenging, and I know it's a big challenge in your business. When you lose a high performer -- a high-performing dentist, where are they going?

Frederic W. J. Birner

I don't know. I mean, it goes across the board. We're not necessarily losing them to competition. I think most high-performing dentists -- I mean, our longevity -- well, our average experience with dentists, one of the things that we don't do is hire younger dentists, I mean, for the most part. We'll hire some out of school. But I think our average dentist has 12 years of experience. We tend to be better with people that have some practical experience out on their own because we think they can understand the benefits of our network. We're also an organization, unlike some of the others, that do not believe in really being in the business of practicing dentistry. We're a business services organization that is related to the dental business. We have a lot of information that we can provide dentists, but we're not going to instruct dentists how to practice dentistry. So we -- I think we do a pretty good job retaining dentists. I mean, sometimes they'll move, they'll retire, they'll -- every once in a while, we'll lose somebody to competition. But somebody that's performing well, it generally doesn't -- that scenario generally doesn't happen. The people that we'll lose to competition are people that we're not all that happy with. Let's put it that way.

Marshall Schutt

Yes, okay. I want to just ask 2 final questions on Vantage.

Frederic W. J. Birner

Yes.

Marshall Schutt

You disclosed that last year was about a $1.1 million of pretax...

Frederic W. J. Birner

Right.

Marshall Schutt

Drain. Can you quantify what that drag was in 2010 and 2011?

Frederic W. J. Birner

We haven't disclosed that, and we're not going to right now.

Marshall Schutt

Okay. And how quick -- with the strategy shift that you have there, how quickly do you see that drag on profitability kind of curing itself?

Frederic W. J. Birner

Fairly quickly. I'm really pleased with the results in March. There are some cleanup -- these cases, because of grafting, bone grafting, and other things, tend to be a little long-lived, like 6 months out. So we're cleaning up some cases, but I would say that just ramping that -- forgetting about the residual Vantage in there for now, but just ramping the office probably takes 4 or 5 months. But I can tell you, we're having a very good month in Vantage right now this month, and this is the last day of the month, so better than I expected. All right?

Marshall Schutt

Great. Okay. All right, just 2 other quick ones. How many specialty centers do you have in your network?

Frederic W. J. Birner

It's a little difficult to answer [ph] that question because we have specialty -- specialty tends to be in a larger office, but it's not necessarily segregated from General Dentistry as well. Vantage is a little bit different, although we're playing with the idea of adding General in there. So I don't know.

Dennis N. Genty

And then you've got something -- pardon me, Fred -- but then you got something like Orthodontics, where we do more Orthodontics in General Dentistry offices than any of the other specialty disciplines just because of the nature of that business, where patients have to come back, and we want it to be more convenient. I mean, I'd say we've got probably 15 offices with Ortho in it, right? And maybe even more.

Frederic W. J. Birner

I mean, they're what we call specialty centers, I mean, it's probably the number is less than that. I -- we just don't think of it that way, so we're kind of -- we just don't want to say how many offices offer specialty, but that's...

Marshall Schutt

Yes, okay. Is it easier to think about it in terms of like large offices versus small offices as far as number of dentists that are on location and that sort of thing? I'm just wondering if there's any way to kind of segregate the -- your system a little bit.

Frederic W. J. Birner

Well, what I would say is what we try to do with the specialty offices is we are looking for a larger facility because we're going to normally have both general and specialty in the office. But we need feeder offices. They're getting fed by the network. So we're also looking for geographic location. We're not going to locate 2 specialty offices near each other. People will travel for oral surgery, for periodontal problems, for just endodontic problems. So geographically, they tend to be laid out, where we can have 10 feeder offices or something like that around them, if that gives you any help. All right?

Marshall Schutt

Sure. And then last one is, how much room for growth do you all have in your core kind of Denver/Boulder market as far as additional offices?

Frederic W. J. Birner

It's a good question. We have a fairly dense geographic footprint. At the same time, there are holes. And that's one of the things we struggle with right now is find -- we're really looking for locations that are outstanding. And it's not that we were looking for poor locations, but we're actually looking for better locations than we ever have. And so we find locations sometimes, and we're not able to secure a lease and things like that. I can't tell you exactly how many locations are out there, but this market is -- I don't know what Colorado is. I mean, it's over probably -- I mean, is it $1 billion a year in -- or greater than that in terms of just overall dental expenditures? So there -- I mean, there is room for growth. We do think we have a long-established reputation as providing high-quality service, particularly given the knocks that a lot of corporate entities take, and we are truly trying to play on that right now. And I don't mean that in a -- well, I don't mean it in any kind of a negative way. We're truly trying to live up to that expectation and really -- I guess, really trying to claim what we think is rightfully ours. We've been at this for a long time. I think we're doing a very good job. I think we, if anything, derailed some of that for the last couple years, but we're back on track here to really start doing some big things. The other thing, as I mentioned, we -- there is an opportunity down in Phoenix for us. It's been a market that we've struggled with over the years, but it's a very big market, and we're solidifying -- we're feeling more comfortable with the offices we have down there. And if we can solidify a few more things, I think -- there's ample room for growth there, is what I should be saying. I mean, I'd like -- I want to see us in the double-digit revenue growth.

Operator

[Operator Instructions] We have no further questions at this time.

Frederic W. J. Birner

Okay. Thank you for joining us. We look forward to reconvening again shortly for first quarter results.

Operator

That does conclude today's conference. We appreciate your participation. You may now disconnect.

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