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Birner Dental Management Services, Inc. (NASDAQ:BDMS)

Q2 2014 Results Earnings Conference Call

August 13, 2014, 11:00 AM ET

Executives

Dennis Genty - CFO

Fred Birner - Chairman and CEO

Analysts

Rimmy Malhotra - Gratio Capital

Operator

Good day and welcome to Birner Dental Management Services, Inc. 2014 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dennis Genty, Chief Financial Officer. Please go ahead.

Dennis Genty

Ladies and gentlemen, thank you 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 six 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’s 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’s call is Fred Birner, CEO and Chairman of Birner Dental Management Services. Good morning, Fred.

Fred Birner

Thank you, Dennis, and thank you all for joining us. I'm going to go over our results for the second quarter ended June 30th, make some general comments and then open it up for question-and-answer afterwards.

Revenues for the quarter ended June 30th were $16.9 million, up 2.7% or $440,000. Our adjusted EBITDA was down $212,000 to $1.1 million or down 16.4%. Net income was a negative $60,000 or down $239,000 from the previous quarter in 2013. Earnings per share were $0.03 versus $0.10 in the prior period for the previous year.

Revenues for the six months ended June 30, were approximately 2% to $33.7 million. Adjusted EBITDA for the same period was down to $2.3 million or down $401,000 or about 15%.

Net income was a negative $10,000 versus net income of $421,000 in the prior period or down $431,000. Our EPS for the six months is $0.01 versus $0.23.

Since the Q4 2012, we've done five de novo offices. There'll be another de novo office opened in the fourth quarter of this year and there are three more to come that we have slated at this point in 2015.

For the first six months of 2014, we had CapEx of $3.1 million. There were dividends paid of approximately $800,000 and our bank debt increased by approximately $500,000.

As you know from my previous call those – who were here, I was more optimistic about our ability to drive revenues in this quarter based on the results that we were seeing and I'd be remised and I'd say that I am not disappointed in the level of revenues that we were able to generate during the quarter in terms of the growth.

Consequently, what we had been seeing and had been hoping for is revenue growth levels at least double what we saw on the second quarter. And we decided and made a conscious decision to reduce cost to more adjust our expenses in line with kind of what the marketplace is giving us right now.

I'm not unoptimistic about our ability to continue to drive revenues with the projects that we’re doing, but to just beat our head against the wall, and expecting greater and greater revenue growth with increased expenses to accommodate debt, it doesn't make sense and we’ve taken some measures to do that.

With that, I'll open it up to question-and-answer.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll take our first question from [indiscernible]. Go ahead.

Unidentified Analyst

Great, thanks. Hey, good morning guys. Was hoping maybe you could give us a little more color on some of the cost reduction efforts that you're taking there Fred. And then, also any color you could provide on Merck's departure on any financial – especially the financial implications if there are any beyond what, what you guys released in the, [indiscernible]?

Fred Birner

What I can say about Dr. Birner's departure is that, he has resigned and we thank him for his years of effort here at the company. The financial impacts are disclosed as were disclosed in the press release.

As far as the cost reductions, we’re not releasing exact numbers, but I will tell you that we’ve taken some measures both here at corporate and down at the office level. Because we really ramped up, like I said in anticipation of greater revenue growth and we’ve just been able to pull-off here as of late.

That seems to be losing up a bit but I'm not going to - it just seems to be prudent to us. Now at the same time, we are not – we’re not cutting back on the improvements that we’re making to the offices, the de novos that we have slated, the digitization and upgrades and all the training initiatives. I think all of those things are important in the long run to the company and they are cheaper longer run objectives.

Unidentified Analyst

Okay. Great. Are you finding in terms of the - the disappointment on revenue growth versus your expectations that it's a competitive issue. Are you finding that your – the competitive environment has changed or I guess what are some of those – you did the analysis.

Fred Birner

I don’t know that the competitive environment has changed. I don’t - based on my - and this is not totally scientific but based on my conversations with my peer group out there, I don’t think our experience revenue wise is very dissimilar from most of the other groups out there.

I think our segment of the marketplace is 50th percentile, maybe 40th percentile, the 65th percentile, 70th percentile of the population base out there. I still think they are reeling from what - the economic conditions and dentistry tends to be a spend that is discretionary and [luster] (ph) and pain.

And I think that really - what we’re facing right now. As I said, it does feel like things are loosing up a little bit, but I was pretty optimistic after the end of the first quarter based on the couple of months results, the problem is, we are getting some very good months, and then we’re not getting such good months.

So I'm not going to continue to have the cost build up to accommodate this greater revenue level when it doesn't seem that reliable at this point.

Unidentified Analyst

Okay. Great. Then just one other question would be, in terms of recruiting staff or just staff retention, any trend change there, at the moment?

Fred Birner

Well no, I don’t think so. As I have continually said over the years, our biggest, and I think anybody in this business – the biggest issues are always recruitment, recruitment of dentist. And that won’t change in the future or at any time.

But, nothing – we haven’t noticed any noticeable changes in that arena at all. I do think that – I'm very optimistic about the company at the same time. I do think that we are a much stronger organization, from the physical plan standpoint, from a philosophical standpoint, from a training standpoint, than we were a year ago or two years ago.

Unidentified Analyst

Great. Thank you.

Operator

(Operator Instructions) We'll take our next question from Rimmy Malhotra. Go ahead.

Rimmy Malhotra - Gratio Capital

Hi, guys. So two questions and again not highlighting the exact expense reductions but maybe if you could give us sort of – sort of a mini-case study or just an example of a reduction of hyper resource that you put in place at corporate and may be at the office level so that you can sort of understand what kind of reductions?

Fred Birner

Well the reductions are primarily human reductions. We are a people business. We are heavily people intensive. And as I said, - I mean - and so they were staffing up at the office level to accommodate these things. They were staffing up at a corporate level to accommodate these things.

And I would say that there were some direct managerial reductions where our results – you can't look at the organization across the board and say, okay, this is an even result. In some of our regions and they're run by regional managers, we got rather good results for the first six months. In some of the regions we got flat results. And in one or two of the regions we got some pretty poor results.

So there was some managerial changes in those regions. And you could basically look at this in one region and say, we fixed that and this looks a lot better. But the cost reductions, we're both at the corporate level and at the office level.

Rimmy Malhotra - Gratio Capital

For example at the corporate level, was it extra accounting staff or like what kind of resources were you putting in there?

Fred Birner

Our regional managers as I discussed tend to be - they get categorized at the corporate level. And we had made some fairly big bets on some - on some highly paid personnel that we thought were going to work out. And these are people that got replaced or being replaced but at a lot lower levels.

There were also some - I don't know, ancillary personnel that for example, that were helping with the roll-out of new offices. And that was a person that was not necessarily [indiscernible] or certainly something we felt like we could live without.

Rimmy Malhotra - Gratio Capital

Got it. And so a majority of those cost reductions, are they yet to focal through the financials or are we already seeing them in the…

Fred Birner

Well, as we discussed in the press release, I think you're going to see some significant cost reductions that will flow through in the third quarter into the fourth quarter. There will be a continued expense reductions, maybe relating to healthcare plan, and things like that going in the next year.

We've also successfully negotiated and I can't give in the specifics. One of our managed care contracts were, there was going to be some incremental revenue from that side.

And as I said, it's not – I'm not blest about our business here. I just think we're – we've positioned the company to kind of take what the market is giving us right now. And we’re continuing to strengthen ourselves in all ways I believe at the same time.

Rimmy Malhotra - Gratio Capital

Understood. So now are we sort of looking back at some of the de novos I think, I don’t have the press release right in front of me, but the four or five de novos. In terms of the maturity curve of how those are progressing there to cash flow breakeven, I'm going to get a sense of magnitude of earnings drag a built to de novos. Are those – are they - has that trajectory flattened out given that there is no revenue growth or are we still inching towards …

Fred Birner

I would say that we've had mixed results with the de novos. Some are doing quite well. Some are definitely lagging. And there is a variety of reasons for mostly reasons that relate to personnel, dentist things like that.

Rimmy Malhotra - Gratio Capital

Got it.

Fred Birner

But overall if you group them all together, there is a negative drag right now.

Rimmy Malhotra - Gratio Capital

And just one follow up to that which is, so you obviously got a number of de novos planned and your view on the marketplace has changed from three months ago. What is your calculus in terms of, do we keep going at same pace on these de novos? Do we push pause and see how the market develops over the next three to six months just, if you can walk us through you framework there.

Fred Birner

One thing in Arizona that we’re committed to and we’re very optimistic about, I mean we can push pause pretty much when they need, as a point of no return when you’re comparing. I think the one in Arizona is there, but I am not saying we would be pushing pause right now.

So the rest of the de novos that we’re looking out right our 2015 projects. And if things get sloppier, which I don’t – I really don’t believe that’s going to happen, we can make some warning adjustments.

Rimmy Malhotra - Gratio Capital

Understood. That’s it for me. Thank you.

Operator

(Operator Instructions) And our next question comes from [Tom Wolf] (ph). Please go ahead.

Unidentified Analyst

Fred, is it correct to say that you expected the cost associated with Dr. Birner's departure will all be booked from an accounting perspective in the third quarter of this year?

Fred Birner

That’s correct.

Unidentified Analyst

Thank you.

Operator

And it appears we have no further questions at this time.

Fred Birner

Thank you all for joining us. We will be talking to you shortly after the third quarter and I really appreciate your patience. I just want to reiterate, I remain positive about the business and our position in our marketplaces here. Thank you.

Operator

And this does conclude today’s conference. Please feel free to disconnect at anytime.

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