Q2 2024 dentalcorp Holdings Ltd Earnings Call
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Speaker Change: At this time I would like to turn the call over to Mr. Nate <unk>, President and Chief Financial Officer of Dental Corp. Please go ahead Sir.
Speaker Change: Thank you operator, and good morning, everyone. Welcome to the Derma Corp, second quarter results Conference call I'm joined here by Graham Rosenberg our CFO.
Speaker Change: Before we start we would like to remind you that all amounts discussed on this call are denominated in Canadian dollars unless otherwise indicated.
Speaker Change: Please note that the statements made during this call may include forward looking statements and information and future oriented financial information regarding demo Corp. Its business and disclosure regarding possible events conditions or results that are based on information currently available to management, which indicate managements' expectations of future growth results of operations business performance business prospects and all.
Speaker Change: 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 circumstance, except as required by applicable securities law.
Speaker Change: Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results.
Speaker Change: Number of these risks and uncertainties could cause results to differ materially from results discussed today.
Speaker Change: 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 our earnings press release issued today for additional information.
Speaker Change: For those of you who have dialed into the call. The company has prepared a series of slides to complement our prepared remarks. These slides are available on the Investor Relations section of our website in the events and presentations section I will now turn the call over to our Chief Executive Officer, Graeme Rosenberg for his opening remarks Graham.
Graeme Rosenberg: Thanks, Nate and good morning, everyone. We're pleased to be with you today to review Journal clubs recent developments as well as our financial and operating results for the three months ended June 30 of 2024.
Graeme Rosenberg: For today's call I'm going to share a number of those developments with you and then I will hand, the call over to <unk>, who will discuss our financial results in detail and provide forward looking remarks about how our business is trending.
Graeme Rosenberg: As a reminder, chemical pulp operates in a highly recurring essential health care 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.
Graeme Rosenberg: We believe that telecom is favorable cost structure with high margins low commodity risk and negligible capital expenditures provide support for the Companys continued delivery of balanced double digit growth in the $22 billion Canadian dental industry.
Graeme Rosenberg: Our confidence in the business is supported by our second quarter results, which met or exceeded our expectations and provide a constructive outlook for the remainder of the year.
Graeme Rosenberg: Overall I am pleased with our results this quarter and as you can see on slide three our results have been made possible by our network of over 10000 team members across the country.
Graeme Rosenberg: Teams continued to deliver the highest standards of care during the reporting period as we support more than $2 3 million active patients and manage over $5 3 million patient visits annually.
Graeme Rosenberg: You will see that we completed our second quarter ended June 30 of 2024 with approximately $1 5 billion of last 12 months pro forma revenue and $283 million of pro forma adjusted EBITDA.
Graeme Rosenberg: As you'll see on the next slide we continued with our balanced approach to growth.
Graeme Rosenberg: We are driving sustained double digit growth and we intend to continue growing our business organically and through accretive M&A and by driving overall business efficiencies and operating leverage over the medium to long term.
Graeme Rosenberg: This is a program that we have meticulously built over the past decade, and we believe we are able to thrive in any economic climate.
Graeme Rosenberg: With respect to M&A, we acquired nine practices in the quarter for total consideration of $41 million. These practices are expected to generate $6 2 million and pro forma adjusted EBITDA after lunch.
We are also encouraged to see that packs as valuations continued to decline down 3% in the second quarter of 2024 over 2023.
Graeme Rosenberg: As access to financing opportunities tightened so many buyers across the industry. Our acquisition multiple has declined on a year over year basis for the past seven quarters, and we remain the best positioned and capitalized partner for independent dentists and will continue to be disciplined about some practices we acquire.
Graeme Rosenberg: On slide five you can see that our business operates with robust and expanding margins.
Graeme Rosenberg: Capex requirements and kept interest rate exposure on a 100% of our existing debt outstanding we continue to convert a high steady percentage of our EBITDA into free cash flow in any given period and expect this conversion to increase over time.
Graeme Rosenberg: On slide six and as expected we completed the quarter at four one times leverage point.
Graeme Rosenberg: Three times from the same time last year as we pursue our medium term target of under three times leverage.
Graeme Rosenberg: And on slide seven you will see that for the fifth consecutive quarter, we self funded our acquisition program.
Graeme Rosenberg: We will continue to apply this disciplined approach to growth by the end of the year, we anticipate realizing a financial benefit from interest savings future deleveraging efforts as per our credit agreements as Red Cross below the next leverage thresholds the interest rate on our existing outstanding debt will be reduced by half a percent bringing out blended cost.
Graeme Rosenberg: Of that $6 six 5% to $6 one 5%.
Graeme Rosenberg: Sure.
Graeme Rosenberg: Turning to the next slide you can see a comparison of valuation and free cash flow yields versus our peers since our IPO. We have seen a decline of nine four times EBITDA of 47% and our <unk> LTM EBITDA trading multiple and we are currently trading at a 34% discounts top total peer group at the same time.
We're trading at an eight 7% free cash flow yield compared to our peer group of three 8%.
Graeme Rosenberg: Turning now to slide nine I am pleased to report that our business delivered revenue of $399 $8 million in the second quarter of 2024 up eight 6% over the same period in 2023, and adjusted EBITDA margin of $73 9 million up 10, 3% over the same quarter last year.
Graeme Rosenberg: Adjusted EBITDA margin came in at 18, 5% an improvement of 30 basis points over Q2 of 2023, and we are encouraged that same practice revenue growth was 2% for the quarter.
Graeme Rosenberg: I would now like to provide an update on the Canadian intensive care plan.
Graeme Rosenberg: Also known as the CDC P.
Graeme Rosenberg: We began providing care to CVC pay Tvs CP patients on May 1st however, in anticipation of that start date, we experienced the deferral of patient visits in April as they awaited that coverage <unk> under the program. These patient deferrals combined with gradual provider enrollment resulted in lower than anticipate.
Graeme Rosenberg: Patient volumes in the quarter.
Graeme Rosenberg: Despite these initial challenges we are now pleased to report that <unk> participation in the program is generally tracking at or above the current national figures and we expect that number to increase over the coming months as the program matures.
Graeme Rosenberg: As participation across our network continues to grow and we continue accepting more CDP patients. We anticipate that same practice revenue and EBITDA growth will follow suit.
Graeme Rosenberg: Notably.
Graeme Rosenberg: Our practices that are seeing CVC patients are outperforming those back youre, not which is an encouraging trend as more practices within our network begin to treat those patients.
Graeme Rosenberg: They have adapted well to the new processes alleviating initial concerns at the practice level about potential operational challenges.
Graeme Rosenberg: Under the CDP, we have and will continue to deliver services at rates consistent with our usual and customary fees.
Graeme Rosenberg: This ensures the high quality of care at all of our patients both new and returning expect and rely on it.
Graeme Rosenberg: Overall, we regard the CDC P is a favorable development for both the Canadian public and dental professionals and we expect it to be neutral to slightly positive for dental op.
Graeme Rosenberg: Okay.
Graeme Rosenberg: Despite the initial adjustments related to the CVC Pete rollout, our overall financial performance remains robust the outcome of our operational efficiency and strategic initiatives was a strong adjusted free cash flow for the quarter of $41 million, enabling us to find that the entirety of our acquisition program with free cash.
Graeme Rosenberg: For the fifth consecutive quarter.
Graeme Rosenberg: As we look to the third quarter of 2024, we anticipate revenues to increase by 8% to 10% over Q3 of 2023, while delivering three 5% to four 5% same practice revenue growth.
We expect adjusted EBITDA margin to be materially consistent with third quarter trying to phase III.
Speaker Change: I will now pass the call over to <unk>, who will walk us through the details of our financial results and share some closing remarks before we open the call for questions.
Speaker Change: Thank you Graham our quarterly results results, which met or exceeded expectations in all respects demonstrate the strength and predictability of our business.
Speaker Change: If we turn to slide 10, Youll see that revenue for the three months period ended June 32024, as grant mentioned was approximately $400 million compared to $368 million for the corresponding period last year.
Speaker Change: Representing an increase of approximately 9%.
Speaker Change: The increase is attributable to our continued acquisitive and organic growth offset by a slower than expected ramp of CDP enrolment throughout the quarter.
Speaker Change: As you can see we reported second quarter adjusted EBITDA of approximately $74 million compared to $67 million in the same quarter last year, our reported second quarter adjusted EBITDA margins of 18, 5%, representing 0.3% of margin expansion year over year as we begin to realize operating leverage following our significant investments in our corporate infrastructure.
Speaker Change: Throughout 2022 and 2023.
Speaker Change: Looking forward, we continue to be confident about our ability to grow the business, both acquisitive as well as organically.
Speaker Change: Turning to the next slide you can see our net leverage and liquidity as of June 32024 on a net debt basis. We are approximately four one times levered at the end of the second quarter deleveraging by 0.2 times over Q1 2024.
Speaker Change: As Graham alluded to earlier, we anticipate crossing the next leveraged threat trust threshold as per our credit agreement. This will result in an interest rate reduction of 0.5%, bringing our blended cost of debt down from $6 six 5% today to 6161, 5%.
Speaker Change: We ended the second quarter 2024, with liquidity of $426 million comprised of $72 million in cash and $353 million in undrawn debt capacity under our senior debt facilities.
Speaker Change: Our second quarter and last 12 months adjusted free cash flow was 41 and $136 million, respectively, which supports our strong balance sheet position.
Speaker Change: In addition, we continue to see strong interest rate coverage as defined by our LTM pro forma adjusted EBITDA after rent divided by our net interest expense of three three times in Q2 2024.
Speaker Change: Overall, we are pleased with our second quarter 2024 results, we increased organic growth in parts of our in sourcing efforts created ongoing operating efficiencies close accretive acquisitions and continue to develop our pipeline.
Turning to slide 12, we remain highly confident about our future opportunities as we look ahead to the remainder of 2024, we remain optimistic on our same practice revenue growth returning to the 4% plus range in the second half of the year, along with our previous 2024 guidance of 15% to 20% of adjusted free cash flow growth per share.
Speaker Change: And adjusted EBITDA margin expansion of 20 plus basis points.
Speaker Change: We also anticipate completing acquisitions, representing pro forma adjusted EBITDA after rent of approximately $20 million in 2024.
Speaker Change: This aligns with our balanced approach to strategic growth. Additionally, we expect further deleveraging of our balance sheet of the company continues to self fund acquisitive growth.
Speaker Change: Thank you all for joining our call today. This concludes the concludes the formal part of the presentation and I would now like to open the line to any questions operator.
Speaker Change: We will now begin the question and answer session. If you have dialed in and would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question against in your press Star followed by the two.
Speaker Change: Your first question comes from the line of Brian <unk> with Jefferies. Brian. Your line is now open.
Speaker Change: Hi, this is nor roble in for Brian. Thank you for taking my question.
Speaker Change: Looking at the Q3 same practice revenue guide just curious if you could provide some color on how much of thats being driven by deferrals of CD <unk> patient volumes versus underlying patient demand and then as a follow up is there anything to note on the seasonality of the business given our historical strength in Q4.
Speaker Change: <unk>.
Speaker Change: Thanks for the question.
Speaker Change: It's a good one and really since the CDP rollout, which began in may and ultimately the impact it had.
Speaker Change: On patient volumes are really on the uninsured uninsured base of Canadians that we're expecting to qualify for coverage under the plan.
Speaker Change: Now as we look to the government actually put out a press release yesterday and had a had a I don't open call with the media $2 3 million Canadians have now been approved to receive coverage under the Canadian dental care plan.
Speaker Change: 450000 Canadians have already received treatment under that plan. So what we are seeing is the.
Speaker Change: The friction in the system as people were getting educated as well as qualifying under the plan.
And the dentists were now signing up.
Speaker Change: Through the initial enrollment as well as the alternative pathway that opened up in July 8th which saw a significant number of clinics and clinicians joined the program. That's really opened up that opportunity to begin seeing those patients. So what we are seeing.
Speaker Change: Is a return to normal.
Speaker Change: In Q3, or a close our path to a return to normal where the volumes are coming back to our expectations.
Speaker Change: Our.
Speaker Change: Optimistic is as we continue to end the year that that will continue to improve albeit not all cage. All age cohorts are eligible yet really we're talking about the 65 plus in the 18 and under remaining age cohorts are going to continue to become eligible through 2025, So I'd say, we're still expecting.
Speaker Change: A limited amount of friction as we exit 2024 and are very optimistic at the volumes coming back to full normalcy in 2025 and forward.
Speaker Change: But I want to reiterate our confidence in the 4% plus growth through the balance of the year.
Speaker Change: Great and then.
Speaker Change: Curious if you could talk about the seasonality of the business and then.
Speaker Change: Also just a follow up on grams remarks on depressed valuations in dental practices, just curious if that might change the pace or cadence of M&A in the near term.
Speaker Change: Yes, so as far as far as seasonality goes.
Speaker Change: Q2, and Q4 are slightly stronger quarters.
Speaker Change: Q1 Q1.
Speaker Change: Q3, or slightly slower quarters, just given given the given the months of operations. We expect the performance to be consistent with what you would have seen.
In 2023 as far as the seasonality impact as it relates to acquisitions Graeme.
Graeme Rosenberg: Yes, good morning, as it relates to acquisitions, we're going to continue to focus on self funding our acquisition program.
Speaker Change: And so.
Speaker Change: As we move into next year whats the free cash flow is increasing will provide us with an opportunity to potentially increase our pricing.
Speaker Change: <unk>.
Speaker Change: But most importantly to note for this quarter and the last few quarters is that valuations are coming down which allow us to drive more accretive.
Speaker Change: Deal flow.
Speaker Change: And crop free cash flow per share, which is a core focus of the business across the board.
Okay.
Speaker Change: Alright, thank you.
Speaker Change: All right.
Speaker Change: Your next question comes from the line of Scott <unk> with CIBC capital markets. Scott. Your line is now open.
Speaker Change: Hey, good morning, Thanks for taking my question I just wanted to ask on some of the puts and takes on the quarter over quarter margins, you sort of had a nice quarter here, where there were slightly above expectations and then.
Speaker Change: Next quarter, you are sort of back down to flat year on year. If you could sort of just give us some color on the puts and takes there.
Speaker Change: Absolutely I would say.
Speaker Change: The only difference and if we get back in the time machine and go back to Q3 2023.
Speaker Change: We discussed the partner conference. So we have our annual meeting.
Speaker Change: Of all of our partners that takes place in Q3.
Speaker Change: That is that is obviously a cost.
Speaker Change: To the business, which was incurred in that period, if we remove that cost margins margins would be consistent.
Speaker Change: However margins are consistent to Q3 'twenty three just given given the investment in that annual partner conference that does take place I do want to reiterate that we are confident in the 20 basis points of margin expansion for the full year period.
Speaker Change: As we exit 2024.
Speaker Change: Okay, Great. That's helpful. And then it looks like it's just in the cash flow statement you disposed again of some practices can you just sort of.
Speaker Change: Give us an idea of what qualifies practices for disposal in that store.
Speaker Change: Potential going forward.
Speaker Change: Absolutely.
Speaker Change: They are all in line with our historical disposals, they're all part of the Standalone specialty that was all pre 2014 acquisitions, we do still have a few left.
Speaker Change: That we may see.
Speaker Change: Of disposals in the future.
Speaker Change: Again, our business today is predominantly.
Jeep General practitioners family Dentistry.
Speaker Change: Have a small group of specialty that continues to remain.
Speaker Change: But it's de Minimis as as it relates to our overall overall performance. So no no change in strategy as it relates to what our disposals.
Speaker Change: Ben.
As it relates to these these two disposals that happened in the quarter.
Great makes sense. Thank you.
Speaker Change: Your next question comes from the line of Dara <unk> with Stifel. Darryl Your line is now open.
Speaker Change: Yes, just one quick one from me related to the supplier environment for equipment and consumables. It seems like theres been some competitive shifts there in the environment seems to be quite competitive I'm. Just curious if that's opening the door at all for you to maybe negotiate better pricing or or new support agreements or just anything there.
Speaker Change: It might further benefit margins in future.
Speaker Change: That's a great question Daryl.
Speaker Change: We have a systematic approach to continue to review.
Speaker Change: All of our material supplier arrangements and continue to ensure that we are.
Speaker Change: Managing relationships, both for our practices as well as vendors to set our providers and ultimately our patients for for success with that.
From a from a pricing strategy, we do continue to evaluate year on year and enter into long term fixed pricing agreements with those vendors that's allowed us even through the period of inflation in 2022, and 2023 to maintain the strong margins that we have.
Speaker Change: And what Youre seeing now is the ability for us to continue to expand on that through the margin expansion that we're experiencing through 2024.
Speaker Change: Got it that's good color, thanks, guys and congrats on a good quarter. Thanks Darryl.
Speaker Change: Your next question comes from the line of Steven <unk> with BMO capital markets. Steven Your line is now open.
Speaker Change: Thank you good morning, guys.
Speaker Change: Just wanted to ask you about the CDC.
Speaker Change: Can you talk a little bit about like I'm, just trying to get a sense of how should we think about.
Speaker Change: That program impacting your business over the long term like is there a way to quantify kind of what what.
Speaker Change: What your penetration is.
Speaker Change: Through your practices of <unk> patients and what it could potentially be or is it more.
Speaker Change: More just existing patients that are.
Speaker Change: Now accessing their.
Speaker Change: Health care coverage through the government as opposed to funding it themselves previously yes.
Speaker Change: Yeah, I'd say, that's a great question, Steven So I think if we look to.
Speaker Change: The the figures that the government is putting out.
Speaker Change: We've always thought about our business is that it's highly representative of the Canadian industry as a whole being the only national platform coast to coast in every province, what we are seeing is the enrollment of patient figures.
Speaker Change: In our business are really consistent and proportional to that what we're seeing across Canada with that what that means is as more patients do come online both patients that have previously been seeking dental care as those.
Speaker Change: That otherwise couldn't couldn't access it and now will it will be a slight positive tailwind to our practices from a volume perspective once it's all through the system again in 2023, we're only seeing a small portion of the Canadian population that is able to actually qualify for the program in 2025, we will see a significant.
Speaker Change: Increase in those total volumes. What we're also seeing is November is really the next mandates were increased.
Speaker Change: All it access to care with more comprehensive treatments will open up.
Speaker Change: And the country coast to coast under the CDC piece, So we will see.
Higher value work us to begin to be provided what we are seeing is really our practices that have been enrolled in the program in the early adopters in the program are outperforming the practices over those same periods that were not enrolled and that's primarily coming from a volume perspective. So what we were seeing as patients ultimately.
Speaker Change: On the sidelines waiting for their clinicians to enroll and get acclimated with the program as well as receive their own accreditation to participate.
Speaker Change: As we see month over month, both in throughout the quarter as well as through the early part of Q3, we're seeing consistent increases in penetration and ultimately a consistent increase in our same practice revenue growth driven by the.
Speaker Change: Correction in volume from the <unk> penetration.
Speaker Change: Okay.
Speaker Change: That's helpful. Thank you.
Speaker Change: And then.
Speaker Change: Is that.
Speaker Change: Expectation for accelerated.
Speaker Change: Patient growth and 25 is that embedded in your 4%.
Speaker Change: This impacts revenue growth medium term target.
Speaker Change: Yeah, So what I'll say is the.
Speaker Change: 4% medium term target.
Speaker Change: That's under the assumption of normal normal patient pay.
Speaker Change: Patient behavior.
Speaker Change: Without taking into consider it consideration.
Speaker Change: <unk> increased our call it patient volume that previously were not seeking dental care. So there is upside in that 4% figure to put it to put it simply.
Speaker Change: Okay. Okay. That's great. Thanks, guys appreciate it.
Speaker Change: Your next question comes from the line of Chile with de Jardin Securities.
Your line is now open.
Speaker Change: Hi, good morning, Thank you.
Speaker Change: So on the CDC.
Speaker Change: A reminder, okay.
Speaker Change: Economy.
Speaker Change: Amit the one thing.
Speaker Change: Gene.
Speaker Change: Yeah.
Speaker Change: Thanks for the question.
Speaker Change: There is no change or difference in the economics.
The process under which the patients are build and treated as far as the actual submission of claim and repayment. Those are the standard pipelines that exist with all the major insurance insurers.
Speaker Change: You May now Sun life is administering the planet and we really would be no different than any other employer sponsored insurance plan that that's unlikely to support as it relates to the reimbursement depending on the household income of that patient theres going to be different levels of coverage, but ultimately to the practice and the economics to the practice.
Speaker Change: Would be the same.
Speaker Change: For for all patients as the practice would balance bill to the provincial guidelines.
Speaker Change: Got it.
Speaker Change: Just on leverage.
Speaker Change: Two more quick ones.
Speaker Change: So.
Alright.
Moving like walkable.
Speaker Change: Yes.
Speaker Change: We're going to continue to delever at the pace of roughly <unk> one per quarter.
Speaker Change: Expect by the end of the year to be at four times or below what I would like to also reiterate is under our under our bank covenants and bank leverage you may have.
Speaker Change: I have heard over the call as we as we get to below four times leverage, which we are very close to.
Speaker Change: We're going to have a 50 basis point pickup on our overall interest cost, which will result in an increase of $5 million to our free cash flow, which will continue to both accelerate our deleveraging as well as allow for additional free cash flow to accelerate our acquisitive program.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the lineup Navy Kuang with TD Cowen David Your line is now open.
Speaker Change: Hey, guys.
Speaker Change: Just.
Speaker Change: Hey, guys.
Speaker Change: Just on the leverage question.
Speaker Change: Flintoff below four times.
Speaker Change: Interest rate base rates declined by 50 basis points does it decline every when it gets below say three and a half and then and then three times.
Speaker Change: Bingo, yes, it does it does it get below.
Speaker Change: Every half turn we pick up 50 basis points of interest cost savings on our spread.
Speaker Change: As you know we are hedged fully on the sofa rate.
Speaker Change: Base rates up until May of 2026. So we will have continued upside overall and our interest costs as we continued to delever and in May of 2026, as we look at the forward yield curve and we see continued easing there are very confident.
Speaker Change: Our strong balance sheet position and continued ability to grow our free cash flow.
Speaker Change: Thanks for the clarification, there and on the CD key you comment how.
Speaker Change: Practices had signed up for and are outperforming the ones that arent enrolled just due to the higher volumes can you quantify how much that's been I know you've kind of talked about the overall I think 20000 patients or so.
Speaker Change: Like how material has that has that.
Speaker Change: So far.
Speaker Change: It's a significant difference I would say.
Speaker Change: Where the practices that are are seeing those patients are performing.
Speaker Change: At a significantly higher rate what I will say is as we look through the quarter.
Speaker Change: Where we ended up 2% I think you could see the significant improvement.
Speaker Change: Our our estimate for Q3 being in the three five to four 5% range.
Speaker Change: That growth is predominantly now driven by.
Speaker Change: By the increase in penetration of CDP practices across our network.
Speaker Change: I know July eight the alternative pathway did open up and what you are seeing even from what the government put forward as prior to that it was call. It roughly 50% participation in June post July Youre, now seeing 75% plus penetration and participation in the dental industry under the CDP again.
Speaker Change: We're highly representative of that which is showing call. It that increase of call. It one 5% to 2% on the same practice growth from where we are in Q2.
Speaker Change: That's helpful. Thanks for the color and just one last question.
Speaker Change: On the comment.
Speaker Change: As a response on the consumable side I think it was <unk> question.
Speaker Change: So you're talking about when you saw on your kind of long term contracts can you talk about when they come off because it sounded like you said that's a.
Speaker Change: <unk> benefited from that in the last couple of years and the higher inflationary environment.
Speaker Change: But I assume once those contracts come up Ian renew that Theres, maybe some catch up there.
Speaker Change: So we just signed the really at the end of at the end of last year. So I can see we continue we continue to be opportunistic and evaluation of all of our supplier partners again, we don't have any sole source relationships. We have we have multiple relationships for for ultimately.
Speaker Change: The goods that we do source in our practice and ensure that we are maintaining our leadership position in the Canadian market as it relates to both access as well as pricing.
Speaker Change: Okay. So I think it's fair to say then that those.
Speaker Change: Increase likely increases with these new contracts wouldn't baked into your margin.
Speaker Change: Right absolutely.
Speaker Change: Perfect. Thanks.
Speaker Change: Your next question comes from the line of Allen Lutz with Bank of America Allo. Your line is now open.
Speaker Change: Hey.
Dev Alan Lux.
Speaker Change: I just wanted to touch quickly on gross margin.
Speaker Change: And how to think about it that simple recipe add into 2020 five.
Speaker Change: Yes, good expansion in Q2, Q here, but it looks like there could be potentially.
Speaker Change: Flat.
<unk> could you just give us.
Speaker Change: Yes.
Speaker Change: Considering the <unk>.
Speaker Change: And how we should think of modeling the second half of the year heading into 2025.
Speaker Change: Yes, I heard the part I'm going to repeat the question because you cut out for the second parts of the first part is is just some color on gross margin and our view on a go forward on gross margin what was the second part of the question.
Speaker Change: Yeah, that's pretty much it.
Speaker Change: Okay.
Speaker Change: As it relates to gross margin.
Speaker Change: Just as a reminder for everyone really what goes into it it's our dental draw compensation, which is a fixed percentage. So ultimately all dentist get paid on commission rates. So that is our number one call it cost of the business, which ensures that variability to as are our cost to a hygienist, which as well on an hourly basis made.
Speaker Change: <unk> variability our consumable costs.
Speaker Change: Two to our practices, which we discussed which were on fixed rates.
Speaker Change: As well as there is additional call it incentive payments to our dentist as part of our structure on an acquisition.
Speaker Change: When a practice ultimately continues to perform significantly well there is a there is a participation in alignment payments to the dental partner.
Speaker Change: Which ultimately given the strong performance that we are having in the business the expansion of margins in.
Speaker Change: And the growth.
Speaker Change: That would be included in the gross margin line as well. So as you look at it that is purely from a financial statement classification perspective.
Speaker Change: Whether it's just sits in gross margin as opposed to call. It in an SG&A area.
Speaker Change: All costs as it relates to the inputs into the delivery of dental services. Our gross margins frankly are consistent <unk> expanding the one the one difference would be.
Speaker Change: The alignment payments that our partners are receiving given the strong.
Speaker Change: EBITDA performance and EBITDA growth at the practice level that we're experiencing.
Yeah.
Speaker Change: Okay. That's helpful.
Speaker Change: And then just on the valuations.
Speaker Change: That does it coming down, but I'm, just trying to square that with the fact that you also mentioned.
Speaker Change: That.
Speaker Change: CDP is benefiting essentially the operating performance it seems like not just core but potentially the market how do you see the CDC impacting.
Speaker Change: Impacting valuations moving forward just curious on any thoughts there, yes, so I think what just to just to.
Speaker Change: Summarized here CDP rollout, which began really in December of 2023.
Speaker Change: Disrupted.
Speaker Change: The dental industry through the first half of 2024, just given the patient flow was disrupted by their patients for qualification and receipt of the CDP.
Speaker Change: Plan and ultimately there was a slow adoption rate from clinicians and seeing those patients. So ultimately patients that they would have other scene in the normal course, there was deferral of volume.
Speaker Change: As well as call it some some disruption as it relates to an administrative perspective of getting up to speed as grant mentioned from an administration progress process. That's all been.
Speaker Change: Really implemented nicely.
Speaker Change: The teams have done a really nice job there. So no no concern on that front. So what we're seeing in call. It Q3 Q4 forward is a return to normal not so much a significant increase from where we were beforehand, albeit as we do see new cohorts of patients begin to qualify for the plan in 2025 and beyond.
Speaker Change: We are optimistic on the upside that is available to our 4% St practice revenue growth target.
Speaker Change: Okay. Thank you.
Speaker Change: There are no further questions at this time that concludes our question and answer session and also today's conference call. Thank you all for joining you may now disconnect.