Description
BDMS spent the last several years focusing on its existing dental offices. According to the company, it is the largest provider of dental management services in Colorado and New Mexico. Management worked on battening down the hatches, filling the dental offices up with providers and controlling expenses.
Net revenues remained flat in ’03 at the $30mm level. Management’s primary focus was on operating the offices.
The strategy for 2004 turned to growing the top line, and this focus continues into 2005. This includes both enhancing the existing offices as well as increasing the office base.
BDMS has brought in additional dentists, increased advertising and marketing and focused more on the specialty side of the business.
In terms of increasing the office base, management has looked at a number of deals, but so far hasn’t pulled the trigger on any acquisitions. They’ve backed away from deals after doing their due diligence, and communicate their intention to remained disciplined in this area. Management owns a significant percentage of the company, and they know it is easy to acquire. Operating the practices afterwards is another matter.
To grow the office count, BDMS has initiated a de novo development plan. BDMS opened a new office in Phoenix this past summer. It has recently opened a new office in the Denver area, and plans to open another office in the Denver area in January. BDMS also has three signed leases in the Phoenix area, with expected openings in mid- to late-summer ’05.
Management intends to continue looking at additional de novo development opportunities.
Historically, in terms of BDMS’ new offices, the company has had some star performers as well as some dirty dogs. The success of these offices depends greatly on the productivity of the dentist. Finding good dentists is the hardest part of the business. BDMS' dentists need to be sales oriented. They also have to be willing to do a lot of dentistry.
In terms of location, BDMS places these offices in supermarket-anchored shopping centers. Management likes to see new rooftops going up in the area.
The new offices are driving BDMS’ capital expenditures significantly higher than the capex incurred over the last several years. The capital budget over the next 12 months is around $2mm. This is exclusive of maintenance. Per the latest Q, de novo openings are expected to run approximately $1.6mm, while two major remodels are expected to run another $.4mm.
Over the last couple of years, capex averaged around $.5mm annually. For some time, management has maintained that maintenance capex on the offices should run approximately $50K per month, or $.6mm annually, which is a bit more than prior spending.
YTD capex amounts to around $1mm. Capex in the first half of the year amounted to around $350K. Capex then shot up to over $670K in Q3. Third quarter capital spending included roughly $400K for de novo development in Phoenix (a larger than typical office that includes both general and specialty), roughly $100K for redevelopments, about $30K for specialty equipment and around $140K for maintenance.
In terms of future redevelopments, other than the two remodels included in the forward capital budget management doesn’t see another redevelopment right now.
In addition to investing in the de novo offices, management also expects to continue with its stronger advertising and marketing spending than incurred in prior years.
LTM net revenues are around $31mm, and anything less than $33mm-$34mm in forward net revenues would be viewed as a disappointment.
LTM EBITDA margin is around 15%, which produces around $4.7mm in EBITDA. Margin in the latest quarter took a hit due to increases in spending on dental supplies for the new office/new dentists, etc, and from additional advertising expenditures. Using a mid-14% margin on forward revenues produces close to $5mm in EBITDA.
Interest expense is minor, and management has focused on debt reduction. After taxes and estimated maintenance capex, this gets to around $3mm in FCF. With approximately 1.3mm diluted shares, this has BDMS trading for around 8x FCF.
Catalyst
Increased efforts to grow the business in a disciplined manner.