Yet Another Value Podcast - Buckley Capital's Zack Buckley on why he's urging $DNTL.TO to undertake a strategic review process

Episode Date: June 27, 2024

Zachary Buckley, Managing Partner at Buckley Capital Management, joins the podcast for the third time to share his thesis on Dentalcorp Holdings (TSX: DNTL) and why he's urging $DNTL.TO Board and Management to undertake a strategic review process. Zack's letter to the board: https://finance.yahoo.com/news/buckley-capital-management-urges-dentalcorp-113000826.html Chapters: [0:00] Introduction + Episode sponsor: Tegus [1:43] Overview of Dentalcorp $DNTL.TO and his letter to the Board & Management [7:15] Why'd they call off strategic alternatives in 2023 and why now is the right time [12:23] Management changes / share restructure / US Listing / CRH comp [17:43] Differences between Canadian and US dentistry[ 20:02] Acquisition process / synergies for mom & pop dentistry practices with $DNTL / why private equity has gone after this industry aggressively [26:16] Competitive landscape and environment [28:58] Why hasn't the market warmed up to $DNTL.TO since it's IPO [32:04] Capital allocation [38:34] $DNTL.TO final thoughts on the company and his letter [41:48] Anything else that keeps Zack up at night about $DNTL.TO? [44:05] How big can Dentalcorp grow (when looking at amount of potential dental acquisitions) Today's sponsor: Tegus If you’ve been reading my newsletters, you know how often I rely on Tegus for my research. It’s truly revolutionized how I get up to speed on new industries and companies. Tegus has the largest transcript library in the world, with over 75% of private market transcripts. Whether you’re curious about AI, biotech, or any niche market, Tegus has the insights you need. What sets Tegus apart is its all-in-one platform. It’s packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Tegus, everything is right at your fingertips. The best part? The insights you get are from the very people shaping the industries you’re interested in. You’ll find perspectives from insiders and executives that you simply can’t get anywhere else. To see Tegus in action and understand why it’s my go-to resource, visit Tegus.com/value – that’s T-E-G-U-S dot com slash value. Trust me, once you try Tegus, you’ll never look back.

This episode is brought to you by Tegas, The Future of Investment Research. Look, if you've been reading my newsletters, you know how often I rely on Tegas for my research. I probably read one or two expert calls a day, you know, probably average seven a week off of Tegis. They've got the largest transcript library in the world with over 75% of the private market transcripts. Whether you're curious about AI, biotech, or any niche market, Tegas has the insights you need. What sets Tegas apart is its all-in-one-pack platform. It's packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data.

With Teegis, everything is right at your fingertips. The best part? The insights you get are from the very people-shaping the industries you're interested in. You'll find perspective from insiders and executives that you can't get anywhere else. To see Teegis in action and understand why it's one of my go-to resources, visit tegis.com slash value. That's teag-g-g-us.com slash value. me. Once you try Tigis, you'll never look back. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, would mean a lot if you

could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have on, I think for the third time, my friend, Zach Buckley. Zach, how's going? I'm doing well. Thanks for having me on. I'm really excited for this one. This is actually a company I've been following for quite some time, so I'm excited to get your thoughts on it. But let's start with the disclaimer. Remind everyone, nothing on this podcast, investing advice. that's always true, maybe particularly true today, because we're talking about a Canadian company, you know, for, so for my domestic people, they need to remember that. I think the company likes to brag, they were the largest healthcare IPO in Canadian history.

So it's not like a Canadian micro cap or anything, but, you know, just remember, lots of extra risk, consult a financial advisor, all that. Zach, the company we're going to talk about today is Dental Cork. The ticker up in Canada is DNTL. We're kind of talking because you published a open letter. There's going to be a link in the show notes. People should go check out the letter. But I'll kind of stop ramling there.

We can talk about the company. We can talk about the letter. We can't talk about everything. Like, what do you think we should be talking about with Dental Corp? Yeah, I mean, we can kind of start off with the letter. I mean, basically, or maybe just step back and talk about the business first. So Dental Corp is an owner of Canadian dentist practices. They own about 550 practices today in Canada, and they're the largest owner of dental practices in Canada.

This is a great business because they grow about 4% organically, same practice sales. And that comes from roughly 3% pricing. So it's always basically inflation plus a little bit and about 1% volume. And that's a combination of population growth, which is quite high in Canada, as well as pricing from or additions of different things like Clear Aliner as an example. So they're adding on different things over time to the practices that are helping them grow revenues organically. And then they're doing acquisitions to get you to like a low teens growth number. And from there, there's some margin expansion because they've invested. dramatically in the corporate. So they've increased corporate spend by about 60 million by my

calculations. And so they'll start to leverage that over the next few years. And that's basically been done for M&A, right? They're highly acquisitive, right? It's a serial acquirer, as well as just some back office software and public company cost. So we'll start to see the over the next, yeah, next few years, which will be beneficial. Yeah, go ahead. Oh, go ahead. I was going to say, In terms of the letter, so the stock has been really undervalued now for about 18 months. So there's a ton of public comps to show what this is worth. You know, transactions have been typically between like 12 and 17 times EBITA. The majority of them have been between 14 and 17 times EBTA.

And the best comp for them was done in July 2022 at 17 times EVTA. Obviously, today's interest rate environment a little different than July 22. You know, some level of haircut to that, I think around 15 times is probably the right number. One of the peers, a company called MB2 Dental is being. shopped right now. And from what I've heard, that will go from 15 to 17 times EBITDA. So it sounds like those mid to high teens multiples on an EBITDA basis are still there. The other way we look at this and we put this in the letter is from sort of the consolidators, right? So who are the Canadian consolidators that have similar economics? You know, we posted a

peer group of that and those also trade for about 15 times EBTA. And so we think there's a lot of different things that get us to that type of share price or sort of valuation range. you know, which is anywhere between 50 and 100% upside from here. Do you think, so there's a lot of places I want to go on this company, but let's just start with the letter because that's the public reason. That's the reason you're coming on. You publish that letter. I guess my first thing is, you know, a lot of times when you publish a letter or you go against

a company, it's because you think the company's actively doing something bad, right? Like the classic is the CEO is, you know, he's spending lavishly. He's doing terrible acquisitions, all this sort of stuff. When I read your letter, what I mainly see is, under valuation, and you would like the company to unlock it, right? It's not, hey, I need you to cut costs. You guys are terrible. It's mainly just this stock market doesn't appreciate you. There's some things that have happened in the past kind of 18 months. We can dive into, but it's the stock market doesn't appreciate you. And the thing that I think is kind

of interesting is, I don't know if the company would even disagree, right? Like, the one thing when I was prepping for this podcast, re-reviewing all my notes on this company, like go to their Q1 earning slides. Slide 14. It's one of the first things they hop in. They talk about, hey, we trade it nine times EBITI, here's all of our peers, direct peers, roll up peers. They trade it 16 times. Like, we don't understand why there's a gap. They were always talking about the free cash flow. So I guess my question is like, why did you feel you needed to publish this public letter?

And like, where do you think there's any like kind of oxygen between you and how the management are viewing this valuation gap? So I thought it just made sense to get it in the public domain because I would love for them to sell it. Obviously, I can't push them to sell it, given my ownership. and given what theirs are, but certainly I would strongly encourage them to sell the business, I think. They probably are of the belief that they're going to get the multiple they deserve in the

public markets. And I do think that's true, but I just think it would happen faster to the extent they did it through a private market transaction. So either way, I think we're going to get to the same valuation multiple. I have every confidence that whether it's in Canada, you know, public markets or private markets, it doesn't matter. You know, ultimately investors are going to figure out what this business should trade at. but, you know, it might take two or three years in the public markets, and it could happen

in six months in the private markets. So I think it's just from an IRA standpoint. And then it was also just a timing thing. You know, we made the investment in, you know, starting in December of 2022. So it's been, you know, roughly 18 months the whole time we've kind of heard we're going on lock value. We're going on lock value. We're going on lock value. And, you know, it's been 18 months and it still hasn't happened. So I'm, I'm a patient shareholder. I understand that things, you know, don't happen overnight. But I also think that at some point you have to recognize when you're not getting the value that you deserve and see if there's other actions that can kind of get you there. 18 months is basically 18 years when Navidia goes up 18% every

day, I guess. But I don't know what I'm saying. And I'm happy to own it for another five years. You know, I think there's a great IRA from here. But I, you know, the IRA is going to be better to the extent that they're selling this business versus it remaining public. Well, you mentioned December 2022. So when I first started following the company, I think around the same time because, you know, on the heels of it was KKR rolled up their number two and number three largest competitor in, I think it was July 2022, 17 times EBDA. The company looked around and said, we're trading at eight times EBIT out here. Like, let's unlock value.

A lot of people got excited about it. They called it off in 2023. So what I do think that background is important. Like, what happened with them calling off the strategic alternatives? Because they, you know, you do strategic alternatives to unlock the value that you're talking about. why did that fail last time and why do you think things could be different now? Yeah, so just to be clear, they had two direct offers to acquire the company. I think that's important.

And that's why they explore strategic alternatives. That's why they made that announcement. So in the fall of 22, they received two offers from private equity firms. Ultimately, the reason they weren't able to complete those deals was because the credit markets kind of fell apart, right? March of 23, we had Silicon Valley Bank and essentially a banking credit. And so the ability to procure high yield debt at that point was essentially impossible for private equity firms. And so the two interested parties weren't able to get the deal done.

Let me just this comes back to one of the things they talk about all the time. And I think you mentioned in your letter, they're, call it four times levered right now. And I've got a quote. I'm trying to look through my notes to find it. But they talked about, hey, our biggest peer that KKR roll up, we think they're seven and a half to eight times levered. All of our peers run more leverage than us right now. And they will also say, hey, we think, and I want to come back and talk about the differences between Canadian and domestic dentistry in a second. But they say, hey, we are a great business. You know, dentistry, good times, bad times. People are going to the dentist. All of our peers are more levered.

We're undervalued, all this sort of stuff. So they say that on one side. But on the other side, like, you know, I understand the market got rocky in March, but they couldn't raise that in March. And on the other side, like right now, when you talk to them about, they're at all these conferences, they say, what's your capital allocation priority? and it's not buying back stock, it's doing small, small and less bolt-ons than they used to do, and mainly paying down debt. And I just like kind of look at those and I say, all right, you're undervalued. You say you're under-levered versus peers, but you're retiring debt and you had trouble

raising debt. And I understand the interest rate environment last year and the crisis and everything. But it's just hard for me to bridge that gap if that makes sense. Yeah. So I think, you know, the reason they had a tough time getting a deal done was just because the credit markets were essentially closed for that period of time. So that's why I wrote the letter because credit markets are open now. So I think now would be a great time.

I have no doubt that a private equity firm could get the funding that they needed to take this private, right? And so obviously you go from whatever, 4.3 times where they're levered today, maybe to that seven, eight times range in the private markets. And that's totally fine for private equity. In terms of the capital allocation today, I actually think it makes sense because they believe that they're trading at this very punitive multiple because, of the leverage, right? I mean, a business of this quality should not trade at a double

digit free cash flow yield like that is not a rational place. You know, most of the consolidator, you know, aggregators trade at like a three to five percent free cash flow yield. And so, you know, there's roughly 100 percent plus upside to where the comps are trading on a free cash yield basis. And do you think that you think that differential, because there are publicly traded roll-ups as well, right? Like a lot of people look at the KKR one, the dental one and think, oh, 2022, they're private, they run with more leverage,

but there are publicly traded ones as well. Why is this specific business having trouble kind of catching a bit? Like, I'm looking at their Canadian Consolidator Appeals. Constellation Software, all right, they're not Constellation Software. That's like the greatest thing. But there are others that, you know, are good comps that have some leverage that trade at higher multiple.

Like, why do you think this one in particular is getting dismissed? I don't know. I don't think there's a rational reason for it. I think sometimes in the public markets, that just happens, right? Some stocks get left for periods of time. And then suddenly that changes. I mean, just since our letter, I think the stock is up, you know, 20% plus. I wasn't going to say it.

You said it. And, you know, part of it is you might have brought eyeballs to it, but part of it is the management change I want to talk about in a second as well. Yeah, look, there's institutional buyers. You know, we know that there's several institutions now that are looking at it. And sometimes that's all it takes. I mean, the stock trades, you know, a million to $2 million a day on average. And so it's just not a super liquid company.

So I think it probably just got left in this place where there weren't the right shareholders, right? Because it's too small from an ADB standpoint for a lot of people. And so I think it just was languishing for a variety of reasons. I think there may have also been a misperception around the sale process as well. People see like a failed sale process and they assume it's because of the business. And I think that absolutely wasn't the case here. No, look, I think that's right. Because to me, when you've got a company with private equity background that was clearly

structured for a sale and you have a failed sale process. The thing I wonder is, oh, what did the due diligence uncover that is worrying here? Let me ask, right after you published the letter, I don't know if it has to do with your letter, if it's in the works, whatever, they announced some management changes, right? And I think part of the reason the stock is up over the past few weeks is maybe you signed some light on it. But part of it is there's some pretty interesting things in these management changes, the promotion of the CFO, some of the things they put around the CEOs, loans and everything that it's really interesting. So I want to ask you, what do you think the management changes and what are they signaling with them? Yeah, I mean, look, we've had a great

dialogue with both Graham and Nate. And I think Nate has done a fantastic job as a CFO. And my assumption is that Graham wants them to take more responsibility. And part of that could be, you know, grandma's getting up there in age and maybe wants more of a partner or someone to sort of be slowly taking over his duties. And part of it is probably Nate's just doing a great job. So I'm sure it's some combination of both, you know, there's a decent age gap between Graham and Nate. And I'm sure that that accounts for part of it where they're wanting him to take over more responsibility. What about, you know, I think the thing that jumped out to me, so this is, people can go look. This is the June 18th, 20204, Dental Corp, strength, and senior leadership.

Nate, the CFO becomes president. Graham, uh, Graham remains the CEO, but they also do a lot of adjustments to some loans and everything with, uh, with Graham. Some of them include a mention of, hey, the, I can't remember the exact thing. I'm trying to look at it. We'll forgive the loan or the loan will come due once we flip to a U.S. listing. There's other things around change of control and everything. What do you think about that side, all the restructuring of the loans to preferred shares, U.S. listing, all of that.

Yeah, I think they're just trying to simplify the structure. So, you know, ultimately, look, they're getting rid of the multi-voting shares, right? So they're dissolving the multi-voting shares, and then they're collapsing the management loan program. I think those are both favorable things from a shareholder standpoint. They're just trying to make this as shareholder-friendly as possible. And, you know, not having a multi-voting share and getting rid of a management loan program are both shareholder-friendly things to do. So definitely apply. Okay, perfect. Obviously, the U.S. listing is something that I would encourage them to do. Do you think, because, you know, this is a Canadian Dental Corp roll-up.

I hear things in the U.S. trade more liquid, but it's like a CRH, which I think you were involved in. I can't remember. But CRH, go ahead. I'm not, but I'm well aware of what happened there. I am too. So CRH, for those who don't know, it had a big U.S. aggregate business. It was listed in London, a bunch of very smart shareholders, apparently smarter than Zach myself said, hey, all your peers in the U.S. trade for 50% multiple better than you, just relist to the U.S., you've got to use this business. You'll go up. Guess what? Relisted the U.S. went up 50%. And I've seen these trades before. But most of the time when they do it, they have like a U.S. focused business.

And it does strike me as like Constellation Software. That is a Canadian company. They get a great multiple. They trade in Canada. Like Dental Corp, you're a Canadian dentistry company. Does moving to the U.S. really, IWG is a business that you and I both know very well. I know. Then moving to the U.S.

I think would make a lot of sense because a lot of their values in the U.S. Dental Corp, everything's in Canada. Like it seems like it belongs listed in Canada. Look, there are companies that have the majority of their business. different jurisdictions from where they're listed and sometimes works out really well. So I think I would I would prefer that they were U.S. listed, but to your point, I think there are plenty of Canadian consolidators, you know, just to kind of name a few auto Canada, you know, Boyd Group Services, First Service Corp, GFL, you know, those are all companies that trade at 12 to 17

times EBITDA. Yep. You know, all consolidators. So I don't think you have to necessarily and just look at dental's history, right? I mean, dental itself traded at the correct. multiple when an IPO. So I do think they can achieve it in the Canadian public markets. I think they would probably achieve it more quickly in the U.S. public markets. I think just in general, stocks in Canada stay undervalued for longer than stocks in the U.S.

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I am glad that it's unlimited because I am looking at BMSEC all the time. I'm looking at my Google Chrome right now and I have 30 tabs open. And I'd say 18 of them are from BAM SEC. So between TIGAS and BAMSECC, I am a very devoted user here. Look, it's one platform where you can dive into expert call transcripts, management checks, panel calls, and detailed financial data. No more fragmented data sources or endless searching. TIGIS brings everything together, giving you a crystal clear view of the industries and companies that matter most. If you're ready to supercharge your research, visit tigis.com slash value.

That's T-E-G-U-S dot com slash value. Trust me, once you've experienced Stegis, you won't go back to your old way of doing research. Stocks in Canada stay undervalued. Stocks listed in London are always undervalued. So that's my rule of thumb. Let's go to the actual business. I think we've covered the event, your letter, the management changes. I think we've covered them pretty well.

Like, hopefully they run a strategic process. I think you would co-vout with me. I think there would be a lot of private equity interests and just like take this private, lever this up more, and continue to run pretty much the same playbook they're running. Let's talk about the differences between Canadian dentistry and U.S. dentistry because I think most of our listeners are domestic. And if I say dentistry, like you, the dentist and your, some of my best friends are dentists, they probably do pretty well. Like as one of my friends said, when I graduated from dentist school, my professor said, hey, you're getting a license to print money with your dentistry licensure. Just remember not to abuse it because you can do some pretty unethical things and really put that at a risk. Nobody needs that.

But, you know, in Canada, I think it's actually better. So I just, how does the Canadian dentistry system defer from the U.S. industry? Yeah, so there's two main things that are better about Canada than the U.S. The first is that just the oral health compliance is higher, just meaning that people go to the dentist more often in Canada than they go in the U.S. And the second thing is the way the payment works. So it's primarily a direct cash pay where the customer comes in, you know, goes to the dentist and basically they pay directly. And then it's on the customer to get reimbursed themselves. So there's not any of that reimbursement risk, you know, which is a big positive relative to the U.S.

What about, so I saw 75% of Canadians have dental insurance, which obviously that's great because if you've got the dental insurance, you can use it. There's a big national dental plan that rolled out actually inch your quarter. May 1st is when it rolled out. How do you look at that for the business? You could tell me it's great, right? Everyone who I think it's under $90,000 gets covered by the government. So, boom, your customer base is covered. I could also argue, like, you know, there are some businesses that get paid in the U.S. Medicare, Medicaid.

You kind of would rather it be more private pay. So how are you looking at that kind of rollout of the National Dental Plan? Yeah, we think it will be a net positive overall for the industry, but I don't think it matters that much. You know, I think it will be a small net positive, but I'm not looking at it to be like a catalyst for change or really any significant change from where they are today. online i got a lot of questions and a lot of the questions that are out look this is damselcorp they're going around and they're buying Canadian dentist offices and you know a lot of the people are worried with the this is this is the first worry when i looked at the business i had as well right like you go you buy i buy zack's dental office and a lot of people are worried

that sells the office but he's the dentist and then he sells it and he says hey thanks for the check i'm headed to the bahamas guy good luck. The dentist is gone and like, you've got that real key man risk. And even without that, a lot of people worry that I buy Zach's business and Zach says, okay, you know, they obviously they lock you up for a little bit. But Zach says, okay, you lock me up. I've got a few years to earn this out and everything. But, you know, I used to come in and I would get in at 7 a.m. to do some 7.30 a.m. cleanings. Now that I've sold and I don't have the equity, you know, I'm a 9 to 5 man right now. Or maybe I'm working the old bank in hours. I'm a nine to three man or

something. So a lot of people were just interested in the acquisition process. how they can make it work, how they can actually accrete value. So I'll toss that over to you. Yeah. I mean, so as a starter, right, it's a five-year contract when someone starts. And then once that five-year contract rolls off, you know, they have 90% plus retention ratio after that, right? So average dentists to say in their, you know, early to mid-40s, you know, say that contract

is over when they're 50, right? They probably want to retire when they're somewhere between 60 and 65 or 60 and 70. And so they're probably going to stay there another 10 to 20 years after. you know, after that rolls off and they're happy, they're getting paid more than they got paid when they were running their own practice. They're not having to deal with as many of the, you know, business headaches that they were having to deal with before. And they got paid up front, you know, maybe $2 million. And so overall, it's a really nice transaction for the dentist themselves. And, you know, it ends up being, I think, a better lifestyle for them over time. But they're still

incentivized to work, right? They're still being incentivized, you know, in part by what the revenue is that they're bringing in. Right. So it's a, it's a base plus bonus structure. And, you know, they still need to work to make a living. So I don't think most of these people are wealthy enough where they can go off to the Bahamas. You know, it's nice to have the $2 million in the bank. But, you know, there's a lot of living expenses. And I think people tend to work. And so, yeah, they're kind of incentivized to stay around until, you know, they're in their 60s.

So I knew that they, they said 90% plus retention after five years. They were at a conference recently and they said 93% of our dentists who we've acquired since 2011 or so with us. So that's obviously longer than five years. And maybe there's some, you know, adjustment. If you do, you acquire one in 11, one in 12, one and 13, and then 100 in 2020, maybe there's a little bit. But I was really impressed by that number. But you mentioned one thing in there. And I think this is a key to the risk we're talking about.

I think it's key to the business model. The dentist can get paid more under this business model than when they kind of owned and hung up their own shingle. And I think that also speaks to the synergies when the company acquires a dental. practice. So why don't we just kind of dive into the synergies, how a dentist can get paid more, while also kind of the private equity firm is kind of suck, Dental Corp and this corp, is kind of sucking out their own fees and profits. Yeah. So practice level, even though, you know, increases 10 to 15 percent from the date of the acquisition. And then, you know, over time, there's additional cost and revenue synergies above and beyond that. So obviously, they have, you know,

better procurement, right? They're buying consumables and other, you know, dental objects or or, you know, things they're using in the practice at much better prices. And then they're adding things, like I mentioned, like clear aligners. So there's other revenue synergies. And so I think those are kind of the main things that make the practices better. But I don't want to overstate it. It is 10 to 15 percent. And then there is, you know, some incremental improvement from there. But the majority of what makes this attractive is just they're buying really high quality consistent businesses at seven times EBITDA. And, you know, you put together a diversified group of those businesses. And that's a really high-quality, you know, high-quality business.

No, look, everything you're saying on a mom-and-pop dentist, you know, I think the cost energies are clear and they're real. But I also think if you're a dentist, you know, it's hard. My friends who are dentists, you run the business, you have to see patients. Like, that's most of your day. I'm sure you're trained to run the business, but having somebody implement best practices instead of mom and pop, like, I think there's something really there. And there's one quote they gave recently that it was,

hey, when we buy practice, you know, the first year before we buy them, the patients come in 2.1 times per year. Then we bring in our technologies, our communication, you know, pinging people, email that we're able to increase it to about 2.5 times on an average basis after year like two or three. Like not just the cost savings, but having that incrementality go up. That's just a huge number. And you can imagine, you know, as you said, maybe before they were doing 90% cleanings and 10% Invisaline or whatever, and Invisalines were a lot of money here. Maybe with a little technology and a little knowledge and a little push, it goes to 8515, so you're increasing the high margins.

Like, it makes sense to me. I've seen it in America. I've seen it there. I know people are skeptical, but it's one of the places that really makes a lot of sense to me. Do you want to add anything there? I mean, look, I would just say this is an industry that private equity has gone after extremely aggressively. And, you know, private equity guys are smart.

Like, there's a reason why tons of large, well, capital. intelligent private equity firms all have dental roll-ups, you know, and I put it in the press release, and, you know, I'm happy to kind of read through it, but it's, you know, you have KKR, you have Blackstone, you have the Jordan Company, you have Harvest in Berkshire, you know, KKR L. Catterton. So it's kind of all the top tier private equity firms that are all involved in this, and that's because dentistry is a really attractive model. And, you know, dentistry is more attractive in Canada incrementally than it is in the U.S. You know, they're, I believe, the fourth largest DSO in the world, you know, top three are all in the U.S.

And, you know, the top three are all owned by private equity. The other thing that I always struggle with the roll-up is I kind of do believe in the synergies and the optimization, but I also struggle with, hey, there's a KKR-backed company that owns what used to be the number two and three-player. Now they're just the number two player, but like the competition, right, where you've got this single dentist, he's only going to make a deal one time in his life to sell, like, Why isn't it, why isn't the returns? Because Dental Corp says we're doing 15 to 18% returns when we buy a dentist's office.

Those are great returns, right? That's what you make a private equity business on, especially when you can, if you're levering up like KKR's done seven times, like you'd really make some juicy equity returns. Why isn't all the return getting competed away by, you know, KKR's bidding and maybe Blackstone's coming and rolling up a number three and they're bidding? Like, Dents is just selling to the highest player. and returns kind of get competed away to cost of capital-ish in terms of, you know, you just have to pay through the nose to buy these things up.

Sure. Yeah. I mean, so the short answer is it's a highly fragmented market, right? So, you know, Dental Corp owns 550, you know, dentals offices in Canada, there's about 15,000 in total, and they're the largest, right? So in terms of the KKR entity from what we've heard, you know, they're not being highly inquisitive right now just because they're kind of dealing with, you know, they are a little bit levered, interest rates are a little bit high.

So a little bit. Okay. From what I've heard, that entity is, I don't want to say struggling, but maybe not an acquisition mode. You know, I think they're just sort of digesting the acquisitions that they have right now. And so there's really not that much competition, right? So if you think about, so there's 15,000 dentists practices, and I'm just going to

do this math off the top of my head. Let's say, I don't know. What do you think the number is 5% want to sell every year? Something in that ballpark. maybe it's 7% maybe it's 5% let's just use 7% and say it's a thousand practices a year want to sell so you know dental corp is trying to acquire somewhere in the ballpark of maybe 40 or 50 practices a year roughly speaking you know obviously it depends on the size so they you know they need to be 5% of the acquisitions of you know a thousand right if they're buying 50 roughly speaking of

the of the thousand they're being sold every year and maybe I'm wrong maybe it's only 500 there being sold. But either way, like, whether they're five or 10 percent, it's just not that competitive. You know, their major competitor right now is not being highly acquisitive. And there's really no one else, right? It's sort of the top two. And then it's just a very fragmented industry. So I really don't think it's that competitive. And look, we've seen that, right? Acquisition multiples have come down dramatically. I mean, I think what made it competitive, you know, in 2021 was just cost of capital was lower. And so more people were more interested in doing it. Now that the cost of capital is higher, you know, multiples are down to seven times. And that's obviously

great for them on a go forward basis. Let me come back. So I think we kind of touch on it, but I do just want to come back. Like, this is the type of business that I feel like the market would generally get excited about, right? Like, you've got very limited cyclicality. That's not to say none because, you know, you might decide to delay your braces or your inviseline by six months if there's a real recession, but very limited cyclicality. Great cash flows. You know, as you mentioned here, the patient pays, and then they ask their insurance for reimbursement. So negative working capital, you know, like all this type of stuff, very consistent. Business is sticky, right?

Like once you have a people, when you're just pressing numbers on a keyboard, you kind of don't think about it. But once you have your dentist, like people don't switch their dentist a lot unless they're moving or anything. So it's actually a pretty sticky business, all this sort of stuff. Why has the market just since the IPO, the stock has gone down, it's been left? Like, just why hasn't the market warmed up to this business? Again, I mean, I think it's hard to say with absolute certainty, but I would point to a few things. I mean, the first thing is it's a fairly levered business in an higher interest rate environment, right? So when you look at when the stock really started to drop, you know, really started to drop sort of late in 2021, early 2022.

And that's what interest rate expectations went up, right? And so throughout 2022, you know, as CPI was worse, right? first we thought inflation was transitory. We obviously realized that that wasn't the case. And so as interest rate expectations continue to go up as inflation was worse than expected, you know, the stock just continued to trade down. And interest rates really haven't come down that dramatically from where they were in kind of like the fall and winter of 2022. And so we just really haven't seen the stock rebound. You know, I think a few other things, obviously a failed sale process does not help. I think you had, you know, some, some salary

there's, you know, reasonably sized sellers probably in the market in the last like nine to 12 months. You know, I think most of those sellers are gone from what I can tell. It feels like that has shifted to actually there being institutional buyers. You know, I think there were some fairly sized institutional sellers. And I think that's shifted. So, you know, headwind has turned to a tailwind from that perspective. And then I think, you know, you have a pretty clear situation where rates should come down

over the next, say, 12 to 24 months. And obviously that will benefit them. now quite frankly I think this is traded way too much in line with rates like I think people are a little like the business is going to do well with or without rates and to the extent that rates come down yes it helps them but it's not like this is highly dependent on rates where you know I think a hundred basis point move in rates is like three or four percent free cash flow change so it definitely helps and by all means I hope rates go down for this you know for this business to burn a little bit more but I think people have been a little too obsessed with

Right. And that probably goes to the other thing, which is Canadian investors don't like debt, right? So I think U.S. investors are the most comfortable with debt, right? More comfortable than Canadian investors, more comfortable than UK investors. U.S. investors just are more comfortable. People in general, investors in the public markets in general don't like that. But if you have to choose a place to be a highly levered company, the U.S. is probably the place to be for that. you know i'm just to your prior point on this trades way too in line with interest rates i'm just laughing because you and i both focus mainly on like let's call them smid to small cap companies and i feel that way about just about every company i look at it they all turn out to be interest rate proxies somehow uh just last thing and we again we kind of touch on this up front but this is just one of the things that just in my head when i look at this company right like since 2022 i mean i read prepping for this podcast i read the last four conferences and the earnings call. And literally the first thing they do is the person greets them and says,

hey, how's it going and say, look, we're dental corp. We clean your teeth. Our stock's too cheap. Every other peer trades at 15 times EBIT or something. Like, that's how they start every conference, everything. And these guys are incentivized, right? Like L. Carlson still owns 40%, if I remember the private equity backing correctly. Graham's got a lot of stock. These guys have a lot of stock, a lot of incentives. And I just don't understand, you know, even if they're going to, even if the end game is to sell in six months, selling three months, selling a month, selling a month, selling nine months.

Like if they were buying back shares, these guys generate a lot of cash flow. If they just said, tell with it, we're not going to, like we could handle seven times over, we're only four times levered. If they were buying back shares, they would be creating so gosh, not much value for the remaining shareholders. And I think it would give just like me personally a lot more confidence that everything was really, or if that makes sense? So I know I've asked and I know I'm around, but like, why aren't they buying back shares?

Like, they see the math and they're paying down to that anyway. Well, just think about it. If they're buying shares, they're paying 10 times today. If they're buying single level practices, they're paying seven times. So they're buying something at some times or otherwise they would be buying their company at 10. So, I mean, I think buying single practices at seven times makes a lot more sense than buying back their shares at 10 times.

No, that's true. But, you know, the most recent one that, A, they have. have kind of dialed back the acquisitions a little bit. Now, that might be because there's it might be because there's not as much to do. They're digesting, but they have said they've slowed a little bit down. But they could buy back shares and buy practices. It seems like they're doing pay down debt and buy a little bit of practices. And like debt paydown seems to be what they're focused on. Somebody asked in the Q1 call, hey, we looked at the management circular and it seems you guys are focusing more on free cash flow instead of EBITDA growth.

is that because you guys are more focused on kind of integration and margin expansion than inorganic growth going forward? And Graham said yes. And again, margin expansion, free cash flow great, I'm here for it. But like, I'm just a little surprised by that because they can buy practices at 7. They can buy back their own stock at 10. Driving up free cash loan and paying down debt seems like actually the least value accretive of all of them to me.

So I get what you're saying, but I think what they're looking for is to get that multiple expansion that will come from lower debt. Right. So while I wish the Canadian investors looked at this and were okay with it being levered at 4.3 times, like the reality is they aren't. And so to the extent that they're able to get down to, you know, say sub four times, which they're probably, you know, three to, you know, two to four quarters away from. You know, I think they're expecting and they probably will get a pretty significant leverage in the multiple, right? So to what we were just talking about a few minutes ago, you know, they've traded kind of just in line with rates historically. And I think they're trying to break out. of that because the reality is this business should not trade with rates like this is an acical you know very nice organic growing very long total addressable market like this should trade at 20 to 25 times free cash flow and it's trading it you know 10 or 11 times free cash flow today and before my letter was trading it eight and a half nine times free cash flow so it's it's just i think they're really focused on getting a higher multiple and then to the extent that they have a higher

multiple, right? They can use their stock as a currency, right? It gives them a lot of different options. So I think if you're thinking about capital allocation priorities, the first capital allocation priority is buying dental practices seven times. I think the second capital allocation priority is getting the debt a little bit lower because that might allow the multiple to go up dramatically. And to the extent the multiple goes up dramatically, then, right, they can start using their stock as a currency. I hear you on the buybacks. I just don't think, I can see. I can see why it's not their biggest priority because I don't think doing buybacks is going to get the multiple up right so like let's say I'm trying to kind of do this on the fly but mathematically

speaking you know if they're acquiring 25 million of you know practice level evens up per year right that's seven times that's 175 million so that's all that's already all their free cash flow right they'll probably do some somewhere of the ballpark of I want to say 150 this year and so I don't think they really have the free cash flow yet to do anything other than acquisitions. Now, maybe if they're doing $20 million and they're paying a little bit less, you know, they might have $10 or $20 million extra, but $10 or $20 million is not going to move the needle in terms of, you know, using that $10 or $20 million for buybacks. This episode is brought to you by Teegas, the future of investment research.

Look, if you've been reading my newsletters, you know how often I rely on Teague's for my research. I probably read one or two expert calls a day, you know, probably average seven a week off of Teegis, they've got the largest transcript library in the world with over 75% of the private market transcripts. Whether you're curious about AI, biotech, or any niche market, Teegas has the insights you need. What sets Tegas apart is its all in one pack platform. It's packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Teegas, everything is right at your fingertips. The best part, the insights you get are from the very

people shaping the industries you're interested in. You'll find perspective from insiders and executives that you can't get anywhere else. To see Teegas in action and understand why it's one of my go-to resources, visit tegis.com slash value. That's teagus.com slash value. Trust me, once you try Teegis, you'll never look back. It's true, though. I guess my pushback on you would be, hey, if you do, if you buy 25 million at seven times and you use all your free cash flow, it's actually naturally de-leveraging because you just increased your e-bidaw by your ebidaw by,

25 million and you should lever that up, you know, it does, which is exactly what they're doing. I mean, that's their plan. Their plan is to deep leverage through essentially just buying more EBITDA and not having the debt actually go up. Yeah. You know, I think my dream and my dream and it seems like it should be so easy, but I've never seen a company. I know they do, but you just never really see a company successfully pull it off. It's like, hey, we think we're worth 10. We're, we're trading at six and we're four times levered. We're just going to keep buying back to stock and then one day we'll sell it at 10 and our remaining shareholders are going to make a fortune because every share that got retired, you know, we get that 6 to 10x multiple ourselves

and like, my dream for these guys is that's what they do. And I understand there's a lot in between here and there, but I just, I want someone to do it. Another thing, just like, it's just at a recent conference, one of the quotes I have is their CFO, who is now the president, comes out and says, we are one of the lowest, if not the lowest levered health care aggregators and definitely one of the lowest levered dental service organizations, both north and south of the border. And I read that, I'm like, yes, keep the leverage, keep the leverage, like buyback shares, keep the leverage. And I understand why they're doing it. And I understand I'm yelling at you and the person I should be yelling at is the board and the CFO, but, you know, it's just one of the things that jumps out to me.

Zach, we actually, I have a list of notes, two and a half pages long, and I actually think we've gone through everything I want to chat about. anything else, jumping up to you, anything else you think listeners should understand either about why you wrote the letter, what you wrote in the letter, or about the business in general? No, I mean, I think we did a nice job of covering it. I think, you know, at the end of the day, if people are looking for a business that is, you know, very economically resistant or, you know, going to do well in a recession, I think it's a unique company because it's really hard to find a really cheap business that is actually going to do well, you know, in a down market.

I think most businesses that are really cheap today, you know, you've had a few on the podcast. I mean, Cesar's as an example. Like, we own Cesar's. I think it's great. And but obviously, if there's an economic contraction, like, we all know Cesar's is going to struggle and the stock is going to go down. You know, dental is very different than Cesar's. I wish I had more dental corpse in my portfolio. You know, it's hard to find really cheap, great businesses that are actually going to do well in a recession.

And so to the extent people are looking for. that I think dental is a great option. I want to come back to Intel one second, but Caesars, you're longer, it sounds like you listen to the podcast, what did you think, like, when I look at Caesars, one of the struggles I have is, hey, the one thing I've learned is with gaming companies in general, just wait, there's always a crisis, just buying during the crisis, and they'll be there cheap. But here, it's like the stock is down, call it 65% over the past 18 months to two years. So I'm guessing you would say that this crisis is here, and I kind of agree, like, what do you

think of that dichotomy? I've sized Caesars in a way that if there's a crisis, I'll have a lot to buy more. So I think it's extremely attractive here, right? I think the argument of fair value being somewhere between two and three times the current price is accurate. And therefore, I want to own it. But at the same time, I also know that if there's a recession, the stock's going down 50% or maybe more. And so I just wanted to have it sized in a way where we'd be able to buy more to the extent that that occurred. Dental Corp, anything else that keeps you up at night with Dental Corp?

And I guess not to put you on the spot, but one tweet you had that I had saved in my notes that I couldn't find the reference to, there was a Veritas. I don't know if it was a short report or if this was a bank that put out of sell side, but you seemed like you didn't like that report. Anything in that report that you wanted to speak to or address or anything? No. No, there was nothing concerning it. I just didn't agree with the work that they had done at the time.

And I remember the specifics because it's been a while. But Veritas is a sell, they're like a sell side shop that essentially does like short reports on companies. And so I knew that, but I was it. I also like when you Google, there's a Veritas Canadian investment research firm and I couldn't find anything. But I wasn't sure it was the Veritas, you know, sell kind of service or Baratos sell side. I wasn't sure. Okay. That makes sense.

What was there? What was the juxt of their argument? It was, it was nothing that that was concerning at all. I mean, I think it was the traditional things of, you know, high leverage. You know, that's really what Canadians don't like with dental ultimately is just the leverage. I mean, I think the only other thing I saw in the questions, you know, people were asking about like the acquisition multiples. So I think what's important to understand is like they've invested quite a bit in corporate GNA in the past few years, right, to make their acquisition engine more viable, you know, investing in software systems. And so all of that will scale going forward.

And so that's been a huge headwind on EBITDA. over the past three years, and right, you've seen adjusted EBITDA margins come down a fair amount. And all of that now is fully done. All the investments are there. And so that will be a huge tail when going forward, where we expect somewhere between like 20 and 40 basis points of EBTA margin expansion per year. There's 15,000 dental practices in Canada. These guys already own 550. So I think that's 3 to 4% if I'm doing that fast math in my head. And I'd be embarrassed if I wasn't. But you know, not every, you're obviously not going to buy 15,000 dental court, dental practices, because the government would have trouble with that at some point.

You know, also of those 15,000, these guys talk about, hey, we've got dental court quality practices, right? And not every practice is going to qualify for that. I think I'm actually looking at the slide. They say, of the 15,000, 10,000 don't even meet our criteria. So there's kind of only 5,000 left. They're at 550. They've already got 10%ish. Like, how many do you, how many do you think they can acquire before you kind of start? reaching up on the, hey, you know, if you're at 1500 and you can only get to 2000, like the next acquisitions kind of don't even budge the needle that much. How big do you think these guys can grow? Yeah, I mean, I think certainly the next five years are not a

concern at all. And then I also think that, you know, it wouldn't surprise me if they got into the U.S. market, right? So I was kind of leaning, leading you towards that. I was wondering, yeah. If it's ever an issue from a total, you know, addressable market standpoint, like the U.S. is absolutely massive, right? So I don't think that will ever be an issue for them. It's just a question of probably when they enter the U.S. markets. But again, from everything I've heard from them and the deal pipeline they have, they have plenty to do in Canada right now. There's absolutely no rush. And to the extent there ever is an issue with that, you know, the U.S. is always an option for them. There's obviously a lot of competition in the U.S. for acquisition.

There's several platforms here. But, you know, one thing that I kind of had in the back of my mind when you said they invested this much into SG&A over the past few years, like you don't invest that much into SG&A to go grow your 550 dental court practice to 1,500. I mean, you're going to do that, but you're also going to do it to go roll up U.S. locations or I don't know what dentist practices in Germany look like, but this is going to be an international business if this goes to plan. Like, you don't make that large investment unless you're going to go international. So I think the growth runway, that's probably five years away, but the growth runway is probably longer than I was leading you to there. I don't know if you agree, disagree anything there.

Yeah, I would emphasize there's plenty for them to do in Canada, right? If you just assume 50 practices a year, right, they'd be 800 practices in five years, right? I think that's, I think they'll get to more than 800 practices in Canada. So there's plenty for them to do in Canada, but I would not be surprised to see them enter the U.S. at some point. Cool. This has been great. Zach, I guess we can wrap it up there unless there's anything else you want to shout about or anything. Nope, that's great. Thanks so much. Well, look, I appreciate you coming on again. I think this is the third time. So you're approaching the five-timer club with the shirt and everything. But I'll include a link to Zach's letter. I'd encourage anyone

who wants to read it to learn more about the company, to learn more about the cops to go read the letter. I read the letter twice and prepped for this podcast. So I know right at the bottom is all of Zach's contact info. So if you want to reach out to Zach, you just got to read the letter all the way through the bottom and all of his contact info is there. But Zach, thanks so much for coming on for the third time. And I'm looking forward to the fourth time. Thanks so much for A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.