Interim Results Presentation - Pacific...

Interim

Results

Presentation

Presented by:

John Gibbs

Managing Director & Chief Executive Officer

Jane Coleman

Chief Financial Officer

19 February 2016

Pacific Smiles Group - Interim Results Presentation 2

Important disclaimer

Important notice and disclaimer

This document is a presentation of general background information about the activities of Pacific Smiles Group Limited (Pacific Smiles) current at the date of the presentation (19 February 2016). The

information contained in this presentation is of general background and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does

not take into account the investment objectives, financial situation or needs of any particular investor. These should be considered, with or without professional advice, when deciding if an

investment is appropriate.

Pacific Smiles, its related bodies corporate and any of their respective officers, directors and employees (Pacific Smiles Parties), do not warrant the accuracy or reliability of this information, and disclaim any

responsibility and liability flowing from the use of this information by any party. To the maximum extent permitted by law, the Pacific Smiles Parties do not accept any liability to any person, organisation

or entity for any loss or damage suffered as a result of reliance on this document.

Forward looking statements

This document contains certain forward looking statements and comments about future events, including Pacific Smiles’ expectations about the performance of its businesses.

Forward looking statements can generally be identified by the use of forward looking words such as, ‘expect’, ‘anticipate’, ‘likely’, ‘intend’, ‘should’, ‘could’, ‘may’, ‘predict’, ‘plan’, ‘propose’, ‘will’,

‘believe’, ‘forecast’, ‘estimate’, ‘target’ and other similar expressions within the meaning of securities laws of applicable jurisdictions. Indications of, and guidance on, future earnings or financial

position or performance are also forward looking statements.

Forward looking statements involve inherent risks and uncertainties, both general and specific, and there is a risk that such predictions, forecasts, projections and other forward looking

statements will not be achieved. Forward looking statements are provided as a general guide only, and should not be relied on as an indication or guarantee of future performance. Forward

looking statements involve known and unknown risks, uncertainty and other factors which can cause Pacific Smiles’ actual results to differ materially from the plans, objectives, expectations, estimates

and intentions expressed in such forward looking statements and many of these factors are outside the control of Pacific Smiles. As such, undue reliance should not be placed on any forward looking

statement. Past performance is not necessarily a guide to future performance and no representation or warranty is made by any person as to the likelihood of achievement or reasonableness of

any forward looking statements, forecast financial information or other forecast. Nothing contained in this presentation nor any information made available to you is, or shall be relied upon as, a

promise, representation, warranty or guarantee as to the past, present or the future performance of Pacific Smiles.

Pro forma financial information

Pacific Smiles uses certain measures to manage and report on its business that are not recognised under Australian Accounting Standards. These measures are referred to as non-IFRS financial

information.

Pacific Smiles considers that this non-IFRS financial information is important to assist in evaluating Pacific Smiles’ performance. The information is presented to assist in making appropriate comparisons

with prior periods and to assess the operating performance of the business. In particular, this information is important for comparative purposes with pro forma information contained in Pacific Smiles’

IPO Prospectus lodged with ASIC on 3 November 2014.

For a reconciliation of the non-IFRS financial information contained in this presentation to IFRS-compliant comparative information, refer to the Appendices of this presentation.

All dollar values are in Australian dollars (A$) unless otherwise stated.


Agenda

1

2

3

4

Performance Highlights

Growth and Outlook

Results Detail

Business Overview and Update

5 Appendix A - Statutory to Pro Forma Results Reconciliation

Section one

Performance

Highlights


Performance highlights

► Revenue $41.6 million, up 10.8% (1H15: $37.6 million)

► Patient fees $67.0 million, up 9.3% (1H15: $61.3 million)

► Same centre patient fees growth +4.9% (1H15: +6.0%)

► EBITDA $9.4 million, up 2.3% (1H15 pro forma: $9.2 million)

► NPAT $4.9 million, down 1.9% (1H15 pro forma: $5.0 million)

► Interim dividend of 2.0 cps (fully franked) declared

► Net cash of $9.1 million

► Network expansion with 5 new Pacific Smiles Dental centres opened

► Key senior hires completed (People & Culture, IT, Business Development)

► Strategic initiatives launched (online bookings, television brand advertising)


$9.2m $9.4m$4.4m $5.0m

$6.8m$8.0m

$10.2m

$13.3m

$15.1m

$18.2m

$20.3m

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Pro formaFY2015

FY2016

EBITDA

Note 1. Low end of FY2016 EBITDA guidance range

History of strong financial performance

1

Return on Invested Capital (EBIT)

$61.3m$67.0m$40.0m

$48.9m

$59.7m$69.8m

$85.6m$94.8m $95.9m

$121.3m

1719

2528

3134

41

49

54

$0.0m

$20.0m

$40.0m

$60.0m

$80.0m

$100.0m

$120.0m

$140.0m

0

10

20

30

40

50

60

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 1H2016

Patient Fees and Number of Centres

$7.0m$6.2m

$2.6m

$5.2m$5.9m

$7.1m

$8.9m

$11.5m

$13.4m

$14.4m

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Pro formaFY2015

1H2016

Operating Cashflow

14% 14%

22%25%

33%

48%52%

56%

47%

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY20161

Section two

Business overview

and update

Pacific Smiles Group – Interim Results Presentation 8

Business overview

Successful dentist &

patient engagement

Strong financial

performance

Highly consistent dentist engagement model, not based on long term contracts or “lock ins”

Strong post visit survey results (Net Promoter Score of >65)

Focus on organic

growth

Focus on organic roll out of centres, rather than acquisitions

Facilitates consistency of branding, operations, dentist engagement and dental centre design

Seven year EBITDA compound annual growth of 22% per annum

Return on Invested Capital ~ 50%

Large market

opportunity

$8.9bn Australian dental market which is highly fragmented

More than 200 identified potential trade areas compared to current network of 54 dental centres

Accomplished

leadership team

Core leadership team together for more than 7 years

Founders continue to be highly engaged with the business in management and clinical governance

capacities


Key elements of the business model

Procurement

• Inventory management

• Negotiations with suppliers, logistics, accounts payable

Training and Development

• In-house Registered Training Organisation

• Mentoring and professional development

Private Health Insurer Relationships

• Co-ordinate and administer Preferred Provider Agreements

• Arrange special marketing collaborations with insurers

Compliance and Administration

• Systematic monitoring of regulatory environment

• Policies and procedures for compliance

Staffing

• Over 700 staff including nurses, receptionists, centre managers, administration

and senior management

Clinical Oversight

• Clinical governance structures

• Incident reporting, monitoring, benchmarking, feedback

Pacific Smiles

Dentists

Patients

~ 280 dentists

• No term contracts or upfront payments

• Dentist pays Pacific Smiles a service fee

• Dentist retains clinical decision making

• Range of dentist age profiles, experience and backgrounds

• Patient satisfaction evaluated through post visit surveys

(Net Promoter Score)

Services &

Facilities

Marketing and Retention

• Local and regional brand marketing

• Targeted marketing campaigns

> 500,000 patient visits per annum

• 80% general dentistry, 20% “high value”

• Demographic is “middle Australia”

• 75% of patients privately insured

• Industry data shows ~50% typically funded out of pocket

for those insured

Service Fee

Quality

assurance

Serv

ice

Fe

es

Private Health

Insurers

Facilities

• Fit-out and operate modern, high quality dental centres

• Ongoing facility maintenance

IT and Systems

• Practice management software and reporting

• IT systems and support


Founding principle

Traditional model

Dentist performs clinical AND operational AND ownership roles

Pacific Smiles model

Dentist performs clinical role


Dental centre network

Note 1 - Derived from Geotech Information Services, Trade Area Network Planning Report (2013)

54 dental centres in total, of which 7 are branded “nib

Dental Care Centre”

Expansion into regional and metropolitan locations

from the Hunter Valley region

Focus on geographic “clusters” to leverage brand and

operational synergies

Opened 5 new Pacific Smiles Dental centres in 1H16:

Queanbeyan, NSW

Cranbourne Park, VIC

Morayfield, QLD

Browns Plains, QLD

Burleigh Heads, QLD

Pacific Smiles centres open for more than 3 years

have an average market share of 14% in their trade

area, with a number of centres achieving 30%+

market share1


New centre openings

Queanbeyan

(NSW)

September 2015

Cranbourne Park

(VIC)

September 2015

Burleigh Heads

(QLD)

December 2015

Morayfield

(QLD)

November 2015

Located within the Stockland Shopping Centre,

Burleigh Heads

Represents expansion from our growing Brisbane

cluster down to the Gold Coast

Located within the newly redeveloped and expanded

Cranbourne Park Shopping Centre in the outer

south-eastern suburbs of Melbourne

Located in the Morayfield Shopping Centre in the

Caboolture region of Queensland

Joins other Pacific Smiles Dental Centres operating

successfully in the area between Brisbane and the

Sunshine Coast

Located in Riverside Plaza Shopping Centre in

Queanbeyan

Complements the cluster of Pacific Smiles Dental

Centres throughout the ACT

Browns Plains

(QLD)

December 2015

Located within the Grand Plaza Shopping Centre in

Browns Plains

The first Pacific Smiles Dental Centre in the

southern suburbs of Brisbane

Section three

Results detail


Summary income statement

Revenue up 10.8% to $41.6 million, and EBITDA (pro

forma basis for 1H15) up 2.3% to $9.4 million

Patient fees up 9.3% to $67.0 million

Same centre Patient Fee growth +4.9% (1H15: 6.0%)

Excluding Haymarket and Parramatta (centres acquired

from Medibank in 2014):

- Patient Fees up 12.6%

- Same Centre Patient Fees up 7.6%

EBITDA to Patient Fees margin down 96bps year-on-year

largely driven by:

- Higher start-up losses from new centres (quantity

and timing of new centre openings)

- Additional investments in brand marketing initiatives

and senior hires to drive long term future growth

EBITDA margins on a same centre basis expanded in

1H16

Statutory Pro Forma Change

$ millions 1H 16 1H 15

Revenue 41.6 37.6 10.8%

Gross profit 39.1 35.6 9.8%

EBITDA 9.4 9.2 2.3%

Depreciation & amortisation (2.4) (2.1) 15.5%

EBIT 7.0 7.2 (1.5%)

Net interest expense 0.0 0.0 nm

Profit before tax 7.1 7.2 (1.3%)

Tax (2.2) (2.2) 0.0%

Net profit after tax 4.9 5.0 (1.9%)

Operating metrics

Number of Dental Centres 54 45 20.0%

Commissioned Dental Chairs 236 215 9.8%

Patient Fees ($m) 67.0 61.3 9.3%

Same Centre Patient Fees growth 4.9% 6.0%

Financial metrics

Earnings per share (cents) 3.2 3.6

EBITDA margin 22.6% 24.5%

EBITDA to Patient Fees margin 14.1% 15.0%

EBIT margin 16.9% 19.0%


Drivers of 1H 2016 Margin

EBITDA to Patient Fees margin decreased to 14.1% in

1H16 (15.0% in 1H15)

The key drivers of the reduction are summarised in the

adjacent table:

1) Start up losses from new centres – in 1H16, 13 of

Pacific Smiles’ centres were less than 18 months old

(1H 2015: 8 centres)

2) Relocation of Parramatta – this includes direct costs in

connection with the relocation

3) Launch of brand marketing – significant spend on

television campaign which can be leveraged in future

periods

4) Corporate overheads – including addition of key hires

to drive growth

Pacific Smiles remains committed to building a platform for

long term sustainable growth

Composition of EBITDA Change$ million

% 1H 16

Patient Fees

Same Centres 1.5 2.2%

Start-up losses from new centres (0.7) (1.0%)

Relocation of Parramatta (acquired) centre (0.1) (0.1%)

Launch of brand marketing campaign (0.3) (0.4%)

Corporate overheads (0.2) (0.3%)

Total Change 0.2 0.3%

1H 15 EBITDA 9.2

1H 16 EBITDA 9.4

Total Change 0.2 0.3%


Balance sheet

Net cash of $9.1 million at 31 December 2015, down

from net cash of $15.2 million at 30 June 2015, as a

result of new centre openings, the payment of dividends

and the cash cost associated with the relocation of the

Parramatta centre

Increases in property, plant and equipment reflect the

investment in new centres as well as the relocation of

the Parramatta centre

ROIC (EBIT) has increased steadily over a number of

years and is now approximately 50%, demonstrating the

highly accretive nature of new centre openings

Statutory Statutory

$ millions 31-Dec-15 30-Jun-15

Current assets

Cash and cash equivalents 9.4 15.6

Receivables 1.6 1.1

Inventories 2.4 2.2

Other 0.3 0.1

Total current assets 13.7 19.0

Non-current assets

Property, plant and equipment 29.7 24.6

Intangible assets 11.5 11.5

Deferred tax assets 4.1 4.0

Total non-current assets 45.3 40.2

Total assets 59.0 59.2

Current liabilities

Payables (9.0) (9.7)

Borrowings (0.3) (0.2)

Current tax liabilities (1.0) (0.9)

Provisions (3.1) (2.9)

Total current liabilities (13.4) (13.8)

Non-current liabilities

Borrowings (0.0) (0.2)

Deferred tax liabilities (0.3) (0.3)

Provisions (4.5) (4.0)

Total non-current liabilities (4.7) (4.4)

Total liabilities (18.1) (18.2)

Net assets 40.9 41.0

Equity

Contributed equity 35.1 35.1

Reserves 0.1 0.1

Retained profits 5.7 5.9

Total equity 40.9 41.0


Summary cash flow

Statutory operating cashflow of $6.2 million (1H15:

$7.0 million)

EBITDA cash conversion1 of 89%

Prior period operating cashflow included $1.3 million

inflow resulting from: 1) a lease surrender payment

received and 2) excess working capital released

following acquisition of the Medibank dental centres

Total capital expenditure of $7.2 million, including:

- $3.8 million for the opening of 5 new centres

- $1.9 million for the relocation of the Parramatta

centre

1H16 final dividend of 2.0 cps declared, payable in

April 2016

Notes: 1. Cash conversion calculated as operating free cash flow (which excludes tax and net finance costs) as a ratio of EBITDA

Statutory Statutory

$ millions H1 16 H1 15

EBITDA (excluding IPO transaction costs) 9.4 9.4

Other non-cash items 0.1 0.0

Changes in working capital (excluding income tax) (1.1) 0.5

Net interest paid 0.0 (0.2)

Income tax paid (2.2) (2.8)

Net cash flow from operating activities 6.2 7.0

Capital expenditure (7.2) (3.0)

Other 0.0 0.2

Net cash flow from investing activities (7.2) (2.8)

Proceeds from shares, net of transaction costs 0.0 19.6

Borrowings (net) (0.1) (9.1)

Dividends (5.1) (5.6)

Net cash flow from financing activities (5.2) 4.9

Net cash flow (6.1) 9.2

Section four

Growth and outlook


Summary of key earnings drivers

1 Growth of existing centres

>40% of centres less than 3 years old

Rollout of new centres

Targeting 8 – 10 new centres in 2016 and 10 new centres

per annum from FY17

200 potential future trade areas identified

3 Margin expansion

Increased scale, new centre ramp-up and operational

improvements

2


10%

16%

7%

-3%

4% 5%

FY11 FY12 FY13 FY14 FY15 1H16

Same Centre Patient Fee Growth (%)

Growth from existing centres

As a result of rapid growth, PSG’s centre network includes a

significant proportion of “immature” centres

Over 40% of centres are less than 3 years old

Average same centre patient fees growth of 6.8% pa over the

five years to 30 June 2015

Network includes 71 additional chairs which can be

commissioned to meet future demand

Strategies to increase same centre patient fees growth include:

- Marketing initiatives to build brand awareness and new

patient attendances

- Collaboration with private health insurers

- Increase range of services (treatment mix, higher value

services)

- Improve patient engagement to promote regular dental

visits and increase patient loyalty

CDDS termination impact

History of strong “same centre” patient fees growth as centres mature...

Centre maturity profile

(years opened)

< 3 years43%

3 - 5 years13%

> 5 years44%


Growth from new centre rollout

Pacific Smiles has grown strongly from 3 centres in 2003 to 54 currently

Acquisitions have been highly selective - strategy continues to be focused on organic rollout

Five new centres opened during 1H16

Targeting eight to ten new centres in FY16 and ten new centres per annum from FY17 onwards

A national network plan has been developed with the assistance of third party demographic experts

Approximately 200 potential future trade areas identified based on demographic, location and competition parameters

Significant organic rollout opportunity...

Target opening ~ 10 per annum

37 7

1417 19

2528

3134

41

49

57 - 59

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16F

Number of dental centres


Business priorities

Objective Progress

Network

expansion Open 8 to 10 new dental centres

5 centres opened during 1H16 with one additional centre

committed after period end. Cluster approach continuing

to prove effective

Patient

engagement

Launch brand marketing initiatives over various

channels to leverage scale

Improve patient experience via introduction online

appointment bookings

Launched first ever brand advertising campaign across

television, radio and cinema in the ACT, Hunter Valley

and Gippsland

Launched online patient appointment bookings

Velocity Partnership to launch in March 2016

Employee

capability

Launch and embed APPEx® (“A Perfect Patient

Experience”) on-line staff training

Appoint new executives to enhance scalable platform

for organic rollout

Online training successful launch in 1H 2016

Senior appointments in the areas of Business

Development, IT and People & Culture

Acquisition

optimisation

Relocate Parramatta centre

Relocate Haymarket centre

Transition acquired centres to Pacific Smiles operating

parameters

Parramatta centre relocated in September 2015

Haymarket relocation locked in, with target opening

before the end of FY2016

Transition of acquired centres to Pacific Smiles operating

parameters still work in progress

1

2

3

4


Funding for Dental

Federal Government funding of the dental sector is low compared to other areas of primary care – only 7% of dental

expenditure comes from this source compared to 82% for general medical

Expenditure on dental services has historically been resilient, including throughout periods of change in the funding

environment, such as in 2012 when the Chronic Diseases Dental Scheme was removed

Private health insurance benefits represent 17% of total dental expenditure. There has been media speculation

around the potential for changes to premium rebates for private health insurance ancillary cover. The estimated share

of private health rebates attributable to dental is ~$600 million, or 6% of total dental expenditure

$5.1b$5.4b

$5.8b$6.1b

$6.8b$7.3b

$7.9b$8.3b

$8.7b $8.9b

$3b

$4b

$5b

$6b

$7b

$8b

$9b

$10b

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Dental - Total Expenditure

82%

7%

38%

General practitioners Dental services Total health sector

Federal Govt. Funding (direct) 2013 - 14 % total

1

Note 1: AIHW 2013-14 Health Expenditure


Outlook

Consistent with the update provided at the AGM, EBITDA is expected to be at the lower end

of the previously issued guidance range ($20.3 million to $22.3 million)

Same centre patient fees growth > 5% for FY16 (year to date actual as at 17 February 2016

of 4.6%)

New centre openings in the range of 8 to 10 in FY2016

Targeting approximately 10 per annum beyond FY2016. At the time of the IPO we had

indicated a rate of 6-10 per annum

Over 200 potential future trade areas identified based on demographic, location and

competition parameters and current pipeline of new centre opportunities is at a record high

Committed to relocate the Haymarket centre, expected to occur prior to 30 June 2016.

Depending on timing, expected one off relocation costs of $0.4 million which are not factored

into earnings guidance

Strong balance sheet, with an expectation that future growth can be funded while maintaining

a net cash position and dividend pay-out ratio in the range of 80-90% of NPAT

Appendix A

Statutory – Pro Forma

Results Reconciliation


Statutory – Pro Forma Reconciliation

Pro forma adjustments to 1H 15 Income Statement

presented on a consistent basis with the Prospectus

pro forma adjustments:

A Listed Public Company Costs - estimate of

the incremental half year costs Pacific Smiles

would have incurred if it had operated as a

listed company for the full comparative period.

B IPO Transaction Costs – IPO costs charged

as expenses in the comparative period

excluded from pro forma results.

C Net Interest – adjustment for half year impact

on comparative period interest income and

interest expense as if the major IPO cash flows

had taken effect at 1 July 2014.

Statutory StatutoryPro forma

adjustmentsPro forma

$ millions H1 16 H1 15 H1 15 H1 15

Revenue 41.6 37.6 37.6

Direct expenses (2.5) (2.0) (2.0)

Gross profit 39.1 35.6 35.6

Other income 0.8 0.7 0.7

Expenses

Employee expenses (17.4) (16.1) (0.2) A (16.3)

Consumable supplies expenses (3.7) (3.1) (3.1)

Occupancy expenses (4.5) (3.7) (3.7)

Marketing expenses (1.0) (0.6) (0.6)

Administration and other expenses (3.9) (3.5) (0.0) A (3.5)

Underlying EBITDA 9.4 9.4 (0.2) 9.2

IPO transaction costs expensed 0.0 (2.0) 2.0 B 0.0

EBITDA 9.4 7.4 1.8 9.2

Depreciation and amortisation (2.4) (2.1) (2.1)

EBIT 7.0 5.4 1.8 7.2

Net finance costs 0.0 (0.2) 0.2 C 0.0

Profit before tax 7.1 5.2 1.9 7.2

Income tax expense (2.2) (1.6) (0.6) (2.2)

Net profit after tax 4.9 3.6 1.4 5.0

Thank you

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