By Andrew Patterson
Technology these days has meant going to the dentist tends to be less about the physical pain you endure sitting in the surgery and more about the pain you experience when it comes to payment.
It’s an issue that has many people putting off a trip to the dentist altogether until a visit becomes absolutely necessary and by then the problem has usually become significantly worse.
Listed healthcare provider Abano has been quietly reshaping the dental sector in recent years becoming the country’s largest single ownership dental group.
With the continued growth of its corporate brand Lumino the Dentists domestically, its wholly owned operations in Australia (Dental Partners) along with a growing presence in Asia, the division now accounts for almost 70% of the company’s earnings.
Its current television advertising campaign promoting its services might be a first for the dental sector to appear on screen and reinforces Abano’s approach to upping the ante in what has largely been an under the radar profession from a marketing perspective.
Corporate leverage and adding value
It’s an indication of the leverage the company has been able to apply to the sector where practitioners are retained on commission allowing them to focus solely on their professional craft while Abano deals with all the back office and purchasing functions.
And in a move that might have other dentists “tut tutting” now it’s not only Noel Lemming or Harvey Norman offering those interest free deals on home appliances and whiteware on TV. A new type of whiteware also has payment terms available with Lumino allowing patients interest free terms of up to 24 months to pay for treatments as part of its quest to improve dental affordability.
Abano Managing Director Alan Clarke says the focus on growing its presence in the dental sector has been a very deliberate strategy.
“We've been in dental now for probably the best part of 10 years. But it's really only in the last couple of years that we’ve become increasingly more visible. Our two operations both here and in Australia are based on similar model; however they’re each at different stages of evolution.”
“The model we’ve developed is 100% ownership. So we go to a dentist and we actually acquire the business outright that they’ve established. They then continue with us, effectively as a contractor, because from that point they work on commission while continuing to work in their practice. We look after the back office, the corporate side, the marketing side, the logistics, the HR. We add value through that back office synergy and providing locum support for them when they need time off.”
“You have to remember dentists are skilled practitioners and there is actually a very wide variation in the fees they can earn than ranges from $75,000 up to $500,000 for a top dentist. So if we can allow them to just focus on their throughput of patients rather than having to deal with all the other aspects of running a dental practice it can significantly lift their earning potential.”
New marketing strategy
Lumino’s recent television ad campaign has been part of a new marketing strategy to raise the profile of the brand in a way that breaks new ground for dental practices, challenging the established paradigm.
“The dynamics within the dental market are astounding. In NZ we spend around $650 million a year going to the dentist while Australians spend $7.5 billion annually, so combined it's an $8 billion trans-Tasman market.
“There are a total of around 14,000 registered dentists. When we started 10 years ago the biggest group had about four clinics, everyone else were sole traders in their environment. So as a consolidator going into that environment the opportunity to keep growing and putting groups together is profound.”
“In terms of Australasia, along with our competitors Dental Corp, Pacific Smiles, and 1-300, all of us have been going about five years and yet collectively we're still less than 15% of the available market so we believe we can keep growing at this rate for decades.”
The collective bulk buying synergies of the group alone represent a significant contribution to Abano’s bottom line.
“We basically buy more of anything a dentist uses than anybody else in Australasia. If we can create genuine partnerships with suppliers it creates significant benefits. For instance, if we can shave 3 or 4% off our materials bill, 4% on a couple of hundred million dollars is a big number for a business like ours.”
But in tough economic times affordability is increasingly an issue when it comes to dental care. That fact has caused Lumino to further refine its customer offering to increase its attractiveness.
“Our new marketing was actually recognition of the economic environment we're in and we went out with an 18-month interest-free offer. On top of that, we've just gone out with a 24-month interest-free offer. It’s been enormously successful in terms of throughput.”
“We use a facility called Q-card. The cost of Q-card to us is effectively the same as a credit card transaction, but what it does is allow our customers to access a period of interest free credit where they can pay off the amount. We don't carry the risk, it's a factoring opportunity, but we do recognize the facility delivers real value to our patients.”
“We’ve also just announced a series of pro-bono initiatives with the likes of charities such as Kids Can. We recognize there are kids out there who can't access proper dental care and oral health is increasingly becoming a big issue, particularly in poorer communities, and we want to help do something to remedy that situation.”
Based on its past growth trajectory, Lumino will need to acquire a dentistry practice every 10 days just to maintain its current growth rate. However, it’s not a metric that intimidates Clarke in any way.
“That pace of acquisition, once every 10 days or two weeks, is roughly the same pace that we've kept to over the last two years. It's not a matter of maintaining that pace of growth, it's saying we've got this enormously fragmented marketplace and the opportunity to pull groups together is very real, and that an acquisition pace of two practices a month is one that we're very comfortable with.”
“When you consider we've got about 1,300 people working in the dentist group on both sides of the Tasman, we look very carefully at making sure the acquisition pace is going to be met by the operational discharge. So we cannot just buy up practices on mass - it's not a buffalo hunt! You want to actually buy them, bring them in, make sure the cultural fit is working well, make sure they're introduced into the group properly and that your operational support can cope with the growth. We figure that our current pace of expansion is about right.”
However, the real opportunities for Abano are increasingly going to be found across the Tasman rather than in NZ.
“The reality is we’re a small country in terms of the size of our domestic market. Just the sheer numbers in Australia mean that the opportunity for growth internationally is going to be outside of New Zealand. That's not a bad thing, it's a great opportunity for our shareholders, but it's just a function of size.”
But is there a risk that in Australia Abano will simply end up in a fight to retain market share by having to cut prices to remain competitive?
“Collectively the corporate players still only currently represent 15% of the market so there is plenty of opportunity for growth before we’d have to worry about market share issues. Our biggest threat is the potential for some rat bag corporate to come along who enters the market, a bit like Attila the Hun, undercuts everyone and clouds the market place with bad practice and behaviour, which would be very damaging for all of us.”
Increasingly, the issue of pay disparity also creates challenges for the company trying to retain professionals on this side of the Tasman.
“The reality is you can probably get 20 to 25% more at face value by going to Australia, in some cases a lot more than that. The thing that's lost though is that Australia is a very high tax environment and that marginal extra tax cost almost negates it - it's almost line ball. So the reality is we have to be very careful in New Zealand, because we are competing with a market that is very attractive in terms of climate and lifestyle so that tension is always there.”
Over the last 10 years Abano has done its fair share of buying and selling various businesses almost acting at times like a private equity company. In 2010 it booked a $78 million gain following the sale of its subsidiary Bay Audiology. However, private equity is a term that doesn’t sit comfortably with Clarke.
“I'm not sure I like the PE analogy because quite honestly, I sell off PE firms, especially when you're buying into businesses. We're an investor operator, so we create symbiotic partnerships with the clinicians that are there. And when we do invest with them, we say we're a generational investor with you. We want this gig to last 100 years and you obviously want it to last that time as well whereas as private equity buyers will pay more but have a much shorter time frame of perhaps just a couple of years before they want to sell.”
“But where we have come across businesses that for a number of reasons have either reached a maturity in their lifecycle or the funding dynamics have changed, we have then sat down with our partners to ask them what they have wanted to do and in cases where we have chosen to exit that’s been a course of action that has been agreed mutually.
Share price weakness
Since providing guidance to the market a month ago, Abano’s share price has been under pressure, slipping more than 17% in the last month.
“Looking at where the market had taken us, up to around $6.70 we were operating on a rear looking PE of about 45 times. While my rationale is never to try and explain the share price we've been very careful over the years about talking to shareholders and investors, being very open, explaining our strategy and if you get the confidence of the investor they will mark you on your forecast, not on what you've done.”
“In late March we came out with a statement that basically said, the economy in Australia was getting pretty ropey, as it has done over the last eight months, and we were just saying the forward-look is going to be more difficult and were just cautious about that. On top of that the recession in New Zealand still bubbles along, but it's inching up. So what we did was take some of the expectation out of the price, but nothing that concerns me.”
While investors will be hoping Abano’s strategy continues to deliver favourable returns for them patients might be hoping that interest free deals are just the start of more enticing incentives to have those teeth checked in the future.
|Turnover:||$206 million (2012)|
|Annual growth rate:||20%|
|Biggest market:||NZ (Australia likely to overtake NZ in 2013)|
|Fastest growing market:||Australia|
|International offices:||Sydney, Southport (Aust) & Hong Kong|
|Domestic/Intl sales split:||50/50 (aprox)|
|12 month share price range:||$3.95 - $6.65|
|Profit:||$1.6 million (2012)|