London, United Kingdom, 20 July 2016. In connection with the previously announced offering by IDH Finance plc, a public limited company incorporated under the laws of England and Wales (the “Issuer”), of £425.0 million in aggregate principal amount of its fixed rate senior notes and floating rate senior secured notes due 2022 (collectively, the “Notes”), the Issuer, Turnstone Midco 2 Limited and its subsidiaries (collectively, the “Mydentist Group”), disclosed certain information to prospective holders of the Notes. A copy of such information is attached hereto as Exhibit A.
The Notes are being offered only to qualified institutional buyers in accordance with Rule 144A under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and outside the United States in accordance with Regulation S under the Securities Act and, if an investor is a resident of a member state of the European Economic Area (the “EEA”), only to such an investor that is a qualified investor (within the meaning of Article 2(1)(e) of Directive 2003/71/EC, together with any amendments thereto, including Directive 2010/73/EU, to the extent implemented in the relevant member state (the “Prospectus Directive”)).
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This document is not an offer of securities for sale in the United States. The Notes may not be sold in the United States unless they are registered under the Securities Act or are exempt from registration. The offering of Notes described in this announcement and any related guarantees have not been and will not be registered under the Securities Act, and accordingly any offer or sale of Notes and such guarantees may be made only in a transaction exempt from the registration requirements of the Securities Act.
It may be unlawful to distribute this document in certain jurisdictions. This document is not for distribution in Canada, Japan or Australia. The information in this document does not constitute an offer of securities for sale in Canada, Japan or Australia.
This document has been prepared on the basis that any offer of the Notes in any Member State of the European Economic Area (“EEA”) which has implemented the Prospectus Directive (2003/71/EC), as amended by Directive 2010/73/EU (each, a “Relevant Member State”) will be made pursuant to an exemption under the Prospectus Directive, as implemented in that Relevant Member State, from the requirement to publish a prospectus for offers of Notes. Accordingly any person making or intending to make any offer in that Relevant Member State of the Notes which are the subject of the placement contemplated in this document may only do so in circumstances in which no obligation arises for the Issuer or any of the initial purchasers of such Notes to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive, in each case, in relation to such offer. Neither the Issuer nor the initial purchasers of such Notes have authorized, nor do they authorize, the making of any offer of Notes in circumstances in which an obligation arises for the Issuer or any initial purchasers of such Notes to publish or supplement a prospectus for such offer.
This document is only being distributed to, and is only directed at, persons in the United Kingdom that are “qualified investors” within the meaning of Article 2(1)(e)(i), (ii) or (iii) of the Prospectus Directive and that also (i) are “investment professionals” falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (ii) are persons falling within Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the Order, or (iii) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any securities may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This document is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and will be engaged in only with relevant persons.
Neither the content of any website of the Mydentist Group nor any website accessible by hyperlinks on any website of the Mydentist Group is incorporated in, or forms part of, this announcement. The distribution of this announcement into jurisdictions other than the United Kingdom may be restricted by law. Persons into whose possession this announcement comes should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.
No money, securities or other consideration is being solicited, and, if sent in response to the information contained herein, will not be accepted.
This press release may include projections and other “forward-looking” statements within the meaning of applicable securities laws. Forward-looking statements are based on current expectations and involve a number of known and unknown risks, uncertainties and other factors that could cause the Mydentist Group’s or its industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. You should not place undue reliance on forward-looking statements and the Mydentist Group does not undertake publicly to update or revise any forward-looking statement that may be made herein, whether as a result of new information, future events or otherwise.
This disclosure includes the release of inside information.
Exhibit A
CURRENT TRADING Based on our management accounts, we believe that our group revenues for the three months ended 30 June 2016 have increased by approximately 6% compared to the three months ended 30 June 2015. UDA delivery rates in our patient services division have continued to decline as we implement the initiatives to recover UDA performance, but this decline was offset by growth in like-for-like private revenue for the three months ended 30 June 2016, which increased approximately 10% compared to the three months ended 30 June 2015. As a result, revenues in our patient services division’s practices acquired before 31 March 2015 have increased by approximately 0.8% for the three months ended 30 June 2016 compared to the three months ended 30 June 2015. We are continuing to implement various measures to reverse our decline in UDA performance, including providing training to improve UDA productivity through improved diary and claims management, working with dentists, including incentivisation, to increase their working hours, and looking to recruit more locums and dentists to increase delivery capacity.
Revenues before intercompany eliminations in our practice services division have increased by approximately 14% for the three months ended 30 June 2016 compared to the three months ended 30 June 2015.
We also believe that our EBITDA before exceptional items for the three months ended 30 June 2016 will be in line with our expectations, representing an increase of approximately 2% compared to the three months ended 30 June 2015.
As at 30 June 2016, we owned 674 practices compared to 651 as at 30 June 2015.
As of the date of this offering memorandum, the quarterly financial statements for the three months ended 30 June 2016 are not yet complete. The results described above are preliminary in nature and represent the most current information available to management as of the date of this offering memorandum. Therefore, our actual results may differ materially from the preliminary results presented above due to the completion of our financial closing procedures, final adjustments and other developments which may arise between now and the time our financial report for the three months ended 30 June 2016 is finalised.
In addition, the preliminary results presented above for the three months ended 30 June 2016 may not be indicative of the results for any other period. Accordingly, you should not place undue reliance on these preliminary results.
The estimated preliminary results for the three months ended 30 June 2016 included above have been prepared by and are the responsibility of management. PricewaterhouseCoopers LLP has not audited, reviewed, compiled or performed any procedures with respect to this preliminary financial data. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.
COMPETITIVE STRENGTHS
Our business benefits from a number of competitive strengths, including the following.
Large and stable market with attractive characteristics
Our patient services division’s core NHS dentistry services market is a large and stable market that has averaged growth in terms of expenditure of approximately 5% per year on average from 1998 to 2013 in nominal terms. For the twelve months ended 31 March 2016, the UK dental care market was estimated by Mintel to have generated £3.84 billion in expenditure on NHS dentistry services, £3.35 billion in spending on private general dentistry services and £2.40 billion on private cosmetic dentistry services, having grown by a cumulative 17% since the twelve months ended 31 March 2012. Approximately 30 million patients received dental care under the auspices of the NHS in England during the two years ended 30 June 2015. The NHS dentistry services market benefits from stability in terms of both volume and pricing, with approximately 59% of our revenue in the twelve months ended 31 March 2016 covered by evergreen GDS Contracts, and with a track record of historical increases in nominal UDA values. Whilst the economic recession of 2008 to 2009 resulted in a decline in demand for private dentistry services owing to increased unemployment and a reduction in discretionary spending, demand for the more affordable NHS dentistry services increased. On the other hand, an improving UK economy typically benefits private dentistry, as more patients purchase self- funded private dentistry services, such as white fillings and teeth whitening.
Unlike other UK healthcare subsectors, such as mental health and private acute medical care, there is little risk of insourcing of dental services by internal NHS providers, as we estimate 95% of all NHS dentistry is provided by the private sector (both corporate-owned and independent practices). Nor is dentistry a large target for government austerity measures, constituting approximately 3% of the total NHS operating expenditures in the twelve months ended 31 March 2015. In nominal terms, funds allocated by the UK Government for dentistry have generally increased since 1998, and we believe that funding for NHS dentistry is likely to grow at or above inflation given systemic demand in the foreseeable future. The UK Government considers dentistry a key front-line service and has announced a goal of increasing access to dentistry to 64% of the population. We believe we are well-positioned to benefit from the UK Government’s focus on growth in dentistry access, as well as from favourable demographic and consumer trends, such as an aging population and increased understanding of the importance of good dental hygiene.
Leading provider of dental services and dental and other medical consumables, materials and services in the United Kingdom, with unparalleled scale and geographic diversity in terms of dental practices
We are the leading provider of dental services in the United Kingdom through our patient services division and a leading provider of dental and other medical consumables, materials and services in the United Kingdom through our practice services division. As at 31 March 2016, our patient services division has a market share of approximately 5% in terms of number of dental practices in the United Kingdom, and a market share of approximately 7% in terms of revenues, with approximately 15% of all UDAs commissioned in England and Wales for the twelve months ended 31 March 2016. With 598 NHS dentistry contracts, 674 dental practices, more than 2,600 dentists, and our footprint across England, Scotland, Wales and Northern Ireland, we are well diversified within the UK dental market, and not dependent on any single contract, practice or region. We focus predominantly on NHS dentistry services, which generated 68.3% of our revenue for the twelve months ended 31 March 2016 and drives our market leadership. We are also a leading provider of private dentistry services in the United Kingdom, with an estimated market share of approximately 2.6% in terms of revenue for the twelve months ended 31 March 2016. Through our practice services division, we supply dental and other medical consumables, materials and services in the United Kingdom, with an estimated market share of 25% (excluding laboratories). Our strong industry presence and reputation make us an important partner for the NHS in respect of dental and orthodontic services.
Strong track record of growth driven primarily by dental practice acquisitions
We have an established platform for further targeted growth through NHS dentistry contract and dental practice acquisitions, having acquired 232 dental practices in the period from 11 May 2011 to 18 July 2016. We employ a disciplined acquisition strategy honed over the last 20 years and centred on the acquisition of practices with NHS dentistry contracts with three or more chairs. We buy practices to acquire their evergreen GDS Contracts, with a focus on the acquired practices’ historical UDA delivery rates, the retention of key personnel and complementary private revenue generation. In particular, we have refocused our acquisition strategy on acquiring dental practices that have consistently delivered 96% or more of their contracted UDAs each year. As we are buying contracted revenues paid monthly, we receive an immediate revenue impact from the dental practices we acquire due to the fact that such practices are already operational. Our experienced acquisitions team manages the acquisition pipeline, generating leads for the majority of the acquisitions we make. Once a practice is acquired, our integration team works to deliver synergies in procurement and back-office cost savings.
On a portfolio basis, we believe the EBITDA projections resulting from our acquisitions team’s due diligence have been generally in line with post-acquisition results, and acquired practices have generally enjoyed EBITDA consistency before and after their acquisition by us. We believe our due diligence methodology produces accurate results and allows us to acquire dental practices at competitive multiples of EBITDA valuations as (i) we know the number of contracted UDAs, (ii) UDA delivery percentage and private revenue generation tend to maintain consistency, (iii) dentist costs are contracted and (iv) we are able to apply our known cost base to the dental practices we acquire.
With 13,815 dental practices according to Mintel, the large majority of which are independent, the UK dental market is highly fragmented, and we believe there is scope for additional consolidation as dentists retire or sell their dental practices to become independent contractors due to the administrative, regulatory and compliance burden of owning their own dental practice. As a consequence, we have typically acquired 40-60 dental practices per year, with such acquisitions, as well as acquisitions in our practice services division, generating incremental EBITDA of £7-10 million per year in aggregate on average, though the number of practices we acquire each year may decrease as we refocus on practices with UDA delivery of at least 96% at acceptable EBITDA multiples. We believe that as the leading provider of dental services in the United Kingdom, we make an attractive purchaser for a dentist selling his or her practice, as we allow dentists to focus on dentistry by taking on the administrative, regulatory and compliance burdens associated with running a dental practice. We also grow organically through our private dentistry services offering. In addition, organic growth has benefited from new builds, greenfield projects and new NHS dentistry contract wins.
Our practice services division provides us with an additional avenue for growth beyond the acquisition of dental practices, and we intend to consider opportunistic acquisitions of high- quality suppliers of dental and other medical consumables, materials and services to continue to expand the offerings of our practice services division.
Stable, primarily evergreen NHS-contracted revenue base with high revenue visibility
Our patient services division benefits from a predominantly evergreen contractual base, which provides high visibility for our revenues. Of our group revenue, 68.3% for the twelve months ended 31 March 2016 was contracted with the NHS. Approximately 93% of our NHS dentistry contracts, covering 59% of our revenue in the twelve months ended 31 March 2016, consisted of GDS Contracts that roll over indefinitely except in cases of repeated UDA underperformance of more than 4% (or 5% in Wales). We have averaged total UDA delivery rates on our NHS dentistry contracts (including amounts carried forward and new contract wins) in excess of 96% over the contract years between 2008 and 2015, and none of our GDS Contracts have ever been terminated. In the contract year ending 31 March 2016, our UDA delivery rates decreased to 92.4%, due to short-term, industry-wide factors, including increased NHS scrutiny of claims (which has resulted in dentists spending more time recording notes detailing patient care and thereby resulting in longer appointment times) and performance benchmarks and a decrease in exempt patients as a result of the improving UK economy. While some of this decrease in productivity under NHS dentistry contracts has been offset by growth in the provision of private dentistry services and in the NHS dentistry contract price uplifts, we are also actively providing training to dentists to improve UDA productivity, through improved diary and claims management, working with dentists to increase their working hours and refocusing our acquisitions on dental practices whose UDA delivery rate has historically exceeded 96%. Each 1% increase or decrease in UDA delivery equates to an increase or decrease of approximately £1.6 million in EBITDA before exceptional items. The effect on our contracted UDAs has also been limited—on a net basis including new contract wins, our contracted UDAs reduced by only 0.5% for the twelve months ended 31 March 2016. Because unclaimed UDAs result in foregone revenue in a period, but not necessarily a loss of potential revenue for future periods, we expect any future improvement in UDA delivery to result in a corresponding increase in EBITDA before exceptional items.
Nor are these contracts subject to administrative change—in England and Wales the basis for our contracts may only be changed pursuant to a statutory instrument laid before Parliament. Since UDAs were introduced in 2006, UDA rates have historically benefited from annual contract uplifts, with an uplift of 1.34% for the contract year ending 31 March 2016 (with an uplift of 1.34% in Wales and 1.60% in Scotland). In the last 15 years, NHS England has never reduced prices, and for the contract year ending 31 March 2017, NHS England has announced a 0.70% uplift (1.00% in Wales) in prices. Our contracted volumes under evergreen GDS Contracts, combined with the historical uplifts in UDA rates in nominal terms, provide us with a high degree of revenue visibility. At the beginning of each month we receive 1/12 of the annual contracted value of our NHS dentistry contracts, resulting in a well-matched cash flow and cost profile as we typically receive payments on our NHS dentistry contracts prior to paying related costs. Our contracts—which we typically hold through our subsidiaries and operating partnerships, not our dentists—are a barrier to entry, as NHS dentistry services in England may only be provided under a NHS dentistry contract. Moreover, we believe we also benefit from our scale and industry presence when tendering to acquire new NHS dentistry contracts. The resilience of our results have benefited from our focus on our core NHS dentistry services, as NHS dental expenditures have remained stable throughout recent economic downturns, whilst demand for private dentistry services has demonstrated degrees of cyclicality.
A dentistry brand with national scale
We began rolling out our “mydentist” brand at the end of 2015 as a way to increase brand identification and to expand dentistry as a retail proposition. As at 31 March 2016, we had rolled out the “mydentist” brand to 418 of our dental practices. No other dentistry brand in the United Kingdom has the same scale in terms of number of practices as “mydentist.” Dentistry in the United Kingdom has historically been less consumer-oriented than other high street healthcare providers such as opticians and pharmacists. The goal of rebranding is to attract new patients and clinicians and to differentiate us from our competitors. Our rebranding campaign is also intended to improve the in practice customer journey and to facilitate upselling and cross- selling of our dentistry services across our business. We have combined our rebranding as “mydentist” with expanded local marketing, call centre support, an expanded presence online, including via our website (where customers can now book and amend appointments online), text message reminders of appointments and social media. In addition, we are also piloting regional television advertising. Initial results from our rebranding have been encouraging with increased new patient registrations, growth in private dentistry services and improved patient feedback recorded across our branded practices.
Variable cost base directly linked to sales volume, with low rental expense and economies of scale
We estimate that up to 70% of our patient services division’s costs are variable and tied to sales volumes and activity. Dentists working in our practices are self-employed, independent contractors who pay us a notional licence fee and receive a fixed rate per UDA delivered, in the case of NHS dentistry services, and a percentage of fees paid for private dentistry services delivered. We negotiate dentist contracts on an individual basis and believe that dentists’ interests are strongly aligned with ours to maximise dental activity and UDA delivery. We are also able to efficiently deploy our dentists, hygienists and nurses across dental practices as needed, providing us an advantage in terms of productivity generated from our fixed costs over that of our smaller competitors. Costs paid for laboratory work, which we generally split evenly with dentists, and materials are also linked to dental activity performed. The scale of our patient services division provides us with advantages over our smaller competitors. We centralise and insource support functions that would otherwise be borne by dentists, including information technology (“IT”), compliance, regulatory requirements, property and equipment maintenance, legal, finance, human resources, health and safety, risk management, talent sourcing, training, marketing, insurance and logistics. In addition, we benefit from low property costs, with rent costs constituting less than 3% of our revenue in the twelve months ended 31 March 2016, and favourable lease dynamics due to the nature of the properties we rent. We have relatively low property maintenance costs, which we closely manage through a central estate management function and, as we provide NHS dentistry services, most of our rates (including UK business property taxes) are reimbursed by the NHS.
Vertically integrated business model
We are active in both the provision of dental care to patients through our patient services division and the provision of consumables, materials and services to dental practices, including those in our patient services division, and their suppliers through our practice services division. We have integrated dbg, The Dental Directory and Med-FX, and are in the process of integrating PDS Dental Laboratories Leeds and Dolby Medical, into a single, full-service provider of dentistry-related supplies and services, both branded and non-branded, to our patient services division’s dental practices as well as to third-party dental practices and the wider healthcare sector. This vertically-integrated business model linking our patient services division’s dental practices to our practice services division’s suppliers has resulted in significant cost savings and synergies, as we capture margin that would otherwise be paid to third-party suppliers and benefit from certain VAT exemptions.
Strong financial performance with high levels of cash conversion
We have historically demonstrated an ability to maintain stable performance in EBITDA before exceptional items and EBITDA margins that we believe are in excess of those of our primary competitors. During the twelve months ended 31 March 2016 and 2015, we generated EBITDA margins of 14.2% and 14.4%, respectively. Our estate of dental practices across the United Kingdom is consistently profitable, with 97% of our dental practices’ EBITDA before central costs and exceptional items positive, with an average EBITDA before central costs and exceptional items per practice of £179,000 for the twelve months ended 31 March 2016. Our top 200 dental practices generated approximately 58% of our EBITDA before exceptional items, and only 19 of our practices were loss-making, in each case for the twelve months ended 31 March 2016. Due in part to our low levels of maintenance capital expenditures and movements in working capital (3.9% and 3.2%, respectively, of revenue in the twelve months ended 31 March 2016), we have historically maintained high levels of cash conversion. Because we are paid 1/12 of the annual value of our NHS contracts at the beginning of each month, we have a well- matched cash flow and cost profile as we typically receive payments on our NHS contracts prior to paying related costs. This cash flow profile also means that the NHS-contracted practices we acquire are immediately cash positive for us. Following the completion of the roll-out of the “mydentist” brand to the majority of our dental practices towards the end of 2016, we expect a portion of the increase in our capital expenditures related to the rebranding to reduce, relative to our revenues, to levels more typical for our business. As such we expect to make capital expenditures equivalent to approximately 4% of patient services revenue in the twelve months ending 31 March 2017.
Strong and experienced management team and shareholder support
We believe our senior management team is well-positioned to deliver growth, with a proven record in the healthcare services sector and the ability to create value through acquisitive integration and practice rollouts. Our senior management team is led by our CEO, Terry Scicluna, who has extensive experience in UK healthcare and retail experience and in managing multi-site businesses. Mr. Scicluna is supported by CFO Mark Robson and a strong team of executives, including our other key personnel in clinical services, acquisitions, IT, property, finance and legal services. Our board of directors includes Mr. Barry Cockcroft, the former Chief Dental Officer for England, who acts as a non-executive director. We believe management incentives are aligned with our long-term goals, with a broad base of management holding a sizeable equity stake of 15.9% in EquityCo. We also benefit from the extensive market expertise, business relationships, and ongoing strong support of our shareholders, Carlyle and Palamon.
OUR STRATEGY
Maintain core NHS focus
We intend to maintain our patient services division’s core focus on providing high-quality NHS dentistry services under NHS dentistry contracts to drive continued strong results, while also continuing to grow our private dentistry services business and our practice services division. We expect to maintain and expand our NHS-contracted revenue base by delivering higher levels of UDA performance under our predominantly evergreen NHS dentistry contracts and by acquiring contracted revenues through the acquisition of new practices. We also expect to grow our NHS dentistry services through new contract wins and greenfield projects, and to build on our strong industry presence and reputation for the provision of consistent, high-quality service.
Maintain and grow our patient services division’s market-leading position by providing high- quality services and support to key stakeholders
We intend to maintain the market-leading position of our patient services division by continuing our focus on the key stakeholders in our NHS dentistry services, namely our patients, dental professionals, and the NHS and other regulators. Excellent patient care is our first priority, and we aim to continue to capitalise on improved customer feedback by combining our provision of consistent, high-quality dental care with more flexible and convenient services, such as online appointment booking, text message reminders and more-convenient opening hours. We are also leading industry efforts to improve clinical excellence and provide practice transparency. We believe our business model is attractive to dentists as we allow them to focus on dentistry by taking on the administrative, regulatory and compliance burdens of dental practices. We intend to utilise our scale to attract and retain selfemployed dentists and hygienists and our employee nurses. We have built and will continue to refine our centralised talent sourcing function, which benefits from the Academy, a dentist training centre and online training initiative for continued professional training of our dentists, hygienists and nurses which we launched in 2013. The employment of KPIs and centralised management systems improve visibility of dentist performance and drive UDA and private revenue delivery. We are also focused on retaining and training our hygienists and nurses, who provide critical elements of our dental services. The market-leading position of our patient services division benefits our reputation and our relationships with the NHS, the CQC, the GDC and other regulators. We intend to maintain our reputation and these relationships through continued consistent achievement of UDA delivery, thereby ensuring NHS dentistry contract retention and solidifying our revenue base. We actively seek dialogue with our partners at the NHS, the CQC and other regulators, and plan to continue to proactively participate in NHS pilot programmes to prepare for and advocate regulatory reforms.
Pursue an active, disciplined growth strategy of purchasing NHS practices with contracted revenues, complemented by selective private and specialist acquisitions and acquisitions to grow our practice services division
We intend to continue to pursue a strategy of expanding our contracted revenue base by selectively acquiring dental practices and their evergreen NHS dentistry contracts. With 13,815 dental practices according to Mintel, the large majority of which are independent, the UK dental market is highly fragmented, and we believe that there is scope for additional consolidation as dentists retire or sell their dental practices to become independent contractors due to the administrative, regulatory and compliance burden of owning their own dental practice. Whilst we maintain our focus on acquisitions in our core NHS dentistry services business, we also intend to opportunistically acquire practices with private dentistry services within our patient services division. We will also seek opportunities to acquire specialist suppliers and services that complement our core NHS dentistry services such as The Dental Directory, dbg, Med-FX, PDS Dental Laboratories Leeds and Dolby Medical. We aim to continue to improve and refine our acquisition processes to continue to improve deal conversion rates and reduce due diligence and acquisition timelines. In particular, we intend to refocus our acquisition strategy on acquiring dental practices that have consistently delivered 96% or more of their contracted UDAs each year. Whilst our ability to verify contracted revenues and contracted costs gives us high visibility of target dental practices’ future performance, we intend to continue refining the accuracy of our due diligence and post-acquisition results. Further, we aim to efficiently integrate acquired practices into our estate so that they benefit from the economies of scale enjoyed by our other practices.
Continue to strengthen profitability through operational excellence and economies of scale
Whilst we differentiate our patient services through the provision of consistent, high-quality dental care to our patients, we believe that we are also able to drive cost synergies by standardising, simplifying and sharing systems and best practices across our group. We intend to drive patient numbers through postal and SMS marketing programmes, through investments in customer relationship management (“CRM”) technology and through improved online interaction with our patients. We also plan to increase chair time available to dentists, and thereby our revenues, and limit the range of our future equipment maintenance requirements through a results-focused equipment replacement programme across our estate. Our initiatives aimed at centralising and insourcing IT, talent sourcing, training, estate management, compliance and health and safety and other functions across our estate will continue to drive efficiency, and we intend to lower costs by using our scale to negotiate volume discounts in supply chain sourcing and procurement, which also benefit from our practice services division.
At the same time, we intend to leverage the returns from our central costs to grow our revenues by investing in highquality personnel, processes and IT. As part of our effort to exploit economies of scale, we also intend to continue to merge the smaller practices which we acquire into practices in our existing estate.
Complete the “mydentist” rebranding to attract new customers, increase brand identification and expand our dentistry offering as a retail proposition
We expect to complete the roll-out of our “mydentist” brand to the large majority of our practices toward the end of 2016. By transforming our business into a nationally-recognised dentistry brand, we intend to attract new customers, increase customer and clinician satisfaction, promote our NHS and private dentistry services and differentiate ourselves from our competition. We aim to deliver a consistent customer experience that reinforces our brand and helps to drive sales, and have implemented new training programmes for clinicians, implemented an online booking system and extended our trading hours to achieve this. In addition, we have sought to improve the environment within our dental practices by redecorating and refurbishing waiting room areas. We are also aiming to expand our dentistry offering in order to become a one-stop-shop for all of our customers’ dental requirements. For example, in connection with the rebranding we have partnered with Colgate in a joint promotion effort to sell Colgate dental products in our “mydentist”-branded practices.
Grow our practice services division by targeting the demand for consumables, materials and services from independent dental practices and adjacent healthcare markets such as GPs and veterinarians
The 13,815 dental practices in the United Kingdom spend an estimated £400-500 million per annum on dental materials, equipment and services. These dental practices are served by a broad cross-section of small-to-mid-size vendors, none of which provides a fully vertically integrated, one-stop shop covering all materials, equipment and services. We believe our practice services division is well-positioned to take advantage of the opportunity that this presents as the businesses that we have acquired, The Dental Directory, dbg, Med-FX, PDS Dental Laboratories Leeds, Dolby Medical, offer a platform capable of serving a significant proportion of dentists’ direct and indirect materials, equipment and services needs. Recently, for example, our practice services division won re-tenders for the supply of medical consumables and materials to NHS Scotland and NHS Supply Chain, the logistics and supply organisation for NHS England. Our acquisition of PDS Dental Laboratories Leeds will allow us to insource more of the laboratory work of our patient services division’s dental practices. We also believe that the market for supplying consumables, materials and services to adjacent healthcare segments such as GPs and veterinarians is significantly larger, and presents a growth opportunity for our practice services division. To that end, we intend to continue to consider opportunistic acquisitions to expand the offering of our practice services division.
Drive organic growth through private dentistry services
The private general dentistry market had £3.35 billion (or approximately 35%) of all spending on dentistry for the twelve months ended 31 March 2016, according to Mintel. Revenue from private dentistry represents only 15.3% of our total revenue and we had 2.6% of the private general dentistry market share in terms of revenue for the twelve months ended 31 March 2016. As a result, we believe the private dentistry market represents an opportunity for us to expand our patient services division and offset recent industry-wide headwinds in the provision of NHS dentistry services. To realise this opportunity, we have developed a strategy designed to drive growth in private dentistry, which includes rebranding from IDH to “mydentist,” and continuing to attract and retain specialists, such as domiciliary, sedation, oral surgery and orthodontics specialists. In addition, we plan to increase our focus on crossselling and up-selling private treatments, and have undertaken training with our dentists to that end. We also intend to boost our private dentistry business through the introduction of new specialty products and services, such as facial aesthetics, which provides us with a cross-selling opportunity for our Med-FX line of products. We believe this strategy has already improved our performance in the private dentistry market, with our like-for-like private dentistry revenue for the twelve months ended 31 March 2016 increasing by 11.6% over that in the twelve months ended 31 March 2015.
Opportunistically expand into secondary care and other adjacent dentistry markets
Whilst the core focus of our patient services division has been on the UK primary care dental market, we also intend to grow and continue to explore the significant opportunities in the secondary care market and other adjacent segments. The secondary care market (also known as “acute care”) for dentistry services consists of hospital-based inpatient and outpatient care and specialised consultative care accessed through a referral from a primary care dentist, including oral pathology and maxilla facial surgery services. The secondary care market constituted approximately £0.8 billion (or approximately 13%) of spending on dentistry in the United Kingdom for the twelve months ended 31 December 2014. The Department of Health is seeking to outsource a number of secondary care dentistry services, including sedation and minor oral surgery. We have had success in winning tenders for these services in a number of practices in which we have suitably located and qualified clinicians, and we intend to continue to pursue these tenders as opportunities arise. We are also exploring opportunities for other types of dentistry services in adjacent segments of the dentistry services industry, such as in prisons (where we have one contract in place), nursing homes and for the Ministry of Defence.
SUMMARY OF CERTAIN KEY METRICS
The table below provides a summary of certain key metrics for our business for the twelve months ended 31 March 2014, 2015 and 2016:
RISK FACTORS
Industry-wide factors have resulted in a decrease in our UDA delivery rates, which negatively impacts our revenues from NHS dentistry services.
During the twelve months ended 31 March 2016, we experienced a decline in UDA delivery rates with respect to the NHS dentistry services provided by our patient services division. Our UDA delivery rate for the contract year ending 31 March 2016 was 92.4% compared to an average UDA delivery rate of 96.8% for the five years ended 31 March 2015. This reduction in UDA delivery rates in our core business of NHS dentistry services resulted in a decline in revenue and EBITDA before exceptional items for the year, with each 1% increase or decrease in UDA delivery equating to an increase or decrease of approximately £1.6 million in EBITDA before exceptional items.
We believe that this decline in our UDA delivery rates is a result of industry-wide factors, namely increased NHS scrutiny of claims and performance benchmarks and a decrease in the number of exempt patients we treat as a result of the improving UK economy. The increased NHS scrutiny of claims and performance benchmarks, including delivery of so-called “28-day letters” to our patient services division’s dental practices, has also reduced dentist productivity by requiring dentists to spend more time recording notes detailing patient care and causing dentists to be more cautious in claiming UDAs. Moreover, the decrease in the number of exempt patients, such as students under 19 years of age, the unemployed, new and expectant mothers and pensioners, exempt from payment (“exempt patients”), has resulted in a decline in the mix of UDA bands delivered, since exempt patients typically receive services requiring a high number of UDAs per course of treatment.
While we are undertaking measures to recover UDA performance, we cannot make any assurances that such measures will be successful, or that the loss of revenues from UDA delivery rates will be offset by increases in the provision of private dentistry services or NHS dentistry contract price uplifts. Furthermore, we may face continued NHS scrutiny in the future that may offset any measures we take to address UDA delivery rate declines. In addition to its impact on revenue, a drop in UDA delivery also increases the risk that NHS Regions may seek to renegotiate the number of UDAs contracted under certain of our patient services division’s NHS dentistry contracts or even, in an extreme scenario, terminate certain NHS dentistry contracts. A continuation of the decline in UDA delivery rate over an extended period of time may have a material adverse impact on our financial condition.
The result of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
We are a United Kingdom-based company and operate principally within the United Kingdom. In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. The referendum result has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union-derived laws to replace or replicate in the event of a withdrawal. Depending on the terms of the withdrawal, the United Kingdom could lose access to the single EU market and to the global trade deals negotiated by the European Union on behalf of its members which could affect the attractiveness of the United Kingdom as a global investment centre and detrimentally impact UK growth. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility.
Volatility in the value of the pound against the euro and the dollar following the referendum has had, and could continue to have, a negative impact on the cost of sales for our practice services division because a significant proportion of our practice services division’s supplies are purchased on a wholesale basis in euros and dollars. The withdrawal of the United Kingdom from the European Union may also make it more difficult for us to source dentists from outside the United Kingdom as a result of changes to UK border and immigration policy. In addition, if the United Kingdom does eventually leave the European Union, Scotland may have a second referendum on independence from the United Kingdom. A vote by Scotland to leave the United Kingdom could raise risks for our dental practices in Scotland. Any of these risks could have an adverse effect on our business, financial condition, results of operations and prospects.
INDUSTRY DATA FROM MINTEL GROUP LTD
The following market and competitive position data have been derived from surveys or studies conducted by Mintel Group Ltd (“Mintel”) and are generally believed to be reliable; however, the accuracy and completeness of such information is not guaranteed.
The market value for dental care in the United Kingdom was estimated by Mintel to be £9.6 billion in the twelve months ended 31 March 2016, with £3.84 billion in spending on NHS dentistry services, £3.35 billion on private dentistry services and £2.40 billion on private cosmetic dentistry services.
According to Mintel, expenditure on dental care in the United Kingdom has grown by a cumulative 17% since the twelve months ended 31 March 2012. Despite the UK Government’s stated policy of expanding access to NHS dentistry services to 64% of the UK population, less than 55% of the population of England accessed a NHS England dentist in the 24 months ended 30 June 2015, according to Mintel.
Mintel estimates that the UK dental market has approximately 13,815 practices.
Mintel estimated in June 2016 that approximately 19% of patients received wholly private dentistry care.
According to Mintel, expenditure on dental care is expected to experience fairly stable levels of growth over the next four years, of between 3.5% and 4.2% per year, and is expected to end the forecast period at £11.6 billion in 2020.
According to the General Dental Council, the inflow of dentists from the EEA has continued, with approximately 17% of the dentists registered with the GDC qualified in other parts of the EEA and approximately 11% qualified outside Europe, according to Mintel.