Boom or bust? Doom or gloom? Dentists just like economists seem to be split on what's happening in the economy. Broadly speaking, the reports from our clients remain highly positive and optimistic. The number one problem is still staffing with strong demand for dental services. Despite this there is still a bit of nervous sentiment about what the future might hold.
If we look at the most recent economic indicators it seems that despite the external shocks and steep increases in the target cash rate the economy is still humming along nicely. GDP grew by 3.9% in FY22 and both the number of jobs and hours worked increased as well. The best estimate of Australia's productive capacity utilisation has it sitting at around 86%, the highest level on record. Demand remains strong and this in part explains the inflation rate hitting 7.3%. In other words businesses are doing very well and there are no signals that this will change in the short term.
The problem with our industry is that we're a bit prone to heuristic bias. Numbers don't lie though, and large numbers are the most honest. Pacific Smiles Group is an interesting source of information. Their reports can provide a bit of insight into the state of our industry beyond a single surgery or small group of clinics. Their most recent performance results have led some to conclude that either their business or our industry is in trouble but we don't think either is true.
PSG FY22 results:
- Underlying net loss of $3.2m, compared to net profit of $14m in FY21
- Underlying EBITDA $11.3m, down 65.9% on FY21
- Group revenue $139.5m, down 8.9% on FY21
- Patient fees of $226m, down 6% on FY21
- Same centre patient fees down 10.1% on FY21
Admittedly, this appears bleak but PSG, themselves don't seem phased. Their most recent guidance to the market is buoyantly optimistic about what this year holds. Their expectation for FY23 is:
- Patient fees between $270-285m, up 19-26%
- Underlying EBITDA between $24-27m, up 112-139%
Some might call this optimism crazy but we think that it is possible, especially considering their massive investment and expansion. The reality is that FY21 was an insanely good year for dentists. We had short term factors that drove a massive growth in demand for dental services and these have now reduced significantly. Prior to the pandemic, PSG's same centre fee growth averaged about 5.6%. In our 20 years' experience this is a fair reflection of the dentistry market in general. PSG's FY21 results represented a 26% increase in same centre fee growth, which was way off trend and organic growth for them.
The interesting thing about trends is that over time there is almost always a reversion to the median. Over the three years prior to FY22 PSG's same centre fee growth actually averaged 10%, with FY21 being particularly exceptional. In hindsight the recent 10.1% drop in same centre fees was not just reasonable but almost inevitable.
If we look closer at their production across different periods we can see the following:- Their average same centre fee growth during the pandemic (FY20 to FY22) was 3.8%, below their pre-pandemic average but not concerning.
- Their average same centre fee growth from FY16 to FY22 was 4.8%, close to but just below their pre-pandemic average.
- We can estimate that their established clinics are generating about 20% more patient fees today than they were before the pandemic.
- Excluding the effect of new clinics, PSG's own forecast puts them on or just above their trend line for organic growth.
All the indicators we have seen and the broad consensus of our clients is that work life is very much business as usual and close to pre-pandemic operating conditions. If PSG's fee growth is a reasonable gauge of demand for dental services we can rest assured that our industry is performing well. The pandemic volatility appears to have given way and we can look forward to steady organic growth once more.
