Western Dental Services Inc. is one year into a turnaround effort under a new management team that changed how it provides care, started selling new products in dental offices, and has begun to shift its client mix toward those who have commercial insurance, pay in cash or pay via new third-party credit.
The strategic moves last fall came just months after a brief standoff with California over treatment for lower-income dental patients—traditionally a big contributor to company revenue that formed the basis of its brand reputation in the market.
The Orange-based company offers dental insurance and runs some 200 offices in four states. About 80% are in California and the rest in Texas, Arizona and Nevada; a location in Colorado has closed.
About 30 of its offices are under Brident Dental & Orthodontics, a brand it started in 2012 in Texas as part of a push to expand orthodontics services through the chain—which has begun using “Western Dental & Orthodontics” as its public name.
Western Dental ranked No. 9 in August on the Business Journal’s list of dental care plans operating in Orange County, with an estimated 45,000 local members.
Company executives declined an interview request; this article is based on company filings, news items, interviews with current and former employees and industry executives, and Business Journal analysis.
Revenue
About 80% of Western Dental’s revenue comes from its California operations.
California state filings show it had net income of $2.4 million here on revenue of $120 million in the quarter ended June 30, compared with a loss of $1 million on revenue of $106 million in the same period last year.
The company in California earned $8 million on revenue of $432 million for all of 2015; through the first half of 2016 it had net income of about $6 million on revenue of $238 million.
The filings are required because Western Dental participates in California’s Denti-Cal program for lower-income patients.
A Moody’s Investor Service credit opinion issued Sept. 6 said companywide revenue for the 12 months ended June 30 was $542 million.
New York-based private-equity firm New Mountain Capital in October 2012 paid $550 million, including debt, for Western’s holding company, Premier Dental Services Inc., also in Orange.
The seller was venture capital firm Court Square Capital Partners in New York—formerly Citicorp Venture Capital, which had acquired Premier Dental for about $380 million in 2006.
News reports pegged Premier’s companywide earnings before interest, taxes, depreciation and amortization at $45 million in 2005 when it sold to the Citicorp venture capital company for $380 million and about $71 million in 2011, as New Mountain was preparing to buy it for $550 million.
The prices equate to multiples of 8.4 and 7.7, respectively, which one dental industry executive said was in the right range due to Western Dental’s heavy focus on one market and lower-income patients.
Earnings before interest, taxes, depreciation and amortization for the year ended in June are at least $50 million to $55 million, based on debt ratio comments by Moody’s.
The opinion raised New York-based Moody’s outlook on Premier Dental Services’ debt from negative to positive and reaffirmed a corporate family rating that the service had cut in May 2015.
The May 2015 downgrade affected $325 million in debt and was based on lower operating margins from “restoration and expansion of certain benefits for adult Denti-Cal coverage” in California.
The state added adult benefits to the program’s child coverage in May 2014—after cutting by 10% the program’s reimbursement rates to dentists in September 2013.
Denti-Cal in 2014 also raised its income limits—which meant patients with higher incomes, including some who had previously paid for dental care out-of-pocket, could now use the state funding system.
Moody’s said this increased the “proportion of lower-margin patients” who also tend to need care more often and displaced “higher-paying, out-of-pocket or commercial insurance customers.”
Western Dental said in May 2015 it would stop taking new adult patients at 13 Sacramento-area sites.
Then-Chief Executive Simon Castellanos told the Sacramento Business Journal that the company would “convert more (sites) to traditional insurance … we need to limit Denti-Cal.”
Company earnings in California fell from $28 million in 2012 when New Mountain Capital bought it to $8 million in earnings last year on roughly similar revenue—$435 million in 2012 and $432 million in 2015.
New Blood
Moody’s move to a positive outlook is based on changes at Western Dental in the last year.
The company in 2012 had 4,000 employees at 280 offices and its headquarters, a news report said. By mid-2015 it had laid off some 200 corporate employees, industry sources said, and a July 2015 press release that announced Daniel Crowley as Premier’s executive chairman put the chain at about 220 offices.
Castellanos left the company in August and Crowley took his place.
Crowley also is founder and chief executive of Sacramento-based Dynamic Healthcare Solutions; its LinkedIn description bills it as leading turnarounds of “troubled companies.”
Some clients listed by Crowley: home infusion provider Coram Healthcare, which Apria Healthcare Group Inc. in Lake Forest bought for $350 million in 2007 and sold in 2013 to CVS Caremark Corp. for $2.1 billion; and Santa Ana-based SmileCare, whose parent company, Dental Technology Inc., ran 57 dental clinics in three states and sold to Coast Dental Services Inc. in Tampa, Fla., in 2011.
Sources said Crowley signed a three-year deal when he came aboard last summer and strategy changes followed quickly.
Eight of 11 senior executives have been with the company less than 18 months; the most recent hire was Chief Dental Officer John Luther, who joined the company in August.
Initiatives
The company in October launched new efforts under Crowley that included dental hygienists at offices and a “network of orthodontists, oral surgeons, pedodontists, periodontists, and endodontists,” a press release said.
The moves get dentists focused on repair work; regular cleanings are delegated to the lower-cost hygienists, and specialty procedures bring in higher-dollar customers or can be referred to other providers in the network.
A source said the company now has more than 125 hygienists—up from 25 in December when “you would have to get your teeth cleaned somewhere else,” or the dentist did it.
“They plan to have [hygienists] at all offices,” this person said. “It’s a more holistic approach.”
Another source said Western Dental offices also now sell products that include toothbrushes and teeth whitening products.
Such sales produced $3.5 million in the second quarter in California, according to a line item in state filings labeled “dental hygiene product sales,” at a “cost of goods sold” of about $1.4 million.
Moody’s noted the company in August 2015 started to offer a third-party credit option through issuer Synchrony Bank in Florida, which moves patient financing away from in-house credit that’s “roughly one-half of the company’s revenue base,” Moody’s said.
Moody’s said curtailed expansion also had saved money: Western Dental opened 33 offices between 2014 and 2015; press materials on its website have noted two new offices through this July.
Infusion
Company initiatives launched last fall coincided with Crowley saying Western Dental had “secured additional funding from its owners and executed an amended credit agreement with its lenders.”
Moody’s May 2015 credit downgrade noted a need for “equity infusions [within] 12 to 18 months.”
Moody’s September 2016 outlook upgrade noted a $40 million boost from New Mountain Capital; 70% of it went to pay down debt, the ratings service said.
Its current debt couldn’t be discerned but is estimated at about $300 million, based on the May 2015 amount minus the debt payment.
It had $45 million in cash balances as of June 30 and “no near-term debt maturities,” but a “considerable level of bad debt”—about 9% of $542 million in revenue—Moody’s said in September.
Moody’s positive outlook is based on “maintenance of a good liquidity profile” keeping its “debt-to-EBITDA (ratio) below 6” and the service’s “expectation that earnings and cash flow will continue to benefit from recent strategic initiatives.”
It “does not reflect any significant debt-funded acquisitions,” Moody’s said, but Western Dental may be on the hunt for link-ups of some kind.
It posted a LinkedIn ad in August for a “Director of Business Development, Mergers & Acquisitions.”
Soft Tissue
Western Dental’s California filings indicate overall top-line growth might allow it to take on more lower-income patients after the downshift on Denti-Cal last year.
The state restored the 10% cut in reimbursements late last year and the federal Centers for Medicare and Medicaid Services agreed in November to inject $750 million over five years into Denti-Cal.
Western Dental in January said it was accepting Denti-Cal patients at all offices and a February column on a trade news website by then-Chief Dental Officer Dr. Ronald Inge said it had only suspended taking new clients for one month the previous summer.
Western Dental named John Duncan senior vice president of government relations in May; Duncan held a similar role at U.S. HealthWorks in Valencia, which Crowley led, part-owned and sold to Dignity Health in 2012. Duncan twice directed the state Department of Industrial Relations, an agency overseeing labor issues.
Western Dental said in June it supported a new state law that extended Denti-Cal benefits to minors regardless of citizenship: “When a child seeks medical attention—the last question should be immigration status.”
The moves don’t derail the company’s shift in client mix that looks to cut the percentage of revenue from Denti-Cal or other public sources and hike it from clients who pay by cash, credit or insurance.
About $29 million of $120 million in California revenue in its most recent quarter—24%—was from government programs compared with $30 million on $106 million in the same period last year, or 28%.
Cash-pay and insurance revenue grew to $86 million in California in the June 30, 2016 quarter, up from $75 million year-over-year.
