One of the best ways to make money in the stock market is to spot when a company's "story" has changed before Wall Street does.
The company is Remedent (REMI, Financial). Remedent is a Belgian company and is fully audited. Its CEO is Guy De Vreese.
Its basic business is the design, manufacture and selling of dental technology. Their products include ultrathin dental veneers, whitening products, and systems for the fitting of crowns and arches. They have several patents. Veneers are a thin layer of restorative material placed over a tooth surface to make the teeth look better or to repair actual damage.
This company's sales and operating margins are exploding as they experience huge demand for their products in China using a direct-to-consumer model.
Prior to 2009, this was not a particularly interesting company. Indeed, if you look at the results under their old business model, it shows growing sales [from their good products] but an inability to substantially increase operating margins to move into real profitability.
However, under the new model, both sales, operating margins, and therefore earnings, are dramatically expanding.
The last quarter saw an increase in sales of 77% of $1.41 million to $3.24 million
The quarter before last saw an increase in sales of 74% of $1.3 million to $3.1 million
In the last quarter the company reached a break-even point after suffering from a million dollar loss the previous year.
The CEO is guiding for at least a 50% increase in revenue from the China operations this year.
Best of all - this turnaround has been completely unnoticed by the market.
Under the first [unsuccessful] model, their whitening products and veneers were sold through distributors who marketed to dentists who applied their technology, when needed, to their patients. This model was not successful for the following reasons.
First, dentists are not salespeople.
Second, the typical dentist may have had, say, 1,000 loyal patients. They had to spend most of their time doing low-paying mundane work like fillings and teeth cleaning. There simply wasn't the time to do cosmetic work. So Remedent's products were not used as much as they could have been.
Third, there was competition. Many dentists simply did not carry Remedent’s products.
Fourth, the entire model was too passive. Consumers were unaware of the possibilities of Remedent's products. Remedent termed this model business-to-business or B2B, and it did not work. The CEO saw the disconnect between how happy customers were with the Remedent products and the lackluster profitability. This prompted a change in the business model.
Their new model to sell veneers (which are the majority of their business) is not B2B, but business to consumer, B2C.
It is resulting in massive sales, margin, and earnings increases.
No other dental technology company has this business model. They currently have no competition in Europe or Asia. Thus, they have first-mover advantage in an industry with significant barriers to entry.
The following are the components of the new business model. This is how Remedent is now selling their veneers and whitening products.
1. Sales leads are established using Internet, magazine and television advertising. Remedent is not marketing the product itself, they are marketing a "Beautiful Smile." The products are simply the tools to achieve that beautiful smile. The brand name for their concept is "GlamSmile" — which is their ultrathin dental veneers to give someone with bad teeth a beautiful smile. They are selling a "look.”
2. Once someone responds to their GlamSmile adverts, it constitutes a sales lead. From this, someone called a "Smile Consultant" takes over. They arrange an appointment at a "dental spa" themed more as a beauty salon than a dentist's office to talk about options to achieve a beautiful smile. In some cases, the appropriate solution is whitening treatments, but mostly it is the application of their special veneers.
At this point, the competitive advantage of these veneers should be clarified.
Note: Remedent's GlamSmile veneers are better than traditional porcelain ones. They are much thinner because of the materials used. This means they are much easier to fit — in terms of time, comfort levels and cost. All the veneers can be fitted in one hour-long sitting using Remedent's patented tray technology following the initial consultation where digital images are taken of the teeth. Overall, it adds up to a far superior product that is in no way less durable than traditional porcelain veneers.
3. Following the decision to fit veneers, the patient will be sent to a Remedent partner dentist, whereby revenue for the veneers is split between the dentist and Remedent. At this point, the difference between the two business models should be clear.
One is a passive approach using unskilled salespeople [dentists] with patients/consumers having little or no awareness of their options unless told by the dentist. The second is an active marketing approach with veneers as the products using skilled salespeople [the Smile Consultants]. The product is not the veneers but the "smile." The dentists are free to focus on what they do best — fix teeth.
Other Businesses
The main area of focus of this article is Remedent's B2C model selling GlamSmile veneers direct to the consumer. Currently, 60% of revenue is comprised of GlamSmile sales. Because of its rapid growth, it will rapidly become the vast majority of revenue.
Remedent also sells teeth whitening products through distributors. It has a number of patents in this area. It competes effectively in this area, but it is not nearly as profitable as the GlamSmile business.
Remedent also receives licensing fees from the distributor Den-Mat for the sale of its veneers in the U.S. as well as for sale of its patented First-Fit crown implants.
It is important to note, since Den-Mat also sells Remedent’s veneers, it could potentially be a competitor in the U.S. market. Because of this, Remedent is focusing on the markets with no competition (Europe and Asia) and greater revenue growth (Asia).
Remedent plans to establish the B2C direct model wherever possible.
Business Model Breakdown (B2C - direct model)
Here are some numbers further explaining Remedent's business-to-consumer direct model.
Remedent has derived these cost and sales estimates from its experience with its Belgian operation and in America using second-hand leads. In fact, its overheads are much lower and demand is much higher in China, so the numbers can be considered conservative.
A) Cost incurred generating one sales lead = $35
B) 10 leads will get one appointment
C) 2 appointments will get one sale.
D) $35 x 10 x 2 = $700 lead cost per sale.
____________________________________________
E) Smile Consultant makes 10 sales per month
F) Commission per sale = $560 per sales
G) $560 x 10 sales = Cost of Smile Consultant of $5600 per month.
____________________________________________
H) Average number of veneers fitted = 13. Price per veneer $568
= $7644 revenue from sale of revenue.
I) Cost to produce veneers = $56 each. So Total cost = 13 x $56 = $728
(Revenue is split 50/50 with the dentist)
J) So $7644 / 2 - $700 - $560 - $728 = $1834 profit to Remedent per average sale.
____________________________________________
Remember, profit is significantly greater in China because overheads are lower. Personnel costs in China are only 8%, whereas they are 25% in Europe.
The most recent monthly sales figures for March, 2011, (compared to the above model of 10 per month) were 24 cases in Beijing, 23 cases in Beijing and 16 in the Shanghai store that just opened January.
Here is the GlamSmile China webpage.
Why is demand for Remedent's products so strong in China?
I include quotes from the company’s 10-K.
1. Cosmetic dentistry is driven by rising incomes and the emergence of an "aspirational" middle class (wanting a beautiful smile)
10- K "In a report published by Millennium Research Group with regard to Chinese markets for Dental Implants, a similar target market as that for our GlamSmile products, finds that this emerging market is growing quickly at a compound annual growth rate of more than 35%."
2. Deregulation of Chinese dental services.
"A strong driver of this growth is the deregulation of dental services in China. Dental services in China are generally provided in government-managed facilities; however, ongoing deregulation of dental services is resulting in the emergence of an increased number of private dental practices and increasing accessibility to dental services."
3. Chinese people have worse teeth (yeah really).
"Another major driver in the Chinese market is the frequency of teeth stained by Tetracycline. For decades, Tetracycline was one of the most prescribed antibiotics in China causing many individuals to suffer from stained teeth. Excessive use of fluoride in drinking water causes a similar problem. When tetracycline exposure occurs while teeth are forming, it creates a permanent gray or brown stain, causing either uniform discoloration of the entire tooth or forming horizontal bands of stain of varying intensity that can range from mild to very dark. Veneers are the treatment of choice for this condition."
Remedent is also experiencing increasing demand worldwide for their products due to the aging population.
It is important to note, however, the B2C model is the key driver of profitability.
Competition
Currently, Remedent is the only company offering their unique thin veneers in Asia or Europe.
One of the key things I looked at when analyzing this company was the possibility of future competition. The size of the future opportunity is obvious. In addition, the current success of the Remedent B2C model is clear. However, is there any moat?
I think there is:
1. It is not easy to start a dental technology business. Remedent's products have been developed by years of research. A cursory look at the products section of their products reveals there is serious know-how, and in some cases patents, behind their products.
2. In the case of China, the CEO told me the most difficult thing is the license applications for new GlamSmile consultancies. This can take several months to up to a year for each one. However, once Remedent has a few licenses, it makes it that much easier to obtain new ones. Thus, a new entrant is going to have to go through a very long and detailed registration process to get started.
3. Remedent is vertically-integrated, meaning they own the entire supply chain for their veneers.
From the 10-K:
"Because we are uniquely positioned to have the ability to control the entire process from manufacturing to marketing to distribution, we believe it is feasible for us to have complete control and flexibility to maximize margins and respond aggressively to any competitive situation."
4. Competition exists in terms of traditional porcelain veneers, which are more costly, painful and time-consuming to fit. There is no evidence they are more durable than GlamSmile veneers. However, some patients still prefer this method.
5. Remedent has filed for a patent on a proprietary tray delivery system for rapid fitting of the veneers. In addition they have developed years of know-how in relation to the fitting of veneers.
6. Remedent is attempting to establish "GlamSmile" as the brand for creating a beautiful smile. Even a small measure of success in this regard is going to widen their moat.
In conclusion, there is a moat here. It is not extremely wide, and the comments of the CEO and gross margins will have to be monitored. However, I believe any erosion in margins will occur much more slowly than in more changeable and fast-moving markets.
Additional Opportunity.
Remedent's Smile Consultants are the key access point for consumers to purchase Remedent’s products. Currently, teeth whitening products and veneers are sold through them. However, they will be a source of great competitive advantage in future Remedent products in terms of accessing the consumer in a cost-efficient and profitable way.
Financials and Other Points of Interest.
Conclusion.
Remedent is a company experiencing explosive growth and reasonably sustainable growth. The market has not seen it at all.
Disclosure: I am long Remedent REMI.
The company is Remedent (REMI, Financial). Remedent is a Belgian company and is fully audited. Its CEO is Guy De Vreese.
Its basic business is the design, manufacture and selling of dental technology. Their products include ultrathin dental veneers, whitening products, and systems for the fitting of crowns and arches. They have several patents. Veneers are a thin layer of restorative material placed over a tooth surface to make the teeth look better or to repair actual damage.
This company's sales and operating margins are exploding as they experience huge demand for their products in China using a direct-to-consumer model.
Prior to 2009, this was not a particularly interesting company. Indeed, if you look at the results under their old business model, it shows growing sales [from their good products] but an inability to substantially increase operating margins to move into real profitability.
However, under the new model, both sales, operating margins, and therefore earnings, are dramatically expanding.
The last quarter saw an increase in sales of 77% of $1.41 million to $3.24 million
The quarter before last saw an increase in sales of 74% of $1.3 million to $3.1 million
In the last quarter the company reached a break-even point after suffering from a million dollar loss the previous year.
The CEO is guiding for at least a 50% increase in revenue from the China operations this year.
Best of all - this turnaround has been completely unnoticed by the market.
Under the first [unsuccessful] model, their whitening products and veneers were sold through distributors who marketed to dentists who applied their technology, when needed, to their patients. This model was not successful for the following reasons.
First, dentists are not salespeople.
Second, the typical dentist may have had, say, 1,000 loyal patients. They had to spend most of their time doing low-paying mundane work like fillings and teeth cleaning. There simply wasn't the time to do cosmetic work. So Remedent's products were not used as much as they could have been.
Third, there was competition. Many dentists simply did not carry Remedent’s products.
Fourth, the entire model was too passive. Consumers were unaware of the possibilities of Remedent's products. Remedent termed this model business-to-business or B2B, and it did not work. The CEO saw the disconnect between how happy customers were with the Remedent products and the lackluster profitability. This prompted a change in the business model.
Their new model to sell veneers (which are the majority of their business) is not B2B, but business to consumer, B2C.
It is resulting in massive sales, margin, and earnings increases.
No other dental technology company has this business model. They currently have no competition in Europe or Asia. Thus, they have first-mover advantage in an industry with significant barriers to entry.
The following are the components of the new business model. This is how Remedent is now selling their veneers and whitening products.
1. Sales leads are established using Internet, magazine and television advertising. Remedent is not marketing the product itself, they are marketing a "Beautiful Smile." The products are simply the tools to achieve that beautiful smile. The brand name for their concept is "GlamSmile" — which is their ultrathin dental veneers to give someone with bad teeth a beautiful smile. They are selling a "look.”
2. Once someone responds to their GlamSmile adverts, it constitutes a sales lead. From this, someone called a "Smile Consultant" takes over. They arrange an appointment at a "dental spa" themed more as a beauty salon than a dentist's office to talk about options to achieve a beautiful smile. In some cases, the appropriate solution is whitening treatments, but mostly it is the application of their special veneers.
At this point, the competitive advantage of these veneers should be clarified.
Note: Remedent's GlamSmile veneers are better than traditional porcelain ones. They are much thinner because of the materials used. This means they are much easier to fit — in terms of time, comfort levels and cost. All the veneers can be fitted in one hour-long sitting using Remedent's patented tray technology following the initial consultation where digital images are taken of the teeth. Overall, it adds up to a far superior product that is in no way less durable than traditional porcelain veneers.
3. Following the decision to fit veneers, the patient will be sent to a Remedent partner dentist, whereby revenue for the veneers is split between the dentist and Remedent. At this point, the difference between the two business models should be clear.
One is a passive approach using unskilled salespeople [dentists] with patients/consumers having little or no awareness of their options unless told by the dentist. The second is an active marketing approach with veneers as the products using skilled salespeople [the Smile Consultants]. The product is not the veneers but the "smile." The dentists are free to focus on what they do best — fix teeth.
Other Businesses
The main area of focus of this article is Remedent's B2C model selling GlamSmile veneers direct to the consumer. Currently, 60% of revenue is comprised of GlamSmile sales. Because of its rapid growth, it will rapidly become the vast majority of revenue.
Remedent also sells teeth whitening products through distributors. It has a number of patents in this area. It competes effectively in this area, but it is not nearly as profitable as the GlamSmile business.
Remedent also receives licensing fees from the distributor Den-Mat for the sale of its veneers in the U.S. as well as for sale of its patented First-Fit crown implants.
It is important to note, since Den-Mat also sells Remedent’s veneers, it could potentially be a competitor in the U.S. market. Because of this, Remedent is focusing on the markets with no competition (Europe and Asia) and greater revenue growth (Asia).
Remedent plans to establish the B2C direct model wherever possible.
Business Model Breakdown (B2C - direct model)
Here are some numbers further explaining Remedent's business-to-consumer direct model.
Remedent has derived these cost and sales estimates from its experience with its Belgian operation and in America using second-hand leads. In fact, its overheads are much lower and demand is much higher in China, so the numbers can be considered conservative.
A) Cost incurred generating one sales lead = $35
B) 10 leads will get one appointment
C) 2 appointments will get one sale.
D) $35 x 10 x 2 = $700 lead cost per sale.
____________________________________________
E) Smile Consultant makes 10 sales per month
F) Commission per sale = $560 per sales
G) $560 x 10 sales = Cost of Smile Consultant of $5600 per month.
____________________________________________
H) Average number of veneers fitted = 13. Price per veneer $568
= $7644 revenue from sale of revenue.
I) Cost to produce veneers = $56 each. So Total cost = 13 x $56 = $728
(Revenue is split 50/50 with the dentist)
J) So $7644 / 2 - $700 - $560 - $728 = $1834 profit to Remedent per average sale.
____________________________________________
Remember, profit is significantly greater in China because overheads are lower. Personnel costs in China are only 8%, whereas they are 25% in Europe.
The most recent monthly sales figures for March, 2011, (compared to the above model of 10 per month) were 24 cases in Beijing, 23 cases in Beijing and 16 in the Shanghai store that just opened January.
Here is the GlamSmile China webpage.
Why is demand for Remedent's products so strong in China?
I include quotes from the company’s 10-K.
1. Cosmetic dentistry is driven by rising incomes and the emergence of an "aspirational" middle class (wanting a beautiful smile)
10- K "In a report published by Millennium Research Group with regard to Chinese markets for Dental Implants, a similar target market as that for our GlamSmile products, finds that this emerging market is growing quickly at a compound annual growth rate of more than 35%."
2. Deregulation of Chinese dental services.
"A strong driver of this growth is the deregulation of dental services in China. Dental services in China are generally provided in government-managed facilities; however, ongoing deregulation of dental services is resulting in the emergence of an increased number of private dental practices and increasing accessibility to dental services."
3. Chinese people have worse teeth (yeah really).
"Another major driver in the Chinese market is the frequency of teeth stained by Tetracycline. For decades, Tetracycline was one of the most prescribed antibiotics in China causing many individuals to suffer from stained teeth. Excessive use of fluoride in drinking water causes a similar problem. When tetracycline exposure occurs while teeth are forming, it creates a permanent gray or brown stain, causing either uniform discoloration of the entire tooth or forming horizontal bands of stain of varying intensity that can range from mild to very dark. Veneers are the treatment of choice for this condition."
Remedent is also experiencing increasing demand worldwide for their products due to the aging population.
It is important to note, however, the B2C model is the key driver of profitability.
Competition
Currently, Remedent is the only company offering their unique thin veneers in Asia or Europe.
One of the key things I looked at when analyzing this company was the possibility of future competition. The size of the future opportunity is obvious. In addition, the current success of the Remedent B2C model is clear. However, is there any moat?
I think there is:
1. It is not easy to start a dental technology business. Remedent's products have been developed by years of research. A cursory look at the products section of their products reveals there is serious know-how, and in some cases patents, behind their products.
2. In the case of China, the CEO told me the most difficult thing is the license applications for new GlamSmile consultancies. This can take several months to up to a year for each one. However, once Remedent has a few licenses, it makes it that much easier to obtain new ones. Thus, a new entrant is going to have to go through a very long and detailed registration process to get started.
3. Remedent is vertically-integrated, meaning they own the entire supply chain for their veneers.
From the 10-K:
"Because we are uniquely positioned to have the ability to control the entire process from manufacturing to marketing to distribution, we believe it is feasible for us to have complete control and flexibility to maximize margins and respond aggressively to any competitive situation."
4. Competition exists in terms of traditional porcelain veneers, which are more costly, painful and time-consuming to fit. There is no evidence they are more durable than GlamSmile veneers. However, some patients still prefer this method.
5. Remedent has filed for a patent on a proprietary tray delivery system for rapid fitting of the veneers. In addition they have developed years of know-how in relation to the fitting of veneers.
6. Remedent is attempting to establish "GlamSmile" as the brand for creating a beautiful smile. Even a small measure of success in this regard is going to widen their moat.
In conclusion, there is a moat here. It is not extremely wide, and the comments of the CEO and gross margins will have to be monitored. However, I believe any erosion in margins will occur much more slowly than in more changeable and fast-moving markets.
Additional Opportunity.
Remedent's Smile Consultants are the key access point for consumers to purchase Remedent’s products. Currently, teeth whitening products and veneers are sold through them. However, they will be a source of great competitive advantage in future Remedent products in terms of accessing the consumer in a cost-efficient and profitable way.
Financials and Other Points of Interest.
- Per the last 10-Q, Remedent has a line of credit of $2.13 million, which the CEO has told me will be used to expand operations (mostly in China)
- The company states it has sufficient cash flow to fund operations
- Funds for aggressive expansion in China will not come from any dilution. The CEO a significant percentage of the company and the stock is too undervalued. Remedent will enter into financing deals if more cash is required.
- Cash on the balance sheet has grown from $613,000 to $1.73 million in the last nine months.
- There are a significantly more diluted than common shares. However, the vast majority of the stock options and warrants are a long way out-of-the money because of the poor performance of the company’s share price since they were issued. The current price of Remedent stock is 40 cents. Exercise prices for stock options range from 87 cents to $1.20. Exercise prices for the warrants range from $1 to $3.
- Trading Volume is thin. It takes time to build a position.
- The CEO owns more than 20% of the company and there has been significant insider buying at prices above 65 cents this year by a hedge fund that owns more than 10% of the company.
Conclusion.
Remedent is a company experiencing explosive growth and reasonably sustainable growth. The market has not seen it at all.
Disclosure: I am long Remedent REMI.
