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Company Update: SmileDirectClub, Inc.

Gabelli Funds

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Gabelli Funds
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COMPANY OVERVIEW

Headquartered in Nashville, TN, SmileDirectClub is an oral care company that manufactures and markets its clear aligner product direct to consumers (DTC). It markets its professional level clear aligner program at $1,895 upfront total cost (>60% lower than competitor Align), or in monthly installments, with its proprietary teledentistry platform, SmileCheck, and vertically integrated model. The company went public on September 12, 2019 at an IPO of $23 per share. The company manages the entire end-to-end process of a member’s journey, from the customer order via website or at a SmileShop through aligner manufacturing, fulfillment, and treatment monitoring by a member’s doctor to treatment completion. Since its founding in 2014, the company has helped over one million members with its treatments and generated $750 million of revenue in 2019.  

We highlight some recent notable developments as the company navigates through the COVID-19 pandemic. 

SmileDirectClub obtained a US patent in April 2020 for its SmileShop concept and process, which prevents clear aligner competitors from duplicating its model for 18 years. The patent encompasses scheduling a SmileShop appointment, sending scheduling confirmation to customer, conducting the intraoral scan, generating a treatment plan, receiving approval of plan by licensed dentist/orthodontist, manufacturing aligners, and sending aligners to the customer.

Exhibit 1

Click Here to See Image, Source: SmileDirectClub, Inc.

SmileDirectClub has a flexible P&L structure as evidenced by recent actions by management during the COVID-19 pandemic. As its business volume has dropped 40%, management has decreased marketing spend by 90%, closed its SmileShops and furloughed 55% of its employees to streamline its cost structure to match demand. Management expects to operate cash flow neutral during this pandemic.

  • With its SmilePay monthly payment plan, SmileDirectClub has not experienced any deterioration in the creditworthiness of its customers as only 1.7% have requested a payment deferral, less than the 4-5% deferral request experienced by other lenders.  Further, SmilePay’s delinquency rates in April were similar to March and consistent with the past 12 months.
  • With most dentist offices closed during COVID-19, the American Association of Dental Boards delivered guidelines to state boards to embrace teledentistry and greater access to patients. Many state legislatures are passing laws to encourage teledentistry and these positive regulatory trends bode well for SmileDirectClub. Furthermore, with its focus on orthodontics, SmileDirectClub participates in one of the least invasive dental procedures, which is adaptable to a telehealth model.
  • SmileDirectClub continues to increase its in-network participation with insurers and is now covered by Anthem BlueCross Blue Shield, in addition to United Healthcare and Aetna. 

Comparison 

We compare SmileDirectClub’s clear aligner product offering vis-à-vis Align Technology’s product offering. Align has noted SDC’s model does not compete directly as Align goes through its doctor base for all its products.

COVID-19 Pandemic – Update 

SmileDirectClub vs Align Technology

With the COVID-19 pandemic, management has taken numerous actions to adapt to the uncertain business environment and new challenges:

  • Closed manufacturing on March 20th and opened them on a limited basis to make PPE supplies including 50,000 face shields sold at cost.
  • Closed all SmileShops except ones in Hong Kong on March 21st; most locations on month-to-month leases.
  • Transition to Impression kit online business since then; overall volume down 40%. Since April, SDC has reduced its marketing spend by 90%, which did not negatively impact brand awareness and demand; management will be more efficient with its marketing spend post-COVID.
  • Open SDC’s telehealth platform to all dentists and orthodontists in the US and Canada to help communicate with their patients remotely; rolled out at-home impression kits available to dentists for their customers. 
  • The American Association of Dental Boards recently delivered guidelines to state dental boards that embraced teledentistry and the access to care; some state legislatures passing legislation that specifically permits teledentistry in their respective states and rejecting proposed legislation to preclude this form of remote care. 
  • On May 21st, the company launched ContinuedCare solution, which offers US patients whose clear aligner treatment with another provider was interrupted to become a SmileDirectClub member for $895 upfront or $250 upfront and $58 per month for 12 months. 
  • Furloughed 55% of employees, including much of its headquarter and retail staff, temporary suspended cash pay for executives and leadership team; SmileShop will reopen slowly as demand is there; Post-COVID, the current ~400 SmileShops will decrease as management reassesses its physical footprint and the optimal level of stores needed for increased efficiency.
  • Taken many actions to operate EBITDA breakeven during the pandemic with marketing spend reduction, the above measures, and other cost reductions. 
  • New credit facility up to $500 million; the company can borrow funds on this facility based on 85% of accounts receivable; rate is 3-month LIBOR (subject to 1.75% floor) + 10.75%; issued warrants of 3.89m shares at $7.11 in conjunction.

Long-Term Targets

Management recently reiterated its long-term goals:

  • Revenue: 20-30% CAGR.
  • Gross margin: 85% of revenue.
  • Sales and marketing expense: 40-45% of revenue.
  • EBITDA margin: 25-30%.

Other

  • Went public at $23 per share on September 12, 2019, net proceeds of $1.29 billion.
  • Leases its headquarters and manufacturing facilities – Nashville, TN, Antioch, TN, Austin, TX for second manufacturing, San Jose, Costa Rica, Cartago, Costa Rica.
  • The two co-founders and CEO own 66.0% of the company and 88% of the voting rights. 

Conclusion

SmileDirectClub is focused on penetrating into a large, underpenetrated global market of 500 million people with malocclusion. As the company markets its orthodontic clear aligners direct to consumer, the company is benefitting from the growing trend of telehealth/teledentistry with COVID-19. With the COVID-19 crisis, SmileDirectClub’s management has taken concrete actions to adjust its cost structure to match consumer demand to operate on an EBITDA breakeven basis during the pandemic. Furthermore, management has been proactive in helping the dental community with enabling technologies and products to help dentists connect with their patients and their ongoing dental care. With its recent actions, SmileDirectClub is well-positioned to weather this crisis and better positioned to achieve its long-term financial goals.

Originally Posted on May 28, 2020 – Company Update: SmileDirectClub, Inc. (SDC: NASDAQ)

IMPORTANT DISCLOSURES

This whitepaper was prepared by Jennie Tsai. The examples cited herein are based on public information and we make no representations regarding their accuracy or usefulness as precedent. The Research Analyst’s views are subject to change at any time based on market and other conditions. The information in this report represent the opinions of the individual Research Analyst’s as of the date hereof and is not intended to be a forecast of future events, a guarantee of future results, or investments advice. The views expressed may differ from other Research Analyst or of the Firm as a whole. 

As of April 30, 2020, affiliates of GAMCO Investors, Inc. beneficially owned less than 1% of all companies mentioned.

This whitepaper is not an offer to sell any security nor is it a solicitation of an offer to buy any security.

Investors should consider the investment objectives, risks, sales charges and expense of the fund carefully before investing. 

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