Smiles Inclusive partner at odds with turnaround message

Smiles Inclusive partner at odds with turnaround message

The leaders of dental practice Smiles Inclusive (ASX: SIL) have assured investors every effort is being made to turn the struggling business around this financial year, but one aggrieved joint venture partner claims the operation is just a "train wreck waiting to happen".

In an announcment to the ASX yesterday, chairman David Usasz and CEO Tony McCormack lamented a disappointing performance but emphasised with the support of JVPs, staff, bankers and suppliers they aimed to bring it back to "acceptable levels" in FY20.

They said the company, which recently raised $1.2 million to help execute the turnaround plan, had also received conditional agreement from National Australia Bank (ASX: NAB) to extend its facilities, initially until the end of November 2019.

The group has dismissed half its support staff - 14 people - with an expected annual saving of $1.5 million, and one more employee is set to leave this month. On the revenue generation front, Smiles has expedited an initial round of patient fee increases with a review underway into opportunities for further price hikes. 

The pair said relationships with joint venture partners (JVP) and practice leaders are in the process of being established through individual practice business plans and budgets. This follows on from several stoushes with JVPs in relation to practices acquired in 2018.

Usasz and McCormack said the mobile dentistry business, which was temporarily closed due to operating performance, had been progressively reactivated.

"Litigation initiated by and against the JVPs has been stayed, pending negotiations to resolve," they said.

"Several key opportunities that will support the future potential and growth of the mobile business have been identified and are being pursued. A General Manager for this was appointed on 22 July 2019."

Arthur Bushell of Smiles' joint venture partner Future Care Mobile Dental Services begs to differ on several aspects of the announcement.

He claims his company is still owed $330,000 from a $1.1 million transaction for the purchase of Future Care, and has confirmed arbitration proceedings are being instituted against Smiles Inclusive today. 

"Our contract states that they must arbitrate. That's one of the conditions in the contract we signed, so we're now going ahead to seek that sitting down to negotiate because we just think what they've done is straight up a breach of contract," Bushell tells Business News Australia

"We're of the belief that Smiles is going to fold because the business model they have is unsustainable," he says. 

"Their cost structure is through the roof. I must say, unless they end up with a whole bunch of more customers at half the cost, It's a train wreck waiting to happen."

The JVP says CEO Tony McCormack claimed the acquired business had misrepresented itself and alleged its directors did not work in the business and had claimed the transaction was a business-as-usual proposition.

"We've got no written evidence of that whatsoever. This is a brand new business, 3.5 years old, and the four directors worked in the business the majority of the time because we had to," he says.

"He [McCormack] said 'no, you misrepresented it so we would have to hire another position, therefore that changes the EBITDA, therefore the value of the businesses has dropped and we're not going to pay you any more money'."

Bushell is also sceptical about Smiles Inclusive's claims of bringing mobile dental clinics back on-line.

"When they talk about their mobile dentistry was temporary closed due to operating performance and has been progressively reactivated, of the five vans they've got in Sydney four of them don't work, so I don't know how they're going to improve the operating performance.

"New South Wales Health have just introduced 35 dental vans, so in NSW they will face massive challenges over the next six or 12 months.

He says his company's program offered the Child Dental Benefits Schedule (CDBS), whereas the new NSW Health initiative offers Medicare.

"Literally anyone that's got a Medicare card, so pretty much any Australian, can be seen," he says.

"But we couldn't see people with non-eligibles unless they paid, so the business model for Smiles has gone out the window. They won't be able to compete with New South Wales Health...and in Victoria it's also very challenging."

Unlike Bushell, Australian Mobile Dental Care's general counsel Cabral Douglas describes the new Smiles Inclusive leadership as a "breath of fresh air".

"We've always maintained that the issues between us that's between Smiles OnSite and Smiles Inclusive stem from poor planning, management and strategic vision of the previous team led by Mike Timoney," says Douglas.

"Since Tony has come in, he's cleaned house, got rid of all the dead weight and appears to be laying the foundation for future growth.

"As a result of that demonstration of good management, we have approached the court to stay the litigation proceedings to allow an opportunity for us to engage Tony and Smiles Inclusive in informal settlement discussions which currently remain ongoing and are progressing in a satisfactory manner."

Under the previous management under Mike Timoney, on 26 October 2018 the employment contracts of Smiles OnSite staff were terminated and its mobile dental clinics under lease to Smiles Inclusive were seized.

"When the assets were seized they were taken to an undisclosed location, and it was part of our intention to discover what had happened to the assets," says Douglas.

"That's one of the reasons why we were actually in court because the assets which we leased to them were not being utilised for their intended purpose, and they were not keeping us up-to-date as to the conditions that they were in.

"There may have been some attempts since then to redeploy them, but they haven't been redeployed on a scale that would be necessary to see a significant growth or turnaround in the business."

Douglas believes the mobile dentistry business could still be instrumental to Smiles Inclusive's future growth.

"Our position has always been that the mobile dentistry component of the Smiles Inclusive business would be the catalyst to significant growth and profitability if the company is run properly and all of the relevant stakeholders are properly engaged," he says.

"This includes the Australian Dental Association, the Department of Health, Medicare, the NSW Department of Schools, and of course the parents and schoolchildren in various regions that are in need of our services."

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