Correspondence

 

11 June 2009

 

 

Mr Bruce Sheppard

Chairman

NZSA

PO Box 6310

Auckland City

 

 

Dear Mr Sheppard

 

I appreciate the opportunity to address your analysis. We are very aware of the deterioration in the New Zealand and world economies and capital markets and as we have stated on numerous occasions, Abano is only relatively protected in these times, but not immune.

 

It is of course our responsibility to deliver on the expectations of our shareholders and to manage the risks of doing so, and we of course have regularly reported to shareholders in the course of the year on our earnings guidance. We are very aware of our obligations under the continuous disclosure regime and continue to remain observant of and compliant with these obligations.

 

I refer you to our web site, www.abanohealthcare.co.nz where all of our publications are listed including all notifications to the exchange.

 

You are correct in you statement that “Clearly each company has differing covenants”. Abano banks with the ASB in New Zealand and with the CBA in Australia. We have banked with these banks for four years in New Zealand and 12 months in Australia.

 

With the ASB we have a committed facility of NZ$100 million. The facility terms have been reported and are described fully in the notes to our accounts and as updated in our recently published newsletter, again, I refer you to our website for a copy of both publications. In Australia, we have a dedicated ring fenced facility of $A25 million with the CBA for our Dental Partners Pty Limited business. The details of this facility have also been reported please see our website.

 

Both facilities having varying maturity dates from 2011 to 2013 and in New Zealand we have roll over rights for a further 12 months. We have also stated that we will have New Zealand dollar equivalent total net debt of $80 to $85 million at year end on these two facilities.

 

Both banks also use a rolling average to calculate covenants that are appropriate to a cash flow lend as has been reported previously. Both facilities have only an EBITDA to Debt and Interest Cover covenant and there is a start up equity covenant in Australia.

 

As we recently reported, in our June newsletter, ASB recently increased the debt facility by $20m with no change in either the covenants or the covenant ratios.

 

We also note your comment regarding a risk of a drop in earnings and we also agree “the risk of earnings dropping by 75% is very remote”. However you refer earlier to ‘by the time we receive published 2009 data,’ again, I refer you to our obligations under continuous disclosure, and our stock exchange notifications on our web site.

 

I also refer you to other healthcare public companies that have cash flow banking facilities in Australia like Sonic Healthcare Limited … see the ASX web site www.asx.com.au health index.

 

You express a concern that vendors have used us as an “exit strategy” and we are at risk “if they leave en masse”.

 

Our business model is to co-invest with the clinicians who often founded and who currently drive the businesses we invest in. This has been fully described in our annual reports and various presentations.  We see no risk of operators ‘leaving en masse’. All our clinicians are employed directly by us on individual employment contracts and all vendors have earn out periods and competition restraints extending years beyond their earn out dates. Therefore, at any one time there are only a few vendors who may be exiting their earn out or restraint obligations in any one year.

 

In addition, we are actively investing in our customer facing brands ; Bay Audiology, Lumino The Dentists, Dental Partners, Ascot Radiology, etc.

That means we are receiving increasing levels of referral and customer loyalty to the brand rather than the clinician. We also have a policy of actively introducing a new generation of clinical leader/partners to aligned equity with us in the various businesses they work in.

 

The Bay Put Call and its terms has been fully described in our annual reports, and further in the two independent appraisal reports during the recent takeover activity. Again I refer you to our web site which contains all this published material. We do not agree that funding of this will be difficult and or expensive, or that it will compromise our debt ratios. Clearly our funders are also aware of this and the earliest date for this event is at the end of 2010 and the latest is beyond 2013 or never.

 

In conclusion, can I again draw your attention to our guidance history and to the statements we have made with respect to continued growth. We have indicated that we will end this year with revenues of $184 to $187 million, an EBITDA of $30.5 to $32.5 million and a NPAT of between $9.1 and $9.7 million. Also as noted in our recent newsletter, which is available on our website, we have expanded significantly in the last financial year both in New Zealand and in Australia and recently in Asia.

 

 

 

I trust you will agree this is solid and pleasing progress.

 

If you wish to discuss any of this please do not hesitate to call Alan Clarke, our Managing Director, who I believe you have met.

 

Yours faithfully

 

 

 

Alison Paterson

Chairman

Abano Healthcare Group Limited