Ann: Chairman & CEO's Address to Shareholders, page-4

re: Ann: Chairman & CEO's Address to Shar... In Gross Profit % terms margins have reduced from around 49% in 2008 to 39% in 2013; the key reason has been the recontracting of doctors on the (new) EBIT based remuneration model, where remuneration has shifted from upfront goodwill and below market (say 5 year) fixed salary payments to a 65% share of individual practice EBIT profits (personal exertion income). This is what the executive and Board said was necessary to avoid the company's demise, where at 30 June 2013 there remain 30% of doctors yet to be recontracted, so the margin pressure will continue to escalate from this issue. By way of example, doctor director Michael Lawless was paid $477,480 in 2008, whereas he was paid $1,262,000 in 2012 and $1,101,000 in 2013, being more than a 100% increase compared to 2008, whereas revenues have declined and profits, including earnings per share and dividends, have collapsed during the same period.

The Board repeatedly advised the new EBIT based remuneration model was also necessary to attract new doctors. Doctor numbers have reduced by around 25% during this period.

The 2013 Chairman and CEO's address states VEI now has the financial capacity to pursue acquisitions given easing of debt constraints as a result of additional equity injections made by external shareholders and the dividend suspension enforced on external shareholders; the company has previously said high margin surgeries were an area of focus, which makes sense given the higher margins earned from this alternative income source compared to basic doctor consulting fees. Doctor surgery fees can be lucrative (as compared to doctor consulting fees), as can be laser vision correction, however the former results in VEI remaining captive to doctor control and the latter has been dismal for VEI in recent years, due to a combination of negative consumer sentiment, poor management and price competition (patient alternatives in the form of medical tourism to South Africa and Thailand etc). To think that laser vision correction was a key marketing item at the time the company was promoted for ASX listing.

Consequently growth alternatives do exist; the sector has a fantastic growth outlook compared to many other industries in Australia, where growth for this company can be achieved in several ways, principally by way of leveraging its size in its industry and a focus on moving away from a dependency on a small coterie of individual doctor partners, to a focus on surgery theatre income fees and service income from diverse doctor and related professional channels, let alone being more innovative in dealing with optometrist referrers and retail channels in ways that one practice competitors can never be.

The diversity in specialist doctor relationships is the nut that Virtus and 1300 Smiles has cracked; these businesses work with their medical supply in a way that is less dependent on individual doctors, a move to dealing with (multiple) contractors to the business rather than a select group of ''partners' on high profit share contracts. Achievement of a restructure in the balance in power, which will lead to recommencement of returns back in favour of shareholders, requires strategic execution of initiatives that favour such an approach; this is where it becomes difficult particularly when doctor partners effectively control the VEI Board, along with there being a limited number of annual ophthalmologist graduates as a result of the closed shop nature of the profession (the old chestnut and guise of 'patient care' being at the heart of the profession). Coles\Woolworths are having another crack at busting open the pharmacy guilds, so a common issue here across various parts of the health and pharmaceutical sectors which won't be resolved in a hurry! Interesting to study the impact of a rapid increase in dental graduates over recent years in Australia on recent changes to dentist incomes, including assessing whether the quality of dental care has commensurately deteriorated.

So the more there is pressure on the Board and management to add value to this listed vehicle by being proactive in executing growth strategies, the greater the chance long term deterioration in margins will be arrested. If I was a Board member I would have been embarrassed to front up to shareholders announcing another fall in EBITDA, especially when I've just squeezed them out of another $27 million.

The partial takeover restrictions were unsuccessfully upheld at the AGM; presumably it now opens the door for Primary to make a nil premium partial takeover offer.