vgh must be a bargain now, page-10

The remuneration structure is changing for the newly re-signing doctor partners. Previously the remuneration was structured so that Partners received a fixed salary with upside through equity ownership, while Associates were remunerated through a share of Individual EBIT (approx 40-50%) personally contributed. I believe it was a stated objective to convert Assocaites to Partners to cut remuneration costs.

In the 2009 Annual Report the following was included:

"Doctor partner recontracting requires a transition to an EBIT based, fully variable remuneration: a 'pay for performance' model. Remuneration is based on paying a percentage of Individual EBIT, Group EBIT and Business Unit EBIT. It rewards individual and group performance plus profitable growth, and is aligned with external shareholder needs."

On 04/05 the company issued an update stating the following:

"Any updated remuneration model, if adopted, is likely to result in an increase in the total Doctor Partner remuneration. The quantum and financial implications of a potential change in this model are being carefully evaluated by the company..."

In FY09 wages and salaries accounted for about 37% of total expenses (FY08: 34%) on an EBITDA margin of around 32% and EBIT margin of 27%. Half year EBIT margin was down to 20.5% due to some one-off charges.

Banking covenants require EBITDA/Interest >3.5, Net Debt/EBITDA <3.5, and Net Debt/Capital Employed <60% - I think this is where the there may be problems arising from the new pay structure. There have been recent reports, supposedly from insiders, that the dividend may need to be cancelled.

Since this thing trades at around 3-4 times last years free cash flow, the market is predicting this (and the legal battles) won't be solved without some fallout. It appears that Director and Doctor Partner Joe Reich is siding with the market as interests associated with him have dumped 450,000 shares in the last two weeks.

Will be interesting to see how this plays out.