Little to smile about
SMILES COMES ON SCENE
Mr Hamilton said corporate dental groups always intrigued him.
He was looking for a way to grow the two practices he held with dentist wife Dr Jade Sun when he came across Smiles in September, 2017. He said corporatisation has not worked in the past because once dentists were bought out, they had moved on to open another practice, taking the goodwill or clients with them.
“I said what they need (to be successful) is some sort of partnership where the corporate entity joins up with the practitioner offering the best of both worlds,” he said.
“When this (Smiles) came along, my wife and I said this is what we were talking about years ago. This could be a good opportunity for us.”
Smiles listed via a joint-venture partner model, where the dentists who sold to the company, remained investors in the business, sharing the profits and success by reinvesting back a portion of the purchase price.
Mr Hamilton and Dr Sun had two practices, one at Pakenham, a satellite suburb of Melbourne, and another in Yarram in country Victoria. Mr Hamilton believed he could grow their network in partnership with Smiles under its Totally Smiles brand while also being able to take a step back from management and enjoy passive income. They also had a son, William Hamilton, who they wanted to spend more time with.
NERVOUS FIRST TALKS
Mr Hamilton said his first talks with then COO Neil Simpson were positive but by the time it came to sign the heads of agreement (HOA) on September 20, 2017, (which sets out the terms for negotiations towards a sale) he was already having doubts.
He said the original aim was to list on November 15 but “I had no confidence it would be anywhere near that”.
He turned out to be right with the listing pushed back to late April.
Mr Hamilton said he was also put off by what he describes as Mr Timoney's “hard sell”.
“Mike came in all guns blazing, very focused on getting the HOA signed,” he said.
“It did feel like a bit of a hard sell without much substance when we had the initial agreement.
“A lot of it was we would hammer out the details later...and everything would follow from there.”
SEIZURES START
In December, right after his first birthday, William started to experience seizures.
“They were very innocuous seizures (at first) where the head falls to his chest and the arms flex out,” he said.
“Initially that might happen over a period of 15 minutes with 30 seizures, however, that progressed to happening over 15 to 20 minutes with more than 100 seizures.”
Mr Hamilton said he and Dr Sun were “beside ourselves” with worry over the seizures, which came during the due diligence phase for selling their practices to Smiles.
He said the seizures turned out to be infantile spasms, a rare form of epilepsy otherwise known as West’s Syndrome.
“It causes the brain to go into hypsarrhythmia, which is where brain activity becomes like a storm,” he said.
Because it was late onset (usually infantile spasms happen in two-to-three-month old babies) it took time for a diagnosis to be reached and at one point William was on five different types of medication. They finally got a diagnosis in April and were able to bring the seizures under control through the use of steroids.
TIME TO SELL
There were people warning from the sidelines not to sell to Smiles, but they were ignored. One of them was Graham Middleton, of Synstrat Group, a leading dental practice valuer.
In a newsletter in March, 2018, he wrote that Smiles’ forecast for revenue of $41m (up 14.9 per cent) for FY18 and net profit of $5.83m (up 50.5 per cent) “stretched the imagination”.
“These forecast increases in a financial year which is almost over are of a magnitude which stretch our imagination,” Mr Middleton wrote.
“Increases remotely approaching this magnitude simply don’t occur in dentistry across a large number of practices in a single year.”
Mr Hamilton said he was aware of Mr Middleton’s warnings but decided to go ahead with the sale anyway.
“That became more important to us (selling and having a passive income) in light of our son’s health,” he said.
“We had to rely more on this idea of passive income. We would still have a stake in the practices and be able to receive money from that.”
They ended up selling 100 per cent of the Yarram practice and entered into a profit-sharing arrangement with Smiles for the Pakenham clinic.
120-DAY INTEGRATION
Mr Hamilton said many people in the industry have a long history of antipathy towards corporatisation. It was no different at their Pakenham practice.
“Our practice manager and a practitioner left upon having the sale confirmed,” he said. “They did not want to be involved with a corporate group. That is really common in the industry.”
Mr Hamilton said they ended up finding a replacement but then found Smiles had no marketing funds to let her prior clients know she had moved.
He said another issue was the rebranding from Sun Dental Group to Totally Smiles Pakenham.
Mr Hamilton said he spoke to Mr Timoney about a period of “co-branding”, which was a agreed to, but then later pushed aside. The practice name was changed on the website after the listing in April last year without the signage being altered.
“They also sent out a communication to our patients advising them of the change of management without detailing that the practitioners and staff remained the same,” he said.
That had an immediate effect on the practice, he said.
“We had an immediate decline in new patients to the practice. We had a higher number of patients requesting transfers than ever.”
Mr Hamilton said it slowed down growth, which was previously running at 10 per cent a year.
“We went from having more than 100 new patients a month to 40.”
He said another pain point for the dentists was the cost of consumables, such as gloves and masks, which rose by 30 per cent when Smiles switched suppliers for the practices to Henry Schein Halas.
“I questioned Mike during a webinar as to what we were doing about the high cost.
“He said something to the effect that we can’t be penny pinching.”
Mr Hamilton said the transfer of the patient management software to Xact had also proved problematic, with issues with transferring data from the old system to the new one.
COUNTING THE COST
Mr Hamilton and Dr Sun invested $450,000 in Smiles shares at the $1 IPO price.
They then bought some more when they hit a high of $1.16.
That is now looking like a huge loss on paper for the couple, with shares now worth about 15.5c. Mr Hamilton estimates their losses at between $600,000 and $650,000.
Mr Hamilton said the other cost has been missed opportunities at the Pakenham practice, which he says is still profitable despite the ongoing problems at Smiles.
He said they have baby number two on the way and are hopeful William will develop normally despite being diagnosed brain dysplasia, a cortical abnormality of brain development, which was identified as the underlying cause of the spasms.
William currently sees a range of specialists from occupational therapists to speech pathologists and more.
Mr Hamilton said the reason he has taken action against Mr Timoney and Mr Herlihy is he doesn’t want any regrets.
He said he wants the company to turn around and be successful.
“This whole thing with the company is the last thing we want to be dealing with,” he said.
“There is no one else that is being vocal about their concerns. I don’t want to be walking around after May 22 saying I wish someone would have said or done something.”
Mr Timoney said through a spokesman that he and Mr Herlihy are focused on strengthening the capabilities of Smiles.
“We fully recognise that we need to do things differently starting with greater emphasis on executing the basics well,” he said.
“We have committed ourselves to positive change, this is reflected in our recent communications to Smiles shareholders.
“The EGM is the ideal forum for all stakeholders to express their thoughts and ideas, to learn more about our proposed way forward and for shareholders to cast their vote accordingly.”