2012 Interim Results

CareTech Holdings PLC

("CareTech" or "the Group" or "the Company")

Interim Results for the six months ended 31 March 2012

CareTech Holdings PLC (AIM: CTH), a leading UK provider of specialist social care services, is pleased to announce its interim results for the six months ended 31 March 2012.

Highlights

Statutory Financial Highlights

(i) Underlying EBITDA is operating profit stated before depreciation, share-based payments charge and non-underlying items (explained in note 3).

(ii) Underlying profit before tax and underlying diluted earnings per share are stated before non-underlying items (explained in note 3).

(iii) EBITDA is operating profit stated before depreciation, share-based payments charge and amortisation of intangible assets.

Commenting on the results, Farouq Sheikh, Executive Chairman said:

"I am pleased to report a solid performance in the six months ended 31 March 2012. CareTech has delivered increased turnover, EBITDA and PBT on the comparable period in 2011 in line with the Board's expectations through anticipating and responding to more sophisticated demand side trends. During the period the Group continued to develop and grow its four operating divisions from the strong platform we have created over the last few years. We extended both our geographic coverage and our care pathway range of services both organically and through an acquisition to address the needs of our marketplace. We are well positioned to address the demands of our growing marketplace and the Board remain confident of the Group's performance for the remainder of the year."

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Chairman's Statement

Results

Group revenue of £56.1m (2011: £52.2m) is 7% higher than the corresponding period last year and has delivered an underlying EBITDA(i) of £11.5m (2011: £10.2m), representing growth of 13%.

During the first half of 2012 we have continued to direct our strategic focus on preparing the Group's operational platform for the next stage of growth. As a consequence, we have invested further in our systems and operating structure in order to provide the appropriate quality and resource to drive medium term growth organically. Additionally, following our analysis of demand trends last year, we have 5 homes which are being reconfigured to meet new demand and service requirements of care commissioners and these are planned to be completed in the second half of the year. The underlying EBITDA(i) margin of 20.4% (2011: 19.5%) has improved on last year.

Underlying profit before tax(ii) increased by 10% to £7.4m (2011: £6.7m) and underlying diluted earnings per share(ii) increased by 10% to 11.88p (2010: 10.76p).

During the past twelve months we have invested £4.3m (previous 12 months: £39.5m) in acquisitions following the Board's decision to focus on organic growth rather than acquisitions. This included £0.6m during the first half of this year (2011: £6.9m), at an overall consideration multiple of around 4 times EBITDA.

Operating cash inflow before non-underlying items of £11.5m represents a 100% cash conversion of underlying EBITDA(i), which demonstrates the strong quality of our earnings. As a result of this and the focus on organic growth, the net debt of £131.5m at 31 March 2012 was better than the Board's expectations.

At the AGM the Company announced that it had commenced discussions with Bankers on the refinancing of its present banking arrangements. It is pleasing to report that these discussions with our current Bankers and new potential participants, which are taking place well ahead of the existing facility's expiry of April 2013, are making good progress and are close to reaching an agreement. An announcement will be made as appropriate.

As part of the refinancing we had an independent valuation of the Group's 135 freehold properties. The property portfolio has been independently valued at £225m which underlines the strong asset backing within the business.

Dividend

Our policy continues to be that of increasing the dividend broadly in line with the movement in earnings. The Board therefore is declaring an interim dividend of 2.21p (2011: 2.00p) per share representing an increase of 10.5%, to be paid on 6 August 2012 to shareholders on the Register of Members on 6 July 2012.

Client capacity and occupancy

During the first six months of our financial year we have increased capacity by 60 places to 2,116 with occupancy levels of approximately 92% in established services and around 87% including facilities being developed.

On annual fee rate negotiations, our experience to date indicates that the overall average fee change this year is likely to be close to a neutral position, in line with our expectations.

Operating review

The Group is now realising the benefit of organisational improvements that were put in place in the last few years. We strengthened the management structure and further improved professional leadership. Our clinical expertise benefited from new appointments in child care, mental health and learning disability.

A summary outline of each of our divisions is as follows:

Adult learning disabilities - with a client capacity at 31 March 2012 of 1,417 places and first half revenue of £37.9m this division represents approximately 68% of the Group's activities. We offer a flexible, person centred approach with support being offered on an individual planned basis. Services include residential care, nursing care, individual and group supported living schemes and domiciliary care services. We also offer day opportunity programmes on an individual basis. Demand remains high for the support of people with learning disabilities and we recognise an increasing complexity of need for referrals to our specialist services. We are actively reconfiguring a small number of learning disability residential services in line with market demand.

Young people residential services - providing care, support and education to young people with complex behavioural problems, physical impairments, learning disabilities and emotional behavioural disorders ('EBD'). This division generated revenue of £7.6m and had a capacity at 31 March 2012 of 125 places. We operate services that cater for local needs but also manage certain highly specialised services that have a national catchment. The division focuses increasingly on those children with the most complex needs and those who require our sophisticated clinical input.

Foster care and family services - with a capacity of 442 children we have established ourselves as one of the largest independent fostering agencies in England and Wales. Family assessments are also provided for the courts and local authorities through our residential assessment service and through placement with highly trained foster carers. The division had turnover of £7.7m in the six months to 31 March 2012. We have observed a significantly increased demand for foster care for children who might otherwise have entered the residential care system. Foster care represents much better value for commissioners but the complexity of children being referred will often make the matching process quite complex, favouring larger agencies like CareTech with a greater range of well supported foster carers.

Mental Health - our care pathway for mental health includes a small community based "open" hospital, residential care homes, independent supported living and community outreach. We also include certain specialised services in this portfolio. At 31 March 2012 the division had a capacity of 132 places and generated revenue of £2.9m in the first half of our financial year. We work in partnership with the NHS rather than competing against them. Our objective is to encourage and support community discharge, enabling the Trusts to work more efficiently and providing a route back to community life for people who have suffered a debilitating mental illness.

Acquisitions

Strategic and bolt-on acquisitions made during the past twelve months have been successfully integrated into our divisional management structure and have performed favourably compared to our original expectations.

In February 2012 we acquired Applied Care and Development Limited ('ACAD') for a consideration of £1m. ACAD is based in Dumfries and with a capacity of 18 provides support to children with a wide range of issues including EBD, sexualised behaviour and learning disabilities. It also has a family centre and provides education to all of the children.

We have consolidated our position in Scotland and will now push forward organic growth in line with our market analysis and understanding of the political and demographic drivers.

Strategy

The specialist social care market continues to benefit from strong demographic trends and higher acuity levels across the UK. Local authorities are faced with increasing demands and financial pressures that have led to a greater focus on value for money. CareTech's experience has been that service commissioners recognise that the most complex people require continuing support that focuses on care pathways and successful outcomes.

Commissioners also seek best value and we have responded by refining our range of service offerings, refocusing certain areas of provision and driving organic developments that deliver what commissioners want.

For those able to transition we provide clear pathways from residential care, principally into various forms of supported housing, while residential options continue to be in demand for those with the greatest need. However, we anticipate further shifts toward more sophisticated supported living packages linked to new personalised payment methodologies.

Demand for the residential care of children and adults with complex needs will benefit from an overall increase in the demographic profile. However, commissioners will expect even more focused service plans with defined outcomes and the opportunity for those people to move into supported living wherever this is feasible. CareTech already has sound clinical and social care expertise but we plan to strengthen this further during the coming year, especially in the areas of specialist adult care.

Our diversification policy means that we are now offering the full spectrum of social care services with the exception of traditional elderly care. We believe that our strategic position is now very strong, backed by an effective organisational structure, first class quality control and developing clinical infrastructure. In the medium term we are focusing on organic growth that builds on our successful base position. However, we will undertake further strategic acquisitions that meet our key criteria by offering new expertise, geographical presence or consolidation opportunities.

Board changes and advisors

As previously announced, Christa Echtle has decided to step down as a Director and has resigned from the Board to pursue a new business opportunity within the sector. The Board is in the process of looking for a new Non-Executive Director. We would like to take this opportunity to thank Christa for the valuable contribution that she has made to the business since she joined the Board in 2008 and wish her well for the future.

We are sensitive to the public's increased awareness and anxiety about safeguarding and care governance. CareTech has always been regarded as a careful and thoughtful provider of care and we have reinforced this by creating a Board level Care Governance and Safeguarding subcommittee chaired by Non-Executive Director Mike Adams that will closely examine and pursue improvement to all matters relating to care governance and the safeguarding of those we support.

The Company has undertaken a review of its auditors and are pleased to announce that at the Board Meeting on 11 June 2012 Grant Thornton were formally appointed as the Group's auditors. We are grateful to the support of KPMG since the Company's IPO in 2005.

In April 2012 we took soundings from key shareholders and implemented a new share based incentive plan. It is pleasing to note that all the Company's senior executives have shown a long term commitment to the Group by their investment in this new Share Scheme.

Outlook and Prospects

First class social care that represents good value and is outcomes focused will remain the main driver for CareTech's continuing growth.

The investment made over that last few years in developing CareTech's strong operating platform with the range of care pathways is beginning to pay dividends as local authorities look to work in partnership with CareTech to deliver outcomes for individuals at a price they can afford. Coupled with strong operating cash flow and the focus on organic initiatives, we look forward with confidence to be able to grow earnings whilst reducing debt over the coming years.

Farouq Sheikh

Chairman14 June 2012

(i) Underlying EBITDA is operating profit before depreciation, share-based payments charge and non-underlying items (explained in note 3);

(ii) Underlying profit before tax and underlying diluted earnings per share are stated before non-underlying items (explained in note 3).

Condensed Consolidated Statement of Comprehensive Income

for the 6 months ended 31 March 2012

(i) Non underlying items are explained in Note 3.

Condensed Consolidated Statement of Changes in Equity

at 31 March 2012

 Condensed Consolidated Balance Sheet

at 31 March 2012

  Consolidated Cash Flow Statement

for the 6 months ended 31 March 2012

Net debt in the balance sheet comprises:

(i) Non underlying items are explained in Note 3.

Notes

1. Accounting policies

This interim report has been prepared on the basis of the accounting policies expected to be adopted for the year ending 30 September 2012. These are anticipated to be in accordance with the Group's accounting policies as set out in the latest annual financial statements for the year ended 30 September 2011.

All International Financial Reporting Standards ('IFRS'), International Accounting Standards ('IAS') and interpretations currently endorsed by the International Accounting Standards Board ('IASB') and its committees as adopted by the EU and as required to be adopted by AIM-listed companies have been applied. AIM-listed companies are not required to comply with IAS 34 'Interim Financial Reporting' and accordingly the Company has taken advantage of this exemption.

The financial information in this interim report does not constitute statutory accounts for the 6 months ended 31 March 2012 and should be read in conjunction with the Group's annual financial statements for the year ended 30 September 2011. Financial information for the year ended 30 September 2011 has been derived from the consolidated audited accounts for that period which were unqualified.

The condensed consolidated interim financial statements for the 6 months to 31 March 2012 have not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

This unaudited interim report was approved by the Board on 14 June 2012.

 2. Segmental information

IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker ('CODM'). The CODM has been determined to be the Chief Executive Officer as he is primarily responsible for the allocation of resources to segments and the assessment of the performance of each of the segments.

The CODM uses underlying EBITDA as reviewed at monthly Executive Committee meetings as the key measure of the segments' results as it reflects the segments' underlying trading performance for the period under evaluation. Underlying EBITDA is a consistent measure within the Group.

Inter-segment turnover between the operating segments is not material.

The Group has four segments, namely, Adult Learning Disabilities ('ALD'), Young People Residential Services ('YPR'), Foster Care and Family Services ('FFS') and Mental Health ('MH'). There has been no aggregation of the operating segments in arriving at these reportable segments.

The segmental results for the 6 months ended 31 March 2012, 6 months ended 31 March 2011 and year ended 30 September 2011 and the reconciliation of the segment measures to the respective statutory items included in the consolidated financial information are as follows:

Reconciliation of EBITDA to profit before tax;

All operations of the Group are carried out in the UK, the Company's country of domicile. All revenues therefore arise within the UK and all non-current assets are likewise located in the UK. No single external customer amounts to 10% or more of the Group's revenues.

No asset and liability information is presented above as this information is not allocated to operating segments in the regular reporting to the group's Chief Operating Decision Maker and are not measures used by the CODM to assess performance and to make resource allocation decisions.

3. Non underlying items

Non underlying items are those items of financial performance which, in the opinion of the Directors, should be disclosed separately in order to improve the readers understanding of the trading performance of the Group. Non underlying items comprise the following:

(i) In accordance with IFRS 3 (as revised) items associated with business combinations have been taken to the income statement as incurred. Acquisition expenses have been incurred with external parties.

(ii) The Group incurred a number of costs relating to the integration of recent acquisitions and reorganisation of the internal operating and management structure.

(iii) In accordance with IFRS 3 (as revised) adjustments to the fair value of acquisitions completed in previous financial years are recognised in the income statement. These adjustments relate to final completion account agreements with vendors.

(iv) Adjustments relate to non-cash additional charges under IAS 17 which incorporates recognising the effect of future minimum lease payment uplifts on a straight-line basis.

(v) The present value of the future cash flows receivable from the operation of a leased asset has been assessed as being lower than the present value of the rental payments to which the Group is committed. Therefore during the year ended 30 September 2011 the Group provided for £646,000 being the present value of any onerous element of the remaining lease life.

(vi) Non underlying items relating to derivative financial instruments include the movements during the year in the fair value of the Group's interest rate swaps which are not designated as hedging instruments and therefore do not qualify for hedge accounting, together with the quarterly cash settlements and accrual thereof.

(vii)Represents the current tax on items (i) to (vi) above.

(viii)A deferred tax charge of £326,000 (31 March 2011: £652,000 and 30 September 2011: £803,000) arises in respect of a charge relating to derivative financial instruments in (vi) above. In addition, a credit of £1,818,000 (31 March 2011: £816,000 and 30 September 2011: £775,000) arises in respect of changes in future corporation tax rates, together with a charge from the effects of full provision for deferred tax under IAS 12 amounting to £86,000 (31 March 2011: £591,000 and 30 September 2011 £311,000 credit).

4. Financial expenses

5. Taxation

In the 2012 Budget, it was announced that the main rate of corporation tax would reduce to 24% with effect from 1 April 2012 falling by a further percentage point in each of the subsequent 2 years. The 24% rate was substantively enacted on 26 March 2012 and has resulted in a deferred tax credit in the 6 months ended 31 March 2012 of £1,818,000. A rate of 23% is expected to be substantively enacted during July 2012 and if so, deferred tax amounts as at 30 September 2012 will need to be calculated at 23%, which will result in a further credit to the income statement based on deferred tax balances in place at 31 March 2012.

6. Earnings per share

7. Acquisitions

(a) Acquisitions during the period ended 31 March 2012

The following provisional fair value table summaries the acquisitions made during the 6 months ended 31 March 2012:

(b) Reconciliation to Consolidated Cash Flow Statement

(c) Deferred and contingent consideration payable

8. Share capital

On 4 April 2012 the Company issued a total of 1,608,337 new ordinary shares of 0.5p in the Company (the "New Ordinary Shares") in connection with the Company's Executive Shared Ownership Plan 2012 (the "Share Plan"). The New Ordinary Shares will be jointly acquired by the employee benefit trust (managed independently by EES Trustees International Limited) and award recipients, at the closing market price as at 4 April 2012 of 140.5p.

9. Distribution to shareholders and further information

This interim report is being sent to all shareholders and will be available to the public on the Group's website (www.caretech-uk.com) and from the Group's registered office, 5th Floor, Metropolitan House, 3 Darkes Lane, Potters Bar, Hertfordshire EN6 1AG. Further information regarding the activities of the Group, including a copy of the interim presentation, is available on the Group's website www.caretech-uk.com.