10th Dec 2007 07:01
Southern Cross Healthcare Grp PLC10 December 2007 Southern Cross Healthcare Group PLC Southern Cross reports strong results for the year ended 30 September 2007 Monday, 10 December 2007 - Southern Cross Healthcare Group PLC (LSE: SCHE) ("Southern Cross", the "Company" or the "Group"), the UK's largest care homeprovider, today announces its preliminary results for the year ended 30September 2007. Operating Highlights • Available beds increased by 18.6% to 34,304 at year end (2006 - 28,917 beds) • Current available beds rises to 36,215 following completion of the Bondcare acquisition on 5 November 2007 • Average occupancy of 90.7% (2006 - 91.0%). Underlying occupancy of 91.1% (2006 - 91.0%) • Underlying average weekly fee up 5.3% to £481 (2006 - £457) • All acquisitions completed during the year have been for nominal net cost and have been successfully integrated, whilst maintaining efficient cost control management of the established portfolio Statutory Financial Highlights • Revenue of £731.9m (2006 - £610.9m) • Operating income of £11.9m (2006 - £1.6m) after a charge of £43.5m (2006 - £30.7m) for future minimum lease charges under IAS 17. Excluding such charges, operating income increased by 71.5% to £55.4m • Basic earnings per share for the year of 0.96p (2006 - Loss 9.35p) Other Financial Highlights • Underlying revenues up 6.6% to £651.2m (2006 - £610.9m) • Home EBITDAR before central costs up 21.4% to £230.2m (2006 - £189.6m) with margins of 31.5% (2006 - 31.0%) • Underlying Home EBITDAR before central costs up 6.9% to £202.6m (2006 - £189.6m) • Adjusted EBITDA up 36.9% to £66.8m (2006 - £48.8m) • Adjusted earnings per share up 61.0% to 19.0p (2006 - 11.8p) • Cash inflow from operations of £70.3m (2006 - £50.6m) representing cash conversion of Adjusted EBITDA of 105.2% (2006 - 103.7%) • Interim dividend of 2.5p per share (2006 - nil) • Proposed final dividend of 5p per share (2006 - 1.1p per share), making 7.5p for the full year Notes: Home EBITDAR is defined as earnings before interest, tax, depreciation,amortisation and profit on disposal of property, plant and equipment andsubsidiary undertakings and charges on operating leases. Adjusted EBITDA isdefined as earnings before interest, tax, depreciation and amortisation as wellas exceptional charges and charges for future minimum rental increases. Adjustedearnings per share is defined as earnings before exceptional items, charges forfuture minimum rental increases, loan arrangement fees written off and thetaxation impact thereof, divided by the weighted average number of shares. Underlying refers to continuing operations that were part of the Group for FY06and FY07. Underlying average weekly fee excludes immature beds, newly developedhomes or refurbished homes that have been trading for less than 12 months. William Colvin, Chairman of Southern Cross, said: "I am delighted to report to shareholders that, during our first full year as apublic company, Southern Cross Healthcare has continued to grow significantly.We have successfully completed and integrated a number of acquisitions and alsogrown organically by building several new generation purpose-built homes andextending existing homes across the UK. This continuing growth has consolidatedour position as the clear UK market leader in the provision of care homeservices for elderly people and strengthened our position as a major provider ofspecialist services for adults with physical and/or learning disabilities." Enquiries: Southern Cross Healthcare Group PLC +44 (0)1325 351100William Colvin, ChairmanGraham Sizer, Finance Director Financial Dynamics +44 (0)20 7831 3113David YatesEmma Thompson About Southern Cross Southern Cross is, in terms of number of beds, the largest UK provider of carehome services for the elderly and a major provider of specialist services forpeople with physical and/or learning disabilities. The Company's care homes forthe elderly operate under two distinct brands: Southern Cross Healthcare andAshbourne Senior Living. Both brands provide a range of social and personalcare services and nursing care services for elderly people with physicalfrailties and differing forms of dementia. The Company's specialist servicesoperate under the Active Care Partnerships brand and provide long-term careservices for people with physical and/or learning disabilities and for youngerpeople with complex forms of challenging behaviour. Southern Cross is focused on providing high quality care in well investedfacilities, seeking to be the home of choice in each local community in which itoperates. The Company provides care services for most of the local authoritiesin the UK which, together with the NHS, represent over circa 80% of theCompany's revenues. Its care home portfolio is largely purpose-built with ahigh percentage of single occupancy rooms and rooms with ensuite bathrooms.Occupancy levels in its elderly care segment are consistently in excess of 90%. This announcement includes statements that are, or may deemed to be, 'forwardlooking statements'. These forward looking statements can be identified by theuse of forward looking terminology, including the terms 'believes','estimates','plans', 'projects', 'anticipates', 'expects', 'intends', 'may','will', or 'should' or, in each case, their negative or other variations orcomparable terminology. These forward looking statements include matters thatare not historical facts and include statements regarding the Company'sintentions, beliefs or current expectations concerning, among other things, theCompany's results of operations, financial condition, liquidity, prospects,growth, strategies and the outlook on the care home industry. By their nature,forward looking statements involve risk and uncertainty because they relate tofuture events and circumstances. Chairman's Statement We have successfully completed and integrated a number of acquisitions and alsogrown organically by building several new generation purpose-built homes andextending existing homes across the UK. This continuing growth has consolidatedour position as the clear UK market leader in the provision of care homeservices for elderly people and strengthened our position as a major provider ofspecialist services for adults with physical and/or learning disabilities. Southern Cross currently employs more than 40,000 staff and operates almosttwice as many care home beds as the second largest UK private operator. Our UKmarket share now stands at 8% of all long-term care beds within approximately 3%of all the registered care home buildings. This gives us the dual advantage ofeconomies of scale, plus the cost advantages inherent in operating purpose-builthomes which are significantly larger than the UK national average. Increasing regulation from UK government bodies, customers expecting improvedfacilities and more intensive care requirements are all driving consolidation inthis highly fragmented service industry. Southern Cross is leading theconsolidation of the sector and we have plans in place, and significantfinancial firepower from our landlords and banks to continue to acquire, buildand grow our business in the UK. Results and Dividends As a result of strong underlying growth in fees per bed and the Group increasingits operating capacity by 7,298 beds, to 36,215 beds as at 30 September 2007,revenue for the 52 weeks ended 30 September 2007 increased by 19.8% to £731.9m.The primary driver of this growth was acquisitions, which contributed £80.7m tototal revenue. Revenue of the underlying business increased by 6.6% to £651.2m.Average weekly fee per occupied bed of the underlying portfolio increasedyear-on-year by 5.3%. EBITDA before exceptional costs and charges for future minimum rental increases("Adjusted EBITDA") increased by 36.9% to £66.8m compared to the prior year.Profit before taxation for the year was £3.0m (2006 - loss £17.4m), as aconsequence of the charge for future minimum rental increases under IAS17 of£43.5m (2006 - £30.7m). Basic earnings per ordinary share was 0.96p, compared to the prior year's lossper ordinary share of 9.35p. Excluding the charge for future minimum rentalincreases, loan arrangement fees written off and the tax effect thereon,adjusted earnings per share was 19.0p, up 61.0% on the prior year. The Company paid an interim dividend of 2.5p per ordinary share for the firstsix months of this year. The Board is delighted to recommend a final dividendfor the year of 5p per ordinary share, giving a total of 7.5p per ordinary sharefor the year. This represents a growth in dividends year-on-year of 56.3%. TheCompany expects the future dividend policy to reflect the anticipated growthprospects and cash flow generation of the business, while maintaining anappropriate level of dividend cover. Management and Staff The Board thanks all staff working for the Company. Our dedicated staff work ina variety of nursing and care roles, as well as those supporting our careservices. They perform difficult tasks in an exemplary way and we are proud ofthem all. As previously announced, our Chief Executive, Philip Scott, plans to step downat the end of 2007. The Board is grateful to Philip for his leadership over thepast seven years, during which he has built Southern Cross into the major forcein the UK healthcare industry that it is today. I am delighted and honoured tobe replacing Philip as Group Chief Executive, from 1 January 2008. I amcommitted to growing our Company and also improving the care services that weoffer in our homes. I believe Southern Cross is well positioned in an importantindustry and I will aim to maximise our operational and financial performance. Outlook The private sector is increasing its role in the UK's long-term care sector aslocal governments increasingly become commissioners of care services rather thanproviders. In future, demographic trends, combined with the currentmeans-testing limits for care home funding support will result in moreindividuals procuring care services from providers directly. We believe thatsignificant opportunities exist in the UK to satisfy the growing demand for carehome services. The Company will continue to deliver high-quality,value-for-money services and focus on local care needs in all the towns andcities in which it operates. If we continue to execute this strategy assuccessfully as we have done in the past, we have a bright future. We believe that the Government understands the pressures of the ageingpopulation. A Green Paper on reform of adult social care has been announced aspart of the Comprehensive Spending Review. The sector requires a fundingoverhaul and needs investment from Government and co-operation with theindependent sector to ensure a sustainable, cost-effective solution is reachedfor our growing elderly population. As clear market leader we would be very keento be involved in this review process. 2008 promises to be another year of significant growth for the Company as ourresults will benefit from the full year impact of the acquisitions we completedin 2007. Our maturing new build homes will increase in occupancy and we arecautiously optimistic about the fee outlook for 2008 across all areas of ourbusiness. Our development program will be stepped up in 2008 and we willcontinue to investigate further high quality acquisitions as they arise. Ourlandlords and banks are supportive and our covenant remains sought after andstrong which will enable the Company to acquire operating businesses in thefuture for little or no financial cost. William ColvinChairman Operational Review The Board is pleased to announce another successful year for the Company. Wehave continued to lead the consolidation of the long-term care market in the UKand remain the market leader in terms of number of beds operated. Overview It has been a busy year for the Company and the Board would like to extend theirthanks to all of our dedicated staff for their hard work and commitment incontinuing to deliver the high standards of care which is the foundation of ourbusiness. Demand for care home services remains strong. Demographic analysis suggests thatan average of 14,000 new long term care beds are required each year between nowand 2031 to satisfy the growing demand in the UK. We believe there is currentlya net loss of beds in the UK market each year and that nationwide developmentprogrammes need to increase significantly to deal with this. We are expandingour own development pipeline rapidly and are delighted to announce that we haverecruited Ben Roberts, former Development Director at Travelodge, to driveforward this exciting part of our business. We have increased bed capacity by 25% during the year, well ahead ofexpectations, with a net 132 homes and 7,298 beds added to the Group. At theyear end the Group operated 712 homes and 36,215 beds. The main focus of growthhas been within the elderly care segment of our business, however we continue toreview opportunities to increase the number of specialist beds operated. Our dynamic operating model continues to deliver shareholder value, with growthduring the year completely financed through sale and leaseback arrangements withour numerous landlords. Despite the wider credit market concerns we havecontinued to successfully implement that model, adding operating beds for anominal consideration under standard lease arrangements providing acceptableentry level rental coverage from lease inception. We continue to see demandfrom landlords for quality healthcare property assets. We believe the Southern Cross covenant has value for landlords and provides theCompany with a unique advantage when bidding for new business. Three of thelarger scale transactions during the year (Life Style, Focus and Bondcare) wereexecuted as "direct tenancy arrangements" rather than traditional WholeCoacquisitions followed by an Opco/PropCo split and subsequent disposal of thePropCo. This eliminated any PropCo transaction risk for the Company, gave thevendor the market leading healthcare operating covenant and created a valuableOpco at nominal consideration for Southern Cross. These arrangements areattractive to all parties and we will continue this strategy going forward. Although we have grown significantly, we only have an 8% market share andbelieve there is still a long way to go in the consolidation of the UK market.We believe professional, well run, well resourced, national operators such asSouthern Cross will continue to lead this consolidation phase over the comingyears. Expansion of Portfolio As detailed in the table below, bed numbers have increased from 28,917 at 2October 2006 to 36,215 at the year end, an increase in capacity of 25%. This hasbeen achieved through a number of acquisitions, each with over 1,000 beds, and anumber of smaller bolt-on deals. Number of available beds Number of homes ______ Acquired Developed ______ ______As at 2 October 2006 580Managed for third parties 15Leased/owned 565 ______ Homes previously managed for third parties 15 742New developments opened 13 753Extensions to existing homes - 18Homes closed for refurbishment, reopened - 36Homes divested/closed (8)Alpha Care 5 162Life Style 23 1,731Focus 29 1,313Avery 15 847Other acquisitions 16 787Management agreement for Bondcare homes 39As at 30 September 2007 712 5,582 807 ______ ______ ______Managed for third parties 39Leased/owned 673 ______ (continued from table above) Number of available beds Managed Divested Total ______ ______ ______As at 2 October 2006 28,917Managed for third parties 742Leased/owned 28,175 ______ Homes previously managed for third parties 742New developments opened 753Extensions to existing homes 18Homes closed for refurbishment, reopened 36Homes divested/closed (260) (260)Alpha Care 162Life Style 1,731Focus 1,313Avery 847Other acquisitions 787Management agreement for Bondcare homes 1,911 1,911As at 30 September 2007 1,911 (260) 36,215 ______ ______ ______Managed for third parties 1,911Leased/owned 34,304 ______ Since our financial year end, we have completed the registration of the 39Bondcare homes as part of the Group and therefore the interim managementagreement has terminated, with the beds becoming revenue generating for SouthernCross from 5 November 2007. As well as acquiring additional beds, we have continued to review the portfolioto identify homes that do not fit our model for the long term. To that end, wehave divested or closed eight homes with 260 beds that were acquired as part ofthe Ashbourne acquisition in November 2005. Management will continue to reviewthe portfolio on this basis to deal with any assets that cannot adjust to thedemands of the local markets in which they operate and that are not sustainableunder a 30-year lease commitment. New Developments Opening new homes is a key part of our growth strategy and a further 13 homeswith 807 beds have been built, commissioned and registered during the year.These are mainly built by third parties with our construction partners and thenacquired at practical completion, directly by the Company or a nominatedlandlord who in turn grants a lease to Southern Cross, once again minimizing theCompany's required capital commitment. All of our new developments arepurpose-built for long-term care. At present we expect to deliver a further 825 beds during the year to September2008 and have a further 1,200 beds in various stages of assessment and planningfor delivery in 2009. This is an area of continued focus for the Board and weare in the process of expanding our team to source and execute on theseopportunities. Once these additional development team resources are in place weanticipate a further increase in the number of new beds being delivered in thisway. Branding Southern Cross Healthcare Southern Cross Healthcare remains the principal elderly care brand and nowprovides services through 588 homes with 30,819 beds. This service is focused onlocal authority purchasers and caters predominantly for high-dependencyresidents with nursing or social care needs. Average weekly fees are £477,generating revenues of £588.5m and Home EBITDAR before central costs of £177.5mor 30.2% (2006 - 29.7%). Ashbourne Senior Living Ashbourne Senior Living targets the self-funded market. We have continued withour rebranding programme, with a further seven care homes repositioned asAshbourne Senior Living during the year, providing services through 79 homeswith 4,415 beds at the year end. We have yet to re-brand any of the homesacquired during the past 12 months and therefore expect to increase the numberof homes under this brand to approximately 100 during 2008. To drive thisforward we have recruited an individual to focus on differentiating the servicespecification in these homes. With the net worth threshold for self funding at just £21,500 (not Scotland) weexpect an increasing number of clients will have to fund their own care over thecoming years and because of that will expect higher standards of accommodation.On average, self-funding clients pay a weekly fee that is 15% above that paid bythe local authorities. The self-funding fee rates correspond to the rates neededunder "true cost of care" models whereas local authorities expect a discount dueto the volume of beds being purchased. Given the impending demographic pressureand demand for services we expect this pricing gap to decrease over the mediumterm, as local authorities will need to increase price to secure bed capacity. Average weekly fees are £547, generating revenues of £105.0m and Home EBITDARbefore central costs of £41.6m or 39.6% (2006 - 40.6%). The dilution in marginis due to new home openings during the year building up to occupancy maturity. Active Care Partnerships Our learning disabilities ("LD") business remains small compared to our elderlycare business, however with 45 homes and 981 beds at the year end, it is thefourth largest independent mental health and learning disability care operatorin the UK. During the year we acquired 30 beds in Clacton, Essex, redeveloped and extendedour Tarry Hill home (16 beds) in Derbyshire, and Thorpe unit (21 beds) inNorthamptonshire, and opened Hollybank (13 beds) in Falkirk, Scotland. Post year end, we completed the acquisition of 46 LD beds across three sites inShropshire. We see significant potential for growth in this sector and willcontinue to pursue both acquisition and development opportunities. Average weekly fees are £912, generating revenues of £38.4m and Home EBITDARbefore central costs of £11.1m or 28.9% (2006 - 24.4%). The improvement inmargin relates to the maturing of the LD business acquired as part of theAshbourne acquisition in November 2005. Operational Highlights 52 weeks 52 weeks ended ended 30 September 1 October 2007 2006 £'m £'m ______ ______Revenue 731.9 610.9Home EBITDAR before central costs 230.2 189.6Margin % 31.5% 31.0%Rent - charge for amounts currently payable 138.9 116.1Rent cover - times 1.66 1.63Adjusted EBITDA 66.8 48.8Revenue growth 19.8%Adjusted EBITDA growth 36.9% ______ The operating leverage within the business is well demonstrated by the resultswith c.20% revenue growth delivering c.37% growth in Adjusted EBITDA and 61%increase in Adjusted earnings per share. Operating margins have improved to31.5% (2006 - 31.0%) with current rents covered 1.66 times (2006 - 1.63 times). We have seen the normal seasonal trading pattern during the year with one-thirdof Adjusted EBITDA earned in H1 and two-thirds in H2. This is driven by thetiming of pay reviews and fee reviews during the financial year and expectedlower occupancy rates during the winter period. This is highlighted in theanalysis below: H1 H2 Total 2007 2007 2007 £'m £'m £'m ______ ______ ______Revenue 336.3 395.6 731.9Home EBITDAR before central costs 98.1 132.1 230.2Margin % 29.2% 33.4% 31.5%Rent - charge for amounts currently payable 64.6 74.3 138.9Rent cover - times 1.52 1.78 1.66Adjusted EBITDA 21.8 45.0 66.8Adjusted EBITDA profile 33.0% 67.0% 100.0% ______ ______ ______ We believe the fundamental drivers in the long-term care market remain positiveand provide good visibility for earnings for the foreseeable future. Occupancy Occupancy rates have remained steady at 91.0% across the Group, reflecting thenumber of new beds opened during the year. Excluding immature beds (newlydeveloped homes or refurbished homes that have been trading for less than 12months); the underlying occupancy rate in the mature business was 91.1%. As wecontinue to develop new beds, the Group occupancy rate will continue to beartificially lower, however over time we expect occupancy rates to improve asthe demand for long-term care services increases. Fee Rates Group average weekly fee rates have increased by 4.4% to £499 per week (2006 -£478 per week). However, taking into account the full year impact of last year'sacquisitions on 2007 revenue numbers, compared to their partial year impact on2006 revenue, underlying fee rates for elderly care continuing beds haveincreased from £457 per week to £481 per week an increase of c.5.3%. Annual fee rate reviews remain the principal driver to earnings growth. Weremain convinced that fee rates will rise at least in line with wage inflationto persuade operators and investors to build and develop the new beds which arerequired to meet the continuing demographic pressure. The impact of national minimum wage ("NMW") and working time directive ("WTD")legislation has thus far been borne by operators from October 2007, increasingcosts by c.4.8%; 3.2% from the increase in the headline rate of minimum wage anda further 1.6% from the additional four days holiday entitlement under the WTD. National operators, such as ourselves, will be expecting to receive commensuratefee rate improvements in April 2008. Personnel, Staff and Payroll Costs Our staff are the key to our business, and they work incredibly hard to deliverthe standards of service that have enabled us to build the Company into the UKmarket leader. We have recently concluded a two-year pay deal with the GMB, with Southern Crossmaintaining its commitment to stay ahead of NMW for all staff groups. Annualleave allocations have been increased, pay differentials equalized across thehomes and rewards introduced for staff who upgrade their skills or experience tobenefit the quality of service delivery. The Pay and Reward package represents atotal increase in excess of 9.5% over the two years. Through our relationship with the GMB Union we have developed our pay andbenefits package to ensure that we attract and retain employees who have thenecessary skills and vocation for the sector. We have reduced our use of agencystaff by 50% this year, which benefits the business two-fold, through continuityof staff in the home, and service quality and investment of the saved cost intothe pay negotiations with permanent staff. The reduction in agency usage has been filled predominantly by migrant workersfrom the European Economic Area ("EEA"). We have found these employees to bevery hard working, caring individuals with excellent English language skills. Wewelcome these employees to Southern Cross. Running Costs and Home Overheads Home running costs have been well controlled by closely managing unit costs aswe have introduced the increased bed volumes to our suppliers. Home runningcosts were 12.7% of revenue in 2007 (2006 - 12.8%). Clearly there are some coststhat are outside of management control such as utilities and insurance, howeverwe are coming to the end of a two-year utilities contract entered into justbefore our IPO where we expect unit costs to decrease upon renewal. Sale and Leaseback Funding We have continued to grow the Group using a sale and leaseback fundingmechanism, working with landlords who wish to invest in UK healthcare realestate assets with quality operators. We have seen a number of new landlordsentering the care home lease market and this can only be considered to be apositive step with the number of new beds required in the near future. During the year we have either sold or exchanged contracts for the sale of over£180m of real estate and entered into direct tenancy arrangements with vendorsfor total starting rents of c. £27m. Capitalising this at current bank baserates equates to a further £466m of real estate transacted on the increasingquality of the Southern Cross operating covenant, all at rent covers at least inline with the Company's target. With nearly 97% of our annual rents on fixed or capped increases we retainexcellent visibility over our rental costs going forward. Management Support Structure As a result of the increased bed capacity we have restructured our centralfunctions to ensure that we have the necessary support infrastructure for thehomes. This ensures that we have appropriately skilled staff to continually audit the service against theregulatory standards and to ensure the Company's policies and procedures areadhered to. This has increased our central costs to £26.0m, an increase ofapproximately £1.5m compared to last year's guidance. Despite that, there are clear synergies realised in spreading our back-officeadministrative functions across a greater number of beds. Central costs as apercentage of revenue were c.3.6% for 2007 compared to 4.2% in 2006 (2006 -excluding exceptional central costs of £5.2m). Looking ahead we have recently established an Internal Audit ("IA") function,which will report directly to the Audit Committee. The work programme of IA willcover both financial and operational areas and provide independent feedback tothe Board on the state of the business. This is expected to add a further £0.5mto central costs next year. Financial Review The Group expanded capacity by 25% across the year through a combination ofacquisition activity and organic development. Fee income and Adjusted EBITDAincreased by 19.8% and 36.9% respectively compared to the prior year. Acquisition and Development Activity During the financial year, the Group continued with its growth strategyincreasing available beds by 7,298 beds, an increase in capacity of 25%. Thegrowth was primarily through acquisition activity with 5,582 beds added. Themost notable acquisitions were the Lifestyle (1,731 beds), Focus (1,313 beds)and Avery (847 beds) portfolios. The Bondcare portfolio (1,911 beds) was alsoadded to the Group initially under a management agreement. In addition, weopened a further 13 care homes with 807 beds from our organic developmentpipeline. We have completed the integration of the operations and back-office supportsystems of all acquisitions with the exception of Bondcare. This has resulted insignificant synergy savings for procurement at home level but in particular wehave reduced the level of back office administration costs required to managethe enlarged Group. These savings are only partly reflected in the currentfinancial year. A full-year impact will be recorded in 2008. Bondcare wasinitially added to the Group portfolio under a management arrangement and legalcompletion did not occur until 5 November 2007. Consequently, Bondcare will befully integrated in early 2008. As part of the strategic review of our existing portfolio, we also sold six carehomes and closed two care homes with 260 beds across the year. These had beenacquired as part of portfolio transactions, but did not match the Southern Crossmodel. International Financial Reporting Standards ("IFRS") As a listed Group, the financial statements continue to be prepared inaccordance with applicable IFRS. There have not been any changes to IFRS whichhave had a significant effect upon the financial statements in the year to 30September 2007. Trading Activities During the 52 weeks ended 30 September 2007, we have experienced strong businessgrowth through acquisitions combined with improvements in revenue and earningsof the underlying business. Both factors contributed to the Group's operatingperformance, which is summarised in the following table: Underlying growth2 2007 2006 Growth £'m £'m % % ______ ______ ______ ______Revenue 731.9 610.9 19.8 6.6Home EBITDAR 230.2 189.6 21.4 6.9Operating income 11.9 1.6 643.8 -Adjusted EBITDA1 66.8 48.8 36.9 -Profit/(loss) before taxation 3.0 (17.4) 117.2 -Average number of available beds 31,093 27,008 15.1 -Cash generated from operating activities 70.3 50.6 38.9 - ______ ______ ______ ______ 1 Adjusted EBITDA is EBITDA before exceptional central costs and the charge forfuture minimum rental increases. 2 Underlying growth excludes the impact of acquisitions in 2007. The impact of acquisitions on the Group's revenue and Home EBITDAR in the yearamounted to £80.7m and £27.6m respectively. Operating income for the year increased by £10.3m to £11.9m reflecting theimprovement in operating performance as a result of expansion combined withgrowth in profitability of the underlying group. Similarly, EBITDA increased by£10.4m (80.7%) to £23.3m. Excluding the impact for future minimum rentalincreases under IAS 17, Adjusted EBITDA increased by £18m (36.9%) to £66.8m.Earnings for the year before taxation were £3.0m (2006 - loss £17.4m). Earnings/(loss) per Share Earnings/(loss) per share for the year was 1.0p (2006 - loss 9.4p). Adjustedearnings per share for the year before future minimum rental increase charges,loan arrangement fees written off and the taxation impact thereof, was 19.0p(2006 - 11.8p), an increase of 61.0%. This adjusted measure excludes non-recurring and non-cash-based charges and is a more accurate measure of thegrowth in earnings attributable to shareholders. Segmental Results The Group continued to have two distinct segments within its operations, namelyElderly Care and Specialist. Significant growth was noted within the ElderlyCare segment over the year. For the forthcoming year, one of the Group's mainobjectives is to focus upon continued growth across both its Elderly Care andSpecialist portfolios. Elderly Care Significant growth through acquisitions over the year was predominantly withinthe Elderly Care segment. Average available beds increased by 4,043 beds to30,152 (2006 - 26,109). The total number of available beds operated by the Groupwithin the Elderly Care portfolio at the year end was 33,323 beds (2006 - 28,001beds). In addition, the Group also managed 1,911 beds from the Bondcareportfolio with legal completion of their acquisition shortly after the year end,increasing the number of operating beds in the Elderly Care portfolio to 35,234beds. Average occupancy for the year was 90.9%, including the impact of acquisitionsand immature developments. Average occupancy excluding the impact ofacquisitions was 91.3% a slight increase compared to the average occupancy forthe same homes in the prior year of 91.2%. Fee income for the Elderly Care segment increased by £117.9m to £693.5m for theyear. The increase was primarily due to acquisition growth of £80.1m. Excludingthe impact of acquisitions in the year, the underlying revenue growth was£37.8m, a relative increase of 6.6%. The average weekly fee ("AWF") for the yearwas £487 p.w. (2006 - £465 p.w.), an increase of 4.7%. However, the year-on-yeargrowth in AWF has been diluted to some extent through a full year's impact in2007 of acquisitions made during 2006 which operate at a lower AWF compared tothe Group average as they relate to the provision of care at a lower level ofdependency. Analysing the part of the portfolio which has been part of thesegment for the whole of 2007 and 2006, the AWF has increased by 5.3% from £457p.w. to £481 p.w. Total Home EBITDAR before central costs increased by £38.1m to £219.1m, theimpact of acquisitions in the year being £27.5m. Excluding the impact ofacquisitions in the current year, total Home EBITDAR increased by £10.6m, beinga 5.9% increase. The operating margin of Elderly Care increased from 31.4% to31.6%. The operating margin of acquisitions in the year was ahead of the Groupmargin at 34.3%. Specialist Care The Specialist segment also recorded an increase in average available beds, from899 beds in 2006 to 941 beds. The total number of available beds at the year endwas 981 (2006 - 916), an increase of 7.1%. Average occupancy of the Specialist segment decreased slightly from 86.4% during2006 to 86.1%. The fluctuation is within our expectations given thesignificantly smaller number of available beds per unit within the segment. Revenue for the segment increased by 8.8% from £35.3m to £38.4m for the 52 weeksended 30 September 2007 as a result of strong increases in AWF as well as theincrease in operational size. AWF increased by 4.5% to £912 p.w. Total Home EBITDAR before central costs for the year increased by 29.1% from£8.6m to £11.1m driven by strong growth in fee income combined with efficientcontrol of payroll and running costs. Similarly, the Specialist segment noted asignificant improvement in operating margin from 24.4% to 28.9%. In summary, the Specialist segment has seen a positive operating performancewith notable fee growth and operating margin improvement. Rent The rent charge for the year amounted to £182.4m (2006 - £146.8m). Excluding thenon-cash charge under IAS 17 for leases with fixed or minimum annual increases,the cash rental charge for the year was £138.9m (2006 - £116.1m), an increase of19.6% and giving a rent cover of Home EBITDAR before central costs of 1.66 times(2006 - 1.63 times). The increase in rental charge is consistent with the growthin operational size of the Group. The cash rental charge per average availablebed for the year was £4,467 per annum (2006 - £4,299), an increase of 3.9%compared to 2006. The increase has been slightly inflated, in addition to thenormal annual reviews, by acquisitions made during the year which perform at ahigher operating margin and consequently have a higher rent charge per availablebed. Central Costs Central costs, excluding exceptional items and charges for costs associated withshare options, reduced by £1m despite the operational size of the Groupincreasing by more than 25%. The Group realised synergy savings relating toprevious acquisitions and was able to control central overheads as it expanded. Total central costs for the year excluding exceptional central costs amounted to£26.0m, a decrease of £4.8m compared to central costs of £30.8m in 2006.Included within this total is a charge of £1.5m (2006 - £0.1m) for the costassociated with shares issued to employees under the Performance Share Plan ("PSP"). Excluding this non-cash charge, central costs actually decreased by £6.2mon a like-for-like basis predominantly as a result of exceptional costs of £5.2mincurred during 2006. In addition, restructuring costs amounting to £0.5m, incurred as a result ofacquisitions made during the year, have been charged to the income statementwithin central costs. Therefore, on a like-for-like basis, central cost savingsas a result of synergy and restructuring completed during the prior year are inexcess of £1.5m. Exceptional Central Costs The Group did not incur any significant, non-recurring, exceptional centralcosts during the year (2006 - £5.2m). Finance Income and Costs The net financing costs for the year amounted to £8.9m (2006 - £19.0m). Theprior year included £7.0m of interest charged on deep discount bonds which wererepaid upon refinancing on flotation in July 2006. Of the total interest charge, £2.2m (2006 - £3.1m) related to the amortisationof loan arrangement fees on bank facilities, with £1.9m charged to the incomestatement as part of bank refinancing in June 2007. In addition, interest of£4.3m was charged on term loans and £3.1m on development loans drawn to financeacquisition and development activity. Other banking fees incurred during theyear amounted to £0.3m (2006 - £0.6m). Interest receivable during the year was £1.0m (2006 - £0.3m), the increase beinga result of the return on the greater amount of cash generated throughout theyear. In addition, the increase in fair value of the interest rate instrumentagainst our term loans increased by £0.3m (2006 - £nil) as LIBOR increased overthe year. Taxation The tax charge on earnings before taxation of £1.1m (2006 - credit £5.3m)represents a headline rate of 38.0% (2006 - 30.5%). However, this headline rateis significantly affected by the tax effect, amounting to £10.9m (2006 - credit£8.1m) of translation adjustments to IFRS. Such effects predominantly relate tothe future tax benefit of the additional-rental charge under IAS 17. The pre-exceptional, pre-goodwill amortisation tax charge under UK GAAP of£12.0m (2006 - £4.2m) represents an effective tax rate of 26.4% (2006 - 25.6%)of earnings before goodwill amortisation and exceptional costs. Going forward, the Group expects the pre-exceptional, pre-goodwill UK GAAPeffective tax rate to remain below the standard rate of corporation tax. Dividends Total dividends paid during the year amount to £6.8m (2006 - Nil), being the£2.1m (1.1p per ordinary share) dividend proposed at the end of the lastfinancial year plus an interim dividend of £4.7m (2.5p per ordinary share) forthe current financial year. The Group has proposed a final dividend of £9.4m(2006 - £2.1m), being 5p per ordinary share (2006 - 1.1p per ordinary share), tobe paid on 11 February 2008, to those shareholders on the register of members atclose of business on 11 January 2008. Non-current assets Non-current assets amount to £325.7m, an increase of £15.6m compared to theprior year, primarily due to increased deferred tax assets recognised inrelation to the accelerated charge for future minimum lease payments inaccordance with IAS 17. Property assets held for sale Property assets held for sale relate to freehold properties amounting to £143.8mwhich were acquired during the second half of the year and disposed of shortlyafter the year end. Such acquisitions were partly financed by £120.0m ofdevelopment loans, which are discussed below. The remainder was financed fromoperating cashflow. Financing The net debt of the Group at 30 September 2007 was £171.9m (2006 - £69.6m).However, included within this total amount are development loans of £120mrelating to acquisitions completed in the second half of the financial year. Thefacility was drawn specifically for the purchase of £120m of freehold propertiesthat are presented within non-current assets for resale. Of this amount, £95m offreehold properties were disposed to third parties shortly after the year endand £95m of development loans repaid in full. Net debt excluding developmentloans ("Adjusted net debt") was £51.9m (2006 - £51.5m). Adjusted net debt increased by £0.4m over the year. The term loan facilityoutstanding is currently £54m (2006 - £60m). Scheduled repayments of £6m weremade during the year. In addition, £4.9m of the outstanding mortgage facilitywas repaid following the sale of freehold property to which it related. Loannotes increased by £3.6m over the year to £10.3m. The Group issued loan notesamounting to £8.6m as part of the consideration for the acquisition of Avery.The increase was partly reduced by £1.9m, being scheduled repayment in full ofthe Trinity loan notes. In addition, £3.1m of the loan notes 2015 were redeemedat the request of the note holders. Finance leases increased by £0.7m across theyear. The closing cash at bank position reduced by £7.0m to £14.9m, thedecrease being a consequence of utilisation of £31.4m of cash generated fromoperations to finance further growth of the Group. In order to finance the Avery acquisition, the Group refinanced its bankingfacilities and renegotiated its borrowing facilities. It currently has a £56.0mterm loan facility, £60.0m development facility and £34.0m revolving creditfacility plus a £1.6m mortgage facility. The Group has used the revolving credit facility to issue £20.4m of guaranteesto landlords and loan note holders. At the year end, the total unutilisedportion of these facilities amounted to £19.6m. The Group has two yearsremaining of a three-year interest rate swap for £30.0m, at a fixed rate of5.07%. Under the Group's treasury policy, this position will be reviewed on aregular basis. Cash Flow 2007 2006 £'m £'m ______ ______Cash flows from operating activities 70.3 50.6Net interest and taxation (13.4) (28.7)Investing activities (38.5) (72.0)Financing activities (25.4) 67.8 ______ ______Net (decrease)/increase in cash (7.0) 17.7 ______ ______ The business continues to demonstrate strong cash generation from operations.Operating cash flow as a percentage of Adjusted EBITDA was 105.2%. Cash inflow from operations was £70.3m (2006 - £50.6m), representing a strongcash conversion ratio compared to Adjusted EBITDA of 105.2% (2006 - 103.7%). Net cash outflow from investing activities amounted to £38.5m (2006 - £72.0m).Gross investing activities amounted to £126.5m, being £56.6m investment onacquisition of subsidiaries, £31.8m being the purchase of freehold assets,£14.8m representing development capital, predominantly freeholds, £2.4mrepresenting short leasehold improvements and £20.9m representing capitalexpenditure. Of the total capital expenditure spend, £18.6m related to the homesand £2.3m was incurred upon the central support function. The Group invested £56.6m on new subsidiaries, primarily Avery. Disposalproceeds relating to the disposal of subsidiary undertakings and freeholdproperties amounted to £72.6m (2006 - £47.9m). Of this amount, £18m related tothe United portfolio of freeholds held on the balance sheet at the prior yearend. Consequently, sale proceeds amounting to £54.6m related to assets acquiredin the year. This frequency of acquisition and disposal of subsidiary entitiesis consistent with our sale and leaseback funding model. Interest charges paid during the year amounted to £9.5m (2006 - £27.4m). Of theinterest payments made during the year, £3.1m related to charges upon thedevelopment facility drawn for specific acquisitions and £0.7m to arrangementfees paid as part of refinancing. The remaining payments related to standardcharges incurred in accordance with our banking facilities. The payments in theprior year included settlement of £11.0m of accrued interest upon the redemptionof shareholder deep discount bonds and £6.5m upon loan notes. The net cash outflow from financing for the year amounted to £25.4m (2006 -£67.8m inflow). Excluding dividends paid during the year of £6.8m, the netoutflow for the year was £18.6m; essentially the repayment of loan finance relating to United from the lastfinancial year end. In the prior year, funds were generated from the IPO and aspart of the associated refinancing. The decrease in cash and cash equivalents during the year was £7.0m (2006 -£17.7m increase) resulting in a year-end balance of £14.9m (2006 - £21.9m)predominantly a consequence of cash generated from operations being investedinto the growth of the Group. The business continued to demonstrate strong cashgeneration from operations. Operating cash flow as a percentage of AdjustedEBITDA was 105.2% (2006 - 103.7%). Consolidated Income Statement - IFRS 52 weeks 52 weeks ended ended 30 September 1 October 2007 2006 Note £'m £'m ______ ______Revenue 731.9 610.9Home payroll costs (409.0) (343.0)Home running costs (92.7) (78.3) ______ ______Home EBITDAR before central costs 230.2 189.6RentCharge for rental amounts currently payable (138.9) (116.1)Charge for future minimum rental increases (43.5) (30.7) ______ ______Total rent (182.4) (146.8) ______ ______Home EBITDA before central costs 47.8 42.8Central costs (26.0) (30.8)Other operating income 1.5 0.9 ______ ______Adjusted EBITDA before exceptional central costs and charge forfuture minimum rental increases 66.8 48.8Exceptional central costs - (5.2)Charge for future minimum rental increases (43.5) (30.7)EBITDA 23.3 12.9Profit on disposal of property, plant and equipment andsubsidiary undertakings 0.8 0.4Depreciation (13.2) (10.1)Amortisation 1.0 (1.6) ______ ______Operating income 11.9 1.6Finance costs (10.2) (19.3)Finance income 1.3 0.3 ______ ______Profit/(loss) before taxation 3.0 (17.4)Taxation 2 (1.1) 5.3 ______ ______Profit/(loss) attributable to ordinary shareholders 1.9 (12.1) ______ ______ Pence per share Pence per shareEarnings/(loss) per share attributable to equity shareholdersBasic 4 0.96 (9.35) ______ ______Diluted 4 0.96 (9.35) ______ ______ All of the above activities relate to continuing operations. Consolidated Balance Sheet - IFRS As at As at 30 September 1 October 2007 2006 Note £'m £'m ______ ______ASSETSNon-current assetsProperty, plant and equipment 95.5 96.3Goodwill 201.3 196.0Other intangible assets 0.8 2.4Deferred tax assets 25.1 12.9Other non-current assets 3.0 2.5 ______ ______Total non-current assets 325.7 310.1 ______ ______Current assetsCash and cash equivalents 14.9 21.9Trade receivables 40.3 28.8Inventories 2.1 1.1Property assets held for sale 143.8 -Other current assets 7.8 12.8 ______ ______Total current assets 208.9 64.6 ______ ______Total assets 534.6 374.7 ______ ______LIABILITIESCurrent liabilitiesShort-term financial liabilities (134.7) (25.9)Trade and other payables (88.0) (65.4) ______ ______Total current liabilities (222.7) (91.3) ______ ______Non-current liabilitiesLong-term financial liabilities (51.5) (63.6)Provisions and similar obligations (7.1) (8.1)Deferred government grants (1.3) -Future minimum rental payable (107.2) (63.7) ______ ______Total non-current liabilities (167.1) (135.4) ______ ______Total liabilities (389.8) (226.7) ______ ______Net assets 144.8 148.0 ______ ______Ordinary shares 1.9 1.9Share premium 161.5 161.5Retained deficit (18.6) (15.4) ______ ______Shareholders' equity 5 144.8 148.0 ______ ______ Consolidated Cash Flow Statement - IFRS 52 weeks 52 weeks ended ended 30 September 1 October 2007 2006 £'m £'m ______ ______Cash flows from operating activitiesCash flows from operations 70.3 50.6Interest received 0.4 0.3Interest and bank loan arrangement fees paid (9.5) (27.4)Tax paid (4.3) (1.6) ______ ______Net cash from operating activities 56.9 21.9 ______ ______Cash flows from investing activitiesPurchase of subsidiary undertakings net of cash acquired (56.6) (94.8)Sales of subsidiary undertakings 72.6 47.9Purchase of property, plant and equipment (69.9) (29.1)Receipts from the sale of property, plant and equipment 15.4 4.0 ______ ______Net cash used in investing activities (38.5) (72.0) ______ ______Cash flows from financing activitiesRepayment of borrowings (258.0) (332.2)New borrowings 239.8 236.4Capital element of finance leases (0.4) (0.2)Dividends paid (6.8) -Proceeds from share issues - 163.8 ______ ______Net cash (used)/generated (in)/from financing activities (25.4) 67.8 ______ ______Net (decrease)/increase in cash and cash equivalents (7.0) 17.7Opening cash and cash equivalents 21.9 4.2 ______ ______Closing cash and cash equivalents 14.9 21.9 ______ ______ Note: Included within the purchase of property, plant and equipment are purchaseof freehold properties totalling £31.8m (2006 - £6.1m) and developmentexpenditure on new properties totalling £14.8m (2006 - £7.1m). Notes to the Preliminary ResultsFor the 52 weeks ended 30 September 2007 1. Accounting policies The financial statements have been prepared in accordance with applicableInternational Financial Reporting Standards (IFRS) as adopted by the EuropeanUnion (EU) and effective at 30 September 2007. Details of the IFRS policies can be found in the Group's consolidated financialstatements for the 52 week period ended 30 September 2007. 2. Taxation 52 weeks 52 weeks ended ended 30 September 1 October 2007 2006 £'m £'m ______ ______Current tax- current period 12.8 (0.3)- prior period 0.9 0.1Deferred tax- current period (11.7) (4.2)- prior period (0.9) (0.9) ______ ______Taxation 1.1 (5.3) ______ ______ Corporation tax is calculated at 30% (2006 - 30%) of the estimated assessableprofit for the period. 3. Dividends Paid and Proposed A dividend of 1.1p per ordinary share, totalling £2.1m, in respect of the periodended 1 October 2006, was paid on 9 February 2007. The Directors declared an interim dividend of 2.5p per ordinary share, totalling£4.7m, and was paid on 22 June 2007. The Directors have proposed a final dividend of 5p per ordinary share, totalling£9.4m, in respect of the 52-week period ended 30 September 2007 and will bepaid, subject to shareholder approval, on 11 February 2008. 4. Earnings/(loss) per Ordinary Share Basic earnings/(loss) per share is calculated by dividing the profit for theperiod attributable to ordinary equity holders of the parent, by the weightedaverage number of ordinary shares outstanding during the period. Diluted earnings per share is calculated by dividing the profit for the periodattributable to ordinary equity holders of the parent, by the weighted averagenumber of ordinary shares outstanding during the period plus the weightedaverage number of ordinary shares that would be issued on the conversion of allthe dilutive potential ordinary shares into ordinary shares. The following reflects the share data used in the basic and diluted earnings pershare calculations and incorporates the impact of the bonus issue made to allshareholders on 5 July 2006: 52 weeks 52 weeks ended ended 30 September 1 October 2007 2006 Number Number ______ ______Basic weighted average number of shares (excluding treasury shares) 188,067,377 128,879,343Dilutive potential ordinary shares:Employee share options 633,761 - ______ ______Diluted weighted average number of shares 188,701,138 128,879,343 ______ ______ The Group presents exceptional items and future minimum rental increases on theface of the income statement. Items that are considered exceptional, by virtueof their size or incidence, are disclosed in order to improve a reader'sunderstanding of the financial information. To this end, additional basic anddiluted earnings per share information, including loan arrangement fees writtenoff, is also presented on this basis. Reconciliations of earnings and theweighted average number of ordinary shares used are set out below: 52 weeks ended 30 September 2007 Basic Diluted per share per share Earnings amount amount £'m p p ______ ______ ______Profit/(loss) attributable to ordinary shareholders 1.9 0.96 0.96Charge for future minimum rental increases 43.5 23.12 23.04Exceptional central costs:- Flotation costs - - -- Restructuring and integration costs - - -- Other - - -Loan arrangement fees written off 1.9 1.03 1.03Taxation impact of above (11.4) (6.07) (6.05) ______ ______ ______Profit attributable to ordinary shareholders before charges forfuture minimum rental increases, loan arrangement fees writtenoff and exceptional central costs and taxation impact thereof 35.9 19.04 18.98 ______ ______ ______ (continued from table above) 52 weeks ended 1 October 2006 Basic Diluted per share per share Earnings amount amount £'m p p ______ ______ ______Profit/(loss) attributable to ordinary shareholders (12.1) (9.35) (9.35)Charge for future minimum rental increases 30.7 23.82 23.82Exceptional central costs:- Flotation costs 3.1 2.37 2.37- Restructuring and integration costs 1.8 1.37 1.37- Other 0.3 0.27 0.27Loan arrangement fees written off 3.1 2.41 2.41Taxation impact of above (11.7) (9.08) (9.08) ______ ______ ______Profit attributable to ordinary shareholders before charges forfuture minimum rental increases, loan arrangement fees writtenoff and exceptional central costs and taxation impact thereof 15.2 11.81 11.81 ______ ______ ______ 5. Shareholders' Funds and Statement of Changes in Shareholders' Equity Profit and loss Share Share Total capital premium account equityGroup £'m £'m £'m £'m ______ ______ ______ ______At 2 October 2006 1.9 161.5 (15.4) 148.0 ______ ______ ______ ______Profit attributable to ordinary Shareholders - - 1.9 1.9Ordinary dividends paid - - (6.8) (6.8)Share-based payments (including deferred tax of£0.2m) - - 1.7 1.7 ______ ______ ______ ______At 30 September 2007 1.9 161.5 (18.6) 144.8 ______ ______ ______ ______ 6. Statutory Accounts The financial information included in this document for the 52 week period ended30 September 2007 has been derived from the audited consolidated financialstatements of the Group for the 52 week period ended 30 September 2007. This financial information does not constitute statutory consolidated financialstatements for the 52 week period ended 30 September 2007 or the 52 week periodended 1 October 2006, which will be filed with the Registrar of Companies forthe 52 week period ended 30 September 2007, following the Company's annualgeneral meeting. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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