Full Year Trading Update

CareTech Holdings PLC

("CareTech" or "the Group")

Full Year Trading Update

CareTech Holdings PLC (AIM: CTH), a pioneering provider of specialist social care and education services to adults and children in the UK, is pleased to announce its pre-close trading update ahead of its results for the full year ended 30 September 2019 which will be announced on Thursday 12 December 2019.

Today's announcement is the first full year trading update to include results of Cambian Group plc ("Cambian") following the transformational acquisition on 19 October 2018 and the unconditional clearance from the Competition and Markets Authority on 8 February 2019.  

The Board announces that the trading performance of the Group for the year ended 30 September 2019 is in line with market expectations. Furthermore, the Board announces that the integration of Cambian is on track, with operational improvements and synergies being delivered in line with the plan set out on acquisition. Importantly, the OFSTED quality ratings for Cambian have improved under CareTech's ownership. The CareTech business continues to perform strongly on all key metrics with quality ratings and staff retention remaining higher than sector averages.

Operating segments

This trading update includes previously announced, presentational changes that reflect the on-going integration of the two businesses including the reporting of three operating segments as follows:

·; Adults Services, comprising the core CareTech Adults business as well as the Specialist Services business;

·; Children's Services, comprising CareTech's and Cambian's children's services; and

·; Foster Care, comprising CareTech's and Cambian's fostering services.

For the financial year ending 30 September 2019, the Group will also provide the segmental data for the historic CareTech and Cambian businesses to enable a like for like analysis in the first year following the acquisition. For subsequent financial years, the results of the Group will be combined on the basis of the operating segments described above.

Capacity

Analysis of the Group's capacity by segment and business as at 30 September 2019 is as follows:

CareTech's organic developments have continued during the year ended 30 September 2019 with the addition of 56 new beds whilst reconfigurations reduced capacity by a net 11 beds. A further 47 supported living contracts came to an end, resulting in a net decrease of 2 places for CareTech. The additional capacity within Adults Services that came online towards the end of the financial year underpins growth in revenues going forwards and is expected to contribute higher EBITDA than the supporting living contracts which came to an end. Blended and mature occupancy of 87% and 92% compares favourably to the last full year trading update (30 September 2018: 86% and 93% respectively).

The occupancy of the Cambian business as at 30 September each year is affected by the timing of the start of the educational year because a number of non-residential Cambian schools operate on a 38-week basis with the new education term commencing in October.

There has been a net increase of 4 places in Cambian homes since acquisition due to one new home registration occurring in August 2019.

Trading performance

The Board confirms that trading for the year ended 30 September 2019 was in line with market expectations.

The Group's performance reflects the acquisition of Cambian and represents a substantial increase in revenue and EBITDA compared with the same period last year.

The EBITDA margins of the CareTech business are in line with market expectations and the EBITDA margins of the Cambian business, before synergies, show considerable improvement when compared with their historic announced margins (which, in June 2018, were announced as 11%). The Board is confident of delivering its EBITDA margin target for the Cambian business in the medium term.

Quality ratings continue to improve across the Group. For our Adult CQC registered services, quality ratings are 95% Good or Outstanding which compares favourably to the market average of 84%. This also represents a significant increase from the September 2018 ratings of 86%. For our OFSTED registered Children's services, ratings for the CareTech services are 93% Good or Outstanding (September 2018: 86%) and 80% for the Cambian services, compared with 77% on acquisition. This results in a blended 82% Good and Outstanding ratings for Children's services across the Group, an increase from 78% when compared with our half year results.

In terms of staff retention, the Group's annualised retention rate sits at 74% (which is analysed as 77% for CareTech employees and 71% for Cambian employees) which when compared with the industry average of 70% remains favourable.

Annual fee rate negotiations with local authorities for adult services are well underway and the Group has received a favourable response. The National Minimum Wage increased from 1 April 2019, as did increases to both employer and employee pension contributions. The Group believes this has positively influenced its discussions with local authorities, who recognise that front line staff are an integral part of quality care delivery.

The Group's commitment to the development of its 10,000 staff remains steadfast. The Group's internal training department delivered 135,000 learning occurrences over last year. This commitment to training and development leads to staff being trained to deliver the highest quality care for the individuals supported by the Group.

The Group continues to explore opportunities for growth, including smaller bolt-on opportunities that the Board believe remain at attractive multiples and the potential for international growth.

During the half year, the Group also completed the ground rent transaction with Alpha Capital which raised net proceeds of £31m in cash on attractive terms providing further capital for investment.

CareTech's care pathways continue to be the primary method for delivering positive outcomes for the Group's service users and for providing value for money for local authorities. Care commissioners continue to demand flexible, high quality care solutions and favour operators able to deliver across care pathways. The Group offers clear, outcome-based pathways from residential care, into various forms of supported housing for adults and foster care for children, while residential options continue to be in demand for those with the greatest need. Following the acquisition of Cambian, the Group has grown into a leading national provider of social care and education services to some of the most vulnerable adults and children in society.

Net debt

At 30 September 2019, net debt was £293.4m, compared with £147.0m at 30 September 2018, the change being in line with the net debt as at 31 March 2019 and reflecting the cash consideration and the associated financing necessary for the Cambian acquisition together with the receipt from the ground rent transaction.

The Group's property portfolio valuation of £774m was undertaken in September 2018 establishing a loan to value at approximately 40%, whilst the net debt to proforma EBITDA of the Group is expected to be under 4.0x and the Board are committed to reducing net debt to under 3.0x in the medium term.

Integration

The integration plan for the combined business is well underway following the unconditional clearance from the Competition and Markets Authority on 8 February 2019. The Group confirms that synergies of at least £3m of profit before tax, in the first full year since acquisition, have been delivered and the Group has taken action to deliver additional synergies of £2m (total of £5m) of profit before tax in the next financial year. A key element of this cost saving is in respect of Cambian's former head office on which has been served with the break taking effect in February 2020.

The integration of the back office teams progresses with IT systems and financial accounting systems successfully integrated.

Employee incentives

In line with previous announcements as part of the Group's focus on attracting and retaining the best talent in the sector, today the Group announces its intention to put in place its most wide-ranging share incentive plan to include 563 individuals from across the business including home managers, back office staff and executive management.

(i) Approved Share Option Plan

The Group has in place an Approved Share Option Plan where options are exercisable at any time from the third anniversary of the date of grant to the tenth anniversary with an exercise price of 380p. Today, options have been granted to 528 employees including a significant number of home managers which it is hoped will further engender employee engagement and staff retention. The total number of share options issued is 1,945,704 representing around 1.7% of the Company's issued share capital.

No Directors or PDMR's are included within the Approved Share Option Plan.

(ii) Executive Share Ownership Plan

The Group also announces its intention to issue shares under an Executive Shared Ownership Plan ("ExSOP"). The ExSOP was created in 2015 and this will be the third such issuance under the plan. Under the provisions of the ExSOP, shares are jointly owned by senior employees and by an employees' share trust ("EBT"). An award under the ExSOP enables the participant to benefit only from the future growth in the value of the shares above the market price on the date of the award.

The ExSOP awards are subject to a time related performance condition measured over a three-year period beginning with the date of the grant ("Performance Period"). To the extent the performance condition is satisfied, the participant can benefit from any growth of the share price in excess of the issue price.

The vesting of the ExSOP scheme requires specific performance conditions being satisfied. As with the previous issuance of the ExSOP, the target is an EPS Target which requires the growth in the Company's underlying Diluted EPS over the Performance Period to be at least 15% (being an average 5% annual growth rate, calculated without compounding).

It is expected that there will be 35 participants in the ExSOP for up to a total of 2,869,725 shares, representing around 2.5% of the Company's issued share capital.

A further announcement will be made in due course upon the grant of the awards.

Non-Executive Directors will not participate in either of the employee incentive schemes.

Focus remains on attracting and retaining the best talent in the sector. The Group continuously focuses on employee engagement and in addition to the above the Company operates a number of SAYE scheme options which are normally exercisable within six months following the third anniversary of the date of grant. It is the Company's intention to make a further SAYE issuance for front line staff in due course. The Group has a number of SAYE schemes in place as well as share schemes for its senior executives and operational staff. Several hundred colleagues took advantage of the 2016 SAYE scheme at a share price of 194p and will see real value now that the scheme has matured.

Board appointments

Gareth Dufton was appointed as Interim Group Finance Director in January 2019 following the sad passing of Michael Hill. The appointment of a permanent successor is in progress.

As previously announced, Professor Moira Livingston was appointed as a Non-Executive Director in June 2019. Professor Livingston chairs the Group's Care Governance and Safeguarding Committee.

Also in June 2019, Mike Adams OBE, who was formerly a Non-Executive Director, became an Executive Director to enable him to pursue a strategic role within the Group.

The Board continue its search for an additional Non-Executive Director and further announcements will be made in due course.

Farouq Sheikh, CareTech's Executive Chairman, commented:

"This has been a year of transformational change within the Group and I am pleased to report that we are delivering all of our key objectives including the integration of the Cambian business and the improvements in its EBITDA margin, whilst delivering on the synergies we set out in our plan and maintaining focus on our core business.

"The integration of Cambian is well underway and is on track with our plan. We will be welcoming those colleagues who will be relocating from Cambian's head office in Hammersmith to Potters Bar in the coming days.

"As part of this announcement, I am delighted to be giving details of our share incentive arrangements. The inclusion of a very broad range of staff, and especially our home managers, demonstrates our commitment to create a culture of share ownership and to ensure that our staff share in the success of our business.

"I am particularly pleased to see our already excellent quality ratings increase for both CareTech and Cambian. This is testament to the dedication and efforts of our operational teams.

"CareTech has grown into a leading national provider of specialist social care and education services to some of the most vulnerable people in our society. I would like to thank everyone involved in the delivery of positive outcomes for those individuals who we support."

For further information, please contact: 

CareTech Holdings PLC 01707 601800

Farouq Sheikh, Executive Chairman

Gareth Dufton, Interim Group Finance Director

Buchanan (PR Adviser) 020 7466 5000

Mark Court

Tilly Abraham

Panmure Gordon (Nomad and Joint Broker) 020 7886 2500

Emma Earl

Freddy Crossley

Charles Leigh-Pemberton

WH Ireland (Joint Broker) 020 7220 1666

Adrian Hadden

Jessica Cave

Matthew Chan

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

About CareTech

CareTech Holdings plc is a leading provider of specialist social care and education services, supporting around 4,500 adults and children with a wide range of complex needs in more than 550 residential facilities and specialist schools around the UK and employing approximately 10,000 staff.

Committed to the highest standards of care and care governance, CareTech provides its innovative care pathways covering; Adult learning disabilities and specialist services; Children's residential and education services; and foster care.

CareTech, which was founded in 1993, began trading on the AIM market of the London Stock Exchange in October 2005 under the ticker symbol CTH.

For further information please visit: www.caretech-uk.com