Half-year Report

Cambian Group plc

("Cambian" or "the Group" or "the Company")

Unaudited results for the six months ended 30 June 2016

1 Adjusted EBITDA is earnings before net finance costs, tax, depreciation, amortisation, profit or loss on disposal of assets, merger and acquisition costs, IPO share option charges and exceptional items.

2 Adjusted basic earnings per share is defined as statutory basic earnings per share before amortisation of acquired intangible assets, merger and acquisition costs, IPO share option charges and exceptional items, net of the tax effect of these adjustments.

Financial

· Revenue growth of 14% to £160.0m (2015 H1: £140.9m) from increased occupancy.

· Adjusted EBITDA of £22.0m reflects strong recovery over the prior six months (2015 H2: £15.9m) from increased revenue and operating efficiencies.

· Exceptional items of £6.4m being primarily financial restructuring costs.

· Finance costs have increased as a result of agreed amendment of the bank facilities.

· Price negotiations with commissioners regarding National Living Wage progressing satisfactorily.

Operational

· Maintained key focus on maturing existing portfolio with total capacity of 2,942 places, with a net reduction of 47 places since the year end in line with plan.

o Children's Services capacity at 1,790

o Adult Services capacity at 1,152

· Increased occupancy from referrals, backed by high quality regulatory ratings.

o Children's Services average occupancy at 75% (2015 H1: 74%; 2015 FY 73%)

o Adults Services average occupancy at 90% (2015 H1: 87%; 2015 FY: 87%)

· Continued progress made in the remediation of financial and administrative processes.

Christopher Kemball, Chairman, commented:

"The Group is benefitting from the remedial actions which we have taken with both our Children and Adult Services divisions, delivering a good first half performance compared to the second half last year. Our focus on maturing the existing portfolio is progressing well and we are seeing an increase in both occupancy levels and demand for our services.

"We are pleased with progress in our core Children's Services business where we see further opportunities ahead. We are close to concluding our review of strategic options to ensure the optimal future shape for the business and expect to make an announcement in due course.

"The second half has started well and the business is performing in line with the Board's expectations."

A results presentation will be held for investors and analysts at 9.30am today at Cambian Churchill Hospital, 22 Barkham Terrace, London, SE1 7PW. If you would like to attend, please confirm your attendance to [email protected].

There will also be a live audio webcast of the presentation available at http://www.investis-live.com/cambian/57d668ab5c14c30700b341c7/ef3g. An audio recording of the presentation will be made available via the same link following the presentation later today.

About Cambian:

Cambian Group is one of the UK's leading specialist behavioural health service providers. Founded in 2004, it has grown to become a significant partner to the UK Government. The Group's services have a specific focus on children and adults who present high severity needs with challenging behaviours and complex care requirements. Cambian employs approximately 7,000 people across a portfolio of over 300 purpose-designed facilities and 9 fostering offices located in England and Wales.

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Overview

We began the year with a clear agenda: continue to implement our remedial action programme; ensure we meet our obligations under the amended bank facilities; and continue to deliver the highest quality specialist services our customers demand.

The period saw the Group trade in line with the Board's expectations following the implementation of our remedial action programme which is delivering tangible benefits.

It is pleasing to note that, despite the well-documented issues we faced last year, we continued to experience significant demand for our services across both divisions. Consequently, the Group's average occupancy levels increased not just over the comparable period to 81% (2015 H1: 79%) but also over 2015 FY's closing occupancy levels of 78%.

Results

Revenue increased by 14% to £160.0 million (2015 H1: £140.9 million). As previously advised, adjusted EBITDA was lower at £22.0 million (2015 H1: £26.6 million) with adjusted EBITDA margin down from 19% to 14% although it represents a strong recovery over the prior six months (2015 H2: £15.9 million). The operating profit was £3.8 million (2015 H1: £14.2 million) and adjusted basic earnings per share were 3.0 pence (2015 H1: 6.8 pence).

Strategic Review

The Board announced in April 2016 that it was reviewing strategic options in light of the need to reduce borrowings as well as the wider market environment in which the Group is operating.

The Board is close to concluding the review which will determine the optimal future shape for the business and is evaluating a proposal to sell the Adult Services division. Adult Services is performing well, has a niche market position and could attract significant interest. Advisors have been appointed and have commenced market testing to assess potential interest in the division.

In the event that Adult Services were to be sold, we would be able to deleverage our business considerably and further grow our market-leading Children's Services division where we see significant opportunities.

The Board will make further announcements as appropriate.

Divisional Review

The Group's total closing capacity was 2,942 places (2015 H1: 2,876 places) reflecting a net planned reduction of 47 places since the year end.

Children's Services

Revenue for the period increased by 18% to £95.7 million (2015 H1: £81.4 million) reflecting an increase in average capacity to 1,802 places (2015 H1: 1,661 places) and average occupancy levels improved to 75% (2015 H1: 74%).

Improvements in capability and occupancy followed from our focus on addressing the previously reported recruitment and training issues.

The impact of these changes, together with operational efficiencies, improved the trading in the first half of the year when compared with the second half of 2015. Adjusted EBITDA was £9.3 million (2015 H2 £5.0million; 2015 H1: £12.6 million).

Our Children's Services are benefitting from the strategic decision we took last year to develop an integrated recovery model incorporating care, education and therapy focused on children and young people with the highest needs. We are retooling our services accordingly, including fostering, and have invested in upskilling our staff capabilities.

With increasing demand for our services and average occupancy at 75%, we see significant potential for the division.

Adult Services

Revenue for the period increased by 8% to £64.3 million (2015 H1: £59.5 million). Average capacity increased to 1,152 places (2015 H1: 1,138 places) whilst average occupancy rose to 90% (2015 H1: 87%).

Adjusted EBITDA at £12.7 million (2015 H2: £11.0 million; 2015 H1: £14.0 million) reflected the improved operating efficiencies.

Whilst the Adult Services market is more mature than the Children's market, there are opportunities across various specialist sub-segments in the Adult market and significant levels of demand for services in those areas.

Following on from the opening last year of four larger units in Adult Services (two Personality Disorder units, an Acquired Brain Injury unit and a unit for Adults with autism), the Group is nearing completion of two new units for people with a learning disability and these are due to open later this year.

Quality and Regulatory

We continue to aspire to be the highest quality provider of behavioural health services to Children and Adults. It is pleasing to report, therefore, that our regulatory scores remain strong with 83% of Children's Services and 90% of Adults Services rated good or outstanding with Ofsted or CQC as at 30 June 2016.

As widely reported, the sector is seeing an increasingly stringent regulatory environment with an enhanced rigour of inspections which we both welcome and are well-positioned to benefit from in this drive to improve the focus on quality of care.

Fees

At the beginning of this year we increased fees for new service users successfully to better align our charges with market rates for similar services.

As previously indicated, we support the introduction of the National Living Wage ("NLW") and have been discussing with commissioning bodies fee increases for existing service users to mitigate the cost to Cambian of its implementation. We are now finalising agreements and are seeking approval with commissioners to increase fees. We are increasingly confident that we will achieve our objective of ensuring that we are able to recover the additional costs imposed by the NLW this year through our fee increases.

Board and Management

The Board has been strengthened with two new appointments since the announcement of our year end results.

Mike Butterworth was appointed as an independent non-executive director in April 2016. Mike has extensive financial experience having worked in various finance roles, both in an executive and non-executive capacity, for a number of public companies.

Donald Muir was appointed as an independent non-executive director in June 2016. Donald has considerable experience in the business transformation field in both restructuring and rapid growth situations. He has also led and delivered the completion of significant savings initiatives across a number of NHS Trusts.

Outlook

The second half of the year has started well and the business is performing in line with the Board's expectations.

Saleem Asaria

Chief Executive Officer 

1 Capacity is the number of separate places registered with a regulator to accept service users.

2 Fostering is excluded from the capacity and occupancy numbers and disclosed separately above.

Capacity and Occupancy

In line with plan, the Group reduced capacity by a net 47 places in the period reflecting planned reductions where sites have been modified to meet changing demand for services.

Average occupancy has increased since the year end to 81% (2015: 78%) reflecting strong conversion of service user referrals and the small reduction in capacity.

Closing occupancy stood at 82% at the half year, being 77% in the growing Children's Services and 91% in the relatively mature Adult Services.

1 Fostering revenue is included within Children's Services, and also disclosed separately.

Revenue

The Group delivered growth in revenue of 14% to £160.0 million (2015 H1: £140.9 million) from increased occupancy and improved fees, with revenue increasing by 18% to £95.7 million (2015 H1: £81.4 million) in Children's Services and by 8% to £64.3 million (2015 H1: £59.5 million) in Adult Services, which reflect their respective mix of services as well as the impact of acquisitions for the whole period.

1 Adjusted EBITDA is earnings before net finance costs, tax, depreciation, amortisation, profit or loss on disposal of assets, merger and acquisition costs, IPO share option charges and exceptional items (Note 3).

Adjusted EBITDA

Although adjusted EBITDA has declined compared to the corresponding period last year, it has increased compared to the previous six months by 38% to £22.0 million (2015 H2: £15.9 million), reflecting increased revenue and operating efficiencies, more than offsetting the impact of the NLW.

Operating Profit

Likewise, compared to the previous six months, operating profit before exceptional items has increased to £10.2 million (2015 H2: £3.1 million) as the benefits of the operational efficiencies and remediation programme have become effective. After exceptional costs of £6.4 million that relate mainly to the financial restructuring, operating profit was £3.8 million in the first half.

Finance Charges

As a result of the financial restructuring, finance costs have increased to £7.3 million (2015 H1: £4.2 million), which reflect two months at the new funding rates that have been calculated at an effective interest rate on the basis of the Group's borrowings being treated as a single loan under IFRS.

Taxation

The Group's tax charge was a credit of £0.5 million (2015 H1: £2.7 million charge) which represents an effective tax rate of 25% (2015 H1: 23%). The difference between the current statutory rate of 20% and the effective tax rate is principally due to non-deductible expenditure and non-qualifying depreciation.

Earnings per Share

Adjusted basic earnings per share was 3.0 pence (2015 H1: 6.8 pence) and statutory basic loss per share was 1.6 pence (2015 H1: 4.1 pence earnings), reflecting the reduced profit after tax and increased number of shares.

Capital Expenditure

The Group incurred £7.8 million (2015 H1: £25.4 million) of capital expenditure in the first half of the year, of which £4.0 million (2015 H1: £21.4 million) was spent on development of new capacity, and £3.8 million (2015 H1: £4.0 million) was spent on the maintenance of existing units. Some new developments were delayed while discussions were ongoing with lenders to amend the bank facilities, which modestly benefited trading and cash flow in the short term.

Cash Flow

The reconciliation of cash flow from Adjusted EBITDA to net debt is as follows:

1 Adjusted EBITDA is earnings before net finance costs, tax, depreciation, amortisation, profit or loss on disposal of assets, merger and acquisition costs, IPO share option charges and exceptional items (Note 3).

2 Prior periods have been represented to exclude client service money from net debt.

Net cash from operating activities was an inflow of £2.7 million (2015 H1: £4.5 million outflow), with the working capital outflow reflecting the growth in activity and termly billing in education services. Taken together with the financing costs of the amended bank facilities, net debt has increased to £253.0 million (2015 H1: £233.0 million restated).

The Board is not currently recommending dividends and will look to reinstate the dividend at an appropriate time.

Debt Facilities

On 18 May 2016, the Group entered into an amended £290 million facilities agreement, the principal provisions of which were that a fee of £2.9 million was payable immediately, with a flat rate margin of 3.75% over LIBOR payable on the amounts drawn under the Facilities, which were split into "Tranche A" of £120 million and "Tranche B" of £170 million. Additional interest of 10% per year is being accrued on Tranche A to be paid on repayment or expiry of Tranche A. Should Tranche A not be repaid by 30 April 2017, then a further fee of £4.0 million is payable. An exit fee of up to £10 million is payable on repayment of Tranche A which expires on 30 September 2017, while Tranche B expires on 31 March 2019. The Group agreed to amended covenants and information undertakings, as well as restrictions on dividends and capital expenditure. The Board is actively exploring with its advisors a number of strategic options for the Group, and the Board is confident that these will enable a successful repayment of Tranche A by 30 September 2017.

The principal risks and uncertainties facing the business are considered to be as follows:

We confirm to the best of our knowledge that this unaudited consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

· an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· material related-party transactions in the first six months and any material changes in the related-party transactions described in the last Annual Report.

The current directors of Cambian are: Christopher Kemball (chairman), Christopher Brinsmead (senior independent director), Mike Butterworth independent non-executive director), Alfred Foglio (non-executive director), Alison Halsey, (independent non-executive director), Donald Muir (independent non-executive director), Dr Graham Rich, (independent non-executive director) and Saleem Asaria (chief executive officer). Biographical details for each of the directors are set out in the Cambian Annual Report and Accounts, and of Mike Butterworth and Donald Muir in the regulatory announcement relating to their appointments, which are available on the Company's website at www.cambiangroup.com/investors.

By order of the Board

Cautionary Statement

Certain statements in this half yearly statement are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. Because these statements contain risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

1. Accounting policies

General information

Cambian Group plc. (the "Company") is a company incorporated in Great Britain under the Companies Act 2006 and its registered office is at 4th Floor, Waterfront Building, Chancellors Road, Hammersmith Embankment, London W6 9RU. The Company is listed on the London Stock Exchange. The principal activity of the Company and its subsidiaries (collectively, the "Group") is the provision of high quality behavioural health services to children and adults.

Basis of preparation

The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The results for the year ended 31 December 2015 are an abridged version of the full accounts for that year, which received an unqualified report from the auditor, did not contain a statement under section 498(2) or (3) of the Companies Act 2006 or include a reference to any matter to which the auditor drew attention by way of emphasis without qualifying the auditor's report, and have been filed with the Registrar of Companies. The annual financial statements of the Company are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this Half-Yearly Financial Report has been prepared in accordance with IAS 34 Interim Financial Reporting, as adopted by the European Union. The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the latest audited annual financial statements.

Going concern

The directors have, at the time of approving the financial statements, considered the financial resources available to the Group, in particular those available under the terms of the Amended Facilities Agreement and the Group's ability to meet the revised terms of that agreement. The directors believe that these facilities will continue to be available to finance the Group's forecast cash requirements. Accordingly, the directors have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for at least 12 months from the date of approval of these financial statements and they have adopted the going concern basis of accounting in preparing the financial statements. The directors have considered the Group and Company's forecasts and projections, taking account of reasonably possible changes in trading performance, and are satisfied that the Group and Company should be able to operate within the level of its current facilities.

Exceptional items

Exceptional items reflect items which individually or, if of a similar type, in aggregate, need to be disclosed separately due to their size or incidence in order to obtain clear and consistent presentation of the Group's performance.

2. Segmental analysis

Products and services from which reportable segments derive their revenues

Management has determined the operating segments based on the monthly management pack reviewed by the board of directors (the "Board"), which is used to assess both the performance of the business and to allocate resources within the Group. Management have identified the Board as the chief operating decision maker ("CODM") in accordance with the requirements of IFRS 8 Operating segments. The operating and reportable segments are in reference to the category of customer:

Children's Services - provision of specialist behavioural science healthcare services for children.

Adult Services - provision of specialist behavioural science healthcare services for adults.

The following is an analysis of the Group's revenue and results by reportable segment.

1 Adjusted EBITDA is earnings before net finance costs, tax, depreciation, amortisation, profit or loss on disposal of assets, merger and acquisition costs, IPO share option charges and exceptional items (Note 3).

2 IPO share option charges arise on Continuation Option Plan shares awarded as part of the IPO, the impact of which is excluded from Adjusted EBITDA. Charges on future share based awards are included within Adjusted EBITDA.

3. Exceptional items

The following table provides a breakdown of exceptional items:

Refinancing costs include the engagement of legal and financial specialists to assist in the refinancing (Note 6). Capitalised finance fees written off relate to the previously capitalised finance fees included in the carrying value of the borrowings prior to refinancing (Note 6). IT project costs written off relate to a decision taken in late-2015 to cancel a project to integrate Finance, HR and CRM system. Redundancy costs relate to senior management who were made redundant in the second half of 2015 and in the first half of 2016.

4. Tax

The tax charge not including tax on exceptional and other items is £0.7million, which equates to an effective tax rate 25.3%.

In March 2016, the UK Government announced its intention to reduce the corporation tax rate to 17% with effect from 1 April 2020. This change was not substantively enacted at the balance sheet date and has therefore not been reflected in the deferred tax provisions. The reduction in the rate is likely to reduce the value of deferred tax assets and liabilities held by the Group.

5. (Loss)/earnings per share

The (loss)/earnings and weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share are as follows:

The weighted average of share options under the Continuation Option Plans has been excluded from the calculation of diluted earnings per share as they were anti-dilutive for the periods presented but could dilute earnings per share in the future.

Adjusted basic earnings per share reconciles to statutory basic earnings per share as follows:

6. Borrowings

On 18 May 2016, the Group entered into an amended £290 million facilities agreement (the "Amended Facilities Agreement"), the principal provisions of which were that a fee of £2.9million was payable immediately, with a flat rate margin of 3.75% over LIBOR payable on the amounts drawn under the Facilities, which were split into "Tranche A" of £120 million and "Tranche B" of £170 million. Additional interest of 10% per year is being accrued on Tranche A to be paid on repayment or expiry of Tranche A. Should Tranche A not be repaid by 30 April 2017, then a further fee of £4.0 million is payable. An exit fee of up to £10 million is payable on repayment of Tranche A which expires on 30 September 2017, while Tranche B expires on 31 March 2019. The Group agreed to amended covenants and information undertakings, as well as restrictions on dividends and capital expenditure.

Borrowings are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis on the basis of the Group's borrowings being treated as a single loan under IFRS.

7. Net debt

1 Cash and equivalents excludes cash held on behalf of clients of £3.3m (30 June 2015: £2.2m; 31 December 2015: £3.1m) and have been represented as at 30 June 2015 and 31 December 2015.

8. Derivative financial instruments

The derivative financial instruments were entered into to manage the Group's exposure to interest rate risk on its external borrowings. All derivative financial instruments are non-current and classified as Level 2 in accordance with the IFRS 13 hierarchy. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as a price) or indirectly (i.e derived from prices).

9. Notes to the cash flow statement

Other non-cash items relate to the charge to the income statement on the IPO share option plans shares under Continuation Option Plan 1 and Continuation Option Plan 2, and non-cash exceptional items.

10. Related party transactions

Balances and transactions between Group companies have been eliminated on consolidation and are not disclosed in this note. Other than remuneration of executive and non-executive directors and members of the senior executive team, there were no related party transactions except for:

· Expenses paid to GI Partners (being a shareholder with representation on the Board) of £20,000 (six months ended 30 June 2015: £40,000, year ended 31 December 2015 £40,000). There were no balances outstanding at the period ends.

All related party transactions are considered to be on an arm's length basis, and in the ordinary course of business.

In addition to these related party transactions, the Group uses the services of PHS Group Limited, a hygiene business chaired by Christopher Kemball, our Chairman. The total cost of these services amount to £176,000 (six months ended 30 June 2015: £164,000, year ended 31 December 2015: £329,000) and Mr Kemball took no part in the contract negotiations.

Independent review report to Cambian Group plc (the "Company")

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement and related notes 1 to 10. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group will be prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants

London, United Kingdom

14 September 2016