Half Year Results

CareTech Holdings PLC

("CareTech" or the "Company")

Interim Results for the six months ended 31 March 2014

CareTech Holdings PLC (AIM: CTH), a pioneering provider of specialist social care services in the UK, is pleased to announce its interim results for the six months ended 31 March 2014.

Key Points

· Revenue increased 9% to £61.5m (2013: £56.6m)

· Underlying EBITDA(i) increased 18% to £13.9m (2013: £11.8m)

· Underlying profit before tax(ii) increased by 12% to £8.5m (2013: £7.6m)

· Underlying diluted earnings per share(ii) increased by 11% to 13.07p (2013: 11.82p)

· Strong operating cash inflow before non-underlying items of £13.1m (2013: £10.9m)

· Net debt at 31 March 2014 of £165.7m (31 March 2013: £133.2m)

· Overall capacity places unchanged at 2,116

· Interim dividend increased 12% from last year to 2.60p (2013: 2.32p)

· Acquisition of EQL Solutions in November 2013, extending Learning Services capability

Statutory Financial Highlights

· EBITDA(iii) increased 25% to £12.7m (2013: £10.2m)

· Profit before tax up 65% to £5.6m (2013: £3.4m)

· Diluted earnings per share increased by 40% to 8.47p (2013: 6.03p)

· Cash inflow from operating activities up 16% to £10.9m (2013: £9.4m)

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

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

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

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

"The continued provision of first-class social care which represents good value and is focused on successful client outcomes will remain the main market driver for CareTech's continuing growth.

"The strategy of taking the Group from a single division to now supporting four complementary and one learning division has served us well and enabled us to consistently keep growing our earnings over recent years in a changing market place. Most importantly during this period the Group's operating cash flow has grown significantly whilst its need for capital to grow has reduced drastically as we have developed services that require little or no capital. Together this puts us in a strong position to continue to grow earnings using the free cash from the business whilst reducing net debt.

"CareTech will continue to work in partnership with Local Authorities to deliver innovative services focussed on delivering outcomes for individuals."

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Chairman's Statement

A sound platform to continue to deliver strong growth

I am pleased to report a solid performance in the six months ended 31 March 2014. CareTech has delivered an impressive performance increasing revenue, underlying EBITDA and PBT on the comparable period in 2013. This further demonstrates the benefits of the Board's strategy over recent years to expand the care pathways.

During the period, the Group continued to develop and grow its four operating divisions, which come under the two outcome-based sectors of Adult services and Young People services. We have also acquired a new Learning services division. The growth going forward is underpinned by the strong starting point that we have built carefully over the past few years. We continue to extend both our geographic coverage and our outcome based care pathway range of services organically and through the purchase and sale of properties to meet the needs of our marketplace, specifically the requirement for greater acuity service provision. This ensures that CareTech is in a very strong position to address the demands of our evolving marketplace and the Board remains confident of the Group's performance for the remainder of the year.

Results

Group revenue of £61.5m (H12013: £56.6m) is 9% higher than the corresponding period last year and has delivered an underlying EBITDA(i) of £13.9m (H12013: £11.8m), representing growth of 18%.

During this period, we also continued to direct our strategic focus on taking the Group's operational platform to the next stage of development in what is a growing market. As a consequence, we have invested again in our systems and operating structure in order to provide the appropriate quality and resource to drive medium term growth organically, spending in total in the period £3.3m (H12013: £3.3m). Additionally, following our analysis in the past two years of demand trends, we are building two new services and two new properties are being developed into a new service and a school and a further five homes are being reconfigured to meet new demand and service requirements of care commissioners and these are planned to be completed in the next financial year. The underlying EBITDA(i) margin of 22.6% (H12013: 20.9%) has significantly improved on last year principally due to the net saving in rents and also services reconfigured.

Underlying profit before tax(ii) increased by 12% to £8.5m (H12012: £7.6m) and underlying diluted earnings per share(ii) was 13.07p (2013: 11.82p) This increase of 12% is in part as a result of the business combination in August 2013 which both improved the profit through lower rent and increased the number of shares issued.

During the past twelve months we have undertaken a business combination and an acquisition following the Board's decision two years ago to focus on organic growth rather than acquisitions, the transactions have been property related and the learning services business EQL Solutions.

A key feature of this business is its strong cash generation. In the half year operating cash inflow before non-underlying items of £13.1m represents a 94% cash conversion of underlying EBITDA(i), which demonstrates the continued strong quality of our earnings. As a result of this and the focus on organic growth, the net debt of £165.7m at 31 March 2014 is £2.8m lower than the year end position at 30 September 2013 of £168.5m even with the EQL Solutions acquisition.

In the trading update issued on 15 April 2014, CareTech announced that, whilst fee rate negotiations with Local Authorities were at an early stage, the Board anticipated that a slightly positive position would be achieved. Since then negotiations have progressed and the final outcome remains likely to be slightly positive.

As part of the refinancing in 2012 we had an independent valuation of the Group's 135 freehold properties which valued the portfolio at £225m. The properties acquired in 2013 had an independent valuation of £50m giving a total of £275m and underlining the business's strong asset backing.

Dividend

Our policy continues to be to increase the dividend broadly in line with the movement in underlying diluted earnings per share. Given the consistent earnings growth and cash generation the Board therefore is declaring an interim dividend of 2.60p (H12013: 2.32p) per share, to be paid on 28 November 2014 to shareholders on the Register of Members on 13 November 2014 with an associated record date of 14 November 2014. The full year dividend will be reviewed at the year end.

Service user capacity and occupancy

During the first six months of our financial year we have increased capacity by 30 places and closed 30 places. As a result, capacity at 31 March 2014 is unchanged from 30 September 2013 at 2,116 (31 March 2013: 2,198) for Adult services and Young People services.

The new capacity was made up of 20 additional beds in supported living services, 10 service users in domiciliary care and net capacity the same within fostering. The reduction in capacity comprises 16 beds in services closed for reconfiguration and 14 beds mainly in supported living. The beds within services for reconfiguration are expected to return to operational use within 12 months.

Occupancy levels within our mature services continue to be maintained at approximately 92% and 84% when taking into account our services under development.

Acquisitions

In November 2013, CareTech acquired EQL Solutions, a national provider specialising in employment and training services to young people and adults. The business was acquired out of the administration of Elmfield Training with the knowledge that it required turnaround. The turnaround is now well underway with the expectations of the new acquisition generating a modest EBITDA in the first 11 months to September 2014.

Its intensive pre-employment, development and apprenticeship programmes use public funds from the Skills Funding Agency to lay the foundations for individuals to achieve their career goals while helping to provide businesses with the vital skills they need in their workforce. Currently EQL Solutions supports around 4,000 individuals working in businesses such as Barclays, BHS, Nationwide, Phones 4u and UK Mail.

Early mapping with CareTech's core business has gone well. Good progress has been made in identifying the potential for EQL Solutions to add value to CareTech's attraction and recruitment of staff and their retention, helping new employees gain the skills and qualifications to grow a successful career in care. 

As well as supporting the workforce, EQL Solutions is also developing programmes for service users by enhancing the pathways to independent living and employment. Young People leaving care, for example, often don't know where to find the right job opportunities or have the opportunity to access employer-focused training. We can now bridge that gap by supporting young people as they make the transition to adult life. We are also exploring how best to help individuals return to employment after mental illness and to give people with learning disabilities the skills and confidence to gain employment so that they are able to live more independently.

For some time the Group has felt that the ability to offer pre-employment training to potential recruits, alongside apprenticeships and other development solutions for existing employees, would enhance and support many aspects of CareTech's outcome-based approach. We are delighted that the learning and development specialists in EQL Solutions are now working with all of the care divisions to continuously improve the standards of care and delivery across all our services, and we look forward to collaborating with our partners to spread best practice and innovative training across the wider industry.

Operating review

The Group now continues to realise the benefit of organisational improvements that were put in place over the past few years. In the half year, we have continued to strengthen the management structure and improve the efficiency of our processes following further investment in new systems which will continue through the second half of the year. We are seeing the benefits of the recent appointments of a Director of Personalisation and a Clinical Director as the two roles have a positive impact across the services. These appointments have put us in a strong position to benefit from a number of the commissioning opportunities by working in partnership with the NHS and Local Authorities.

In the half year we introduced the new care system for Foster Care which has recently gone live. We also have a new Time and Attendance system being implemented across all of the residential services in the coming months which will further our back office centralisation.

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

For the time being we continue to report the four operating divisions with their individual statistics and the new division of EQL Solutions. We have then reported Adult Services which is the total of Adult Learning Disabilities and Mental Health, and we have also reported Young People Services which is the total of Young People Residential, Fostering and EQL Solutions.

Adult Services

Adult Learning Disabilities - with a client capacity at 31 March 2014 of 1,430 places and first half revenue of £36.6m, this division represents just under 60% of the Group's activities. We continue to offer a flexible, person-centred approach with support being offered on an individual planned basis. Services include residential care, nursing care, individual and group supported living schemes and domiciliary care services. We also provide day opportunity programmes on an individual basis. Demand remains high for the support of people with learning disabilities and we recognise an increasing complexity of need for referrals to our specialist services. We have identified a small number of additional learning disability residential services to reconfigure into services that provide a greater level of acuity and these are being developed. Our focus on quality is now showing through with compliance for our services in England at 87% for our adult regulated services compared with a Care Quality Commission national average of 82%.

Mental Health - our care pathway for mental health includes a small community based "open" hospital, residential care homes, independent supported living and community outreach. We also include certain specialised services in this portfolio. At 31 March 2014 the division had a capacity of 150 places and generated revenue of £3.7m in the first half of our financial year up 18% on March 2013. We work in partnership with the NHS rather than competing against them. Our objective is to encourage and support discharge into the community, enabling the Trusts to work more efficiently and providing a route back to community life for people who have suffered a debilitating mental illness. Our staff team in Finchley at the Lyndhurst service won the National Care Team Award at the Great British Care Home Awards in April 2014.

Young People Services

Young People Residential Services - providing care, support and education to young people with complex behavioural problems, physical impairments, learning disabilities and emotional behavioural disorders ('EBD'). This division generated revenue of £10.6m and had a capacity at 31 March 2014 of 153 places. We operate services that cater for local needs but also manage certain highly specialised services that have a national catchment. Since 2012 the Group gained a foothold in Scotland and this is now being further extended with the opening of additional services in Fife. The division focuses increasingly on those children with the most complex needs and those who require our sophisticated clinical input. Two new services are being developed in Dudley in response to a new contract with the first opening in the next Quarter, and a property in Dumfries is being adapted to become a school. Our Dumfries facility is due to open in August.

Foster Care - with a capacity of 383 children we have established ourselves as one of the largest independent fostering agencies in England and Wales. The division had turnover of £6.6m in the six months to 31 March 2014. We have observed an increased demand for foster care for children who might otherwise have entered the residential care system. Foster care represents much better value for commissioners but the complexity of children being referred will often make the matching process quite complex, favouring larger agencies like CareTech with a greater range of well supported foster carers. Having established itself in England and Wales, the Foster Care division is now laying the foundations in Scotland to provide a care pathway alongside the Young People Residential Services and to offer the same well supported foster carer services platform as in England and Wales. The residential Family Assessment Centre has now been closed and the division focusses solely on Foster Care and there has been a major investment in new foster carers in the half year.

Learning Services - this new division is fully described in the Acquisitions note above. Revenue to 31 March 2014 was £3.8m in the five months post acquisition. Since then EQL Solutions were successful in winning the Phones 4u contract which went out to tender in April 2014 and also it has gained a pilot with Paddy Power to supply and train apprentices across their high street branch network.

Strategy

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

Commissioners also seek best value and we have responded by refining our range of service offerings, refocusing certain areas of provision and driving organic developments that deliver what commissioners want. We have opened reconfigured services designed to meet commissioner demands in the half year, and have also continued our strategy of purchasing sites so that we can provide services tailor-made to satisfy demand.

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

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

Our diversification policy means that we are now offering the full spectrum of social care services with the exception of traditional elderly care. We believe that our strategic position is now very strong, backed by an effective organisational structure, first class quality control and developing clinical infrastructure. In the medium term we are focusing on organic growth that builds on our

successful base position. However, we will undertake further strategic acquisitions that meet our key criteria by offering new expertise, geographical presence or consolidation opportunities.

Board changes

There have been no changes to the Board or the Remuneration Committee, Care Governance and Safeguarding Committee and the Audit Committee in the half year.

Outlook and prospects

The continued provision of first-class social care which represents good value and is focused on successful client outcomes will remain the main market driver for CareTech's continuing growth.

The strategy of taking the Group from a single division to now supporting four complementary and one learning division has served us well and enabled us to consistently keep growing our earnings over recent years in a changing market place. Most importantly during this period the Group's operating cash flow has grown significantly whilst its need for capital to grow has reduced drastically as we have developed services that require little or no capital. Together this puts us in a strong position to continue to grow earnings using the free cash from the business whilst reducing net debt. Moreover the investment in IT and infrastructure made recently, coupled with strengthening of the senior management team, provides greater opportunity to further grow revenue and earnings for the Group.

CareTech will continue to work in partnership with Local Authorities to deliver innovative services focussed on delivering outcomes for individuals.

Farouq Sheikh

Chairman 

12 June 2014

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

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

Condensed Consolidated Statement of Comprehensive Income

for the six months ended 31 March 2014

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

Condensed Consolidated Statement of Changes in Equity

at 31 March 2014

Condensed Consolidated Balance Sheet

at 31 March 2014

Consolidated Cash Flow Statement

for the six months ended 31 March 2014

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

Net debt in the balance sheet comprises:

Notes

1. Accounting policies

This interim report has been prepared on the basis of the accounting policies expected to be adopted for the year ending 30 September 2014. These are anticipated to be in accordance with the Group's accounting policies as set out in the latest annual financial statements for the year ended 30 September 2013.

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

The financial information in this interim report does not constitute statutory accounts for the six months ended 31 March 2014 and should be read in conjunction with the Group's annual financial statements for the year ended 30 September 2013. Financial information for the year ended 30 September 2013 has been derived from the consolidated audited accounts for that period which were unqualified.

The condensed consolidated interim financial statements for the six months to 31 March 2014 have not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

This unaudited interim report was approved by the Board on 12 June 2014.

2. Segmental information

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

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

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

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

2. Segmental information continued

The segmental results for the six months ended 31 March 2014, six months ended 31 March 2013 and year ended 30 September 2013 and the reconciliation of the segment measures to the respective statutory items included in the consolidated financial information are as follows:

Reconciliation of EBITDA to profit before tax;

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

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

3. Non underlying items

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

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

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

(iii) Adjustments relate to non-cash additional charges under IAS 17 which incorporates recognising the effect of future minimum lease payment uplifts on a straight-line basis. These leases were terminated in the previous financial year.

(iv) The present value of the future cash flows receivable from the operation of a leased asset has been assessed as being lower than the present value of the rental payments to which the Group is committed. During 2013 the Group provided for £73,000 being the present value of any onerous element of the remaining lease life.

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

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

(vii) A deferred tax credit of £106,000 (31 March 2013: £315,000 and 30 September 2013: £551,000) arises in respect of a charge relating to derivative financial instruments in (vi) above. In addition, a credit of £nil (31 March 2013: £678,000 credit and 30 September 2013: £2,712,000) arises in respect of changes in future corporation tax rates, together with a charge from the effects of full provision for deferred tax under IAS 12 amounting to £209,000 (31 March 2013: £404,000 and 30 September 2013 £158,000).

4. Financial expenses

5. Taxation

In the 2014 Budget it was announced that the main rate of corporation tax will fall to 21% with effect from 1 April 2014 and to 20% from 1 April 2015. The 23% rate was substantively enacted on 26 March 2013.

6. Earnings per share

Diluted earnings per share is the basic earnings per share adjusted for the dilutive effect of the conversion into fully paid shares of the weighted average number of share options outstanding during the period.