Half Year Results for period ended 30 June 2016

Circle Holdings plc

("Circle", the "Company" or "Group")

Half year results

For the period ended June 2016

London, 25 August 2016: Circle Holdings plc (LSE: CIRC), the employee co-owned health group, today announces its results for the half-year ended 30 June 2016.

Highlights

Core business highlights

• Group revenue increased by 6% to £66.5million from H1 2015

• Group gross profit margin improved by 3% to 30%

• Excluding Head Office recharges, net EBITDA from Circle operations increased 60% to £4.2m

• Patient satisfaction consistently high at 99% across Circle hospitals

• Patient choice driving NHS growth with over 87% of NHS work coming through the e-Referral system

• Circle Bedfordshire won HealthInvestor's Public/Private Partnership of the Year award

Growth highlights

• Announced 20-year management agreement with a Chinese investor group to develop and operate a state-of-the-art medical facility in Shanghai

• Selected as preferred bidder by Greenwich CCG to manage a five-year MSK integrated services contract, Circle's second

• Pilot rehabilitation offering planned to open in Q1 2017

Chairman's statement

"In the midst of a volatile UK health economy, I am happy that Circle has made a number of significant steps forward, but acknowledge that we still have more work to do.

Existing sites continue to further embed themselves in their local areas. CircleBath and CircleReading have maintained high clinical standards throughout the start of this year, but further EBITDA enhancement is clearly necessary. CircleNottingham has had another positive period, securing several local contracts and increasing patient volumes, particularly of inpatients, which has led the hospital to explore adding more inpatient beds to cope with the increased demand. The MSK service in Bedfordshire again proved itself to be a model of collaboration as it enters its third year of operation.

The last six months have been tumultuous in national politics, which has exacerbated uncertainty around the public funding of healthcare. This does not alter increasing demand for healthcare services: Circle's model is based more on long-term demographics than short-term policy, and we are pleased that we have maintained a healthy balance between NHS and private patients across the Group.

Looking forwards, we are delighted to have been confirmed as the preferred bidder to manage MSK services for the adult population in Greenwich and look forward to finalising contractual terms with commissioners before the end of the year.

Circle's experience in MSK and orthopaedic procedures has enabled us to identify a gap in the market for rehabilitation services in the UK. In many European countries, rehabilitation services are provided on an inpatient basis and typically in a lower cost setting than in the UK. In light of growing demand for rehabilitation services (orthopaedic, neurology and cardiology) and the emergence of a national "bed blocking" problem within the NHS, Circle believes there is a significant addressable market for inpatient rehabilitation services and we anticipate rolling out an offering at our Reading facility in Q1 2017.

Finally, we are also broadening our horizons beyond the UK market. This half-year has seen Circle deliver on one of our major new business opportunities, as we announced the signing of a contract with Chinese partners to run a premium integrated health clinic in Shanghai. It has long been our intention to export our recognised standards of patient care to other markets, and the signing of this contract moves us one step closer to that goal.

The Board and management continue to support the business as it evolves and grows. Even as UK healthcare funding remains in a state of flux, we are confident that as Circle continues to pursue its essential ideas of patient focus, clinical leadership and staff engagement, it is well-placed to thrive."

Michael J Kirkwood CMG

Chairman

Chief Executive Officer's Statement

"This half saw Circle increase revenues by 6%, patient volumes by 1%, and reduced EBITDA loss to £1.9m. 

The strategy we outlined last year was, first to continue to grow our existing sites' revenue and margins; and second, to take the experience and intellectual property that we have developed and apply it to new settings and markets, both on our own and with other organisations who offer a compelling partnership.

The continued growth of existing sites has seen some positives and negatives in performance between sites, but in broad terms, the Group continues to move towards sustainability.

Being selected as preferred bidder to manage a second integrated MSK service contract and the management agreement in China is evidence that the second component of our strategy is also yielding results.

Combined with our innovative rehabilitation product, the expected start to our fourth hospital in Birmingham, I am confident that Circle's strategic direction is correct."

Steve Melton

Chief Executive Officer

For further information, please contact:

Circle Holdings plc Tel: +44 20 7034 5270

Steve Melton, Chief Executive Officer

Paolo Pieri, Chief Financial Officer

Elizabeth Matthews, Investor Relations Lead

Numis Securities Tel: +44 20 7260 1000

Michael Meade, Nominated Adviser

Alex Ham, Ben Stoop, Corporate Broking

An analyst briefing and live conference call will be held at 12:00 BST today at the offices of Numis, 10 Paternoster Square, London EC4M 7LT. If you are unable to attend please contact Elizabeth Matthews on 0207 034 5270 for dial-in details.

Chief Executive Officer's Report

Operating Environment

UK healthcare is seeing an ever increasing demand for healthcare services, a trend that is unlikely to subside in the near future due to the projected population growth, in particular in the over 65 age group.

These unprecedented pressures facing the NHS has seen an increase in 14% of its patients waiting longer than the prescribed 18 weeks for treatment and an increasing number of delayed transfers of care.

The impact of these pressures on the private sector has been an increase in referrals of NHS patients along with growth of the number of patients willing to pay for treatment. In contrast, private medical cover, traditionally the largest funding source for private hospitals, has seen only very marginal growth.

What has become apparent in recent years is that the opportunity for improved efficiency is greatest when considering the whole system, as opposed to individual silos of provision within the system. This is in line with the thinking set out in the NHS Five Year Forward View which advocates a move towards more joined-up healthcare where principles of early care and intervention are applied. Our Bedfordshire MSK service is an excellent example of how this works in practice; delivering cost savings across the system while simultaneously providing the patient with an enhanced experience.

A similar principle underpins the need for a more coherent rehabilitation offering in the UK. Too many patients, capable of independent or supported living, are either leaving hospital without the required onward care or are continuing treatment in a high-cost acute care setting. Rehabilitation can offer cost savings to the healthcare system and better meet the patient needs.

Hospital Services

All Circle hospitals made steady progress in this financial period, with Nottingham in particular performing well.

The attraction of treatment at a premium facility continues to be demonstrated at CircleBath where we have seen continued growth in patient volumes and revenue growth of 4% and 7%, respectively. Furthermore, a majority of CircleBath's NHS patients (82%) were treated at the facility because they chose to be, rather than being transferred from an NHS hospital. We are delighted at the continued recognition CircleBath is receiving from patients, demonstrated by a recommendation rate of 99%.

Previous discussion on CircleBath has highlighted the expenditure on agency staff and to date in 2016 this challenge continues. Efforts to fill permanent nurse vacancies and build up a staff bank have been slower to materialise, with CircleBath seeing an increased expenditure on agency staff to £475,000 in this period (H1 2015: £326,000). We have been affected by the national nursing shortage more at CircleBath than our other facilities due to its location and a more competitive marketplace. Work continues to ensure CircleBath is an attractive working environment and to ensure that we are innovative in our recruitment methodology to deal with the shortfall of nurses in the area. While we do expect our spending on agency staff to reduce, challenges are likely to continue into the second half of 2016, which will impact margins, with improvements targeted towards the end of the year.

In contrast, CircleReading has reduced its agency spend from £328,000 in H1 2015 to £209,000 in H1 2016. We maintained a high level of patient satisfaction with 100% of patients recommending the service and over 93% of our NHS patients came to the hospital through their own choice.

CircleReading saw slower-than-expected growth due to discontinuing some of our less profitable specialties which has allowed an increased focus on core specialities. We were pleased to continue our growth in orthopaedics with a 15% increase in the number of joint replacements completed, a trend we expect to see continue into the second half of 2016, contributing to an increased H2 revenue. With an expanding number of doctors with practicing privileges at the facility, the expected introduction of our pilot rehabilitation model in early 2017, and the launch of health screening we expect improved results from prior year and positive full year EBITDA in 2017.

Last year we were delighted to report on CircleNottingham's 'Outstanding' CQC rating for surgery and now we have more recognition of quality offered by the facility and its staff. The GMC have approved Circle Nottingham to offer training to post-graduate NHS doctors, the first independent sector provider to hold this approval. 

CircleNottingham continues to go from strength to strength as this period saw another substantial increase in total revenue of 7% over the same period in 2015; driven largely by increased activity in orthopaedics. Consequently, work is underway to expand the short stay unit from the current 11 beds to accommodate an additional 5 beds.

As part of CircleNottingham's continued integration into its local healthcare economy we were delighted that the facility secured two contracts from local CCGs to deliver an integrated clinical assessment and treatment service for orthopaedics. EBITDA for CircleNottingham will continue its positive trend but will be slightly offset by the updated management fee charge which better reflect the use of head office management resources across our Circle facilities.

Other Circle Services

Like CircleNottingham, the Bedfordshire MSK service has also received recognition of its quality and was recently awarded 'Public-Private Partnership of the year' at the 2016 HealthInvestor Awards.

The contract in Bedfordshire is to manage the services for musculoskeletal conditions for the entire local adult population within a capitated budget. During the past six months, more patients have received the most appropriate treatment first time around as we increase the level of referrals directly to our triage hub. All patients receive a choice of where to receive treatment. Patient satisfaction and outcomes remain very high, demonstrating the ability of the service to deliver not only good financial results for the commissioner but also a superior outcome for patients.

Outlook Statements

Each site has contributed to our improved Group financials, where we have seen a further reduction in EBITDA losses of 11%.

On a full year basis, we expect to achieve solid progress in our core business and anticipate overall Group results to deliver strong improvement versus last year. As mentioned, there are some specific operational challenges at CircleBath and CircleReading that may result in a slightly weaker than expected financial performance at those sites, however, with a focussed recovery plan now in place, we believe many of these challenges will be resolved by the end of 2016.

CircleBirmingham

We hope to confirm the commencement of the construction work for our fourth new-build facility, CircleBirmingham, in Q4 2016. There have been delays in commencement to allow for some planning changes in anticipation of a flagship rehabilitation facility to be incorporated into the building and also due to more complex ground conditions than originally anticipated. This facility has been designed to be built as a nucleus hospital, incorporating three theatres initially with potential for expansion at a later date as and when the market dictates. At present, we plan to complete construction and open mid-2018. 

Circle Rehabilitation

We have spent time with our clinical partner to adapt our offering to the UK market. We are now looking to finalise the terms of our partnership in Q4 2016.

With a focus on the latest technology and evidence-based outcomes, our rehabilitation model is synergistic with our existing business model as it allows us to extend our service offering to rehabilitation across many of our core specialities. In addition, rehabilitation provides a solution to many current problems facing the wider healthcare system by providing a more appropriate level of treatment at a lower cost.

Current intentions are to introduce a pilot rehabilitation offering in early 2017, utilising space within CircleReading hospital. Designs for our new-build Birmingham hospital are being revised to incorporate a full-scale rehabilitation facility of 120 beds with a view to open in mid-2018.

We are currently assessing other UK locations for rehabilitation facilities, as well as holding a number of discussions with individual Trusts. We envisage that the market for rehabilitative care will see considerable growth in the next 5-10 years, for both the public and private sector.

Circle Harmony

We were pleased to have recently announced our plans for opening premium brand clinics in China through a joint venture, Circle Harmony, with our partner Deep Sea Capital. We believe we have identified a gap in the market to provide a premium service that offers the capacity to meet growing demand for high quality private healthcare in Chinese cities as well as utilising the best quality local doctors in China through partnerships with state hospitals. The service will offer a range of primary care, diagnostic and outpatient services, as well as providing reliable links for patients to leading hospitals, both in China and internationally for specialist treatments

Circle Harmony has entered a 20-year management agreement with a group of investors, who have committed RMB 200 million (c.£23million) to support development of the first facility in Shanghai. 

The investment comes from an equal split of state-owned and private investment organisations including China Taiping, one of China's largest insurance companies and also XinXing, a global Fortune 500 conglomerate. We anticipate opening the initial facility in Shanghai in late 2017/early 2018 with a view to opening an additional nine clinics within six years.

Circle will provide development and clinical management services to the joint venture and will be able to recover costs associated with these services, roughly £700,000 per clinic. Once the facility is operational, Circle will receive a share of profits projected to be circa £0.5m per year, per facility. In addition, Circle Harmony has received warrants equal to 20% of the investor-owned entity (of which, Circle's share will be 10%).

By entering this fast growing international market, Circle is able to leverage its considerable experience in providing a premium private healthcare experience for patients, while minimising the risks of operating in an emerging healthcare market by working alongside reputable Chinese organisations that fully understand the financial and clinical environment in which the facilities will operate.

Greenwich MSK Service

Finally, we were pleased to announce recently that Greenwich CCG have confirmed Circle as the preferred bidder to provide integrated musculoskeletal services in Greenwich.

Under the proposed five-year arrangement, which is subject to contract, Circle will be responsible for managing MSK services for 276,000 Greenwich residents. The contract is valued at approximately £73.7 million and is expected to deliver estimated savings of £12 million for the CCG over the initial five-year term, which is renewable for up to two additional years.

Our approach in Greenwich will see Circle introduce the same kind of innovation and reform that have enabled us to ensure more appropriate and timely clinical care for Bedfordshire patients. Finalisation of the contractual terms will take place over the coming weeks with service commencement expected in Q4 2016.

Steve Melton

Chief Executive Officer

Chief Financial Officer's report

Financial review

Introduction

The first half of 2016 saw Group revenue grow by 6%, gross profit improved by 16% and operating losses1 reduced by 32% compared to the same period in 2015.

The core operations of the Group continue to experience steady growth while maintaining the delivery of high quality healthcare. Revenue growth at the hospital sites has been driven by a combination of: a larger proportion of the orthopaedic market share being captured; an increase in the number of NHS e-referral slots published to meet heightening patient demand; and the recruitment of new specialist consultants into our Circle partnership. We have seen increases in inpatient and daycase activity as well as improvements in revenue per inpatient/daycase across the Group. We continue to see an increase in activity that is driven by patients choosing to come to our Circle hospitals: this is indicative of the high quality care that we offer to all our patients. Specialised orthopaedic procedures, specifically joint replacements, have increased by 27% on prior year across all our hospital sites. Our growth in the orthopaedic market is reflective of our strong and innovative musculoskeletal expertise.

Group gross profit increased by 16% to £19.8 million and gross profit margin by 3% to 30% on the same period in 2015. Our efforts to improve the operational efficiency of the business have produced some positive results, reducing EBITDA2 loss by 47% on prior year to EBITDA2 loss of £1.9m. EBITDA results have improved on prior year across all Circle facilities and significant cost savings were also achieved at Head Office of approximately £0.9m year-on-year. At our operational sites, the net EBITDA profit excluding Head Office management fee was £4.2m, 60% higher than the profit achieved in the first half of 2015.

The Group generated an operating loss before exceptional items and Project Reset charge of £3.5m, an improvement of 32%, while the 'loss per share' now stands at 2.2 pence, improved from a 'loss per share' of 2.5 pence.

We have achieved some promising results for the first half of 2016 and looking ahead at year end, we anticipate the core business to grow in line with overall expectations while the cost challenges experienced in the first half are expected to wane. 

Highlights

Review of performance

Patient volumes continue to increase at our Circle hospital facilities, particularly in daycase and inpatient activity. Outpatient activity has increased by a smaller percentage, primarily due to outpatient activity at CircleNottingham, where the number of follow up appointments has significantly reduced. In addition, our telederm service has created an innovative and more efficient method of diagnosing dermatology conditions, enabling the patients to receive care remotely.

CircleNottingham's short stay unit continues to garner recognition in the local market, with increasing number of patients actively selecting CircleNottingham as their favoured provider for treatment. Inpatient volumes increased by 62% from 2015. The increase is primarily in orthopaedic and gynaecology procedures, resulting in inpatient revenues contributing towards 8% of total revenues (H1 2015: 5%). As the Group's most mature asset, we are yet again encouraged by CircleNottingham's continuing strong growth performance. We anticipate that local commissioners will commence in early 2017 the process to re-procure the existing contract to operate the Nottingham Treatment Centre, which ends in July 2018.

Total patient volumes at CircleBath have grown 4% on prior year and total revenues increased by 8% on prior year to £13.0m for the first six months of 2016. We envisage a similar level of growth to continue into the second half of 2016. As mentioned in the Chief Executive Officer's Report, we are currently behind our margin targets, a key area of focus that we are working hard to address. Nevertheless, we have seen some positive growth trends in the first half, with average daycase and inpatient revenue per case growing by 4%. The number of joint replacements conducted in H1 2016 is 14% higher than prior year.

CircleReading has also increased patient volumes by 4%, driving revenue growth of 3% on prior year. The increase in activity is attributable to a rise in orthopaedic procedures undertaken while we have also grown our daycase offerings by appointing two new consultants, one specialising in shoulder procedures and the other in gynaecology. We expect this positive growth to further improve in H2 2016 following the roll-out of various plans to extend market reach.

Overall, however, we are seeing a positive trend in increasing the Group's overall gross profit margin and our two largest facilities, Circle Nottingham and CircleReading, each improved gross profit margins by 2% on prior year.

In the first half of 2016, CircleBedfordshire MSK have made further advances in engaging Bedfordshire GPs to utilise the referral process managed by Circle: 95% of system-wide referrals now come through the Circle Hub (H1 2015: 86%). Although we have seen an increase in patient referrals, the combination of greater control of the patient pathway with patients receiving more appropriate treatment leading to an improvement in financial results. CircleBedfordshire has grown in line with management expectations and we plan to continue our focus to reduce circumvention of the Circle triage facility by working closely with Bedfordshire CCG and local providers.

At a Group level, we are pleased with our continual progress to reduce operating overheads. From January 2016, the Group management fee allocation method was revised prospectively to better reflect the use of head office management resources across our Circle facilities. The impact of this is an increase of management fees recharged to Circle hospitals of £0.5m.

Closing cash balance as at 30 June 2016 was £12.7m. Net cash generated from operating activities was £0.7m (H1 2015: £3.7m), with the variance on prior year attributable to the timing of working capital.

In the 2015 Annual Report, we noted that the Manchester land owned by Circle was being marketed for sale. Negotiations for sale are now in advanced stages and we expect to complete the sale by the end of 2016. 

This month, the latest policy proposals for the 2017 to 2019 NHS national tariff were published by Monitor. One of the most significant changes proposed is a tariff decrease for orthopaedic procedures and outpatient consultation revenue. As in prior years, when similar tariffs have been proposed, we will engage with Monitor, professional bodies and other NHS and independent sector providers in respect of these proposals that we believe could have an adverse impact on waiting times for patients.

The first half of the year demonstrated good growth in our core business and we are now set to further enhance our strategic model with complementary growth options, both in the UK and abroad.

Paolo Pieri

Chief Financial Officer

Footnotes

1 Operating loss before exceptional items and Project Reset charge.

2 EBITDA loss before exceptional items and Project Reset charge.

3 Project Reset charge relates to the IFRS 2 share-based payment charge for share options granted to Circle employees and clinical partners.