Interim Management Statement and Board Changes

25 July 2013

SYNERGY HEALTH PLC("Synergy" or "the Company") 

Q1 Interim Management Statement and Board Changes

Synergy (SYR.L), a leading provider of specialist outsourced support services to health-related markets, is pleased to provide an update on trading performance since 31 March 2013.

Trading Update

Trading for the quarter has been in line with the Board's expectations with reported revenue for the three months to 30 June 2013 increased by 21.9% to £96.6 million (Q1 2012/13: £79.3 million). Underlying revenue, excluding currency effects, was £94.3 million, 19.0% above last year and overall organic growth is in line with last year. There has been a slightly slower start to the year with US healthcare volumes static as a result of structural changes in the healthcare market filtering through from the Patient Protection and Affordable Care Act (PPACA) together with the continued impact of austerity measures in the UK and Europe. Operating margins for the quarter were ahead of plan despite increased investment in business development.

Organic growth was up 6% for both Applied Sterilisation Services (AST) and Hospital Sterilisation Services (HSS). The full year effect of price deflation in the Dutch linen business is reflected in Healthcare Solutions revenues down 8.7%.

Underlying revenue in the operating regions was as follows:

* Underlying revenue excludes the impact of currency effects

** Americas Total includes the SRI/Surgical Express acquisition ('SRI')

UK & Ireland

Revenue growth in the region continued recent trends with steady growth of 5.8% and 5.0% in HSS and AST respectively. During the quarter we won two private sector contracts worth £0.6 million pa. However, the NHS continues to be a challenge with one of our largest HSS bid prospects recently deferring a decision on outsourcing for another year. This decision reflects the difficulties of an environment where broader political and economic challenges dominate the current agenda. The recent strengthening of the Care Quality Commission could ultimately have a positive effect on the outsourcing market with improved enforcement of sterilisation standards that we believe has had less focus in recent years. The AST business continues to perform well with relatively high utilisation rates and we may expand our capacity if the conditions allow. The UK linen business is operating well and the healthcare products business continues to improve operating margins although has yet to complete the replacement of legacy products with new product launches.

Europe & Middle East

The region continued to operate positively with solid AST revenue growth of 8.6% offset by the full year effect of price deflation in healthcare linen revenues. Growth in AST is expected to be stronger in the second half of the year having intentionally delayed cobalt loadings to the autumn. We have had a setback with Marcoule where a recent change in the regulatory environment for new French facilities requires a minor modification to the safety systems. We are taking all reasonable steps to accommodate customers who are intending to use the facilities in Marcoule.

Last year's price competition is reflected in the Dutch linen business with a contraction of 11.6%. Whilst we remain confident that prices are now stabilising, we still face some short term impact from recent tenders that have either been won on lower prices or abandoned as we no longer accept marginally priced business. We are in the process of putting in place new management for the business and as part of this change we may update our strategy with the intent of broadening the available market.

Asia & Africa

The expanded management team in Asia is having a positive impact on prospects for the region. AST grew by 6.5% whilst HSS grew by 6.7%. AST had a slow start to the year related to the subdued US demand but we have seen incremental improvements as the year has progressed. The newest gamma facility in Malaysia, recently outsourced to Synergy, is also performing well and ahead of plan. Our HSS facility in Suzhou continues to gain new customers, recently winning the Suzhou Kowloon Hospital, which is one of Suzhou's premier hospitals. The new facility in Chengdu is expected to be completed by January 2014 and further progress is being made with a bid in Nanjing. Our marketing partnership with Sinopharm is making progress with three tangible proposals in development and these will shape further discussions with Sinopharm in September during a planned review.

Americas

Despite evidence from our customer base indicating an absence of growth in the number of surgical procedures in the US market as a result of the PPACA, the larger opportunity for Synergy is new contract wins and in this regard we remain very positive about overall prospects for the growth. The HSS and Reusable Sterile Services (RSS) businesses that were formerly part of the SRI Surgical Express acquisition last year, continue to perform well. A solid bid pipeline reflects the market opportunity and we anticipate having one of the preferred bidder facilities under construction early in the new calendar year. As part of our ambition to establish market leadership in the US we will be opening a technical training facility for the HSS industry, in Tampa.

The US AST business grew by 8.3% constrained by available capacity. We have allocated capital to build an additional electron beam facility once certain contractual preconditions are fulfilled. In Costa Rica our primary customer is on track to revalidate their products for the late autumn, but in the short term we continue to operate under-utilised facilities.

Strategy

The group remains focused on continuing to expand its sterilisation services on an international basis, with a particular emphasis on Asia and the Americas. The Board recognises that the economic malaise in Europe and the UK, particularly with regard to publicly funded healthcare, is creating a structural change in the market that needs to be addressed. We have initiated a review of options in which we are examining the merits of developing adjacent B2B services that could help to reinvigorate growth in these regions, and we expect to update the market when we report half year results in November.

Changes to the Board

After 11 years serving on Synergy's Board Sir Duncan Nichol has announced that he will retire at the end of the financial year on 31 March 2014. After consultation with a number of Synergy's shareholders the Board feels that this is an appropriate time for Dr Richard Steeves, the Group CEO, to succeed Sir Duncan as the Non-Executive Chairman of Synergy with effect from 31 March 2014.

Dr Adrian Coward, the Regional CEO for the UK and Ireland will step up to take over from Richard, having successfully led his region for three years. Adrian joined Synergy in 2004 as the Group IT Director, became Managing Director of HSS and joined the senior executive board in 2008, and subsequently became the Regional CEO of the UK and Ireland when the group restructured in 2010. Adrian has a very deep understanding of all of Synergy's services, is highly regarded by the senior management team and customers alike, and in recent years has been broadening his experience of the group's global operations assisting with projects in Asia and the United States.

As a result of these changes the Board will expand the number of independent non-executives to four including the appointment of a senior independent Non-Executive Director, and this latter appointment is at an advanced stage.

Outlook

Challenging markets in Europe and the UK are offset by exciting opportunities in Asia and the US, which is reflected in the strategy set out 18 months ago when we took the decision to enter the US HSS market early. We remain confident that the strategy is correct, and subject only to short term timing issues on material new contracts, the board remains confident in the outlook for this year and beyond.

Sir Duncan Nichol, Chairman said:

"I am confident that we will achieve a smooth transition with the Board changes, building in continuity of leadership and maintaining strength and depth in our regional organisations"

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