Interim Management Statement

Thursday 14 February 2013

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

Q3 Interim Management Statement

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 30 September 2012.

Trading Update

Reported revenue for the nine months to 30 December 2012 increased by 13.9% to £264.7 million (Q3 2011/12: £232.5 million). Underlying revenue, excluding currency effects, was £273.0 million, 17.4% above last year.

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')

Underlying growth by service sector reflected good progress within our two sterilisation businesses, whilst our linen business suffered further from price compression in Holland and our products-based business recorded lower revenues as a result of both rationalisation to improve product profitability, and lower NHS demand.

Operating margins decreased 0.3% on the comparative period as a result of the dilution created by the acquisition of SRI Surgical Express, and further margin pressure in Europe caused by extreme price compression in the Dutch linen market. Net debt was £191.2 million.

UK & Ireland

Revenue in the region remained steady, with the expected slowdown in AST and HSS growth reflecting the general economy. We have doubled capacity at our small ETO facility in Thorne, UK, and we are expecting to be processing additional work early in the new fiscal year. New outsourcing opportunities in the HSS market are slowly surfacing, with £0.85 million p.a. of new contracts signed and three more bids at an advanced stage. Our healthcare linen business has won £1.8 million p.a. of new contracts starting between now and the end of the year. Our products-based business is now profitable, but year-on-year revenues are down as a result of both discontinuing unprofitable work, and lower demand from the NHS.

Europe & Middle East

AST revenue has continued to grow despite the difficult economic background. Our Swiss gamma and x-ray facility has been fully integrated into the Group and is contributing to the region's good AST growth rate. Our new facility in Marcoule is waiting for final approval from the French Authorities, which is now expected at the end of May, some eight months later than originally planned.

We have recently appointed a new managing director for Europe & Middle East to help unlock growth opportunities in our HSS business, as well as to continue to develop our regional AST services. Although Europe is a difficult market, we remain focused on long-term growth prospects in our sterilisation businesses.

Our Dutch linen business has continued to be a challenge with further price declines eroding revenue and, more importantly, margin. The region has embarked upon a further radical cost reduction programme (including another facility closure) to minimise the impact of price competition, but we are expecting regional margins to decline by approximately 3% notwithstanding these changes. It is clear to us that the pricing environment is unsustainable and if this continues, will result in a lossmaking industry. After careful review, we have decided to try to extract Synergy from the price war with a change of strategy that will see us remove a degree of excess capacity through further site closures, whilst at the same time withdrawing any further price discounts.

Asia & Africa

Revenue growth in Asia & Africa continued to be satisfactory, but has been constrained by AST capacity in Thailand and Malaysia. In Malaysia we are close to securing a new outsourcing opportunity that will be worth approximately £1.0 million of additional revenue in 2013/4. In Thailand we have won a contract to provide EtO services for one of our largest global customers. Subject to agreeing final details, a new facility will be built over the next year and will come on line in 2014.

In China we have signed a Memorandum of Understanding (MOU) with a large State Owned Enterprise in the healthcare market, to develop a network of HSS facilities. The MOU is expected to lead to a joint marketing agreement after the Chinese New Year, and potentially a joint venture agreement towards the end of the summer.

Americas

The Americas continues to be Synergy's highest growth region, with strong AST growth and the first contribution from our SRI acquisition. The AST facilities in the United States have performed well, but we have experienced customer delays in Costa Rica that have delayed the start of our second electron beam facility for at least two more quarters. The delays are the result of one customer's quality and regulatory issues, and are outside of Synergy's control.

Our acquisition of SRI has continued to progress well and is performing ahead of expectations. We anticipate margins approaching 10% by the year end as a result of the reorganisation of our operations. Further margin improvements will arise from revenue growth across the business. Following the introduction of a new range of surgical gowns, a $0.8 million p.a. contract was recently signed. The new product has been well received and we expect most of the $5 million p.a. bid book to convert over the coming six months. $0.6m p.a. of new HSS business has been won together with a $0.13m HSS consulting assignment. Most of the current HSS bid book has a good probability of converting, with bids valued at approximately $25 million p.a. being decided in the coming months.

Outlook

The outlook for 2014 and beyond is very healthy for Synergy as the growth prospects for our sterilisation businesses remain strong across all four geographic regions, and our SRI acquisition is progressing well. In AST and HSS we have more outsourcing bids underway than we have seen at any time since 2007. Our focus is on retaining margin over the next two quarters, where revenues will fall short of our original plan owing not only to the linen situation in Continental Europe, but also the delayed start of AST services at our Marcoule and Costa Rica facilities. As a result of the revenue shortfalls and the short term pressures on operating margins, we are taking aggressive measures to control costs without damaging the growth prospects of the underlying businesses, especially in the United States. We expect earnings to be within the range of market forecasts, with next year's outlook being underpinned by bids currently in progress. Synergy will provide a further update at the end of the next quarter in April, and will report preliminary results on 5 June 2013.

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