20 September 2017

Cambian Group plc

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

Unaudited results for the six months ended 30 June 2017

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 Exceptional items are defined in the accounting policies (note 1).

³ 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 and extinguished items, net of the tax effect of these adjustments.

⁴ Re-presented (note 11).

·      Underlying business has performed in line with the Board's expectations despite managing the complex separation issues.

·      Revenue growth of 6% to £100.6m (2016 H1: £94.5m) from higher severity services and increases in fees, and including one-off transitional services income.

·      Adjusted EBITDA of £8.4m (2016 H1: £8.3m) reflects the growth in revenue, offset by the one off impact of the loss of assets temporarily stranded following the sale of Adult Services business, higher overheads to accelerate the completion of the transitional services agreement and an increased provision in relation to "sleep-ins".

·      Strong balance sheet with net cash of £122.3m following the repayment of all bank debt at the end of 2016, and before the return of capital.

·      Special dividend of £50m returned to shareholders on 15 September 2017.

·      Dividend reinstated with interim payment of 0.14 pence per share (2016 H1: nil pence).

·      Completed the transitional services agreement following sale of the Adult Services business.

·      Finalised the closing statement for the sale of the Adult Services business, with an adjustment which reduces the consideration by £4.0m to £379.0 million excluding expenses.

·      Cost reduction programme underway.

Saleem Asaria, Chief Executive Officer, commented:

"Following the successful sale of the Adult Services business the Cambian Group is now focused on being a market leading provider of specialist Children's Services. Our strategy to move more of our portfolio to higher severity is progressing well and the Group is performing in line with the Board's expectations. Furthermore, with a strong balance sheet and confidence in the Group's outlook in the medium term, we have reinstated the dividend as planned."

A results presentation will be held for analysts at 9.00am today at the offices of Investec Bank Plc, 2 Gresham Street, London EC2V 7QP. If you would like to attend, please confirm your attendance to james.gray@instinctif.com.

About Cambian:

Cambian Group is one of the UK's leading children's specialist education and behavioural health service providers. Founded in 2004, it has grown to become a significant partner to the UK public sector. The Group's services have a specific focus on children who present high severity needs with challenging behaviours and complex care requirements. Cambian employs over 4,300 people across a portfolio of 224 residential facilities, specialist schools and fostering offices located in England and Wales.

Overview

The underlying performance of the business in the first half of 2017 has been in line with the Board's expectations despite managing the complex issues surrounding the separation of the Adult Services business. 2017 remains a year of transition for the Group and significant progress has been made.

Revenue increased by 6% to £100.6 million (2016 H1: £94.5 million) primarily from the increase in fees from moving more of our portfolio to higher severity services.  Revenue in 2017 H1 includes £2.4 million received from the Transitional Services Agreement ("TSA") which ended on 28 June 2017.  Underlying revenue, excluding income from the TSA, increased by 4%.

Adjusted EBITDA increased by 1% to £8.4 million (2016 H1: £8.3 million), with an adjusted EBITDA margin of 8.3%, representing a stable performance during a period of transition. This increase is despite the lost EBITDA from a small number of assets temporarily stranded following the sale of the Adult Services business ("Stranded Assets") and the higher overheads incurred to accelerate the completion of the TSA.  In addition, as a result of the proposed changes by the Government to "sleep-in" charges, the Group has recorded provisions for these potential costs which were not included in the corresponding period in 2016 H1.

Operating profit before exceptional items was £0.3 million (2016 H1: £1.0 million). Loss before tax for the period was £1.2 million (2016 H1: £12.7 million loss).

Average occupancy levels remained consistent during the period at 1,299 places (2016 H1: 1,309) and includes approximately 370 new admissions. The average daily fee, excluding Fostering, increased by 6% to £353 (2016 H1: £333).   

The Group's closing capacity at 30 June 2017 was 1,640 places (2016 FY: 1,744 places) reflecting a planned net reduction of 104 places since the end of 2016. The reduction, predominately within the Specialist Education division, relates to sites re-positioned to enable Cambian to accommodate children with higher acuity needs.

Closing occupancy was 1,332 places, reflecting an increase of 62 places from the end of 2016, giving a closing utilisation of 81% (2016 FY: 73%). Excluding the impact of reduced capacity from re-positioning, closing occupancy was 76%.

Average occupancy in the Fostering division remained consistent at 641 placements during the period (2016 FY: 642).

Disposal of Adults Services business

The disposal of the Adult Services business at the end of 2016 enabled the Group to fully pay down its bank debt, return £50 million to shareholders and focus its attention on the Children's Services business. As part of the sale the Group entered into a TSA to provide services relating to IT, finance, procurement and estates to the purchasers.  These services ended on 28 June 2017, ahead of schedule, allowing the Group to focus on its core operations.

As part of the transaction five Stranded Assets, which formed part of the Adult Services business, were required to be transferred back to the Group following certain regulatory approvals. The transfer of the Stranded Assets has taken longer than originally envisaged and this delay has resulted in the Group not being able to benefit from the EBITDA from these assets as it had originally planned. All of these assets were successfully transferred back to the Group by 30 June 2017.

The Sale and Purchase Agreement ("SPA") for the disposal of the Adult Services business required agreement of a Closing Statement, as is customary in such transactions.  This was concluded on the 19 September 2017, after agreement was reached between the Group and the buyer, and is reflected in the results for the period.  Following a net adjustment of £4.0 million to the buyer the final consideration for the Adult Services business is £379.0 million excluding directly attributable costs.

Focus on re-positioning of the Children's Service business

There is a recognised shortage of high quality specialist education and behavioural health services for children in the UK. The higher the severity of need, the more significant the shortage and the Group estimates there are approximately 88,000 children who would fall into Cambian's core target market. The vision is to become the highest quality provider of specialist education and behavioural health services for children. To this end, the Group took the strategic decision to develop the Children's Services business around a differentiated integrated recovery model incorporating care, education and therapy for children with the highest needs.

This vision has involved the Group re-positioning more of its Residential Care and Specialist Education services and focusing its Fostering services entirely on higher acuity therapeutic fostering.  The Group has made significant progress on this transition. 

The Group's focus is to fill existing capacity, increase fee levels and reduce the cost base to increase margins. Good progress has been made on increasing average fee levels and average occupancy levels have been maintained with an increase in occupancy at the period end. 

Cost base restructuring

Pursuant to the sale of the Adult Services business, and the transition to focus on higher acuity in Children's Services, the Group is undertaking a restructuring exercise including the right-sizing of the cost base.  Post the completion of the TSA further restructuring is taking place particularly in the finance, estates and HR functions.  Overall, the Group will reduce headcount by 60 people and is looking to make further cost savings in procurement, estates and fleet.  The Group is well underway to achieving its goal of creating the optimal overhead structure and to improve margins.

Processes and systems

With the ending of the TSA, the Group has now started upgrading its processes and systems to enable it to operate more efficiently and to support its measured growth plan.

Quality and regulatory

The Group remains committed to providing the highest quality specialist education and behavioural health services to children. Its regulatory scores continued to be strong with 82% of services rated Good or Outstanding with Ofsted or CQC as at 30 June 2017. It is especially pleasing that 11% of sites have received an Outstanding inspection report.

The sector continues to see an increasingly stringent regulatory environment with an enhanced rigour of inspections. This is welcomed and we are well-positioned to benefit from this drive to improve the focus on quality of care. Our aim is to achieve Good or Outstanding ratings in all of our facilities. In the short-term some fluctuation may be expected during the transition to higher severity services.

Board and management

Anoop Kang joined the Board as Chief Financial Officer on 12 July 2017. Anoop's most recent role was as Group Financial Controller at Kier Group plc, having previously held senior positions in the construction industry. Martin Hopcroft having joined the Group in late 2015 stepped down as Chief Financial Officer on this date.

At the conclusion of the Company's Annual General Meeting on 5 June 2017, both Alison Halsey, Chair of the Audit and Risk Committee, and Christopher Brinsmead, Senior Independent Director and Chair of the Remuneration Committee, stepped down from the Board.

Dr. Graham Rich is the newly appointed Senior Independent Director in addition to his role as Chair of the Quality and Safeguarding Committee. Mike Butterworth took over as Chair of the Audit Committee on 1 January 2017 and Donald Muir took over as Chair of the Remuneration Committee on 5 June 2017.

We would like to thank Martin, Alison and Christopher for the extremely valuable contribution they made to Cambian during a time of significant transition.

Dividend

The Board took the decision in early 2016 to suspend the dividend in view of the Group's financial performance. Following the sale of the Adult Services business, the balance sheet strength and confidence in the Group's outlook over the medium term, the Board has decided to reinstate the dividend at an appropriate level. The Board is therefore declaring an interim dividend of 0.14 pence per share, which will be paid by 31 October 2017.

Outlook

In the short-term we look to complete our re-positioning, cost reduction programme, and upgrading of processes and systems. We remain confident for the medium-term outlook.

Saleem Asaria

Chief Executive Officer

Capacity and occupancy

Average occupancy remained consistent during the period despite re-positioning of services. Capacity utilisation at 30 June 2017 increased to 81% (2016 FY: 73%) reflecting sustained conversion of service user referrals as well as the planned reduction in capacity. Operational capacity was reduced by a net 104 places in the period predominately within the Specialist Education division.  Fostering placements remained constant.

¹  Includes Stranded Assets owned by Cygnet Health Care Ltd on 1 January 2017 but transferred to Cambian during the period.

²  Re-presented to reflect transfers of sites that occurred prior to the sale of the Adult Services business.

³  Fostering is excluded from the capacity and occupancy numbers and disclosed separately.

Fees

The average daily fee increased by 6% to £353 reflecting improved fee levels from higher severity services.

¹ Implied daily fee from revenue (excluding other income for 2017 H1) and average number of places or foster placements during the period.

Revenue

The Group delivered underlying growth in revenue of 4% to £100.6 million (2016 H1: £94.5 million) reflecting the re-positioning to higher severity services and increases in fees. The total growth in revenue of 6% in 2017 H1 includes £2.4 million received from the TSA, which ended on 28 June 2017. 

¹ Fostering revenue is included within revenue, and also disclosed separately.

Adjusted EBITDA

Adjusted EBITDA remained stable in the period at £8.4 million (2016 H1: £8.3 million) despite the lost EBITDA from the Stranded Assets and the higher overheads incurred to accelerate the completion of the TSA. In addition, the 2017 H1 result has been impacted by the provision for "sleep-ins", which were first created at the end of 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 (Note 2).

Operating profit

Operating profit before exceptional items was £0.3 million (2016 H1: £1.0 million). After exceptional costs of £1.5 million, which relate mainly to restructuring and reorganisation of the business post the disposal of the Adult Services business and professional fees in relation to restructuring of reserves, the operating loss was £1.2 million in 2017 H1 (2016 H1: £5.4m loss).

Finance charges

As a result of the repayment of the Group's borrowings, following the sale of the Adult Services business on 28 December 2016, net finance costs have decreased to £0.1 million (2016 H1: £7.3 million).

Tax

The Group's tax charge was a credit of £0.2 million (2016 H1: £2.8 million credit) which represents an effective tax rate of 17.5% (2016 H1: 25.3%). The difference between the current statutory rate of 19.25% and the effective tax rate is principally due to non-deductible expenditure.

Earnings per share

Adjusted basic earnings per share was 1.4 pence (2016 H1: 2.0 pence). The statutory basic loss per share was 0.6 pence (2016 H1: 5.4 pence loss), primarily reflecting the impact of exceptional items and the amortisation of acquired intangible assets.

Capital expenditure

£2.2 million (2016 H1: £5.2 million) of capital expenditure was incurred in 2017 H1, of which £0.5 million (2016 H1: £2.1 million) was spent on development of new capacity, and £1.7 million (2016 H1: £3.1 million) was spent on the improvements to existing units.

Cash flow

Net cash from operating activities was an inflow of £7.7 million (2016 H1: £2.7 million inflow), which represents a good operating cash flow conversion and reflects stability following the changes in the business. Net cash of £122.3 million (2016 H1: £246.0 million net debt) reflects the proceeds from the sale of Adult Services after the settlement of the Group's borrowings. This does not take into account the return of capital to shareholders of £50 million on 15 September 2017.

Disposal of Adult Services

The disposal of the Adult Services business took place on 28 December 2016 for consideration of £383.0 million excluding directly attributable costs. For the six months to 28 June 2017 the Group continued to provide IT, finance, procurement and estates services to the purchasers under a TSA for an agreed fee. These central services are in the process of being realigned to reflect the requirements of the continuing Children's Services business.

Pursuant to the SPA the original purchase has been adjusted following agreement between the Group and the buyer on the Closing Statement. The consideration of £383.0 million has been reduced by a net adjustment of £4.0 million resulting in a final consideration of £379.0 million excluding directly attributable costs (note 6).

At the time of the sale, the transfer of all business contracts to the continuing Children's Services business was not possible for five sites, termed Stranded Assets, because the requisite regulatory approval had not been received. All of these sites have been successfully transferred back into the ownership of the Group. Whilst this has not materially changed the overall economics, there was a modest decrease in revenue and Adjusted EBITDA during the six months to June 2017 as a consequence of these assets not being owned throughout the period.

Debt facilities

On 18 May 2017, the Group entered into a three year £30 million revolving credit facility agreement with a flat rate margin of 2.0% over LIBOR payable on the amounts drawn. No drawdowns have occurred.

Return of capital

On 15 September 2017, a special dividend of £50 million (27.1 pence per share) was paid to shareholders. This is in line with previous announcements on the return of capital to shareholders following the sale of the Adult Services business.

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

Further details on the principal risks and uncertainties can be found in the Group's Annual Report and Accounts 2016.