Last checked at 9 Dec 2008 07:00
Southern Cross Healthcare Group PLC
-- Preliminary results --
Tuesday, 9 December 2008 - Southern Cross Healthcare Group PLC (LSE: SCHE) ('Southern Cross', 'the Group' or the 'Company'), the UK's largest care home provider, today announces its preliminary results for the year ended 28 September 2008.
Operating Highlights
Available beds increased to 37,425 at year end (2007: 34,304 beds)
Number of homes operated increased to 735 at the year end (2007: 673)
Average occupancy 89.5% (2007: 90.7%). Mature occupancy 90.5% (2007: 91.1%)
Average weekly fee up 4.6% to £522 (2007: £499)
Statutory Financial Highlights
Revenue £889.4m (2007: £731.9m)
Operating loss £5.2m (2007: £11.9m income) after a charge of £50.5m (2007: £43.5m) for future minimum lease charges under IAS 17. Excluding such charges, operating income decreased by 18.2% to £45.3m (2007: £55.4m)
Basic loss per share for the year of 9.57p (2007: 0.96p earnings)
Other Financial Highlights
Revenue from continuing operations up 14.5% to £837.7m (2007: £731.9m)
Home EBITDAR before central costs up 19.8% to £275.7m (2007: £230.2m)
Home EBITDAR from continuing operations before central costs up 13.9% to £262.1m (2007: £230.2m)
Adjusted EBITDA up 16.9% to £78.1m (2007: £66.8m)
Home EBITDAR margin, before central costs, 31.0% (2007: 31.5%)
Cash inflow from operations £71.4m (2007: £70.3m)
Adjusted earnings per share for the year was 19.60p (2007: 19.04p)
Interim dividend of 3.75p per share (2007: 2.5p). As previously advised no final dividend will be paid
Ray Miles, Chairman of Southern Cross, said:
"Having made considerable progress in stabilising the Group during the second half of the year with the successful renegotiation of the Group's banking facilities, our objectives now are to improve the efficiency and profitability of the Group and to grow the business in a deliberate manner. With a clear direction, a new management team, greater focus on operational performance and a continuing expansion in the market for elderly care, we face the future with confidence."
Notes: Home EBITDAR is defined as earnings before interest, tax, depreciation, amortisation, rent and loss on disposal of property, plant and equipment and subsidiary undertakings and impairment of property assets held for resale. Adjusted EBITDA is defined as earnings before interest, tax, depreciation and amortisation and charges for future minimum rental increases.
Adjusted earnings per share is defined as earnings before charges for future minimum rental increases, loan arrangement fees written off, loss on disposal of property, plant and equipments and subsidiary undertakings and impairment of freehold assets held for sale and the taxation impact thereof, divided by the weighted average number of shares.
Mature occupancy excludes immature beds, newly developed homes or refurbished homes which have been trading for less than 12 months.
Chairman's Statement
This has been a very difficult year for Southern Cross after a promising debut in July 2006 as a listed company. We have had to completely overhaul our senior management; we ran into difficulties with our financing in July 2008 which required us to renegotiate our facilities and which reached a satisfactory outcome in October 2008; we have experienced some pressure on operating performance leading to an outcome below our original expectations but still comfortably ahead of last year; and we have had to adjust our growth strategy to the new credit and property markets.
New Management and Strategic Focus
We have appointed a new management team. Richard Midmer joined as Finance Director in July and led the bank negotiations. Kamma Foulkes was promoted to the Board as Operations Director, also in July, replacing John Murphy. Jamie Buchan will join us in January 2009 as Chief Executive with a track record of business turnaround and excellence in service delivery and cost control in people-intensive businesses.
The mission of the new team, and the Board as a whole, is firstly to stabilise the Group. We have already made considerable progress with the successful negotiation of new bank facilities totalling £166.2m. We have also concluded the sale and long-term leaseback of 17 homes realising £62.6m which has been used to repay some of the debt. Financial controls have been improved and management is focused on cost control. In addition, we have adopted a more integrated approach to management throughout the Group allowing us to properly absorb the acquisitions that have been made.
Secondly, to improve the efficiency and profitability of the business over time. Improving quality of service and lowering costs whilst concentrating on maximising cash flow.
Thirdly, to grow the business in a more deliberate manner and mostly by leasing homes directly from landlords or developers. We are the leading operator by quite a significant margin and still have only an 8% share of the UK market. This leading position leaves us much better able to deal with more difficult real estate and banking markets, tighter local authority funding, more demanding regulation and increasing costs, which will all put pressure on many of our competitors, leading to further consolidation and closures. In this environment, we will not contemplate further transforming transactions, instead target steady and manageable growth.
The events which took place during the course of the year have caused us to re-examine our internal control systems and our management of risk. We are making some fundamental changes to the way in which management report and interact between themselves and the Board. We are continually assessing the areas of risk in the business in order to embed risk awareness within the organisation from the Board to the most junior of care home staff. With over 42,000 employees and an industry where staff turnover is typically high, we know that we have to be more diligent.
Financial
In July, we lowered our expectations of full-year financial results and have met those new targets. Indeed, in the year ended 28 September 2008 we increased Adjusted EBITDA from £66.8m in the previous year by 16.9% to £78.1m this year. Revenue increased by 21.5% to £889.4m. However, Home EBITDAR margin before central costs fell slightly from 31.5% to 31.0%.
As previously announced, to conserve cash and repay debt, the Board has decided not to pay a final dividend for the year just ended and will also forego an interim dividend in the year just commenced. We will review dividend policy again at the time of the final dividend for the year ending 27 September 2009. However, it is our intention to operate the business in the future with a lower level of debt.
Industry
Demand for care home services remains strong notwithstanding the development of alternative forms of care provision. Our elderly service users are highly dependent, often very frail or have dementia and we believe a care home offers the most holistic support for those towards the end of their lives. Demographic analysis indicates significant growth in demand for care home places over the coming decade.
Furthermore, we expect that the net loss of beds in the UK market is likely to continue. Local Authorities are reducing their in-house care home provision in favour of purchasing care from the independent or voluntary sector. Small independent care providers are struggling with increasing regulation, higher costs and premises that may no longer be suitable.
We remain committed to the provision of a safe and secure environment for people who would be vulnerable and isolated in their own homes and believe care homes will remain the best option for those who are physically less able or otherwise in need of substantial care.
Our People
We have over 42,000 staff nearly all working in our 735 homes across the UK. They are the core of our business and it is their dedication in often demanding circumstances that makes our Group successful. The Board is hugely grateful for their commitment to service delivery and high, but still improving, standards of care. Our operational management team has also stayed the course when it would have been easy for them to have been diverted and there are many who can be proud of their achievements this last year.
Outlook
We consider that the fees paid by many Local Authorities do not, currently, meet the generally accepted true cost of care. Through the Scottish Care, Care Forum Wales and The English Community Care Association, Southern Cross continues to actively campaign to persuade Local Authorities to meet the true cost of care. Progress has been made in Wales and Scotland, less so with most English Local Authorities. We remain confident about the demand for our services but we are fully alert to the financial problems of Local Authorities. Nevertheless, we cannot compromise the care we offer to our service users by accepting fees which are lower than the "true cost of care".
In the current year, we expect occupancy levels similar to last year and to follow their usual seasonal profile. Fee rates will need to rise above inflation in order to encourage operators and investors to build and develop the new beds that are required to meet the impending demographic pressure.
Cost pressures from legislation, regulation and the minimum wage will need to be recovered to encourage operators, including ourselves, to deliver the development that is required to sustain the quantity and quality of long-term care facilities for the future.
While remaining focused on our core residential elderly care operations, we also intend to respond flexibly to the changing market demand. This includes day care provision, domiciliary care into the community and short term or respite care as Local Authorities seek to encourage people to stay in their own homes, with support, for as long as practicable.
With a clear direction, a new management team, greater focus on operational performance and a continuing expansion in the market for elderly care, we face the future with confidence.
Ray Miles Chairman
Operational Review
Quality of care is the foundation of Southern Cross' business and the Group continues to strive to achieve positive life choices and outcomes for all its service users. None of this would be possible without the continued hard work and commitment shown by the Group's dedicated staff and the Board would like to extend its gratitude to every one of them.
Overview
There has been an increase in bed capacity of 9.1% during the year, with a net 62 homes and 3,121 beds being added to the Group. At the year end the Group operated 735 homes and 37,425 beds.
During the year the Group succeeded in selling over £181.9m of real estate and entered into direct tenancy arrangements with vendors for total starting rents of approximately £11.6m.
Although Southern Cross has grown significantly, the Group still has just an 8% market share and believes that the UK market continues to present an attractive opportunity for consolidation. Professional, well resourced, reputable operators such as Southern Cross are expected to lead this consolidation phase over the coming years as small providers face the many economic barriers that prevent them from meeting the increasingly stringent quality standards demanded.
Expansion of Portfolio
As detailed in the table, bed numbers have increased from 34,304 at 1 October 2007 to 37,425 at the year end, an increase in capacity of 9.1%. This has been achieved through acquisitions and a number of smaller bolt-on transactions.
| Number of available beds | ||||
| Number of homes | Acquired | Developed | Total | |
| As at 1 October 2007 | 712 | 36,215 | ||
| Managed for third parties | 39 | 1,911 | ||
| Leased/owned | 673 | 34,304 | ||
| Homes previously managed for | ||||
| third parties | 39 | 1,911 | 1,911 | |
| New developments opened | 3 | 213 | 213 | |
| Acquisitions | 20 | 997 | 997 | |
| As at 28 September 2008 | 735 | 2,908 | 213 | 37,425 |
New Home Developments
Three new homes have been built, commissioned and registered during the year.
There are a further six homes under construction which will be completed in 2008/09, four in Q1 and two in Q2. These will provide a further 465 beds. The Group has committed to a further 616 beds on an agreement to lease basis.
Opening new homes, in addition to maximising organic growth opportunities, will remain part of the Group's growth strategy. In the main these are expected to be built by third parties with construction partners and then acquired at practical completion, directly by the Group or by a nominated landlord who in turn grants a lease to Southern Cross.
Branding
Southern Cross Healthcare
Southern Cross Healthcare remains the principal elderly care brand and now provides services through 593 homes with 31,490 beds. This service is primarily funded by Local Authorities and provides care to service users who are very dependent with 24 hour nursing needs. This service also provides social care to service users who may be frail or have an early dementia.
The Southern Cross brand generated revenue of £718.8m in the year (2007 - £588.5m) and achieved an average weekly fee of £500 (2007 - £477). Home EBITDAR before central costs was £220.5m (2007 - £177.5m), a margin on sales of 30.7% (2007 - 30.2%).
Ashbourne Senior Living
This brand within the Group provides a service which is aimed towards the self-funded market. This year the branding programme has continued and a further twelve care homes have been re-positioned. It is anticipated that the total of 91 homes with 4,855 beds at the year end will increase to approximately 110 during 2008/9. This will be achieved through re-branding of existing suitable care homes and the integration of new developments into this brand.
The average fees within the Ashbourne Senior Living homes are 15% above the average fees charged within Southern Cross branded homes. In 2008 this was £572 (2007 - £547) and Ashbourne Senior Living generated revenue of £125.9m (2007 - £105.0m) and Home EBITDAR before central costs of £44.3m (2007 - £41.6m), a margin on sales of 35.2% (2007 - 39.6%). The dilution in margin is due to new Ashbourne Senior Living homes opening during the year building up to maturity.
Active Care
The Group's specialist business remains small compared to its elderly care business. However, with 51 homes and 1,080 beds at the year end, it is the fourth largest independent mental health and learning disability care operator in the UK.
This year three small learning disability homes in Dorset have joined the portfolio - Bramble Gate, Touchwood and Principle House with 4, 5 and 6 rooms respectively. In addition, three care centres in Shropshire, Oswestry and Newbiggin with a total of 80 beds were also added to the portfolio.
Active Care generated revenue of £44.7m (2007 - £38.4m) and achieved average weekly fees of £952 (2007 - £912). Home EBITDAR before central costs was £10.9m (2007 - £11.1m), a margin on sales of 24.4% (2007 - 28.9%). The deterioration in margin relates to the full integration of homes and increases in payroll costs on a per resident basis.
The performance of this brand has not met the Company's expectations and is under management review.
Operational Highlights
There has been a normal seasonal trading pattern during the year. This is driven by the timing of pay reviews and fee reviews during the financial year and expected lower occupancy rates during the winter period. This is highlighted in the analysis following:
| H1 | H2 | Total | |
| 2008 | 2008 | 2008 | |
| £'m | £'m | £'m | |
| Revenue | 431.2 | 458.2 | 889.4 |
| Home EBITDAR before central costs | 129.1 | 146.6 | 275.7 |
| Margin % | 29.9% | 32.0% | 31.0% |
| Rent - charge for amounts | |||
| currently payable | 84.3 | 86.8 | 171.1 |
| Rent cover - times | 1.53 | 1.69 | 1.61 |
| Adjusted EBITDA | 30.8 | 47.3 | 78.1 |
| Adjusted EBITDA profile | 39.4% | 60.6% | 100% |
Occupancy
Average occupancy rate during the year was 89.5% across the Group, reflecting the number of new beds opened during the year and subsequent occupancy build-up period. Private residents accounted for 19.6% (2007 - 19.1%) of the Group's occupied beds during the year. Excluding immature beds (newly developed homes or refurbished homes that have been trading for less than 12 months), the mature occupancy rate was 90.5%, 0.6% lower than the previous year.
There was a clear delay in Local Authorities releasing funds at the start of their financial year in April and the increase in referrals which typically occurs in April did not materialise until late May and June 2008. Referrals for care home placements also evidenced a considerable increase in dependency and thus a consequential reduction in average length of stay. There was a limited opportunity to reduce costs, at that time, without compromising the quality of care provision.
Fee Rates
Group average weekly fee rates for the year have increased by 4.6% to £522 per week (2007 - £499 per week). Increases in Local Authority payments during the year were as follows; England - 3.0%, Scotland - 4.2% and Wales - 5.1%, whilst increases in respect of private residents averaged 5.8% for the year.
In terms of private fees, the net threshold for self-funding eligibility is currently set at less than £22,250 capital assets (not Scotland) and it is believed that an increasing number of clients will have to fund their own care over the next few years as property ownership continues to rise among the older generation who are at risk of requiring long term care.
Personnel, Staff and Payroll Costs
Staff remain key to Southern Cross' business, and their hard work and delivery of quality care is highly valued by service users and their families. Their dedicated support has enabled the Company to continue to build market share as the UK market leader.
The impact of national minimum wage ("NMW") and working time directive ("WTD") legislation was borne by operators in October 2007, increasing costs by approximately 4.8%, 3.2% of which is from the increase in the headline rate of minimum wage and 1.6% from the additional four days holiday entitlement under the WTD.
This year the NMW and WTD have further increased costs by 3.8% and 1.6% respectively. The overall increase in staff costs for the Company was 4.4%.
Southern Cross continues to work with the GMB as part of the second phase of a two year agreement on pay and has retained rates above NMW for all staff groups. An increase in annual leave entitlement was initiated in October 2008 prior to the timescale set by the WTD of April 2009. In addition, pay differentials were honoured and staff who achieved National Vocational Qualifications were rewarded. The Pay and Reward package has represented a total increase in excess of 9.5% over the two years.
Southern Cross has continued with its strategy to minimise reliance on agency staff. The control of agency usage has been assisted predominantly by migrant workers from the European Economic Area ("EEA"). The Company finds these employees to be very hard working, caring individuals with excellent English language skills.
During 2007 there were difficulties with renewing work permits for non-EEA staff, due to the Border and Immigration Authority ("BIA") changing the qualifying criteria without any form of consultation with care home operators. This meant that many workers who had settled in the UK with long-term employment prospects faced deportation unless paid £7.02 per hour which was the basis for work permit renewal.
This rate of pay, in the short term, was not sustainable within fees currently paid by Local Authorities. In August 2008 the Migration Advisory Committee (MAC) proposed an even higher rate of £8.80 for 2009, which is scheduled for further review by MAC during 2009. This would further impact heavily on the care home operators and is not sustainable for the sector.
In the light of the above, Southern Cross has adjusted its strategy from one of overseas recruitment to one of overseas training. Upon commencement of a National Vocational Qualification staff would then be able to work and stay in the UK for a period of two years. Upon completion, they could then apply for team leader positions commanding the rate of pay to meet the BIA qualifying criteria.
Financial Review
Revenue Statement
The Group's operating performance is summarised in the following table:
| 2008 | 2007 | Growth | |
| £'m | £'m | % | |
| Revenue | 889.4 | 731.9 | 21.5 |
| Home EBITDAR | 275.7 | 230.2 | 19.8 |
| Home EBITDAR margin (%) | 31.0 | 31.5 | - |
| Adjusted EBITDA1 | 78.1 | 66.8 | 16.9 |
| Operating (loss)/income | (5.2) | 11.9 | - |
| (Loss)/profit before taxation | (22.9) | 3.0 | - |
| Average number of available beds | 36,626 | 31,093 | 17.8 |
| Cash generated from operating activities | 71.4 | 70.3 | 1.6 |
1 Adjusted EBITDA before charge for future minimum rental increases.
Revenue
During the year, the Group continued with its growth strategy increasing the number of available beds by 3,121 to 37,425, an increase in capacity of 9.1%. The growth was primarily through acquisition activity with 2,908 beds added. The significant acquisitions completed in the year were Bondcare with 1,911 beds and Portland with 496 beds (including 110 daycare beds). In addition, a further 3 care homes with 213 beds from the Group's organic development pipeline were opened during the year.
The average number of available beds increased by 5,533 (17.8%) during the year from 31,093 in 2007 to 36,626.
Revenue increased by £157.5m from £731.9m in 2007 to £889.4m. The key drivers of revenue growth were acquisitions completed during the year, the full year impact of acquisitions completed in the prior year and fee rate increases achieved. Acquisitions completed in the current year contributed £51.7m of revenue, whilst the full year impact of acquisitions completed in the prior year and associated fee rate increases accounted for a further £105.8m of revenue.
Across the Group's entire portfolio, the average weekly fee increased 4.6% from £499 to £522. During the year, in respect of homes that have been in the Group for the entire year, the increase in average weekly fee equates to £38m of revenue.
Home Operating Costs
Home payroll costs increased from £409.0m to £500.6m, of which £66.2m was a result of a higher number of beds being occupied during the year. On an average per available bed basis, home payroll costs were £13,668 per annum, compared to £13,154 during 2007. The 3.9% increase in payroll costs on a per available bed basis is attributable to increases of 3.8% in the National Minimum Wage, which directly impacts approximately 50% of staff and an increase of 1.6% in annual leave entitlement set by the Working Time Directive which impacts the majority of staff. Staff not directly impacted by the National Minimum Wage received pay rises below 3.8%.
Home running costs for the current year have remained at 12.7% of revenue.
Rent
The rent charge for the year amounted to £221.6m (2007 - £182.4m). Excluding the non-cash charge of £50.5m (2007: £43.5m) under IAS 17, for leases with fixed or minimum annual increases, the rental charge for the year was £171.1m (2007 - £138.9m), an increase of 23.2% and giving a rent cover of Home EBITDAR before central costs to cash rent of 1.61 times (2007 - 1.66 times). The increase in rental charge is consistent with the growth in operational size of the Group.
The cash rental charge per average available bed for the year was £4,672 per annum (2007 - £4,467), an increase of 4.6% compared to 2007. This increase reflects the impact of the higher rents being paid under leases entered into recently. Excluding the impact of new leases entered into during the last two years, the cash rental charge per available bed increased by 2.7% on the prior year.
Central Costs
Total central costs for the year amounted to £26.5m, an increase of £0.5m over 2007. As a percentage of revenue, central costs decreased from 3.6% in 2007 to 3.0% in 2008, reflecting economies of scale achieved during the year.
Segmental Results
The Group continued to have two distinct segments within its operations, namely Elderly Care (which incorporates the Southern Cross Healthcare and Ashbourne Senior Living brands) and Specialist (being the Active Care Partnership business).
Elderly Care
Growth through acquisitions over the year was predominantly within the Elderly Care segment. Average available beds increased by 5,435 beds to 35,587 (2007 - 30,152). The total number of available beds operated by the Group within the Elderly Care portfolio at the year end was 36,345 beds (2007 - 33,323 beds).
Fee revenue in the Elderly Care segment increased by £151.2m to £844.7m for the year. The increase was due to acquisitions completed during the year, the full year impact of acquisitions completed in the prior year and fee rate increases achieved. Acquisitions completed during the year delivered revenues of £49.1m during the year, whilst the full year impact of acquisitions completed in the prior year, together with associated fee rate increases, added a further £102.1m of revenue.
Across the Elderly Care portfolio the average weekly fee increased 4.7% from £487 to £510. Excluding the impact of acquisitions made during the year the average weekly fee, on a continuing basis, increased 5.1% from £487 to £512 and equates to £37m of revenues.
Total Home EBITDAR before central costs increased by £45.7m to £264.8m, the impact of acquisitions in the year being £13.2m. Excluding the impact of acquisitions in the current year, total Home EBITDAR increased by £32.5m, being a 14.8% increase. Home EBITDAR before central costs of Elderly Care decreased from 31.6% to 31.3%. The comparable margin for acquisitions in the year was behind that of the Group margin at 26.9%.
Specialist Care
The Specialist segment also recorded an increase in average available beds, from 941 beds in 2007 to 1,039 beds. The total number of available beds at the year end was 1,080 (2007 - 981), an increase of 10.1%. Average occupancy during the year in Specialist care increased from 86.1% to 86.9%.
During the year revenues in the Specialist segment increased by 16.4% to £44.7m (2007 - £38.4m). Acquisitions completed during the year contributed £2.6m of revenue, whilst underlying growth within the portfolio contributed additional revenues of £3.7m and the average weekly fee increased by 4.4% to £952.
Due to higher payroll costs, on a per resident basis, Home EBITDAR before central costs for the year decreased from £11.1m to £10.9m and operating margin fell from 28.9% to 24.4%.
EBITDA
Earnings before interest, tax, depreciation and amortisation of goodwill ("EBITDA") for the Group increased by £4.3m (18.5%) to £27.6m. Excluding the impact for future minimum rental increases under IAS 17, Adjusted EBITDA increased by £11.3m (16.9%) to £78.1m.
Depreciation
Depreciation has increased from £13.2m in 2007 to £17.6m in the current year, reflecting the increased number of homes operated by the Group and higher spend incurred during the year as the Group continues to invest to improve the quality of its homes.
Loss on freehold assets
The impact of holding freehold property during a period of falling prices is reflected in the Group's results in two ways. First, a loss on disposal of £9.3m has been recognised after £60.9m of freehold properties were sold for £51.6m in August and September; the loss was primarily due to the disposal of the Portland portfolio of homes. Second, the Directors have reviewed the carrying values of all freehold properties held for resale and this has resulted in an impairment charge of £4.5m being recognised, reducing the value of freehold assets held for resale from £40.6m to £36.1m.
Following the losses recognised in respect of disposed freehold properties, the Group's operating result has decreased by £17.1m, resulting in an operating loss for the year totalling £5.2m.
Finance revenue and costs
The net financing costs for the year amounted to £17.7m (2007 - £8.9m). Interest charges of £10.0m (2007 - £7.4m) relate to interest payable on bank borrowings. The higher charge is due to higher rates of interest being charged on borrowings and average levels of debt held by the Group being 7% higher than 2007. Also included are costs totalling £6.9m in relation to loan arrangement fees and associated costs incurred by the Group as a result of renegotiating its banking facilities following the failure to repay a loan in June 2008 which would have caused a breach of its banking facilities. Interest receivable during the year was £0.4m (2007 - £1.3m).
Taxation
The tax credit on earnings before taxation of £4.9m (2007 - £1.1m charge) represents a headline rate of 21.4% (2007 - 36.7%). Both the current and deferred tax charge is significantly impacted by £14.2m (2007 - £10.9m) relating to the future tax benefit of the additional rental charge under IAS 17. Furthermore, the current year tax charge is impacted by the loss on disposal of property, plant and equipment of £9.6m, impairment charges of £4.5m and amortisation charges of £1.1m.
After consideration of the above items, the current tax charge of £11.1m represents an effective tax rate of 25.8% (2007 - 26.4%) before charges for minimum rental increases, losses on disposal, impairment charges and amortisation.
The Group expects the effective future tax rate to remain at or slightly below the standard rate of corporation tax.
Dividends
Total dividends paid during the year amounted to £16.5m (2007 - £6.8m), being the £9.4m (5p per ordinary share) dividend proposed at the end of the last financial year and paid in the current year, plus an interim dividend of £7.1m (3.75p per ordinary share) for the current financial year. As previously announced the Directors have decided not to recommend a final dividend for the year ended 28 September 2008.
Loss per share
The loss per share for the year was 9.57p (2007 - earnings 0.96p). Adjusted earnings per share for the year before future minimum rental increase charges, loan arrangement fees written off and the taxation impact thereof, was 12.10p (2007 - 19.04p), a decrease of 36.4%. Excluding the impact of losses recognised in respect of freehold properties and impairment charges, adjusted earnings per share was 19.60p (2007 - 19.04p).
Balance sheet
Non-current assets
Property, plant and equipment
Property, plant and equipment increased from £95.5m to £121.3m, largely due to fixtures, fittings and equipment additions of £29.3m, offset by depreciation charges of £15.8m. Expenditure on the Group's seven developments under construction totalled £16.1m, whilst during the year £8.8m of assets under construction were either transferred or divested, giving a net increase of £7.3m.
Goodwill
Goodwill increased by £9.7m due to the acquisition of Portland (£5.2m), the acquisition of Bondcare (£2.6m) and other acquisitions totalling £1.9m.
Deferred tax
Deferred tax assets increased by £16.1m from £25.1m to £41.2m and relate primarily to deferred tax assets recognised in relation to the accelerated charge for future minimum lease payments in accordance with IAS 17.
Property assets held for sale
At the start of the current year the Group held property assets for sale of £141.0m. In respect of these, assets disposals totalling £116.3m were made during the first quarter of the year, with a further £14.0m divested during the second quarter.
In the year under review the Group acquired and developed a further £83.1m (net of impairment charges) of freehold assets held for resale and during August and September divested of £55.7m of freehold properties for a net cash consideration of £47.5m, resulting in a loss on divestment of £8.2m. The divestments also included the sale of one home under construction for £4.1m, resulting in a loss on divestment of £1.1m.
The property assets held for sale at the year end relate to 11 freehold properties amounting to £36.1m. The Group is actively seeking landlords for all the freehold properties held for resale. Subsequent to the year end the Group has sold the Torrwood care centre for a cash consideration of £7.8m, which is equal to the asset's carrying value.
Cash Flow
| 2008 | 2007 | |
| £'m | £'m | |
| Cash flows from operations | 71.4 | 70.3 |
| Net interest and taxation | (21.8) | (13.4) |
| Investing activities | 64.7 | (38.5) |
| Financing activities | (127.0) | (25.4) |
| Net decrease in cash | (12.7) | (7.0) |
Cash inflow from operations was £71.4m (2007 - £70.3m), representing a cash conversion ratio compared to Adjusted EBITDA of 91.4% (2007 - 105.2%).
Finance charges paid during the year amounted to £11.5m (2007 - £9.5m) and included £2.5m relating to arrangement fees. The remaining payments related to standard charges incurred in accordance with the Group's banking facilities. Tax payments made during the year totalled £10.6m (2007 - £4.3m).
Net cash inflow from investing activities amounted to £64.7m (2007 - £38.5m outflow). Included within net cash inflow from investing activities are the purchase of subsidiary undertakings of £55.2m, purchase of property, plant and equipment totalling £62.0m, receipts from the sale of subsidiary undertakings of £130.3m and receipts from the sale of property, plant and equipment of £51.6m.
The Group invested £55.2m in new subsidiaries, of which £40.4m related to Portland. Disposal proceeds relating to the disposal of subsidiary undertakings amounted to £130.3m and included £94.8m in respect of the Avery portfolio of freeholds, £21.5m in respect of the Dolphin portfolio and £14.0m in relation to Belmont, all of which were held on the balance sheet at the prior year end. Receipts from the sale of property, plant and equipment related to 16 freehold properties disposed of in August and September, at a book loss of £9.3m.
Purchase of plant, property and equipment totals £62.0m and includes £25.0m of development expenditure and £30.3m representing capital expenditure on the Group's portfolio of homes. The Group received amounts in respect of capital grants totalling £2.5m in the year.
The net cash outflow from financing for the year amounted to £127.0m (2007 - £25.4m). Excluding dividends paid during the year of £16.5m (2007: £6.8m), the net outflow for the year was £110.5m and included net repayment of bank borrowings totalling £99.6m and repayment of loan notes of £10.3m. The loan notes repaid primarily related to loan notes issued upon the acquisition of Avery in the prior year.
Net debt
During the year the Group's net debt has reduced by £74.4m from £171.9m to £97.5m. Bank borrowings have reduced by a net £77.7m during the year. Included within the net repayments are scheduled repayments of term loans totalling £6m. Loans drawn to fund acquisitions under the acquisition facilities totalled £99.9m. Repayments made from disposals of freehold properties and scheduled loan amortisations under the acquisition facilities amounted to £186.0m. The net draw downs during the year under the development facility and revolving credit facility were £8.4m and £6.0m respectively.
Loan note repayments totalled £10.3m, whilst repayments under finance leases were £0.6m.
In addition to the net draw down of £6.0m made under the revolving credit facility the Group has also used the revolving credit facility to issue £10.1m of guarantees, primarily relating to landlord rent deposits. As at the year end, the Group had just under a year remaining of a three-year interest rate swap for £30.0m, at a fixed rate of 5.09%.
Financing
Facilities
During the year the Group had a syndicated term facility, a syndicated revolving credit facility for the purpose of managing working capital, a bilateral development facility for financing the Group's own development programme and two syndicated credit facilities specifically for the purpose of funding acquisitions.
One of the acquisition facilities, originally drawn to £46.0m, was due for repayment on 30 June 2008. It was intended that the property assets funded by this facility would have been sold prior to this date and the loan repaid. The assets remained unsold at 30 June 2008 and the Group was unable to repay the associated loans as they fell due. Accordingly, the Group's syndicated lenders granted an extension to the repayment date and a waiver on the related financial covenants until 28 July 2008. A subsequent extension and waiver was granted up until 30 October 2008.
Due to the non-payment of an acquisition facility due on 30 June 2008, totalling £46.0m, the bank was contractually entitled to request early repayment on all credit facilities. As such, loans outstanding of £96.7m have been classified as due within one year.
Following the divestment of 16 freehold properties on 29 August 2008 and 4 September 2008 for a total consideration of £51.8m together with scheduled amortisations, the borrowings under the acquisition facilities were reduced to £33.4m as at the year end.
Covenants
The Group's syndicated credit facilities are subject to various financial covenant clauses, whereby the Group is required to meet certain key financial performance indicators. One such indicator is a net debt to EBITDA ratio. As a result of delays in the sale of various acquired freehold properties, the Group was unable to satisfy the net debt to EBITDA financial covenant as at 6 July 2008 and 28 September 2008. As noted above, the Group's syndicated lenders granted waivers to these financial covenants.
Renegotiated Banking Facilities
Negotiations with the Group's banking syndicate were concluded in October which increased the facilities available to the Group to £166.2m. The key terms of the renegotiated facilities are given below.
The Term loan A has been increased to £70m. This consists of the original £48m term loan facility, £14m transferred from a previous acquisition facility (representing the shortfall in proceeds from the sale of the Portland portfolio), and an £8m increase in the funds available to the Group. The final repayment date is 30 June 2011, with the first amortisation payment of £5m due on 31 March 2009.
The revolving credit facility of £36m finances the Group's working capital and the amount of this facility, which is available up to 30 June 2011, remains unchanged. In addition to this, a £12m seasonal revolving credit facility has been put in place to cover the period from 22 December 2008 to 22 February 2009 to meet the Company's expected seasonal working capital requirements during the Christmas and New Year period.
At the year end the Group had borrowings under the acquisition facilities of £33.4m. Following the transfer of £14m to the term loan, the acquisition facilities have now been combined and replaced by one bridging loan totalling £19.4m. The bridging loan, which is due for final repayment on 30 June 2010, will be repaid from the proceeds of further freehold divestments during the term of the loan.
In addition, the Group's development facility, which is in place to fund the Group's development programme, remains unchanged. It was drawn to £13.6m at the year end and may be drawn to a maximum of £28.8m. The development facility will continue to be utilised and drawn for the purpose of financing the Group's own development programme.
A revised covenant package has been agreed as part of the refinancing, based upon on the Company achieving a minimum Adjusted EBITDA of £70m for the financial year to 27 September 2009. The Group's Adjusted EBITDA used for covenant purposes will exclude any rentals associated with freehold disposals made during the year to 27 September 2009.
Interest on the new facilities will be charged at margins between 2.75% and 3.25% above LIBOR.
The banking facilities are considered to be sufficient for the Group's medium-term needs.
International Financial Reporting Standards ("IFRSs")
As a listed Group, the financial statements continue to be prepared in accordance with applicable IFRSs. There have not been any changes to IFRSs which have had a significant effect upon the financial statements for the 52 week period ended 28 September 2008.
Consolidated Income Statement
| 52 weeks ended 28 September 2008 | 52 weeks ended30 September 2007 | ||
| Note | £'m | £'m | |
| Revenue | 889.4 | 731.9 | |
| Home payroll costs | (500.6) | (409.0) | |
| Home running costs | (113.1) | (92.7) | |
| Home EBITDAR1 before central costs | 275.7 | 230.2 | |
| Rent | |||
| Charge for rental amounts currently payable | (171.1) | (138.9) | |
| Charge for future minimum rental increases | (50.5) | (43.5) | |
| Total rent | (221.6) | (182.4) | |
| Home EBITDA2 before central costs | 54.1 | 47.8 | |
| Central costs | (26.5) | (26.0) | |
| Other operating income | - | 1.5 | |
| Adjusted EBITDA3 before charge for future minimum rental increases | 78.1 | 66.8 | |
| Charge for future minimum rental increases | (50.5) | (43.5) | |
| EBITDA | 27.6 | 23.3 | |
| (Loss)/profit on disposal of property, plant and equipment and subsidiary undertakings | 2 | (9.6) | 0.8 |
| Impairment of freehold assets held for resale | 2 | (4.5) | - |
| Depreciation | (17.6) | (13.2) | |
| Amortisation | (1.1) | 1.0 | |
| Operating (loss)/income | (5.2) | 11.9 | |
| Finance costs | 3 | (11.2) | (10.2) |
| Exceptional finance costs | 3 | (6.9) | - |
| Total finance costs | 3 | (18.1) | (10.2) |
| Finance income | 3 | 0.4 | 1.3 |
| (Loss)/profit before taxation | (22.9) | 3.0 | |
| Taxation | 4 | 4.9 | (1.1) |
| (Loss)/profit attributable to ordinary shareholders of the company |
| (18.0) | 1.9 |
| Note | Pence per share | Pence per share | |
| (Loss)/earnings per share attributable to equity shareholders of the company | |||
| Basic | 6 | (9.57) | 0.96 |
| Diluted | 6 | (9.57) | 0.96 |
All of the above activities relate to continuing operations.
1 EBITDAR represents earnings before interest, tax, depreciation, amortisation, loss on disposal of property, plant and equipment and subsidiary undertakings, impairment of freehold assets held for resale and rent.
2 EBITDA represents earnings before interest, tax, depreciation, amortisation, loss on disposal of property, plant and equipment and subsidiary undertakings and impairment of freehold assets held for resale.
3 Adjusted EBITDA represents EBITDA after adding back the charge for future minimum rental increases.
Consolidated Balance Sheet
| 28 September 2008 | 30 September 2007 - restated | ||
| £'m | £'m | ||
| ASSETS | |||
| Non-current assets | |||
| Property, plant and equipment | 121.3 | 95.5 | |
| Goodwill | 218.5 | 208.8 | |
| Other intangible assets | - | 0.8 | |
| Deferred tax assets | 41.2 | 25.1 | |
| Other non-current assets | 3.3 | 3.0 | |
| Total non-current assets | 384.3 | 333.2 | |
| Current assets | |||
| Cash and cash equivalents | 2.2 | 14.9 | |
| Trade receivables | 44.6 | 39.8 | |
| Inventories | 2.4 | 2.1 | |
| Property assets held for sale | 36.1 | 141.0 | |
| Other current assets | 9.7 | 7.8 | |
| Total current assets | 95.0 | 205.6 | |
| Total assets | 479.3 | 538.8 | |
| LIABILITIES | |||
| Current liabilities | |||
| Short-term financial liabilities | (97.4) | (134.7) | |
| Corporation tax payable | (8.8) | (7.8) | |
| Trade and other payables | (91.2) | (80.2) | |
| Total current liabilities | (197.4) | (222.7) | |
| Non-current liabilities | |||
| Long-term financial liabilities | (1.3) | (51.5) | |
| Provisions and similar obligations | (9.4) | (11.3) | |
| Deferred government grants | (3.4) | (1.3) | |
| Future minimum rental payable | (157.7) | (107.2) | |
| Total non-current liabilities | (171.8) | (171.3) | |
| Total liabilities | (369.2) | (394.0) | |
| Net assets | 110.1 | 144.8 | |
| Equity | |||
| Ordinary shares | 1.9 | 1.9 | |
| Share premium | 161.5 | 161.5 | |
| Accumulated deficit | (53.3) | (18.6) | |
| Total equity | 110.1 | 144.8 |
Consolidated Cash Flow Statement
| 52 weeks ended 28 September 2008 | 52 weeks ended 30 September 2007 | ||
| £'m | £'m | ||
| Cash flows from operations | |||
| Cash generated from operations | 71.4 | 70.3 | |
| Interest received | 0.3 | 0.4 | |
| Interest and bank loan arrangement fees paid | (11.5) | (9.5) | |
| Tax paid | (10.6) | (4.3) | |
| Net cash generated from operations | 49.6 | 56.9 | |
| Cash flows from investing activities | |||
| Purchase of subsidiary | |||
| undertakings net of cash acquired | (55.2) | (56.6) | |
| Sales of subsidiary undertakings | 130.3 | 72.6 | |
| Purchase of property, plant and equipment | (62.0) | (69.9) | |
| Receipts from the sale of property, plant and equipment | 51.6 | 15.4 | |
| Net cash generated from/(used in) investing activities | 64.7 | (38.5) | |
| Cash flows from financing activities | |||
| Repayment of borrowings | (250.6) | (258.0) | |
| New borrowings | 140.7 | 239.8 | |
| Capital element of finance leases | (0.6) | (0.4) | |
| Dividends paid | (16.5) | (6.8) | |
| Net cash used in financing activities | (127.0) | (25.4) | |
| Net decrease in cash and cash equivalents | (12.7) | (7.0) | |
| Opening cash and cash equivalents | 14.9 | 21.9 | |
| Closing cash and cash equivalents | 2.2 | 14.9 |
Note: Included within the purchase of property, plant and equipment are the purchase of freehold properties totalling £nil (2007 - £31.8m) and development expenditure on new properties totalling £25.0m (2007 - £14.8m).
Consolidated Statement of Changes in Shareholders' Equity
| Share capital | Share premium account | Accumulated deficit | Total equity | |
| £'m | £'m | £'m | £'m | |
| Balance at 2 October 2006 | 1.9 | 161.5 | (15.4) | 148.0 |
| Share-based payments (including deferred tax of £0.2m) | - | - | 1.7 | 1.7 |
| Ordinary dividends paid | - | - | (6.8) | (6.8) |
| Profit attributable to ordinary shareholders | - | - | 1.9 | 1.9 |
| Balance at 30 September 2007 | 1.9 | 161.5 | (18.6) | 144.8 |
| Share-based payments | - | - | (0.2) | (0.2) |
| Ordinary dividends paid | - | - | (16.5) | (16.5) |
| Loss attributable to ordinary shareholders | - | - | (18.0) | (18.0) |
| Balance at 28 September 2008 | 1.9 | 161.5 | (53.3) | 110.1 |
Notes to the Preliminary Results
Notes for the 52 weeks ended 28 September 2008.
1 Accounting Policies
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, IFRIC interpretations and the Companies Act 1985 applicable to Companies reporting under IFRS.
Details of the IFRS policies can be found in the Group's consolidated financial statements for the 52 week period ended 28 September 2008.
2 Sale of Subsidiary Undertakings, Property, Plant and Equipment and Impairment of Freehold Assets Held for Resale
Sale of Subsidiary Undertakings
On 14 November 2007, the Group disposed of the Avery sub-group for a consideration of £94.8m net of professional fees, consisting of 12 subsidiaries and holding the freehold interests of the 15 homes acquired from Avery Healthcare in June 2007 and realised a profit on the transaction of £nil.
On 21 December 2007, the Group disposed of Dolphin Propco Limited and Dolphin Scotland Properties Limited and freehold interests for £21.5m net of professional fees, being the enterprise value on acquisition of the portfolio and realised a profit on disposal of £nil.
On 12 March 2008, the Group disposed of Southern Cross (Belmont Subsidco) Limited for £14.0m net of professional fees, being the enterprise value on acquisition of the portfolio and realised a profit on disposal of £nil.
Sale of Property, Plant and Equipment
During the year the Group disposed of freehold property and related fixtures and fittings for a net cash consideration totalling £51.6m. The related assets had a net book value of £60.9m, resulting in a loss on disposal of £9.3m.
Other assets disposed during the year resulted in a loss on disposal totalling £0.3m.
Impairment of Freehold Assets Held for Resale
The Group has reviewed the carrying values of freehold properties held for resale. Following this review, a number of properties were found to have a fair value lower than their carrying value, as a result the carrying value of the related freeholds has been written down by £4.5m.
3 Finance Costs and Finance Income
| 52 weeks | 52 weeks | |
| ended | ended | |
| 28 September | 30 September | |
| 2008 | 2007 | |
| £'m | £'m | |
| Interest payable on bank borrowings | 10.0 | 7.4 |
| Interest payable on loan notes | 0.2 | 0.3 |
| Amortisation of loan arrangement fees | 0.1 | 2.2 |
| Fair value of financial instruments | 0.2 | - |
| Other finance costs | 0.7 | 0.3 |
| Finance costs | 11.2 | 10.2 |
| Loan arrangement fees and associated costs | 6.9 | - |
| Exceptional finance costs | 6.9 | - |
| Fair value of financial instruments | - | (0.3) |
| Bank interest receivable | (0.4) | (1.0) |
| Finance income | (0.4) | (1.3) |
| Finance costs - net | 17.7 | 8.9 |
Exceptional finance costs of £6.9m (2007 - £nil) relate to loan arrangement fees and associated costs incurred by the Group as a result of the breach of its banking facilities.
4 Taxation
| 52 weeks | 52 weeks | |
| ended | ended | |
| 28 September | 30 September | |
| 2008 | 2007 | |
| £'m | £'m | |
| Current tax | ||
| - current period | 10.6 | 12.8 |
| - prior period | 0.5 | 0.9 |
| Deferred tax | ||
| - current period | (12.4) | (11.7) |
| - prior period | (3.6) | (0.9) |
| Taxation | (4.9) | 1.1 |
As from 1 April 2008, the UK Corporation Tax rate changed from 30% to 28%. The current rate applicable to the Group for the period ended 28 September 2008 was 29%. Deferred tax relating to temporary timing differences that reverse after 1 April 2008 have been measured at a tax rate of 28% as these are the rates that will apply on reversal.
The tax for the period differs from the standard rate of corporation tax in the United Kingdom as follows:
| 52 weeks | 52 weeks | |
| ended | ended | |
| 28 September | 30 September | |
| 2008 | 2007 | |
| £'m | £'m | |
| (Loss)/profit before taxation | (22.9) | 3.0 |
| (Loss)/profit before taxation multiplied by the standard rate of corporation tax in the United Kingdom of 29% (2007: 30%) | (6.6) | 0.9 |
| Effects of: | ||
| Amortisation of intangibles | - | (0.3) |
| Expenses not deductible for tax purposes | 0.3 | 0.3 |
| Rate differences | 0.5 | 2.2 |
| Other | 0.9 | (2.0) |
| Tax (credit)/charge for the period | (4.9) | 1.1 |
The tax charge is expected to be lower than the standard rate in future periods, as the impact of non-deductible intangibles and depreciation is expected to be outweighed by benefits from the use of tax assets, including brought-forward losses and capital allowance pools.
5 Dividends Paid and Proposed
A final dividend of 5p per ordinary share, totalling £9.4m, in respect of the 52 week period ended 30 September 2007, was paid on 11 February 2008.
The Directors declared an interim dividend of 3.75p (2007: 2.5p) per ordinary share, totalling £7.1m (2007: £4.7m) and was paid on 20 June 2008 (2007: 22 June 2007).
The Directors have decided not to recommend a final dividend for the year ended 28 September 2008.
6 (Loss)/Earnings per Ordinary Share
Basic (loss)/earnings per share is calculated by dividing the (loss)/profit for the period attributable to ordinary equity holders of the parent, by the weighted average number of ordinary shares outstanding during the period.
Diluted (loss)/earnings per share is calculated by dividing the (loss)/profit for the period attributable to ordinary equity holders of the parent, by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.
The following reflects the share data used in the basic and diluted earnings per share calculations:
| 52 weeks | 52 weeks | |
| ended | ended | |
| 28 September | 30 September | |
| 2008 | 2007 | |
| Number | Number | |
| Basic weighted average number of shares (excluding treasury shares) | 188,067,377 | 188,067,377 |
| Dilutive potential ordinary shares: | ||
| Employee share options | NIL | 633,761 |
| Diluted weighted average number of shares | 188,067,377 | 188,701,138 |
The Group presents exceptional items and future minimum rental increases on the face of the income statement. Items that are considered exceptional, by virtue of their size or incidence, are disclosed in order to improve a reader's understanding of the financial information. To this end, additional basic and diluted earnings per share information, including loan arrangement fees written off, is also presented on this basis. Reconciliations of earnings and the weighted average number of ordinary shares used are set out below:
| 52 weeks ended 28 September 2008 | 52 weeks ended 30 September 2007 | |||||
| Basic | Diluted | Basic | Diluted | |||
| per share | per share | per share | per share | |||
| Earnings | amount | amount | Earnings | amount | amount | |
| £'m | p | p | £'m | p | p | |
| (Loss)/profit attributable to ordinary shareholders | (18.0) | (9.57) | (9.57) | 1.9 | 0.96 | 0.96 |
| Charge for future minimum rental increases | 50.5 | 26.85 | 26.85 | 43.5 | 23.12 | 23.04 |
| Loan arrangement fees written off | 6.9 | 3.67 | 3.67 | 1.9 | 1.03 | 1.03 |
| Taxation impact of above | (16.6) | (8.85) | (8.85) | (11.4) | (6.07) | (6.05) |
| Profit attributable to ordinary shareholders before charges for future minimum rental increases and loan arrangement fees written off and taxation impact thereof | 22.8 | 12.10 | 12.10 | 35.9 | 19.04 | 18.98 |
7 Statutory Accounts
The financial information included in this document for the 52 week period ended 28 September 2008 has been derived from the audited consolidated financial statements of the Group for the 52 week period ended 28 September 2008.
This financial information does not constitute statutory consolidated financial statements for the 52 week period ended 28 September 2008 or the 52 week period ended 30 September 2007, which will be filed with the Registrar of Companies for the 52 week period ended 28 September 2008, following the Company's annual general meeting.