Healthcare Locums plc Group Unaudited Preliminary Results for the Year ended 31 December 2011
Healthcare Locums plc Group Unaudited Preliminary Results for the Year ended 31 December 2011
Without doubt, 2011 has been the most challenging year in the history of Healthcare Locums plc.
In January, the Company announced the suspension of its shares following the discovery of serious accounting irregularities and that the financial performance of the UK business was well below the then market expectations. The UK business was not generating free cash and the business model had not been adapted sufficiently to accommodate changing market conditions. The investigation of the irregularities took several months to complete and led to the restatement of the 2009 accounts when the 2010 accounts were published in August. During the course of the investigations it became clear that the capital structure of the Group and the costs of servicing its debt were unsustainable. In July, the Board announced the disposal of the Homecare Division of Healthcare Australia ("Homecare") which raised approximately £20.3m in cash that was used to reduce Group debt. This was insufficient to restore financial viability and the Board sought a capital injection and re-negotiated bank facilities. The Refinancing was approved at a General Meeting of the Company in September following which the Company's shares were re-admitted to trading.
All of these issues had to be managed against a background of difficult market conditions, especially relating to supplies to the UK's major customer, the National Health Service ("NHS"), which was implementing its own stringent cost saving measures.
The sale of Homecare and the Refinancing completed in September re-structured the balance sheet and removed a major source of risk to the on-going financial viability of the Group. At 31 December 2011, the Group had bank and finance lease debt net of cash of £23.4m. In addition, the Group has a £10.2m zero-coupon loan note that is not repayable in normal circumstances until 30 September 2021. This is stated at £2.6m on the balance sheet at 31 December 2011.
Board and Governance
During the year, the entire Board was replaced. Alan Walker the Chairman, the Deputy Chairman Alasdair Liddell, the Executive Vice Chairman Kate Bleasdale, the Chief Financial Officer Diane Jarvis, and the Chief Operating Officer Mo Dedat had all been removed from or left the Board by the end of March. David Henderson and I were appointed to the Board in February and we were joined by Stephen Burke and Andy McRae as Group CEO and Managing Director of HCA in Australia respectively in May. Colin Whipp served as Interim Finance Director from May until September and Bill Jessup served in that capacity from October until March 2012. Mark Andrews, formerly a partner with law firm SNR Denton, joined the Board as a non-executive director in October and Sue Bygrave was appointed as the permanent Chief Financial Officer on 6 February 2012. We now have a settled and experienced Board comprising three executive directors and three non-executive directors. Martin Hughes was appointed as Company Secretary in March 2011.
Under the former Board, corporate governance had been extremely poor and an immediate action of the new Board has been to improve the policies and procedures relating to the governance of the Company. We aspire to have the sort of governance regime that would be found in a well run FTSE 250 company. We have not completed this programme yet but significant steps have been made.
The Board has appointed new auditors (Deloitte), lawyers (SNR Denton) and Nominated Advisor and Broker (Investec) and remuneration advisors (PwC) and now has a team of advisors that are well able to guide the Board and the Company in the future.
Following the successful Refinancing the new team set about ensuring the stabilisation of the business after what had been a period of unprecedented disruption. In the UK, the transformation of the Company to one that puts the satisfaction of its customers' requirements at the heart of its business is well underway. Provision of Locums to the NHS through existing framework agreements is now the normal way of doing business. We believe that a quality led offering with pricing transparency is the best way of building a long-term relationship with the NHS and we have invested in people, processes and systems to promote that transparency and to improve standards of clinical compliance. We are also investing in software-led solutions - HCL Clarity - that will deliver significant savings to our customers by providing visibility and control to reduce the cost of agency spend and optimise the substantive workforce, without compromising the quality of care. In Australia, opportunities for organic growth exist, in particular, by the further development of our nursing agency business in the Eastern states and the roll out of the existing doctor locum business nationally. With the opportunities available in these two sectors we no longer see the allied health professionals market as a priority for expansion in Australia. We can now concentrate on executing the strategy to grow the business, both in the UK and Australia, and thereby generate acceptable financial returns for our shareholders.
The growth strategy will be underpinned by strong operational and cost control. During the latter part of 2011 we made some important appointments of senior leaders in UK business development, IT, talent and people management and the operating divisions in the UK and Australia. Although this has increased costs, it was essential to build a widely skilled management team that is capable of delivering the Company's strategic vision. During 2012 we will be rolling out a new UK front-office IT system capable of delivering real-time accurate management information and embedding operational and compliance controls. Once implemented, this system, known as Itris, is expected to make a meaningful impact on net margins.
Results for year ended 31 december 2011
The revenue for the year was £227.1m (2010: £154.9m) and the loss from continuing operations before tax was £12.9m (2010: £63.6m). The adjusted earnings, before interest, tax, depreciation, amortisation, highlighted items and share based charges or credits increased from a loss of £0.1m in 2010 to a profit of £5.9m in 2011.
The results for 2011 are analysed in full in the Financial Review. These include the first full-year contribution from our Australian businesses acquired in 2010. The results of the Homecare Division of Healthcare Australia have been shown as discontinued operations. Both 2011 and 2010 results include items that have been highlighted in the Consolidated Statement of Comprehensive Income to show the underlying performance of the business. There is a restatement of 2010 balance sheet in relation to HCA acquisition accounting and an impairment of the UK Social Care business. These are accounting restatements with no ongoing cash impact.
Currently we are not able to pay dividends as we have negative distributable reserves and our banking arrangements prohibit us from declaring dividends until the outstanding amount under the Syndicated Facility Agreement has been reduced to less than £35m. Despite this, the Board recognises that dividends should form part of shareholders' investment returns and the Board will be working towards the reintroduction of dividend payments as soon as possible.
After taking legal and accounting advice, the Board has concluded that the dividend paid on 10 January 2011 was unlawful as the then Board should have known at the date that the dividends were approved and paid that the Company had insufficient reserves available to make the payment. The Board has been unable as yet to come to a definite conclusion about the legality of the dividends paid on 1 April and 25 June 2010. No action will be taken to recover unlawful dividends from shareholders in general. However, the Board is considering whether remedies are available against former directors to recover unlawful dividends paid to them and damages for breach of duty in authorising the relevant dividends.
Litigation and going concern
The Board has previously announced two major claims against the Company, one from the former Executive Vice Chairman and the other from a number of shareholders. These are described in Note 25. No provision has been made in these accounts for future legal costs or for any settlement or adverse determination arising from the litigation. While the Board continues to adopt the going concern basis, these claims and the other matters described in the going concern section of the Financial Review such as the narrow margin against banking covenants, give rise to a material uncertainty regarding the Group's ability to continue as a going concern.
2011 has been a tremendously turbulent year for our staff. There has been a complete change in the Board and extensive change in the senior leadership of the Group. Matters emerged during the course of investigations that were highly damaging to the
Company. During parts of the year, the future of the Company was in doubt and there were long periods when it was not possible to keep staff well informed because of the uncertainty of negotiations with third parties. At the same time, in the UK, there was also a significant change in strategy towards on-Framework business. Despite this, our staff have overwhelmingly stayed loyal to the Company and it is primarily through their personal commitment and their engagement with our customers that the Company has retained its market position. For this, and their unstinting efforts, especially during the period leading up to the re-financing, the Board and shareholders owe them a substantial debt of gratitude.
Although there will be many risks and challenges ahead, we believe that 2011 saw the nadir in the Company's fortunes. The Group has been re-financed a new leadership team has brought operational stability and is implementing new growth strategies to generate long-term improvements in financial performance. Despite all the issues of 2011, the Group remains a leading business in healthcare recruitment in both the UK and Australia. In the short-term we have the uncertainty regarding two major legal cases to deal with. Once legacy issues are addressed, the Board and I are confident that the Group can prosper.
Following the successful Refinancing of the Company on 12 Sept 2011, we have begun implementing the restructuring and re-engineering plans which we had previously outlined to shareholders and which we believe are key to generating sustainable growth. In the following paragraphs we describe how that strategy is being implemented and comment on trading in 2011. Although the balance of operations in the UK and Australia is different, there are common themes in the execution of the overall strategy.
Customer Relationship Management
A significant part of the UK business's supply to the NHS had historically been outside of the purchasing Framework Agreements. Increased cost pressures on the NHS through 2010 and 2011 resulted in a key, and in the Board's view, irreversible shift to locum procurement through the Framework structures.
Having adopted a transparent Framework supply strategy across all divisions, we believe we have made considerable progress in repositioning HCL as a valued and trusted supplier, aligned to our customers' needs. Our market leading Managed Solution, HCL Clarity which is described in more detail below, demonstrates our understanding of and commitment to the Department of Health's Quality, Innovation, Productivity, Prevention ("QIPP") strategy which we believe will enable HCL to become a long-term partner to the NHS, private healthcare groups and Local Authorities in providing flexible workforce solutions.
We have restructured our UK Business Development function together with our Recruitment and Compliance supply chain, to mirror our clients' demands and to facilitate relationships at national, regional and local levels. The implementation of our new CRM recruitment system is explained in more detail below.
A UK Head of Clinical Governance and Compliance has been appointed who is responsible for testing the Group's compliance programme. The Group continues to supply to the NHS without restriction and has positively engaged with the NHS to improve the service which it provides.
Organic Growth and Operational Improvement
Former management had focused on an acquisitive strategy but had not operationally integrated the acquired businesses so it is not surprising that the UK business has been operating through a large number of brands and legal entities acquired over several years. This left the Company without a clear scalable business model, too many brands to support fully, overly complicated internal processes and a range of front office systems without the capability to share customer relationship data. From the customer's viewpoint and in particular for the NHS, the existence of multiple brands has at times caused confusion over our Framework and Direct Sales offerings.
The current Board's strategy is to integrate those acquisitions and grow the business organically with a key focus on cash generation to pay down debt and in time, return cash to shareholders.
We have made excellent progress to date:
· Our detailed plan to rationalise the legal entities and brands has the support of the Government Procurement Service enabling us to agree the management of compliance processes through the transition stage.
HCL will become our key Framework brand, with category sub-brands for example HCL Nursing, HCL Doctors etc. A distinct Direct Sales brand will be supported in each of the health and social care markets with similar category sub-brands. We expect this plan will be implemented by end Q2 2012.
· The creation of a simplified legal entity structure behind the brand rationalisation will enable us to standardise our back office processes and realise the resulting operational efficiencies. We expect to complete this reorganisation by end 2012 and would anticipate benefiting from the operational efficiencies in 2013.
· We have completed a thorough review of market leading IT applications and have selected an integrated front office and compliance package with a proven track record within the healthcare staffing sector. The first divisional implementation has already taken place in Allied Health Professionals and the UK roll out is expected to take 15 months. Concurrently, the existing IT infrastructure will be upgraded to meet the demands of the UK business and to ensure robust business continuity across technology and telecoms.
Operationally we expect the new system to improve the efficiency of the compliance and recruitment processes and to drive productivity gains through the sharing of both client and candidate data across all UK businesses. Post implementation we will integrate the application with our back office functions and managed solution technology during 2013.
A number of changes have been made to the structure of the business that we believe will result in operational efficiencies and increase productivity through improved communication both internally and with our candidate and client populations.
· The Business Development function has been reorganised to create accountability both at a national, pan-HCL level and at a regional divisional level. The team is also now responsible for the implementation of Contracts and targeted on fulfilment rates. Further investment has been made in the Bid Management team.
· The Theatre and General Nursing businesses covering England, previously in separate locations in the South East and under different management, have been brought together in our London office under one management team.
· Certain national Compliance roles previously supporting specific divisions are now managed centrally to provide cross-discipline support regionally.
· The Allied Health disciplines have been relocated from Loughton in Essex to our London office and restructured to reflect a similar ratio of Resourcer to Recruitment Consultant roles as operated elsewhere in the UK business.
· The UK Finance function has also been relocated from Loughton to the London office.
These changes were implemented during Q4 2011 and the early part of 2012 and we have been pleased with how the integrations have proceeded.
Managed Solutions - HCL Clarity
The Board believes that pressure to reduce costs within the NHS will result in opportunities for companies that are able to provide solutions which manage effectively the flexible workforce and result in significant and measureable savings to NHS Trusts and Commissioning Groups.
We have recently entered into a partnership and commercial agreement with Skillstream, a leading supplier of contingent workforce management software, enabling us to combine HCL's recruitment process and people expertise with software already proven to generate substantial and quantifiable cost-savings within the NHS.
Skillstream's software, which is well established and operational with a high quality blue chip customer base throughout the private sector (www.skillstream.co.uk), has been customised to meet the specific requirements of the NHS including Framework pricing matrices, Clinical Governance and compliance demands and its VAT regime. The software is fully functional in several NHS Trusts where it has generated significant savings very quickly following implementation. These are detailed in a case study from the Royal Free Hampstead NHS Trust which you can find at www.hclclarity.com.
HCL Clarity is a managed service powered by Skillstream, enabling significant cost savings by providing visibility and control to reduce the cost of agency spend and optimise the substantive workforce, without compromising the quality of care.
The early reaction from clients to this ground breaking proposition within the healthcare sector has been encouraging and we look forward to updating shareholders on our progress in selling this solution later in the year.
The first half and second half performance in the UK is as follows:
Locum allied health professionals (restated)
Locum nursing (restated)
Locum qualified social workers
Gross profit %
Locum allied health professionals
Locum nursing (restated)
Locum qualified social workers
During 2011 placement of theatre nurses, which was previously in allied health professionals, was moved to the nursing segment. The information above has been restated to show the position had the move taken place on 1 January 2011.
As noted above the new Board have decided to pursue a different strategy to that followed by previous management in the Healthcare market and to re-engineer the business to focus its supply to the NHS through Framework contracts.
Engaged Framework suppliers earn lower gross margins but benefit from significantly increased volume opportunities. We will continue to maintain a discreet and transparent brand for non-Framework business which will continue to provide flexible supply on demand to the NHS as required and to a range of private sector organisations.
Although 2011 was an uncertain period for the Company, the macro issues facing our clients did not materially change. A combination of pressures within the NHS, not only cost-related but on-going concerns about the quality of care, are driving NHS strategies such as QIPP creating opportunities for suppliers capable of providing value for money solutions in the area of flexible workforce management. We believe that we have a market leading offering in this space.