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Edited Transcript of CMBN.L earnings conference call or presentation 26-Apr-17 8:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 Cambian Group PLC Earnings Call

London Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Cambian Group PLC earnings conference call or presentation Wednesday, April 26, 2017 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Martin Hopcroft

Cambian Group plc - Interim CFO

* Saleem Asaria

Cambian Group plc - CEO and Executive Director

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Conference Call Participants

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* Graham Doyle

* Sally Anne Taylor

Numis Securities Ltd., Research Division - Director and Healthcare Analyst

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Presentation

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [1]

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Good morning, everyone. Thank you for attending or dialing in to the Cambian Group results presentation for the year ending 31st December 2016. My name is Saleem Asaria, I'm the Chief Executive of the Cambian Group, and I'm joined today by Martin Hopcroft, our CFO.

2016 was a busy year for the Cambian Group, and we ended the year with some notable successes. The key highlight of the year was the sale of our Adult Services for which we received a premium price of GBP 379 million in cash, and that enabled us to settle all our bank debt. We will be reporting this, the Adult Services as discontinued operations going forward.

With regards to our Children's Services, during the course of the year, the revenue increased by 13%. The increased average occupancy by 11%.

We're reporting an adjusted EBITDA for the year of GBP 16.2 million with some of the increased revenue offset by extended negotiations on fee increases, provisions for sleep-ins and as a result of repositioning on some of our services. The repositioning of some of our services is a strategy that we identified last year and will be continuing during the course of this year. We'll be talking about it in more detail during the course of this presentation. But in essence, we are moving all of our services to the highest severity end, where we believe there is a defensible position where we believe there is greater demand and need for our services.

We are pleased to report that while we have been navigating this journey, we've been able to maintain our high-quality regulatory ratings with 83% of our facilities rated as good or outstanding as of December 31, 2016.

We ended the year with a strong balance sheet with a net cash position of GBP 116 million, and we're announcing this morning that we are increasing the return on capital from GBP 40 million to GBP 50 million (inaudible)

Before I hand over the call to talk a little bit about the financials, I just want to dwell briefly on the adult sale and Adult Services. The premium valuation that we received here was not out of chance. This is -- this business is one that we carefully positioned as a high-severity business focusing on a niche population where we felt there was considerable growth opportunity. Over a 12-year period, we created a platform that became a major consolidator that achieved average utilization of 92% in terms of occupancy and quality ratings of a similar number. And as a result of its premium position in the marketplace, we were able to attract significant interest as part of the sale process, navigate to a competitive process and achieved an accelerated completion before the year-end to enable us to save on bank fees. We believe that we have a very significant opportunity to create a similar platform in Children's Services, albeit we believe to a larger scale. Martin?

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Martin Hopcroft, Cambian Group plc - Interim CFO [2]

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So with regards to financial highlights for the year. It could be transaction of Adult Services being shifted to discontinued operation. We presented some information here on a combined basis to better understand metrics that it could create because it's quite a transitional change that our business may have to actually report some to the discontinued. And also, the Adult Services business was sold on the 28th of December. And therefore, we've got almost all the year-end guidance with the combined business. And that creates some quirks regard to the way the accounting is done. It's required for us to treat this business. And that in turn, the P&L will have to back out all of the Adult Services as discontinued operation. And the balance sheet stayed in all the way out to 28th of December, so there are some quirks there. And I'll try and guide you through this.

So on a combined basis, we saw an overall revenue increase of 12%, and adjusted EBITDA increased by 6% to GBP 45 million. On a statutory basis and therefore just purely looking at the Children's Services group subscriptions we actually have a little bit gone forward, we have a 13% increase in revenue. And we've made up with an 11% increase in occupancy and the balance coming through from improved fees as well as a minor impact from a full year impact of acquisitions that took place in early 2015.

In terms of adjusted EBITDA for the remaining Children's Services group, it's GBP 16.2 million. And that's derived from the 13% increase in revenue that was achieved as well as some operating efficiencies, offset by some extended negotiations on fee increases, provision for sleep-ins and the repositioning of some services that remains detrimental too.

On a combined basis, exceptional items were GBP 17 million but largely -- or withholding reflect costs of related to either to the financial restructuring or the sale of the Adult Services business which is subject to a lot of (inaudible)

In terms of finance costs, likewise, we're reporting as extinguished because they fall in line with a full exception of our bank debt on 28th of December. And therefore and overall with regards to transaction, we have GBP 374 million cash inflow from the sale of the Adult Services business leading to GBP 116 million of net cash at the end of the year.

Moving on to the transaction highlights. As we mentioned there, we paid all of bank debts, including the (inaudible) groups, with minimal tax impact transaction between the substantial shareholding exemption. Just in line with regards to those that have been factored in forecasting, some of those exceptional costs actually set the bar in year-end. And therefore, the net cash balance at the end of the year was slightly elevated as a result of that going forward there.

And know that it's not possible to transfer all of the contracts for a very small number of sites, certain sites that's initiated in December but materially change the economics that may impact some reported figures until these are finalized and may be derived from huge sites where we were requiring regulatory approval to get that in line. A number of those have gone across already without a regulatory approval condition, as of the moment a couple it needs to go.

Under the transitional services agreement that we have with Cygnet, which is a wholly-owned subsidiary of Universal Health Services. That TSA will last not less than 6 months and not more than 9 months. It covers essentially the shared services that we have. We have very instated service structure in place, and those will need to be migrated out to Cygnet. And they cover information technology, finance, procurement and estate. And we are as part of the negotiation of the transaction, there is compensation to cover a proportion of cost relating to those services that have been provided.

With regard to transaction, the board approved by shareholders on 28th of December with only conditional on shareholder approval and not on completion markets but also approval.

Moving on to profit and loss. As you can see there, the revenue was up by 12% on a combined basis, and the adjusted EBITDA increased by 6% to GBP 45 million.

Just want to note there with regards to the column for continuing in 2016, of those exceptional items, GBP 4 million related to the financial restructuring that took place April that results to all the bank debt being paid and therefore was actually extinguished. Net finance charges. GBP 30 million of those, almost all of those are extinguished with the business going forward. And therefore, on an overall basis, business in '16 after the Adult business have been discontinued, we deal with the attachment in services as well as it's underlying, so that when they all become adults they can for form lasting the relationships and ultimately (inaudible) Just note there the profit on sale of discontinued operations represents the accounting sale of GBP 155 million.

Moving on to the balance sheet. Just to highlight the strong asset backing on the business, net assets of 202p per share. And I just think it's worth highlighting that the working capital is a self-financing unit of this business in the sector.

Moving on to the cash flow. The working capital movements overall reflected growth in that activity as well as the extended negotiations on fee increases that led to the elevated net working capital. The interest costs reflected stepped increased from financial restructuring took place in the second quarter last year. In terms of capital expenditure, going forward, we will see a moderate increase in that. We will no longer have quite certain constraints with our -- with regards to the capital structure that we had last year and also with regards to focused management with purely Children's Services, and we will see that level of capital expenditures slightly expand, together with increments of some investment in systems that will be initiated during the course of this year.

I'll now move on to the financial strategy going forward. So the special dividend, I understand that we pit stopped in certain caps in the board are concentration and with less shareholders with a view that this would be made by they of special dividend that's been increased by GBP 10 million -- GBP 50 million. We do need to generate, for those that are equalized in regards to the company balance sheet in a respective way regulated by the annual report accounts sufficient distributable reserves, and also require final board approval before we can make that happen. For the rationale why the increase in special dividends, there are actually 2 reasons. The first reason, we had a very accelerated transaction process, which meant that we managed to get the transaction aligned before the end of the year when saving fees took place; and secondly, with the elevated level of working capital was also a high consideration for the transaction and the sale of our disposal of the Adult Services business.

So financing facilities, we have agreed terms for a new RCF for general corporate purposes.

Turning to dividend policy. The board intends resume a progressive dividend policy with an interims. And obviously, we've natured that and structured that with the replacement fund.

And in terms of gearing, the board have made a strong statement that in the medium term, net debt adjusted EBITDA will not exceed 1.5x.

And with that, I hand it back.

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [3]

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Thank you. I think that it's no secret that we started 2016 at a difficult place, and we've started the year with 3 key objectives. The first one is to deleverage our group. And following a strategic review, we took the decision to go through the sale of our Adult Services business so we're more focused now. The second key objective was to continue to implement our remedial action program. And here, Martin and his team have made tremendous progress in delivering improvements across all our systems. Our business is now managed more rigorously, in particularly in cost control. And Martin is looking to start implementing the next stage of systems upgrade during the course of 2017. And our last key and most important focus as we walk into 2016 is to look to position our Children's Service business toward that higher-severity profile that I referred to earlier and to ensure that whilst we did that, we continue to deliver on the highest quality to meet the customers' need and demand in this area. And in this phase, Anne Marie, our Chief Operating Officer, and her team did a phenomenal job during the course of '16 to create this platform for Cambian in which we are looking to build.

I think it's appropriate here for me to take a step back and really try and articulate this population of high severity. And if I take you to Slide 14 and I look at the total population of children in the U.K., that's 11.6 million today. Of those, there's 1.9 million children who have a developmental disability. These are children who have mild-level severity who have missed one or more milestones. But as we navigate through these various levels of severity, you end up with a cohort of 88,000 that have severe, complex needs, all of whom have an education and healthcare plan that's been identified by the local authorities or the health authorities as a series of needs that must be met with a level of urgency. We believe that the addressable market in terms of value for this cohort is over GBP 7 billion. And we understand and recognize that this population is increasing, and we believe that it will continue to increase in the foreseeable future.

In terms of provision for these children today, the local authorities, because of the complexity of these children, have recognized that it is more appropriate to outsource this population. And we currently estimate that 60% of these children are looked after by private providers, 30% by charities and 10% by the local authorities themselves.

And whilst we in the U.K, we are identifying these children, the journey that these children navigate through to adulthood is traumatic. And when these children become adults, they're not in a good space. I can give you the example of a looked-after child, that individual go through anywhere between 10 to 18 placement breakdowns between the time they are taken into care until the time they reach 18. And if you look at the statistics or stat curve for that cohort, we see that 24% of today's prison population does come from care. 70% of today's sex worker populations come from care. The educational attainment rates for this cohort are minus 43%, and the offending rate reflects 400%. So whilst there is a great effort to try and resolve the issue, we're not making significant progress when it comes to those statistics.

The Cambian perspective, we believe we have a possible solution here. And what we are looking to do is to create a service and an offer that looks to navigate that individual from providing a place of safety to stabilize that placement to make sure that those breakdowns do not occur, to ensure that there is an education offering for that individual that's appropriate to the needs and that it is bespoke, to ensure that there is a therapeutic intervention, which is appropriate and timely; and where possible, to give that child a parenting experience. So when their child becomes an adult, that child really has a chance.

Currently within Cambian, we've built up a platform that has the key components of this offering. We have care homes. We have specialist schools, both day and residential. We have child and analyst mental health services. We have therapeutic fostering homes, and we have over 4,000 people who are highly trained with the right mindset and skill set to be able to deliver these interventions.

If I just take you to Page 16, I'd like to give you a little bit more detail as to our approach and our model. It's not just having a series of these individual programs for these people. The true crux of our service is our integrated approach which is extremely differentiated, and it takes the form of a recovery triangle. At the bottom right-hand side, we have care. And the purpose of care is to provide the stability of that placement and to ensure that, that child is ready for learning. The second base of that triangle is therapy. And the purpose of therapy is to ensure that they want intervention to deal with that challenging behavior but also to make sure that we deal with the attachment disorder which is underlying. So that when that child becomes an adult, they're able to form lasting relationships. And ultimately, at the top of that triangle is education. And we believe this is going to be the true success for that individual because through this program they are going to develop skills, competences and qualifications.

Over the last 3 years, we've built up a market-leading position in these separate areas. Today, Cambian operates more than 3x the number of care facilities to its nearest competitors. We are close to 2x greater in terms of provision, in terms of education. And we are the largest provider of therapeutics fostering in the U.K.

If we go back to where we find ourselves in 2017, we made great inroads in '16 to navigate through our circumstances, to create a strong balance sheet and to get our company and business ready to be able to deliver value creation and these operational services for our children. And at a high level, we identify the steps on Page 18.

During the course of 2017, we are going to complete our obligations under our transitional services agreement. We're going to look to navigate to an optimal central overhead structure and margin normalization as we remove costs from the business. We are going to compete the repositioning of our portfolio to a higher-severity offering that I referred to. We have a tremendous opportunity to improve utilization within our existing portfolio as we head towards optimal occupancy, giving an opportunity for EBITDA growth within our existing services. Martin has mentioned that we are starting our second phase of system and process improvements, and we are looking to increase our governance in this space in Children's Services through a formation of a Quality & Safeguarding Committee. And ultimately, as we navigate into 2018, we feel there is a tremendous opportunity for us to start growing our business again in a measured fashion through organic growth and bolt-on acquisitions.

So if I were to take a compete step back and just summarize where I believe we now are. We've established a Children's Services platform with high quality that's recognized and is needed by the authorities as a valued provider of specialist education and behavioral services. We've positioned it in a space with high severity where we believe it's defensible and where we believe there is high demand. We recognize that, that regulatory bar has increased, and we've been able to maintain our quality ratings through that journey. But we also recognize that 2017 is another complex year for Cambian as we navigate through a separation of our services. We're looking to invest in our management information systems. But ultimately, we see a pride at the end of this. And we believe that we have a phenomenal opportunity to create a platform that becomes the consolidator and we'll be able to grow organically to fulfill our ambition and aspiration to significantly increase the size of our business, and more importantly, the number of children we positively support over the next 5 years.

Thank you. We'll take any questions that you have.

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Questions and Answers

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Sally Anne Taylor, Numis Securities Ltd., Research Division - Director and Healthcare Analyst [1]

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I wanted to talk around the potential for mix asset going forward. I think you talked about an 11% increase in capacity, and then you're making up about 13% of fees. Is that like for like? When should we start seeing the mix benefit come through from the re-profiling that's been ongoing...

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [2]

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So if I understand your question exactly, is it around trust fees? Was it more on the...

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Sally Anne Taylor, Numis Securities Ltd., Research Division - Director and Healthcare Analyst [3]

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The benefit from the fees, from the profiling hierarchy of each services.

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [4]

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Okay. I think it's pretty well stated at this point that we provided the fess by the occupancy as capacity increase. One is combined business. The combination of Adult Service and interims meant that the actual -- the government and parliament variable takes charge. The Children's Services are much more variable in terms of services we provide, and the value of those services are individual. And therefore, if the figure drops then it would be much less useful for families going forward because that significant variable is a huge difference between someone who we'll be looking after for 53 weeks a year, 24/7. To someone who'll be coming in a few days over, maybe at a timely basis with very significant variation of fees there. Turning with regards to -- therefore to answer your question about -- with regard to the fees, it means that the average fees we would expect to see rise based on what we actually have because of that very significant variability per individual. And therefore, the revenue will be a much more reliable guide going forward over the years. Does that answer your question?

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Sally Anne Taylor, Numis Securities Ltd., Research Division - Director and Healthcare Analyst [5]

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Yes. I guess within -- You're saying it's difficult to know between special education and residential facility. I guess it's more really profiling. And then do we start to see the benefit of that? Or are we starting to see that already?

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Martin Hopcroft, Cambian Group plc - Interim CFO [6]

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You're already seeing that benefit from the P&L.

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [7]

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If I could just add to that, Sally, if you imagine that we have 3 key sets of services. So we have therapeutic fostering. Those we told that we couldn't have pretty much handle them last year, where we basically said we're going to move all our foster care into the high severity. Some of our residential services also, we're able to navigate to smaller homes. Our education services take more time, a, because of the seasonality of when resources come in and also because of the size of the facilities.

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Sally Anne Taylor, Numis Securities Ltd., Research Division - Director and Healthcare Analyst [8]

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Okay. And then just to follow on from that. In terms of occupancy, you gave specific data on occupancy and residential care (inaudible) a question of compensation to secure that (inaudible) but can you give a little more flavor on (inaudible) going forward?

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [9]

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Yes. As Martin said, it's difficult to pinpoint an occupancy number that's related directly to revenue because of our mix. But I think that when we finalized our capacity numbers, we are comfortable to say that we think this portfolio can get to -- has moved to mid (inaudible) in terms of an occupancy depends upon the existing portfolio.

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Martin Hopcroft, Cambian Group plc - Interim CFO [10]

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I think Sally what's worth mentioning there is that -- as we basically mentioned that the Adult Services is not in absolute terms. The Adult Services is quite different and therefore would be a strong basis -- to take that as the basis. And second with the weak condition itself the actual utilization will probably increase. And that restructured mix led by that metric secured due to the fact the different value of the services that we are providing and the severity that's definitely going on. So we just want to focus you more on the revenue, but just be a little bit careful when you're doing your numbers around the individual services.

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Unidentified Analyst, [11]

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(inaudible) what sort of percentages (inaudible) to shift into the higher severity offering?

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [12]

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I think that it's a journey, and it’s difficult to say that x has been completed and y is still left to go. So I'm reluctant to give you a number and then lead you to a calculation that comes out the other end. I do wish to answer the question, however, and I think with the current state of our portfolio, we believe that completely during -- as we would like it, would probably complete within the next 24 months. And some of that is because of the seasonality of the schools.

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Graham Doyle, [13]

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And just looking at the school business, how conceivable is this? A number of (inaudible) how many slots in place that are available? Or do we need to wait until September? And then just on Ofsted the way it is hurdled it's being replaced, is there anything from the pipes that we need to keep an eye on? Are they benefit or a headwind?

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [14]

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Let me take the first question first. Because we are positioning our portfolio more to the high-severity services, we see our schools admitting the children who have been broken down in other facilities during the course of the year. However, we still have a relatively large intake in September. In terms of Ofsted, it's been very clearly, I think, articulated by Ofsted that they wish to raise the bar, rightly so, within these services. And that they are navigating from a generic compliance to a position where they actually want to understand that the right care is being provided to the right child. And they're taking certain steps. Not only have they changed their procedures, they, as an example, used to outsource a lot of their services to private provided to accounts inspection to take all of those in-house. So they're going through their own journey. At a high level, the bar is being increased. We see, like any organization that goes through a process, inconsistences, and we need navigate those. But we work well in partnership with Ofsted as we work through this change. Hope that answers it.

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Graham Doyle, [15]

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Just on Ofsted, I remember on the last (inaudible) day you guys talking about certain track records and (inaudible) affect the gate factors as what the public sector can do. Have we any progress on that or is that still...

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [16]

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No, Graham. We invest a lot of time and effort. And it's not so much with Ofsted, but it's also with our customers and the stakeholders around the children. It's a little early for us to come out and tell you exactly what comes on and what you guys were tracking. But we have, as part of our system development, investing a lot of time and effort on that because one of the high-value differentiators of our adult business is the fact that we are able to demonstrate during that journey the progression on care metrics. And with children, we're able to demonstrate the adoptions and behaviors that are anti-social or disruptive. We'll be able to demonstrate the advances in learning. We'll be able to demonstrate length of stay and stabilization processes. So we're very excited about the opportunity of taking some of the learnings in the adult business and taking them to Children's.

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Operator [17]

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(Operator Instructions) It appears to be none at this time. Please continue.

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Saleem Asaria, Cambian Group plc - CEO and Executive Director [18]

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I think we should -- if there's no further questions from the floor, I'd like to just reiterate our thanks for your attendance this morning or for dialing in. Thank you very much, look forward to seeing you at our half year.

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Operator [19]

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Thank you. Now this concludes the conference for today. Thank you for participating, and you may now disconnect.