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HCL’s “most challenging year”

02 April 2012

Healthcare Locums Plc (HLO:LSE), the specialist health and social care staffing agency, has published unaudited preliminary results for the year ended 31 December 2011. Revenues in 2011 were £227.1 million compared to a restated £154.9 million for 2010.

Gross Profit was 21.9% last year compared to 21.3% in 2010. While losses from operations stood at £10.7 million compared to a loss of £59.2 million the year before. The net income loss narrowed from £10.9 million compared to £60.9 million the year before.

Healthcare Locum’s Chairman, Peter Sullivan, said: “without doubt, 2011 has been the most challenging year in the history of Healthcare Locums plc……The UK business was not generating free cash and the business model had not been adapted sufficiently to accommodate changing market conditions”. In January 2011, Healthcare Locums suspected its shares following the discovery of serious accounting irregularities and announced a financial performance well below market expectations.

In July, the Board announced the disposal of the Homecare Division of Healthcare Australia ("Homecare") which raised approximately £20.3 million in cash that was used to reduce group debt.

The company restated its 2009 accounts when the 2010 accounts were published in August following an internal investigation. During this investigation, it also became clear that the capital structure of the group and the costs of servicing its debt were unsustainable In September, Healthcare Locum’s refinancing was approved and the shares were re-admitted to trading. 

All this activity was set against a background of difficult market conditions (especially relating to Healthcare Locum’s major UK customer, the National Health Service, which was implementing its own stringent cost saving measures), a complete change of the board and its advisors, legal challenges and complaints from shareholders.

In the United Kingdom, revenue for 2011 was £110.3 million (48.5% of total revenue)

Allied Health Professionals represented 31.5% of the UK's continuing Gross Profit in 2011.  The move of the National Health Service business onto Framework supply resulted in a reduction in gross margin, to 25.0% from 28.5%, with revenues slipping by 6% over the same period.

Locum Doctors represented 14.2% of the UK's continuing Gross Profit in 2011; as this business completed its transition to Framework supply, margins slipped from 15.3% in H1 to 13.6% in H2.

Nursing represented 26.5% of the UK's continuing Gross Profit in 2011. Historically it had been managed within the Allied Health Professionals Division.

Qualified Social Workers represented 17.7% of the UK's continuing Gross Profit in 2011. The market saw reduced consultant headcount for Qualified Social Workers around the half year; which inevitably resulted in a reduction in Gross Profit in H2. The market remains tight with Local Authorities under budget pressure. The gross margin slipped to 17.0% in the second half from 17.6% in H1 due to margin pressure within the Managed Vendor contracts, and fewer off-contract bookings available.

Permanent Placements represented 10.0% of the UK's continuing Gross Profit in 2011.  Headcount in this area was reduced from 80 to 30.  The structure of the division has been altered to create greater focus by discipline and provide a solid foundation from which to grow.

In Australia, HCL’s revenue for the year was £116.8 (51.5% of the total) and the gross profit 20.3%. The Nursing Agency represented 87% of Australian continuing Gross Profit in 2011, locum doctors 11%, and permanent recruitment 2%

The Australian business works closely with the UK business, to ensure that they are able exploit the candidate pipeline of nurses in the UK and Europe wishing to work in Australia, either on a permanent basis or also under the Working Holiday Visa scheme.

During 2011, the Company also opened a New Zealand resourcing office aimed at taking advantage of the Trans-Tasman Mutual Recognition Agreement and sourcing doctors and nurses wishing to work in Australia on a locum or permanent basis.

The company has executed a significant change in strategy to focus on Framework contacts in the UK.  In 2011, 69% of UK revenue was from the NHS.  They are also investing in software-led managed solutions through HCL Clarity a managed service solution powered by Skillstream and a front-office IT system (Itris). 

Framework suppliers earn lower gross margins but benefit from significantly increased volume opportunities according to the results. However, HCL say they 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. 

In Australia, the company believes that opportunities for organic growth exist, in particular, through the further development of their nursing agency business in the Eastern states and the roll-out of the existing doctor locum business nationally.

The Board has previously announced two major claims against the Company, one from the former Executive Vice Chairman (Kate Bleesdale) and the other from a number of shareholders. No provision has been made in the accounts for future legal costs or for any settlement or adverse determination arising from the litigation.  So while the Board continues to adopt the going concern basis, these claims and the other matters 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.

The company is not paying a dividend given they have negative distributable reserves. Furthermore, their banking arrangements prohibit us from declaring dividends until the outstanding amount under the Syndicated Facility Agreement has been reduced to less than £35 million. In addition, 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.

The company reported that, 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. While the company aspires to have the sort of governance regime that would be found in a well-run FTSE 250 company, it acknowledges that it has not completed this programme yet.

However Peter Sullivan says: “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”.

Healthcare Locums’ principal activity is that of a recruitment agency, providing temporary and permanent staff to the healthcare and social care sectors. The Company provides recruitment services for health and social care staff, doctors, qualified social workers (QSW), specialist nurses and allied health professionals (AHP). In early trading this morning, the company’s share price was flat at £2.38, 30.49% above the 52 week low of £1.82 set on 20 March, 2012 but  97.19% down from a year ago. This values the company at £20.14 million.

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