Business in the provider care sector Actively adapting to a changing environment
There has never been a greater need for a company to assess its own business and nowhere is this more true than in the provider care sector The five big issues 1 2 3 4 5 Quality Structural imbalances Capital structure Challenging market Innovation From our analysis across providers, home and group level quality focus is the key driver of sustainable high performance Relentless focus also critical in light of increased regulatory and media scrutiny Impact of changing regulation and intervention from regulators and governments, including market oversight by CQC in England Imbalance between provider costs of quality care and customer price expectations ( fair cost of care ) This is a sensitive political issue Uncertainty over public sector demand (including overall level, acuity and geographical spread nationally and locally) A number of lenders are exiting situations in the sector as they restructure their balance sheets Traditional and alternative capital providers have huge amounts of capital ready to invest in equity, across performing, high yield and distressed opportunities Significant over-leverage remains Revised 2014 Corporate Governance Code requires companies to assess capital (and wider) risks over an extended period Austerity II and CCG/ NHS funding constraints impacting price and volume Wage inflation is increasing and political pressure on the living wage exacerbates this Longer term demand fundamentals remain positive Shortage of key skills, particularly nursing and quality home managers, still acute Opportunity to use technology to change the way services are managed and improve information flows NHS and acute care provision represents opportunity for providers to innovate services and routes to market to take advantage/create much needed capacity Capex plans and estates need to ensure they are flexible enough to meet changing needs Business
Active management is critical to adapt in a changing environment Stakeholder Operational A clear vision for the business, supported by market trends and organisational capabilities Active management of key stakeholders to minimise impact of regulatory, political and media scrutiny Credible management teams and strong corporate governance Outline sustainability plans considered for regulatory risks Market Revenue risks e.g., occupancy, customer mix, local competition and pricing understood and managed Clear strategy regarding changing customer requirements Service offering can be flexed to meet changing market demands Adapt Stakeholder Market Business Operational Capital Mitigate Identify Management of staff churn (in particular key personnel) in order to drive quality care and minimise the use of agency staff Operational risks regularly monitored, understood and managed Identify who critical personnel are from a quality perspective Management of cost base in the face of changing demand Close working across local areas in multi-site groups Capital Flexible long term financing and achievable debt covenants supported by robust cash forecasts Strong working capital performance building cash balances and capital efficiency Funding for capex maintenance and expansionary Appropriate funding headroom in place
What are the warning signs? Stakeholders Self-assessment against the financial oversight tests from CQC should be considered and stakeholders briefed Embargoes/soft embargoes, investigation by CQC/DoH/sustainability plans Increased regulatory or media scrutiny Sudden or unexplained management change Stakeholders not aligned Operations Deteriorating operational KPIs: occupancy, enquiry to placement ration, quality, accidents, staff vacancies Over-reliance on agency staff High staff/home manager churn Profit warnings and earnings under performance versus peers Operating cash flow negative Poor cash conversion IT fails to support the business Markets Loss of market share, declining occupancy, revenue deteriorating or growth rate behind peers Over-dependence on NHS/LA Market price pressure Inability to pass on input price changes New market entrants or competitor behaviour Capital Risk of, or actual, covenant breach or missed interest payment Refinancing required within 24 months Lack of funding for key capex Excess and deficient working capital Profit warnings Lack of forward visibility re cash or cash targets
Key contacts Joe O Connor Tel: + 44 20 7951 2252 Email: joconnor@uk.ey.com Adrian Gibb Tel: + 44 20 7783 0730 Email: agibb2@uk.ey.com Andy Taylor Tel: + 44 20 7951 7265 Email: ataylor16@uk.ey.com
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. 2015 Ernst & Young LLP. Published in the UK. All Rights Reserved. ED None 1595306.indd (UK) 04/15. Artwork by Creative Services Group Design. In line with EY s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk