Annual Financial Report

RNS Number : 0347L

Spire Healthcare Group PLC

22 April 2015

22 April 2015

Spire Healthcare Group plc

Annual Report and Notice of Annual General Meeting

Spire Healthcare Group plc (the "Company") released its preliminary announcement of its annual results for the year ended 31 December 2014 ("Preliminary Announcement") on 24 March 2015.

Further to that Preliminary Announcement, the Company confirms that the Annual Report 2014 (the "Annual Report'), Notice of Meeting and Form of Proxy are being posted to shareholders today.

The Annual General Meeting (AGM) of the Company will take place at 11.00am on Thursday 21 May 2015 at Freshfields Bruckhaus Deringer, 65 Fleet Street, London EC4Y 1HS.

They are available on the Company's website as follows:

Annual Report 2014: www.spirehealthcare.com/annualreport, and

Notice of Meeting: http://investors.spirehealthcare.com/financial-investor/financial-calendar/

In accordance with Listing Rule 9.6.1, the Company will submit its Annual Report and other shareholder documents to the National Storage Mechanism. These documents should then be available for inspection within two working days at www.hemscott.com/nsm.do

The appendix to this announcement contains information required for the purposes of compliance with DTR 6.3.5 (1) of the Disclosure and Transparency Rules, including a directors' responsibility statement. This information is extracted, in full unedited text, from the Annual Report 2014 and should be read in conjunction with the Preliminary Announcement, which contained other information required by DTR 6.3.5 (1), released to the market on Tuesday 24 March 2015.

Dan Toner

General Counsel and Company Secretary,

22 April 2015

Enquiries:

Antony Mannion, Investor/Public Relations Director

Tel: +44 (0) 20 7427 9000

Appendix

Principal risks

The Group's principal financial and operational risks, how they have changed and how they are managed, are shown below:

Risk	Description and impact	Risk change	How we manage the risk
Macroeconomic conditions	Approximately 70% of the Group's revenue is dependent on private patients having private medical insurance (PMI), paid by their employer or paid by the individual, or being able to afford its services (self-pay). In an economic downturn, the number of insured individuals falls with the level of employment and individuals have reduced real income to fund insurance or 'self-pay' for procedures. This would have an adverse effect on the Group's business, the results of its operations and prospects.	Down	The Board manages this risk by regularly reviewing market conditions and economic indicators to assess whether actions are required. As successfully employed in the recent economic downturn, if the private market contracts, the Group can try to reduce costs and future investment to improve profit and cashflow, and may be able to offer the released capacity to the NHS at its lower tariff, reducing the impact on profit.
Government policy	Change in the medium-term public funding of NHS services provision, and/or the prioritisation of this funding to particular service lines over time (elective healthcare, A&E, community care, etc.), could adversely reduce the flow of NHS patients. Changes in the service level requirements for providers of NHS services, and service level commitments to members of the public served by the NHS, could adversely impact the attractiveness of privately funded treatment. A fundamental change in the tariff structure (pricing arrangements), associated with the provision of services to the NHS, could result in reduced access to patients, reduced tariffs, or reduced prices leading to reduced volumes and/or margins.	Up	The Group believes that the private sector has become a fundamental partner of the NHS across the UK. The continued use of private facilities is, in Spire's view, the best way to meet the challenges facing the NHS particularly as there is limited capacity within the NHS to take back work currently undertaken by the private sector. The Group's service levels are confirmed by regular surveys of patients, GPs and consultants, which provide ongoing feedback to ensure NHS requirements (whether as providers or as commitments to its patients) are met. In addition, the Board regularly reviews the competitiveness of its patient offering (both NHS and private patients). The Board continually monitors government policy, NHS requirements and associated tariff structures to consider the need for cost and/or investment reduction, whether in the short, medium or long term. See Spire Hull and East Riding Hospital's case study (on pages 46 and 47), which demonstrates a successful partnership with the NHS.
Laws, regulations and loss of reputation	The Group operates in a highly regulated environment, including complying with the requirements of, for example, the CQC, Monitor and the CMA. Failure to comply with laws, regulations or regulatory standards may expose the Group to patient claims, fines, penalties, damage to reputation, suspension from the treatment of NHS patients and loss of private patients, such that the Group may not be able to operate one or more of its hospitals, causing a significant reduction in profit. In addition, the Group could fail to anticipate legal or regulatory changes leading to a significant financial or reputational impact.	Down	Following the IPO, the Group is in the process of implementing a new group-wide risk management framework (and associated policies and procedures), which is tasked with the review, monitoring and, via the executive management team, ensuring that these risks are mitigated as far as possible. During 2015, this framework will be further strengthened in order to monitor and react to the changing regulatory framework of a listed company in the healthcare sector. Emerging legal or regulatory changes are monitored by the Board, its executive management team and the risk Board Committees, as well as consultations with external advisers and industry briefings.
Clinical care	Spire operates in a highly complex medical sector and requires high clinical standards from staff, consultants and third-party suppliers. If they fail to meet the standards required, the Group may be subject to litigation and/or media coverage, resulting in reputational damage and, potentially, financial loss. The Group's future growth depends upon its ability to maintain its reputation for high-quality services by meeting its quality goals. Poor clinical outcomes, negative media comment or patient, GP and/or consultant dissatisfaction could reduce the quality ratings, which could lead to a loss of patient referrals. The Group could receive claims arising from clinical care that could exceed its insurance limits of cover, giving rise to additional expenses being borne by the Group.	Level	Spire has implemented and continually monitors its clinical standards, policies and procedures. The introduction of the Board's Clinical Governance and Safety Committee will aid the monitoring and control of clinical risks. A number of key performance indicators are used in the assessment of clinical standards and these may be found in the Clinical Review, on pages 38 and 39. The Group reviews and maintains insurance to mitigate the possibility of a major loss. Adequacy of cover is reviewed annually with the Group's brokers.
Competitor challenge	Spire operates in a highly competitive market. New or existing competitors may enter the market of one or more of our existing hospitals, or offer new services, reducing the market share for the Group. The potential impact would be the loss of market share and reduced profitability and cash-flow.	Level	The Group maintains a watching brief on new and existing competitor activity and retains the ability to react quickly to changes in patient and market demand. The Group considers that a partial mitigation of the impact of competitor activity is ensured by providing patients with high-quality care and by maintaining good working relationships with GPs and consultants.
Concentration of PMI market	The PMI market is concentrated, with the top four companies - Bupa, AXA, Aviva and VitalityHealth (formerly PruHealth) - having a market share of over 87% (see page 13). Loss of an existing contractual relationship with any of the key players could significantly reduce revenue and profit.	Down	The Group works hard to maintain good relationships and a joint product/patient health offering with the PMI companies, which, it is believed, assists the healthcare sector as a whole in delivering high-quality patient care. The Board believes continuing to invest in its well-placed portfolio of hospitals should provide a natural fit to the local requirements of all the PMI providers. The Group has entered into contracts to continue the good relationships for the long term (see Bupa in the Chief Executive Officer's statement on page 8) and to reduce the Group's risk.
Availability of key medical staff	Due to growing demand for healthcare, and a limited supply of appropriately qualified nursing staff, the healthcare sector is seeing a rising shortage of skilled nursing staff. Profitable growth, in line with the Group's strategy, requires an expansion of clinical services in hospitals, particularly including more complex surgical procedures and ongoing treatment of higher-risk patients, which could be impacted by a shortage of key medical staff. In order to expand our directory of services at hospital level, in line with our strategy, it is vital to have access to appropriately qualified, self-employed consultants. The market may well see salary rates rise as competition for staff increases and, as a result, the Group's costs would increase and its profits would reduce.	Up	The Board focuses on staff retention, evidenced by very high levels of staff satisfaction and, hence, low staff turnover, and its excellent reputation to attract new staff. Overseas recruitment of English-speaking nurses is being used to mitigate the UK shortage of trained nursing staff and to reduce the cost of using agency staff. The Group believes consultants are attracted by its advanced facilities, technology and equipment, excellent brand and reputation, the availability of a broad range of treatments, skilled nursing staff and medical support staff, and the efficiency of administrative support. The Group undertakes continuous investment in its equipment, facilities and services to retain high-quality consultants and also provides theatre capacity to new consultants. This is confirmed by high consultant satisfaction levels, see page 24. An employee survey is conducted annually to establish employee satisfaction and, where appropriate, changes in working practices are made in response to the survey findings to aid retention.
Investment plans and execution	The capital investment programme (which includes IT system developments) for the Group in 2015 and beyond consists of the largest number of parallel developments undertaken to date. The management of the programme brings risks relating to: · delays in bringing additional facilities, or IT functionality, on line; · cost overruns; and · change capacity and project management capability. Any major cost overrun or substantial delay in delivery could impact upon the expected returns and the Groupís planned profit growth and future cashflow.	Up	The Group ensures change and project risks are minimised by the following: · a detailed financial and operational appraisal process is in place to evaluate the expected returns on capital. During the course of development, the actual costs and estimated returns are regularly monitored; · implementing robust bid procedures, including a thorough review of the contract terms and conditions, technical requirements and programme cost forecasting; · rigorous planning, and programme and project management; · the selection of contractors and suppliers is based upon track record of delivery and credit worthiness; and · regular reviews of the programme, and individual projects, by the executive sponsor and the Board.
Liquidity and covenant risk	The Group may have insufficient liquid resources to meet its financial liabilities as they fall due, or breach financial covenants linked to its borrowings. Failure to meet its obligations or covenants would have a substantial adverse effect on the Groupís reputation and may lead to borrowings becoming repayable earlier than contracted for.	Down	The Group actively monitors and manages its liquid asset position, its financial liabilities falling due and the cover against its loan covenants. Forward projections show that the Group can meet its liquidity requirements from existing liquid assets and maintain its loan covenant obligations, even in adverse scenarios. In addition, there is a committed, undrawn revolving credit facility of £100 million available to meet liquidity needs, if required. In an adverse scenario, capital expenditure could be cut back to reduce the demand on liquidity.
Interest rate risk	The Group has liabilities outstanding under floating rate bank loan facilities and, is therefore, exposed to interest rate risk from fluctuations in market rates. Cashflows would be adversely impacted due to any increases in interest rates, reducing availability for other purposes.	Down	On a regular basis, the Group reviews the cost benefit of entering into derivative financial instruments to hedge its exposure to interest rate volatility based on existing variable rates, current and predicted interest yield curves, and the cost of associated medium-term derivative financial instruments. The impact of changes in market rates of interest would be partially mitigated by increased rates receivable on money market deposits.

Statement of directors' responsibilities

As set out above, the following responsibility stamen is repeated here solely for the purpose of complying with Disclosure and Transparency Rule 6.3.5. This statement relates to and is extracted from page 92 of the Annual Report 2014. Responsibility is for the full Annual Report not the extracted information presented in this announcement or the Preliminary Announcement.

The directors are responsible for preparing the Annual Report and Accounts, including the consolidated financial statements and the Company financial statements, Directors' Report, including the Directors' Remuneration Report and the Strategic Report in accordance with applicable law and regulations. Under that law, the directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the parent company financial statements in accordance with IFRS, as adopted by the EU.

Company law requires the directors to prepare such financial statements for each financial year. Under company law, the directors must not approve the financial statements, unless they are satisfied that they give a true and fair view of the state of affairs of the Company on a consolidated and individual basis, and of the profit or loss of the Company on a consolidated basis for that period.

In preparing these financial statements, the directors are required to:

· select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements in IFRSs as adopted by the EU is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's and Company's financial position and financial performance;

· state that the Group's and Company's financial statements have complied with IFRSs as adopted by EU, subject to any material departures disclosed and explained in the financial statements; and

· prepare the financial statements on a going-concern basis, unless it is not appropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions, and disclose, with reasonable accuracy at any time, the Company's financial position and enable them to ensure compliance with the Companies Act 2006. They are also responsible for safeguarding the Company's assets and for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Each of the directors, whose names and functions are listed on pages 56 and 57, confirms that:

· to the best of their knowledge, the consolidated financial statements and the Company financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company on a consolidated and individual basis;

· to the best of their knowledge, the Strategic Report and the Directors' Report include a fair review of the development and performance of the business and the position of the Company on a consolidated and individual basis, together with a description of the principal risks and uncertainties that it faces; and

· they consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

By order of the Board,

Rob Roger

Chief Executive Officer

Simon Gordon

Chief Financial Officer

23 March 2015

Related party transactions

The following description of related party transactions is extracted from pages 125 and 126 (note 33) of the Spire Healthcare Group plc Annual Report 2014.

Key management personnel are deemed to be the directors and members of the executive management team as set out on pages 56 to 58.

More detailed information regarding the directors' remuneration, shareholdings, pension entitlements and other long term incentive plans is shown in the Directors' Remuneration Report on pages 74 to 88.

Relationship Agreement

On 7 July 2014, the Group and Cinven Funds, the former ultimate parent undertakings, entered into the Relationship Agreement, which, upon Admission, regulates the ongoing relationship between the Group and Cinven Funds. The principal purpose of the Relationship Agreement is to ensure that the Group is capable of carrying on its business independently of Cinven Funds, that transactions and relationships with Cinven Funds (including any transactions and relationships with any member of the Group) are at arm's length and on normal commercial terms, and that the goodwill, reputation and commercial interests of the Group are maintained.

The directors believe that the terms of the Relationship Agreement will enable the Group to carry on its business independently of Cinven Funds.

Trading transactions

Group companies entered into the following transactions:

(£ million)
Counterparty	Nature of transaction	2014	2013
Former parent undertakings:
Cinven Limited	Monitoring fees*	0.4	0.6
Rozier Finco Limited	Interest payable	45.1	75.8
Rozier Finco 2 Limited	Interest payable	9.1	14.9
Other related party:
Management team of Spire Group	Interest payable	0.3	0.5
Subsidiary undertakings:
Montefiore House Limited**	Management services	0.5	0.3
Montefiore House Limited **	Property rentals	1.8	1.7
Montefiore House Limited**	Interest receivable	1.0	1.5

* In respect of the monitoring of the performance of the Group on behalf of Cinven Funds.

** Montefiore House Limited ('MHL') is a hospital operating company which is owned 50.1% by the Group. A subsidiary company of the Group provides management services to MHL, leases the hospital property to MHL in exchange for the payment of rent by MHL and loan finance.

Amounts owed (to)/by related parties

(£ million)	Nature of relationship	2014	2013
Cinven Limited	Former parent undertakings	-	0.1
Rozier No. 1A Limited Partnership	Former parent undertakings	-	12.6
Montefiore House Limited	Subsidiary undertaking	22.1	18.6

Loans due to related parties

(£ million)	Nature of relationship	2014	2013
Spire Healthcare Limited Partnership	Former parent undertakings	-	2.6
Rozier Finco Limited	Former parent undertakings	-	707.6
Rozier Finco 2 Limited	Former parent undertakings	-	138.9
Management team	Other related party	-	4.4

As part of Admission, the loans due to former parent undertakings and the Management team were either capitalised or repaid.

For year ended 31 December 2013, amounts payable to Rozier Finco Limited, Rozier Finco 2 Limited and Management carried interest of 12% per annum.

Transactions with key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly. They include the Board and executive management team, as identified on pages 56 to 58.

Compensation for key management personnel is set out in the table below: