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Reed Social Care

Turnover increased to £35.2 million (2004: £34.3 million)

Year on year sales growth was achieved, largely due to the eight new branches opened in the last two financial years. Sales increases in these branches have offset a decline in sales experienced by some of the more established Social Care branches. This is attributable to an increasing level of competition, price and margin erosion resulting from new Neutral/Master Vendor contracts and other forms of supply agreement, together with periodic local authority campaigns to cut expenditure on agency staff and fill key roles with permanent staff.

Branch costs increased by £0.54 million year on year due to the investment in new branches. At the year end all twenty branches, with the exception of two were trading profitably. In the new financial year, there will be a much lower level of investment in expanding five established branches into the large domiciliary market, a sector which Reed Social Care has historically supplied on a limited scale from two branches. A successful initial penetration of this £1.9 billion market, will be followed by a roll-out across all existing branches over the next three years.

The focus in the forthcoming year will be to maximise the returns from our established branch network. However, further branches will be opened to service new business contracts. During the period the division won nine new local authority and private sector preferred supplier agreements, were included in a large scale regional multi-supplier contract and as announced in the interim results, the division renewed the Rotherham Borough Council Master Vendor contract for a second year and won a sole supplier contract for outreach services for adults with physical disabilities worth £0.5 million. In order to drive future growth through new contract gains, the Group is investing £0.18 million in a strengthened business development team.

Reed Health and Reed Doctor

Turnover in the combined division was £40.6 million (2004: £47.5 million)

As reported at the time of the interim results, sales and margins in this division have been severely impacted by continuing harsh trading conditions, caused by increased permanent NHS appointments, particularly for Doctors, reducing demand in addition  to extremely competitive pricing in new contract negotiations. Due to systemic leakage to non-approved and often higher priced agencies, these contracts have continuously failed to deliver compensating volume growth to offset the substantial price/margin erosion.

The situation has deteriorated to such an extent that some major staffing providers have chosen not to be included in new NHS framework agreements, assessing that the commercial rewards are greater for off-framework suppliers.

However, Reed Health Group continues to believe that these NHS agreements are in a transitory stage, that increasing pressure will reduce contractual leakage and that compliance is in the best interests of the NHS, patients and the earnings quality of approved suppliers.  Consequently, Reed Doctor has successfully gained a place on the new three year National Framework Agreement for Doctors from 1 October 2005.  The Group is already included on the National Framework Agreement for Allied Health Professionals. Re-tendering of the latter agreement has been brought forward to early 2006 to include Scientific and Laboratory staff and is likely to demand further price/margin reductions.


Reed Health Group supports those Trusts and Authorities that recognise that contractual leakage undermines their efforts to reverse budget deficits, while also increasing patient risk as non-approved framework agencies are not audited to the Purchasing and Supply Agency (PaSA) standards. The Group believes that these contract compliance objectives can be best achieved through Master Vendor or similar agreements.  The Group’s experience of the landmark North West London Strategic Health Authority (“NWL”) master vendor agreement for allied health professionals and scientific and laboratory staff, which commenced in April 2005, supports these conclusions: by year end the contract was delivering c40% cost savings to NWL, while achieving 92.8% fill rates of which Reed Health Group was meeting 52.9% of the vacancies and the remainder fulfilled by our secondary supplier partners.

During the period the division also secured a master vendor agreement for the provision of staffing to one of the new NHS Foundation Trusts and a key position on the preferred supplier list of another. Other major agreements include contracts to supply two of the NHS Procurement Confederations in the Midlands.

In Scotland, Reed Health has signed agreements with 10 of the 15 Scottish Health Boards and Reed Doctor has secured agreement with 14 of the 15 Scottish Health Boards, as well as a core supplier agreement in Northern Ireland.

In order to improve cost efficiencies and provide an integrated service to the health sector, the Reed Doctor and Reed Health divisions were merged in April 2005, delivering annualised savings of £0.75 million and enhanced business development capability under the leadership of Steve Cheetham, who was appointed Divisional Director in June 2005.

Reed Nurse

Turnover declined to £12.5 million (2004: £20.1 million)

The significant sales decline in Reed Nurse reflects the Board’s decision to restructure the division in the face of deteriorating market conditions. Consequently, ten branches were closed in the first half and, leaving two branches serving the London nursing market. Annualised cost savings of £1.0 million were delivered through the restructuring programme and the division traded profitably over the six months to 30 June 2005, albeit it at a marginal level.

As announced in March 2005, Reed Nurse successfully won a place on the London Agency Project 3 NHS framework (“LAP3”) for midwifery, mental health and general nursing staff with 3 star status in the pre-award audit. However, the division was not successful in being selected for critical care nursing in LAP3 and this, together with the disruption experienced during the roll-out of the new bill and pay system in 2004, has resulted in the loss of two major clients at the beginning of the new financial year.

The Division has retained four existing nurse supply agreements and two major nurse bank contracts, and the outcome of new nurse bank managed service bids and preferred supplier agreements is expected by the half year.

The extremely low charge and pay rates necessitated by the LAP3 tender process have eroded the historical cost and pay differentials between agency and NHS substantive staff. In the short term, this is resulting in nurses joining nurse banks or regrettably leaving the profession entirely. This fundamental change in economics has caused some NHS trusts to reconsider the traditional balance between substantive and agency staff and evaluate the increased workforce efficiencies that might accrue from an increased proportion of agency supplied nurses. The longer term impact of LAP3 is unlikely to become clear before 2006.

 
Teachers UK

Turnover was £1.2 million (2004: £2.6 million)

As announced in the interim results, a strategic review of this loss making division was undertaken and concluded that the division was non-core and sub-scale.  Consequently, the assets of Teachers UK were sold to Ocean Education Ltd in May 2005 for a consideration of £0.04 million and the relevant staff also transferred with the disposal.

The Group will continue to source and supply teaching professionals from its international subsidiaries and generate commissions by placing candidates within the Education sector via Ocean Education and other employment agencies.

International

Turnover was £0.5 million (2004: £0.3 million)

During the period new management was appointed in both the Australian and Canadian subsidiaries and the unviable New Zealand branch was closed. In Australia, a 56% increase in local placements income was achieved during the six months to 30 June 2005 compared to the first half. At the beginning of the new financial year, the Canadian subsidiary relocated from Calgary, Alberta to take advantage of the greater opportunities that exist in Vancouver, British Columbia and is expected to begin local placement sales during the coming year.

The main purpose of both businesses has been sourcing candidates for UK requirements and as a result of improved tracking, communication and management focus, conversion rates of International candidates increased from an average 39% in the first half to 60% during the second half.

Branding

As announced in May 2005, Reed Executive plc has given Reed Health Group notice of termination of the Trade Mark licence agreement granted at the time of Reed Health Group’s demerger from Reed Executive. Accordingly, the existing licence, which governs the terms under which Reed Health Group may use the Reed brand, will expire on 7 May 2006.

The Board is assessing the benefits and implications of introducing a new operating brand, while holding discussions with Reed Executive on the terms under which a new licence may be agreed. At present Reed Health Group is not subject to any brand licence fees.

Outlook and Strategy

The Social Care and Health markets will continue to be highly competitive, with NHS Professionals creating additional pressures within the Nurse and Doctors segments, and NHS contract compliance unlikely to improve materially in the short term. However, the overall potential for specialist staff within these sectors remains substantial and together with the expanding demand for flexibility in both staffing levels and working hours provides significant opportunities for growth.

All sectors are moving towards a more contractual and regulated environment, with a notable rise in Local Authority and NHS interest in Master/Neutral Vendor agreements, that should favour the leading staffing suppliers, especially those offering a wide spectrum of disciplines such as Reed Health Group. These types of agreement are forming the first real barriers to entry in the staffing market, as are higher compliance standards and HR legislation covering the provision of temporary staff.


The Group is investing in strengthening its business development capability in both the Social Care and Health Divisions and bringing in expertise from more sophisticated B2B markets. We will exploit the experience gained from the successful NWL Master Vendor and other managed service agreements to achieve quality earnings growth and use the MIS data provided by our systems to address weaknesses in contract compliance. We will work with strategic partners to satisfy customer requirements for Neutral/Master Vendor agreements encompassing all temporary staffing disciplines, beyond healthcare.

Reed Health Group expects to achieve improved sales growth in the Social Care and Allied Health Professions sectors, with more limited improvements in Doctor and Nurse due to NHS Professionals and the uncertainties of LAP3.  We are expecting to see a further decline in margins due to continuing competitive pressures and as the mix of contracted, recurring income grows at the expense of higher margin spot sales.

In order to operate within these lower margins the Group will enhance customer service and achieve the efficiencies needed through the application of its leading edge business systems and a rigorous approach to cost control.  Head Office costs will be reduced to continuously enhance the conversion of gross margin into operating profits.

During the year we have made solid progress in addressing many of the issues that were hindering the performance of the Group.  Whilst the drive towards improved business effectiveness must continue, our focus will be increasingly directed towards our customers and candidates to deliver sustainable income growth. 

We believe that Reed Health Group is strongly placed to take a leading position within the market in which it operates by exploiting its core strengths of breadth of offer, quality of candidates and competitive advantage in systems.

Trevor Goul-Wheeker, Chief Executive