Final Results

Southern Cross Healthcare Group PLC

-- Preliminary Results --

Tuesday, 7 December 2010 - Southern Cross Healthcare Group PLC (LSE: SCHE) ('Southern Cross', 'the Group', or the 'Company'), the UK's largest care home provider, today announces its preliminary results for the period ended 30 September 2010.

Financial Highlights

·; Home EBITDAR before central costs decreased by 3.3% to £280.9m (2009: £290.6m).

·; Adjusted EBITDA of £53.4m (2009: £72.5m).

·; Adjusted earnings per share for the period of 7.65p (2009: 17.65p).

·; Net debt at period end reduced by £25.8m to £7.3m.

·; Revision to existing banking arrangements, including an improvement in the fixed charge covenant from 1.23x to 1.1x.

Statutory Financial Highlights

·; Revenue increased by 2.3% to £958.6m (2009: £937.1m).

·; Operating loss £44.1m (2009: loss of £12.7m) after a non-cash charge of £51.3m (2009: £51.8m) for future minimum lease increases under IAS17 and exceptional charges of £6.3m (2009: £Nil). Excluding these charges, operating profit was £13.5m (2009: £39.1m).

·; Basic loss per share for the period of 19.51p (2009: 11.75p loss).

Operating Highlights

·; Available beds increased to 38,603 at the period end (2009: 38,124 beds).

·; Number of homes operated increased to 752 at the period end (2009: 744).

·; Average occupancy 84.8% (2009: 87.7%), average occupancy restated for marketable beds of 87.8%.

·; Average weekly fee increased by 2.2% to £558 (2009: £546).

·; Significant progress made towards improving overall service quality, with 82% (CQC suspended ratings nationally in June 2010) judged excellent or good, up from 81% in March 2010, 77% in September 2009 and 71% in May 2009.

·; Self funding admissions up from 17% of total admissions in March 2010 to 20% in September 2010.

Jamie Buchan, Chief Executive, said:

"In the last year our trading environment has been difficult leading to a reduction in profits; nevertheless we have been successful in reducing borrowings and in making major progress in our business re-engineering programme, New Horizons, which remains on course to transform our delivery of care.

"I am pleased that the continued support of our banking partners has brought greater stability to the business and we continue our efforts to convince landlords that they should adopt a similar approach. Our forthcoming negotiations with local authorities on fee levels will be critical if the gap between the true cost of delivering care and the fee levels which many authorities are prepared to pay is not to widen. Given the cost pressures facing our industry, including the reasonable expectations of the people who work within it and the increasing acuity of residents placed in its care, it is very clear that no local authority can justify reductions in fee levels at this time.

"In 2011 we will complete the delivery of the New Horizons programme giving particular focus to care quality, resident sales mix and cost effectiveness. That said, we anticipate another challenging year involving continuing pressure on fee levels and placements which, when combined with fixed and variable cost inflation, have the potential to impact profitability."

Enquiries:

Notes

Mature occupancy excludes immature beds, newly developed homes or refurbished homes which have been trading for less than 12 months.

Home EBITDAR represents earnings before interest, tax, depreciation, amortisation, loss on disposal of property, plant and equipment and subsidiary undertakings, impairment of freehold assets held for sale, onerous contracts and related impairments and rent.

Adjusted EBITDA represents earnings before interest, tax, depreciation, amortisation, loss on disposal of property, plant and equipment and subsidiary undertakings, impairment of freehold assets, onerous contracts and related impairments and charges for future minimum rental increases and exceptional central costs.

Adjusted earnings per share is defined as earnings before charge for future minimum rental increases, exceptional central costs, onerous contracts and related impairments, loan arrangement fees written off, loss on disposal of property, plant and equipment and subsidiary undertakings and impairment of freehold assets held for sale and the taxation impact thereof, divided by the weighted average number of shares.

At the start of the financial period, the Group changed its internal reporting cycles and now reports on a calendar monthly basis (previously the Group reported 13 periods of 4 weeks). The results for the period ended 30 September 2010 are therefore for a period of 368 days (2009: 364 days).

Chairman's Statement

Strategic Focus

During the period, we maintained a clear strategic focus on the Group's New Horizons change programme the aim of which is to create an organisation capable of providing universally trusted levels of care based on the respect and dignity of the individual and delivered in modern, high quality accommodation. To some extent, the operational imperatives underlying this programme - improving the quality of our service delivery, investing in the development of our people and management systems, and capturing efficiency savings - have been given more immediacy by the need to meet the challenges posed by the macro-economic factors impacting the Group.

In common with other sectors, economic uncertainty was prevalent during the period under review. The period started positively before conditions became more difficult as concerns grew about the public deficit and future government policy, including the significant impact of likely cuts in public spending to be announced in the autumn Comprehensive Spending Review. This was always likely to have a substantial impact on a business so reliant on Local Authority funding.

Against this backdrop, the Group experienced lower admissions than seen for some time, resulting in a fall in occupancy rates. In addition, fee negotiations with Local Authorities became more difficult. At the same time, cost pressures continued unabated including the negative effects of rent escalation, rising minimum wage and higher utility costs.

Against this background, the need for delivering the New Horizons programme is clearer than ever. Its main objectives are to:

·; Enhance care delivery so that we are ultimately recognised as the most trusted care home group in the UK.

·; Increase the number of self-funding residents, thus reducing our dependence on public funding and improving margins.

·; Improve efficiency so that everything is done in a better, more effective and lower cost manner.

·; Reorganise our management structure to create a flatter, more responsive and accountable management team.

In all of these we have made substantial progress during the period but there is still much to be done.

As announced on 25 November 2010, the Board has been approached by other parties expressing potential interest in the Group. The approaches are still preliminary in nature, and the Board continues to believe it to be in shareholders' interests to continue to hold exploratory discussions.

Financials

The macro-economic factors described above combined to negatively impact Group results and in March we lowered market expectations for the full year outturn. An adjusted EBITDA of £53.4m was achieved compared with £72.5m in 2009 and £78.1m in 2008. Revenue grew by 2.3% to £958.6m from last year's £937.1m. Home EBITDAR margin before central costs has fallen by 1.7% to 29.3%. Occupancy in our mature homes fell from 88.4% to 86.1%.

Net debt fell further by £25.8m to £7.3m, a significant achievement given the underlying trading environment. The Group continues to pursue its policy of further reducing debt and, therefore, the Board has decided not to propose a final dividend for FY2010.

On 19th May, we announced we had consolidated the Group's banking arrangements into a revised amortising £50m revolving credit facility (RCF). This facility replaced all the Group's existing bank facilities and reduced the number of Syndicate lenders from eight banks to two. I am pleased to report that following recent discussions with the Group's lenders, revisions to the existing banking arrangements were agreed on 6 December 2010. The facility now comprises an amortising £45m RCF repayable in September 2012, with the fixed charge covenant relaxed from 1.23x to 1.1x.

Industry Developments

In July 2010, the Government launched its Commission on the Funding of Care and Support (known as the Dilnot Commission) to examine the future provision and funding of care in the UK. Southern Cross fully supports the work of this important body and made an early initial submission to it.

We look forward to working with the Commission to help it reach a balanced view of how our society can provide affordable and sustainable care capable of meeting the long-term needs of an ageing population. In particular, we believe the Commission should play a critical role in encouraging Local Authorities, the NHS and care providers such as ourselves to work together in developing the services required to meet the future needs of an ageing population. Such collaboration should enhance the care delivered to our elderly population, whilst generating better value for all those who commission care and moving us towards a system which pays providers the true cost of care and alleviates current imbalances in fee rates around the country.

The NHS is changing, with GP consortia about to assume responsibility for commissioning replacing PCTs in this regard. They will be responsible for organising healthcare and deciding which services to buy and from whom. While remaining focused on our core elderly care services, we will continue to respond flexibly to changing market demands and take advantage of the opportunities presented. This will include offering more specialised care - for example, in dementia, palliative and step down care. As people's perception of appropriate personalised care for individuals evolves, this will also involve greater levels of day care provision, outreach care in the community and short-term and respite care as Local Authorities seek to encourage and support people to stay in their own homes, with support, for as long as practicable.

Landlords

During the period, the Group engaged Morgan Stanley to review its lease arrangements with landlords. All leases are subject to escalation clauses. Whilst many are fixed, a significant number of rents are tied to RPI, resulting in rents currently rising faster than the fees we charge. This work is ongoing and the Group has entered into a dialogue with some of its landlords to explore ways in which rents might be restructured to provide greater stability and a stronger covenant.

People

The Group remains a significant employer with a dedicated team of over 43,000 people working in homes across the UK. I never fail to be impressed by the commitment and expertise of our staff, so often displayed in testing circumstances. For most, their job is more than a way of earning a living - it is a vocation. Increasingly, we seek to recognise this in our comprehensive training programmes and remuneration packages. Our people are one of the reasons that I am optimistic about the future. On behalf of the Board, I thank colleagues throughout the business for their outstanding contribution in a difficult year.

In August, Irene Gray joined the company as Director of Care. This is an important milestone. Her appointment is a clear demonstration of the Group's commitment to take the lead in clinical governance and deliver dependable high quality services which are respected by those who commission care as well as by residents and their families.

Notwithstanding, we see difficult trading conditions in the short term, we remain as determined as ever to forge ahead with our change programme which we confidently expect to deliver long-term, industry-leading levels of quality and service. This will put Southern Cross in a strong position to take advantage of the demographic trends that continue to indicate a longer-term increase in average age and demand for elderly care services.

Ray Miles 

Chairman

Chief Executive's Statement

My priorities for the business are as follows:

·; Improve care delivery to our residents in a measurable and sustainable way.

·; Grow our share of dementia, end of life and 'step down' care markets.

·; Increase the number of self funding and co-paying residents.

·; Achieve real reductions in cost to serve.

·; Invest in our care homes and in the staff who deliver care.

Overview

During the period, we have made significant progress towards transforming the business such that, by 2015, we become recognised as providing the most trusted and sought after care experience in the UK. In pursuit of this aim we successfully completed the first phase of our internal change programme, New Horizons, which I introduced in last year's report and for which the following objectives (end calendar year 2011) have been communicated:

·; Improving service quality such that at least 85% of our homes are externally judged good or excellent.

·; Adding 1,200 self funding residents, thereby raising their proportion of total residents to 22%.

·; Reducing Home Manager turnover to 22% per annum.

·; Re-engineering the Group's cost structure to achieve savings of at least 1% of revenue.

Overall we believe that the New Horizons programme will generate between £15-£20m of annualised value to the business by the end of 2011 together with a transformed operational capability.

New Horizons

1. Organisation Structure

In order to enable the business to meet its objectives, between February and July of this year, we undertook a major re-organisation of our field operations and central functions. We de-layered our operations function from seven to four management levels, exiting 38% of operations staff above Home Manager level and invested the savings in:

·; Decentralising operations to four P&L accountable regions.

·; Establishing a care function.

·; Establishing a full human resources function.

·; Establishing a sales capability.

Whilst the reorganisation has not been without its challenges, it is already clear that the new structure has led to improved care quality (lower number of embargoed homes) and a better sales mix (more self funders) whilst empowering Home Managers to develop their businesses for the benefit of the communities which they serve.

Regional Business Units

Our four new Regional Directors have fully established their regional teams in which 33 Area Managers, each with a team of c21 Home Managers, play the central role. Within each area, Home Managers are further supported by a local team of subject matter experts covering people management, training, sales development and business analysis. In addition, each Area Manager team is supported by a dedicated Care Quality Advisor responsible for raising standards of care.

Care Function

Our overriding obligation and commitment is to deliver excellent, affordable, personalised care to our residents and we have made strong progress in the creation of a care function within the Group. In February we created over sixty new, field-based, roles including a national team of Service Quality Inspectors who inspect every one of the Group's homes on a risk-assessed frequency against a set of demanding standards based on individual resident outcomes. In August, the Group announced the appointment of Professor Irene Gray to lead the function as Director of Care. Irene's job is to raise standards of care and clinical governance across the portfolio and to act as a champion for the development of the nursing and care profession within Southern Cross.

A revised Clinical Governance system has also been introduced to provide assurance over standards. New systems are being deployed to analyse key care data with the objective of establishing a set of indicators which will allow the Group to predict homes which are failing and, consequently, to adopt an early intervention approach.

We have continued to make good progress against our target for improving the quality of care delivered in our homes. The table below shows that the number of homes in England judged by the external regulator as Good or Excellent had risen 5% to 82% by Q3 of 2010. Full year figures are not available as the Care Quality Commission discontinued their star rating system in June. The Group is confident however that its internal quality inspection process will continue to drive standards up whilst reducing the number of poor and adequate homes.

*1 CQC no longer update their quality scores following the implementation of the new standards under the Health and Social Care Act 2008.

People Management

Ours is a people business and I am very pleased indeed with the progress which has been made in delivering a comprehensive set of people management services to our care homes.

During the period, the Group introduced a full suite of processes covering staff recruitment, induction, performance appraisal and training. A national HR support hub was created to act as a one stop shop for all internal people processes and enquiries covering our 43,000 staff. In addition, a national training organisation, embedded within our Regional Business Units, has been created to act as the delivery vehicle for statutory, clinical and management training across all staff groups. In particular, our Home Managers have received training in business management and finance, people management and sales which has already paid dividends in reducing staff turnover by 3% and in increasing the numbers of self funding residents within our homes. Overall I am confident that an improved level of staff engagement has been achieved.

We are committed to further developing and refining training opportunities for everybody in the business. Having the best trained staff in the sector is not only the right and responsible thing to do for our people, it is absolutely central to our business model: high job satisfaction and motivation levels will lead directly to better quality service delivery which will enhance our reputation.

During the period the Group invested in the creation of a human resources database which will go live in early 2011 and which will capture all staff records, thereby enabling a wide range of people management and efficiency programmes to be undertaken.

A Time and Attendance rostering system is being rolled out across all homes. Indications from the first 60 homes to use this system are that labour costs are reduced by more than 1% as a result of greater control and accuracy of rostering. The system will also enable the set up of internal staff bank groups which the Group believes will lead to a reduction in agency costs.

Sales

One of the priorities we have set ourselves is to improve the Group's penetration of the self funding market. During the period, the average weekly fee for self funding residents was £668 versus £534 for residents whose care was funded by Local Authorities. The Group has developed a new sales process supported by an on-line enquiry management system and a small national sales call centre. Following a successful pilot in the South of England, which showed an increase in self funder admissions of up to 50%, 250 Home Managers across the UK have been fully trained in our new sales process. In order to support Home Managers in achieving sales targets we recruited experienced sales development professionals within each Regional Business Unit. In addition, the Group's website has been updated with improved functionality and an enhanced ability to drive sales enquiries.

2. Segmentation and Cost Management

During the period we introduced an internal business segmentation model in order to help drive performance, simplify management communication and inform capital investment decisions.

Each home has been classified within one of five segments according to its sales opportunity and cost structure. Each segment has distinct operating characteristics and margin potential:

·; "Premium": capable of over 60% at self funder penetration at premium prices.

·; "Plus": capable of over 30% self funder penetration.

·; "LA Major": large, cost efficient homes focused on local authority provision.

·; "LA Minor": less efficient homes focused on local authority provision.

·; "Cosy": small (less than 35 bed) homes.

 In turn, homes are also accorded the following status:

·; "Mover": capable of moving into a more attractive segment.

·; "Improver": capable of improvement within the existing segment.

·; "Trend": operating at an acceptable level within the existing segment.

The Group believes that approximately 200 homes can be positioned in the "premium" and "plus" segments and that over 300 homes have "mover" or "improver" potential.

In May of this year, each Area Manager used the segmentation model in preparing area business plans collaboratively with Home Managers. This process has further enabled the development of simple, focused plans for each home and improved stewardship.

During the period the Group invested £30.3m in maintaining and improving the portfolio, more than meeting its commitment from last year. A Director of Property Services was hired to lead the investment programme and to ensure that its execution optimised returns according to the segmentation methodology.

Progress has been made in re-engineering the cost base. The Group began a comprehensive review of central procurement and this work is two thirds complete with approximately £2m of annualised savings already captured in telecommunications, utility supply and food. A review has also been undertaken in repairs, renewals and improvements where the group spends approximately £70m per annum (labour and materials). As a result I am very pleased to announce the appointment of Bovis Lend Lease as our strategic partner for the provision of maintenance and refurbishment services across our national network of 752 homes. We believe the partnership with Bovis Lend Lease will lead to improved standards of service to our home management teams and therefore our residents, greater operational integrity and a more efficient use of the Group's cash resources. The Group is also in the process of reviewing its catering arrangements where it spends c£80m per annum (labour and materials) in order to improve both the quality and cost effectiveness of this important service.

Industry 

During the period, the increase in fees paid by local authority commissioners fell materially below the rate of inflation. In addition, older people placed into the Group's care are increasingly frail on admission and have increasingly acute needs, often involving dementia, which require higher levels of personal attention by our nurses and carers.

The care industry is largely dependent on state funding through either Local Authorities or the National Health Service. It is our view that this funding model is not sustainable in the future as the proportion of elderly people with acute care needs continues to increase. The Group has recognised this in its twin objectives of improving standards of care and in attracting a higher proportion of self-funding and co-paying residents. That said, the provision of services to public commissioners will remain our key market for some considerable time and consequently we have actively raised our industry profile during the lead in to the Government's Comprehensive Spending Review (CSR).

Our objective in engaging with government was to gain recognition of the proper economic and social value of care services, such as those delivered by the Group. To that end, the Group highlighted:

·; The value for money provided by residential care versus the true cost of providing other forms of care, for example 'extra care' and domiciliary care.

·; Continued inefficient local authority provision and commissioning conflict.

·; The opportunity for care homes to provide a wider range of services to the NHS at significantly lower cost.

The outcome of the CSR was disappointing. Local Authorities face reductions in their budgets of 26% over the four years commencing April 2011 and Social Care is not ring fenced. We remain deeply concerned that Local Authorities will reduce expenditure on care for older people by increasing eligibility criteria, thereby leaving vulnerable people without the access to appropriate forms of care, and by depressing fees to increasingly unsustainable levels.

The Group welcomes the setting up of the Dilnot Commission into the funding of long term care. This development gives the industry in general the opportunity to influence the future funding of appropriate elderly care provision in the UK and to debate the benefits of different models of care provision with a clear understanding of the true costs of each model. We will continue to work closely with the Commission which will report next summer.

Portfolio

Southern Cross operates 752 homes across the UK. During the period the Group added 479 new beds. At the beginning of FY2011, the Group took the decision to re-categorise 1,303 rooms, previously marketed as twin bedded rooms, for single occupancy at premium rates. This will reduce the number of available beds being marketed across the Group to 37,300, representing a 10.2% share of the UK market for independently provided residential care. (Source: Laing & Buisson).

Caring for Older People

Historically, the Group has operated under two brands, Southern Cross Healthcare and Ashbourne. Following the work done on internal business segmentation and the classification of homes into five segments (Premium, Plus, LA Major, LA Minor, and Cosy) the historical classification under Southern Cross and Ashbourne has been discontinued.

The Group is currently undertaking a major review of its elderly care marketing proposition and branding.

Specialist Services

Active Care

Active Care is one of the country's largest independent mental health and learning disability care providers, operating 49 homes and 930 beds. In the period under review, Active Care generated revenue of £41.9m (2009: £43.8m) a decrease of 4.3%, due primarily to the closure of Abbeydale. It attracted average weekly fees of £1,086 (2009: £1,097).

Operating Performance

During the period, the macro-economic climate has materially worsened leading directly to a like for like decline in mature occupancy of 2.3%. In particular, the Group experienced a reduction in Local Authority admissions in the second half of the period in contrast to the recovery normally seen over the summer months.

The average Local Authority settlement during the period was 1.3% versus RPI of 4.4%. We continued to see restrictions on eligibility criteria and movement towards the provision of domiciliary care to elderly people with acute social needs.

Overall average weekly fees increased by a net 2.2%, while home payroll costs increased by 3.4% (excluding the additional 4 days in the current period of account) and home running costs increased by 5.2%. The results were negatively impacted by falling occupancy. Average occupancy in mature homes fell by 2.3% to 86.1%, although the market generally also fell. The net effect was that operating margin reduced by 1.7% to 29.3%.

The operating performance is summarised below.

Fee Rates

In the period under review, the Group achieved a net increase in average weekly fee rates of 2.2% to £558 (2009: £546). Fees charged to private clients were reviewed and an overall increase of 3.7% was agreed, effective from February 2010. Over the period, Local Authority fee rate increases differed from Authority to Authority. In England, an average increase of 1.0% was achieved, while in Scotland and Northern Ireland the increase was 2% while for Wales it was 1.6%, resulting in an overall average increase of 1.3%.

People

As I wrote last year in my first report as Chief Executive, I am constantly struck as I go round the business by the professionalism, enthusiasm and dedication of colleagues throughout the country. Our people - Home Managers, Carers, Nurses, Chefs, Housekeepers, Administrators and Maintenance Staff - take the lead in fostering relationships with our residents, their families and the local community. Along with regional and head office staff, they are our route to achieving our ambition to deliver the highest levels of care in the UK. They are vital to our success. Once again, I am delighted to express my thanks to all of them for the contribution they make to the business.

Outlook

The long term demographics for our business remain positive and we are clear that significant opportunities exist for the Group in the provision of dementia and end of life services. In addition we are developing a range of step down and re-ablement services which we believe will be attractive to NHS commissioners.

In the short term however, we will face continued pressure on occupancy levels and on margin as a direct consequence of Local Authority budget reductions and the lack of current definition from central government on long term funding for the care of older people.

Despite these challenges, the Group enters 2011 with a very clear sense of purpose. In its first year, the achievement of the New Horizons Programme has been to lay the foundations for turning Southern Cross into a significantly improved national operator of care homes. As we enter the second year of the programme we now have the management capability to create benefit in the following three areas:

·; Further improvement in care standards.

·; Capture of a higher margin resident mix.

·; Achievement of further cost efficiencies.

To that extent I believe that we are creating a valuable operating brand which will stand the company in very good stead for the future.

Jamie Buchan

Chief Executive

Financial Review

Revenue Statement

At the start of the financial period, the Group changed its internal reporting cycles and now reports on a calendar monthly basis (previously the Group reported 13 periods of 4 weeks). The results for the period ended 30 September 2010 are therefore for a period of 368 days (2009: 364 days).

The Group's operating performance is summarised in the following table:

Revenue

As at the period end, the Group had increased the number of available beds by 479 (1.3%) to 38,603 (2009: 38,124). The growth was attributable to the completion of two in-house developments (156 beds), an extension to an existing home (23 beds) and the acquisitions of four leasehold homes (300 beds).

The average number of available beds increased by 867 (2.3%) during the period, to 38,531 (2009: 37,664).

Revenue increased by £21.5m to £958.6m (2009: £937.1m), an increase of 2.3%. Excluding the additional 4 days in the current period of account, revenue increased by £11.2m. The increase in revenue is due to the net impact of fee increases, being 2.5% during the period and contributing additional revenue of £23.8m, the impact of acquisitions made in the prior and current period which contributed £12.7m, offset by a reduction in average occupancy of £22.4m and mix effects of £2.9m. Overall the average weekly fee rate increased by a net 2.2%.

Home Operating Costs

Home payroll costs increased £24.1m from £533.7m to £557.8m, of which £5.9m was due to the additional 4 days in the current period of account and £8.8m was attributable to acquisitions made in the current and prior period. Excluding these, home payroll costs increased by £9.4m, driven primarily by wage increases of 1.7% effective in October 2009.

Home running costs for the current period were 12.5% of revenue (2009: 12.0%), in absolute terms, excluding the additional 4 days in the current period of account, home running costs increased by £5.9m (5.2%). The increase was driven by cost of inflation of 3% (£3.4m) and increases in planned repairs and maintenance (£2.5m).

Rent

The rent charge for the period, including the non-cash charge of £51.3m (2009: £51.8m) under IAS17, was £248.3m (2009: £239.1m). Excluding the non-cash charge and the additional 4 days in the current period of account, the rental charge increased by £7.7m. The increase was driven by new leases entered into (£3.3m), leases with average fixed increases of 2.7% (£3.0m), leases with RPI linked average increases of 2.5% (£1.0m) and leases subject to 5 yearly increases (£0.4m).

Central Costs

Total central costs, including £6.3m in respect of exceptional central costs, were £36.8m. Excluding exceptional central costs and costs for the 4 additional days in the current period of account, central costs decreased by £0.7m. As a percentage of revenue, central costs (excluding exceptional central costs) equated to 3.2% (2009: 3.3%).

Exceptional Central Costs

Exceptional central costs relate to the internal change programme "New Horizons" and other exceptional costs. During the period £5.3m was incurred in respect of New Horizons. The total costs of the programme are expected to be £6m with the majority of the remaining costs anticipated to be incurred during the first half of FY2011. Other exceptional central costs totalled £1.0m, the majority of which related to costs incurred in respect of a review of the Group's operating lease portfolio.

Segmental Results

The Group continued to have two distinct segments within its operations, namely Elderly Care (which incorporates Southern Cross Healthcare and Ashbourne Senior Living) and Specialist (being the Active Care Partnership business).

Elderly Care

Average available beds within the Elderly Care portfolio increased by 867 to 37,601 (2009: 36,734). The total number of available beds within the Elderly Care portfolio at the period end was 37,673 (2009: 37,195).

Fee revenue in the Elderly Care segment increased by £23.4m (2.6%) to £916.7m, excluding the additional 4 days in the current period of account, revenue increased by £13.5m. The key driver of revenue growth was the increase in average weekly fee (£23.3m) and acquisitions completed in the prior and current period (£12.7m). These increases were offset by a reduction in occupancy (£20.4m) and mix effects (£2.1m).

Total Home EBITDAR before central costs decreased by £9.7m (3.5%) to £269.6m. Home EBITDAR margin before central costs for Elderly Care reduced to 29.4% (2009: 31.3%).

Specialist Care

Available beds in the specialist segment remained at 930 and included 53 beds in respect of Abbeydale, a centre that was closed during the period and which will re-open during FY2011 under the Elderly Care segment.

During the period, revenues in the Specialist segment decreased by £1.9m (4.3%) to £41.9m (2009: £43.8m) due primarily to the closure of Abbeydale.

Home EBITDAR before central costs for the period remained at £11.3m with Home EBITDAR margin before central costs increasing from 25.8% to 27.0%.

EBITDA

Loss before interest, tax, depreciation and amortisation, loss on disposal of property, plant and equipment and subsidiary undertakings, onerous contracts and related impairments, and impairment of freehold assets held for sale ('EBITDA') for the Group decreased by £24.9m to a £4.2m loss (2009: £20.7m profit). Excluding the impact of future minimum rental increases under IAS 17 and exceptional central costs, adjusted EBITDA decreased by £19.1m (26.3%) to £53.4m.

Depreciation

Depreciation has increased from £21.6m in 2009 to £27.1m in the current period, reflecting the higher spend incurred during the prior period.

Disposal of Freehold Assets

During the period, the Group disposed of freehold assets for a net cash consideration totalling £31.2m. The related assets had a net book value of £31.4m, resulting in a loss on disposal of £0.2m. Further freehold assets were sold for deferred consideration of £0.6m, being equal to the book value of the assets.

During the period, the Directors reviewed the carrying value of the Group's freehold properties. Following this review, a number of properties were found to have fair values lower than their carrying value. As a result, the carrying value of the related freeholds has been written down by £1.1m.

Onerous Contracts and Related Impairments

During the period, management took the decision to close two of the Group's homes. As previously reported, Abbeydale, an independent hospital located in North London, was closed in the first half of the financial period. Ferngrove, a home located in Lancashire, was closed in September 2010 due to the building not meeting the standard required by the Group. As a result of these decisions an onerous contract charge of £11.5m has been recognised in the period and included £0.9m of related impairment charges.

Net Finance Costs

The net financing costs for the period amounted to £3.3m (2009: £7.1m), representing a decrease of £3.8m due to lower levels of debt across the period.

Included within net finance costs are interest charges of £2.2m (2009: £6.0m) in relation to interest payable on bank borrowings and amortisation of loan arrangement fees of £1.1m (2009: £0.7m). The lower interest charge was due to lower levels of debt held by the Group, with net debt at 30 September 2010 of £7.3m (2009: £33.1m). Amortisation of loan arrangement fees increased as a result of costs associated with the consolidation of the Group's banking facilities, which was completed on 18 May 2010.

Taxation

The tax credit on earnings before taxation of £10.7m (2009: £2.3m charge), consists of a current tax credit of £0.3m and a deferred tax credit of £10.4m, and represents a headline rate of 22.6% (2009: 11.6% negative). The deferred tax credit includes a current period credit of £8.2m, a prior period credit of £3.1m and a charge of £0.9m attributable to a change in the rate of taxation. The current period deferred tax credit is significantly impacted by £8.0m of trading losses arising in the period which cannot be recognised due to the uncertainty of their future economic benefit. This is offset by a £5.3m credit (of which £2.5m relates to prior periods).

Furthermore, the current period tax credit is impacted by future minimum rental increases, onerous contracts and related impairments, impairment charges of freehold assets held for sale, losses on disposal of property, plant and equipment and subsidiary undertakings and the rate change on the recognition of deferred tax assets from 28% to 27%. The corporation tax rate change is effective from April 2011 and it is anticipated that all deferred tax assets will reverse after this date.

The reconciliation below shows the effective rate of tax after consideration of the above items.

After consideration of the above items, the current tax charge of £4.1m represents an effective tax rate of 24.6% (2009: 25.8%) before charges for future minimum rental increases, onerous contracts and related impairments, losses on disposal and impairment charges.

The Group expects the effective future tax rate to remain at or slightly below the standard rate of corporation tax in future periods.

Dividends

Total dividends paid during the period amounted to £Nil (2009: £Nil) and the Directors have decided not to recommend a final dividend for the period ended 30 September 2010.

Loss per Share

The loss per share for the period was 19.51p (2009: loss of 11.75p). Earnings per share for the period before future minimum rental increase charges, exceptional central costs and the taxation impact thereof, was 2.55p (2009: 8.08p), a decrease of 68%. Excluding the impact of losses recognised in respect of freehold properties, impairment charges and charges in respect of onerous contracts and related impairments, adjusted earnings per share was 7.65p (2009: 17.65p).

Balance Sheet

Non-current Assets

Property, Plant and Equipment

Property, plant and equipment increased from £111.4m to £118.4m due to the net impact of additions to property, plant and equipment of £35.8m, offset by depreciation charges of £27.1m, and other asset disposals and impairments of £1.7m.

Deferred Tax

Deferred tax assets have increased by £10.5m from £14.7m to £25.2m. The movement is primarily due to the increase in capital allowances available to the Group.

Property Assets Held for Sale

At the start of the current period, the Group held 20 freehold property assets for resale with a value totalling £46.5m. During the period, 6 were disposed of with a value of £31.4m. Following a review by the Directors of the carrying values of the remaining 14 freehold property assets held for sale, an impairment charge of £1.1m was made.

The property assets held for sale at the period end relate to 14 freehold properties amounting to £14.0m, all of which are being actively marketed.

Cash Flow

Net decrease in cash during the period was £30.6m (2009: £29.6m increase), with cash inflow from operations of £33.4m (2009: £87.5m). Cash inflow from operations represents a cash conversion ratio of Adjusted EBITDA, after exceptional items, of 74.3% (2009: 120.7%). The current period cash conversion ratio has been reduced due to the impact of 5 quarterly rent payments (£14.6m) being made as a result of the extended period. Excluding the impact of these items, the cash conversion ratio, after exceptional items, was 102%.

Finance charges paid during the period amounted to £3.7m (2009: £13.1m) and included £1.1m relating to loan arrangement fees and costs in respect of the consolidation of the Group's banking facilities in May. The remaining payments relate to standard charges incurred in accordance with the Group's banking facilities. Tax payments during the period totalled £0.2m (2009: £15.6m repayment) and related to prior periods.

Net cash outflow from investing activities amounted to £3.9m (2009: £25.6m). Included within net cash outflow from investing activities are purchase of property, plant and equipment of £35.1m and receipts from the sale of subsidiary undertakings and the sale of property, plant and equipment and other assets of £25.5m and £5.7m respectively.

Purchase of property, plant and equipment totalled £35.1m and included £2.1m of development expenditure, £30.3m of maintenance and improvement capex on the Group's homes and other capital expenditure of £2.7m.

The net cash used in financing activities for the period amounted to £56.4m (2009: £35.6m) and included net repayment of bank borrowings totalling £55.8m.

Net Debt and Financing

During the period, the Group's net debt reduced by £25.8m to £7.3m (2009: £33.1m) with bank borrowings reducing by a net £55.8m. On 18 May 2010 the Group consolidated its existing banking arrangements into a revised £50m revolving credit facility. Interest on drawn amounts is charged at margins between 2.75% and 3.25% above LIBOR. At 30 September 2010, the Group had loans of £7.5m drawn on the facility.

As at the period end, the Group had committed bank facilities of £50m, against which it had loans drawn of £7.5m, finance lease obligations of £1.0m and guarantees issued of £11.8m, leaving £29.7m of undrawn facilities.

The Group holds agreements to limit its exposure to interest rate movements. At the period end, the Group had £13.6m of interest rate caps outstanding at 4.62% and £21.0m of interest rate collars outstanding with cap rates of 4.50% and floors of 2.57%. The notional amount hedged under these agreements reduces over their term and both expire on 30 June 2011.

Following recent discussions with the Group's lenders, revisions to the existing banking arrangements were agreed on 6 December 2010. The Group's facility now comprises an amortising £45m RCF repayable in September 2012, with the fixed charge covenant relaxed from 1.23x to 1.1x. The first amortisation, of £3.3m, takes place on 1 October 2011.

Available beds

Following a review of double occupancy rooms, the Group has reclassified 1,303 rooms as single occupancy. As at the beginning of FY11, this will have the net impact of reducing the number of available beds across the Group by 1,303 beds to 37,300. For FY10, this amendment to available beds would have had the effect of increasing average occupancy for the Group from 84.8% to 87.8%.

Richard Midmer

Group Finance Director

Consolidated Income Statement

All of the above activities relate to continuing operations.

The Consolidated Income Statement above represents all the gains and losses incurred by the Group during the periods presented and therefore no separate Consolidated Statement of Comprehensive Income has been presented.

1 EBITDAR represents earnings before interest, tax, depreciation, amortisation, loss on disposal of property, plant and equipment and subsidiary undertakings, impairment of freehold assets held for sale, onerous contracts and related impairments, and rent.

2 EBITDA represents earnings before interest, tax, depreciation, amortisation, loss on disposal of property, plant and equipment and subsidiary undertakings, impairment of freehold assets held for sale and onerous contracts and related impairments.

3 Adjusted EBITDA represents EBITDA after adding back exceptional central costs and the charge for future minimum rental increases.

Consolidated Balance Sheet

Consolidated Cash Flow Statement

Note: Included within the purchase of property, plant and equipment is development expenditure on new properties totalling £2.3m (2009: £18.1m).

Consolidated Statement of Changes in Shareholders' Equity

Notes to the Consolidated Financial Statements

For the period ended 30 September 2010

1 Accounting Policies

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, IFRIC interpretations and the Companies Act 2006 applicable to Companies reporting under IFRS.

Details of the IFRS policies can be found in the Group's consolidated financial statements for the period ended 30 September 2010.

2 Sale of Subsidiary Undertakings, Property, Plant and Equipment, Impairment of Freehold Assets Held for Sale and Onerous Contracts and Related Impairments

During the period the Group disposed of subsidiary undertakings for net cash consideration totalling £25.5m. The related assets had a net book value of £25.7m, resulting in a loss on disposal of £0.2m.

During the period the Group disposed of freehold assets for net cash consideration totalling £5.7m which was equal to the book value of the assets.

Further freehold assets were sold for a deferred cash consideration of £0.6m, being equal to the book value of the assets.

Impairment of Freehold Assets Held for Sale

The Group has reviewed the carrying values of its freehold properties. Following this review, a number of properties were found to have a fair value less than their carrying value. As a result the carrying value of the related freeholds has been written down by £1.1m.

Onerous Contracts and Related Impairments

During the period, management took the decision to close two of its homes, as a result a charge of £11.5m has been recognised in respect of onerous contracts and included £0.9m of related impairment charges.

3 Finance Costs and Finance Income

4 Taxation

The tax for the period is higher than the average standard rate of corporation tax in the United Kingdom (28%) (2009: 28%). The differences are explained below:

There are trading losses of £28.6m (tax effected: £8.0m) arising in the period that cannot be recognised due to the uncertainty of their economic benefit.

The tax charge is expected to be lower than the standard rate of tax in future periods due to the availability of tax losses, furthermore the tax charge will be impacted by the change in the standard rate of corporation tax from 28% to 27% from April 2011.

5 Dividends Paid and Proposed

The Directors declared an interim dividend of £Nil (2009: £Nil) per ordinary share, totalling £Nil (2009: £Nil).

The Directors have decided not to recommend a final dividend for the period ended 30 September 2010.

6 Loss per Ordinary Share

Loss per share is calculated by dividing the loss for the period attributable to ordinary equity holders of the parent, by the weighted average number of ordinary shares outstanding during the period.

Diluted loss per share is calculated by dividing the loss for the period attributable to ordinary equity holders of the parent, by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

The following reflects the share data used in the basic and diluted earnings per share calculations:

The Group presents exceptional items and charges for future minimum rental increases on the face of the income statement. Items that are considered exceptional, by virtue of their size or incidence, are disclosed in order to improve a reader's understanding of the financial information. To this end, additional basic and diluted earnings per share information, is also presented on this basis. Reconciliations of earnings and the weighted average number of ordinary shares used are set out below:

7 Statutory Accounts

The preliminary results for the period ended 30 September 2010 were approved by the Board of Directors on 7 December 2010. They are abridged from the Group's audited financial statements and do not constitute the statutory accounts of the Company within the meaning of section 434 of the Companies Act 2006. The auditors, PricewaterhouseCoopers LLP, have reported on the Group financial statements for each of the periods ended 30 September 2010 and 27 September 2009 and given unqualified opinions, which did not include a statement under Section 498 of the Companies Act 2006. The Group financial statements for 2009 have been delivered to the Registrar of Companies and the Group financial statements for 2010 will be filed with the Registrar of Companies following the Company's annual general meeting.