Interim Management Statement

Q1 2011 Interim Management Statement

8th February 2011 - Southern Cross Healthcare Group PLC (LSE: SCHE) ('Southern Cross' or the 'Group'), the UK's largest care home operator, today issues its Interim Management Statement for the three months ended 31 December 2010 ("Q1").

Key Points

·; Revenue decreased £4.2m to £236.3m (Q1 2010 restated: £240.5m)

·; Average weekly fee up 1.1% to £558 (Q1 2010: £552)

·; Average occupancy rate in the mature estate of 87.6% (Q1 2010 restated: 90.7%)

·; Home EBITDAR margin, before central costs, 27.2% (Q1 2010: 29.3%)

·; Adjusted EBITDA £5.0m (Q1 2010 restated: £14.4m)

·; Net debt £21.4m as at 31 December 2010, an increase of £14.1m during the quarter.

Financials

The first quarter earnings are impacted by seasonal decreases in occupancy. As such, Q1 2011 Adjusted EBITDA is in line with expectations at £5.0m.

Net debt during the quarter increased by £14.1m due to working capital requirements and timing effects of payroll and supplier payments.

Occupancy and Fee Levels

Average occupancy in the period was 87.6% for mature homes and 86.5% for the network in total (Q1 2010: restated 90.7% and 89.4% respectively). Average occupancy for the mature estate was 86.2% for the week ended 30th January 2011.

During the quarter, like for like admissions in the elderly care business reduced by 7.0% with a 14.7% reduction in local authority admissions offset by a 14.7% increase in admissions from the NHS and an 18.0% increase in self funder admissions. The reduction in local authority admissions is reflective of cuts in service provision to older people in direct response to reduced central government funding.

The Group had previously anticipated that this year's local authority fee rate settlements would be marginally positive however, whilst the Group expects to agree rates with most authorities at levels which are broadly flat in nominal terms, some authorities have indicated their intention to impose significant fee reductions. Overall, the Group currently anticipates that fee levels will be marginally negative however a more exact picture is unlikely to emerge until April.

The Group continues to negotiate robustly with authorities in the interests of all stakeholders and remains acutely concerned at the serious risks presented to older people by commissioning decisions which arbitrarily reduce fees, deny access to proper care and prevent the industry investing in the staff training and facilities required to look after older people with increasingly high levels of need.

Political Environment

The Government Commission on the Funding of Care and Support (known as the Dilnot Commission) is currently examining the future provision and funding of care in the UK and will issue its report in July.

In providing its submission, the Group has argued that a gap exists between the true cost of delivering care and the fee levels which many authorities are prepared to pay, and that this gap is widening. The Group has encouraged the Commission to urgently recommend how affordable and sustainable care, capable of meeting the long-term needs of an ageing population, can be provided. In particular, the Group believes central government must play an active role in encouraging Local Authority commissioners to close inefficient in-house provision and to act collaboratively with the independent sector to develop properly costed service models which will facilitate investment both in staff and in infrastructure.

The Group is also involved in a joint industry initiative which is encouraging central government to intervene immediately to open up the NHS to the independent care home sector in order to reduce bed blocking and to actively use care homes for the substantial provision of end of life, step down and re-ablement services. The Group believes that the provision of these services presents a significant opportunity to the sector and a cost reduction opportunity for central government whilst also delivering a materially improved service user experience.

Overall the Group believes that, despite the near term challenges, the medium term outlook remains positive, based on the underlying demographics, the inherent cost and service advantages of the independent care home sector (against other forms of care) and the significant improvements which the Company has made in its operational capability.

New Horizons

The Group's New Horizons Programme remains on track to deliver the expected benefits and material progress has been made against key objectives since September 2010:

- a reduction in the number of homes subject to regulatory embargoes from 26 to 20

- annualised staff turnover reduced from 27.0% to 24.5%

- self funder admissions have risen by 18.0% on a like for like basis

- new time and attendance system generating staff cost reductions, where implemented, of about 2%.

In response to a further deterioration in market conditions, management has implemented a series of significant additional actions.

Central costs have been reviewed and the Group's re-procurement programme has been accelerated. The Group is encouraged with the progress being made in its partnership with Bovis Lend Lease, including benefits from the maintenance supply chain and from its e-maintenance system. The Group is also in discussion with third parties, initially regarding the procurement of all catering supplies for its network of homes.

Overall the Group expects to make additional central and procurement cost savings of £3m in FY11 and £4m on an annualised basis.

In addition, the Group is developing a new staffing model for introduction across all homes, covering both care and ancillary roles. The new model is expected to deliver staff cost efficiencies of about 4% (about £20m) per annum on a like for like basis, without compromising care delivery, and will be rolled out progressively from April. The FY11 benefit is anticipated to be about £4m.

The Group has further strengthened management with senior appointments covering Dementia and Marketing. Together with the recently appointed Director of Planning & Strategy, these new resources are being directed at accelerating self funder sales and in developing the Group's Dementia, End of Life Care and Re-ablement services.

Quality of Care

When the CQC in England suspended its star ratings programme in June 2010, the Group had 82% of its homes judged excellent or good, up from 81% in March 2010, 77% in September 2009 and 71% in May 2009.

CQC has indicated that it will not introduce a rating system of equivalent utility. As a consequence the Group is using its internal inspection teams and care outcome methodology to measure progress. The Group's internal system is based upon the combined standards applied by each of the four regulators in the UK and Northern Ireland. The Group will announce its targets in this respect at the half year. 

Landlord Discussions

The Group continues to engage with Landlords in pursuit of a restructuring of its lease terms and will provide a further update on this subject in due course.

Notes:

1. EBITDA is defined as 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 contract and related impairment .

2. Adjusted EBITDA is defined as 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 contract and related impairments, exceptional central costs and charges for future minimum rental increases.

3. At the start of the previous financial year, the Group changed its internal reporting calendar to report on a calendar monthly basis (previously the Group reported 13 periods of 4 weeks), and as such Q1 FY2010 was for a period of 95 days. Comparatives for FY2010 have been restated to exclude the additional 3 days in the period so as to present information herein on a like for like basis.

4. Following a review of double occupancy rooms, the Group has reclassified 1,303 rooms as single occupancy, thereby reducing the number of available beds by 1,303 from the beginning of FY2011. Prior year occupancy figures have been restated to exclude these 1,303 beds so as to present information herein on a like for like basis.

Enquiries:

About Southern Cross

Southern Cross is, in terms of number of beds, the largest UK provider of care home services for the elderly and a major provider of specialist services for people with physical and/or learning disabilities. The Group's care homes for the elderly operate under two distinct brands: Southern Cross Healthcare and Ashbourne Senior Living. Both brands provide a range of social and personal care services and nursing care services for elderly people with physical frailties and differing forms of dementia. The Group's specialist services operate under the Active Care Partnerships brand and provide long-term care services for people with physical and/or learning disabilities and for younger people with complex forms of challenging behaviour.

Southern Cross is focused on providing high quality care in well invested facilities, seeking to be the home of choice in each local community in which it operates. The Group provides care services for most of the local authorities in the UK which, together with the NHS, represent circa 78% of the Group's revenues. Its care home portfolio is largely purpose-built with a high percentage of single occupancy rooms and rooms with ensuite bathrooms.

This announcement includes statements that are, or may be deemed to be, "forward looking statements". These forward looking statements can be identified by the use of forward looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will", or " should" or, in each case, their negative or other variations or comparable terminology. These forward looking statements include matters that are not historical facts and include statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial condition, liquidity, prospects, growth, strategies and the outlook on the care home industry. By their nature, forward looking statements involve risk and uncertainty because they relate to future events and circumstances.