Interim Management Statement

Q3 2010 Interim Management Statement

Monday 9th August 2010- 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 30 June 2010 ("Q3"). At the start of the financial year, 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 comparatives for FY2009 have been restated so as to present information on a like-for-like basis.

Highlights for the 3 months ended 30 June 2010: 

EBITDA is defined as earnings before interest, tax, depreciation, amortisation, onerous contract and loss on disposal of property, plant and equipment and subsidiary undertakings.

Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation, exceptional central costs, onerous contract, loss on disposal of property, plant and equipment and subsidiary undertakings and charges for future minimum rental increases.

Outlook

Whilst the longer-term fundamentals for residential care remain positive, the short-term outlook is challenging as pressure grows to reduce overall public sector spending. As a result of this pressure, the Group has continued to experience a reduction in admissions from Local Authorities during the third quarter. The Board expects that this position will not change significantly in the final quarter and consequently full year adjusted EBITDA is expected to be about £53m.

Against this backdrop, Southern Cross will contribute to both the Comprehensive Spending Review and the Dilnot Commission into funding of social care in order that the quality of the commissioning of the services, which the Group provides, can be improved. The Group is confident that a well informed assessment of the true costs of delivering alternative forms of care will demonstrate that residential care delivered by private sector, low cost/high service quality operators represents both the lowest cost to the taxpayer and the best possible experience for those requiring such care, when all factors are taken into account.

Occupancy and fees

Average occupancy in the mature estate for the three months ended 30 June 2010 was 85.4% (2009: 87.5%). Spot occupancy was 85.6% on 31 March 2010, 85.4% on 30 June 2010 and 85.5% on 30 July 2010. For the first 9 months, average occupancy in the mature portfolio was 86.3% (2009: 88.3%).

Average occupancy during the third quarter, for all homes, including immature homes, was 84.0% (2009: 86.9%). For the first 9 months, average occupancy for all homes was 85.0% (2009: 87.7%).

During the three month period ended 30 June 2010, self funding residents represented 17.4% of total residents (2009: 18.0%). Increasing the number of self funding residents continues to be an area of focus. During the quarter, admissions of self funding residents increased to 19% of total admissions, from 17%.

Average weekly fees for the three month period ended 30 June 2010 increased 1.6% to £564 (2009: £555). On a year to date basis average weekly fees increased 2.8% to £557 (2009: £542).

New Horizons

The New Horizons change programme remains on track to deliver against the targets set for service quality, cost reduction, revenue enhancement and home manager turnover reduction, leading to improved profitability.

During the third quarter the following progress was made: 

Service Quality

Further progress has been made in improving external service quality ratings and, as at 30 June, a total of 83% of homes in England were rated as "2 or 3 star" by CQC compared with 81% at the end of the prior quarter. CQC has announced the suspension of their star rating system and the Group has expressed its disappointment at the decision.

Inadequate service delivery in a limited number of homes continues to present a management challenge and, during the quarter, the number of homes rated as "0 star" by CQC increased from 12 to 16. In response to this challenge the Group has continued to strengthen its Care delivery system through the rigorous completion of monthly internal inspections, by increasing the number of Service Quality Advisers to align boundaries with those of Area Managers and by conducting an external review of clinical governance.

Irene Gray has now joined the Group as Director of Care; she was previously Chief Operating Officer for the University Hospitals Bristol NHS Foundation Trust.

During the period, the Group has progressed the re-registration of all homes in its English portfolio under the terms of the Health and Social Care Act 2008 and expects this process of re-registration to be complete by the end of September.

Financial Overview

Revenues in Q3 2010 were £238.0m an increase of 0.8% on the same period last year (2009: £236.0m). The average weekly fee rate increased 1.6% to £564 (2009: £555). However, this was partly offset by a 2.1% reduction in average mature occupancy.

Home EBITDAR margin, before central costs, for Q3 2010 was 29.0%, 2.5% lower than for the same period last year. This was primarily due to lower fee increases in the current period and higher payroll costs. Payroll costs as a percentage of revenue were 58.7% (2009: 57.0%). In absolute terms, payroll costs increased £5.2m compared to the same period last year, £2.5m arising from wage increases and £2.7m from acquisitions. Home running costs as a percentage of revenue were 12.3%, compared to 12.6% during the first six months of the year, and continue to follow the expected seasonal pattern.

The cash rental charge in Q3 2010 increased by £2.2m compared to the same period last year. New leases entered into by the Group through either freehold disposals or leasehold acquisitions contributed £1.0m of this additional charge, with a further increase of £1.2m due to leases with fixed annual increases or RPI linked increases.

Taking into account the above, adjusted EBITDA in Q3 2010 was £12.1m (2009: £19.9m). During Q3 2010, the Group incurred £1.2m of exceptional central costs in respect of the internal change programme, New Horizons. As planned, costs incurred to date in respect of this programme are £4.5m.

Net finance costs for the 3 months ended 30 June 2010 were £1.0m (2009: £1.5m). Excluding the impact of loan arrangement fees and the non-cash charge in respect of the fair value of financial instruments, net finance costs were £0.6m (2009: £1.3m) a decrease of £0.7m due to lower levels of debt.

Cash flow from operations in Q3 2010 was £1.1m (2009: £9.7m), representing an unusually low cash conversion ratio compared to adjusted EBITDA of only 9.1% (2009: 48.7%). This was primarily due to a £9m negative working capital movement, attributable to the timing of cash receipts around the Easter period and of payroll payments at the end of the period.

During the period, net debt reduced by £3.6m, from £25.7m at 31 March 2010 to £22.1m at 30 June 2010. On 18 May 2010, the Group consolidated its banking arrangements into a revised £50m revolving credit facility, repayable in September 2013. As at 30 June 2010, the Group had drawings of £22.1m against this facility and guarantees issued of £11.8m.

Net debt as at 6 August 2010 was £13.6m.

Year to date revenues were £718.7m an increase of 2.0% on the same period last year (2009: £704.4m). The average weekly fee rate increased 2.8% to £557 (2009: £542). This was offset by the year to date average occupancy of the mature estate being 2.0% lower than last year at 86.3% (2009: 88.3%). As a result, year to date adjusted EBITDA reduced by £8.8m to £40.1m (2009: £48.9m).

Freehold Sales and Estate

During the period, the Group sold the freehold interests in its two remaining internally developed properties and received a net cash consideration of £14.0m. During the year to date, a total of six freeholds, with a value of £31.4m, have been disposed of. The Group continues to hold eight freehold assets for resale with a net book value of £15.1m and discussions continue with potential purchasers in respect of a number of these properties.

There will be a conference call for analysts at 11.00a.m. today. Please call Juliet Edwards at Financial Dynamics for dial-in details on +44(0)20 7269 7125 or email her at [email protected].

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.