Southern Cross warns on profits as cuts hit care home spending

The care homes operator Southern Cross Healthcare issued its second profits warning in six months yesterday as it blamed government spending cuts for what it expects to be a tough second half of the year.

Lower local authority fees, and pressure on councils to keep potential residents in their own homes as long as possible, will result in Southern Cross missing analysts' earnings forecasts for the full year, according to a statement from the company yesterday.

It said average occupancy rates – a key industry measurement – fell in the third quarter, to 85.4 per cent from 87.5 per cent. Southern Cross added that it saw no recovery in its fortunes the short term, despite a strong longer-term outlook for the residential care sector.

In addition to the poor occupancy numbers, the company said its adjusted earnings for the three months to the end of June had fallen to £12.1m from £19.9m a year earlier. It also saw a deterioration in its quality of service, because 16 of its homes were awarded no stars by independent assessors.

A spokesman said the coalition's public spending cuts would not affect the company's efforts to improve its operating margin. Jamie Buchan, the chief executive who joined the Darlington-based company last year, has implemented a "New Horizons" programme in an attempt to improve its performance. The strategy aims to increase the proportion of private patients to 22 per cent of the group's overall clients by the end of next year. Currently, 17 per cent of patients pay for their own care, which is fewer than when the plan was revealed earlier this year. At the time, 18 per cent of occupants were private clients.

Southern Cross has issued several profits warnings in recent years, a factor that it admits has made investors wary and has contributed to it losing 77.5 per cent of its value in the past 12 months.

Two years ago, the company issued a warning just two months after saying it was "well placed to make further progress".