The new management at Southern Cross, the care homes group, said that its transformation is on track, despite a sharp fall in earnings triggered by a surge in winter resident mortality and reduced spending by local authorities.

The company, which is seeking to rebuild itself following a rocky period in which it breached banking covenants and issued a profit warning, saw first-half pre-exceptional pre-tax profit tumble 16.1 per cent to £14.1 million.

Losses in the 26 weeks to the end of March rose to £12.5 million, up from £8.6 million at the same time last year.

The earnings fall was partly down to decreased occupancy following the cold winter months, said the group.

It had also been hit by a move by local authorities, its biggest client, accounting for 69 per cent of sales, to cut spending in the recession, it said. Councils are applying "increasingly stringent placement criteria", triggering an increase in the average age and frailty of residents being admitted, added Southern Cross.

However, Jamie Buchan, the group's chief executive, said a revival of the nursing homes group was on track. "Despite the challenging market conditions, Southern Cross has the potential to deliver significant operational improvement," he said.

The group, which has suffered from underperforming homes, is working hard to boost occupancy levels and profitability mainly though seeking to raise standards, he said.

It has put in place a two-year plan to increase the percentage of them with official scores from the Care Quality Commission of "good" or "excellent" from 71 per cent to 80 per cent. It is also seeking to reduce the turnover of managers at its homes. Investors should expect to see progress in the second half of this year, Mr Buchan said.

Southern Cross, which has more than 730 homes and 37,000 beds nationwide, was floated on the stock exchange by Blackstone, the private equity group, in 2006.

Mr Buchan was appointed in January after the group hit serious funding problems after taking out costly loans to fund care-home purchases. It was forced into crisis bank talks after missing a £46 million repayment deadline.

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