Arriva interim report 2009

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Courtesy of Arriva plc

UK Bus

Our UK Bus division has continued to trade strongly, with the continuing focus on cost control and efficiency offsetting an increase in fuel costs of £9 million during the first half of 2009. Operating profit rose 3.7 per cent to £47.2 million (2008: £45.5 million) on revenue up 4.2 per cent to £473.6 million (2008: £454.5 million).

Regions

We have reduced commercially operated mileage by 3.3 per cent year-on-year to control costs whilst maintaining the viability of our network for future growth in the medium and longer term. This will help to mitigate the further increases in fuel costs in the second half of the year, but will also be reflected in patronage and revenue growth.
Investment in the division’s future continues. 233 new buses entered service in the first half of 2009, with around 220 more to be added by the end of the year, further improving our attractiveness to existing and potential customers.
We remain committed to developing and investing in technology. ‘EcoManager’, which helps drivers to reduce fuel consumption, is now operational in almost 1,000 buses, with plans to use the technology in a further 1,000 buses by the end of the year. Mobile phone ticketing technology has been introduced across the Yorkshire and Kent networks, making for a convenient cash-free way to travel.
London
Mileage growth in our contracted London business, which accounts for around a third of the division by revenue, was 3.4 per cent.
We continue to work with Transport for London trialling new and green technologies, and we were pleased to welcome six new Volvo hybrid double-deckers to our fleet in June.
The Original Tour sightseeing business is trading well, with a promising summer season so far.

UK Trains

UK Trains revenue was £376.2 million (2008: £415.5 million), with operating profit falling to £10.4 million (2008: £14.8 million). The division’s fall in operating profit is largely attributable to slower passenger revenue growth together with an increase in fuel costs of £2 million.
The Rail Regulator’s review of charges has reduced both headline revenue and costs by approximately £47 million in the first half of the year. The economic impact of this review is broadly neutral. The 2009 full year effect for the division is expected to be a reduction in both revenue and costs in the region of £150 million.

CrossCountry

As we have reported previously, to maintain 2008 levels of profitability, against a background of reducing franchise support payments, CrossCountry needs to achieve passenger revenue growth of around 10 per cent in 2009, from a 2008 base of £319 million. Actual passenger revenue growth for the franchise for the first half of the year was 1.8 per cent. Despite encouraging cost saving measures in areas such as replacement bus and coach services, sales commission, marketing, station services, catering and cleaning, the growth achieved was insufficient in the period to offset the decline in franchise support payments.
The franchise is operating efficiently, recording excellent improvements in the level of trains arriving at their destination within 10 minutes of schedule – 91.6 per cent for the six months to 30 June 2009, up from 90.2 per cent for the same period in 2008.
We have almost completed plans to increase capacity by 35 per cent at peak periods. All five refurbished High Speed Trains are now in service and refurbishment of the 57 Voyagers, adding around 4,000 seats to our fleet, is on track for completion in early September.
We have significantly improved online ticketing facilities. After introducing e-ticketing
nationwide in December, our customers have been able to purchase and print tickets at home, by 6.00 pm the day before departure.
The sharp contraction in UK economic activity suggests slower passenger revenue growth may continue for some time into the future while our contract provides for reducing franchise support payments. From November 2011, 80 per cent of any shortfall in passenger revenue below 94 per cent, and 50 per cent of the shortfall between 98 and 94 per cent, against the annual franchise target, is recovered through the risk sharing mechanism with the Department for Transport. This arrangement continues to the end of the franchise in March 2016.

Arriva Trains Wales

At Arriva Trains Wales, passenger revenue growth was 8.2 per cent, after compensation for timetable changes in December 2008.
Arriva Trains Wales’ strong operational record continues to improve, with 95.1 per cent of services arriving at their destination within five minutes of schedule, up from the already high 92.9 per cent in 2008, making Arriva Trains Wales one of the best performing train operators in the UK.
Arriva Trains Wales continues to work closely with the Welsh Assembly Government to develop rail services in Wales and the border regions, and in May 2009, increased the frequency of the service between Merthyr Tydfil and Cardiff.
Finance
Cash generation continues to be strong. EBITDA (earnings before interest, tax, depreciation, goodwill impairment and intangible asset amortisation) was £165.6 million, an increase of 11 per cent over the comparable period (2008: £149.2 million). A working capital outflow of £40.7 million (2008: outflow of £29.9 million) includes recurring outflows in respect of retirement benefit obligations (pension scheme contributions exceeded costs by £10 million in the first half year) and release of provisions for acquired loss making contracts (£7 million). The balance of the outflow principally represents timing differences. Cash generated from operations was up five per cent to £124.9 million (2008: £119.3 million).
We continue to invest in the future of Arriva. Net capital investment was £100.1 million (2008: £84.8 million), principally reflecting investments in new buses in the UK, and mobilisation of rail and bus contracts in mainland Europe.
Payments of interest, taxation and dividends totalled £60.3 million (2008: £52.2 million), reflecting a five per cent increase in the 2008 year end dividend, the increased level of debt from June 2008, and the £3.1 million impact of translating euro interest costs at a higher exchange rate.
Translating overseas debt into sterling at £0.85 to the euro, compared to £0.97 to the euro at 31 December 2008, reduced net debt by £73.6 million. Net debt overall fell by £38.2 million to £785.2 million.
Total shareholders’ equity was £568.7 million (31 December 2008: £682.5 million) at the end of the period. Retained profits contributed £4.3 million to group distributable reserves. Actuarial losses on employment benefits, reflecting a reduction in liability discount rates and an increase in long-term inflation expectations, reduced equity by £99.6 million whilst the fair value of cash flow derivatives caused an increase of £13.6 million. The fall in the value of the
euro since the year end has resulted in a foreign translation loss, after tax, of £36.8 million in respect of unhedged overseas assets. Gearing, the ratio of net debt to equity, for the group at 30 June 2009 was 130 per cent (31 December 2008: 115 per cent).
The interest cover for the 12 months ended 30 June 2009 (the ratio of EBITDA to net finance costs) was 10 times (year ended 31 December 2008: 13 times). The ratio of net debt to EBITDA, for the 12 months ended 30 June 2009, was 2.3 times (year ended 31 December 2008: 2.5 times). Arriva remains comfortably within the financial covenants set by its lenders, the principal covenants being that the ratio of EBITDA to net finance costs is not less than 3:1 and the ratio of net debt to EBITDA is not more than 3.5:1.

Fuel

As previously reported, the total anticipated increase in fuel costs is around £60 million for the whole of 2009, of which approximately £18 million fell in the first half of the year.

75 per cent of the approximate 100 million litre annual fuel requirement for CrossCountry remains fixed at 26.5 pence per litre, until 2016.
Borrowing facilities
The principal sources of credit to the group have historically been the banking markets of the UK and mainland Europe, and the group has continued to raise finance from these sources, with over £250 million of amortising and term facilities being raised in 2009 to date.
The headroom on committed borrowing facilities has increased from £258 million at 31 December 2008 to £327 million at 30 June 2009, reflecting the raising of additional amortising facilities of £134 million in the period partially offset by repayments on existing facilities. Subsequent to the period end, a €100 million bilateral term facility has been obtained, coterminous with the £615 million syndicated revolving credit facility that expires in August 2012, together with £38 million of amortising facilities, further strengthening the group’s funding position.
Group net debt of £785 million comprises the drawdown of £946 million in the table above, less cash balances of £161 million.
The existing fleet of 29 trains for the Jutland rail contract is likely to be recognised on the balance sheet in the second half of the year, with a book value of around £60 million. These
will continue to be financed by the existing provider. A further 12 new trains are required by the new contract by the end of 2010, with a related investment of around €40 million.

Outlook

Arriva continues to show its strengths as a broadly-based group with a balanced portfolio of operations which prevent it from becoming over-dependent on a single contract or a single source of revenue. The group has a secure funding position, an extensive contract order book providing visibility of long-term diverse revenue streams, and a proven strategy for medium and long-term growth. This is underpinned by tight management and cost control across the group.
Our strong and consistent cash generation enables investment in new contract wins and renewals, and returns to shareholders. The competitive landscape for contracted business is encouraging, and there are further opportunities for growth as shown by recent new business wins in mainland Europe.
During the second half of 2009 the group will experience still higher fuel prices locked in by forward fuel purchasing. The results for the first half of 2009 show the effectiveness of actions already taken to absorb the fuel cost impact for the year. During 2010, fuel costs are set to recover by approximately £30 million.
The short-term outlook for passenger revenue growth remains difficult to predict. As previously reported, a reduction in the second-half profitability of our UK Trains division can be anticipated, due to softening passenger revenue growth coupled with reducing support payments. The CrossCountry franchise will benefit from the availability of the contracted revenue risk sharing regime from November 2011.
We remain confident in the underlying resilience and growth potential of the business, and that it will continue to demonstrate the delivery of long-term value to shareholders

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