Arriva plc: pre-close trading statement

• Trading in line with expectations
• Cost reduction programmes in all three divisions
• Continuing signs of recovery in UK Trains passenger revenue growth
• Earnings benefit from other items

Leading European transport services group Arriva plc reports that trading has continued in line with its expectations. Cost reduction initiatives have reduced the impact of both recessionary conditions and a year-on-year fuel cost increase of around £60 million, and will continue to benefit the group in future years. Whilst the economic environment remains challenging there is evidence of recovery in passenger revenue growth in our UK Trains division.

Trading

Revenue in the UK Bus division, adjusted for the same number of trading days, has increased by 4.4 per cent in the 11 months ended 30 November. Mileage growth in the contracted London business, which accounts for around a third of the division by revenue, was over two per cent in the same period. In the UK regional business, targeted reductions in commercial mileage of 3.4 per cent year-on-year have reduced the cost base whilst improving yield per mile and maintaining the viability of our network ahead of fuel cost reductions in 2010. Results for the division will reflect the second-half weighting of the 2009 fuel cost increase.

Revenue in the Mainland Europe division, expressed in euro, grew by 5.8 per cent in the 11 months ended 30 November. Excluding the effect of acquisitions made in 2008, revenue growth was 2.4 per cent. Cost saving programmes have been implemented throughout the division and will benefit the business next year. As previously reported, the commercial operations in Portugal have been particularly adversely affected by the recession, whilst trading conditions in the Netherlands bus market have been difficult.

Passenger revenue for CrossCountry is up by 2.1 per cent for the first 48 weeks of 2009. For the 13 weeks ended 12 December 2009 the increase has been 6.1 per cent, continuing the marked improvement in patronage since September. At Arriva Trains Wales, passenger revenue growth was 7.0 per cent for the same 48 week period, after allowing for timetable changes in December 2008. Both franchises have continued to provide excellent operational performance. Cost reduction measures already in place have contributed annualised savings of approximately £15 million. As reported previously, the revenue growth and cost savings in CrossCountry will be insufficient, this year, to offset the decline in franchise support payments.

Financial position

The group’s financial position remains solid, with continuing healthy cash generation and significant undrawn committed bank facilities. The group’s principal facility, a £615 million revolving credit facility, does not expire until August 2012 and has been enhanced by an additional €100 million facility with the same expiry date.

As previously anticipated, the existing fleet of 29 trains for Arriva’s Jutland rail contract has been recognised on the balance sheet in the second half of the year, with a book value of around £50 million and corresponding increase in debt. The trains continue to be financed by the existing provider. Most of the group’s debt is denominated in euro or in currencies linked to the euro. If the recent strengthening of the euro persists until the end of the year, the sterling equivalent of that debt will be higher than the half year when the exchange rate was 85 pence to the euro.

Other items

In addition to earnings derived from underlying trading activities, it is anticipated that there will be a net earnings benefit from the following items.

There has been an agreed change in the benefit structure of the Arriva Passenger Services Pension Plan, the largest of the group's defined benefit pension schemes. Following discussions and subsequent agreement with the trade union and the Trustee, and a consultation process with the active members of the scheme, a proposal to reduce future benefit accrual, reducing costs to both members and to the company, was implemented with effect from 1 December. This change will significantly moderate the increase in retirement benefit obligations in the group balance sheet and is expected to give rise to a corresponding credit to the income statement (before taxation) of around £45 million. It will also mitigate against future pension cost increases that would otherwise arise from the increase in such obligations.

During the year the group has resolved a number of historical tax matters with tax authorities. These include a recent settlement which we expect to give rise to a saving of approximately £70 million. The timing of the recognition of this amount in the income statement is yet to be determined.

An impairment charge of approximately £30 million is anticipated. In light of the factors affecting the Portuguese bus market and the likely continued abstraction of revenue to the recently extended light-rail system south of Lisbon, the Portuguese operation has been de-scaled to a level commensurate with the changed environment.

Outlook

Although 2009 has been marked by uncertainty over the general macroeconomic outlook and impact of challenging market conditions, some of which continues, the trading performance of the group, tight cost control, and the circa £30 million reversal of the 2009 peak fuel cost increases, all combine to give the Board greater confidence in a positive medium-term outlook. The competitive landscape continues to provide opportunities for further growth, with an encouraging pipeline of tenders in the mainland European market.

The recent upturn in CrossCountry passenger revenue growth represents a substantial improvement from the levels experienced in the first half of 2009, but still falls well short of the level required to compensate for declining franchise support payments. With the availability to CrossCountry of contractual protection from shortfalls in projected passenger revenue from November 2011, and the continuing good financial performance of Arriva Trains Wales, we have clear visibility of significant anticipated recovery in the financial performance of the UK Trains division from 2012 onwards.

The group is scheduled to release preliminary results for the year to 31 December 2009 on Wednesday 3 March 2010.

* The group’s forward fuel fixing for 2010 is substantially complete, with 17.1 per cent of the anticipated 510 million litre annual fuel requirement protected by indexation arrangements, and 76.6 per cent forward purchased at an average price of 35.9 pence per litre, excluding fuel taxation and delivery. The position for 2011 is 37.3 per cent fixed at an average price of 31.4 pence per litre. As reported previously, 75 per cent of the approximate 100 million litre annual fuel requirement for CrossCountry remains fixed at 26.5 pence per litre, until 2016.

Read the full document