ROL.L Regulatory News (ROL)

28 July 2022

Rotala Plc

("Rotala", the "Company" or the "Group")

Interim Results

Rotala plc (AIM:ROL), a provider of transport solutions across the UK, announces its unaudited interim results for the six months to 31 May 2022.

Highlights

· Passenger numbers recovering slowly but steadily

· Profit after tax of £2.1m (2021: £0.8m)

· Basic earnings per share of 4.17p (2021: 1.61p)

· Interim dividend declared of 0.5p per share (2021: nil)

· Net debt at 31 May 2022 of £44m (2021: £64m)

Simon Dunn, Chief Executive said: "During the COVID-19 pandemic, we decided to focus on cash conservation and debt reduction with the objective of emerging from the pandemic with a robust balance sheet, fit for renewed commercial operation. We believe that we have achieved these objectives.

"As the bus industry recovers from the effects of COVID-19, bus networks are being reviewed and rationalised and this is causing a good deal of turbulence in the industry which should bring a continuing flow of acquisition opportunities to Rotala, much like the acquisitions made in the first half of FY 2022. We are well placed to take advantage of these opportunities as they arise. " 

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Chairman's Statement

I am pleased to be able to make this report to the shareholders of Rotala Plc in respect of trading for the six months ended 31 May 2022.

After a period of two years in which bus operation and service levels had been to a great extent determined by the objectives of the Department for Transport ("DfT") and local authorities, in the first half of the current financial year, ending 30 November 2022 ("FY 2022"), bus operations returned to more or less normal, though still underpinned by grants and subsidies provided by the DfT and local authorities.  

Government support

The DfT's Bus Recovery Grant ("BRG") scheme, which was originally due to expire in early April 2022, covers the period up to October 2022. However, at the same time, concessionary fares re-imbursement levels, which are controlled by local authorities, are being gradually adjusted to reflect actual travel patterns such that by the end of calendar 2022 the re-imbursements received will represent actual concessionary passenger usage. Thus, broadly, DfT and local authority support is being tapered as passenger numbers slowly recover from the impact of COVID-19.

Passenger numbers

At 30 November 2021, the end of the Company's most recent financial year, passenger numbers overall were ranging between 80% and 85% of pre-COVID-19 levels. In FY 2022, they have continued to grow slowly but steadily towards the upper end of that range. In some areas, sharper rises in activity levels have been observed: for example, usage of the "Hoppa" services around Heathrow Airport has increased considerably since the start of the calendar year in response to much improved volumes of airline travel. However, recent industry reports have made it clear that, unlike rail, where the issue is the reduction in commuter traffic, it is in the concessionary card holder segment of bus passengers (largely pensioners) where passenger levels have not yet recovered to pre-pandemic levels. This reluctance to travel seems to have its root in an aversion to the risk of exposure to current variants of COVID-19. Full recovery in bus passenger numbers will therefore depend on concessionary card holders regaining their former confidence in travelling by bus. Reflecting these underlying trends, the Board expects passenger numbers to continue to grow slowly but steadily for the remainder of FY 2022, but not to recover fully to pre-pandemic levels until 2023.

Revenues

The factors set out above are the key drivers of total revenues in the above table. As grants and subsidies from the various arms of the Government have tapered as passenger numbers recovered and bus service levels ceased to be mandated by the Government, so total revenues have fallen back. It can be seen that the peak of Government support for the bus industry was reached in the first half of 2021 and that it then fell slowly in the second half of that year, but has declined substantially in the first half of FY 2022. At the same time, as the various COVID restrictions were lifted, commercial revenue has recovered strongly. Contracted revenue, largely derived from tendered bus contracts operated for local authorities, was much less sensitive to COVID restrictions, but has shown some recent growth. Charter revenue, which is ad hoc by nature, is always highly variable.

Profits

One of the key requirements of Government support, which was prevalent throughout most of FY 2021, was that a bus company should, in return for the package of grants and subsidies, make neither a profit nor a loss at the normalised pre-tax profit line. This is not a requirement of the current BRG regime, but, at the moment, the key factor in returning to profitability is the return of passenger numbers to their pre-COVID levels. As set out above, the Board does not expect this to happen until FY 2023 and so the results for the first six months of FY 2022 were in line with budget and the Board's expectations.

Profit before tax after exceptional items fluctuates principally as a result of the marking to market of the Group's fuel derivative position (profit of £2.4m in 2022 and £1.2m in 2021). Note 3 to this statement contains a full analysis of the make up of exceptional items. In addition, in this reporting period, a profit of £0.6 million was recorded on the sale of a surplus leasehold property.

It is worth noting that the way that the fuel derivative is accounted for anticipates profits (and losses as in FY 2020) but serves to protect pre-tax profits for the year as a whole from any further increase in fuel prices.

Working capital and debt

The Group's trade and other receivables were inflated during 2021, as they had been the previous year, by the amounts receivable from the DfT under BRG and its predecessor programmes. During the first half of FY 2022, the reconciliation processes governing the release of these grants were completed. The receipt of the grants in cash facilitated the substantial reduction in working capital which can be seen in the above table, given that the other components of working capital remained within their normal ranges.

The release of working capital in the first half of FY 2022 occasioned by the receipt of the grants and subsidies described above enabled the Group to significantly reduce its drawings on its revolving commercial facility ("RCF"). In March 2022, the Company also announced that it had signed new banking facilities with its principal bankers, HSBC Bank plc; these facilities include an RCF of up to £17 million, of which only £1.3 million was drawn as at 31 May 2022. This leaves ample resources to fund future organic growth and acquisitions.

The release of working capital should ensure that net debt (including hire purchase debt, details of which are set out in the table below) is under £40 million by 30 November 2022, in line with the Board's plans and expectations. This target would need to be modified if any further acquisitions were made by the Company in the second half of FY 2022, but this is the only circumstance which would occasion such a modification. 

Hire purchase debt and fleet management

As stated at the time of the publication of the FY 2021 results, the Board did not foresee any requirement, unless for specific new business, for new vehicles in FY 2022. Capital expenditure in the first half of FY 2022 therefore totalled only £451,000 and was mostly covered by asset disposals, including that of the surplus leasehold property. No new hire purchase finance was taken out in the period. Therefore, the Board is confident that its forecast that hire purchase debt will be approximately £34 million by 30 November 2022 will be met.

The continuing disposal of older vehicles ensured that the average fleet age remained closely comparable to previous periods.

Dividend

In April 2022, the Company, as it resumed dividend payments post the pandemic, paid a special interim dividend of 1.0p per share. At the same time, the Board stated its intention to return to its former policy of maintaining 2.5 times earnings cover for any future dividend payments. While dividends will therefore now reflect the Group's current profitability, the Board will adopt a progressive dividend policy, as before the onset of the COVID-19 crisis, recognising the importance of dividend flows to shareholders. The Board therefore has declared an interim dividend of 0.5p per share which will be paid on 9 September 2022 to shareholders on the register on 19 August 2022 .

It is anticipated that future dividends will be paid in the pattern of September (interim) and June (final), in the proportion of one third at the interim dividend stage and two thirds for the final.

Share Buy Back programme

On 23 March 2022 the Company announced that it would commence a Share Buy Back programme in accordance with the AGM resolution then in force. This resolution was renewed at the AGM held on 19 May 2022. So far under this programme the Company has acquired 921,316 ordinary shares at a total cost of £273,000. In accordance with accounting standards, the cost of shares acquired in this manner is written off to reserves. A total of 1,721,316 shares is now held in treasury.

 Acquisitions and DfT Policy

In the period under review the Company made two small acquisitions in the West Midlands. The first was the bus business of Claribel Coaches Limited ("Claribel") which completed on 22 April 2022. Claribel is a bus operator, in the eastern part of Birmingham. Through its Diamond Bus subsidiary, Rotala acquired the business and 18 vehicles for a total cash consideration of £339,000. The Group did not assume any liabilities. On completion, the acquired business was immediately transferred to, and integrated within, the Group's existing depot infrastructure in the West Midlands. No goodwill arose on the transaction.

The second occurred on 29 May 2022, when the Group completed, through its Diamond Bus subsidiary, its acquisition of the bus business of Johnsons (Henley) Limited ("Johnsons"), together with 20 vehicles, for a total cash consideration of £936,000. Johnsons is a well-established operator of commercial and contracted bus services in Warwickshire and the southern West Midlands. The Group did not assume any liabilities. Since acquisition, the acquired business has been suitably rationalised and integrated within, the Group's existing depot infrastructure in the West Midlands. No goodwill arose on the transaction. 

The DfT recently announced awards under its Bus Service Improvement Plan ("BSIP") scheme, which is part of the Government's National Bus Strategy. A number of the local authorities in which the Group operates were awarded funds under this scheme, including Greater Manchester, the West Midlands and Lancashire. The next stage is that the local authorities concerned must develop, with the support of bus operators, detailed schemes for further submission to the DfT. While the effect of these awards on Rotala's businesses cannot yet be known in detail, the overall position is clearly positive.

Franchising in Greater Manchester

 On 26 March 2021, the Company announced that the Mayor of Greater Manchester (the "Mayor") had made the formal decision to franchise the bus market in the Greater Manchester region. The Company made an immediate claim to the High Court of Manchester to judicially review a number of aspects of the consultation process carried out by the Greater Manchester Combined Authority ("GMCA"') which led to the decision of the Mayor to franchise the bus network.

On 9 March 2022, Mr Justice Julian Knowles rejected these arguments, dismissed the claim and refused to give leave to appeal. The Company applied to seek permission to appeal the decision to the Court of Appeal and was granted leave to appeal. The appeal hearing took place on 12 July 2022. The Court of Appeal released its judgement on 25 July 2022: it dismissed the Company's appeal. The Company has considered the Court of Appeal's judgment in its claim against GMCA and the Mayor and, whilst disappointed with the result, it respects the decision of the Court and has resolved to take no further steps in this legal process.

GMCA has already announced mechanisms which cover the acquisition of bus depots and bus fleets under its franchising proposals. The Board has reviewed these mechanisms and is confident that, should it decide to place the Bolton depot and its associated bus fleet assets under these mechanisms, the values which would be realised from the sale of the Bolton depot and its related bus fleet should meet or exceed their respective book values. These amounts should also be more than sufficient to pay off the existing mortgage on the Bolton depot and the hire purchase debt associated with the bus assets based there. As a result, the sale of these assets to GMCA, should it take place, would have no negative effect on the Group's balance sheet and its leverage would fall to very low levels. The capital which the Group currently has invested in its Bolton operation would therefore be realised into cash and be available for re-investment or redeployment elsewhere in the Group.

Fuel hedging

Fuel represents about 12% of total costs and approximately 54% of the Group's fuel requirement for the remainder of 2022 is covered by hedging contracts, at an average price of 82p per litre. These prices should be compared to the current spot price for diesel (excluding VAT) of 140p per litre.

The Board will continue to monitor market conditions closely and take out such further fuel hedges as it deems are appropriate to meet its objective of reducing volatility in its costs and creating business certainty.

Financial review

Income statement

The Consolidated Income Statement is set out below. The factors governing the levels of revenue have been dealt with earlier in this statement in the section on total revenue. As normal commercial operation has returned, costs of sales have also fallen in line with total revenues and the gross profit margin has remained stable at approximately 14%. Administrative expenses rose during the pandemic because of the extra requirements covering such items as general legal and professional advice, health & safety, risk assessment, recording and logging systems for COVID-19 purposes, medical advice and staff training, but as these demands have receded so administrative expenses have returned to the levels experienced before the COVID-19 pandemic struck. Profit from operations (setting aside exceptional items) has remained a similar proportion of total revenue as in the prior period and year, but finance expense has fallen as the Group's total net debt has fallen for the reasons explained above in the section on net debt. Thus, at the normalised profit before tax line, the Group broke even in line with budget and the Board's expectations. Profit before tax (including exceptional items) rose considerably when compared to the prior period for reasons which have already been stated above in the section on profits. Note 3 to this statement sets out a full analysis of exceptional items.

The rate of taxation is higher than expected in the period ended 31 May 2022 because, in anticipation of the rise in the basic rate of corporation tax in April 2023 from 19% to 25%, a charge of £500,000 has been taken to cover those deferred tax items which are expected to reverse after the date of the change in the corporation tax rate.

As a result of all the factors set out above, basic earnings per share for the six months ended 31 May 2022, after all exceptional items, were 4.17p (2021: 1.61p). 

Balance sheet

The gross assets of the Group as at 31 May 2022 declined to £91.1 million (2021: £104.4 million). This resulted to a degree from a fall in the book values of property, plant and equipment (which are fully analysed in note 6) as depreciation exceeded new additions. But the principal factor was the decline in trade and other receivables, the reason for which is set out above in the section on working capital. These reductions were offset to some extent by the rise in the value of the Group's fuel derivative at 31 May 2022, driven as it was by the fuel price at that date.

Current liabilities fell principally because of the reduction in loans and borrowings, the reasons for which have been set out above in the section on net debt. The full analysis of loans and borrowings at period ends is set out in note 7 below. Total obligations under hire purchase contracts fell as repayments were made but no new contracts were taken out. Note 9 contains a full analysis of the profile of hire purchase obligations. Non-current liabilities were little changed from those seen at the end of 2021 and/or the prior period.

The result of the movements outlined above, combined with the profit after tax of £2.1 million (2021: £0.8 million) was that the net assets of the Group grew somewhat to £34.1 million (2021: £31.5 million).

Cash flow statement

Cash flows from operating activities (before changes in working capital and provisions) fell when compared to 2021 to £7.7 million (2021: £9.6 million). The principal reason for this was a fall in depreciation, offset by higher profitability. Cash flows from changes in working capital and provisions increased markedly as working capital was released for the reasons set out above in the relevant section on this item. Cash generated from operations therefore reached £17.2 million for the period (2021: £7.8 million). Interest paid on lease liabilities fell slightly as no new hire purchase contracts were entered into. Purchases of property, plant and equipment, at £0.45 million, were lower than the prior period (£0.96 million) and consisted in the main in vehicles for new business. The cash outflow for the acquisition of businesses was in respect of the Claribel and Johnsons businesses described earlier in this statement.

Within financing activities, the Company paid a special interim dividend in April 2022 and commenced its share buy back programme as previously announced. Repayment of bank borrowings includes a net reduction of £6.3 million in the Group's drawings on its Revolving Commercial Facility. Bank interest fell as bank borrowings fell.

Thus, given cash flows from operating activities of £16.4 million, £1.8 million of cash used in investing activities, and cash used in financing activities of £11.4 million, there was an overall increase in cash of £3.2 million in the period (2021: increase of £0.8 million). In summary, the net cash position of the Group stood at £30,000 at 31 May 2022, compared to liabilities of £2.5 million at 31 May 2021 and £3.2 million at 30 November 2021. 

Outlook

The Group continues to trade in line with budget for FY 22. The Board's base assumption for the year is that the slow upward trend in passenger numbers described above will continue and that full recovery will not take place until FY 2023.

The Group has at present no hedging cover in place for FY2023. However, recognising that fuel prices may rise further, but also bearing in mind that fuel represents only some 12% of the total costs of operation, the Board has been taking active steps to re-align bus service operations so that it remains sustainable in any future period of still higher fuel prices. This has been effected through such actions as disposing of vehicles with unacceptable fuel consumption and planning fare increases where necessary.

During the COVID-19 pandemic, the Board decided to focus on cash conservation and debt reduction with the objective of emerging from the pandemic with a robust balance sheet, fit for renewed commercial operation. The Board believes that these objectives have been successfully achieved. The continued large-scale investment by the Government under the banner of its National Bus Strategy is also positive for the industry in the medium term. The acquisition, actual and prospective, of two of the UK's largest bus groups (Stagecoach Group plc and The Go Ahead Group plc) by new groups of investors is also, the Board believes, an important statement about the positive direction of the bus industry as a whole.

The bus industry is now in a prolonged post-pandemic recovery phase which is likely to involve the general overhaul of bus networks and rationalisation amongst bus operators. This will undoubtedly produce continued turbulence in the bus industry which should bring a healthy flow of opportunities to Rotala, much like the acquisitions made in the first half of FY 2022, for both organic growth and acquisitions. For all these reasons, I am therefore very confident about Rotala's prospects.

John Gunn

Non-Executive Chairman

Date: 27 July 2022

Notes to the Unaudited condensed Consolidated Interim Financial Statements for the six months ended 31 May 2022

1. Basis of preparation:

The unaudited condensed consolidated interim financial statements for the six months ended 31 May 2022 have been prepared using the accounting policies set out in the Group's 2021 statutory financial statements.

The financial statements of the Group for the full year are prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and these interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting". The interim financial statements have been prepared on a going concern basis.

2. Turnover:

Revenue represents sales to external customers excluding value added tax. All of the activities of the Group are conducted in the United Kingdom within the operating segment of provision of bus services. Management monitors revenue across the following business streams: contracted services, commercial services and charter services.

As set out in the Chairman's Statement, the Group has been the beneficiary of extensive support from the Department for Transport and local authorities.

3. Profit before taxation:

Profit before taxation includes the following items which the directors consider to be outside of the normal trading transactions of the Group and are therefore to be regarded as exceptional in nature:

4. Taxation:

The main rate of corporation tax will increase from 19% to 25% from April 2023. The tax charge in the condensed consolidated income statement for the period ended 31 May 2022 has therefore been increased by £500,000 to reflect the estimated effect of the reversal of deferred tax items after April 2023.

For the same reason, the deferred tax liability arising on the gross pension scheme asset has been increased by £250,000 and this charge has been reflected in the condensed consolidated statement of comprehensive income.

5. Earnings per share:

Basic earnings per share have been calculated on the basis of profit after taxation and the weighted average number of shares in issue for the period of 49,947,223 (31 May 2021: 50,091,109; 30 November 2021: 50,091,109). Diluted earnings per share have been calculated on the basis of profit after taxation and the weighted average number of shares in issue (including such potential issues as are dilutive) for the period of 49,947,223 (31 May 2021: 50,091,109; 30 November 2021: 50,091,109).

Basic adjusted and diluted adjusted earnings per share before exceptional items have been calculated using the same weighted average numbers of shares in issue, but on the basis of profits after tax and before any exceptional items. This is done in order to aid comparability between the accounting periods.

6. Property, plant and equipment:

The Group signed an unconditional contract to sell a surplus leasehold property before the period end, but the transaction was completed just after the period end. Accordingly, in these unaudited condensed consolidated interim financial statements, the transaction has been treated as an adjusting event.

7. Loans and borrowings:

Secured bank loans are mortgage-type loans secured by reference to the Group's freehold property.

8. Lease liabilities:

9. Hire purchase agreements:

The Group's obligations under hire purchase agreements are secured by the lessors' rights over the leased assets.

10. Other lease liabilities:

Future lease payments for leases treated as finance leases under IFRS 16 but which take the legal form of rental agreements, without the legal right of ultimate ownership of the asset leased, are as follows:

11. Dividends:

The Company paid a special interim dividend of 1.0p per share in April 2022 in relation to the six months ended 31 May 2022. All dividends are payable in cash only.

12. Additional information:

The unaudited Consolidated Interim Report was approved by the Board of Directors on 27 July 2022. The consolidated interim financial information for the six months ended 31 May 2022 and for the six months ended 31 May 2021 is unaudited. The financial information in this interim announcement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The statutory accounts of Rotala Plc for the year ended 30 November 2021 have been reported on by the Company's auditors and have been delivered to the Registrar of Companies. The report of the auditors on these accounts was unqualified, did not contain an emphasis of matter and did not include a statement under section 498 of the Companies Act 2006. Copies of the financial statements are available from the registered office of the Company at Rotala Group Headquarters, Cross Quays Business Park, Hallbridge Way, Tividale, Oldbury, West Midlands, B69 3HW and the Company's website www.rotalaplc.com.

13. Copies of this statement are available from the registered office of the Company at Rotala Group Headquarters, Cross Quays Business Park, Hallbridge Way, Tividale, Oldbury, West Midlands, B69 3HW and the Company's website www.rotalaplc.com.