ROL.L Regulatory News (ROL)

Rotala plc

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

Trading Update

Rotala is pleased to announce the following trading update for the twelve months ended 30 November 2010.

In the statement of interim results issued on 27 August 2010, a number of factors were identified which would have a bearing on the financial results for the full year. Since that date there have been further developments both in these factors and in the transport sector generally (particularly in relation to the Coalition Government's Spending Review) which are dealt with below. 

Rotala is nevertheless pleased to report that it expects its full year results to be broadly in line with management's expectations and that the board will recommend the payment of a dividend for the year ended 30 November 2010 in accordance with the Company's progressive dividend policy.

1. Bus Services Operators' Grant ("BSOG")

In its Spending Review, the Government set out its policy on the continuation of BSOG to support bus operations. At the current time, this grant is a mechanism by which some 80% of the fuel duty paid on diesel used in bus operations is refunded to the operator. The Government has stated its intention to reduce this grant by 20% from April 2012. Although this change in policy will not have an impact on the Group during 2011, Rotala, like all other bus operators, will be obliged to review its fare structures in 2012 for this increase in fuel costs. It is anticipated currently that fare increases of only some 5-6% will be required to cover the extra costs. Approximately one third of Rotala's turnover (the private bus networks business) is not supported by BSOG and is therefore unaffected by these changes.

2. Concessionary Fares Schemes

As a closely related adjunct to spending reductions, the previous government had announced a review of concessionary fares arrangements with the object of greater economy and efficiency. The Coalition Government has continued with this review and aims to introduce changes in April 2011. It is believed that nationally this will have the effect of reducing concessionary fares re-imbursements by up to 30%. The Transport Authority in the West Midlands, Centro, is not forecasting such a material change in its models but a more significant impact might be seen in other local authority areas. Inevitably bus fares will have to rise in order to compensate for this reduction in revenues, but it will be the same for all operators in any particular locality.

This change will however create complex challenges to all operators which will require close management attention and decisive action. Rotala believes that the high quality of its management will be invaluable in this process, which is likely to prove difficult for competitors smaller than Rotala. The larger competitors to the Company are also likely to face difficult decisions about their more marginal routes as a result of their higher cost bases. Thus, while the Company acknowledges the risks in any period of material change, it also believes that this change in concessionary fares re-imbursements will bring opportunities to gain market share.

3. Spending Review

Besides the detailed proposals affecting the transport sector, the Coalition Government announced many other initiatives in its spending review. A single purpose authority like Centro can more easily manage the effects of this review, where choices can be made between capital and revenue spend within a budget confined to only one objective, transport provision for the West Midlands region, although this is dependent on the annual levy process between Centro and its constituent district councils. The preliminary view from Centro, our largest customer, is that revenue spend will not be reduced in 2011/12. The plans announced by the Government to devolve expenditure decisions to local councils on many different items will inevitably confront other local authorities with difficult decisions of prioritisation. The Board anticipates that these decisions may involve some reductions to transport budgets and some continuing uncertainties.

4. Fuel

Fuel is a significant cost to Rotala's business. Each year the Company uses about 10 million litres of diesel and as previously reported has been unable to obtain a hedge against rising diesel prices at an economic rate. The Group therefore remains vulnerable to further price rises. In 2010 the diesel fuel used cost about £1 million more than in 2009 on the same basis of operations. In drawing up its budgets for 2011 the Board has anticipated further rises in the price of diesel and that the increases in fuel duty so far announced will be implemented. The Group will continue to monitor the impact of rises in the price of diesel and will be able to mitigate further rises by fare increases and the use of contract price escalators.

5. New Contracts

Now that the Spending Review announcement has removed uncertainties, it is pleasing to be able to report the award of some new contracts. In and around our Heathrow depot we have been successful in winning contracts to transport aircrew for two smaller airlines for a contracted period of between two and five years. These two contracts should bring additional revenues to the Group of about £340,000 in a full year. It is also noticeable that, amongst private and public customers alike, there is a renewed willingness to make decisions and move forward, in contrast to the natural caution and indecision which afflicted the period from the election in May 2010 until the publication of the Spending Review in late October.

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6. Other developments

In the West Midlands, the introduction of new technology continues at a fast pace. Following the rollout of ticket machines capable of handling smartcard transactions within the ITSO environment, initially for concessionary travel transactions, Centro is pressing ahead with a plan to introduce a cross-operator commercial smart card with Oyster-type features. Ease and efficiency of operation will be of benefit to customer and operator alike. Furthermore an accent on quality of bus operations in the city centre by Birmingham City Council, Centro and operators working in partnership will improve standards of travel for customers and serve to ensure that only services which meet the required quality standards are allowed into the central area. The Company has, in anticipation of requirements for buses of increased specification, ordered 53 new vehicles in the 2009/10 financial year and remains amongst those operators with the youngest average fleet age.

The Company also remains keen to take advantage of market conditions to expand its business wherever possible. The outcome of the on-going investigation of the Competition Commission into the local bus services market is not yet known, but we have participated fully and willingly in the inquiry. We believe the Commission is better placed from our participation to recognise that measures that are favourable to operators like Rotala are in the best interests of the market for local bus services as a whole. On that basis we are hopeful that the outcome of the investigation will be positive for Rotala.

Rotala believes that these developments will provide further opportunities for the Group.

The preliminary results for the year ended 30 November 2010 are expected to be released in March 2011.

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