Rotala PLC - Half-year Report

15 September 2020

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Rotala Plc

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

Unaudited 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 2020.

Highlights

·     Operating profit before exceptional items for first half 2020 of £0.37m (H1 2019: £2.3m), despite impact of COVID-19

·     Passenger volumes gradually increasing as Government restrictions eased

·     Operating well within extended overdraft facility put in place by the Company's bankers  HSBC

·     Bus services continue to be well supported by Government

·     No necessity for Company to utilise any of the Government loan schemes

·     Post-crisis opportunities for both organic growth and growth by acquisition

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Chairman's Statement

I am pleased to present this interim report to shareholders in respect of the six months ended 31 May 2020.  Up until the COVID-19 pandemic triggered the "lockdown" phase of the Government's response in late March 2020, the Group was trading in line with budget and was well on course to achieve its best ever first half results.  All that progress was halted however when the Government introduced severe restrictions on travel for all but essential workers on 23^rd March 2020.

In line with the announcement dated 9 April 2020, the Company has continued over the intervening period to align bus services with local requirements, reduce commensurately the costs of operation and conserve cash. Cash flow, both at EBITDA level and net of all debt, interest and other payments, was quickly stabilised and since the beginning of May 2020 has been positive. As highlighted in the same 9 April 2020 announcement, the bankers to the Company, HSBC Bank Plc, responded to the COVID-19 crisis by increasing the Company's overdraft facility to £6.6 million.  The Company has operated well within that facility in the intervening period and, whilst it has benefited from the grants Government is providing to the bus sector, it has not taken up any of the options offered under the various Government-supported loan schemes, and at the current time sees no requirement to do so. Besides the response of HSBC Bank Plc outlined above, the Company benefited from a moratorium of between three and six months declared by the majority of hire purchase finance providers.

In the announcement of 9 April 2020 we set out the Group's response to the restrictions placed upon it by Government action. In brief we consulted closely with the Local Authorities in whose areas we operate (as we were directed to do by Government), reconfigured timetables to meet the likely new passenger levels and reduced driver rosters to match the new levels of service provision. All other employees not rostered to work were placed into the Coronavirus Job Retention Scheme. At the beginning of the crisis passenger loadings fell to under 15% of expected levels on a like for like basis but since then passenger volumes have slowly recovered as the crisis has eased and the Government has lifted many of the initial restrictions.

At the time of writing passenger volumes are rising steadily as schools have returned and the holiday season has ended. On a like for like basis passenger volumes now stand at about 54% of the same period in the previous year. We expect this upward trend to continue. To match these increases bus service frequencies have been gradually returned to pre-crisis levels. We are now running at roughly the level we were at before the Coronavirus crisis hit. We are also playing our full part in the Home to School transport initiative being funded by the Department of Education. Staff have accordingly gradually been brought back from furlough. At one time just under 50% of staff were on furlough but this proportion has fallen steadily and, bearing in mind that between 5% and 10% of staff are always on holiday, almost all of our staff are now back at work.   

Throughout this period the support of Government at local and national level has been key to sustaining our operations. As we highlighted in the announcement of 9 April 2020, as soon as the "lockdown" phase of the Coronavirus pandemic began, the UK Government designated bus operation to be an essential service. Government also took steps, through specific direction provided by the Cabinet Office to all arms of the State at both national and local level and through the Department for Transport, to ensure that bus companies had sufficient cash flow to support the operations that they were being asked to run. These measures encompassed a specific COVID-19 Bus Service Support Grant (now renamed "CBSSG Restart") and the maintenance of Bus Services Operator's Grant, concessionary fares re-imbursements and payments for contracted bus services broadly at their pre-crisis levels. These support measures continue to be in place at the current time. We remain grateful to Government for recognising early that bus operation was indeed an essential public service and for putting in place the support measures that were necessary to keep services running in very adverse circumstances.

Government has confirmed that CBSSG Restart and all other support measures will continue in place for the time being. Government has stated that, if it decides to terminate CBSSG Restart, it will give eight weeks' notice of termination. This should give ample time for us to make any service changes which might be necessary following the withdrawal of the grant.

Results and review of trading

For the six months ended 31 May 2020 group revenues were £35.5 million (2019: £30.5 million). However, as should be apparent from my words above, there is no comparability between the two accounting periods and therefore little meaningful to be said, except to point out that the 2020 figures include the results of the Bolton acquisition made in August 2019, but that the results for the period ended 31 May 2019 obviously do not include any such contribution.  In the period to 31 May 2020 the grant and subsidy regime described above contributed £7.1 million to total revenues (which are broken down in detail in note 3 to this statement).   

Despite the adverse operating conditions, before exceptional items, the Group recorded an Operating Profit of £373,000 for the six months to 31 May 2020 overall (2019: £2,330,000). For the same period the Group incurred a charge of £4.1 million for exceptional items, largely brought about by the COVID-19 crisis. The charge is analysed in detail in Note 4 to this statement and is the main cause of the loss before tax of £4.9 million (2019: profit before tax £1.1 million). The principal components of that charge are as follows:

·              As the COVID-19 crisis took hold it rapidly became clear to the Board that the oldest vehicles in the bus fleet (retained mainly to increase the flexibility of service operation) were very unlikely ever to see service again. Accordingly the Board concluded that it would be more beneficial to group cash flow to sell these seventy one vehicles for scrap and take a one-off charge to the profit and loss account of £913,000. The group's cash flow will be improved by about £300,000 by the combined effect of the sale of the buses and the release back into the tyre pool of the tyres used by these vehicles;

·              In order to hedge its requirement for diesel fuel, the Group enters, as a matter of course, into diesel commodity forward contracts. These agreements do not meet the definition of hedging transactions under IAS 39 "Financial Instruments: Recognition and Measurement". Accordingly they are accounted for as a derivative and are recorded at fair value through profit and loss in any accounting period. This means that the group's entire fuel derivative exposure is marked to the market price at the end of any reporting period. Therefore the profit and loss account for the six months ended 31 May 2020 recognises the charge of £2,877,000 required to reflect the full potential loss to the Company of all its remaining fuel derivative contracts at the price prevailing at that date. Since 31 May 2020 the market prices and exchange rate underlying this provision have changed considerably and as at 31 August 2020 the provision required was £1,626,000, £1,258,000 as a current liability and £368,000 as a non-current liability. The cash flow impact of the mark to market provision on the fuel derivative exposure, if realized wholly into cash, would arise evenly over the eighteen months to 30 November 2021.

Financial review

The Board believes that the Company will be able to sustain its activities for the foreseeable future under current operating conditions. Therefore it is considered to be appropriate to draw up these financial statements on the going concern basis.

Income statement

Trading conditions for the six months ended 31 May 2020 were abnormal and not directly comparable with preceding accounting periods. The restrictions on trading prompted by the COVID-19 pandemic caused gross profits to fall by 14% compared to the same period in 2019 and the gross profit percentage to fall to 14.2% (2019: 19%). Administrative expenses rose to £4.7m (2019: £3.5 million) reflecting the addition of the large depot at Bolton in the second half of 2019. Consequently Profit from Operations before exceptional items fell to £373,000 (2019: £2,330,000) and, after interest and tax, a loss before exceptional items of £644,000 was recorded (2019: profit £1,269,000). The loss per share was 1.29 pence (2019: profit per share of 2.64 pence).

The composition of the charge for exceptional items of £4.1 million has already been analysed above. The Loss from Operations after exceptional items was £3.8 million (2019: Profit of £1.9 million) and, on the same basis, the Loss before Tax was £4.9 million (2019: Profit before Tax of £1.1 million). The loss per share for the period was therefore 7.61 pence (2019: profit per share of 1.75 pence).

Balance sheet

The balance sheet as at 31 May 2020 was relatively static when compared to that pertaining at 30 November 2019. Note 6 should be consulted for a detailed analysis of property, plant and equipment. In accordance with IFRS 16 - Leases (see note 2) right of use assets were recognised in the opening balance sheet using the modified retrospective approach. Some additions were made to the vehicle fleet in the period but, given that deliveries of new buses for the Bolton re-equipment were delayed by the pandemic, they were outweighed by depreciation, disposals and the decision, as above, to scrap 71 older vehicles. The liabilities side of the balance sheet encompasses for the first time the lease obligations calculated under IFRS 16, as both current and non-current liabilities.  Otherwise the only item of note is that, making use of the increased overdraft facility provided by HSBC Bank Plc as part of their response to the COVID-19 crisis, net bank debt increased from £24.6 million at 30 November 2019 to £26.5 million as at 31 May 2020. No new bank borrowings were taken out in the period under review and indeed a small repayment of mortgage borrowings was made in the period.

Cash flow statement

Despite the loss before tax of £4.9 million for the period, major components of that loss were formed from non-cash items. Thus the Group was able to record a positive cash flow generated from operations of £1,235,000 (2019: £1,456,000) and positive net cash flow from operating activities of £668,000 (2019: £1,070,000).

The sale proceeds of the disposal of the Atherton depot in May 2020 outweighed purchases of property, plant and equipment and the interim dividend was paid in December 2019, well before the COVID-19 crisis was upon us, but no final dividend was declared and paid.

The mortgage repayment of £1 million of the previous year was directly connected to the sale of a property and so was not repeated this year. The capital payments under HP agreements benefited somewhat from the moratorium already mentioned but otherwise the pattern of payments and receipts under financing activities was very similar to the comparative period. Cash used in financing activities therefore totalled £3.1 million (2019: £3.2 million) and the net decrease in cash and cash equivalents at this stage of the year was actually lower than in the comparative period at £2.1 million (2019: £2.6 million).   

New vehicles

The delayed delivery of the new buses for the Bolton depot, to replace the buses presently leased from First Group plc in accordance with the terms of the acquisition in August 2019, means that a large batch of these vehicles will arrive in close order in the second half of the year and cause the book value of passenger service vehicles and the hire purchase debt financing them to increase by about £17 million by 30 November 2020. The remainder of the vehicles on order, with a value of some £11 million, almost all destined for Bolton, will arrive throughout 2021. In cash flow terms these acquisitions will be cash neutral as the current leasing costs are equivalent to the capital repayments on the new vehicles. In addition the replacement vehicles are far more fuel efficient and have much lower maintenance costs. Furthermore, given the change in circumstances since these orders were placed last year, we do not foresee any requirement, unless for completely new business, to acquire any vehicles for the following two years. In a normal year we would expect to invest about £4m in the natural cycle of fleet replacement, so, after the initial large increase in the size of the outstanding HP debt, that increase will be temporary and reduce rapidly so that, when the next re-equipment cycle begins HP debt levels will be comparable to where they were as at 31 May 2020.

Dividends

Because of the onset of the lockdown under the COVID-19 crisis the directors were unable to recommend to the Annual General Meeting in May 2020 a final dividend in respect of the year ended 30 November 2019. One of the terms of the CBSSG Restart scheme is that no dividends can be paid to shareholders. However, once the CBSSG Restart grant period has ended, the Board will consider whether it is possible to reinstate dividend payments.

Fuel hedging update

The normal annual fuel requirement of the Group is approximately 14.0 million litres.  In drawing up its budget for 2020 and beyond the Board originally targeted an average fuel price of about 100p a litre. The board continued to hedge this fuel requirement until early in 2020. By that stage about 77% of the group's fuel requirement for 2020 was covered by hedging contracts and about 87% of the fuel requirement for 2021. Actual fuel usage during the COVID-19 crisis has of course been well below expected levels and full provision has been made in these financial statements against the fuel derivative exposure as at 31 May 2020 at the then market prices.

Outlook

For the foreseeable future the Group will continue to work closely with the Department for Transport and relevant Local Authorities and be in receipt of the various elements of Government support in the form of the grants and subsidies already described. In these abnormal circumstances it is not possible, while the CBSSG Restart regime remains in place, to give any guidance to the market as to expected financial performance. 

The Board does expect the steadily increasing trend in passenger volumes to continue until normal trading conditions can be re-established, although it is of course impossible to forecast exactly when that will be. The Board however does believe that the Company will be well placed after the pandemic has passed to take advantage of opportunities in the bus market. Even before the onset of the COVID-19 crisis it was evident that the likelihood of major opportunities in our markets was increasing. Since then a number of small and medium sized competitors in our areas of operation have either collapsed or withdrawn from the market and the factors causing stress to several of our larger competitors have not diminished. Therefore the Board expects there to be increased opportunities in the future both for organic growth and for sizeable acquisitions. 

In addition the Board believes that the Group, its management and its employees have met the stress test posed by extraordinary and unprecedented circumstances and come through them with flying colours. We have seen service delivery and reliability improve throughout the crisis, management learn to be quicker on its feet, and the increased investment in systems infrastructure continue to produce discernible benefits.  We are therefore very confident that, operationally, the Group is in good shape, fitter and leaner to meet the challenges that lie beyond the end of the COVID-19 crisis.   

John Gunn

Non-Executive Chairman

15 September 2020