Management review

Arriva today, like any business, reflects the strategic choices we have made in the past. And while we need to keep a firm grasp on the realities of the present, the future is where we keep our focus on behalf of our passengers, investors and other stakeholders.

Population growth, congestion and rising mobility driven by economic growth are combining to create social, political and environmental challenges. Public transport is increasingly an important part of the response to these challenges across Europe. With expansion into the changing markets of mainland Europe at the heart of our strategy, our future lies in our ability to engage with stakeholders and develop appropriate solutions to their growing needs.

In this respect, progress in 2007 has been extremely encouraging. We have continued our development through a combination of organic growth, acquisitions and investments throughout 2007 and early 2008. Further acquisitions and tenders are now being pursued actively. The groundwork has been laid for further growth in the rest of 2008 and beyond.

Arriva has developed a diverse portfolio of operations. This diversity limits our dependence on any single market or contract for success and ensures we have excellent knowledge of, and access to, a range of new opportunities across most of Europe.

We have reinforced our positions in the UK, Germany, Portugal, Sweden, Denmark, Italy and Spain, and have broken new ground in Poland via a joint venture in that country’s first ever private-sector passenger rail contract.

The smooth start in November 2007 of CrossCountry, the UK’s most geographically extensive rail franchise, established Arriva as one of the UK’s leading rail operators, alongside its position as a leading bus operator.

The rising awareness of environmental issues goes to the heart of the public debate on the role of transport, on how it provides value for society, and how that society can reconcile mobility with sustainability. Our recently-announced target for improving the carbon efficiency of our operations will be demanding, but will protect the long-term interests of our investors as well as the communities in which we operate. Many fuel efficiency and CO2 reduction measures bring immediate cost savings, others require us to invest in technology and ways of working that protect and build long-term value.

In financial terms, the full year effect of many of our recent successes has yet to be seen. Nevertheless, for 2007 I am pleased to report strong growth in revenue, up 16 per cent to £2,000.7 million (2006: £1,729.0 million) and group operating profit up seven per cent to £128.0 million (2006: £119.5 million). Profit before taxation for continuing operations was up five per cent to £115.8 million (2006: £109.8 million), despite the headwinds of increased fuel costs and the significant costs incurred on bidding for three UK rail franchises.

Basic earnings per share from continuing operations before goodwill impairment, intangible asset amortisation and exceptional items, our preferred measure, increased to 46.5 pence (2006: 44.4 pence).

Even after a year of significant growth through acquisitions as well as contract wins, our financial position has strengthened further. Having taken advantage of market conditions in early August by securing a £615 million, five-year, revolving credit facility agreement, on improved terms, the group has the financial capacity to meet its anticipated investment needs within existing cash and medium-term credit resources.

Given the strength of the balance sheet, the cash generating power of the business and the prospects for continuing profitable growth, the Board is recommending a significantly higher dividend increase than in previous years. We propose to raise the final dividend by 10 per cent, to 17.06 pence per share. Together with the interim dividend of 5.59 pence per share paid in October 2007, this makes a proposed total dividend of 22.65 pence per share. The final dividend will be paid on 1 May 2008 to all shareholders on the register at the close of business on 28 March 2008.

Overall, we believe that the commercial progress achieved in 2007 will be reflected in results during 2008 and beyond. In parallel, much work is underway to develop promising contract and acquisition opportunities for the medium term. With robust finances, a diverse portfolio, and the momentum provided by our £12.0 billion group order book, Arriva is performing strongly and has built an attractive position for further success.

Sir Richard Broadbent
Chairman