Divisional review

North America

Revenue for North America was £444.5 million (2008: £372.5m) and normalised operating profit was £25.3 million (2008: £32.5m). In local currency, revenue was US$695.0 million (2008: US$690.5m) and normalised operating profit was US$39.6 million (2008: US$60.3m).

North America delivered modest revenue growth in the year, with underlying revenue up nearly 2%, and once again achieved good contract retention at over 90%. However, overall, this was not a strong year, with operating profit declining from £32.5 million in 2008 to £25.3 million in 2009.

We won 19 new contracts in 2009, worth US$30 million annually, gaining over 500 additional routes. But we also lost, or resigned due to poor margin levels, 24 contracts, reducing our overall network by over 500 routes. Competition was strong and we had to balance achieving sensible contract margins with retaining market share. The 2009 bid season was also characterised by increased interest in outsourcing of contracts by school boards who currently operate in-house - however, there was very little actual conversion.

Profit in local currency terms was significantly lower than 2008, primarily due to higher fuel costs and continued double running costs and infrastructure investment associated with having parallel centralised and distributed field service costs, as part of our transformation project.

A thorough review of the project has identified changes to its scope which will allow greater focus on cost efficiency and value-adding aspects going forward. This recovery programme will allow us to remove some short-term cost increases where non-driver wage costs, together with facility and infrastructure costs, rose by US$13 million in 2009. The programme will help us to deliver greater efficiency, and the changes in scope will allow double running costs to be eliminated from 2010. We are targeting a US$40 million reduction in the overall cost base by 2011, compared to 2009 performance.

2009 profitability was also negatively impacted by higher fuel costs, reflecting global market conditions at the time of hedging in 2008. This added US$9 million on a constant volume basis. Investment in depreciation and leasing added US$5 million, reflecting recent investments. However, we have made some significant cost improvements, such as in the management of driver wages, our largest single cost area. 2009 saw a US$7 million improvement in costs on a constant volume basis.

We remain convinced of the attractions of this market, with pressures on education budgets promoting outsourcing; currently only one third of buses are outsourced. Children continue to go to school, despite the recession. Medium-term contracts provide suppliers with protection from revenue risk. As school boards convert to outsourcing, the market can grow, offsetting margin pressures in the existing market.

During 2010, our performance will improve as a result of the actions we have taken and further initiatives currently being assessed. Firstly, our recovery programme has been targeted on the most effective delivery areas. Secondly, we have made senior management changes, driving a greater operational focus. We are in the process of consolidating all centralised operations and management in Chicago, closing two existing centres. We are committed to restoring margins, while further improving services for our customers.

Revenue
£444.5m
Normalised operating profit
£25.3m

Transforming our North American operations

Our transformation programme in North America has three core elements:

  1. centralisation – consolidating activities previously carried out in local field offices in order to harness efficiency and reduce cost;
  2. standardisation – adopting a single approach and process across North America to the way we do things, to share best practice and deliver a single solution to customers and employees alike; and
  3. optimisation – improving the way we utilise our fleet and reducing cost and investment needs.

The programme recognised that the decentralised approach of the business, which had been built up through many acquisitions, needed to change to drive better service and cost efficiency in a competitive market place. Several elements have already yielded benefits – duplication and activity has been removed from the 165 field locations; driver recruitment has been centralised, improving recruitment costs and retention rates; customer billing and payroll has been moved onto a single IT platform, driving improved reliability and cash collection; and maintenance depots have been consolidated.

But programmes of this nature have a degree of trial. And some of our pilot activities have shown that not all the hoped for benefits will be realisable. For example, the on-bus system to centralise despatch has proved too complex and has been stopped. And too much cost was being added at the centre to deliver the benefits. Refining our programme in this way will deliver a better result operationally and help achieve our goal of US$40 million of cost savings by 2011.