• Year in review
• Market overview

Overall performance

Our North American operations made significant progress in 2010 in delivering the Business Recovery programme. Retaining only the beneficial parts of the previous transformation project, the business refocused on delivering consistent customer service to its school board customers from a lean, efficient cost base. Under new management, most parts of the business have had to be overhauled and this is still work in progress. However, over US$30 million of annualised cost have been removed since 2009 and a number of new contracts have been secured with customers. The North American business is well on the road to recovery and is targeting best-in-class industry performance. This market, with its longer term contracts and associated low revenue risk, remains attractive for future organic and bolt-on growth.

Revenue of US$712.1 million was 2% up on prior year (2009: US$695.0m; in Sterling terms, 2010: £459.8m, 2009: £444.5m). However, this reflected a 3% decline in the first half of the year, due to bid losses for the 2009/10 academic year, followed by strong growth in the second half with good success in securing new contracts.

Normalised operating profit increased to US$57.1 million, an increase of 44% on 2009 (2009: US$39.6m; in Sterling terms, 2010: £36.9m, 2009: £25.3m). Operating margin improved to 8.0% (2009: 5.7%); we are targeting to reach double digit, industry-leading levels by the end of 2011.

Our North American operations made significant progress in 2010 in delivering the Business Recovery programme.

Driving revenue

The 2010/11 bid season was highly successful – with a gross increase of 11% in new routes leading to an increase of over 700 routes on a net basis, 5% of total revenue. With strong local relationships and access to necessary capital investment, National Express secured 19 new contracts from competitors at a similar margin profile to the existing book of business.

In addition, three contracts were secured as conversions from in-house school board operations. This outsourcing is a positive trend, representing real market growth, and reflects the budgetary pressures on school boards and the improvements in service and efficiency that we can offer. This area will be a key target for future growth, although a natural conservatism amongst public sector bodies is likely to make this a longer term process. We also saw slowing of recent declines in organic volumes from existing contract customers, with no significant change in school populations or like-for-like route mileage.

Managing costs

Over US$25 million of actual in-year savings were delivered in 2010 as part of the targeted US$40 million Business Recovery cost saving programme. Double running costs, brought about by duplicating field-based and corporate activities, were eliminated, by returning responsibility for customer delivery to local teams. Two of the three corporate offices were closed in April and management of the business consolidated in Chicago. The replacement of a matrix management structure by a flatter, directly managed organisation led to substantial overhead cost savings and a more responsive decision- making approach. The exceptional cost of securing these savings and of writing off unproductive investment in prior years is now complete.

Building on better control introduced in 2009, driver wages improved by a further 0.5% of revenue in 2010. Fuel costs benefited by US$13 million in 2010 from lower priced hedges. This was partly offset by higher insurance costs, due to increased premia and provisioning to reflect the rising legal costs of claims.

Most new contracts in the school bus business require the provision of new buses. As a result, capital investment, primarily in fleet, increased to US$126.3 million in 2010 (2009: US$38.3m). However, the Business Recovery project delivered a thorough overhaul of fleet management systems which will see the improved cascading of buses around the country to maximise returns in this capital intensive business. In addition, almost 2,000 existing buses were removed from the fleet, reducing the proportion of ‘spare’ vehicles from over 20% to 11% and driving improved efficiency in fleet maintenance, vehicle licensing and storage costs.

Developing opportunities

Safety is paramount in the school bus industry and 2010 saw new management target improvements in accidents, injuries and child safety. Lost Time Injury rates decreased by 26%. This continued focus will ensure a better service is delivered to customers, insurance and legal costs are reduced and fewer employees are at risk of injury.

We are targeting to complete our two year margin improvement plan in North America by the end of 2011. Delivering the remaining US$10 million of annualised cost savings will be key. Improving fleet management will remain a priority in 2011 with the progressive roll out of GPS systems. This will be combined with an improved procurement process, targeting fleet investment and parts savings.

We are maintaining a high rate of contract retention to reduce churn, with margin discipline maintained. Nevertheless, the challenging market conditions, with their pressure on school board transport budgets, provide opportunity and we will continue to seek conversion of existing in-sourced school board contracts.

We have completed our first bolt-on acquisition for some time, acquiring a privately owned 200 bus operation in New Jersey which has a strong geographic fit with our existing operations, and we will continue to explore such opportunities. With a strengthened management team substantially in place, we are confident that this business has both revenue and margin growth opportunity for the future.

We are confident that this business has both revenue and margin growth opportunity for the future.