National Express Group plc Annual Report and Accounts 2010

Annual Report and Accounts 2010

How we performedPerformance and financial review

RevenueGroup revenue for the year was £2,125.9 million (2009: £2,711.1m), with the reduction reflecting the handing back of the East Coast rail franchise in November 2009 and the sale of the Travel London bus business, which together accounted for £603.4 million of 2009 revenue. Underlying revenue increased 1%, whilst foreign exchange movements accounted for a 3.9% negative impact in Spain and a 2.7% positive effect in North America. Growth reflected yield management in UK Bus, and passenger volume increases in UK Coach and Rail, whilst new contracts benefited Spain and North America.

Normalised profitNormalised operating profit for the year increased by 28% to £204.2 million (2009: £159.8m). This was driven by a strong focus on delivery of cost reduction and margin improvement plans, particularly in UK Bus and North America. With two profitable franchises in UK Rail, and Spain also increasing profitability in 2010, the Group made significant progress in delivering its Business Recovery plans. Normalised margin increased from 5.9% in 2009 to 9.6% in 2010.

The key year-on-year benefits to profitability were as follows:

  • Driving revenue through organic growth, yield and new bid wins, adding a net £20 million to profitability;
  • Managing costs down; our core programmes in UK Bus and North America, together with 2009 full annualised savings, delivering £39 million of benefit;
  • Better hedged fuel costs, delivering £24 million of price benefit, supported by the introduction of fuel efficiency technology across the Group; and
  • Net loss avoided on exited businesses, adding £13 million of profit.

This was partially offset by:

  • Increased corporate costs, reflecting investment in procurement, business development and talent development to drive future performance, which added £3 million;
  • Increased rail franchise premia, adding £11 million;
  • Increased insurance costs of £6 million;
  • Adverse impact of foreign currency on profit translation of £3 million; and
  • General cost inflation, estimated at £38 million.

Normalised net finance costs for the year were £44.0 million (2009: £43.5m), reflecting a continued reduction in average debt offset by a higher average interest rate, due to refinancing shorter term floating debt with longer term fixed rate bonds.

Improvement in normalised operating profit 2010

Normalised operating profit

  • Spain
  • North America
  • UK Bus
  • UK Coach
  • UK Rail

The resulting normalised profit before tax for the year was £160.5 million, a 38% increase in the year. With a normalised tax charge for 2010 of £39.2 million (2009: £23.0m), the Group’s normalised effective tax rate (“ETR”) was 24.4% (2009: 19.8%). The normalised profit for the year was £121.3 million (2009: £93.2m). Normalised basic EPS were 23.6 pence (2009: 30.5p), the reduction reflecting the part year impact of the Rights Issue on 2009.

Normalised profit before tax for the year was £160.5 million (2009: £116.2m), a 38% increase in the year.

Exceptional items and intangible amortisationExceptional costs in continuing Group operations reduced significantly from 2009 to £16.6 million after tax (2009: £74.2m).

Pre-tax, operating exceptional costs were driven by implementation of the successful Business Recovery programmes. The table below summarises exceptional costs by division:









North America




UK Bus




UK Coach




UK Rail




Central functions




Group continuing operations




In North America, exceptional costs of £25.7 million before tax were incurred in relation to asset write-offs from the previous transformation project, together with rationalisation costs and fleet write-downs as part of the margin improvement programme. Exceptional costs required to complete the cost reduction programme have now been incurred.

Other divisional pre-tax operating exceptional spend was for rationalisation costs in Spain (£1.9 million); UK Bus margin improvement and analysis to support the Competition Commission’s enquiry into the Bus industry (£6.7 million); rationalisation costs in UK Coach, offset by a one-off benefit from closure of its defined benefit pension plan (£0.1 million credit); and one-off charges to adopt a flatter management structure and relocate the corporate office from London to the Birmingham headquarters (£8.7 million).

In UK Rail, the Group reached agreement with the DfT for both sides to withdraw all claims relating to the hand-back of the East Coast rail franchise. A pre-tax charge of £18.3 million was taken in 2010 to write-off balances previously treated as recoverable in relation to the exited franchise. Net of tax relief of £7.0 million secured on rail exit costs, the net after tax exceptional charge for UK Rail in 2010 was £11.3 million.

The Group recorded a £32.1 million after-tax credit on settlement of its outstanding UK corporate tax liabilities (see ‘Reducing legacy risks’ below).

The Group is committed to minimising future operating exceptional costs, with all of the cost of implementing the Group’s Business Recovery programme now recognised.

The Group incurred exceptional finance costs of £2.0 million in 2010 (2009: £19.9m) to write-off facility fees on the refinancing of the Group’s principal banking facility in July 2010. The charge for intangible asset amortisation in 2010 was £57.1 million (2009: £60.4m), primarily relating to contracts, software and similar assets previously acquired in Spain.

The Group’s principal capitalised goodwill is in Spain and North America. The Group carried out goodwill impairment tests in 2010 and no such impairment was identified. Maintained non-impairment of goodwill in North America is dependent on continuing to deliver the expected margin recovery.

The resultant net charge for intangible amortisation and exceptional items was £59.0 million, significantly better than the 2009 charge of £145.9 million. The overall Group profit for the year was £62.3 million (2009 loss: £52.7m). Diluted EPS was 12.0 pence (2009 loss: 17.6p).

In 2010, significant progress was made resolving legacy issues of long-standing risk within the Group.

Reducing legacy risks In 2010, significant progress was made resolving legacy issues of long-standing risk within the Group and thereby providing greater certainty over future cash flows for these items and reducing future profit risk. In addition to the agreed East Coast hand-back (set out under ‘Exceptional items and intangible amortisation’ above), key items were as follows:

  • Corporate tax – the Group became one of several UK corporates to negotiate a resolution with the UK’s HMRC on all outstanding UK tax issues, for which provision had previously been made of approximately £50 million in the Group’s accounts. This agreement will see the Group settle £17 million over the next four years and should significantly reduce risk in the Group’s dealings with HMRC. The resultant exceptional credit of £32.1 million gave rise to a one-off benefit of over 6 pence per share in statutory EPS in 2010;
  • Eurostar – the Group negotiated the termination of the onerous contract between Inter-Capital and Regional Rail Limited (“ICRRL”), in which National Express has a 40% shareholding, and LCR, the Eurostar operator. Historically, the Group has been liable for its share of significant losses generated by LCR and had previously made provision in the accounts for these losses. The Group has now reached agreement with LCR to pay approximately £9 million in each of 2011 and 2012 to terminate this arrangement;
  • Pensions – agreement has been reached to close the National Express Group Staff Pension Plan to all members from 31 January 2011, removing the Company’s future salary funding risk relating primarily to UK Coach and corporate scheme members. In addition, a deficit funding plan of up to £4.2 million per annum for six and a quarter years was agreed by the Company to bring the fund to ‘self-sufficiency’ (where it should not be dependent on the Company for future funding contributions), in order to eliminate an expected scheme deficit of over £20 million (expected to be confirmed on an actuarial funding basis as at 5 April 2010). Discussions are ongoing to secure a deficit funding plan for the principal UK Bus pension plan which remains open to existing members; this plan will replace the current annual deficit recovery payment of £3.4 million.

Fuel risk managementThe Group has a forward fuel buying policy in place with the objective to secure a degree of certainty in its planning. Based on the hedgable consumption (which was 233 million litres in 2010), a proportion of this is fixed for the following three years. The Group currently has 100% fixed for 2011 at an average price of 40 pence per litre, 75% fixed for 2012 at 41 pence per litre and 15% fixed for 2013 at 42 pence per litre. The Group aims to recover fuel cost increases through a combination of concession and contract price adjustments, together with fuel efficiencies.

Cash management In 2009, the Group established a primary focus on driving cash generation from its businesses. Through long-term cash generation, the Group seeks to generate strong shareholder returns, to fund dividends and reinvestment in profitable growth.

Operating cash flow (which the Group uses as the cash equivalent of normalised operating profit) was £221.7 million (2009: £281.3m). Although behind prior year, which benefited from one-off improvements to working capital management and lower capital investment, this represented 109% conversion of normalised operating profit, as set out in the table below:




Normalised operating profit






Grant amortisation, profit on disposal and share-based payments






Net maintenance capital expenditure



Working capital movement



Pension contributions above normal charge



Operating cash flow



The prior year’s improvement in working capital was sustained.

The prior year’s improvement in working capital was sustained, with a further reduction achieved, despite a partial repayment of deferred social security in Spain. Both Spain and North America achieved good success in cash collection from local authorities, a clear focus in light of the challenging economic backdrop for public funding. Maintenance capital investment, primarily replacing ageing fleet and systems, increased in 2010 to 88% of depreciation. We expect to maintain this level in future years at close to 100% of depreciation and the average age of the Group’s vehicle fleet reduced in 2010 to 6.1 years (2009: 7.3 years).

The Group’s free cash flow in 2010 was £79.3 million (2009: £125.5m). Significant cash flows continued for past rail operations and exceptional items. Interest remained relatively constant, whilst the Group returned to tax payment, albeit that cash tax remains well below the Group’s effective tax rate (“ETR”).




Operating cash flow



Discontinued operations



UK rail franchise entry and exit



Exceptional cash flow



Payments to associates



Net interest



Dividends paid to minorities






Free cash flow



Free cash flow measures the cash available to fund future investment, in growth capital and acquisition, and to return to shareholders by way of dividend and share buyback. In 2010, the Group returned to investing in new capital expenditure opportunities. New contracts in North America school bus and in Spain, with the Agadir contract, saw growth investment of £33.9 million (2009: £nil). In addition, a bolt-on acquisition was completed in North America on 31 December 2010, although payment was deferred into 2011.




Free cash flow



Net growth capital expenditure



Financial investments and shares



Rights Issue



Acquisitions and disposals






Net funds flow



With no material disposals, equity issuance or dividend payable in 2010, net funds flow was £37.2 million (2009: £497.6m).

Return on capital employed New investment is targeted to drive the Group’s ROCE, a core KPI adopted to measure the delivery of shareholder returns by National Express. Based on the Group’s estimated after-tax weighted average cost of capital of 8%, a hurdle of 12% pre-tax has been set for each business and growth project (projects are also evaluated on a discounted cash flow basis). The Group is targeting to deliver 15% pre-tax ROCE in the medium term. In 2010, National Express improved its ROCE to 13.2% (2009: 10.7%). The Group uses Return on Equity as a secondary KPI to measure the effect more directly on shareholder value. In 2010 post-tax ROE was 8.7% (2009: 6.2%), which is now also above the weighted average cost of capital.

During 2010, the Group completed the rebuilding of its financial platform.

Treasury management During 2010, the Group completed the rebuilding of its financial platform. It secured the refinancing of all of its debt at attractive terms and extended its debt maturity profile substantially. In January 2010 the Group’s residual €270 million 2011 Euro facility was refinanced with a heavily oversubscribed seven-year 6.25% £350 million unrated Sterling bond, which was subsequently awarded an investment grade rating by Moody’s and Fitch in March 2010. In June and July the Group refinanced its residual £800 million 2011 bank facility, firstly with the issue of a ten-year 6.625% £225 million Sterling bond and then with a £500 million unsecured revolving credit facility (“RCF”) committed until August 2014 by the Group’s relationship banks. The RCF is attractively priced, currently at LIBOR plus 1.45%, and will primarily be used for seasonal working capital, growth and headroom purposes.

With these arrangements now in place, the Group has no requirement to refinance its debt before 2014. At 31 December 2010, the Group had available cash and undrawn committed financing facilities of £517.8 million (2009: £409.0m). Net debt during the year decreased to £610.4 million (2009: £657.9m) through continued focus on cash generation. As a result, the Group’s headroom against its principal banking covenants continued to improve, as follows:

  • debt gearing ratio (adjusted net debt to EBITDA): 2.1x (2009: 2.5x; covenant not to exceed 3.5x); and
  • interest cover ratio (EBITDA to net interest): 6.9x (2009: 6.5x; covenant not to be less than 3.5x).

As the Group’s debt is now entirely denominated in Sterling, foreign currency forward and swap contracts were utilised to create synthetic debt positions to hedge the exposure of our Spanish and North American earnings and assets. At 31 December 2010, the value of this synthetic debt was €275 million and US$165 million respectively. The forward contracts had a maturity date of 20 January 2011 and have been rolled forward since the balance sheet date. No gain or loss was attached to the value of these instruments in the financial statements. Further details of the Group’s treasury management policies are set out in the Accounts.

Pensions The Group’s principal defined benefit pension schemes are all in the UK. At 31 December 2010, these schemes reflected a substantial improvement in the combined deficit under IAS19 of £10.4 million (2009: £54.9m). The decrease in the deficit balances during the year was principally through appreciation in investment asset values during the period, together with the benefit of deficit recovery plans.

Under IAS 19, in UK Bus (under the West Midlands Passenger Transport Authority Pension Fund and the Tayside Transport Superannuation Fund), the deficit at 31 December 2010 was £5.3 million (2009: £46.4m deficit). There was no IAS19 deficit in UK Coach (under the National Express Group Staff Pension Plan), compared to the 2009 deficit of £5.2 million. The Group’s UK Rail business participates in the Railways Pension Scheme; the deficit exposure in the UK Rail division was £3.7 million (2009: £1.9m deficit) and would transfer to the incoming operator in the event of franchise termination. All deficits tend to be greater when measured on a scheme actuarial basis and are funded through the deficit payment plans.