Corporate news releases
National Express Group PLC (‘National Express’ or the ‘Group’), a leading international public transport group, operates bus and coach services across the UK, continental Europe/North Africa and North America, together with rail services in the UK.
National Express reports its interim management statement for the first quarter of 2010, the three months ended 31 March 2010, ahead of its Annual General Meeting later today.
A good start has been made to 2010 with cost saving programmes and stronger operational focus driving improved margins. As a result, the Group is on track to meet expectations for margin and profit in the full year and continues to build its financial strength.
The first quarter saw a stabilising in revenue trends, although economic conditions remain relatively difficult. Operating margins have improved across the business, reflecting successful progress in the Group’s key programmes:
- The full benefit of cost savings achieved in 2009, driving improved efficiency across the business
- Early success in delivery of cost saving plans in North America
- The successful reduction in operating mileage, improving network efficiency
- The elimination of prior year rail losses, with the remaining rail franchises profitable
- The benefit of lower fuel costs, with 100% hedged for 2010.
The Alsa business had a good first quarter. Network efficiency continued to improve, with a reduction in kilometres operated of 3% exceeding a reduction in passenger journeys of 1%. Underlying* revenue was flat on prior year, although this included a benefit from earlier Easter bookings.
While domestic economic conditions remain challenging, the previously reported passenger trend in intercity has been slowly improving and urban revenues have shown growth. Cost management continues to be strong.
Margins improved strongly in the first quarter. This reflected the increased network efficiency and the benefit of earlier overhead cost reduction programmes, supported by lower fuel costs. Further cost savings have been identified for 2010 to mitigate any residual revenue weakness.
The contract to operate urban buses in Agadir, Morocco will start ahead of schedule, in September 2010, with investment in fleet brought forward from 2011. The business has also identified several organic growth opportunities both within and outside Spain.
UK performance improved in the first quarter, benefitting from a return to profitability in rail and delivery of actions to increase margin.
In UK Bus, good initial progress has been made in rebalancing the network, with operating mileage reduced by 5% in the first quarter. In comparison, underlying revenue reduced by only 1%. Passenger numbers grew overall but yield declined slightly as prices were held to encourage travel.
A detailed review of Bus operations has been completed. This has highlighted several structural areas for improvement, to address lower average revenues per journey, above average wage costs and opportunities to rebalance service provision to meet changing customer demand. An action plan has now been developed to target improvements in these areas, whilst delivering excellent customer service. This plan should enable the restoration of margins to industry average levels as a minimum, through the business working closely with its employees, regional partners and suppliers.
In UK Coach, underlying passenger revenues in the seasonally quiet first quarter increased by 1% on the prior year. Airport routes continued to show signs of improvement. April saw the successful launch of the £1.2 million Spring marketing campaign. This delivered promising results over the busy Easter period.
Rail enjoyed a steady first quarter, with underlying revenue unchanged on prior year in East Anglia but good growth reported in c2c. This has been driven through improved passenger numbers, with overall prices unchanged. Strong cost control and government revenue support for East Anglia continue to protect profitability in these two established franchises.
In the North America school bus business, the change in leadership and refocusing of the Business Recovery programme are already delivering benefits. Revenue is slightly ahead of expectation and new contracts have been secured for the new school year, whilst costs have been reduced.
First quarter underlying revenue declined by 4% on the prior year. Weather-related school closures are estimated to have impacted revenue by 1.5%, most of which is expected to be recovered at the end of the school year in June. Lower contract revenues, following the previously reported loss of contracts in the last bid season, have been partly offset by organic growth from school consolidation, despite budgetary pressure on school boards. In addition, charter and field trip revenue, a key focus for future growth in the business, increased.
Contract renewals for the 2010/11 school year have been good. To date, over 1,300 buses have been added, including the first two conversion contracts for some time. Net of lost contracts, nearly 500 new routes have been added and average margin improved by replacing business with better quality contracts. These new contracts will be supported by incremental fleet investment in the third quarter of 2010.
Initial progress has been made to improve margins. Driver wages as a percentage of revenue were nearly 100 basis points lower than in the prior year period, despite increased unemployment insurance costs in the US. Reduced fuel costs are also benefitting margin. The annualised reduction of US$13 million in double running and staff costs was completed on schedule at the end of March and the consolidation of three corporate locations was completed at the end of April. These savings form the first part of a planned US$40 million annual saving to be delivered by 2011. New management is delivering a focused business recovery programme, driving cost reduction, sustainable improvement and profitable growth.
During the first quarter, the Group successfully completed its debut bond issuance, launching a £350 million 7 year Sterling bond, and secured an investment grade credit rating (Baa3/BBB-). This has strengthened the Group by diversifying our sources of finance, extending our debt maturity profile and improving access to a range of debt markets.
We expect core capital investment in 2010 to be similar to depreciation. In addition, organic growth will see investment in an additional 500 net new buses in North America and €11 million to launch the Agadir contract.
A continued focus on cash generation, together with expected growth in earnings, should allow continued investment in growth, alongside maintenance of appropriate debt ratios.
Chief Executive’s perspective
Dean Finch joined the Group as Chief Executive on 15 February 2010. He has completed a review of the business, focused on enhancing operational delivery, concluding as follows:
- The underlying strength of the Group’s operating businesses is apparent in our first quarter progress
- This reinforces my view of the considerable potential for National Express to be a major participant in public passenger transport markets internationally
- Our Spanish business is performing strongly; it has excellent management and is extremely well run. The long term concessionary model and our market leading position provide an established platform to excel both domestically and internationally
- In North America we have started a complete overhaul of the business. The transformation programme was not working and was strangling the operational life blood. We have refocused the programme, made management changes and started to reduce overhead costs. Whilst improving the operating efficiency, we are also seeing some new business opportunities emerging
- Our UK Bus division has been underperforming. Over the past five years, revenue has risen by an average of 17% and costs by 25%. Our yield management has not been strong. There is considerable scope for both revenue growth and cost improvement
- UK Coach is an excellent business and, with improved yield management and greater attention to both our existing and new customers, we can achieve future growth
- We are creating a flatter organisation with clearer management accountability and responsibility. I am taking direct “hands on” control over each of our businesses to deliver greater operational focus. We are selectively strengthening our leadership team, with the recent appointments of John Elliott and David Duke to run the North America business, and the recruitment of Group Commercial and Procurement Directors.
Dean Finch, Group Chief Executive, said, “We have made an encouraging start to 2010 as we roll out our plans for operational improvement. We are already seeing signs of progress in North America, have clear plans for our UK Bus business and continue to build on our strengths in Spain and UK Coach. Whilst we have much to do, National Express has a strong portfolio of first class transport businesses and the ability to deliver to its full potential over the longer term.”
National Express Group PLC
*Underlying revenue compares the current year with the prior year period on a consistent basis, including adjusting for the impact of currency, acquisitions and disposals.