Significant growth
Presentation of results
To supplement IFRS reporting, we also present our results on a normalised basis which shows the performance of the business before intangible amortisation for acquired businesses. In years when there are discontinued operations, significant disposals or restructuring costs these are also removed from normalised results. The Board believes that this gives a more comparable year-on-year indication of the operating performance of the Group and allows the users of financial statements to understand management’s key performance measures. Unless otherwise noted, all references to profit measures throughout this review are for continuing operations for both the current and prior reporting period. In addition to performance measures directly observable in the Group financial statements (IFRS measures), alternative financial measures are presented that are used internally by management as key measures to assess performance. Further explanation in relation to these measures, together with cross-references to reconciliations to statutory equivalents where relevant, can be found in the Cash Management section of this review.
Statutory profit
The Group again delivered a record profit for the year of £148.3 million (2018: £138.7m), an increase of 6.9%, driving basic earnings per share of 27.6 pence (2018: 26.6p). The 3.8% increase in earnings per share is lower than the increase in profit for the year as profit attributable to non-controlling interests increased to £7.2 million (2018: £3.0 million), principally driven by the 40% of WeDriveU not yet acquired by the Group.
|
Reconciliation of normalised profit before |
2019 |
2018 |
| Normalised profit before tax | 240.0 | 220.0 |
| Separately disclosed items | (53.0) | (42.3) |
| Profit before tax | 187.0 | 177.7 |
| Tax charge | (38.7) | (39.0) |
| Profit for the year | 148.3 | 138.7 |
The increase in separately disclosed items is driven by the amortisation of intangibles acquired in the current or prior year, primarily in relation to WeDriveU. Also included within separately disclosed items are the gain on the sale of Ecolane, which has been presented net of all costs including contingent bonus payments (further detail on page 40), and charges related to the restructuring of our North America division. These latter two items fully offset each other hence having no effect on the year-on-year movement. The statutory tax charge was £38.7 million (2018: £39.0m), an effective tax rate of 20.7% (2018: 21.9%). The reduction in effective tax rate reflects an underlying increase offset by the benefit from the taxfree gain on disposal of Ecolane.
Revenue
| Revenue bridge | £m |
| 2018 revenue | 2,451 |
| Currency translation | 39 |
| 2018 revenue at constant currency | 2,490 |
| Growth in the continuing business | 109 |
| 2019 acquisitions | 145 |
| 2019 revenue | 2,744 |
Group revenue for the period was £2,744.4 million (2018: £2,450.7m), an increase of 10.2% on a constant currency basis (up 12.0% on a reported basis with the benefit of £39 million of foreign currency gains on translation). Revenue growth of £109 million from our existing businesses, representing growth of 4.4%, was boosted by a further £145 million from acquisitions, principally in North America and Spain.
Our business in North America delivered revenue growth of 11.1% on a constant currency basis. A key component of this growth was the acquisition of WeDriveU, our largest acquisition for eight years and one of five completed in North America in 2019. WeDriveU is performing well in its first year of operation within the Group with revenue growth of over 30% and profit growth of around 25%. Performance in the continuing business was robust, with the school bus business benefitting from the 2019/20 bidding season in which we achieved an average price increase of 3.9% across the entire portfolio and 5.9% on those contracts up for bid and renewal. In transit, we extended our two biggest contracts on improved terms, contributing to a total transit and shuttle business now generating an annualised $0.5 billion in revenue.
ALSA delivered a record level of revenue, growing by 11.7% in constant currency, with strong organic growth of 10.8% boosted by three acquisitions made in the year. Record passenger numbers in both Spain and Morocco, up 5.8% and 20.3% (up 3.0% excluding the impact of Rabat and Casablanca) respectively, have driven revenue growth and Switzerland has also delivered strong revenue growth, up 13.7%. Pleasingly, we have seen high levels of growth across each of our long haul, regional and urban services, with our increasingly sophisticated Revenue Management System (RMS) helping to drive a 2.9% increase in occupancy to 51.9%. Underlying growth in Morocco has been boosted by the successful mobilisation of two new large contracts to run urban bus services in Rabat and asablanca which, whilst having minimal profit impact in 2019, significantly increase the size of the business moving forward.
Our UK business delivered a good performance with revenue growth of 3.9% for the year driven by robust growth in both our coach and bus businesses. In coach, core network revenue rose by 3.6%, benefitting from RMS, helping to drive record revenue and passenger numbers, together with a 2.4% increase in occupancy to 60.9%. Total UK bus revenue grew by 3.7%, with commercial revenue per mile growing by 3.2%. This has been driven by the continued expansion of low fare zones and products together with strong growth in digital sales, with two thirds of passengers now using digital tickets. Growth has been further augmented with the acquisition of ATG (rebranded to National Express Accessible Transport, or NEAT), providing entry into the accessible transport market.
In German Rail, reported revenue is up 33.8% to €102.5 million, reflecting the startup of two services for Rhine-Ruhr Express.
Normalised profit
Group normalised operating profit increased by 13.1% to £295.3 million on a constant currency basis, up 14.6% on a reported basis (2018: £257.7m). £7.6 million of this increase was driven by the adoption of IFRS 16 which is offset by an equal and opposite impact on interest to give a net zero impact on normalised profit before tax (see the Impact of New Accounting Standards section of this review for more detail).
| Profit bridge for the continuing operations | £m |
| 2018 normalised profit before tax (as reported) | 220 |
| Currency | 3 |
| Normalised profit before tax at constant currency | 223 |
| Growth in continuing business | 46 |
| 2019 Acquisitions | 19 |
| Driver wages | (28) |
| Fuel | (6) |
| Weather | (6) |
| Interest | (8) |
| 2019 normalised profit before tax | 240 |
Group normalised profit before tax increased by 7.8% to £240.0 million on a constant currency basis, up 9.1% on a reported basis (2018: £220.0m), after the benefit of £3 million of currency translation driven by the weakening of Sterling against the US Dollar.
The continuing business contributed a strong £46 million of profit, with growth across all divisions. This figure is the flow through of revenue growth and all costs other than those broken out for transparency above (namely the increase in driver wages; the year-on-year impact of weather; and the year-on-year difference in hedged fuel prices). Netting these together represents organic growth in normalised profit before tax of around 3%.
This was augmented by the nine acquisitions made during the year which delivered a £19 million contribution, net of deal fees. This was partially offset by driver wage increases, predominantly in North America and ALSA, and higher hedged fuel prices together with a greater level of disruption from adverse weather conditions year-on-year. The additional interest charge of £8 million, as shown in the table above, reflects a higher level of debt over the year together with a higher proportion of debt denominated in Sterling.
Segmental profit performance
| Normalised operating profit | 2019 Local currency m |
2018 Local currency m |
| ALSA €m | 124.9 | 119.1 |
| North America | 157.0 | 129.3 |
| German Rail | 5.7 | 3.4 |
| Normalised operating profit | 2019 £m |
2018 £m |
| ALSA | 109.5 | 105.3 |
| North America | 123.0 | 96.9 |
| UK | 85.0 | 79.9 |
| German Rail | 5.0 | 3.0 |
| Central Functions | (27.2) | (27.4) |
| Group normalised operating profit | 295.3 | 257.7 |
In our North America business, normalised operating profit increased by 21.4% to $157.0 million, driven by a strong contribution from the acquisition of WeDriveU. Solid underlying performance reflected the flow through of the revenue growth noted above where price increases more than covered driver wage increases, albeit at the expense of the loss of some less profitable contracts. This was partially offset by a greater level of weather disruption in the period versus the prior year. The adoption of IFRS 16 had a favourable impact of $5 million. Operating margin improved by 90 basis points to 10.0%, with 50 basis points improvement on an underlying basis (excluding the impact of IFRS 16).
Our UK businesses delivered an increase of 6.5% in operating profit to £85.0 million, reflecting the record revenue in our core coach business, together with cost efficiencies, new routes, and network reviews in both the bus and coach businesses, partially offset by higher driver wages. During the year, we recorded again on the sale of a depot, slightly below the level of gains achieved last year at around 1% of the UK cost base as we continue to execute our multi-year property rationalisation strategy. Underlying operating margin remains strong and is broadly flat year-on-year. Reported operating margin improved by 40 basis points to 14.2% driven by the adoption of IFRS 16.
ALSA also delivered a record level of profit of €124.9 million, with a normalised operating profit increase of 4.9% on a constant currency basis predominantly driven by strong organic revenue growth in Spain and Morocco. The impact of higher hedged fuel prices in Morocco coupled with lower profitability during the mobilisation phases of the Rabat and Casablanca contracts drove an 80 basis point decline in 2019 profit margin to 13.3%.
Profit in our German Rail operations increased to €5.7 million (2018: €3.4m) as we continue to drive improvements to contract lifetime profitability. There are a number of drivers of improved performance in German Rail including higher than expected growth in passenger revenues (including settlements for prior periods) and agreements with the local transport authorities on penalty exemptions for particular construction works. We are very pleased with the smooth mobilisation of our new RRX franchise. Group normalised operating profit margin grew by 30 basis points at 10.8% (2018: 10.5%).
Summary income statement
| 2018 £m |
2017 |
|
| Revenue | 2,744.4 | 2,450.7 |
| Operating costs | (2,449.1) | (2,193.0) |
| Normalised operating profit | 295.3 | 257.7 |
| Share of results from associates | 0.4 | 0.9 |
| Net finance costs | (55.7) | (38.6) |
| Normalised profit before tax | 240.0 | 220.0 |
| Tax | (55.2) | (49.0) |
| Normalised profit after tax | 184.8 | 171.0 |
Net finance costs were £17.1 million higher at £55.7 million (2018: £38.6m) with around half of the difference driven by the adoption of IFRS 16 and the remainder the results of a higher level of debt and a greater proportion of borrowings denominated in Sterling.
Normalised profit before tax of £240.0 million represents growth of 7.8% on a constant currency basis, up 9.1% on a reported basis (2018: £220.0m).
The normalised tax charge was £55.2 million (2018: £49.0m), a normalised effective tax rate of 23.0%, (2018: 22.3%), in line with previous guidance. The mix of profits in different tax jurisdictions drives a slight increase in the normalised effective tax rate. Normalised profit attributable to noncontrolling interests increased to £8.6 million (2018: £3.0m) primarily driven by the acquisition of WeDriveU. Normalised basic earnings per share were 34.5 pence (2018: 32.9p).
Return on Capital Employed (ROCE)
ROCE is a key performance measure for the Group, guiding how we deploy capital resources and as such is a key component of executive incentives. Like-for-like ROCE (excluding the impact of IFRS 16) is up by 80 basis points, demonstrating our disciplined approach to capital allocation and Balance Sheet management and the accretive impact of our high return acquisitions. Reported ROCE was flat year-on-year at 12.4%, reflecting the adoption of IFRS 16.
| Reconciliation of ROCE | 2019 £m |
| Group statutory operating profit | 242.3 |
| Separately disclosed items | 53.0 |
| Return – Normalised Group operating profit | 295.3 |
| Average net assets* | 1,148.6 |
| Remove: Average net debt* | 1,203.4 |
| Remove: Average derivatives, excluding amounts within net debt | (12.0) |
| Foreign exchange adjustment | 35.8 |
| Average capital employed | 2,375.8 |
| Return on capital employed | 12.4% |
*Prior year restated for IFRS 16
Capital allocation
The cash-generative nature of the Group creates a solid platform for investing for growth and paying dividends. After investing in maintenance capital expenditure and working capital, and paying interest and tax, the Group’s priorities for the allocation of the resulting free cash flow are to:
- invest in the business (growth capital and acquisitions) to deliver 15% return;
- manage gearing within the range of 2.0 to 2.5 times; and
- return to shareholders – at least 2.0x covered.
Cash management
The Group delivered £178.7 million of free cash flow in the period (2018: £198.6m).
| Free cash flow | 2019 £m |
2018 £m |
| Continuing normalised operating profit | 295.3 | 257.7 |
| Depreciation and other non-cash items | 214.8 | 144.4 |
| EBITDA | 510.1 | 402.1 |
| Net maintenance capital expenditure | (211.4) | (123.9) |
| Working capital movement | (42.0) | (17.5) |
| Pension contributions above normal charge | (7.6) | (7.4) |
| Operating cash flow | 249.1 | 253.3 |
| Net interest paid | (45.4) | (33.6) |
| Tax paid | (25.0) | (21.1) |
| Free cash flow | 178.7 | 198.6 |
The Group delivered £510.1 million of EBITDA in the period (2018: £402.1m). This is an increase of £108.0 million, of which £54.7 million was driven by the adoption of IFRS 16 at the start of the period.
Net maintenance capital expenditure payments increased by £87.5 million to £211.4 million, reflecting a return to a normalised level of expenditure of 1.0 times depreciation. Additions of property, plant and equipment were £311.5 million (2018: £210.1m); the increase of £101.4 million reflected a step up in fleet requirements reflecting both the cycle of fleet replacement across the Group and new contracts, particularly in Morocco and North America. Consistent with previous years, the Group’s standard payment terms for fleet purchases are up to 12 months and, accordingly, it is typical for a large proportion of fleet additions in the year to be outstanding at the year end. At the period end there was £263.3 million (2018: £160.3m) owing to vehicle suppliers driven by the increase in additions noted above.
The working capital outflow of £42.0 million in 2019 reflects significant growth in new contracts, notably in Morocco and German Rail. The Group makes use of non-recourse factoring arrangements on receivables and advance payments. The total draw down at the period end was £107.1 million (2018: £88.7m) with the increase on the prior year driven by advanced factoring of subsidies in the two new rail franchises in Germany.
Net interest paid increased by £11.8 million to £45.4 million, of which £7.6 million was attributable to the adoption of IFRS 16 (a proportion of lease payments are now presented in interest) and the balance reflected increased payments as a result of higher net debt and a change in mix of borrowing currency. Tax paid increased by £3.9 million to £25.0 million, driven both by increased profit and an increase in the effective tax rate.
Statutory cash generated from operations for the year was £356.2 million (2018: £306.8m) as shown in the Group Statement of Cash Flows and expanded further in note 39 to the Financial Statements. Operating cash flow of £249.1 million presented in the table above is different, predominantly due to the inclusion of net maintenance capital expenditure of £211.4 million.
| Reconciliation of free cash flow to net cash flow from operating activities | 2019 £m |
| Free cash flow | 178.7 |
| Add: Operating cash flows from discontinued operations (note 11) | (1.2) |
| Add: Exceptional cash expenditure | (7.2) |
| Remove: Net maintenance capital expenditure | 211.4 |
| Remove: Other non-cash movements (note 39) | (11.6) |
| Profit on disposal of fixed assets | (13.9) |
| Net cash flow from operating activities | 356.2 |
| Net funds flow | 2019 £m |
2018 £m |
| Free cash flow | 178.7 | 198.6 |
| Net growth capital expenditure | (42.2) | (5.8) |
| Net inflow from discontinued operations | (1.2) | 0.4 |
| Acquisitions (net of cash acquired) | (166.4) | (154.5) |
| Disposal of subsidiaries (net of cash disposed) | 21.7 | 0.0 |
| Dividends | (78.3) | (70.8) |
| Other, including foreign exchange | 11.4 | (31.5) |
| Net funds flow | (76.3) | (63.6) |
| Net debt | (1,241.5) | (951.5) |
Growth capital expenditure during the period of £42.2 million included vehicles for new contracts in WeDriveU in North America and for the Rabat contract in Morocco, investment in digital and e-commerce initiatives in the UK, and costs associated with the mobilisation of our RRX rail contract in Germany.
Continuing our successful compounding growth strategy, we completed nine acquisitions in the year: five in our North
America division, three in ALSA and one in the UK. Total consideration for these acquisitions was £162.2 million of which £10.6 million is deferred into future years.
The most significant investment in the year was the purchase of 60% of the share capital of WeDriveU on 11 April 2019. At the same time, the Group and the vendor entered into a put/call agreement whereby the Group and the vendor have the right to sell/buy the remaining 40% shareholding to the other party in three tranches over the next three years. The call options have no value for accounting purposes. However, the put options are required to be valued and booked on the balance sheet. Accordingly a liability of £96.8 million has been recognised at the period end, recorded at the present value of the estimated redemption value, using forecast earnings of WeDriveU.
£14.8 million of deferred consideration relating to acquisitions completed in prior years was settled in 2019, resulting in a total net funds outflow in the period of £166.4 million.
The cash inflow of £21.7 million from disposals reflects the net proceeds from the sale of Ecolane in July 2019.
Other items include £11.4 million relating to the retranslation of foreign currency debt balances and the maturity of some foreign exchange contracts.
Net funds flow for the period was an outflow of £76.3 million (2018: outflow of £63.6m), resulting in year end net debt of £1,241.5 million (2018: £951.5m). Opening net debt increased from £951.5 million, as previously reported, after applying the transitional adjustment of £213.7 million in respect of the adoption of IFRS 16. Gearing at the end of the period was 2.4 times EBITDA, within the Group’s target range of 2-2.5 times. The adoption of IFRS 16 in 2019 impacted gearing by 0.2 times.
Dividend
National Express’ dividend policy is to cover the dividend at least two times by normalised earnings. In considering the level of the dividend to declare, the Board has carefully considered three principal factors, in addition to level of cover:
- available distributable reserves;
- in-year free cash flow generation; and
- gearing and indebtedness.
In line with the interim dividend, the Board has proposed a 10% increase in the final dividend to 11.19 pence, to give a full year dividend of 16.35 pence at 2.1 times cover.
Treasury management
The Group maintains a prudent approach to its financing and is committed to an investment grade credit rating. The Board’s policy is to target a level of debt that allows for disciplined investment and ample headroom on its covenants, with net debt to EBITDA of 2.0-2.5 times over the medium term. Moody’s credit rating agency re-affirmed its upgraded investment grade rating to Baa2/stable earlier in the year while Fitch credit rating agency upgraded its investment grade credit rating to BBB/stable.
The Group’s key accounting debt ratios at 31 December 2019 were as follows:
- Our bank covenant for gearing is not to exceed 3.5 times net debt to EBITDA – in 2019 the gearing ratio was 2.4 times EBITDA (31 Dec 2018: 2.3x)
- Our bank covenant for the interest cover ratio is EBITDA not to be less than 3.5 times interest – in 2019 the interest cover ratio was 9.6 times interest (31 Dec 2018: 10.5x).
The Group’s covenants are set on a ‘frozen GAAP’ basis, removing the impact of IFRS 16, thus providing greater levels of headroom.
The highly successful refinancing of the Group this year creates a solid platform for future growth. Through 2019, the Group has put in place a number of new facilities, further diversifying the sources of funding and providing additional liquidity until 2032, in a low interest rate environment. In October 2019, the Group issued a series of private placements totalling £414 million denominated in US Dollars, Sterling and Euros with maturities ranging from 2027 to 2032 and an average coupon of 1.92%, representing the Group’s debut issuance in the US private placement syndicated market. These facilities were taken on a delay-draw basis and will remain undrawn until May 2020 when existing facilities mature. In November 2019, the Group issued a £250 million Sterling bond maturing in 2028 with a coupon of 2.375%.
At 31 December 2019, the Group had £2.7 billion of debt capital and committed facilities, comprising £875 million of Sterling bonds, a £211 million floating rate note, £175 million of bank loans, a £557 million revolving credit facility (RCF), private placements of £480 million and £407 million of leases. At 31 December 2019, the Group’s RCF was undrawn with £1.0 billion in cash and undrawn committed facilities available, this elevated level of cash driven by the early refinancing, and partial double-carry, of the Sterling bond noted above.
To ensure sufficient availability of liquidity, the Board requires the Group to maintain a minimum of £300 million in cash and undrawn committed facilities at all times. This does not include factoring facilities which allow the without-recourse sale of receivables. These arrangements provide the Group with more economic alternatives to early payment discounts for the management of working capital, and as such are not included in (or required for) our rolling liquidity forecasts.
At 31 December 2019, the Group had foreign currency debt and swaps held as net investment hedges. These help mitigate volatility in the foreign currency translation of our overseas net assets. The Group also hedges its exposure to interest rate movements to maintain an appropriate balance between fixed and floating interest rates on borrowings. It has therefore entered into a series of swaps that have the effect of converting fixed rate debt to floating rate debt or vice versa. The net effect of these transactions was that, at 31 December 2019, the proportion of Group debt at floating rates was 24%
(2018: 37%).
Group tax policy
We pursue a prudent approach to our tax affairs which are aligned to business transactions and economic activity. We have a constructive and good working relationship with the tax authorities in the countries in which we operate and there are no outstanding tax audits in any of our main three markets of the UK, Spain and the USA. The Group’s tax strategy is published on the Group website in accordance with UK tax law.
Pensions
The Group’s principal defined benefit pension schemes are all in the UK. The combined deficit under IAS 19 at 31 December 2019 was £90.0 million (Dec 2018: £116.8m).
The two principal plans are the UK Group scheme, which closed to new accrual in 2011, and the West Midlands Bus plan (WM Bus), which remains open to accrual for existing active members only. The overall level of deficit contributions will be around £8 million in total per annum until 2020.
In October 2018, the Group Pension Scheme, through its trustee company, completed an insurance buy-in transaction with Rothesay Life to cover 100% of future benefits payable to members and the detailed transfer process is ongoing. The IAS 19 valuations for the principal schemes at 31 December 2019 were as follows:
- WM Bus: £99.1 million deficit (2018: £127.3m deficit)
- UK Group scheme: £14.2 million surplus (2018: £14.9m surplus)
Fuel costs
The Group consumes approximately 255 million litres of fuel per year for which it bears pricing risk (i.e. there is no direct fuel escalator in the contract or concession price). Fuel costs represented a total cost to the Group in 2019 of £188 million (approximately 7% of related revenue), at an average fuel component cost (i.e. excluding delivery and taxes) of 37.3 pence per litre. The Group pursues a forward fuel buying policy in order to secure a high degree of certainty in its planning. This policy is to hedge fully a minimum of 15 months’ addressable consumption against movements in price of the underlying commodity, together with at least 50% of the next nine months’ consumption in the contract businesses. Currently, the Group is 100% fixed for 2020 at an average price of 37.2 pence per litre, 73% fixed for 2021 at an average price of 36.5 pence and 13% fixed for 2022 at 33.9 pence.
Impact of new accounting standards – IFRS 9, 15 and 16
The new accounting standard, IFRS 16 ‘Leases’, came into effect on 1 January 2019.
The standard primarily affects the accounting for the Group’s operating leases and results in an increase in the number of leases being recognised on the Balance Sheet as the distinction between operating and finance leases has been removed. As a result we have recognised right-of-use assets of £201.1 million and lease liabilities of £213.7 million as at 1 January 2019.
The impact is summarised as follows:
- An increase in EBITDA of £54.7 million reflecting the reduction in operating lease costs which are now recognised on the Balance Sheet
- An increase in operating profit of £7.6 million as the operating lease costs are removed and replaced with depreciation (included in operating profit) and interest costs (excluded from operating profit)
- Zero impact on profit before tax as the increase in operating profit and finance costs fully offset
- A decrease in ROCE by 80 basis points, reflecting the increased level of average capital employed following the recognition of right-of-use assets on the Balance Sheet
- An increase in net debt of £213.7 million reflecting the recognition of operating leases on the Balance Sheet
- An increase in gearing of around 0.2 times net debt to EBITDA
Brexit
Given the diversified nature of our business model and the limited exposure to crossborder trade, we do not believe that Brexit poses a material threat to the Group. We no longer run scheduled operations between the UK and the Continent, therefore the main Brexit risk specific to the Group is that inbound and outbound airport travel in our UK coach business may be impacted should air travel be materially reduced due to restrictions or currency fluctuation. We purchase some vehicles from European manufacturers for UK operations although we have good working relationships with both these and alternative UK suppliers to mitigate any long-term impact should further Sterling depreciation materially increase purchase cost. For the purposes of viability testing, we have modelled a hard Brexit in conjunction with other principal risks and remain confident that we have suitable mitigation plans in place however Brexit eventually unfolds.
Summary
The strong financial performance delivered in 2019, coupled with the additional financing facilities and continued prudent Balance Sheet management, further augment the Group’s robust financial position. We remain confident about the prospects for the year ahead.
Chris Davies
Group Finance Director
27 February 2020