24th Feb 2005 07:03
National Express Group PLC24 February 2005 24 February 2005 National Express Group PLC Preliminary Results For the year ended 31 December 2004 Financial Highlights • Turnover of £2.6 billion (2003: £2.6 billion restated) • Normalised operating profit* up 17.9% to £152.0 million (2003: £128.9 million restated) • Normalised profit before tax* up 30.8% to £130.5 million (2003: £99.8 million restated) • Profit before tax up 16.6% to £63.1 million (2003: £54.1 million restated) • Normalised diluted earnings per share* up 35.5% to 71.8 pence (2003: 53.0 pence restated) • Final dividend increased by 18.0% to 20.65 pence per share (2003: 17.5 pence per share), making a total dividend for the year of 30.0 pence per share (2003: 26.0 pence per share) • Strong operating cashflow** of £187.5 million (2003: £139.7 million) • Effective net debt** significantly reduced to £136.6 million (2003: £307.8 million) • Share buyback programme of up to £100 million to be initiated *excluding goodwill, exceptional items and tax relief thereon as appropriate **operating cashflow and effective net debt as defined in sections marked 'Cashflow' and 'Year at a glance' respectively Operating Highlights • Rail passenger numbers up 5% on a like-for-like basis • Rail punctuality and reliability above Government target of 85% • Launch of 'one' rail franchise with strong performance since April 2004 • Signing of two-year franchise extensions for Great Northern, Wessex Trains and Silverlink • New initiatives undertaken to stimulate further bus growth • Successful entry into London bus market • Coach passenger numbers up 6% • Further roll-out of best value fares in coach division alongside product enhancements • Successful bidding season and contract renewals in student transportation • Improved financial performance in Public Transit. Commenting on current trading and prospects, Chairman, David Ross said: "These results are ahead of market expectations following a very strongfinancial and operational performance in 2004. I am pleased to report ourbusiness has started the year well and is on target to achieve further growth in2005. "We remain committed to enhancing shareholder value. This will be achievedthrough using our strong balance sheet to fund both organic and acquisitivegrowth, our progressive dividend policy and a share buyback programme. The Boardlooks forward with confidence to the year ahead." - E N D S - For further information, please contact: Phil White, Chief ExecutiveAdam Walker, Finance DirectorNicola Marsden, Director of Group CommunicationsNational Express Group PLC 020 7529 2000 Andrew Dowler/ Ben Foster Financial Dynamics 020 7831 3113 • There will be an analyst and investor meeting at 0900 hours on 24 February 2005 at Financial Dynamics, Holborn Gate, London, WC1. • A webcast of the analyst presentation will be available on our website www.nationalexpressgroup.com at 0900 hours on 24 February 2005. For further details, contact Elaine Holder at Financial Dynamics on 020 7269 7121. • Photographs are available through Vismedia at www.vismedia.co.uk or telephone 020 7436 9595. National Express Group PLC Preliminary Results For the year ended 31 December 2004 Chairman's Statement In my first year as Chairman, I am delighted to report that 2004 has been anexcellent year for the National Express Group. We have achieved substantialgrowth in our earnings, good cash generation and a significant reduction in ourdebt. We have seen a strong performance across all our divisions in both the UKand North America. We have also exited a number of businesses which were noncore to the Group's long term strategy. In view of the quality of these resultsand the strengthening of our balance sheet, the Board is recommending an 18%increase in our final dividend and we will seek to return value to shareholdersthrough a share buyback programme of up to £100 million over the next twelvemonths, subject to market conditions. The year was outstanding for our trains division. In February, we won the newGreater Anglia franchise which we rebranded 'one'. This is the first time thata single operator has been given sole use of a major London rail terminal. Theintegration of three major railways was completed on time, our franchisecommitments over the first nine months were delivered and we improved overalloperational performance. I am also pleased to report that further stability wasbrought to our trains division through the two-year extensions awarded for theGreat Northern, Wessex Trains and Silverlink franchises, following the CentralTrains extension during 2003. We have been playing a leading role in the working groups set up by theDepartment for Transport ("DfT") to develop its plans for the railways followingthe publication of the White Paper, "The Future of Rail". During the year the focus within the bus division was to stimulate growth andpromote greater social inclusion. We continue to press for greater bus priorityschemes and to encourage local councils to work with us on transport plans whichmeet the needs of the local communities we serve. In February 2004, we enteredthe London bus market through the acquisition of Connex's bus operations in thecapital and this business is trading in line with our expectations. National Express coaches goes from strength to strength. Both revenue and profitgrowth have continued reflecting the high quality, value for money offeringwhich we provide to our customers. Following on from last year's rebranding, thebusiness continued to modernise its image, increasing its appeal to a broadermarket. In North America, we saw further expansion of our school bus operations throughthe award of new contracts and the implementation of new routes. Theinitiatives undertaken to improve the performance of our public transit businesshave resulted in a significant increase in profits. However, the reportedresults have been impacted by the weakening of the dollar. In October, we sold three Australian bus businesses for £26.4 million and inJanuary this year our involvement in Australian public transport came to an end. We know there is a strong correlation between the morale of our employees andthe quality of customer service. We regularly seek the views of our employeesand develop action plans based on their views. We have undertaken extensiveresearch amongst 10,000 UK customers who have provided valuable information tohelp us develop our businesses. This research will enable us to measurecustomer satisfaction on a regular basis. Our commitment to improved servicequality for our customers has again been reflected in the opening of our secondCustomer Service Academy in Birmingham. We are planning to open a thirdtraining facility in Stratford, east London in 2005. People commute, shop and go to school with us, travelling both long and shortdistances. We join up people and places, making journeys easy and enjoyable bytaking the stress out of travelling. We aim to do this by making travel easy andsimple for them, being open and honest about our performance, working togetherwith our various stakeholders and taking the lead in bringing new ideas andtechnology to both our business and the industry for the benefit of ourcustomers. Safety The safety and security of our customers and employees is of paramountimportance to us. At National Express Group, we place great importance on oursafety culture and we strive continuously to ensure that our systems andprocesses meet the highest standards. Employees I would like to take this opportunity to thank all our employees for theirefforts during the year, including those ScotRail and Australian bus employees'who left the Group. We wish them well for the future. I would also like towelcome all those people who joined us this year, in particular our new teams atTravel London, 'one' and our new employees in Canada. The Board Following the retirement of Michael Davies, I was delighted to be appointedChairman of the Group in March. The Board has since appointed two newnon-executives. Sir Andrew Foster joined the Board on 1 August. Sir Andrew has had an extensivecareer in the public sector serving as Chief Executive of the Audit Commissionfor England and Wales between 1992 and 2003 and prior to that Deputy ChiefExecutive of the NHS. Tim Score, Chief Financial Officer of ARM Holdings PLC,joined the Board on 21 February 2005. Tim is a chartered accountant and haspreviously held senior financial roles at BTR plc, LucasVarity plc, WilliamBaird plc and Rebus Group Limited. I believe the professionalism and experience of Sir Andrew and Tim will furtherstrengthen the board and I welcome them to the Group. Results and Dividend Turnover was £2.6 billion (2003: £2.6 billion as restated) and normalised Groupoperating profit increased by 17.9% to £152.0 million (2003: £128.9 millionrestated). After interest and the Group's share of losses from associatedundertakings, normalised profit before tax was £130.5 million (2003: £99.8million restated). Normalised diluted earnings per share were 71.8p (2003: 53.0prestated). The Group experienced a strong operating cash flow of £187.5 million (2003:£139.7 million). We are particularly pleased with the reduction in oureffective net debt position to £136.6 million at the year end. Given the Board's confidence in the Group's future prospects, as well as itsfinancial strength, we are recommending a final dividend of 20.65p per ordinaryshare (2003: 17.5p), an increase of 18%, to be paid on 6 May 2005 toshareholders on the register at 8 April 2005. Including the interim dividend,the proposed total dividend for the year is 30.0p (2003: 26.0p). Current trading and outlook These results are ahead of market expectations following a very strong financialand operational performance in 2004. I am pleased to report our business hasstarted the year well and is on target to achieve further growth in 2005. We remain committed to enhancing shareholder value. This will be achievedthrough using our strong balance sheet to fund both organic and acquisitivegrowth, our progressive dividend policy and a share buyback programme. The Boardlooks forward with confidence to the year ahead. Operational Review Trains We operate c2c, Central Trains, Gatwick Express, Midland Mainline, 'one'including the Stansted Express, Silverlink, Great Northern and Wessex Trainsfranchises. The division currently employs 11,500 people. Turnover for the period was £1,705.2 million (2003: £1,702.2 million restated)with normalised operating profit of £58.5 million (2003: £33.2 millionrestated). These results were achieved through improved trading across thetrains division, the commencement of the new 'one' franchise and two-yearextensions granted on four of our franchises. We achieved passenger growth of 5% on a like-for-like basis on the back ofstrong operational performance. We are pleased that in the Strategic RailAuthority's ("SRA") last National Rail Trends survey, which covered the periodfrom July - September 2004, 'one' and Midland Mainline ("MML") were the top longdistance operators and c2c, Great Northern and 'one' came in the top four Londonand South East train operating companies. Currently the majority of our trainsportfolio is performing above pre-Hatfield levels with c2c and MML operating attheir best levels ever. On the back of our improvement in performance, in the summer we launched a freerail ticket promotion, the Getaway Giveaway, to encourage more people to travelon rail. We gave away seven million free tickets, delivering both increasedawareness of the benefits of rail travel and generating additional demand on thenetwork during the off peak. Following the launch of the new Greater Anglia franchise, 'one', our immediatepriority was to achieve a seamless transition for our customers and torestructure the operation into 'one' business. This franchise is one of thelargest and most complex in the country and therefore we were particularlypleased that this reorganisation was achieved on time, alongside improvedoperational performance. In December, we introduced our revised Anglia Railwayand Greater Eastern timetables which provide a greater number of directconnections to London from the Greater Anglia region. We have upgraded thefleet on the Norwich to London route and we have introduced a new Passengers'Charter offering a simpler compensation regime. MML performance was good despite the Channel Tunnel Rail Link blockade whichtook effect in September. On the back of the Route Utilisation Strategy ("RUS")issued in March 2004, the SRA has concluded that the proposed London to Leedsservices will not be required in the long term. We are in discussions with theSRA concerning the impact of this on the franchise. In December, the Secretaryof State for Transport gave his approval for the new East Midlands Parkwaystation, located between Derby and Loughborough. In February, we signed a two-year extension for the Great Northern franchise.This franchise achieved third place in the latest SRA London and South Eastperformance league table. We were pleased to complete negotiations for atwo-year extension to our Silverlink franchise in September and we continue towork closely with Transport for London ("TfL") on the future of SilverlinkMetro. During the year c2c achieved excellent operational performance, moving tothe top of the London and South East performance league table. The performance of Gatwick Express improved on the back of increased growth atthe airport and new ticket arrangements with low cost airlines. Gatwick Expresscontinues to be a loss making franchise. In September 2004, the SRA publishedits RUS for the Brighton Main Line and we are currently in discussions with themover the future of this franchise. We signed a two-year franchise extension for Wessex Trains in February 2004.Wessex experienced encouraging revenue growth, partly attributable to anincrease in revenue protection and the introduction of ticket vending machinesaround key commuter routes. Central Trains has improved its performance in terms of both employee and fleetavailability but we continue to work with Network Rail to increase the overallquality of the service. In July, a new £1 million Customer Service Academy wasopened in the West Midlands. As part of the Rail Review, the SRA plans todisaggregate the Central Trains franchise and consolidate its services intoother franchises. We have submitted proposals to the DfT and the SRA setting outhow we could assist in this exercise. We regularly review the incidence and severity of SPADs (signals passed atdanger), a key performance indicator within our train operations. We achieved a10% year-on-year improvement in our SPAD record over the period. We are working with the SRA and DfT on the rail remapping process following theGovernment's Rail Review and believe that rail refranchising provides furtheropportunities for growth. We have recently submitted to the SRA ourAccreditation Questionnaires for both the Greater Western and Thameslink/GNfranchises. Buses The bus division operates over 2,100 buses and employs 6,300 people in the WestMidlands, Dundee and London. We also operate the Midland Metro, the light railservice in the West Midlands. Turnover for the period was £239.0 million (2003: £211.9 million) and normalisedoperating profit was £44.2 million (2003: £47.5 million restated). Theseresults are in line with expectations following the revisions made to thepassenger transport authority's concessionary fare scheme in West Midlands whichchanged the provisions for new entrants to the scheme. In the West Midlands, we continue to seek ways to stimulate the market. OurSaver Bus initiative, which offers competitive one-price fares on one ofBirmingham's key inner city routes, has proved very popular and latest trendsshow double digit growth in passenger numbers. This service aims to promotegreater social inclusion through increased travel opportunities in one ofBirmingham's most deprived areas. At the beginning of this year we launched thePremier 997 service between Walsall and Birmingham which provides a limited stopservice targeted at attracting commuters. This new service includes featuressuch as multi-media CCTV technology. It has been well received. We have also simplified our fares structure, making it easier for our customersto use our services. We introduced 170 new low-floor easy-access buses into the Travel West Midlands("TWM") fleet. TWM now has the largest low floor fleet outside London with over70% of the fleet offering easy access. We have improved the selection and recruitment of staff, tapping into newopportunities arising from the opening up of the European Union. This hasresulted in over 100 new drivers being recruited from Poland. 57% of our TWMdrivers are now accredited with NVQ level II and a further 17% are workingtowards the qualification. We were pleased to sign a Concordat with Dundee City Council for the continuedinvestment in bus services. By November, the whole of the Travel Dundee fleetwas low-floor easy-access buses with 100% CCTV. In February, we entered the London bus market. Since then we have renewedexisting contracts on improved terms and won additional new contracts. We nowoperate from three bus depots, including Walworth which was developed during2003/4 in partnership with TfL. This depot still has capacity for an extra 60buses, allowing us to bid for further contracts in the coming year. We have also invested further in the safety of our employees and passengersthrough the roll-out of CCTV and expansion of the Operation Safer Travelinitiative. During the coming year we will stimulate further growth in the market whilstdeveloping closer working relationships with local authorities to improve thequality of our bus services through the roll-out of bus priority schemes. Coaches The coach division provides Britain's only scheduled national coach network andserves more than 1,200 destinations. The airport services provide premier, highfrequency scheduled coach services to all the UK's major airports, as well asairside coaching services. Eurolines offers value for money European travel bycoach. The division employs 1,900 people. Turnover for the year was £192.4 million (2003: £186.4 million restated) with anormalised operating profit of £18.8 million (2003: £15.9 million restated).Coach passenger numbers during the year was up 6% through the continued use ofyield management pricing, fare innovations and changes in our service offering. We are rolling out dynamic pricing across the network. Fun fares have now beenextended to 28 towns and cities, enabling customers to travel for as little as£1 each way. Our "go anywhere fares" allow long distance travel anywhere in theUK for a flat £9 fare. In our first full year of offering "Route Sixty"concessionary fares to the over 60s, we have carried over 3 million customers.In addition, a new youth coachcard, the NX2 card, was launched, giving allcustomers aged 16 - 26 the opportunity to obtain up to a 30% discount on coachtravel. Our focus on moving towards more direct sales continues. Nearly 20% of all salesare now on-line. Early in November we launched a new improved website which iseasier and faster to access and also provides better travel informationincluding maps, tourist guides and weather reports. During the year we carried out a detailed route analysis to develop further thekey routes in our network. In September we launched a new half hourly London toBirmingham service. This showcase route has seen the introduction of a numberof additional features including state-of-the-art coaches, incorporating leatherseating, extra leg room, air conditioning and on-board entertainment. A revised24 hr timetable for the service has been introduced, offering a half hourlyoperation throughout the day and hourly during the night. Coach passengernumbers on this route have grown by over 15% following the relaunch. We havenow extended this concept onto routes connecting London to the South West. We have recently launched our own on-board TV coach entertainment channel,called NXTV, which is to be further rolled out on 100 vehicles. It providesnews, sports and entertainment, all of which are regularly updated via wirelesscommunication technology throughout the day. We continue to improve the efficiency of the operation through investing inbetter management systems. In the next six months we will launch Coachcom, aportable data terminal, which provides better management information as well asenabling the driver to receive valuable traffic updates and customer informationwhilst in transit. New m-tickets have also been introduced enabling the textingof confirmed coach bookings to customer mobile phones. We continue to work with the DfT and coach manufacturers on vehicles which aremore accessible for the less able, in accordance with European DDA legislation.We will be introducing a wheelchair accessible vehicle onto the network in 2005. To support our airport services we are working closely with BAA on theredevelopment of our Heathrow airport coach facility. On 22 February 2005 we sold our airports contract business at Heathrow. North America The North American division consists of student transportation, public transitoperations and Stewart Airport in New York State. The division employs 20,500employees, with 2,500 in Canada. Turnover in the student transportation division for the year was £208.5 million(2003: £228.1 million) and normalised operating profit was £29.6 million (2003: £32.4 million). In US dollars, turnover was $383.7 million (2003: $374.1million) and normalised operating profit $54.5 million (2003: $53.1 million). At Durham School Services we retained a very high proportion of our contractsthat came up for renewal whilst maintaining operating margins, despite acompetitive bid season. We won new contracts in California, Connecticut andKansas and a conversion opportunity was gained in Texas. We continue to improveour operating efficiency through better asset and cost management. Improvementsin safety management and systems achieved significant reductions in thefrequencies of accidents and personal injury incidents. In Canada, Stock tradedwell and added extra routes. Our student bus division continues to focus on better utilisation of the fleetthrough greater exploitation of the charter and field trip market. We alsocontinue to reduce operating costs through greater leverage of our purchasingpower. Turnover in the public transit division for the year was £156.1 million (2003:£172.0 million) and normalised operating profit was £7.3 million (2003: £4.6million). In US dollars, turnover was $287.2 million (2003: $282.1 million)and normalised operating profit $13.4 million (2003: $7.6 million). Thisimproved performance was achieved on the back of increased margins throughbetter contract performance and a significant reduction in the frequency ofaccidents. In addition insurance costs reduced, greatly assisted by theroll-out of Drive-Cam technology which accurately records the sequence of eventswhen an accident takes place. We continue to focus on costs through national purchasing schemes. We werepleased to introduce a new Bus Rapid Transit system into Las Vegas during theyear. This new "bullet bus" uses an optical guidance system and interacts withbus priority traffic systems providing fast transit through the city. Australia Turnover for the period was £59.0 million (2003: £65.1 million) with operatingprofit of £2.1 million (2003: £3.4 million). In October, we sold threeAustralian bus businesses for £26.4 million and at the end of January ourinvolvement in Australia came to an end. Associates At Eurostar, settlement has been reached with Network Rail over the historicapplication of performance regimes over the period 2001 - 2003. This hasresulted in a one-off credit of £5 million reducing our associate losses thisyear. Finance Director's Review Year at a glance We have achieved a strong set of results, increasing profit on ordinaryactivities before tax by 17% to £63.1m (2003: £54.1m restated), driven by an 11%increase in operating profit from continuing operations to £89.7m (2003: £80.6mrestated). Basic earnings per share improved to 32.6p (2003: 31.9p restated). For the remainder of this report we will refer to normalised results, which wefeel reflect the performance of the business more appropriately. Normalisedresults are defined as the statutory result before the following as appropriate:profit on the sale of businesses and charges for goodwill amortisation, goodwillimpairment, tangible fixed asset impairments, exceptional charges and tax reliefon certain exceptional items and North American goodwill amortisation. Normalised group operating profit was up by 18% to £152.0m (2003: £128.9mrestated), on turnover of £2,560.2m (2003: £2,565.7m restated) resulting in anincreased normalised operating margin of 5.9% (2003: 5.0% restated). Normalisedprofit before tax increased by 31% to £130.5m (2003: £99.8m restated) driving upnormalised diluted earnings per share to 71.8p (2003: 53.0p restated) anincrease of 35%. Cash flow remained strong with effective net debt* reducing by£171.2m to £136.6m. Full year dividend per share increased by 15% to 30.0p(2003: 26.0p). *Effective net debt at 31 December 2003 excluded the £18.7m of cash depositssecured as a bond in respect of future rolling stock maintenance at ScotRail.This cash deposit was transferred with the ScotRail franchise in 2004. Divisional review Trains Normalised operating profit increased to £58.5m (2003: £33.2m restated) onconstant turnover of £1,705.2m (2003: £1,702.2m restated) resulting in improvednormalised margins of 3.4% (2003: 2.0% restated). Rail passenger numbers were up5% on a like-for-like basis across our portfolio of TOCs. Five of our trains franchises operated under new financial terms in 2004 as aresult of extensions agreed with the SRA. This provided greater stability to ourearnings and cash inflow for a further two years. We commenced operation of the new 'one' franchise on 1 April 2004 and we arepleased with the progress to date. The integration of the three separate headoffice and finance functions has been completed satisfactorily in the year. Midland Mainline had a busy year with its London to Manchester services(operated during the West Coast Mainline blockade) extended until Septemberwhich coincided with the commencement of the Thameslink blockade at St Pancraswhich saw us sharing platforms at the interim station. Gatwick Express had a better year although remains loss-making because of thefranchise premium paid to the SRA. We ceased to operate ScotRail on 17 October2004. Buses Turnover before acquisitions increased by 2% to £216.2m (2003: £211.9m) withoperating profit of £43.9m (2003: £47.5m restated). Traffic flow issues in thecentre of Birmingham following the redevelopment of the Bull Ring have disruptedour efforts to grow revenue. We continue to work with Centro as we seek toincrease the number of bus priority measures. In addition, a change in themethodology applied to the concessionary fare scheme has reduced the continuingoperating margin to 20.3% (2003: 22.4% restated). Our effective hedging policyin 2004 mitigated the impact of rising fuel prices. The acquisition of Travel London in February 2004 contributed operating profitof £0.3m on turnover of £22.8m. The low margin on the acquired business reflectsthe inherited loss making contracts, which are fully funded by cash acquiredwith the business. The integration of Travel London into the Bus division hasprogressed smoothly. Coaches Our Coach operations delivered another year of strong performance, increasingnormalised operating profit by 18% to £18.8m (2003: £15.9m restated). A 6%increase in passenger numbers, driven by improvements in our fares offeringbacked by strong marketing initiatives, produced a £6.0m increase in turnover to£192.4m (2003: £186.4m restated). The normalised operating margin improved to9.8% (2003: 8.5% restated) reflecting strong cost controls, a record number ofinternet sales with lower distribution costs and continuing investment inmanagement systems, which by providing improved route by route profitabilityanalysis has enabled us to develop the network further. North America In local currency, normalised operating profit increased by $7.2m, on a $14.7mincrease in turnover, improving our normalised margins to 10.1% (2003: 9.2%).The weakening dollar reduced turnover by £39.9m year on year and operatingprofit by £3.8m. Turnover Normalised operating profit 2004 2003 2004 2003 £m £m £m £m Student Transportation 208.5 228.1 29.6 32.4Public Transit 156.1 172.0 7.3 4.6 364.6 400.1 36.9 37.0 $m $m $m $mStudent Transportation 383.7 374.1 54.5 53.1Public Transit 287.2 282.1 13.4 7.6 670.9 656.2 67.9 60.7 Average US dollar exchange rate of 1.84 (2003: 1.64). Turnover in our Student Transportation business increased by 3% through thebenefit of new routes operated. Normalised operating margin remained consistentat 14.2% (2003: 14.2%). The 2004 US bid environment was strongly pricecompetitive but we are pleased with our performance in both retaining 62contracts with revenue of $110m and winning new business with revenue of $22m.Stock Transportation continued to perform well. We increased the proportion ofcharter work as well as gaining additional routes in the stable evergreenCanadian market. The normalised operating margin of our Public Transit business continued toimprove to 4.7% (2003: 2.7% and 2002: 0.9%). Cost reduction and efficiencyinitiatives over the past two years have increased profitability and ourindustry recognised customer service levels have led to a high retention rate ofkey contracts. Australia Three businesses were sold for gross consideration of £26.4m in October 2004. Atthe year end we have carried out an impairment review on the remainingAustralian assets. Associates We hold a 33% investment in Altram LRT Limited (Altram) and a 40% investment inInter-Capital and Regional Rail Limited (ICRRL). Altram has operated the Midland Metro since June 1999. Our share of theoperating loss for 2004 was £0.2m (2003: £0.5m). We have continued discussionswith our fellow shareholders at Altram and Centro regarding a restructuringwhich may lead to the Group taking full ownership. ICRRL is contracted to manage the operations of Eurostar UK to 2010. Our shareof the operating loss for the year was £3.2m (2003: £3.6m), which represented asecond half profit of £1.0m. The second half benefited from a settlement withNetwork Rail relating to the historic application of performance regimes. Wecontinue to seek an exit from Eurostar which we believe is in the best interestsof shareholders. The cash outflow of £3.1m comprises the Group's share offunding for the 2003 losses. Interest Net interest payable decreased to £18.1m (2003: £25.0m), principally reflectinga lower level of net debt in the year when compared to 2003. In addition, theweakening of the US dollar reduced the cost of servicing our US dollardenominated financing. Normalised operating profit before depreciation (EBITDA)was £209.1m (2003: £189.1m restated) and EBITDA interest cover improved to 11.6times (2003: 7.6 times restated). Goodwill amortisation and impairment The annual goodwill amortisation charge increased to £52.7m (2003: £45.7m). Theamortisation charge for the year on the goodwill arising on the acquisition ofPrism Rail PLC in December 2000 has been increased by £10.0m to ensure that thecapitalised value of goodwill in the future will be supportable by the remainingfranchises. This has been offset by a lower amortisation charge for US goodwillas a result of the weakening US dollar. An impairment charge of £9.5m (2003: £nil) has been made on the goodwill arisingon the acquisition of Australia Bus. Following a review of the carrying value ofthe remaining assets in Australia an additional impairment write down of £6.1mhas been made. Exceptional items Exceptional items totalled £7.9m (2003: £nil), of which £7.2m was incurred inrelation to the UK Trains division. The integration of the three legacy TOCsinto the 'one' franchise resulted in reorganisation and redundancy charges. TheGroup also incurred redundancy, property and pension charges following themerger of Qjump with the Trainline.com. Redundancy costs were incurred atMaintrain as a result of the decision to cease tendering for external work andfocus on improving service to Central Trains and Midland Mainline. The balancecomprises the cost of reorganisations at UK Bus (£0.4m) and North America(£0.3m). Taxation The tax charge on normalised profit of £130.5m (2003: £99.8m restated) was£28.6m (2003: £22.6m restated), which represents an effective rate of 21.9%(2003: 22.6% restated). Effective tax rates on overseas earnings maintain a lowoverall rate. The total tax charge includes one off credits of £2.2m arising from a review ofgroup tax liabilities as a result of agreeing prior years' computations. Italso includes tax relief on certain North American goodwill amortisation and UKexceptional costs. Cash flow Our focus on operating cash flow produced another excellent result. We againdemonstrated our ability to convert operating profits into cash by generating£181.4m (2003: £152.0m restated) of operating cash flow before one-offs, and£187.5m (2003: £139.7m) after exceptional items and cash flows associated withchanges to our TOC franchise portfolio. NorthOperating Cash Flow UK UK UK American Australia Central Bus Coaches Trains Bus Buses functions Total £m £m £m £m £m £m £m Normalised operating profit 44.2 18.8 58.5 36.9 2.1 (8.5) 152.0 Depreciation 10.4 6.1 21.9 21.4 3.5 0.9 64.2 Amortisation of fixed asset - - (6.5) - - - (6.5)grants Profit on disposal (0.3) 0.2 (0.3) (0.2) - - (0.6) EBITDA 54.3 25.1 73.6 58.1 5.6 (7.6) 209.1 Working capital movement (8.7) 3.6 47.7 (9.7) 1.9 7.1 41.9 Eurostar - - - - - (3.1) (3.1) Net cash inflow from operations 45.6 28.7 121.3 48.4 7.5 (3.6) 247.9 Net capital expenditure (24.1) (4.0) (17.4) (22.4) 1.5 (0.1) (66.5) Operating cash flow before 21.5 24.7 103.9 26.0 9.0 (3.7) 181.4one-offs Other - Exceptional items (5.2) - Franchise revisions 11.3 Operating cash flow 187.5 Operating cash flow represents "Net cash inflow from operating activities" plus"Receipts from the sale of tangible assets" less "Finance lease additions" and "Payments to acquire tangible assets" as set out in note 20c and the cash flowstatement. This result has been driven by a strong performance in UK Trains where the cashinflow of £103.9m includes the one-off benefit of £10m from the build up ofdeferred season ticket income from the 'one' franchise in the last quarter and£9m from the timing of subsidy receipts for the ScotRail franchise. The cashimplications of the entry and exit of these franchises are included in 'franchise revisions' (discussed below). There were working capital timing gainsof approximately £25m which are expected to reverse in 2005. These includeperformance payments and profit share monies owed to the SRA. The working capital outflow in UK Bus came from a VAT timing difference. In UKCoaches the excellent cash flow performance underlines the strength of thebusiness model. The working capital outflow in North America represents apartial reversal of 2003's strong inflow, and has been driven by the promptsettlement of insurance claims provided in previous years and slightly slowerreceivable collections. Net capital expenditure of £66.5m from continuing operations (2003: £43.1m)includes £24.1m (2003: £9.1m) in UK Buses, £17.4m (2003: £8.4m) in UK Trains,and £18.3m (2003: £17.0m) in North American school buses. This expenditureincludes £16.2m (2003: £8.0m) of additions purchased under finance leasecomprising £0.2m (2003: £0.1m) in UK Buses, £0.3m (2003: £0.3m) in UK Coaches,£2.9m (2003: £1.0m) in UK Trains, £12.7m (2003: £6.6m) in North America and£0.1m (2003: £nil) in Central functions. Approximately £8m of capitalexpenditure incurred in the year will be paid for in early 2005. The increase in capital expenditure in UK Buses reflects the increased vehiclepurchases in UK Buses of 186 (2003: 74) both at Travel West Midlands and atTravel London following the awarding of new routes. An additional 28 (2003: 83)vehicles were funded by operating lease in the division. The capitalexpenditure in UK Buses is net of an £8.2m inflow from a property disposal inBirmingham, completed at the end of December. The increase in UK Trainsreflects an increased spend on franchise commitments (including the 'one'franchise). In North America we purchased 771 (2003: 701) school buses, of which230 (2003: 127) were for new routes and contracts. The net £11.3m of cash receipts in relation to the change in UK Trainsfranchises include an inflow of £29.9m from 'one' and outflows of £15.7m fromScotRail and £2.9m incurred as part of the exit from Wales and Borders. Reconciliation of net debt 2004 2003 £m £m Operating cash flow 187.5 139.7 Net interest (20.3) (23.9) Taxation (3.2) (22.3) Free cash flow 164.0 93.5 Financial investments & shares 2.6 10.6 Acquisitions and disposals 22.8 (54.1) Dividends (36.4) (33.2) Net funds flow 153.0 16.8 Foreign exchange 18.2 10.0 Funds flow post exchange 171.2 26.8 Opening effective net debt (307.8) (334.6) Closing effective net debt (136.6) (307.8) Net interest paid of £20.3m (comprising the cash outflow of £18.5m adjusted forloan fee amortisation of £1.8m) reduced in the year following the reduction inGroup net debt. The receipt of tax rebates in respect of prior years resulted ina significant reduction in tax payments. Therefore, we generated £164.0m (2003: £93.5m) in free cash flow which, afterthe effect of acquisitions, disposals, investments, shares issued and dividendsgenerated a net funds inflow of £153.0m (2003: £16.8m). Acquisitions and disposals include £26.4m from the sale of three Australian Bussubsidiaries in October 2004. The 2003 outflow includes £49.8m to indemnify theproviders of performance bonds and to cover accrued exit costs in respect of ourAustralian Trains division which was exited in December 2002. The net inflowfrom acquisitions of £22.8m comprises the cash flow from acquisition anddisposals of £31.3m, offset by the £8.5m of finance leases and loans acquiredand disposed. Dividend An interim dividend of 9.35p per share was paid in October 2004 and a finaldividend of 20.65p per share will be paid in May 2005, bringing the totaldividend for the year to 30.0p. This is a 15.4% increase in total dividendsdeclared compared to 2003. This dividend is covered 2.5 times (2003: 2.2 timesrestated) by normalised profits after tax. Pensions The Group's principal defined benefit pension schemes are all in the UK. Themost recent triennial actuarial valuations were carried out at 31 March 2001 and31 March 2002 for the two Bus schemes, 5 April 2001 for Coaches and 31 December2001 for the Train schemes. These valuations showed funding levels of 107% to119% on the Bus schemes, 67% on the Coach scheme and 89% to 108% on the Trainschemes. Approximately 1,600 (25%) Bus division employees are members of thetwo schemes, which have been closed for some years, and some 450 members ofstaff are members of the Coach division scheme which was closed in June 2002.New employees in the Bus and Coach division are offered membership of definedcontribution pension schemes. In the Trains division approximately 11,000employees are members of the Train schemes. We continue to provide full disclosure, in the notes to the accounts, of the FRS17 position of the defined benefit schemes in the group which includes the railpension schemes (RPS), where our main obligation is to pay the contributionsagreed with the scheme actuary over the life of our franchise. Overall, the FRS 17 deficits have grown as the increased values of the financialassets, reflecting the improvements in global equities, have been offset byincreased liabilities arising from decreases in the discount rate and anincrease in the longevity assumptions. In the coach scheme the deficit increasedto £11.0m (2003: £4.7m), mainly as a result of increased liabilities of £6marising from increased longevity assumptions. In the Bus schemes the deficit hasreduced slightly to £36.2m (2003: £38.7m). We expect to increase the Group'scontribution to the Bus schemes during 2005 when the results of the nextactuarial valuation are available. In the long term Train franchises the deficitincreased by £19.1m to £37.0m mainly with the inclusion of a £14.6m deficit fromthe new 'one' franchise. In the short term Train franchises (expiring in 2006)the deficit reduced by £4.4m to £48.5m as a result of a £29.1m deficit beinghanded over to new franchises almost offset by an actuarial loss of £24.2m. Wereport the RPS results in full compliance with FRS 17 although we have nowexperienced three changes of TOC ownership where the pension deficit hastransferred to the new operator. Post balance sheet events At year end, the Group's remaining bus operations in Australia, operating underthe trading names of Westbus, Glenorie and Blue Ribbon, were subsidiarycompanies of Bosnjak Holding Pty Limited (BHPL). BHPL is a 57% subsidiary ofNational Bus Company (NBC) Pty Limited whose ultimate parent is National ExpressGroup PLC. On 31 January 2005, BHPL went into voluntary administration as the company hadbeen unable to renegotiate its loan with NBC. Accounting policies UK GAAP We continue to apply the transitional arrangements of FRS 17 "RetirementBenefits" and will move directly to the International Accounting Standardequivalent (IAS 19) in 2005 following the Accounting Standards Board's decisionto defer full adoption of FRS 17. UITF 38 "Accounting for ESOP trusts" has been adopted, resulting in own sharesheld as fixed asset investments at 31 December 2003 being deducted in thecalculation of both shareholders' funds and the company's distributable reservesat 1 January 2004. In accordance with FRS 18, "Accounting Policies" the Group's accounting policiesare reviewed regularly and changed when a new policy becomes more appropriate.Under the previous revenue accounting policy, the Group accounted for ticketssold in advance and for return journeys on a cash basis, with the exception ofseason tickets in the UK Trains division which were recognised evenly over thelife of the season ticket. Following improvements in the Group's informationsystems we are now able to reliably measure the deferred revenue adjustmentrequired in relation to these tickets, and therefore a change in accountingpolicy is appropriate. As discussed in note 1, the effect is not material. As reported in the Interim 2004 results, the costs incurred in bidding forfranchises in our UK Trains division are now classified as operating costs andthe costs and assets incurred and utilised in operating the Group managementfunction are now disclosed separately as Central functions. See note 2 to theaccounts for further details. IFRS The Council of the European Union announced in June 2002 that all listedcompanies would adopt International Financial Reporting Standards (IFRS),formerly known as International Accounting Standards (IAS), from 1 January 2005.The adoption of IFRS will be first reflected in the Group's financial statementsfor the half year ending 30 June 2005 and the year ending 31 December 2005. The Group is well prepared to convert to IFRS and we will issue IFRS restated2004 results on 3 May 2005. The main areas impacted are expected to bepensions, share based payments, goodwill, financial instruments, dividends andtaxation. The detailed application of IAS19 to the rail pension schemes isstill under discussion with both our transport peer sector companies and ourauditors, Ernst & Young LLP, who are considering the issue with the other majoraccounting firms. Adam Walker Finance Director NATIONAL EXPRESS GROUP PLC GROUP PROFIT AND LOSS ACCOUNT Total before Goodwill & Total Total before Goodwill & Total goodwill & exceptional goodwill & exceptional exceptional items 2004 exceptional items 2003* items 2004 items 2003* 2004 2003*For the year ended 31 December2004 Note £m £m £m £m £m £mTurnover - continuing operations 2,475.3 - 2,475.3 2,497.9 - 2,497.9- acquisitions 22.8 - 22.8 - - -- discontinued operations 62.1 - 62.1 67.8 - 67.8 Turnover 4 2,560.2 - 2,560.2 2,565.7 - 2,565.7Other operating income 8.8 - 8.8 10.9 - 10.9 Other operating costs beforegoodwill and exceptional items (2,417.0) - (2,417.0) (2,447.7) - (2,447.7) Goodwill amortisation andimpairment 4 - (62.2) (62.2) - (45.7) (45.7) Tangible fixed assetimpairment 4 - (6.1) (6.1) - - - Other exceptional items 4 - (7.9) (7.9) - - - Total operating costs (2,417.0) (76.2) (2,493.2) (2,447.7) (45.7) (2,493.4) Group operating profit 152.0 (76.2) 75.8 128.9 (45.7) 83.2 - continuing operations 149.2 (59.5) 89.7 125.1 (44.5) 80.6- acquisitions 0.3 - 0.3 - - -- discontinued operations 2.5 (16.7) (14.2) 3.8 (1.2) 2.6 Group operating profit 4 152.0 (76.2) 75.8 128.9 (45.7) 83.2 Share of operating losses ofassociates 4 (3.4) - (3.4) (4.1) - (4.1) Total operating profit 148.6 (76.2) 72.4 124.8 (45.7) 79.1Loss on sale of properties - (0.1) (0.1) - - -Profit on sale of businesses 11 - 8.9 8.9 - - -Profit on ordinary activitiesbefore interest 148.6 (67.4) 81.2 124.8 (45.7) 79.1 Net interest payable 5 (18.1) - (18.1) (25.0) - (25.0) Profit on ordinary activitiesbefore taxation 130.5 (67.4) 63.1 99.8 (45.7) 54.1 Tax on profit on ordinaryactivities 6 (28.6) 6.3 (22.3) (22.6) 10.2 (12.4) Profit after tax 101.9 (61.1) 40.8 77.2 (35.5) 41.7 Minority interest 1.0 2.6 3.6 1.0 - 1.0Profit for the financial year 102.9 (58.5) 44.4 78.2 (35.5) 42.7 Dividends (41.3) - (41.3) (35.1) - (35.1)Retained profit 61.6 (58.5) 3.1 43.1 (35.5) 7.6 Basic earnings per share 7 32.6p 31.9p Normalised basic earnings per 7 72.9p 54.6pshare Diluted earnings per share 7 32.1p 31.0p Normalised diluted earnings 7 71.8p 53.0pper share * Restated for change in revenue recognition (see note 1) and classification(see note 2). NATIONAL EXPRESS GROUP PLC GROUP BALANCE SHEET 2004 2003*At 31 December 2004 Note £m £m Fixed assets Intangible assets 8 324.4 404.6Tangible assets 9 380.3 405.6Investments and interests in associates 10 10.5 7.3 715.2 817.5Current assets Stock 12 16.3 17.3Debtors 13 328.5 343.7Cash at bank and in hand 14 147.2 97.0 492.0 458.0Creditors: amounts falling due within one year 15 (610.6) (605.2)Net current liabilities (118.6) (147.2) Total assets less current liabilities 596.6 670.3 Creditors: amounts falling due after more than one year 16 (256.0) (347.3)Provisions for liabilities and charges 18 (76.1) (58.8)Net assets 264.5 264.2 Capital and reserves Called up share capital 7.0 6.8 Share premium account 19 47.5 45.1Other reserves 19 10.3 10.3 Revaluation reserve 19 - 0.8Profit and loss account 19 198.8 196.5Equity shareholders' funds 263.6 259.5 Equity minority interest 0.9 4.7 264.5 264.2 * Restated for change in revenue recognition and accounting policy for ownshares (see note 1). NATIONAL EXPRESS GROUP PLC GROUP STATEMENT OF CASH FLOWS 2004 2003For the year ended 31 December 2004 Note £m £m Net cash inflow from operating activities 20(a) 254.1 182.8 Interest received 13.1 7.6Interest paid (24.7) (26.7)Interest element of finance lease rentals (6.9) (3.9) Return on investments and servicing of finance (18.5) (23.0)UK corporation tax paid (2.2) (22.2)Overseas tax paid (1.0) (0.1) Taxation (3.2) (22.3)Payments to acquire tangible assets (69.2) (48.0)Receipts from sale of tangible assets 18.8 12.9Receipts from sales of shares to satisfy employee share scheme 0.1 2.1Receipts in respect of other investments - 8.1Capital expenditure and financial investment (50.3) (24.9)Receipts from the sale of businesses 11 25.0 0.8Cash disposed in businesses closed 11 (0.3) -Payments in respect of businesses sold/closed 11 (1.5) (49.8)Payments to acquire businesses 11 (7.3) (4.7)Cash acquired in businesses purchased 11 19.9 -Net deferred consideration for businesses (acquired)/disposed (4.5) (0.4) Acquisitions and disposals 31.3 (54.1)Equity dividends paid (36.4) (33.2) Cash inflow before financing activities 177.0 25.3 Management of liquid resources Cash (paid in to)/withdrawn from short term deposits 20(c) (53.1) 14.2 Financing Issue of share capital 2.5 0.4Cash outflow from lease financing 20(c) (15.8) (13.8) Repayment of loan notes 20(c) (0.9) (0.7) Loans repaid 20(c) (93.1) (26.1) Net cash outflow from financing (107.3) (40.2) Increase/(decrease) in cash 20(b) 16.6 (0.7) NATIONAL EXPRESS GROUP PLC GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 2004 2003*For the year ended 31 December 2004 Note £m £m Profit for the financial year 44.4 42.7Related Shares:
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