Final Results

National Express Group PLC 26 February 2004 26 February 2004 National Express Group PLC Preliminary Results For the year ended 31 December 2003 Financial Highlights • Turnover from continuing operations is up 6% to £2.6 billion (2002: £2.4 billion) • Normalised operating profit* up 3% to £134.6 million (2002: £130.9 million) • Normalised profit before tax* of £105.5 million (2002: £106.8 million) • Normalised diluted earnings per share* of 59.7 pence (2002: 60.3 pence) • Final dividend increased by 6.7% to 17.5 pence • Strong operating cashflow** from continuing businesses of £139.7 million (2002: £105.5 million) • Effective net debt** reduced to £307.8 million (2002: £334.6 million) *excluding goodwill, exceptional items and tax relief thereon as appropriate **operating cashflow and effective net debt as defined on pages 13 and 10 respectively Operating Highlights • Rail patronage up 5% • Coach patronage up 2% • Signing of first public transport Concordat at Travel Coventry • Entry into London bus market through acquisition of Connex Bus • Award of Greater Anglia franchise • Signing of two year extensions for Central Trains, Great Northern and Wessex Trains • Solid performance from North American student bus division and an improvement in public transit Commenting on current trading and prospects, Chairman, Michael Davies said: 'We have made a good start to the year. In the Bus division, we remain focused on growing our UK business by delivering further bus priority measures and investing in additional quality partnerships. We look forward to signing the first statutory quality partnership in the bus industry during this year. The acquisition of the Connex bus business creates an important entry for the Group into the London market. Our Trains division continues to perform well and we expect to build on this success during 2004. We are working closely with Network Rail to gain further improvements in reliability and punctuality. We are already well advanced with our plans for the merging of the three TOCs which will create the new Greater Anglia franchise, due for launch in April, and look forward to submitting our pre-qualification questionnaire for the Intercity East Coast rail franchise. The Coach division has started the year well and we anticipate building on the growth we achieved last year. We are encouraged by the opportunities in North America. Our US student bus business is in its bidding season. We remain confident of securing new business wins and retaining our current contracts. Our entry into the Canadian market has been successful and we are actively seeking opportunities to expand this part of our business. Overall, we look forward to the future with confidence.' For further information, please contact: Phil White, Chief Executive Adam Walker, Finance Director Nicola Marsden/Fiona Noblet, Group Communications National Express Group PLC 020 7529 2000 Steve Jacobs/Ben Foster/Dido Laurimore Financial Dynamics 020 7831 3113 • An analyst presentation will take place at 0900 hours on 26 February 2004 at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB • A copy of the analyst presentation will be available on our website www.nationalexpressgroup.com at 0900 hours on 26 February 2004. For further information, contact 020 7529 2036 • For details of the live webcast, please contact Elaine Holder or Dido Laurimore at Financial Dynamics on 020 7269 7121 • Photos are available through Newscast on Tel: 020 7608 1000. Chairman's Statement I am delighted to announce that 2003 was a year of significant progress for the National Express Group ('Group'). Despite the market, economic and business challenges that we have faced, we are very pleased with our performance and I would like to thank all our staff for their contribution during the year. Our coach division marked its 30th anniversary with a complete rebranding of its operations, reinforcing our high quality, value for money services. During this year we have taken the business forward with new, exciting marketing and pricing initiatives which, together with the introduction of a new concessionary fares scheme in association with the Department for Transport, have increased the overall attractiveness of coach travel. We experienced significant patronage growth on our key routes, including the airport services and, as a result, we carried a record number of passengers during the year. Within our trains division, we have made considerable progress working with the Strategic Rail Authority ('SRA') in their rail refranchising programme. We secured two year extensions at Central Trains ('Central'), Great Northern and Wessex Trains ('Wessex'). We anticipate signing the Silverlink two year extension this summer and await news of the preferred bidder for the ScotRail franchise. Two year extensions provide a strong financial footing for our franchises and give the Group a firmer base from which to develop our portfolio. In January, we were awarded the new Greater Anglia franchise by the SRA. This franchise, which combines the existing Anglia and Great Eastern franchises, and the West Anglia Liverpool Street services (including Stansted Express) from the Group's Wagn franchise, marks the introduction of the first of the new franchise template agreements. This franchise will run for seven years with an automatic extension of three years, subject to the achievement of performance and service quality targets set out by the SRA. We now have a portfolio of seven franchises which run until 2006 or beyond. We look forward to welcoming our new colleagues from Anglia Railways and Great Eastern to the Group. We continue to work with Network Rail, our other key suppliers and the industry participants to improve the level of operating performance. We are particularly encouraged to see consistent patronage growth returning across all our train operating companies ('TOCs'). We welcome the major review of the structure of Britain's railway announced by the Transport Secretary in January 2004 and we are already playing an active part in the consultation process. During the year, the Wales and Borders franchise transferred ownership to Arriva following three years of operation in which the Group significantly developed this business. I would like to take this opportunity to thank our employees for their hard work during our tenure and we wish them well for the future. Our bus operations delivered another strong set of results. We were particularly pleased with the response to the Travel Coventry branding which we launched at the end of last year. The signing of the Coventry Concordat, which marked the culmination of a partnership between Coventry City Council, Centro and ourselves, is aimed at ensuring further development of the bus network in the region. This initiative was supported by Central Government which provided £35 million of funding to improve bus priority measures and passenger facilities. We have also introduced smartcards onto the network. We look forward to the signing of the first bus industry statutory quality partnership on our Castle Vale service in Birmingham. We continue to work with Centro and the City Council to stabilise traffic flows arising from the redevelopment of Birmingham city centre to improve reliability of our services. I am pleased to announce the acquisition of Connex's London bus operations for a nominal consideration. This gives the Group an important entry into the London bus market through established depots in Battersea and Croydon. With 200 buses operating twelve contracts on behalf of Transport for London, this gives us the critical mass we require to develop our bus operations in this fast growing market thereby increasing our presence in the UK bus market overall. Our North American operations have continued to grow and we have improved profits despite the weakening dollar. Our student bus operation continues to provide essential services to school boards in 20 states and two Canadian provinces. Following its first full year of contribution, our Canadian acquisition, Stock Transportation, has proved to be a strong business run by an experienced management team. The Canadian market with its longer term contracts provides stability and, in common with the United States, relies on strong relationships with school boards. We look forward to increasing our presence within Canada. The results from the public transit division showed year-on-year improvement. We continued to exit poor performing contracts and renew existing ones at higher rates to reflect the increased cost of accident claims in the United States. Safety is a priority and we were pleased to see the frequency of accidents reduce. We are pleased with the performance of our Australian Bus operation. We continue to negotiate an exit from our shareholding in Eurostar. These negotiations are expected to be completed when the new structure for Eurostar is put in place. We are committed to achieving a solution which benefits all parties as soon as possible but will ensure we act in the best interests of our shareholders. The Board With my retirement from the Board taking place at our next Annual General Meeting in May, I would like to thank all the members of the National Express Group Board for their support and contribution during the period of my Chairmanship. I was Chairman of the Group at the time of its flotation back in 1992 and it is very pleasing to see the progress and developments that have taken place over the last decade. Today we are a leading international transport group with a sound financial base and I look forward with confidence to watching the Group capitalise on its many opportunities for future growth. The process of recruiting a successor is well underway and an announcement will be made before the Annual General Meeting. I would like to take this opportunity to pay tribute to Larry Durham who has decided to retire from the Group but remains as a consultant. Larry joined the Group in 1999 when we acquired Durham Transportation, the company that he founded. Since joining he has been responsible for the successful growth of our North American operations. We are delighted that Larry has stayed with us for nearly five years since we acquired his business. In this time he has successfully integrated a number of major acquisitions as well as established a strong management team. We wish Larry all the best for the future. He leaves behind a business that continues to perform well. Results and Dividend Turnover from continuing operations increased by 6% to £2.6 billion (2002: £2.4 billion) and normalised Group operating profit increased by 3% to £134.6 million (2002: £130.9 million). After interest and the Group's share of losses from associated undertakings, normalised profit before tax was £105.5 million (2002: £106.8 million). Normalised diluted earnings per share were 59.7p (2002: 60.3p). The strong cash performance of the Group's continuing operations continues with £139.7 million operating cash flow (2002: £105.5 million). Our effective net debt has reduced from £334.6 million to £307.8 million. Given the Board's confidence in the Group's operations, as well as its financial strength, we are recommending an increased final dividend of 17.5p per ordinary share (2002: 16.4p) to be paid on 7 May 2004 to shareholders on the register at 13 April 2004. Including the interim dividend, the proposed total dividend for the year is 26.0p (2002: 24.5p). Current trading and outlook We have made a good start to the year. In the Bus division, we remain focused on growing our UK business by delivering further bus priority measures and investing in additional quality partnerships. We look forward to signing the first statutory quality partnership in the bus industry during this year. The acquisition of the Connex bus business creates an important entry for the Group into the London market. Our Trains division continues to perform well and we expect to build on this success during 2004. We are working closely with Network Rail to gain further improvements in reliability and punctuality. We are already well advanced with our plans for the merging of the three TOCs which will create the new Greater Anglia franchise, due for launch in April, and look forward to submitting our pre-qualification questionnaire for the Intercity East Coast rail franchise. The Coach division has started the year well and we anticipate building on the growth we achieved last year. We are encouraged by the opportunities in North America. Our US student bus business is in its bidding season. We remain confident of securing new business wins and retaining our current contracts. Our entry into the Canadian market has been successful and we are actively seeking opportunities to expand this part of our business. Overall, we look forward to the future with confidence. Operational Review Buses Travel West Midlands is the leading bus operator in the West Midlands incorporating Travel Coventry, Travel Midland Metro and Travel Dundee. It employs over 5,500 employees and has a fleet of 1,800 buses operating over 600 routes. Turnover for the period was £211.9 million (2002: £208.7 million) with operating profit of £47.2 million (2002: £49.8 million) principally impacted by the financing of new buses through operating leases. Overall, performance of this business remains strong. Following the completion of the development works in the centre of Birmingham in September, there have been a number of traffic flow issues concentrated around the main shopping mall resulting in extended journey times and delays to services. We are working with Centro and the City Council to resolve these matters as quickly as possible. We have undertaken a series of successful joint marketing initiatives with the local authorities to promote key events and destinations within the West Midlands. Many of these promotions have been backed up by special travel offers giving added value to passengers. In addition, we have joined forces with Centro to open the latest one-stop shop for travel information and sales in the West Midlands. We have also supported Centro in their relaunch of Travelwise which promotes travel by public transport and launched our first internal journey planning facility as part of the West Midlands Traveline service. We actively encourage travel by bus as part of a journey through involvement in the PlusBus integrated rail-bus ticketing scheme. We continue to invest in our bus operations. In Birmingham, we introduced 155 new vehicles during the year which has resulted in 60% of the fleet now being low-floor easy access, well above the industry average. We have a further 155 buses on order for our West Midlands operation for delivery in 2004. Nearly half of the fleet has CCTV installed and during the period we extended our involvement and promotion of the Operation Safer Travel initiative. In Coventry, the roll-out of the new Travel Coventry brand was completed and feedback from customers and stakeholders has been very positive. In December we were the first bus operator to sign a Public Transport Partnership Concordat committing Coventry City Council, Centro and ourselves to work in partnership for the promotion and enhancement of bus services across the region. We believe that this is a major positive step by all parties for the future development of the network of services and believe that additional quality partnerships will be launched on the back of this. To support this initiative we introduced nine new low-floor articulated vehicles into the Coventry fleet which has resulted in 14% growth in passenger numbers in the first eight months. In addition, the first phase of the smartcard scheme in Coventry, targeted at seniors, was launched with over 30,000 smartcards issued. Travel Dundee performed well with an increase in patronage. We remain committed to developing public transport services in the West Midlands and Dundee. We were pleased to be the first bus operator nationwide to adopt the Bus Forum Service Stability initiative which ensures that service changes are only undertaken on a maximum of twelve dates per annum. We remain strongly of the view that quality partnerships are the way forward for our bus operations as all our stakeholders are beneficiaries. We aim to be the first bus operator to sign a statutory quality partnership later this year. We believe that the acquisition of Connex bus operations in London positions our bus division well for the future and provides the foundation for future growth opportunities. Trains We operate c2c, Central Trains, Gatwick Express, Midland Mainline, ScotRail, Silverlink, Wagn including the Stansted Express and Wessex Trains franchises. The division currently employs 12,800 people. Turnover for the year increased by 10% to £1,702.4 million (2002: £1,553.2 million). Normalised operating profit was £32.0 million (2002: £33.9 million). This reduction was due to increased headcount to improve operational performance, increased pensions and insurance costs, as well as a subsidy reduction for our London and South East operations. We are pleased that patronage across the division was up 5% on last year with particularly strong growth across the long distance and London and South East companies. Operational performance has improved over the past twelve months through closer working relationships with Network Rail. We believe a more hands-on approach through Joint Boards and a further investment in driver resources will deliver improvements. Within our own operations, we have introduced improvement plans designed to enhance performance control at all levels within the TOCs. At Midland Mainline and Central Trains we have brought the operations and engineering functions closer together through a reorganisation of these businesses. We have strengthened our Trains division management teams over the past six months with a number of senior appointments from within the industry including the appointment of a new fleet engineering director and managing directors for the Midland Mainline and the Greater Anglia franchises. In February 2004 we appointed David Franks as the Chief Executive of the division. London and the South East Turnover for the period was £555.9 million (2002: £535.7 million). Normalised operating profit was £20.0 million (2002: £21.0 million). Patronage growth on these services was very encouraging at 7%, mainly from off-peak travel. Both Wagn and c2c performed well with Stansted Express achieving strong patronage growth of 17%, reflecting the growth of the airport. We commenced the introduction of driver only operations at c2c towards the end of the year. Patronage on Gatwick Express is improving but this franchise continues to be impacted by the relocation of international flights from Gatwick airport. Long distance Turnover for the year increased to £207.0 million (2002: £156.1 million) with an operating profit of £12.4 million (2002: £8.2 million). This increase reflected the commencement of operations by Midland Mainline ('MML') of a new London to Manchester service, which started in May 2003 at the request of the SRA and additional compensation received as a result of engineering work. Passenger numbers on this service have been encouraging with many passengers transferring to the route following the West Coast Main Line blockade throughout the summer months. Overall there was a 6% increase in patronage. We continue to undertake the refurbishment of MML's 15 high speed trains. With half of the fleet already completed, it is anticipated that the whole fleet will be finished by Spring 2004. The first of the new Meridian trains is expected to come into operation later this year. MML's performance continues to be impacted by the Channel Tunnel Rail Link development work at St Pancras. During the course of this year, its operations will be restricted by a reduction in the number of platforms at St Pancras and the opening of a temporary station. Regional Services Turnover for the period was £939.5 million (2002: £861.4 million) with a normalised operating loss of £0.4 million (2002: profit £4.7 million). As part of our two year extension at Central, £5.0 million will be invested over the next two years in passenger benefits including a new Customer Service Academy for all Central staff. Following the reopening of Birmingham city centre, Central's patronage has increased 3% year-on-year as shoppers from a wider catchment area are travelling to Birmingham by train. During the year, Central took over operation of the Birmingham to Cardiff and Liverpool services. Operational performance continues to be a challenge but we are making progress in this area. Wessex Trains increased its operations significantly over the last twelve months following a transfer of selected services from Virgin Trains to Wessex. Patronage growth during the year was a very creditable 8%. In February 2004 a two year extension for Wessex was signed. ScotRail's patronage grew by 7%. Operational performance has improved and recent passenger research has shown marked improvements in customer satisfaction. This month will see the delivery of 21 new turbostar trains. At the request of the SRA and the Scottish Executive, we are extending our existing franchise by seven months to October 2004 to assist with the refranchising process. Summary At the beginning of this month, we merged our Qjump operation with Trainline.com, creating a stronger, larger operation for rail ticket sales. As part of the merger we have acquired a 14% shareholding of the enlarged business. The combined business consolidates Trainline.com's position as the UK's leading rail ticketing retailer and we believe the enlarged entity will be more successful moving forward. Earlier this month we signed two year extensions for our Great Northern and Wessex franchises. Moving forward a two year franchise extension is under discussion for Silverlink and we await the preferred bidder announcement for the ScotRail franchise. Plans are well underway for the launch on the Greater Anglia franchise at the beginning of April. We are also preparing ourselves for the next round of franchise bids, including the Intercity East Coast rail franchise. We look forward to further improvements in operational performance across the division. Coaches The coach division provides Britain's only scheduled national coach network and serves more than 1,200 destinations. The airport services provide premier, high frequency scheduled coach services to all the UK's major airports, as well as airside coaching services. Eurolines offers value for money European travel by coach. The division employs 1,900 people. Turnover for the year was £186.6 million (2002: £184.5 million) with a normalised operating profit of £15.0 million (2002: £12.2 million). This was especially pleasing against a background of uncertainty in the tourist market. Progress in the second half was exceptional with patronage up 2% for the year. We have invested in better management systems, which has facilitated improved yield management, as well as focusing on cost control and increasing the proportion of direct sales. Key routes have seen a significant growth in patronage and delivered well above average revenue growth. Widespread promotion of our scheduled services, particularly to major events such as the Glastonbury Festival, has delivered good results. Best value fares have been rolled out to our most popular routes and this has reduced costs with less duplication of services as passengers have transferred to non peak services. The concessionary travel scheme, launched in May in conjunction with the Department for Transport, provides all disabled customers and those over the age of 60 with up to half price travel on over 80% of our services. Over a million passengers have benefited from this scheme since it started. The refocusing of our airport services and strengthening of management, has produced good growth despite the well publicised issues with which the airline industry has had to contend. We have improved coach links from Stansted into Central London. With the continuing strong growth in passenger numbers using Stansted and plans for an additional runway at the airport, we believe further growth will occur. We look forward to the future with confidence following a successful 2003. We are extending our £1 best value fares across the network and continuing to invest in our coach facilities. We remain committed to investing in a new coach station in Birmingham as a key hub for our services. Moving forward we aim to meet the coach travel needs of the future whilst continuing to provide a value for money product. We believe there is scope to improve further the product offering and consequently we are continuously reviewing vehicle design and on board facilities as well as investing in training and development of drivers and other front line staff. North America The North American division consists of student transportation, public transit operations and Stewart Airport in New York State. The division employs 21,000 employees, with 1,700 in Canada. Student transportation provides services in more than 260 school districts and two Canadian provinces. Public transit operates in 18 states. Turnover in the student transportation division for the year was £228.1 million (2002: £219.6 million) and normalised operating profit was £32.4 million (2002: £30.9 million). In US dollars, turnover was $374.1 million (2002: $331.6 million) and normalised operating profit $53.1 million (2002: $46.6 million). Progress within this division has been encouraging, particularly in Canada, with underlying trading in the Canadian marketplace being very positive. New routes were added at Durham School Services in spite of the slowing US economy and lower tax revenues which have impacted on school district budgets. New contracts were won in Arizona and Kansas and we added two new conversions in Natchez, Mississippi and Uvalde, Texas. Durham School Services has maintained its regional, targeted focus in bidding. In common with Stock Transportation, its strength is based on its attention to safety and provision of a quality service. We are pleased with the performance of our Canadian business after its first full year of ownership. The quality of its management and their strong relationships with school boards has resulted in sustainable organic growth. Whilst many of the factors which are key to operating successfully in the United States student bus market are also common in the Canadian market, Canada has not experienced some of the significant cost pressures particularly increased workers' compensation and insurance claim costs. We continually focus on extracting synergy savings across the two businesses particularly in the areas of fleet and parts procurement. Turnover in the public transit division was £172.0 million (2002: £188.4 million) and normalised operating profit was £4.6 million (2002: £1.7 million). In US dollars turnover was $282.1 million (2002: $284.5 million) and normalised operating profit $7.6 million (2002: $2.6 million). During the year we withdrew from a number of underperforming contracts and key contracts were retained at improved rates to address increasing insurance costs. Operating costs across the public transit division remain an area for focus. Following a benchmarking exercise across the engineering and maintenance functions, we are rolling out best practice across our depots. As part of our accident and claims initiative launched last year, all our safety programmes focus on preventability and reducing accident frequency through improved safety training. We are pleased to note that the accident frequency rates have fallen this year. Moving forward Brian Stock, President and Chief Executive Officer of Stock Transportation, will head up our North American student bus operations working alongside John Elliott who has been Chief Operating Officer of Student Transportation for the past three years. Jim Long will continue to head up our public transit operations. During 2004 we will focus on retaining profitable contracts across the division, reducing the cost base further and improving the competitiveness of our bids. We will continue to look for share shift and conversion opportunities as well as bolt on acquisitions within student transportation. Australia The Group operates six bus companies in Australia. Operations are in Brisbane, Melbourne, Perth and Sydney and employ 1,800 people. Turnover for the Australian Bus division totalled £65.1 million (2002: £58.0 million) with a normalised operating profit of £3.4 million (2002: £2.3 million). Trading remains in line with expectations. The New South Wales Government review of bus services has recommended a reduction in the number of operators areas in the Greater Metropolitan area of Sydney. We believe that Westbus, as the largest private operator in New South Wales, will play a key role in the review. Finance Director's Review I am particularly pleased at the progress the Group has made from a financial viewpoint over the past year. Securing a number of two year extensions has provided more stability to our UK Trains profits and the acquisition of Connex Bus along with the new Greater Anglia franchise provides opportunities for further profit growth. Our business faces increasing cost pressures which we mitigate through long term pay deals, fuel hedging and tight financial procedures and controls. Where we refer to a normalised result, this is defined as the statutory result before the following as appropriate: charges for goodwill amortisation, exceptional charges and tax relief on certain North American goodwill amortisation and exceptional items. Year at a glance Normalised group operating profit was £134.6m (2002: £130.9m), on turnover of £2,566.1m (2002: £2,572.3m). Normalised profit before tax from continuing operations was £105.5m (2002: £106.7). Normalised diluted earnings per share were 59.7p (2002: 60.3p), a small reduction caused by lower profits and a higher average number of diluted shares. Cash flow was strong with effective net debt* reducing by £26.8m to £307.8m after paying out the Australia trains cash exit costs of £49.8m. Full year dividend per share increased by 6% to 26.0p (2002: 24.5p). *Effective net debt is net debt excluding the £18.7m of cash deposits secured as a bond in respect of future rolling stock maintenance at ScotRail. Divisional review Buses Turnover increased by 2% to £211.9m (2002: £208.7m). Operating profit fell to £47.2m (2002: £49.8m). The difficulty of operating in the centre of Birmingham as a result of the redevelopment of the Birmingham Bull Ring has dampened revenue growth. The fall in operating profit reflects the increasing number of buses financed by operating leases, now totalling 377, which is 20% of the fleet. The increase in the lease charges in the year of £2.7m compares with a notional saving on depreciation of £1.3m. As a result, the operating margin reduced to 22.3% (2002: 23.9%). We will continue to review the most cost effective way to finance our new bus purchases. Trains Turnover increased by 9.6% to £1,702.4m with overall patronage growth of 5% across our portfolio of TOCs. Normalised operating profit fell to £32.0m (2002: £33.9m). Turnover Normalised operating profit / (loss) 2003 2002 2003 2002 £m £m £m £m London and South East 555.9 535.7 20.0 21.0 Long distance 207.0 156.1 12.4 8.2 Regional services 939.5 861.4 (0.4) 4.7 1,702.4 1,553.2 32.0 33.9 Normalised operating profit in our London and South East TOCs fell to £20.0m (2002: £21.0m). Turnover increased by £20.2m as strong passenger revenue growth offset the £12.2m net reduction in subsidy. The normalised operating margin fell to 3.6% (2002: 3.9%) reflecting increased passenger compensation payments. Our long distance TOC increased turnover by 32.6% and normalised margins to 6.0% (2002: 5.3%), benefiting from the SRA's decision to strengthen London to Manchester services whilst the West Coast Route Modernisation was in progress. Margins were also assisted in part by performance compensation related to the Channel Tunnel Rail Link construction work at St. Pancras. This work continues throughout 2004 and will have a significant impact on operational performance and therefore may restrict passenger growth during the year. We are expecting to receive the first of our new Meridian train fleet later this year. The regional TOCs made a normalised operating loss of £0.4m (2002: £4.7m profit). From the beginning of April, Central Trains and ScotRail will operate on new improved terms. The former as part of the two year extension and the latter a seven month extension currently being finalised with the SRA. We ceased to operate Wales & Borders from 6 December 2003. Since the year end we have undertaken two restructuring exercises. Qjump.co.uk, our on-line loss making ticketing service which we set up in January 2002, was merged with Trainline.com, the UK's leading on-line rail ticket provider, on 9 February 2004. Our train maintenance company, Maintrain, will cease to pursue maintenance work outside of the Group and instead concentrate on improving rolling stock performance for Midland Mainline and Central Trains. Consequently, we have removed the 'Other' segmental disclosure for the Trains Division, reallocating the profit or losses of Maintrain and Qjump to the division in which they conducted their activities. Coaches Our Coach operations performed strongly increasing normalised operating profit by 23.0% to £15.0m (2002: £12.2m). Yield management on ticketing and the introduction of the concessionary fare scheme providing discounted travel to the over 60s increased turnover from continuing operations by 2.9% to £186.6m (2002: £181.4m). Investment in management systems during the year provided improved route by route profitability analysis enabling key strategic decisions to be implemented to target this growth. The normalised operating margin improved to 8.0% (2002: 6.6%) benefiting from the improved ability to avoid duplicate coaching costs as passengers switch journey times to the off peak. North America Normalised operating profit increased by £7.0m before a £2.6m adverse foreign exchange movement. Turnover fell by £7.9m, but at constant exchange rates increased by £24.5m. Turnover Normalised operating profit 2003 2002 2003 2002 £m £m £m £m Student Transportation 228.1 219.6 32.4 30.9 Public Transit 172.0 188.4 4.6 1.7 400.1 408.0 37.0 32.6 $m $m $m $m Student Transportation 374.1 331.6 53.1 46.6 Public Transit 282.1 284.5 7.6 2.6 656.2 616.1 60.7 49.2 Average US dollar exchange rate of 1.64 (2002: 1.51). Turnover in our Student Transportation business increased by £8.5m (and £25.2m at constant exchange rates) through the full year effect of Stock, acquired in July 2002, and new routes operated. Normalised operating margin improved to 14.2% (2002: 14.1%) through tight control of costs and the full year impact of Stock. The 2003 bid season was price competitive and we expect this to continue during the current bid season. Stock Transportation performed well. The evergreen nature of the Canadian market provides long term stability. The normalised operating margin of our Public Transit business improved to 2.7% (2002: 0.9%). Whilst encouraging, this is still not at a level that we find acceptable. We are continuing with our policy of eliminating unprofitable contracts and negotiating new contracts at substantially higher rates to mitigate the effects of on-going claims and insurance cost pressures. Australia Our Australia Bus operations experienced an encouraging year, increasing normalised operating profit to £3.4m (2002: £2.3m) on turnover of £65.1m (2002: £58.0m). Normalised operating margin increased to 5.2% (2002: 4.0%). Associates We hold a 33% investment in Altram LRT Limited (Altram) and a 40% investment in Inter-Capital and Regional Rail Limited (ICRRL). Altram has operated the Midland Metro since June 1999. Our share of the operating loss for 2003 was £0.5m (2002: £0.5m). We are in discussions with our fellow shareholders at Altram and Centro regarding a restructuring which may lead to the Group taking full ownership. ICRRL is contracted to manage the operations of Eurostar UK to 2010. Our share of the operating loss for the year was £3.6m (2002: £3.5m), which represented a second half loss of £0.1m. Revenue performance at Eurostar UK improved markedly in the last quarter of 2003, after the opening of the first section of the Channel Tunnel Rail Link. The second half also benefited from settling several large claims with its partners. The cash outflow of £3.9m comprises the Group's share of funding for the 2002 losses. We continue to seek an exit from Eurostar which we believe is in the best interests of shareholders. Interest Net interest payable increased to £25.0m (2002: £20.1m) reflecting a higher level of net debt in the first half of 2003 following payments of £49.8m mainly to indemnify the providers of the performance bonds in respect of our withdrawal from Australia Trains. Interest payable was also impacted, but to a lesser extent, by higher interest rates. Normalised operating profit before depreciation (EBITDA) from continuing operations was £194.8m (2002: £191.5m) and EBITDA interest cover from continuing operations was 7.8 times (2002: 9.5 times). Goodwill amortisation The annual goodwill amortisation charge increased to £45.7m (2002: £45.2m) reflecting a full year amortisation charge for the Stock acquisition in July 2002, offset by the weakening of the US dollar. Exceptional items Exceptional items comprise £5.3m (2002: £5.0m) of pre-contract bid costs incurred in the UK Trains refranchising process. Taxation The tax charge on normalised profit of £105.5m (2002: £106.8m) was £24.3m (2002: £24.6m), which represents an effective rate of 23.0% (2002: 23.0%). Continuing low effective tax rates on overseas earnings maintain a low overall rate. The total tax charge includes one off credits of £6.0m arising from a review of group tax liabilities as a result of agreeing prior years' computations. It also includes tax relief on certain North American goodwill amortisation and UK Trains exceptional costs. Cash flow The strong cash performance of the Group demonstrates our ability to convert operating profits into cash and underlines the importance we attach to managing cash in our various businesses. We generated £156.9m (2002: £176.5m) of on-going operating cash flow from continuing businesses and £139.7m (2002: £90.5m) after other items. North UK UK UK American Australian Bus Coaches Trains Bus Bus Total £m £m £m £m £m £m Normalised operating profit 47.2 15.0 32.0 37.0 3.4 134.6 Depreciation 10.0 4.8 21.8 24.4 3.7 64.7 Amortisation of fixed asset grants - - (3.0) - - (3.0) Profit on disposal (0.4) - (1.1) 0.3 (0.3) (1.5) EBITDA 56.8 19.8 49.7 61.7 6.8 194.8 Working capital movement (3.7) 10.2 (7.0) 9.1 0.5 9.1 Eurostar - - (3.9) - - (3.9) On-going net cash inflow from operations 53.1 30.0 38.8 70.8 7.3 200.0 Net capital expenditure (9.1) (6.0) (8.4) (17.4) (2.2) (43.1) On-going operating cash flow 44.0 24.0 30.4 53.4 5.1 156.9 Other items (17.2) Operating cash flow 139.7 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 18c and the cash flow statement Strong working capital inflows in UK Coach and North America resulted from improved receivable collections and the on-going timing delays in settling accident claims in North America where the cash outgoings were £5.4m less than the claims. The working capital outflow in the UK Trains division includes a catch up payment of £43m on contractual and performance payments to Network Rail which was partially offset by timing differences of £25m which will reverse in 2004. £3.9m was paid to fund our share of Eurostar losses from the previous year. Net capital expenditure of £43.1m from continuing operations (2002: £52.4m) includes £9.1m (2002: £0.3m) in UK Buses, £8.4m (2002: £17.3m) in UK Trains, £17.0m (2002: £19.0m) investment in North American school buses. Capital expenditure includes £8.0m (2002: £0.8m) of additions purchased under finance leases, comprising £0.1m (2002: £0.1m) in UK Buses, £0.3m (2002: £0.5m) in UK Coaches, £1.0m (2002: £0.2m) in UK Trains, and £6.6m (2002: £nil) in North American school buses. A further £7.6m of expenditure incurred in the year will be paid for in early 2004. The reduction in capital expenditure this year reflects the reduced capital requirements of the Trains Division as a large number of our franchises approach the end of the current contracts and North America where we have started a major exercise in fleet utilisation to improve efficiency. Other items comprise £5.0m for a top up payment into the Coaches pension scheme, £4.9m for train bid costs, and £7.3m to unwind the working capital position upon exiting the Wales and Borders rail franchise. Net funds inflow was £66.6m, before payments of £49.8m to settle the performance bonds and other costs relating to the exit from Australia trains and a foreign exchange gain of £10.0m. Therefore, the effective net debt was reduced by £26.8m to £307.8m, with the benefit of a favourable exchange movement of £10.0m arising principally from the translation of US$ denominated debt. The published net debt of £289.1m is stated after taking into account £18.7m of cash deposits secured as a bond in respect of future rolling stock maintenance at ScotRail. Dividend An interim dividend of 8.5p per share was paid in October 2003 and a final dividend of 17.5p per share will be paid in May 2004, bringing the total dividend for the year to 26.0p. This is a 6% increase in total dividends declared compared to 2002. This dividend is covered 2.3 times (2002: 2.5 times) by normalised profits after tax. Pensions The Group's principal defined benefit pension schemes are all in the UK. The most recent triennial actuarial valuations were carried out at 31 March 2001 and 31 March 2002 for the two Bus schemes, 5 April 2001 for Coaches and 31 December 2001 for the Train schemes. These valuations showed funding levels of 107% to 119% on the Bus schemes, 67% on the coach scheme and 89% to 109% on the train schemes. Approximately 1,750 people (32%) of bus division employees are members of two schemes, which have been closed for some years, and some 500 members of staff are members of the coach division scheme. New employees in the bus and coach division are offered membership of defined contribution pension schemes. In the trains division approximately 12,500 employees are members of the train schemes. The group injected £5m into the coach scheme in March 2003 in order to enhance its funding position. Overall, the FRS 17 deficits have increased as the increased values of the financial assets, reflecting the improvements in global stock markets, have been more than offset by increases in the liabilities arising from decreases in the discount rate and higher inflation as well as the extra year of service. The deficit in the bus schemes has increased to £38.7m (2002: £18.7m); the increase in liabilities of £32.7m compares with the asset increase of £12.7m. We expect to increase the Group's contribution to the Bus schemes in 2005 after the next actuarial valuation. In the coach scheme the deficit reduced to £4.7m (2002: £9.5m), mainly as a result of the £5m injection in the year. In the train schemes the deficit increased to £70.8m (2002: £53.8m) with the increase in liabilities of £82.7m being significantly more than the asset increase of £65.7m. We will provide full disclosure in the accounts position of our defined benefit schemes under FRS17 which includes the train pension schemes, where our main obligation is to pay the contributions as agreed with the scheme actuary. Post balance sheet events On 9 February 2004 we merged our train on-line ticketing service, Qjump.co.uk, with Trainline.com. We have acquired 14% of the equity in Trainline, which will be classified as a trade investment. On 25 February 2004 we acquired the entire issued share capital of Connex Bus (UK) Limited for a nominal consideration. We will take over the new Greater Anglia train franchise from 1 April 2004. This will be the first franchise operated under the new franchise template agreement and will be for an initial period of seven years with an extra three years if performance targets are achieved in the first five years. The performance bond requirement will be £5m at inception rising to £22m by April 2006. There will be a share capital cash subscription of £15m and we will maintain an amount of cash in the company calculated in accordance with the financial covenants. It is estimated that the franchise will commence with season ticket bonded cash of approximately £43m of which £9m will come from the present West Anglia franchise. Accounting policies UK GAAP We continue to apply the transitional arrangements of FRS 17 'Retirement Benefits' and plan to move directly to the International Accounting Standard equivalent (IAS19) in 2005 following the Accounting Standards Board's decision to defer full adoption of FRS17. UITF 38 'Accounting for ESOP trusts' will be adopted from 1 January 2004, resulting in own shares held as fixed asset investments at 31 December 2003 being deducted in the calculation of shareholders' funds. IFRS The Council of the European Union announced in June 2002 that all listed companies 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 statements for the half year ending 30 June 2005 and the year ending 31 December 2005. The Company has established a project team to manage the convergence to IFRS. Throughout this process we have worked closely with our auditors, Ernst & Young LLP. At the date of this report, the Group has made good progress on converting to IFRS. Whilst the Group has undertaken an exercise to understand the differences between IAS/IFRS and the Group's current policies, the conversion project is on-going. A number of new standards were only issued by the IASB in December 2003 and the IASB have indicated they will not issue all the standards which will apply for adoption in 2005 until March 2004. The IASB are also expected to continue to issue further new standards during 2004, 2005 and beyond, for which the Group will consider early adoption on a case by case basis. In addition, the International Financial Reporting Interpretations Committee are expected to continue to issue interpretations which will apply to the standards that are mandatory for 2005. Adam Walker Finance Director NATIONAL EXPRESS GROUP PLC GROUP PROFIT AND LOSS ACCOUNT Total before Goodwill & Total before Goodwill & goodwill & exceptional goodwill & exceptional exceptional items exceptional items items Total items Total 2003 2003 2003 2002 2002 2002 for the year ended 31 December 2003 Note £m £m £m £m £m £m Turnover - continuing operations 2,566.1 - 2,566.1 2,412.4 - 2,412.4 - discontinued operations - - - 159.9 - 159.9 Turnover 3 2,566.1 - 2,566.1 2,572.3 - 2,572.3 Other operating income 10.9 - 10.9 10.8 - 10.8 Other operating costs before goodwill and exceptional items (2,442.4) - (2,442.4) (2,452.2) - (2,452.2) Goodwill amortisation and impairment 3 - (45.7) (45.7) - (58.7) (58.7) Other exceptional items 3 - (5.3) (5.3) - (5.0) (5.0) Total operating costs (2,442.4) (51.0) (2,493.4) (2,452.2) (63.7) (2,515.9) Group operating profit 134.6 (51.0) 83.6 130.9 (63.7) 67.2 - continuing operations 134.6 (51.0) 83.6 130.8 (63.7) 67.1 - discontinued operations - - - 0.1 - 0.1 Group operating profit 3 134.6 (51.0) 83.6 130.9 (63.7) 67.2 Share of operating losses of 3 (4.1) - (4.1) (4.0) (2.6) (6.6) associates Total operating profit 130.5 (51.0) 79.5 126.9 (66.3) 60.6 Loss on closure of businesses - - - - (126.1) (126.1) Profit /(loss) on ordinary activities before interest 130.5 (51.0) 79.5 126.9 (192.4) (65.5) Net interest payable 4 (25.0) - (25.0) (20.1) - (20.1) Profit/(loss) on ordinary 105.5 (51.0) 54.5 106.8 (192.4) (85.6) activities before taxation Tax on profit /(loss) on ordinary activities 5 (24.3) 11.8 (12.5) (24.6) 4.3 (20.3) Profit/(loss) after tax 81.2 (39.2) 42.0 82.2 (188.1) (105.9) Minority interest 1.0 - 1.0 0.6 - 0.6 Profit/(loss) for the 82.2 (39.2) 43.0 82.8 (188.1) (105.3) financial year Dividends (35.1) - (35.1) (32.4) - (32.4) Retained profit/(loss) 47.1 (39.2) 7.9 50.4 (188.1) (137.7) Basic earnings/(loss) per share 6 32.1p (80.0p) Normalised basic earnings per share 6 61.4p 62.9p Diluted earnings/(loss) per share 6 31.2p (80.0p) Normalised diluted earnings per share 6 59.7p 60.3p NATIONAL EXPRESS GROUP PLC GROUP BALANCE SHEET 2003 2002 at 31 December 2003 Note £m £m Fixed assets Intangible assets 7 404.6 467.7 Tangible assets 8 405.6 420.5 Investments and interests in associates 9 12.5 25.3 822.7 913.5 Current assets Stock 10 17.3 19.7 Debtors 11 343.7 359.8 Cash at bank and in hand 12 97.0 93.7 458.0 473.2 Creditors: amounts falling due within one year 13 (601.0) (659.7) Net current liabilities (143.0) (186.5) Total assets less current liabilities 679.7 727.0 Creditors: amounts falling due after more than one year 14 (347.3) (360.0) Provisions for liabilities and charges 16 (58.8) (104.4) Net assets 273.6 262.6 Capital and reserves Called up share capital 6.8 6.7 Share premium account 17 45.1 44.7 Share capital to be issued 17 0.1 0.2 Merger reserve 17 15.4 15.4 Capital reserve 17 - 0.4 Revaluation reserve 17 0.8 0.8 Profit and loss account 17 200.7 189.6 Equity shareholders' funds 268.9 257.8 Equity minority interest 4.7 4.8 273.6 262.6 NATIONAL EXPRESS GROUP PLC GROUP STATEMENT OF CASH FLOWS 2003 2002 For the year ended 31 December 2003 Note £m £m Net cash inflow from operating activities 18(a) 182.8 175.5 Interest received 7.6 7.0 Interest paid (26.7) (24.1) Interest element of finance lease rentals (3.9) (1.9) Return on investments and servicing of finance (23.0) (19.0) UK corporation tax paid (22.2) (9.4) Overseas tax paid (0.1) (2.4) Taxation (22.3) (11.8) Payments to acquire tangible assets (48.0) (91.6) Receipts from sale of tangible assets 12.9 7.4 Receipts from sales of/(payments to acquire) shares to satisfy employee share 2.1 (2.7) scheme Receipts/(payments) in respect of other investments 8.1 (1.2) Capital expenditure and financial investment (24.9) (88.1) Receipts from the sale of businesses 0.8 2.9 Cash disposed in businesses sold/closed - (3.3) Payments in respect of businesses disposed/closed (49.8) - Payments to acquire businesses (4.7) (74.9) Cash acquired in businesses purchased - 2.2 Deferred consideration for businesses acquired (0.4) (2.4) Acquisitions and disposals (54.1) (75.5) Equity dividends paid (33.2) (29.9) Cash inflow/(outflow) before financing activities 25.3 (48.8) Management of liquid resources Cash withdrawn from/(paid in to) short term deposits 18(c) 14.2 (50.4) Financing Issue of share capital 0.4 1.0 Cash (outflow)/inflow from lease financing 18(c) (13.8) 20.3 Repayment of loan notes 18(c) (0.7) (0.9) Loans advanced - 32.0 Loans repaid 18(c) (26.1) - Net cash (outflow)/inflow from financing (40.2) 52.4 Decrease in cash 18(b) (0.7) (46.8) NATIONAL EXPRESS GROUP PLC GROUP STATEMENT OF RECOGNISED GAINS AND LOSSES 2003 2002 For the year ended 31 December 2003 Note £m £m Profit/(loss) for the financial year 43.0 (105.3) Exchange differences on foreign currency net investments 17 2.8 (2.7) Total recognised gains and losses 45.8 (108.0) RECONCILIATION OF MOVEMENT IN GROUP SHAREHOLDERS' FUNDS 2003 2002 For the year ended 31 December 2003 Note £m £m Profit/(loss) for the financial year 43.0 (105.3) Dividends (35.1) (32.4) Exchange differences on foreign currency net investments 17 2.8 (2.7) New share capital issued for cash 0.4 1.0 Goodwill realised - 0.4 Net addition/(reduction) to shareholders' funds 11.1 (139.0) Equity shareholders' funds at 1 January 257.8 396.8 Equity shareholders' funds at 31 December 268.9 257.8 NATIONAL EXPRESS GROUP PLC Notes 1. Basis of preparation The Preliminary Results presented have been prepared using the accounting policies set out in the Group's 2002 statutory accounts. 2. Exchange rates The most significant exchange rates to the pound for the Group are as follows: 2003 2003 2002 2002 Closing rate Average rate Closing rate Average rate US dollar 1.79 1.64 1.61 1.51 Australian dollar 2.37 2.53 2.86 2.78 Canadian dollar 2.32 2.31 2.54 2.47 If the results for the year ended 31 December 2002 were retranslated at the average exchange rates for the year ended 31 December 2003, North America would have achieved an operating profit before goodwill and exceptional items of £30.0m on turnover of £375.6m, and Australian Bus an operating profit before goodwill and exceptional items of £2.5m on turnover of £63.6m. 3. Turnover and segmental analysis Due to the nature of the Group's businesses, the origin and destination of turnover is the same. During the year, franchise agreement receipts amounted to £684.0m (2002: £634.9m) in the UK. In 2002, franchise agreement receipts totalling £62.5m were received from the Victoria Department of Public Transport in Australia and were treated as turnover. Turnover Operating profit Net assets/ before goodwill and (liabilities) exceptional items 2003 2002 2003 2002 2003 2002 Analysis by class of business £m £m £m £m £m £m UK Bus 211.9 208.7 47.2 49.8 46.3 34.7 UK Trains 1,702.4 1,553.2 32.0 33.9 (8.0) 3.3 UK Coach 186.6 184.5 15.0 12.2 24.8 28.1 UK operations 2,100.9 1,946.4 94.2 95.9 63.1 66.1 North American Bus 400.1 408.0 37.0 32.6 449.9 521.5 Australian Bus 65.1 58.0 3.4 2.3 58.9 48.9 Continuing operations 2,566.1 2,412.4 134.6 130.8 571.9 636.5 Discontinued operations - Australia Trains - 159.9 - 0.1 - (49.8) 2,566.1 2,572.3 134.6 130.9 571.9 586.7 Goodwill amortisation (45.7) (45.2) Goodwill impairment - (13.5) Exceptional items (see table below) (5.3) (5.0) Group operating profit 83.6 67.2 Share of operating losses of associates (4.1) (6.6) Total operating profit 79.5 60.6 Loss on closure of businesses - (126.1) Profit/(loss) on ordinary activities before interest 79.5 (65.5) Unallocated net liabilities (303.0) (328.9) 268.9 257.8 Equity minority interest 4.7 4.8 Net assets 273.6 262.6 Goodwill amortisation of £45.7m (2002: £45.2m) is analysed as UK Trains £24.3m (2002: £23.2m), UK Coach £0.9m (2002: £0.8m), North American Bus £19.4m (2002: £19.4m) and Australian Bus £1.1m (2002: £1.8m). The goodwill impairment charge for 2002 relates to Australian Bus. Unallocated net liabilities comprise other investments, cash at bank and in hand, borrowings (other than finance leases), deferred consideration payable, dividends payable and taxation. The net assets in respect of the Group's investment in associates have been analysed according to the activities of the associate. 3. Turnover and segmental analysis continued Exceptional items are analysed as follows: 2003 2002 £m £m Pre-contract bid costs: UK Trains 5.3 5.0 Included in the 2002 share of operating losses of associates of £6.6m is a £2.6m exceptional loss which comprises the Group's share of an impairment charge in the accounts for Altram LRT Limited following a review of the carrying value of its fixed assets. 4. Net interest payable 2003 2002 £m £m Interest payable and similar charges: Bank loans and overdrafts (26.7) (20.1) Other loans (0.9) (3.1) Finance lease charges (3.5) (3.9) (31.1) (27.1) Interest receivable 7.6 7.0 Unwinding of discount on insurance provisions (see note 16) (1.5) - Net interest payable (25.0) (20.1) 5. Taxation 2003 2002 £m £m Current taxation: UK corporation tax 22.9 27.5 Prior years - UK 0.4 - 23.3 27.5 Overseas taxation 5.1 3.4 28.4 30.9 Tax relief on goodwill and exceptional items: UK corporation tax current (1.6) (1.4) Prior year adjustment (6.0) - Overseas (4.2) (2.9) Total current taxation 16.6 26.6 Deferred taxation Origination and reversal of timing differences (4.1) (6.3) Tax on profit on ordinary activities 12.5 20.3 The exceptional prior year adjustment consists of one off credits arising from a review of Group tax liabilities as a result of agreeing prior years' computations. 6. Earnings per share 2003 2002 Basic earnings/(loss) per share 32.1p (80.0p) Normalised basic earnings per share 61.4p 62.9p Diluted earnings/(loss) per share 31.2p (80.0p) Normalised diluted earnings per share 59.7p 60.3p Basic earnings/(loss) per share is calculated by dividing the profit for the financial year of £43.0m (2002: £105.3m loss) by the weighted average number of ordinary shares in issue in the period, excluding those held by employees' share ownership trusts which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year. For 2002, the weighted average number of ordinary shares for the purpose of calculating the diluted loss per share is identical to that used for basic loss per share. This is because the adjustment for dilutive potential ordinary 6. Earnings per share continued shares would have the effect of reducing the loss per ordinary share and is therefore not dilutive under the terms of FRS14, 'Earnings per share'. The reconciliation of weighted average number of ordinary shares is detailed as follows: Number Number of shares of shares 2003 2002 Basic weighted average shares 133,765,928 131,602,152 Adjustment for dilutive potential ordinary shares 3,951,354 5,622,274 Diluted weighted average shares 137,717,282 137,224,426 The normalised basic and normalised diluted earnings per share have been calculated in addition to the basic and diluted earnings per shares required by FRS 14 since, in the opinion of the Directors, they reflect the financial performance of the core business more appropriately. The normalised basic and normalised diluted earnings per share for the year ended 31 December 2002 exclude the earnings from discontinued operations. Normalised profits for the financial year are: 2003 2002 £m £m Profit/(loss) for the financial year 43.0 (105.3) Earnings from discontinued operations - (0.1) Goodwill amortisation (including impairment of £13.5m in 2002) 45.7 58.7 Exceptional operating costs 5.3 5.0 Exceptional loss of associate (see note 3) - 2.6 Loss on closure/sale of businesses - 126.1 Tax relief on goodwill and exceptional items (11.8) (4.3) Normalised profits for the financial year 82.2 82.7 7. Intangible assets Goodwill arising on all acquisitions, except Prism, is amortised evenly over the Directors' estimate of their useful economic life of 20 years. The goodwill arising on the acquisition of Prism in the year ended 31 December 2000 is amortised over the weighted average life of the franchises. Goodwill £m Cost: At 1 January 2003 593.3 Additions 3.6 Exchange adjustment (25.6) At 31 December 2003 571.3 Amortisation: At 1 January 2003 125.6 Charge for the year 45.7 Exchange adjustments (4.6) At 31 December 2003 166.7 Net book value: At 31 December 2003 404.6 At 31 December 2002 467.7 8. Tangible assets Freehold Long Short land and leasehold leasehold Infra-structure Public Plant buildings property property service and Total vehicles equipment £m £m £m £m £m £m £m Cost or valuation: At 1 January 2003 44.4 48.5 31.0 1.7 318.4 94.2 538.2 Additions 1.0 0.7 0.5 0.5 38.2 23.7 64.6 Acquisitions of - - - - 1.1 - 1.1 businesses Disposals (1.7) (0.1) (0.1) - (15.1) (7.9) (24.9) Disposal of businesses - - - - - (0.4) (0.4) Exchange adjustments 1.6 (2.5) (0.3) (0.4) (6.8) (0.5) (8.9) At 31 December 2003 45.3 46.6 31.1 1.8 335.8 109.1 569.7 Depreciation: At 1 January 2003 4.3 2.9 10.3 0.2 62.0 38.0 117.7 Charge for the year 1.0 1.4 6.0 0.1 35.6 20.6 64.7 Disposals (0.3) - (0.1) - (9.4) (3.7) (13.5) Disposal of businesses - - - - - (0.4) (0.4) Exchange adjustments 0.4 (0.5) (0.1) - (4.0) (0.2) (4.4) At 31 December 2003 5.4 3.8 16.1 0.3 84.2 54.3 164.1 Net book value: At 31 December 2003 39.9 42.8 15.0 1.5 251.6 54.8 405.6 At 31 December 2002 40.1 45.6 20.7 1.5 256.4 56.2 420.5 9. Investments and interests in associates Loan to Interests in Other Own Total associates associates investments shares £m £m £m £m £m Cost or valuation: At 1 January 2003 4.5 1.4 20.9 7.2 34.0 Additions - - - 1.6 1.6 Redemption - - (8.1) - (8.1) Disposals - - - (3.3) (3.3) Capitalisation of loan (4.2) 4.2 - - - At 31 December 2003 0.3 5.6 12.8 5.5 24.2 Share of post-acquisition reserves: At 1 January 2003 - (1.4) - - (1.4) Transfer from provisions (see note 16) - (4.2) - - (4.2) At 31 December 2003 - (5.6) - - (5.6) Provisions: At 1 January 2003 - - (5.8) (1.5) (7.3) Disposals - - - 1.2 1.2 At 31 December 2003 - - (5.8) (0.3) (6.1) Net book value: At 31 December 2003 0.3 - 7.0 5.2 12.5 At 31 December 2002 4.5 - 15.1 5.7 25.3 In accordance with FRS 9 'Associates and joint ventures', the Group's share of associates' post acquisition reserves in excess of the cost of investment are included in provisions (see note 16). 10. Stock 2003 2002 £m £m Raw materials and consumables 17.3 19.7 11. Debtors 2003 2002 £m £m Trade debtors 175.3 192.8 Amounts due from associates 9.2 4.7 Other debtors 75.4 78.1 Prepayments and accrued income 83.8 84.2 343.7 359.8 Included within other debtors of the Group is £2.8m (2002: £4.7m) which is recoverable after more than one year. Included within prepayments of the Group is £5.9m (2002: £1.7m) which is recoverable after more than one year. £5.2m (2002: £1.4m) of the Group's prepayments recoverable after more than one year is in respect of pensions. 12. Cash at bank and in hand 2003 2002 £m £m Cash 33.2 16.8 Overnight deposits 2.3 19.5 Other short term deposits 61.5 57.4 97.0 93.7 Included in cash at bank and in hand are restricted balances of £62.7m (2002: £35.0m) held by the train companies which cannot be distributed by means of a dividend or loaned to other Group companies. Within the restricted balances is £18.7m (2002: £nil) of cash deposits secured as a bond in respect of future rolling stock maintenance at ScotRail Railways Limited. 13. Creditors: amounts falling due within one year 2003 2002 £m £m Loan notes 8.4 9.1 Bank loans 19.9 53.2 Bank overdrafts 0.2 - Trade creditors 160.1 201.6 Amounts owed to associates 0.2 0.1 Finance lease obligations 11.6 10.0 Corporation tax 18.4 25.3 Social security and other taxation 16.4 21.7 Accruals and deferred income 169.4 160.3 Other creditors 172.8 156.7 Proposed dividend 23.6 21.7 601.0 659.7 Included in other creditors is £18.7m (2002: £nil) of cash deposits secured as a bond in respect of future rolling stock maintenance at ScotRail Railways Limited. 14. Creditors: amounts falling due after more than one year 2003 2002 £m £m Bank loans 304.5 308.0 Finance lease obligations 41.5 48.0 Other creditors 1.3 4.0 347.3 360.0 15. Net borrowings 2003 2002 £m £m Due within one year Loan notes 8.4 9.1 Bank loans 19.9 53.2 Bank overdrafts 0.2 - Finance lease obligations 11.6 10.0 40.1 72.3 Due within one to two years Bank loans - 308.0 Finance lease obligations 12.2 11.5 12.2 319.5 Due within two to five years Bank loans 304.5 - Finance lease obligations 27.7 31.3 332.2 31.3 Due by instalment after five years Finance lease obligations 1.6 5.2 Total borrowings 386.1 428.3 Cash at bank and in hand (see note 12) (97.0) (93.7) Net borrowings 289.1 334.6 Secured borrowings within the Group (representing finance leases) total £53.1m (2002: £58.0m). 16. Provisions for liabilities and charges Unfunded Insurance Deferred Associates Other Total pension claims tax provision (a) (b) (c) (d) £m £m £m £m £m £m At 1 January 2003 0.7 35.1 10.7 8.5 49.4 104.4 Provided in the year 0.2 31.7 4.7 4.1 - 40.7 Utilised in the year - (22.9) - - (49.0) (71.9) Unwinding of discount - 1.5 - - - 1.5 Transfer to investments (see note 9) - - - (4.2) - (4.2) Released in the year - - (8.8) - (0.4) (9.2) Exchange difference (0.1) (2.6) 0.2 - - (2.5) At 31 December 2003 0.8 42.8 6.8 8.4 - 58.8 (a) The unfunded pension provision relates to commuted pensions not provided within the pension schemes, which will be paid out over 15 to 20 years. (b) The insurance claims provision arises from estimated exposures at the year end, the majority of which will be utilised in the next six years, and principally comprises provisions for existing claims arising in the UK and North America. (c) The interests in net liabilities of associates comprises £4.9m (2002: £4.4m) for Altram LRT Limited and £3.5m (2002: £4.1m) for Inter-Capital and Regional Rail Limited. See note 9 for more details. (d) Within other provisions at 1 January 2003 was £48.0m which related to the settlement of the performance bonds on the exit of the Australia Trains business at the end of 2002. They were settled in the first half of 2003. 17 Reserves Share Share Merger Capital Reval-uation Profit Total premium capital to reserve reserve reserve and loss be issued account £m £m £m £m £m £m £m At 1 January 2003 44.7 0.2 15.4 0.4 0.8 189.6 251.1 Shares issued during the year 0.4 (0.1) - - - - 0.3 Transfers - - - (0.4) - 0.4 - Exchange differences - - - - - 2.8 2.8 Retained profit for the year - - - - - 7.9 7.9 At 31 December 2003 45.1 0.1 15.4 - 0.8 200.7 262.1 As at 31 December 2003, the cumulative amount of goodwill on acquisitions made prior to 1 January 1998 which has been set off against the capital reserve and profit and loss reserve is £281.4m (2002: £281.4m). 18 Cash flow statement (a) Reconciliation of operating profit to net cash inflow from operating activities 2003 Continuing Discontinued Total operations operations £m 2002 2002 2002 £m £m £m Group operating profit 83.6 67.1 0.1 67.2 Depreciation of tangible assets 64.7 60.7 10.8 71.5 Amortisation of fixed asset grants (3.0) (1.3) (1.1) (2.4) (Profit)/loss on disposal of fixed assets (1.5) 1.7 0.1 1.8 Annual goodwill amortisation 45.7 45.2 - 45.2 Goodwill impairment - 13.5 - 13.5 Decrease/(increase) in stocks 2.0 (0.5) (0.3) (0.8) Decrease/(increase) in debtors 17.6 (10.5) 5.7 (4.8) (Decrease)/increase in creditors (34.2) 44.8 (2.9) 41.9 Increase/(decrease) in provisions 7.9 (62.8) 5.2 (57.6) Net cash inflow from operating activities 182.8 157.9 17.6 175.5 The net cash flows from operating activities include outflows of £4.9m (2002: £71.0m) from continuing operations which related to exceptional costs. There are no cash flows from discontinued operations in 2003. 2003 2002 (b) Reconciliation of net cash flow to movement in net debt (note 18c) £m £m Decrease in cash in the year (0.7) (46.8) Cash outflow/(inflow) from movement in debt and lease financing 40.6 (51.4) Cash (inflow)/outflow from movement in liquid resources (14.2) 50.4 Change in net debt resulting from cash flows 25.7 (47.8) Change in net debt resulting from non cash flows 19.8 28.2 Movement in net debt in the year 45.5 (19.6) Net debt at 1 January (334.6) (315.0) Net debt at 31 December (289.1) (334.6) 18 Cash flow statement continued (c) Analysis of changes in net debt At Cash flow Other At 31 movements December 1 January £m Exchange 2003 2003 Differences £m £m £m £m Cash 16.8 16.7 (0.3) - 33.2 Overnight deposits 19.5 (17.2) - - 2.3 Bank overdrafts - (0.2) - - (0.2) Net cash 36.3 (0.7) (0.3) - 35.3 Liquid resources - other short term deposits 57.4 (14.2) (0.4) 18.7 61.5 Debt due within one year: Loan notes (9.1) 0.7 - - (8.4) Bank and other loans (53.2) 26.1 1.1 6.1 (19.9) (62.3) 26.8 1.1 6.1 (28.3) Debt due after one year: Bank loans (308.0) - 10.5 (7.0) (304.5) Finance lease obligations (58.0) 13.8 (0.9) (8.0) (53.1) Net debt (334.6) 25.7 10.0 9.8 (289.1) Short term deposits included within liquid resources relate to term deposits repayable within three months. Changes in net debt arising from acquisitions and disposals in the year are disclosed separately on the face of the cash flow statement. Other non cash movements in net debt represent finance lease additions of £8.0m (2002: £0.8m), £0.9m (2002: £nil), amortisation of loan arrangement fees, and £18.7m (2002: £nil) cash deposits secured as a bond in respect of future rolling stock maintenance at ScotRail Railways Limited. 19 The financial information set out above, which was approved by the Board on 26 February 2004, is derived from the full Group accounts for the year ended 31 December 2003 and does not constitute the full accounts within the meaning of section 240 of the Companies Act (as amended). The Group accounts on which the auditors have given an unqualified report which does not contain a statement under section 237 (2) or (3) of the Companies Act 1985 will be delivered to the Registrar of Companies in due course. Copies of the Preliminary Results may be obtained from the Company Secretary at 75 Davies Street, London W1K 5HT. Copies are also available via www.nationalexpressgroup.com. - ENDS - This information is provided by RNS The company news service from the London Stock Exchange

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