Final Results

National Express Group PLC 24 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 'Cash flow' 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 strong financial and operational performance in 2004. I am pleased to report our business has started the year well and is on target to achieve further growth in 2005. 'We remain committed to enhancing shareholder value. This will be achieved through using our strong balance sheet to fund both organic and acquisitive growth, our progressive dividend policy and a share buyback programme. The Board looks forward with confidence to the year ahead.' - E N D S - For further information, please contact: Phil White, Chief Executive Adam Walker, Finance Director Nicola Marsden, Director of Group Communications National 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 an excellent year for the National Express Group. We have achieved substantial growth in our earnings, good cash generation and a significant reduction in our debt. We have seen a strong performance across all our divisions in both the UK and North America. We have also exited a number of businesses which were non core to the Group's long term strategy. In view of the quality of these results and 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 shareholders through a share buyback programme of up to £100 million over the next twelve months, subject to market conditions. The year was outstanding for our trains division. In February, we won the new Greater Anglia franchise which we rebranded 'one'. This is the first time that a single operator has been given sole use of a major London rail terminal. The integration of three major railways was completed on time, our franchise commitments over the first nine months were delivered and we improved overall operational performance. I am also pleased to report that further stability was brought to our trains division through the two-year extensions awarded for the Great Northern, Wessex Trains and Silverlink franchises, following the Central Trains extension during 2003. We have been playing a leading role in the working groups set up by the Department for Transport ('DfT') to develop its plans for the railways following the publication of the White Paper, 'The Future of Rail'. During the year the focus within the bus division was to stimulate growth and promote greater social inclusion. We continue to press for greater bus priority schemes and to encourage local councils to work with us on transport plans which meet the needs of the local communities we serve. In February 2004, we entered the London bus market through the acquisition of Connex's bus operations in the capital and this business is trading in line with our expectations. National Express coaches goes from strength to strength. Both revenue and profit growth have continued reflecting the high quality, value for money offering which we provide to our customers. Following on from last year's rebranding, the business continued to modernise its image, increasing its appeal to a broader market. In North America, we saw further expansion of our school bus operations through the award of new contracts and the implementation of new routes. The initiatives undertaken to improve the performance of our public transit business have resulted in a significant increase in profits. However, the reported results have been impacted by the weakening of the dollar. In October, we sold three Australian bus businesses for £26.4 million and in January 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 and the quality of customer service. We regularly seek the views of our employees and develop action plans based on their views. We have undertaken extensive research amongst 10,000 UK customers who have provided valuable information to help us develop our businesses. This research will enable us to measure customer satisfaction on a regular basis. Our commitment to improved service quality for our customers has again been reflected in the opening of our second Customer Service Academy in Birmingham. We are planning to open a third training facility in Stratford, east London in 2005. People commute, shop and go to school with us, travelling both long and short distances. We join up people and places, making journeys easy and enjoyable by taking the stress out of travelling. We aim to do this by making travel easy and simple for them, being open and honest about our performance, working together with our various stakeholders and taking the lead in bringing new ideas and technology to both our business and the industry for the benefit of our customers. Safety The safety and security of our customers and employees is of paramount importance to us. At National Express Group, we place great importance on our safety culture and we strive continuously to ensure that our systems and processes meet the highest standards. Employees I would like to take this opportunity to thank all our employees for their efforts 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 to welcome all those people who joined us this year, in particular our new teams at Travel London, 'one' and our new employees in Canada. The Board Following the retirement of Michael Davies, I was delighted to be appointed Chairman of the Group in March. The Board has since appointed two new non-executives. Sir Andrew Foster joined the Board on 1 August. Sir Andrew has had an extensive career in the public sector serving as Chief Executive of the Audit Commission for England and Wales between 1992 and 2003 and prior to that Deputy Chief Executive 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 has previously held senior financial roles at BTR plc, LucasVarity plc, William Baird plc and Rebus Group Limited. I believe the professionalism and experience of Sir Andrew and Tim will further strengthen 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 Group operating profit increased by 17.9% to £152.0 million (2003: £128.9 million restated). After interest and the Group's share of losses from associated undertakings, normalised profit before tax was £130.5 million (2003: £99.8 million restated). Normalised diluted earnings per share were 71.8p (2003: 53.0p restated). The Group experienced a strong operating cash flow of £187.5 million (2003: £139.7 million). We are particularly pleased with the reduction in our effective 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 its financial strength, we are recommending a final dividend of 20.65p per ordinary share (2003: 17.5p), an increase of 18%, to be paid on 6 May 2005 to shareholders 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 financial and operational performance in 2004. I am pleased to report our business has started the year well and is on target to achieve further growth in 2005. We remain committed to enhancing shareholder value. This will be achieved through using our strong balance sheet to fund both organic and acquisitive growth, our progressive dividend policy and a share buyback programme. The Board looks 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 Trains franchises. 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 million restated). These results were achieved through improved trading across the trains division, the commencement of the new 'one' franchise and two-year extensions granted on four of our franchises. We achieved passenger growth of 5% on a like-for-like basis on the back of strong operational performance. We are pleased that in the Strategic Rail Authority's ('SRA') last National Rail Trends survey, which covered the period from July - September 2004, 'one' and Midland Mainline ('MML') were the top long distance operators and c2c, Great Northern and 'one' came in the top four London and South East train operating companies. Currently the majority of our trains portfolio is performing above pre-Hatfield levels with c2c and MML operating at their best levels ever. On the back of our improvement in performance, in the summer we launched a free rail ticket promotion, the Getaway Giveaway, to encourage more people to travel on rail. We gave away seven million free tickets, delivering both increased awareness of the benefits of rail travel and generating additional demand on the network during the off peak. Following the launch of the new Greater Anglia franchise, 'one', our immediate priority was to achieve a seamless transition for our customers and to restructure the operation into 'one' business. This franchise is one of the largest and most complex in the country and therefore we were particularly pleased that this reorganisation was achieved on time, alongside improved operational performance. In December, we introduced our revised Anglia Railway and Greater Eastern timetables which provide a greater number of direct connections to London from the Greater Anglia region. We have upgraded the fleet 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 which took 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 Leeds services will not be required in the long term. We are in discussions with the SRA concerning the impact of this on the franchise. In December, the Secretary of State for Transport gave his approval for the new East Midlands Parkway station, 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 East performance league table. We were pleased to complete negotiations for a two-year extension to our Silverlink franchise in September and we continue to work closely with Transport for London ('TfL') on the future of Silverlink Metro. During the year c2c achieved excellent operational performance, moving to the top of the London and South East performance league table. The performance of Gatwick Express improved on the back of increased growth at the airport and new ticket arrangements with low cost airlines. Gatwick Express continues to be a loss making franchise. In September 2004, the SRA published its RUS for the Brighton Main Line and we are currently in discussions with them over 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 an increase in revenue protection and the introduction of ticket vending machines around key commuter routes. Central Trains has improved its performance in terms of both employee and fleet availability but we continue to work with Network Rail to increase the overall quality of the service. In July, a new £1 million Customer Service Academy was opened in the West Midlands. As part of the Rail Review, the SRA plans to disaggregate the Central Trains franchise and consolidate its services into other franchises. We have submitted proposals to the DfT and the SRA setting out how we could assist in this exercise. We regularly review the incidence and severity of SPADs (signals passed at danger), a key performance indicator within our train operations. We achieved a 10% 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 the Government's Rail Review and believe that rail refranchising provides further opportunities for growth. We have recently submitted to the SRA our Accreditation Questionnaires for both the Greater Western and Thameslink/GN franchises. Buses The bus division operates over 2,100 buses and employs 6,300 people in the West Midlands, Dundee and London. We also operate the Midland Metro, the light rail service in the West Midlands. Turnover for the period was £239.0 million (2003: £211.9 million) and normalised operating profit was £44.2 million (2003: £47.5 million restated). These results are in line with expectations following the revisions made to the passenger transport authority's concessionary fare scheme in West Midlands which changed the provisions for new entrants to the scheme. In the West Midlands, we continue to seek ways to stimulate the market. Our Saver Bus initiative, which offers competitive one-price fares on one of Birmingham's key inner city routes, has proved very popular and latest trends show double digit growth in passenger numbers. This service aims to promote greater social inclusion through increased travel opportunities in one of Birmingham's most deprived areas. At the beginning of this year we launched the Premier 997 service between Walsall and Birmingham which provides a limited stop service targeted at attracting commuters. This new service includes features such as multi-media CCTV technology. It has been well received. We have also simplified our fares structure, making it easier for our customers to 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 over 70% of the fleet offering easy access. We have improved the selection and recruitment of staff, tapping into new opportunities arising from the opening up of the European Union. This has resulted in over 100 new drivers being recruited from Poland. 57% of our TWM drivers are now accredited with NVQ level II and a further 17% are working towards the qualification. We were pleased to sign a Concordat with Dundee City Council for the continued investment in bus services. By November, the whole of the Travel Dundee fleet was low-floor easy-access buses with 100% CCTV. In February, we entered the London bus market. Since then we have renewed existing contracts on improved terms and won additional new contracts. We now operate from three bus depots, including Walworth which was developed during 2003/4 in partnership with TfL. This depot still has capacity for an extra 60 buses, allowing us to bid for further contracts in the coming year. We have also invested further in the safety of our employees and passengers through the roll-out of CCTV and expansion of the Operation Safer Travel initiative. During the coming year we will stimulate further growth in the market whilst developing closer working relationships with local authorities to improve the quality of our bus services through the roll-out of bus priority schemes. 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 £192.4 million (2003: £186.4 million restated) with a normalised operating profit of £18.8 million (2003: £15.9 million restated). Coach passenger numbers during the year was up 6% through the continued use of yield management pricing, fare innovations and changes in our service offering. We are rolling out dynamic pricing across the network. Fun fares have now been extended 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 the UK 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 all customers aged 16 - 26 the opportunity to obtain up to a 30% discount on coach travel. Our focus on moving towards more direct sales continues. Nearly 20% of all sales are now on-line. Early in November we launched a new improved website which is easier and faster to access and also provides better travel information including maps, tourist guides and weather reports. During the year we carried out a detailed route analysis to develop further the key routes in our network. In September we launched a new half hourly London to Birmingham service. This showcase route has seen the introduction of a number of additional features including state-of-the-art coaches, incorporating leather seating, extra leg room, air conditioning and on-board entertainment. A revised 24 hr timetable for the service has been introduced, offering a half hourly operation throughout the day and hourly during the night. Coach passenger numbers on this route have grown by over 15% following the relaunch. We have now 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 provides news, sports and entertainment, all of which are regularly updated via wireless communication technology throughout the day. We continue to improve the efficiency of the operation through investing in better management systems. In the next six months we will launch Coachcom, a portable data terminal, which provides better management information as well as enabling the driver to receive valuable traffic updates and customer information whilst in transit. New m-tickets have also been introduced enabling the texting of confirmed coach bookings to customer mobile phones. We continue to work with the DfT and coach manufacturers on vehicles which are more 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 the redevelopment 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 transit operations and Stewart Airport in New York State. The division employs 20,500 employees, 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: $374.1 million) and normalised operating profit $54.5 million (2003: $53.1 million). At Durham School Services we retained a very high proportion of our contracts that came up for renewal whilst maintaining operating margins, despite a competitive bid season. We won new contracts in California, Connecticut and Kansas and a conversion opportunity was gained in Texas. We continue to improve our operating efficiency through better asset and cost management. Improvements in safety management and systems achieved significant reductions in the frequencies of accidents and personal injury incidents. In Canada, Stock traded well and added extra routes. Our student bus division continues to focus on better utilisation of the fleet through greater exploitation of the charter and field trip market. We also continue to reduce operating costs through greater leverage of our purchasing power. 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: £4.6 million). In US dollars, turnover was $287.2 million (2003: $282.1 million) and normalised operating profit $13.4 million (2003: $7.6 million). This improved performance was achieved on the back of increased margins through better contract performance and a significant reduction in the frequency of accidents. In addition insurance costs reduced, greatly assisted by the roll-out of Drive-Cam technology which accurately records the sequence of events when an accident takes place. We continue to focus on costs through national purchasing schemes. We were pleased to introduce a new Bus Rapid Transit system into Las Vegas during the year. This new 'bullet bus' uses an optical guidance system and interacts with bus priority traffic systems providing fast transit through the city. Australia Turnover for the period was £59.0 million (2003: £65.1 million) with operating profit of £2.1 million (2003: £3.4 million). In October, we sold three Australian bus businesses for £26.4 million and at the end of January our involvement in Australia came to an end. Associates At Eurostar, settlement has been reached with Network Rail over the historic application of performance regimes over the period 2001 - 2003. This has resulted in a one-off credit of £5 million reducing our associate losses this year. Finance Director's Review Year at a glance We have achieved a strong set of results, increasing profit on ordinary activities 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: £80.6m restated). 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 we feel reflect the performance of the business more appropriately. Normalised results are defined as the statutory result before the following as appropriate: profit on the sale of businesses and charges for goodwill amortisation, goodwill impairment, tangible fixed asset impairments, exceptional charges and tax relief on certain exceptional items and North American goodwill amortisation. Normalised group operating profit was up by 18% to £152.0m (2003: £128.9m restated), on turnover of £2,560.2m (2003: £2,565.7m restated) resulting in an increased normalised operating margin of 5.9% (2003: 5.0% restated). Normalised profit before tax increased by 31% to £130.5m (2003: £99.8m restated) driving up normalised diluted earnings per share to 71.8p (2003: 53.0p restated) an increase 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 deposits secured 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) on constant turnover of £1,705.2m (2003: £1,702.2m restated) resulting in improved normalised margins of 3.4% (2003: 2.0% restated). Rail passenger numbers were up 5% on a like-for-like basis across our portfolio of TOCs. Five of our trains franchises operated under new financial terms in 2004 as a result of extensions agreed with the SRA. This provided greater stability to our earnings and cash inflow for a further two years. We commenced operation of the new 'one' franchise on 1 April 2004 and we are pleased with the progress to date. The integration of the three separate head office 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 September which coincided with the commencement of the Thameslink blockade at St Pancras which saw us sharing platforms at the interim station. Gatwick Express had a better year although remains loss-making because of the franchise premium paid to the SRA. We ceased to operate ScotRail on 17 October 2004. Buses Turnover before acquisitions increased by 2% to £216.2m (2003: £211.9m) with operating profit of £43.9m (2003: £47.5m restated). Traffic flow issues in the centre of Birmingham following the redevelopment of the Bull Ring have disrupted our efforts to grow revenue. We continue to work with Centro as we seek to increase the number of bus priority measures. In addition, a change in the methodology applied to the concessionary fare scheme has reduced the continuing operating margin to 20.3% (2003: 22.4% restated). Our effective hedging policy in 2004 mitigated the impact of rising fuel prices. The acquisition of Travel London in February 2004 contributed operating profit of £0.3m on turnover of £22.8m. The low margin on the acquired business reflects the inherited loss making contracts, which are fully funded by cash acquired with the business. The integration of Travel London into the Bus division has progressed smoothly. Coaches Our Coach operations delivered another year of strong performance, increasing normalised operating profit by 18% to £18.8m (2003: £15.9m restated). A 6% increase in passenger numbers, driven by improvements in our fares offering backed by strong marketing initiatives, produced a £6.0m increase in turnover to £192.4m (2003: £186.4m restated). The normalised operating margin improved to 9.8% (2003: 8.5% restated) reflecting strong cost controls, a record number of internet sales with lower distribution costs and continuing investment in management systems, which by providing improved route by route profitability analysis has enabled us to develop the network further. North America In local currency, normalised operating profit increased by $7.2m, on a $14.7m increase in turnover, improving our normalised margins to 10.1% (2003: 9.2%). The weakening dollar reduced turnover by £39.9m year on year and operating profit by £3.8m. Turnover Normalised operating profit 2004 2003 2004 2003 £m £m £m £m Student Transportation 208.5 228.1 29.6 32.4 Public Transit 156.1 172.0 7.3 4.6 364.6 400.1 36.9 37.0 $m $m $m $m Student Transportation 383.7 374.1 54.5 53.1 Public 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 the benefit of new routes operated. Normalised operating margin remained consistent at 14.2% (2003: 14.2%). The 2004 US bid environment was strongly price competitive but we are pleased with our performance in both retaining 62 contracts with revenue of $110m and winning new business with revenue of $22m. Stock Transportation continued to perform well. We increased the proportion of charter work as well as gaining additional routes in the stable evergreen Canadian market. The normalised operating margin of our Public Transit business continued to improve to 4.7% (2003: 2.7% and 2002: 0.9%). Cost reduction and efficiency initiatives over the past two years have increased profitability and our industry recognised customer service levels have led to a high retention rate of key contracts. Australia Three businesses were sold for gross consideration of £26.4m in October 2004. At the year end we have carried out an impairment review on the remaining Australian assets. 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 2004 was £0.2m (2003: £0.5m). We have continued 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 £3.2m (2003: £3.6m), which represented a second half profit of £1.0m. The second half benefited from a settlement with Network Rail relating to the historic application of performance regimes. We continue to seek an exit from Eurostar which we believe is in the best interests of shareholders. The cash outflow of £3.1m comprises the Group's share of funding for the 2003 losses. Interest Net interest payable decreased to £18.1m (2003: £25.0m), principally reflecting a lower level of net debt in the year when compared to 2003. In addition, the weakening of the US dollar reduced the cost of servicing our US dollar denominated financing. Normalised operating profit before depreciation (EBITDA) was £209.1m (2003: £189.1m restated) and EBITDA interest cover improved to 11.6 times (2003: 7.6 times restated). Goodwill amortisation and impairment The annual goodwill amortisation charge increased to £52.7m (2003: £45.7m). The amortisation charge for the year on the goodwill arising on the acquisition of Prism Rail PLC in December 2000 has been increased by £10.0m to ensure that the capitalised value of goodwill in the future will be supportable by the remaining franchises. This has been offset by a lower amortisation charge for US goodwill as a result of the weakening US dollar. An impairment charge of £9.5m (2003: £nil) has been made on the goodwill arising on the acquisition of Australia Bus. Following a review of the carrying value of the remaining assets in Australia an additional impairment write down of £6.1m has been made. Exceptional items Exceptional items totalled £7.9m (2003: £nil), of which £7.2m was incurred in relation to the UK Trains division. The integration of the three legacy TOCs into the 'one' franchise resulted in reorganisation and redundancy charges. The Group also incurred redundancy, property and pension charges following the merger of Qjump with the Trainline.com. Redundancy costs were incurred at Maintrain as a result of the decision to cease tendering for external work and focus on improving service to Central Trains and Midland Mainline. The balance comprises 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 low overall rate. The total tax charge includes one off credits of £2.2m 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 exceptional costs. Cash flow Our focus on operating cash flow produced another excellent result. We again demonstrated 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 with changes to our TOC franchise portfolio. North Operating 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) 181.4 one-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 flow statement. This result has been driven by a strong performance in UK Trains where the cash inflow of £103.9m includes the one-off benefit of £10m from the build up of deferred season ticket income from the 'one' franchise in the last quarter and £9m from the timing of subsidy receipts for the ScotRail franchise. The cash implications of the entry and exit of these franchises are included in ' franchise revisions' (discussed below). There were working capital timing gains of approximately £25m which are expected to reverse in 2005. These include performance payments and profit share monies owed to the SRA. The working capital outflow in UK Bus came from a VAT timing difference. In UK Coaches the excellent cash flow performance underlines the strength of the business model. The working capital outflow in North America represents a partial reversal of 2003's strong inflow, and has been driven by the prompt settlement of insurance claims provided in previous years and slightly slower receivable 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 expenditure includes £16.2m (2003: £8.0m) of additions purchased under finance lease comprising £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 capital expenditure incurred in the year will be paid for in early 2005. The increase in capital expenditure in UK Buses reflects the increased vehicle purchases in UK Buses of 186 (2003: 74) both at Travel West Midlands and at Travel London following the awarding of new routes. An additional 28 (2003: 83) vehicles were funded by operating lease in the division. The capital expenditure in UK Buses is net of an £8.2m inflow from a property disposal in Birmingham, completed at the end of December. The increase in UK Trains reflects an increased spend on franchise commitments (including the 'one' franchise). In North America we purchased 771 (2003: 701) school buses, of which 230 (2003: 127) were for new routes and contracts. The net £11.3m of cash receipts in relation to the change in UK Trains franchises include an inflow of £29.9m from 'one' and outflows of £15.7m from ScotRail 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 for loan fee amortisation of £1.8m) reduced in the year following the reduction in Group net debt. The receipt of tax rebates in respect of prior years resulted in a significant reduction in tax payments. Therefore, we generated £164.0m (2003: £93.5m) in free cash flow which, after the effect of acquisitions, disposals, investments, shares issued and dividends generated a net funds inflow of £153.0m (2003: £16.8m). Acquisitions and disposals include £26.4m from the sale of three Australian Bus subsidiaries in October 2004. The 2003 outflow includes £49.8m to indemnify the providers of performance bonds and to cover accrued exit costs in respect of our Australian Trains division which was exited in December 2002. The net inflow from acquisitions of £22.8m comprises the cash flow from acquisition and disposals of £31.3m, offset by the £8.5m of finance leases and loans acquired and disposed. Dividend An interim dividend of 9.35p per share was paid in October 2004 and a final dividend of 20.65p per share will be paid in May 2005, bringing the total dividend for the year to 30.0p. This is a 15.4% increase in total dividends declared compared to 2003. This dividend is covered 2.5 times (2003: 2.2 times restated) 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 108% on the Train schemes. Approximately 1,600 (25%) Bus division employees are members of the two schemes, which have been closed for some years, and some 450 members of staff 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 defined contribution pension schemes. In the Trains division approximately 11,000 employees are members of the Train schemes. We continue to provide full disclosure, in the notes to the accounts, of the FRS 17 position of the defined benefit schemes in the group which includes the rail pension schemes (RPS), where our main obligation is to pay the contributions agreed with the scheme actuary over the life of our franchise. Overall, the FRS 17 deficits have grown as the increased values of the financial assets, reflecting the improvements in global equities, have been offset by increased liabilities arising from decreases in the discount rate and an increase in the longevity assumptions. In the coach scheme the deficit increased to £11.0m (2003: £4.7m), mainly as a result of increased liabilities of £6m arising from increased longevity assumptions. In the Bus schemes the deficit has reduced slightly to £36.2m (2003: £38.7m). We expect to increase the Group's contribution to the Bus schemes during 2005 when the results of the next actuarial valuation are available. In the long term Train franchises the deficit increased by £19.1m to £37.0m mainly with the inclusion of a £14.6m deficit from the 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 being handed over to new franchises almost offset by an actuarial loss of £24.2m. We report the RPS results in full compliance with FRS 17 although we have now experienced three changes of TOC ownership where the pension deficit has transferred to the new operator. Post balance sheet events At year end, the Group's remaining bus operations in Australia, operating under the trading names of Westbus, Glenorie and Blue Ribbon, were subsidiary companies of Bosnjak Holding Pty Limited (BHPL). BHPL is a 57% subsidiary of National Bus Company (NBC) Pty Limited whose ultimate parent is National Express Group PLC. On 31 January 2005, BHPL went into voluntary administration as the company had been unable to renegotiate its loan with NBC. Accounting policies UK GAAP We continue to apply the transitional arrangements of FRS 17 'Retirement Benefits' and will move directly to the International Accounting Standard equivalent (IAS 19) in 2005 following the Accounting Standards Board's decision to defer full adoption of FRS 17. UITF 38 'Accounting for ESOP trusts' has been adopted, resulting in own shares held as fixed asset investments at 31 December 2003 being deducted in the calculation of both shareholders' funds and the company's distributable reserves at 1 January 2004. In accordance with FRS 18, 'Accounting Policies' the Group's accounting policies are reviewed regularly and changed when a new policy becomes more appropriate. Under the previous revenue accounting policy, the Group accounted for tickets sold in advance and for return journeys on a cash basis, with the exception of season tickets in the UK Trains division which were recognised evenly over the life of the season ticket. Following improvements in the Group's information systems we are now able to reliably measure the deferred revenue adjustment required in relation to these tickets, and therefore a change in accounting policy is appropriate. As discussed in note 1, the effect is not material. As reported in the Interim 2004 results, the costs incurred in bidding for franchises in our UK Trains division are now classified as operating costs and the costs and assets incurred and utilised in operating the Group management function are now disclosed separately as Central functions. See note 2 to the accounts for further details. 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 Group is well prepared to convert to IFRS and we will issue IFRS restated 2004 results on 3 May 2005. The main areas impacted are expected to be pensions, share based payments, goodwill, financial instruments, dividends and taxation. The detailed application of IAS19 to the rail pension schemes is still under discussion with both our transport peer sector companies and our auditors, Ernst & Young LLP, who are considering the issue with the other major accounting 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 December 2004 Note £m £m £m £m £m £m Turnover - 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 - 2,565.7 Other operating income 8.8 - 8.8 10.9 - 10.9 Other operating costs before goodwill and exceptional items (2,417.0) - (2,417.0) (2,447.7) - (2,447.7) Goodwill amortisation and impairment 4 - (62.2) (62.2) - (45.7) (45.7) Tangible fixed asset impairment 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 of associates 4 (3.4) - (3.4) (4.1) - (4.1) Total operating profit 148.6 (76.2) 72.4 124.8 (45.7) 79.1 Loss on sale of properties - (0.1) (0.1) - - - Profit on sale of businesses 11 - 8.9 8.9 - - - Profit on ordinary activities before 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 activities before taxation 130.5 (67.4) 63.1 99.8 (45.7) 54.1 Tax on profit on ordinary activities 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 - 1.0 Profit 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 54.6p share Diluted earnings per share 7 32.1p 31.0p Normalised diluted earnings 7 71.8p 53.0p per 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 8 324.4 404.6 Tangible assets 9 380.3 405.6 Investments and interests in associates 10 10.5 7.3 715.2 817.5 Current assets Stock 12 16.3 17.3 Debtors 13 328.5 343.7 Cash at bank and in hand 14 147.2 97.0 492.0 458.0 Creditors: 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 45.1 Other reserves 19 10.3 10.3 Revaluation reserve 19 - 0.8 Profit and loss account 19 198.8 196.5 Equity 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 own shares (see note 1). NATIONAL EXPRESS GROUP PLC GROUP STATEMENT OF CASH FLOWS 2004 2003 For 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 7.6 Interest 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 12.9 Receipts from sales of shares to satisfy employee share scheme 0.1 2.1 Receipts in respect of other investments - 8.1 Capital expenditure and financial investment (50.3) (24.9) Receipts from the sale of businesses 11 25.0 0.8 Cash 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 0.4 Cash 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 42.7 Exchange differences on foreign currency net investments 19 (27.3) (25.9) Exchange differences on foreign currency borrowings 19 29.8 27.9 Tax on exchange differences on foreign currency net investments 19 (4.1) 0.8 Total recognised gains and losses relating to the period 42.8 45.5 Prior year adjustment for revenue recognition (see note 1) (4.2) Total recognised gains and losses 38.6 * Restated for change in revenue recognition (see note 1). RECONCILIATION OF MOVEMENT IN GROUP EQUITY SHAREHOLDERS' FUNDS 2004 2003* For the year ended 31 December 2004 Note £m £m Profit for the financial year 44.4 42.7 Dividends (41.3) (35.1) Exchange differences on foreign currency net investments 19 (27.3) (25.9) Exchange differences on foreign currency borrowings 19 29.8 27.9 Tax on exchange differences on foreign currency net investments 19 (4.1) 0.8 New share capital issued for cash 2.5 0.4 Net reduction in own shares 0.1 0.5 Net addition to shareholders' funds 4.1 11.3 Equity shareholders' funds at 1 January* 259.5 248.2 Equity shareholders' funds at 31 December 263.6 259.5 * Restated for change in revenue recognition and accounting policy for own shares (see note 1). Shareholders' funds at 1 January 2004 were originally £268.9m before deducting prior year adjustments of £4.2m for the change in accounting policy for revenue recognition and £5.2m for the change in accounting policy for own shares. NATIONAL EXPRESS GROUP PLC NOTES 1. Basis of preparation and changes in accounting policies Basis of preparation The Preliminary Results presented have been prepared using the accounting policies set out in the Group's 2003 statutory accounts, except as noted below. Changes in accounting policies • Own shares UITF38, 'Accounting for ESOP Trusts', has been adopted with effect from 1 January 2004. The adjusted accounting policy is that shares held in respect of employee benefit trusts should be deducted from shareholders' funds. Prior to 1 January 2004 these shares were held as fixed asset investments. The prior year comparatives have been restated to comply with UITF 38, resulting in a reduction in the net book value of investments and reserves of £5.2m at 31 December 2003 and £5.7m at 1 January 2003. • Revenue recognition In accordance with FRS18, 'Accounting Policies' the Group's accounting policies are reviewed regularly and changed when a new policy becomes more appropriate. Under the previous revenue accounting policy, the Group accounted for tickets sold in advance and for return journeys on a cash basis, with the exception of season tickets in the UK Trains division which were recognised evenly over the life of the season ticket. Following improvements in the Group's information systems we are now able to reliably measure the deferred revenue adjustment required in relation to these tickets, and therefore a change in accounting policy is appropriate. The prior year comparatives have been restated for this change in revenue recognition resulting in an additional £5.9m recognised as deferred income at 31 December 2003, and a £1.7m reduction in the corporation tax liability. The net effect is to reduce the Group's profit after tax by £0.3m from £42.0m to £41.7m in the year to 31 December 2003, comprising a reduction in turnover and operating profit of £0.4m, and a reduction in the tax charge of £0.1m. Basic earnings per share has been decreased by 0.2p to 31.9p. There was no impact on the prior year comparatives for the Company. The Group's profit after tax for the current year has been reduced by £0.5m as a result of this change in revenue recognition comprising a £0.7m reduction in turnover and operating profit and a £0.2m reduction in the tax charge. Net assets and reserves have been reduced by £4.2m at 31 December 2003 and £3.9m at 1 January 2003. 2. Change in segmental analysis classification A number of changes have been made to the Group segmental analysis as follows: (a) The costs incurred in bidding for franchises in our UK Trains division are now classified as operating costs. These costs were previously classified as operating exceptional items. The change in classification aligns our reporting with the majority of our sector peer group. (b) Costs and assets incurred and utilised in operating the Group management function are now disclosed separately as Central functions. These were previously allocated across the Divisions. The change in classification is intended to align our external reporting with the Group's internal management reporting. (c) Restatement of comparatives following the amendment to the revenue recognition accounting policy as set out in note 1. (d) Removal of own shares from net assets following the adoption of UITF 38 as set out in note 1, and change to net assets following the change in the revenue recognition accounting policy as set out in note 1. 2. Change in segmental analysis classification (continued) The segmental analysis as restated, and as reported, is as follows: Turnover Operating profit before Net assets/ goodwill and exceptional (liabilities) items _________________________ __________________________ __________________________ Details 2003 2003 2003 2003 2003 2003 above As restated As reported As restated As reported As restated As reported £m £m £m £m £m £m UK Bus (b) 211.9 211.9 47.5 47.2 45.6 46.3 UK Trains (a), (b), 1,702.2 1,702.4 33.2 32.0 (10.9) (8.0) (c) UK Coach (b), (c) 186.4 186.6 15.9 15.0 21.5 24.8 UK operations 2,100.5 2,100.9 96.6 94.2 56.2 63.1 North American (b) Bus 400.1 400.1 37.0 37.0 442.8 449.9 Australian Bus (b) 65.1 65.1 3.4 3.4 58.0 58.9 Central functions (b) - - (8.1) - 9.0 - 2,565.7 2,566.1 128.9 134.6 566.0 571.9 Goodwill (45.7) (45.7) amortisation Exceptional items- (a) - (5.3) UK Train bid costs Group operating 83.2 83.6 profit Unallocated net (d) (306.5) (303.0) liabilities (d) 259.5 268.9 Equity minority 4.7 4.7 interest Net assets (d) 264.2 273.6 3. Exchange rates The most significant exchange rates to the pound for the Group are as follows: 2004 2004 2003 2003 Closing rate Average rate Closing rate Average rate US dollar 1.92 1.84 1.79 1.64 Australian dollar 2.45 2.48 2.37 2.53 Canadian dollar 2.31 2.38 2.32 2.31 If the results for the year ended 31 December 2003 were retranslated at the average exchange rates for the year ended 31 December 2004, North America would have achieved an operating profit before goodwill and exceptional items of £33.5m on turnover of £360.5m, and Australian Bus an operating profit before goodwill and exceptional items of £3.5m on turnover of £66.5m. 4. 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 from the SRA and PTEs amounted to £497.0m (2003: £684.0m) in UK Trains. Turnover Operating profit before Net assets/ goodwill and exceptional (liabilities) items _________________ ___________________ ______________ 2004 2003* 2004 2003* 2004 2003* Analysis by class of business £m £m £m £m £m £m UK Bus - continuing operations 216.2 211.9 43.9 47.5 66.0 45.6 - acquisitions 22.8 - 0.3 - (15.6) - 239.0 211.9 44.2 47.5 50.4 45.6 UK Trains 1,705.2 1,702.2 58.5 33.2 (95.1) (10.9) UK Coach - continuing operations 189.3 183.7 18.4 15.5 12.5 19.1 - discontinued operations 3.1 2.7 0.4 0.4 2.2 2.4 192.4 186.4 18.8 15.9 14.7 21.5 UK operations 2,136.6 2,100.5 121.5 96.6 (30.0) 56.2 North American Bus 364.6 400.1 36.9 37.0 407.4 442.8 Australian Bus - discontinued operations 59.0 65.1 2.1 3.4 20.6 58.0 Central functions - - (8.5) (8.1) 2.4 9.0 2,560.2 2,565.7 152.0 128.9 400.4 566.0 Continuing operations 2,475.3 2,497.9 149.2 125.1 393.2 505.6 Acquisitions 22.8 - 0.3 - (15.6) - Discontinued operations 62.1 67.8 2.5 3.8 22.8 60.4 2,560.2 2,565.7 152.0 128.9 400.4 566.0 Goodwill amortisation (52.7) (45.7) Goodwill impairment (9.5) - Tangible fixed assets impairment (6.1) - Exceptional items (see table below) (7.9) - Group operating profit 75.8 83.2 Share of operating losses of associates (3.4) (4.1) Total operating profit 72.4 79.1 Loss on sale of properties (0.1) - Profit on sale of businesses 8.9 - Profit on ordinary activities before interest 81.2 79.1 Unallocated net liabilities (136.8) (306.5) 263.6 259.5 Equity minority interest 0.9 4.7 Net assets 264.5 264.2 * Restated for change in revenue recognition and accounting policy for own shares (see note 1) and classification (see note 2) Goodwill amortisation of £52.7m (2003: £45.7m) is analysed as UK Trains £33.3m (2003: £24.3m), UK Coach £0.7m (2003: £0.9m), North American Bus £17.7m (2003: £19.4m) and Australian Bus £1.0m (2003: £1.1m). The goodwill and tangible fixed asset impairment charge for 2004 relates to the Bosnjak Group, comprising Westbus Pty Limited, Glenorie Bus Company Pty Limited and Westbus (UK) Limited. Exceptional items are analysed as follows: 2004 2003* £m £m UK Bus- Reorganisation 0.4 - UK Trains - Reorganisation 7.2 - North America - Reorganisation 0.3 - Total exceptional items 7.9 - * Restated for change in classification (see note 2) 4. Turnover and segmental analysis (continued) The exceptional costs in UK Trains were incurred at 'one' (integration of the three legacy TOCs resulted in reorganisation and redundancy charges), Qjump (redundancy, property and pension charges following the merger with the Trainline.com) and Maintrain (redundancy costs incurred as a result of the decision to cease tendering for external work and focus on improving service to Central Trains and Midland Mainline). The balance of exceptional items comprises the cost of reorganisations at UK Bus (£0.4m) and North America (£0.3m). Unallocated net liabilities comprise other investments, cash at bank and in hand, borrowings (other than finance leases), deferred consideration payable, dividends payable and taxation. 5. Net interest payable 2004 2003 £m £m Interest payable and similar charges: Bank loans and overdrafts (23.0) (26.7) Other loans (0.5) (0.9) Finance lease charges (6.9) (3.5) (30.4) (31.1) Interest receivable 13.5 7.6 Unwinding of discount on insurance provisions (see note 18) (1.2) (1.5) Net interest payable (18.1) (25.0) 6. Taxation 2004 2003* £m £m Current taxation: UK corporation tax 24.3 21.2 Prior years - UK (2.2) 0.4 22.1 21.6 Overseas taxation 5.4 5.1 Prior years - overseas (0.1) - 27.4 26.7 Tax relief on goodwill and exceptional items: UK corporation tax: current (2.1) - UK corporation tax: prior year adjustment - (6.0) Overseas (4.2) (4.2) Total current taxation 21.1 16.5 Deferred taxation (see note 18): Origination and reversal of timing differences 1.2 (4.1) Tax on profit on ordinary activities 22.3 12.4 *Restated for change in revenue recognition (see note 1) and classification (see note 2). There is no tax arising on the profit on sale of businesses. The exceptional prior year adjustment in 2003 consists of one off credits arising from a review of Group tax liabilities as a result of agreeing prior years' computations. 7. Earnings per share 2004 2003* Basic earnings per share 32.6p 31.9p Normalised basic earnings per share 72.9p 54.6p Diluted earnings per share 32.1p 31.0p Normalised diluted earnings per share 71.8p 53.0p * Restated for change in revenue recognition (see note 1) and classification (see note 2) 7. Earnings per share (continued) Basic earnings per share is calculated by dividing the profit for the financial year of £44.4m (2003: £42.7m) by the weighted average number of ordinary shares in issue in the year, 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 potentially dilutive 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. The reconciliation of weighted average number of ordinary shares is detailed as follows: Number Number of shares of shares 2004 2003 Basic weighted average shares 136,166,921 133,765,928 Adjustment for dilutive potential ordinary shares 2,066,108 3,951,354 Diluted weighted average shares 138,233,029 137,717,282 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. 2004 2004 2004 2003* 2003* 2003* Diluted Normalised profits for the Basic eps Diluted eps Basic eps eps financial year are: £m pence pence £m pence pence Profit for the financial year 44.4 32.6 32.1 42.7 31.9 31.0 Goodwill amortisation 52.7 38.7 38.1 45.7 34.1 33.1 Goodwill impairment 9.5 7.0 6.9 - - - Tangible fixed assets impairment (net of minority interest) 3.5 2.6 2.5 - - - Exceptional operating costs 7.9 5.8 5.7 - - - Profit on disposal of businesses (8.9) (6.5) (6.4) - - - Loss on disposal of properties 0.1 - - - - - Results from discontinued operations (net of minority interest) (3.6) (2.6) (2.5) (5.1) (3.8) (3.7) Tax relief on goodwill and exceptional items (6.3) (4.7) (4.6) (10.2) (7.6) (7.4) Normalised profits for the financial year 99.3 72.9 71.8 73.1 54.6 53.0 * Restated for change in revenue recognition (see note 1) and classification (see note 2) 8. Intangible assets Goodwill arising on all acquisitions, except Prism, is amortised evenly over the Directors' estimate of its 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 2004 571.3 Additions 5.4 Disposal of businesses (14.6) Exchange adjustment (22.4) At 31 December 2004 539.7 Amortisation: At 1 January 2004 166.7 Charge for the year (including impairment of £9.5m) 62.2 Disposal of businesses (8.4) Exchange adjustments (5.2) At 31 December 2004 215.3 Net book value: At 31 December 2004 324.4 At 31 December 2003 404.6 9. Tangible assets Freehold Long Short Public Plant land and leasehold leasehold Infra- service and buildings property property structure vehicles equipment Total £m £m £m £m £m £m £m Cost or valuation: At 1 January 2004 45.3 46.6 31.1 1.8 335.8 109.1 569.7 Additions 3.2 0.7 3.6 - 52.2 27.0 86.7 Acquisitions of - - - - 7.9 - 7.9 businesses Disposals (4.1) (9.2) (1.4) - (9.9) (17.8) (42.4) Disposal of businesses (0.6) - (0.4) - (17.2) (8.4) (26.6) Reclassification (5.3) (1.0) 6.2 - - 0.1 - Exchange adjustments (0.8) (1.9) (0.1) (0.1) (14.8) (1.0) (18.7) At 31 December 2004 37.7 35.2 39.0 1.7 354.0 109.0 576.6 Depreciation: At 1 January 2004 5.4 3.8 16.1 0.3 84.2 54.3 164.1 Charge for the year 1.3 1.2 3.6 0.1 34.2 23.8 64.2 Impairment 1.2 - - - 4.9 - 6.1 Disposals (0.7) - (1.4) - (7.2) (12.8) (22.1) Disposal of businesses - - (0.2) - (3.7) (4.4) (8.3) Reclassification (0.9) (0.1) 1.0 - - - - Exchange adjustments (0.1) (0.4) - - (6.6) (0.6) (7.7) At 31 December 2004 6.2 4.5 19.1 0.4 105.8 60.3 196.3 Net book value: At 31 December 2004 31.5 30.7 19.9 1.3 248.2 48.7 380.3 At 31 December 2003 39.9 42.8 15.0 1.5 251.6 54.8 405.6 10. Investments and interest in associates Loan to Interests in Other Own associates associates investments shares Total £m £m £m £m £m Cost or valuation: At 1 January 2004 as previously reported 0.3 5.6 12.8 5.5 24.2 Prior year adjustment (note 1) - - - (5.5) (5.5) 0.3 5.6 12.8 - 18.7 Additions (note 11) - - 3.2 - 3.2 At 31 December 2004 0.3 5.6 16.0 - 21.9 Share of post-acquisition reserves: At 1 January and 31 December 2004 - (5.6) - - (5.6) Provisions: At 1 January 2004 as previously reported - - (5.8) (0.3) (6.1) Prior year adjustment (note 1) - - - 0.3 0.3 At 1 January and 31 December 2004 - - (5.8) - (5.8) Net book value: At 31 December 2004 0.3 - 10.2 - 10.5 At 31 December 2003 as restated 0.3 - 7.0 - 7.3 At 31 December 2003 as previously reported 0.3 - 7.0 5.2 12.5 The Group's share of associates post acquisition reserves in excess of the cost of investment are included within provisions (see note 18). 11. Acquisitions and disposals during the year (a) Acquisitions The Group acquired the entire share capital of Connex Bus UK Limited (since renamed Travel London Limited), a bus operator in the UK, on 26 February 2004, the entire share capital of 1114448 Ontario Limited, the holding company of Student Express Limited, a school bus operator in North America on 8 July 2004 (together referred to as 'Student Express'), and certain assets of M&O Bus Lines (Handicab) Limited on 16 August 2004, another school bus operator in North America. Net assets at date of acquisition: Book Value Book Value Book Value Fair Value Fair Travel Student Express Total Adjustments Value London and M&O Total £m £m £m £m £m Intangible fixed assets 0.3 - 0.3 (0.3) - Tangible fixed assets 0.8 3.4 4.2 3.7 7.9 Stock 0.2 - 0.2 - 0.2 Debtors 2.2 0.2 2.4 1.6 4.0 Cash at bank and in hand 19.1 0.8 19.9 - 19.9 Creditors: amounts falling due within one year (3.3) (0.8) (4.1) (2.5) (6.6) Creditors: amounts falling due after more than one year (0.1) (0.6) (0.7) (8.1) (8.8) Provisions (19.3) (0.7) (20.0) 5.3 (14.7) Net assets acquired (0.1) 2.3 2.2 (0.3) 1.9 Goodwill on acquisition 5.4 Total consideration 7.3 Total consideration 7.3 Less: net cash acquired (19.9) Net cash inflow (12.6) The acquisition balance sheets have been adjusted to reflect provisional fair value adjustments. 11. Acquisitions and disposals during the year (continued) For Travel London this comprises the elimination of goodwill in Connex Bus UK Limited's balance sheet (£0.3m), the recognition of finance lease assets for public service vehicles (£10.1m), the impairment of public service vehicles to reflect their net realisable value on the expiry of the onerous contracts acquired (£6.0m), the recognition of group relief receivable on that impairment (£1.9m), onerous contract adjustments net of deferred tax (£5.3m), and other sundry amendments to reduce debtors (£0.1m) and increase creditors (£0.5m). For Student Express this comprises a downward revaluation of tangible fixed assets (£0.4m) and an adjustment to reduce debtors (£0.2m). Consideration for the North American acquisitions was £7.1m, and acquisition costs for Travel London of £0.2m were incurred. The Connex Bus UK Limited year end prior to acquisition was 31 December 2003. The profit after tax and minority interest for the year then ended was £4.5m and for the period from 1 January 2004 to acquisition was £0.4m. The Student Express year end prior to acquisition was 31 August 2003. The profit after tax and minority interest for the year then ended was £0.5m and for the period from 31 August 2003 to acquisition was £0.6m. During the year ended 31 December 2003, the Group acquired the entire share capital of Shantz Enterprises Inc, a school bus operator in North America. No revisions to the fair value adjustments made in the year ended 31 December 2003 have been made in the current year. (b) Disposals The Group sold National Bus Company (Victoria) Pty Limited, National Bus Company (Queensland) Pty Limited and Transport Management Group Pty Limited on 1 October 2004 for gross proceeds of £26.4m, before costs of £1.7m. Qjump Limited was sold on 9 February 2004. In exchange for the net assets of Qjump Limited the Group received a 14% shareholding in Trainline Holdings Limited, and a £1.0m loan note from the same company. Additionally the Group has provided £1.5m to fund working capital since disposal which is included in other debtors. Australia Buses Qjump Total Net assets disposed of: £m £m £m Tangible fixed assets 14.2 4.1 18.3 Stock 0.3 - 0.3 Debtors 2.1 6.5 8.6 Cash at bank and in hand 0.3 - 0.3 Creditors (7.3) (7.3) (14.6) Provisions - (0.1) (0.1) Net assets disposed 9.6 3.2 12.8 Goodwill realised 6.2 - 6.2 Profit on sale of businesses 8.9 - 8.9 Net consideration 24.7 3.2 27.9 Net consideration 24.7 3.2 27.9 Less: investment in Trainline Holdings Limited (note 10) - (3.2) (3.2) Less: net cash disposed (0.3) - (0.3) Add: disposal costs accrued 0.3 - 0.3 Net cash inflow 24.7 - 24.7 The Australian bus companies disposed of in the year contributed £26.8m (2003: £33.8m) to the Group's turnover and £3.1m (2003: £4.0m) to the Group's operating profit. They also contributed £6.4m (2003: £5.1m) to the Group's net operating cash flow and paid out £0.1m (2003: £1.1m) in respect of capital expenditure. The turnover, operating result and cash flow of the Qjump business sold are not disclosed, as the amounts are not material. During the year ended 31 December 2003 the Group sold the Multisystems Consultancy Division for £0.8m resulting in no gain or loss on disposal. Cash payments of £49.8m were also paid in the year ended 31 December 2003 to indemnify the providers of the performance bonds and to cover other accrued exit costs on the Group's withdrawal from the Australian Trains division. 12. Stock 2004 2003 £m £m Raw materials and consumables 16.3 17.3 13. Debtors 2004 2003 £m £m Trade debtors 169.7 175.3 Amounts due from associates 12.5 9.2 Other debtors 61.9 75.4 Prepayments and accrued income 84.4 83.8 328.5 343.7 Included within other debtors is £1.7m (2003: £2.8m) which is recoverable after more than one year. Included within prepayments is £12.3m (2003: £5.9m) which is recoverable after more than one year. £4.9m (2003: £5.2m) of the prepayments recoverable after more than one year are in respect of pensions. 14. Cash at bank and in hand 2004 2003 £m £m Cash 26.8 33.2 Overnight deposits 24.1 2.3 Other short term deposits 96.3 61.5 147.2 97.0 Included in cash at bank and in hand are restricted balances of £73.9m (2003: £62.7m) 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 £nil (2003: £18.7m) of cash deposits secured as a bond in respect of future rolling stock maintenance at ScotRail Railways Limited. 15. Creditors: amounts falling due within one year 2004 2003* £m £m Loan notes 7.5 8.4 Bank loans 8.0 19.9 Bank overdrafts - 0.2 Trade creditors 175.1 160.1 Amounts owed to associates 0.1 0.2 Finance lease obligations 16.3 11.6 Corporation tax payable 36.8 16.7 Social security and other taxation 17.4 16.4 Accruals and deferred income 216.2 175.3 Other creditors 104.7 172.8 Proposed dividend 28.5 23.6 610.6 605.2 *Restated for change in revenue recognition (see note 1) Included in other creditors is £nil (2003: £18.7m) of cash deposits secured as a bond in respect of future rolling stock maintenance at ScotRail Railways Limited. 16. Creditors: amounts falling due after more than one year 2004 2003 £m £m Bank loans 207.5 304.5 Finance lease obligations 45.5 41.5 Other creditors 3.0 1.3 256.0 347.3 17. Net borrowings 2004 2003 £m £m Due within one year Loan notes 7.5 8.4 Bank loans 8.0 19.9 Bank overdrafts - 0.2 Finance lease obligations 16.3 11.6 31.8 40.1 Due within one to two years Finance lease obligations 16.7 12.2 16.7 12.2 Due within two to five years Bank loans 207.5 304.5 Finance lease obligations 25.1 27.7 232.6 332.2 Due by instalment after five years Finance lease obligations 3.7 1.6 Total borrowings 284.8 386.1 Cash at bank and in hand (see note 14) (147.2) (97.0) Other debt receivable (1.0) - Net borrowings 136.6 289.1 Secured borrowings within the Group (representing finance leases) total £61.8m (2003: £53.1m). 18. Provisions for liabilities and charges Unfunded Insurance pension claims Deferred Associates Other provision (b) tax (c) (d) Total (a) £m £m £m £m £m £m At 1 January 2004 0.8 42.8 6.8 8.4 - 58.8 Provided in the year - 29.7 1.2 3.4 - 34.3 Utilised in the year (0.2) (26.5) - - (4.6) (31.3) Unwinding of discount - 1.2 - - - 1.2 Acquisition of subsidiary undertakings - 3.0 (4.1) - 15.8 14.7 Disposal of subsidiary undertakings - - (0.1) - - (0.1) Exchange difference - (1.6) 0.1 - - (1.5) At 31 December 2004 0.6 48.6 3.9 11.8 11.2 76.1 (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 £1.0m (2003: £0.8m) for Altram LRT Limited and £10.8m (2003: £7.6m) for Inter-Capital and Regional Rail Limited. (d) An onerous contract provision of £15.8m was assumed on the acquisition of Travel London. This was prefunded by the vendor on acquisition and £4.6m has been utilised up to 31 December 2004. 19. Reserves Share Share Reval-uation Own shares Merger Profit Total premium capital to reserve reserve and loss be issued account £m £m £m £m £m £m £m At 1 January 2004 as previously reported 45.1 0.1 0.8 - 15.4 200.7 262.1 Prior year adjustments (see note 1) - - - (5.2) - (4.2) (9.4) At 1 January 2004 as restated 45.1 0.1 0.8 (5.2) 15.4 196.5 252.7 Shares issued during the year 2.4 (0.1) - - - - 2.3 Own shares released to satisfy employee share schemes - - - 0.1 - - 0.1 Transfers - - (0.8) - - 0.8 - Exchange differences - - - - - 2.5 2.5 Tax on exchange differences - - - - - (4.1) (4.1) Retained profit for the year - - - - - 3.1 3.1 At 31 December 2004 47.5 - - (5.1) 15.4 198.8 256.6 20. Cash flow statement (a) Reconciliation of operating profit to net cash inflow from operating activities Continuing Discontinued Total Continuing Discontinued Total operations Operations 2004 operations Operations 2003* 2004 2004 2003* 2003* £m £m £m £m £m £m Group operating profit 90.0 (14.2) 75.8 80.6 2.6 83.2 Depreciation of tangible assets 60.5 3.7 64.2 60.6 4.1 64.7 Tangible fixed assets impairment - 6.1 6.1 - - - Amortisation of fixed asset (6.5) - (6.5) (3.0) - (3.0) grants Profit on disposal of fixed (0.6) - (0.6) (1.2) (0.3) (1.5) assets Goodwill amortisation 51.6 1.1 52.7 44.5 1.2 45.7 Goodwill impairment - 9.5 9.5 - - - Decrease in stocks 0.8 (0.1) 0.7 1.9 0.1 2.0 Decrease in debtors 17.1 2.1 19.2 16.9 0.7 17.6 Increase/(decrease) in creditors 34.9 (0.3) 34.6 (33.3) (0.5) (33.8) (Decrease)/increase in provisions (1.6) - (1.6) 8.0 (0.1) 7.9 Net cash inflow from operating 246.2 7.9 254.1 175.0 7.8 182.8 activities *Restated for change in revenue recognition (see note 1) The net cash flows from operating activities include outflows of £5.2m (2003: £nil) from continuing operations which related to exceptional costs. 2004 2003 (b) Reconciliation of net cash flow to changes in net debt (note 20(c)) £m £m Increase/(decrease) in cash in the year 16.6 (0.7) Cash outflow from movement in debt and lease financing 109.8 40.6 Cash outflow/(inflow) from movement in liquid resources 53.1 (14.2) Change in net debt resulting from cash flows 179.5 25.7 Change in net debt resulting from non cash flows (27.0) 19.8 Movement in net debt in the year 152.5 45.5 Net debt at 1 January (289.1) (334.6) Net debt at 31 December (136.6) (289.1) 20. Cash flow statement (continued) At At 31 (c) Analysis of changes in net 1 January Acquisitions/ Exchange Other December debt 2004 Cash flow disposals Differences movements 2004 £m £m £m £m £m £m Cash 33.2 (5.4) - (1.0) - 26.8 Overnight deposits 2.3 21.8 - - - 24.1 Bank overdrafts (0.2) 0.2 - - - - Net cash 35.3 16.6 - (1.0) - 50.9 Liquid resources - other short term deposits 61.5 53.1 - 0.4 (18.7) 96.3 Other debt receivable - - 1.0 - - 1.0 Debt due within one year: Loan notes (8.4) 0.9 - - - (7.5) Bank loans (19.9) 13.7 - - (1.8) (8.0) (28.3) 14.6 - - (1.8) (15.5) Debt due after one year: Bank loans (304.5) 79.4 - 17.6 - (207.5) Finance lease obligations (53.1) 15.8 (9.5) 1.2 (16.2) (61.8) Net debt (289.1) 179.5 (8.5) 18.2 (36.7) (136.6) Short term deposits included within liquid resources relate to term deposits repayable within three months. Other non cash movements in net debt represent finance lease additions of £16.2m (2003: £8.0m), £1.8m (2003: £0.9m) amortisation of loan arrangement fees, and £18.7m outflow (2003: £18.7m inflow) of cash deposits which were secured as a bond in respect of future rolling stock maintenance at ScotRail Railways Limited. 21. The financial information set out above, which was approved by the Board on 24 February 2005, is derived from the full Group accounts for the year ended 31 December 2004 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 1995, 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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