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Revenue

Group revenue declined by 2.0% to £2,711.1 million (2008: £2,767.0m). Underlying revenue in most businesses increased year on year; however, the disposal of Travel London, the return of the East Coast franchise, changes to rail access charges and premia presentation, and foreign exchange changes distort the reported revenue comparison.

Normalised profit

Normalised Group operating profit declined to £159.8 million (2008: £253.9m). Wage cost inflation was reduced, although increased pension costs impacted the UK, particularly in Bus. Fuel costs rose by 16% to £244.6 million (2008: £211.4m), reflecting the higher cost of hedges taken out in pre-recessionary oil markets - this cost is expected to fall by £24 million in 2010. The depreciation charge rose to £108.0 million (2008: £96.0m), reflecting higher investment prior to 2009.

Despite the recession, most businesses demonstrated good resilience in normalised operating profit terms. Overseas businesses benefited by £17.6 million from translation gains due to the weakening of Sterling. Of the £94.1 million reduction in normalised operating profit in 2009, the East Coast rail franchise accounted for £56.3 million and UK Bus £19.2 million.

Normalised net finance costs reduced in 2009 to £43.5 million (2008: £51.5m), as 'self-help' measures reduced Group debt and market interest rates fell. Normalised profit before tax reduced by 43% to £116.2 million (2008: £202.4m), in line with the Group’s expectations.

The Group’s effective tax rate on normalised profit was 19.8% (2008: 25.8%). This benefited from successful resolution of an outstanding tax issue in the UK. The resultant normalised basic earnings per share were 30.5 pence (2008: 48.9 pence).

East Coast

National Express East Coast (NXEC) made a normalised operating loss of £26.3 million in the first half of 2009, compared with a profit of £30.0 million in the whole of 2008. The second half operating loss of £21.4 million was provided for as an exceptional onerous contract loss. The Group funded these losses through a £40 million subordinated loan to NXEC, the maximum payable under the franchise agreement. The Group also provided, within exceptional items, for a £31.4 million performance bond, paid in November 2009, and a £12.0 million non-cash write-off related to bid mobilisation and other costs. The total exceptional charge for the East Coast onerous contract and termination was £64.8 million.

At 31 December 2009, the Group was owed £25.7 million by the new operator for assets transferred, now subject to adjudication by reporting accountants.

Exceptional items

The recession brought with it the need to resolve a number of key issues. Exceptional operating items in 2009 totalled £100.0 million (2008: £30.9m). In addition to the East Coast charge, this comprised £14.2 million in respect of North America transformation programme costs, relating to non-capital expense incurred in the implementation of the project; £9.7 million for restructuring to deliver cost savings of £50 million on an annualised basis; £7.2 million in corporate activity and bid defence; and £4.1 million in relation to a change in the expected termination date of rail franchises.

A non-operating exceptional loss of £39.3 million (2008: £6.4m) comprised £19.9 million of finance costs to write-off interest rate hedges following the successful rights and bond issues in December 2009 and January 2010 and the repayment of the Euro debt taken out to purchase Continental Auto in 2007 (the cash flows associated with exiting these swaps will occur in 2010); £12.0 million for Associate operations, reflecting the Group’s share of a claim on a contract held by its associate company ICRRL with LCR (this contract was declared an onerous contract in 2006; negotiation of the claim continues); and £7.4 million on asset disposals, primarily the sale of Travel London in June 2009.

Exceptional charges 2009 £m

Goodwill impairment and intangible amortisation

The charge for intangible asset amortisation in 2009 was £60.4 million (2008: £55.2m), primarily relating to contracts, software and similar assets previously acquired in Spain. The Group’s principal capitalised goodwill is in Spain and North America. This was tested for impairment in 2009; however, no such impairment was identified, although continued non-impairment in North America is dependant on delivering the expected margin recovery in future years.

Net of tax credits on exceptional items and intangible amortisation, the Group made a statutory loss for the year of £52.7 million (2008: profit £119.7m). The basic loss per share was 17.6 pence (2008: earnings 40.4 pence).

Cash management

Despite a difficult year in profitability for the Group, its performance in cash management was excellent. At the beginning of 2009, the Group set out to deliver:

1. strong cash management, to reduce the Group’s debt; and
2. a stronger balance sheet and appropriate capital structure.

During 2009, the Group has built on the strong cash generative qualities of its businesses, through cash collection, limiting investment to match reduced passenger demand and taking other 'self-help' measures to reduce cash usage. As a result of this action, the Group delivered normalised operating cash flow of £281.3 million in 2009 (2008: £152.3m). In 2009 we delivered:

1. 176% conversion of normalised operating profit into normalised operating cash;
2. over £200 million of incremental cash generation, compared with a target of £100 million set 12 months ago; and
3. a reduction in the Group’s year-end debt gearing ratio to 2.5x (2008: 3.5x).

Incremental cash generation 2009 £m

Normalised operating cash generation in 2009 included a £63.9 million reduction in working capital (2008: increase £83.3m). This reflects both a sustainable improvement in the management of working capital - for example, through an improved customer collection process in North America - and temporary benefits, due to seasonality and a social security deferment scheme in Spain. Capital expenditure was significantly curtailed in 2009 at £51.9 million (2008: £114.8m), representing just 48% of depreciation (2008: 120%). With declining passenger volumes in the UK and Spain, less fleet investment was required, whilst in North America capital expenditure was reduced and some fleet acquisitions leased.

Debt reduction

Normalised operating cash flow was applied to pay non-operating cash flows - including net interest of £48.8 million (2008: £50.7m) and exceptional cash flow of £74.3 million (2008: £27.9m) - to give a free cash flow of £125.5 million, significantly ahead of prior year (2008: £47.4m). Net of the proceeds from asset disposals, including Travel London, and a reduced dividend, net funds flow for the Group was an inflow of £497.6 million (2008: outflow £31.0m), benefiting from the proceeds of the Rights Issue in December 2009.

Net debt reduced by £521.9 million, including a £24.3 million foreign exchange gain, during the year to £657.9 million (2008: £1,179.8m). Of this, £357.9 million came from shareholders and £164.0 million from internal cash generation. This underlines the success of the debt reduction programme in 2009. As a result, the Group’s key debt ratios returned to more typical and favourable levels compared to the Group’s banking covenants:

1. debt gearing ratio: 2.5x (2008: 3.5x; covenant not to exceed 3.5x); and
2. interest cover ratio: 6.5x (2008: 5.9x; covenant not to be less than 3.5x).

Treasury management

Excellent progress has been made in the last 12 months in refinancing the Group’s maturing debt. Following successful renegotiation of elements of the Group’s banking covenants in June 2009, the success of the Rights Issue in December 2009 was followed by a heavily oversubscribed £350 million debut Sterling bond issue in January 2010. The bond has a coupon of 6.25% fixed for its seven-year term, which would step up to 7.5% if the Group has not obtained and maintained two investment grade credit ratings by January 2011. The Group expects to obtain credit ratings during 2010.

The Rights Issue and bond allowed the repayment of the Group’s €540 million Euro loan facility, which had been due to mature in September 2010. The Group’s debt facilities now comprise the £350 million bond, maturing in 2017, and an £800 million revolving credit facility (RCF) with the Group’s banking partners which matures in June 2011. It is anticipated that the RCF will be replaced with a smaller facility comprising bond debt and/or bank debt during 2010.

At 31 December 2009, the Group maintained significant debt financing headroom, with cash and undrawn committed financing facilities of £409.0 million (2008: £200.0m).

Pensions

The Group’s principal defined benefit pension schemes are all in the UK. These schemes saw an increase in the combined deficit under IAS19 at 31 December 2009 to £54.9 million (2008: £45.0m). The deficit exposure in the UK Rail business (under the Railways Pension Scheme) reduced markedly to a deficit of £1.9 million (2008: £38.7m) on liabilities of £423.7 million (2008: £554.9m), given the earlier exit from the Group’s rail franchises.

The deficit in UK Coach (under the National Express Group Staff Pension Plan) increased slightly to £5.2 million (2008: £1.2m) on liabilities of £56.8 million (2008: £43.3m), as improved investment values offset a rise in liabilities due to a lower discount rate. On a similar basis, the deficit in UK Bus (under the West Midlands Passenger Transport Authority Pension Fund and the Tayside Transport Superannuation Fund) increased to £46.4 million (2008: £3.6m) on liabilities of £446.3 million (2008: £357.4m).

It is expected that the Bus and Coach deficits on a scheme valuation basis would be higher than under IAS 19. Triennial valuations of the two largest schemes are due in 2010 and current cash contributions to each scheme will be reviewed at that time. In 2009 the combined deficit funding contribution was £6.2 million. Both schemes are closed to new entrants.