RNS Number : 8563U
National Express Group PLC
01 July 2009
1 July 2009
National Express Group PLC
Pre Close Statement
National Express Group PLC ('National Express') provides the following update on Group trading in advance of its first half year results, for the six months ended 30 June 2009, to be published on 30 July 20091.
Trading conditions throughout the first half year have remained challenging. While the majority of the Group benefits from being less sensitive to economic change, all of our businesses have experienced difficult market conditions, whether in reduced passenger volumes or in lower growth in yield. In addition, higher hedged fuel costs are expected to add £11 million of cost in the first half year, while increased pension costs will add a further £3 million.
To help mitigate these effects, we are successfully implementing a planned Group-wide cost reduction programme which is expected to yield annual benefits of over £40 million. Nevertheless, profitability in the first half year will be adversely impacted, primarily in the East Coast rail franchise, which is expected to lose over £20 million.
Discussions with the UK Department for Transport ('DfT') have not secured an improved outlook for the East Coast franchise. As a result, the loss-making East Coast rail franchise will continue to be supported by National Express in line with its franchise support commitments until the committed funding is fully utilised, expected to be later in 2009. In the event that the Secretary of State for Transport ('Secretary of State') reassumes control of the franchise, National Express would work with the DfT to ensure an orderly handover and ensure that passengers, services and employees are unaffected. The Group does not expect that such circumstances would result in cross default of the Group's other rail franchises.
Fuel costs for 2010 have now been substantially hedged at lower prices than for 2009. This, together with the full year impact of the cost saving programme and completion of investments across the Group, should benefit future years.
Total reported Group revenue in the first half year is expected to have increased by 5 per cent, benefiting from currency movements impacting the revenues of overseas operations and offsetting the exited rail franchise in the prior year.
The Group has a 'self help' programme in place to strengthen its balance sheet against the challenging economic backdrop. The Board is committed to reducing debt and ensuring investment grade credit equivalent.
Progress to date has been good. The Group has rebased its dividend, saving over £30 million against the prior year. In addition, following a period of recent investment across the Group, capital expenditure has been reduced significantly. The normal seasonal increase in working capital in the first half year has been substantially reduced through an enhanced cash management process, which has now been embedded across the Group. This good progress places the Group well on the way to delivering its goal of realising incremental cash benefits in excess of £100 million in 2009, compared to the prior year.
In addition, we have successfully completed our first disposals as part of a wider review to realise value from Group businesses and other assets. This has raised £33 million and further opportunities have been targeted for the second half of the year. These opportunities are focused on non-core business disposals and other opportunities to realise value without materially impacting the overall composition of the Group.
In June 2009, National Express agreed a number of amendments to its debt arrangements with its banking partners, including a relaxation of its key debt leverage covenant at 30 June 2009 which would otherwise have been reduced to a tighter, more typical level2. It also agreed a change to average exchange rates for calculating net debt for covenant purposes, which will reduce the volatility caused by using spot rates. This agreement included a commitment by the Group to deleverage, which will see some increase in interest costs, particularly in 2010, if debt levels have not continued to fall.
As a result of the successful progress on 'self help' initiatives and Sterling's recent strengthening, net debt3 is expected to fall markedly at the half year and the Group's debt leverage is expected to be below 3.5 times EBITDA. Recognising its continued commitment to reduce debt, the Board is also exploring options to accelerate the reduction of National Express' borrowings, while providing additional headroom around its future debt covenants and enhancing the opportunities for refinancing of existing facilities as these mature in 2010 and 2011. This will include options around possible equity funding and/or further disposals.
In Spain, total revenue in local currency terms is expected to have increased by 2 per cent in the first half year. Strong performance by recent acquisitions has helped offset a 2.8 per cent underlying4 revenue reduction in the existing business, the latter resulting from the ongoing impact of the economic slowdown on the local travel market. There are, however, some signs that the rate of decline is beginning to slow.
Long distance revenue has been impacted most, with a reduction in weekend travel and continued competition from high speed rail on a selected number of routes. An enhanced loyalty scheme, together with television advertising, is expected to support the approaching key summer travel period. Regional travel is seeing some adverse impact, while urban has been less affected and also benefits from subsidy support.
The adverse revenue impact has been offset by increased productivity, with kilometres operated reduced by 3.9 per cent. Service frequency has been reduced and a close dialogue maintained with local regulators to manage services economically. In addition, the cost reduction programme is delivering substantial savings, expected to exceed €10 million in 2009.
In the first half year, these cost savings, together with the benefit of the stronger Euro on profit translation, will offset the majority of the adverse profit impact of lower underlying revenues and higher fuel costs. The impact of higher hedged fuel costs is expected to add £14 million in 2009.
Opportunities to develop business in both Spain and other markets continue to be identified. Alsa has been declared as provisional awarded bidder for a long-term contract to operate urban services in Agadir, Morocco from January 2011, with expected full year revenue of £14 million. This will complement Alsa's successful existing business in Marrakech.
Revenue in the North America school bus business has remained robust through the first half year. Underlying revenue has grown by 5 percent in local currency. Travel to school contract revenue has remained good, although there has been a slowing in other field and out of school trips, which are a smaller part of the product offering but are more exposed to economic slowdown.
Operating cost performance has improved from the disappointing levels achieved in the second half of 2008 but remains above prior period levels, with further progress targeted for the new school year. Contract retention for this year's bidding season has been over 90%, although some contracts have not been retained where bid margins were unacceptable. Hedged fuel costs are expected to be £3 million higher in the full year. However, the impact of the stronger dollar should see first half profitability broadly in line with 2008 levels in Sterling terms.
The Business Transformation project continues to progress to plan. The centralisation programme is well advanced, with the enterprise resource planning (ERP) system implemented and HR/payroll processes live for the new school year. This, along with centralised driver recruitment, will allow cost savings in the field to begin from 2010. In addition, the piloting of new bus technology, to provide information on student and bus location at all times, supporting centralised customer service, is nearing completion. This will enable optimisation of routes and associated cost savings to be delivered as new zones are rolled out across North America through 2010 and 2011. This key project will deliver significant margin and service benefits and improve the current profit performance from 2010 onwards.
UK Bus and Coach
UK Bus and Coach growth slowed during the second quarter, with underlying revenue growth across the first half of 2.2 per cent. The West Midlands Bus business has shown some weakness, reflecting a slowing in the regional economy. Improved integrated transport opportunities, for example through our new West Midlands-wide Partnership Agreement, together with our successful travel card scheme, supported by strong cost control, are expected partly to offset this adverse impact. Bus profitability will, however, be reduced due to higher hedged fuel costs, adding £6 million in the full year, while lower pension scheme asset values will increase the net pension cost by £5 million.
The Travel London Bus business was sold on 9 June for £32 million. The business made a profit before interest and taxation of £3.9 million in 2008, with this rate of profitability maintained in the first half of the current year. Given the limited scale of our London business, together with the significant investment required to grow the operation in the future, this is a successful example of enhancing our 'self help' debt reduction programme through the disposal of non-core assets at attractive values.
The Coach business has seen no underlying growth in the first half year. While passenger volumes over Easter saw some improvement, the lateness of the holiday appears to have reduced travel over the May holiday weekends. Our Spring television campaign has, however, increased web originated sales, attracting 135,000 new customers to the brand. The Express coach business has continued to perform resiliently on cross country routes, but volumes have been impacted on the intensely competitive London routes, while airport volumes have remained well below the prior year. The impact of slower revenue growth on profitability has been more than offset through our flexible cost model, where cost savings have been delivered in outsourced coach hire and staffing, improving first half profitability.
The Rail business has continued to experience declining revenue growth rates, in common with the rest of the UK industry. To help offset this impact, the Rail business implemented a cost reduction programme during the first half year.
Underlying growth in the East Anglia franchise ('NXEA') in the first half year was 5 per cent. Yield continues to be resilient, although passenger journeys have been impacted by rising unemployment. Under the terms of its agreement with the DfT, the franchise receives 80 per cent revenue support from the DfT. This, together with excellent cost control, has fully protected profits during the first half year. Underlying revenue growth in c2c has slowed somewhat but profitability has been successfully maintained.
NXEA is also expected to benefit from its new contract with the DfT to expand capacity during the peak commuter travelling period, expected to be worth £180 million over the remaining franchise period.
Consistent with other long distance rail operators, the East Coast franchise, operated by National Express' subsidiary NXEC Trains Ltd ('NXEC'), has been most impacted by the challenging economic environment. Underlying revenue grew by 1 per cent in the first half year, with fewer passenger journeys and lower yield growth, due to significant down trading from full and first class fares. Combined with an increase in franchise premium from April 2009, NXEC is expected to record a loss of over £20 million in the first half year.
Update on East Coast franchise
As a result of NXEC's substantial operating loss, the Group has been engaged in discussions with the DfT since January 2009 to explore opportunities to manage the impact of the recession on the East Coast franchise. Despite these extensive discussions, it has not proved possible to agree a solution with the DfT that would meet the needs of all stakeholders. It has been recognised that the challenges facing NXEC are purely financial and brought about by the economic downturn. NXEC continues to meet or exceed all its franchise commitments and has made significant improvements in the performance of the service since taking charge in December 2007.
While disappointed that discussions have failed to achieve a negotiated agreement, NXEC continues to comply with the terms and conditions of its franchise. We have advised the DfT that National Express will encourage NXEC to continue to operate its franchise on all its existing terms, with the contractual support of National Express. The performance and season ticket bonds will remain in place. This will continue until such time as National Express' committed financial support has been fully utilised. National Express anticipates this committed funding should allow NXEC to continue to operate in accordance with its franchise commitments until later in 2009, although this will depend on trading conditions. National Express has confirmed that it will continue to work closely with the DfT within its existing funding commitments, in order to ensure high standards of passenger service delivery by NXEC and, in the event that the Secretary of State reassumes control of the franchise, to ensure an orderly handover of the franchise.
Under the DfT's model for franchise bidding, the Group's financial obligations under the East Coast franchise are strictly limited. Like all rail franchises, NXEC is a special purpose vehicle, set up to meet the DfT's requirement as a standalone legal entity, with its own assets, management team and franchise agreement with the DfT. National Express is not a party to, or a guarantor of, NXEC's obligations under the East Coast franchise agreement. Instead, National Express' committed financial obligations are restricted to a £40 million subordinated loan to NXEC, available to NXEC to maintain contractual liquidity ratios, and a performance bond to meet the DfT's costs in the event of franchise default by NXEC, up to a maximum of £32 million5. Other than these commitments, National Express has no further financial obligations under the East Coast franchise agreement or to NXEC. At the half year, £17.5 million of the subordinated loan had been drawn down, in compliance with the liquidity requirements set by the DfT. The performance bond remains uncalled.
If, despite the best efforts of NXEC and the full utilisation of National Express' committed financial support, trading conditions result in NXEC being unable to meet its financial obligations under the terms of the East Coast franchise agreement, the Board believes that the Secretary of State would have a duty to reassume control of the franchise. Should such circumstances arise, National Express believes that the Secretary of State would not be permitted either to recover from National Express any losses arising from any possible breach of the franchise agreement by NXEC or to execute the right of cross default contained in the franchise agreements for NXEA and c2c. Cross default can only be applied where the Secretary of State can reasonably expect that the default under one franchise within an owning group has a material impact on the other franchises within that group. However, the Group believes that the Secretary of State would have no grounds on which to come to this conclusion in circumstances where the Group has satisfied in full all of the parental support obligations to which the DfT asked it to commit at the time of tendering the East Coast franchise and awarding it to NXEC, and will continue to do so at both NXEA and c2c. National Express has taken and received clear and detailed advice from leading legal Counsel upon its, and its subsidiaries', positions under the East Coast and other franchise agreements and is confident that the implication of any NXEC default should be confined to the NXEC franchise. The Group would oppose any attempt by the DfT to cross default, in order to protect shareholder value5.
Richard Bowker CBE, Group Chief Executive, has advised the Board of his intention to leave the Group, in order to take up a position as Chief Executive Designate of Union Railway in the UAE. Mr Bowker will leave the Group on 31 August 2009 and will stand down as a director on 10 July 2009. John Devaney, currently Non-Executive Chairman, becomes Executive Chairman, and Ray O'Toole, currently Chief Executive UK Division, becomes Chief Operating Officer, while the Board identifies a suitable successor for Mr Bowker.
Commenting on the pre-close statement, John Devaney, National Express Executive Chairman, said:
'Our performance in the first half year has been resilient across most of our businesses, with the exception of the East Coast rail franchise. We are achieving success in managing our operations, supported by 'self help', despite the challenging economic conditions.
'Following lengthy negotiations with the DfT concerning East Coast, in which our excellent operating performance has been fully recognised, it is disappointing that it has not been possible to find a solution that protects the best interests of all stakeholders. Our clear legal advice is that the Group's financial obligations to the franchise are clearly defined and limited. We will continue to support East Coast to the full extent agreed with the DfT at the time of entering into the franchise until the committed funding is fully utilised.
'We remain committed to the rail industry and will continue to run the rest of the franchises within our Group as before, with the aim of maximising shareholder value.
'On behalf of the Board, I would like to thank Richard for all his efforts leading National Express in the past three years.'
There will be a conference call for investors and analysts at 0830 BST on 1 July 2009. Dial-in details are available from Rebecca Mitchell at Maitland on 020 7379 5151.
National Express Group PLC
Jez Maiden, Group Finance Director
020 7506 4324
Nicole Lander, Director of Communications
0121 460 8401
020 7379 5151
Neil Bennett/George Hudson
1 Performance information is based on the first five months management accounts.
2 As noted in the 2008 results, June 2009 was due to see the Group's banking covenants returning to their normal level with a maximum debt gearing ratio of 3.5 times EBITDA (following a relaxation to 4.0 times EBITDA for the first three half year period end tests after the Continental Auto acquisition in November 2007). This will now revert to 3.5 times at 31 December 2009.
3 Net debt is as defined in the 2008 Report & Accounts.
4 Underlying revenue compares the current year with the prior year period on a consistent basis, including adjusting for the impact of currency, acquisitions and disposals, together with the estimated impact of advance travel.
5National Express Group Plc provides the following maximum support to its rail franchises. In respect of NXEC, a £40 million subordinated loan and £32 million performance bond. In respect of NXEA, a £20 million subordinated loan and £22 million performance bond. In respect of c2c, a £4 million performance bond.
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