Performance Review

Given the benefits of reducing debt and conserving cash in difficult global debt markets, the Board is recommending a total dividend in respect of 2008 of 22.72p per share (2007: 37.96p), a reduction of 40%. This represents normalised earnings per share (EPS) cover of 4.2 times (2007: 2.2 times).

Subject to shareholder approval, a final dividend of 10.00p per share (2007: 26.40p) will be payable on 3 July 2009 to shareholders on the register on 19 June 2009.

2009 has seen recession hit the global economy with full force. The Group's exposure to more defensive public transport markets is expected to offer considerable protection to National Express, and translation of overseas profits is expected to benefit from the weakness in Sterling. Both North American school bus and UK local bus markets have continued to benefit from steady revenue growth in these less economically sensitive markets. There have been signs of some limited revenue decline in both UK Coach and Spanish long distance markets, reflecting lower consumer discretionary spend; however, the value-orientated nature of these businesses and schedule flexibility are expected to provide a degree of mitigation.

The UK rail industry has seen growth slow markedly. For National Express, revenue support should mitigate the majority of any impact on East Anglia. Constructive discussions are ongoing with Government on a wide range of issues relating to the outlook for UK Rail. However, we have also developed our cost reduction plans, which will need to be implemented to reflect the difficult economic conditions.

The Group has a robust plan in place to reduce debt through careful investment and strong cash management, which is expected to deliver over £100 million of benefit in 2009, over and above normal cash generation. Significant cost reduction programmes are underway across all businesses to protect profitability, supported by falling inflation resulting in lower cost increases, although 2009 will see the adverse impact of higher hedged fuel costs before expected relief in 2010.

Although visibility in the current market is limited, and whilst not immune to the difficult economic conditions, by focusing on self help management measures, the Group is meeting a challenging economic period with clear objectives and a robust plan. We expect financial performance in Rail to weaken in 2009 but to remain profitable, after taking account of our cost reduction plans, with a resilient performance from our other, less economically sensitive businesses.

Group revenue grew by 5.9% to £2,767.0 million (2007: £2,612.3 million). All but one of the Group's divisions saw growth, with only Rail declining due to the exit of a number of franchises in 2007 and 2008, partially offset by a full year operation of the East Coast franchise.

Like for like revenue growth in the UK Bus and express coach business was robust at 5% for each of bus and coach, with bus benefiting from new bus routes in London and coach enjoying strong cross country growth. Airport coach routes were adversely impacted by reduced activity by 'no frills' airlines. Like for like revenue growth in Rail was 7%, with East Coast growing double digit through most of the year, before some slowing in the fourth quarter, whilst East Anglia and c2c saw good growth across the year.

Bus and coach operations in Spain saw like for like growth of 5% in local currency, benefiting from good urban and long distance performance, whilst total revenue grew by 40% in local currency with a full year from the Continental Auto acquisition. North America revenue was up 8% in local currency, with a steady income stream from longer term school board contracts, supported by a successful bid season.

In 2008, the Group improved its performance in each of its four key profit measures (measured on a normalised basis, which the Board feels reflects the performance of the business more appropriately). Normalised profit from operations increased 20.7% to £253.9 million (2007: £210.4 million), stated before a loss on the Dot2Dot discontinued operation of £8.3 million (2007: £4.8 million loss). Group normalised operating margin for continuing operations increased by over one percentage point to 9.2% (2007: 8.1%). Total UK profitability rose by 10.1%, benefiting from increased profits in Rail, with a successful first year for the East Coast franchise, together with the contribution of the Gatwick Express franchise until its exit in June and the resolution of significant outstanding commercial claims in former operations, which will not recur in 2009. The UK Coach business broadly maintained profitability. Bus profitability reduced slightly as fuel costs impacted adversely; however, this remains a robust business for the Group.

Spain increased its profit from operations by 64% in Sterling terms, primarily driven by the integration of the Continental Auto acquisition with our strong performing ALSA business. North America Sterling profitability declined by 14%, as higher operating costs, driven by driver wages and double-running costs during the Business Transformation project, more than offset a currency translation benefit.

Key performance indicators

In 2008, National Express has delivered good results against four of its six financial key performance indicators (KPIs - note that non-financial KPIs are included in the separate Corporate Responsibility Report, which is published online later in the year).

As expected, normalised net interest expense increased to £51.5 million (2007: £29.0 million), reflecting the additional debt arising from the Spanish acquisition in late 2007. During the fourth quarter of 2008, the Group also moved much of its dollar and Euro debt into Sterling; however, falling Sterling interest rates helped offset the resultant adverse impact on interest.

Normalised profit before tax increased 11.3% to £202.4 million (2007: £181.8 million), before discontinued operations, in line with the Group's expectations and completing a strong year for National Express. The effective tax rate on normalised profits was 25.8% (2007: 27.2%), giving a normalised tax charge of £52.3 million (2007: £49.5 million). Normalised profit for the year was £150.1 million (2007: £132.3 million) for continuing operations.

Continuing exceptional items totalled £30.9 million (2007: £15.8 million). These costs principally related to the North America Business Transformation project (£11.1 million), for non-recurring costs involved in the implementation of the project but not of a capital nature, and UK rationalisation and redundancy costs (£17.2 million), associated with the integration of the UK businesses and East Coast franchise mobilisation in early 2008, together with a rationalisation programme announced in the fourth quarter of 2008 which will reduce headcount by 750. Some of the cost for the latter programme will be charged in 2009. A profit on disposal of operations of £5.1 million (2007: £16.2 million) largely related to the sale of a Portuguese transport business by ALSA.

Amortisation of £55.2 million (2007: £32.9 million) was charged on intangible assets, relating to contracts, software and similar assets acquired in Spain £48.7 million (2007: £25.6 million), North America £4.7 million (2007: £5.1 million), UK Bus £0.5 million (2007: £1.1 million), UK Rail £1.0 million (2007: £1.1 million) and UK Coach £0.3 million (2007: £nil).

Exceptional finance costs represented a charge of £11.5 million (2007: £nil) for losses on interest rate hedges no longer required, following a change in the Group's debt strategy.

The taxation credit on exceptional items, disposal and amortisation was £75.5 million (2007: £12.1 million credit). This includes tax credits on exceptional items and intangible asset amortisation, together with recognition of significant tax benefits arising from the integration of Continental Auto with ALSA.

Including discontinued operations, the Group profit attributable to shareholders was £118.8 million (2007: £105.1 million).

Net of a loss on discontinued operations, normalised diluted earnings per share were 93.6p (2007: 83.9p).

The Group's businesses are naturally cash generative. However, normalised operating cash flow in 2008 was 24% lower at £152.3 million (2007: £200.9 million). This represented a 60% (2007: 95%) conversion of profit from operations, due to significant capital investment, particularly in North America, and an adverse movement in working capital, particularly related to the new rail franchise secured at the end of 2007.

EBITDA for the Group rose to £350.4 million (2007: £287.6 million). Net capital expenditure was £114.8 million (2007: £103.0 million), including £8.2 million invested in intangible assets. This included £59.8 million in North America, in school bus fleet to service new and existing contracts, and in IT systems and bus equipment for the Business Transformation project, which saw the opening of the 'Every Time Center' in Illinois, to manage future bus operations and the 'go live' of a new Enterprise Resource Planning (ERP) system. UK investment reduced to £28.0 million, primarily focused on developing the new Digbeth coach station in Birmingham and franchise capital projects for the East Cost rail franchise. Spain invested £26.5 million, primarily in new coach fleet.

Working capital increased by £83.3 million (2007: £16.3 million decrease). The UK increased working capital by £48.8 million, reflecting the impact of the East Coast franchise after an inflow on take on in 2007, and North America by £9.1 million, due to new contract receivables and delays in collections during commissioning of the new ERP system. Spain decreased working capital by £2.7 million, whilst the corporate centre saw a £28.1 million outflow due to foreign currency swap settlements.

The resultant free cash flow (being the cash available to service equity dividends, acquisitions and disposals, before foreign currency translation) was £47.4 million (2007: £113.5 million). This included cash outflow on exceptional items of £27.9 million (2007: £11.3 million) and net interest payments of £50.7 million (2007: £23.4 million). Cash taxation payments were significantly lower at £5.0 million (2007: £18.8 million), benefiting from tax relief on goodwill amortisation in Spain and project spend in North America. The cash tax payment is expected to remain below the income statement charge in 2009 as well. After dividend payments of £59.6 million (2007: £53.9 million), which reflected a 10% increase year on year, and acquisitions net of disposals of £17.5 million (2007: £482.1 million), net funds outflow for the Group was £31.0 million (2007: £417.0 million outflow).

The dramatic weakening of Sterling against both the US dollar and the Euro in the latter part of 2008 resulted in an adverse foreign exchange movement on net debt of £238.0 million (2007: £55.4 million adverse). Prior to year end, the Group's currency debt strategy was changed to hold debt in line with the currencies of the Group's debt facilities, which significantly reduces debt exposure to currency movements, in particular, the US dollar.

Net debt increased by £269.0 million (2007: £472.4 million) to £1,179.8 million (2007: £910.8 million). The Group's principal ratios for debt financing purposes are adjusted net debt to EBITDA (the 'debt gearing ratio') and adjusted net debt to interest (the 'interest ratio'); adjusted net debt is net debt together with any cash which is restricted in its use; primarily relating to the UK Rail business. The Group's debt funding arrangements prescribe limits for each of these ratios. At 31 December 2008, the ratio values were:

• Debt gearing ratio: 3.5 times (not to be greater than 4.0 times; 2007 actual value 3.4 times); and
• Interest ratio: 5.9 times (not to be less than 3.5 times; 2007 actual value 9.9 times).

The maximum debt gearing ratio reduces under the Group's funding arrangements to 3.5 times from June 2009. In light of this stricter requirement, and given the difficult global debt markets conditions, the Group is targeting significantly lower capital investment and working capital requirements during 2009.