Parcel Delivery

MARKET CONDITIONS

The UK market saw growth above GDP in 2006. There was a modest reduction in consignment prices. The sector is consolidating, there are some weak players and strong economies of scale for larger players.

2006 REVIEW

Parcel Delivery volumes and revenue grew well above market rate, despite a decline in revenue per consignment experienced by the UK express parcels industry in general. Organic revenue growth was 9.7%. Adjusted operating profit performance was ahead of expectations as the business performed very strongly, despite the potential for disruption with the integration of acquired franchises and the acquisition of Target Express.

2006 saw the beginning of the transformation of City Link from a hub and trunking operation to a fully integrated parcel delivery service. There were two important strategic developments: the buy back of franchise businesses during the course of the year and the acquisition of Target Express in November.

Nine franchise businesses were acquired during 2006, representing 33 territories. The total acquisition consideration on franchises during the year was £51.2 million. By the end of the year, City Link owned 80% of its network, representing 57 of the 69 territories.

Target Express was acquired for £213 million in November. Target Express and City Link are highly complementary businesses with similar operating models and strong cultures based on customer service and operational excellence. Bringing them together will create a leading UK overnight parcel operator able to meet the increased demands of current and prospective customers in a dynamic marketplace. The integrated business is expected to continue to grow parcel volumes and revenues at an above-market rate. In addition, City Link management believes that synergies at an annual run rate of at least £10 million will be achieved by the end of 2008. These synergies will be realised through operational integration and investment in IT, resulting in improved network efficiencies and back office support functions. The integration cost of this investment is expected to be £12 million.

2007 PREVIEW

The focus for 2007 will be the integration of Target Express into a combined organisation which will be branded City Link. This is a complex process and, although it will not be completed in 2007, significant progress is expected during the year. Key deliverables include the commencement of operational integration of the two national networks and the implementation of a single sales proposition. A regional operating structure for the combined business will also be established. The first depot consolidation is expected to take place in August. Around half of the £12 million integration cost will be incurred in 2007 although synergies will not be realised until 2008. We will also continue to buy back the outstanding City Link franchises.