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Stagecoach FD on driving value of bus operator

The finance director of the FTSE-250 transport provider reveals his role in supporting a continually changing business model.

When Ross Paterson became finance director of Stagecoach in 2013 he had already been with the transport group for 14 years. In that time, the Perth-based firm founded in 1980 had acquired and disposed of numerous train and bus operating assets, so taking time to understand an evolving business model proved highly valuable before stepping up to the top finance role.

Paterson already knew the business when he started as finance reporting manager in his previous role at Arthur Andersen, where Stagecoach was one of his clients. “But there was still a step up in terms of the learning curve, as it was a big business,” he says.

Then it had just bought the US assets of Coach America, and in the UK was involved in two rail franchises as well as owning roll stock operator Porterbrook. The UK train businesses have gone but Stagecoach is still a significant player in the coach and bus sectors- annual revenue for 2019 was £1.87bn, yielding operating profit of £161m.

What appealed to Paterson was the chance to “get stuck in and get my hands dirty” in a finance function operating close to the operating elements of the group. Early on, he worked in North America integrating the recent acquisition, “making sure that that business was producing accurate numbers, both for the City but also our own internal decision-making”.

On his way up the Stagecoach ladder Paterson worked on several M&A and financing projects, especially after taking on responsibility for Treasury, issuing bonds a US private placing, as well as several refinancings- one of which was intended to bankroll the unsuccessful bid for rival National Express in 2009.

Paterson says cultivating good relationships with lenders has been important, as well as with investors. “People are going to have to trust you if they’re going to invest in you, if they’re going to lend money. My approach to that is to be open and honest with people about the risks and opportunities because on the occasion when things go wrong, you get more understanding,” he advises.

As his role developed, “an evolution over a long period of time”, he has been able to get to grips with the complexity of a changing business model focused on return on capital (RoC). Key to achieving targets across the group- which is now focused on local bus and tram transport businesses, is managing staff costs which amount to around 60% of the cost base.

“In terms of growing the profitability of the business, the main focus is generating growth and revenue through a combination of more journeys and setting pricing to offset the growth in our staff costs,” says Paterson.

“The biggest challenge I found as my roles developed was that you can sometimes know too much, and if you’re a hands-on person as I am, the temptation is always to roll your sleeves up and get stuck in. But as your role widens you don’t have the time to get involved in every aspect of finance.

“I’ve been focused on making sure we have the right people below me, giving them the opportunity to take responsibility for some of these areas, because that’s actually quite challenging. When you’ve been here for a long time, you know a lot about the business and often more than others in the team, so you have to resist that temptation to micro manage everything,” says Paterson.

The finance team now has a blend of staff who have worked in the sector for a long time, who know bus and rail finance inside out, and newer members who have come from other sectors who bring fresh ideas and fresh perspectives.

The hybrid finance operation

Within a devolved management structure, Paterson says Stagecoach operates a hybrid finance function combining local knowledge and expertise with economies of scale from centralising some specialisms. “I can’t sit in Perth and tell you what bus fares to charge in Hong Kong or Chicago. So, we have a relatively small team for the size of the business and we look to empower our local people,” he says.

“Most of our finance people are either in Perth or Stockport, where we have a big shared service centre (SSC), but the finance staff that are based in Stockport are quite regularly on the road visiting companies,” he adds.

When it comes to understanding what is happening across the business at a granular level, finance is playing a key role, through providing insights from data. But Paterson feels there’s scope to add more information from disparate sources so that finance can run more analysis and generate better insights. “That’s helpful in making decisions about what routes we run, frequency and pricing as we get more data, right down to individual sections of routes,” he says.

Innovations being considered include a fare capping project, to address reduced transportation as work and shopping patterns that have changed with the growth of the digital economy. “There is some revenue risk in this plan, but we think this is about building trust and making our services attractive for people to use. If we can provide that flexibility, then people are more likely to use us,” says Paterson.

Other areas for development are growth in the inter-urban offering, featuring relatively short trips between cities such as Barnsley and Leeds, or Leeds and Newcastle, and routes reflecting the growth of the airline market, such as the journey between Glasgow and Edinburgh airports. “We see big opportunities to grow further these parts of the business,” he adds.

Another growth area may well come from green thinking-  bus travel is seen as the most environmentally friendly transport solution. Yet only 4% of travel in the UK is by this mode of travel compared to 77% by car, says Paterson. “The opportunity here is enormous. Even if 1% of the 77% switches to bus, that’s a 25% increase in bus passengers,” he reveals.

“I think now we’re on the cusp of real change here. For the first time in a general election you just saw all the parties talking on a day to day basis about what they were going to do to address climate change and the environment, and it wasn’t just seen as a minor issue, it was front and centre,” says Paterson.

Already a set of funding measures have been slated. “The UK government has already announced long term funding for buses, they’re going to provide more detail in the New Year, including bus priority measures. In Scotland there’s been a £500m funding for bus priority measures,” says the Stagecoach finance director.

Threats to the Stagecoach business model include the impact on staff by Brexit, but Paterson says the effect on staff turnover has so far been mostly limited to London. “It’s become a bit more difficult to recruit drivers,” he admits. “It’s clearly a factor we continue to monitor,” says Paterson.

Thinking risk

On risk management, Paterson says that while its important that the Stagecoach board has good visibility of risks and risk appetite, he adds: “I think it’s less important that we over-agonise and try to put a financial value on every risk, I don’t think all of these things can be condensed into a number.

But he adds that an inherent risk if you’re running transport is safety of passengers and staff. “We’re running big pieces of metal and carrying lots of people, so one of the things the board is really focused on is health and safety.”

A major feature of Stagecoach’s recent history has been a departure from rail, a sector Paterson says has delivered a lot of value for shareholders since the 1990s. “The private sector operated relatively successfully in growing the business, but there hadn’t been the same investment in infrastructure, accommodating all that demand,” he says.

Stagecoach incurred losses running the East Coast franchise, but Paterson says that hasn’t put the company off a return to the sector. “When I talk to some of our investors, I compare it to what they do. They wouldn’t necessarily expect every single company they invest in to deliver outstanding returns, likewise we’ve been very successful in UK rail, but we had one experience that wasn’t welcome,” he says.

Although Stagecoach still has appetite for re-entering the rail market, it had three bids for new UK rail franchises disqualified by the Department of Transport (DoT) which it is challenging at the High Court in January. Paterson, who is appearing as a witness in the case brought by Stagecoach, along with others by rivals Arriva, Virgin and SNCF, says: “The government was asking the bidders for these franchises to take certain pension risks that we didn’t feel any operator could reliably take and reliably manage. We bid accordingly and we were disqualified as a result.

“We’re not happy about that, but equally we don’t regret our decisions. Having gone through the East Coast saga, we didn’t want to risk a situation where we were unable to meet all of the obligations of the franchise agreement,” says Paterson.

If the disqualifications are deemed illegal, it’s unlikely that the bidding process would be reset, but Paterson says a financial remedy night be an outcome. But he adds it would need to run to tens of millions of pounds to adequtely compensate Stagecoach for what it has incurred in the bidding and legal costs.

If that were the case, it would offset some of the negative market sentiment that Paterson says has resulted from the group no longer owning a significant railway business. “That’s a big part of what’s influenced our share price over recent years,” he informs.

Stagecoach’s share price, that breached the 400p mark in June 2015, is now at less than half of that level, resulting in the group’s market value dipping below £1bn by the end of 2019.

Even if 2020 is a bumpy ride for Stagecoach, it will inevitably be another fascinating year in the life of one of Britain’s most interesting companies. “Given the focus on the environment and some of the things we are doing around new services and multi-journey fares we think the medium-term outlook for public transport in the UK is good,” says Paterson.


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