9 December 2015 Stagecoach Group plc Interim results for ...

9 December 2015 Stagecoach Group plc – Interim results for the six months ended 31 October 2015 Good financial results, in line with expectations       

Adjusted earnings per share* up 12.6% to 17.0 pence (2014: 15.1 pence) Interim dividend per share up 9.4% to 3.5 pence (2014: 3.2 pence) Investing for growth in regional UK bus markets o new mobile-friendly website and digital functionality for customers o smart multi-operator ticketing in English city regions Accelerated expansion of megabus.com coach operations in Europe, while North American mileage rebalanced to current demand New East Midlands Trains franchise and plan to extend West Coast Trains Successful re-financing of £400m bonds, with good financial position maintained Cautious outlook o Recent revenue softer than expected in UK Bus regional operations o Lower rate of rail and inter-city coach revenue growth since mid-November in UK/Europe o Modest revision to full-year expectation of adjusted earnings per share

Financial summary

Six months ended 31 October

Revenue (£m)

Results excluding intangible asset expenses and exceptional items* 2015 2014

1,970.4

1,545.0

Reported results

2015

2014

1,970.4

1,545.0

Total operating profit (£m) Non-operating exceptional items (£m) Net finance charges (£m)

144.6 (23.1)

129.8 (21.2)

137.2 (46.4)

123.5 (4.0) (21.2)

Profit before taxation (£m)

121.5

108.6

90.8

98.3

12.8p 3.5p

13.9p 3.2p

Earnings per share (pence) Interim dividend per share (pence) *

17.0p 3.5p

15.1p 3.2p

see definitions in note 22 to the condensed financial statements

Chief Executive, Martin Griffiths, said: “These are a good set of results with overall earnings per share in line with expectations. “We have continued to invest in making travel better and easier for our customers. Public transport is a shared responsibility between the public and private sectors. It is crucial that the investment of transport operators is matched by steps by the public sector to tackle the growing challenge of road congestion, which is holding back the potential of the bus. At the same time, shrinking public investment in local transport can impact on the cost of travel and the network of services. We look for efficiencies within our own businesses to protect our customers as far as we can from any impact of Government cuts. “Our bus passengers in the UK are now benefitting from our new UK Bus website, which enables them to check live running times for their bus services and purchase travel on their smart phones. In 2016, we will also introduce a new mobile bus app. In addition, we are on track to complete delivery of smart multi-operator bus ticketing in England’s main city regions within the next few weeks.

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“Our rail businesses have demonstrated the benefits of a commercially-led approach, with passenger revenue growth and ongoing investment in improved facilities and better information for customers. We are working closely with Government and Network Rail to deliver new trains, greater capacity and more train services. “We are pleased that the Department for Transport has agreed to extend our operation of East Midlands Trains and plans to extend Virgin Rail Group’s operation of West Coast Trains. This will allow us and Virgin to continue to deliver improvements to our customers, attract more people to rail travel and increase the future value of these franchises to Government. “In North America, we have taken steps to mitigate the impact of lower motoring costs on demand for our megabus.com inter-city coach services by better matching the level of vehicle mileage to current demand. The rest of the North America Division is performing in line with our expectations. “Overall, the Group is in good financial shape and we were pleased to have put new bond financing arrangements in place earlier this year. Challenges remain in our sector in the short-term but the underlying strength of our businesses across the UK, continental Europe and North America, means we are well placed to drive value for our customers and investors.” Copies of this announcement are available on the Stagecoach http://www.stagecoach.com/investors/financial-analysis/reports/2015.aspx

Group

website

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For further information, please contact: Stagecoach Group plc

www.stagecoachgroup.com Investors and analysts Ross Paterson, Finance Director Bruce Dingwall, Group Financial Controller

01738 442111 01738 442111

Media Steven Stewart, Director of Corporate Communications

07764 774680

Notes to Editors Stagecoach Group  Stagecoach Group is an international public transport group, with extensive operations in the UK, mainland Europe, the United States and Canada. The Group employs around 39,000 people, and operates around 13,000 buses, coaches, trains and trams.  Stagecoach is one of the UK's biggest bus and coach operators with around 8,500 buses and coaches. The Group’s business includes major city bus operations in London, Liverpool, Newcastle, Hull, Manchester, Oxford, Sheffield and Cambridge. Low-cost coach service, megabus.com, operates a network of inter-city services across the UK and continental Europe.  Stagecoach is a major UK rail operator, running the South West Trains, Island Line and East Midlands Trains networks. It has also partnered with Virgin to run the East Coast and West Coast inter-city rail franchises.  Stagecoach operates the Supertram light rail network in Sheffield.  In North America, Stagecoach operates around 2,400 buses and coaches in the United States and Canada. megabus.com directly links over 130 key locations in North America. Stagecoach is also involved in operating commuter, transit, contracted, charter, airport shuttle and sightseeing services.

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Interim management report The Directors of Stagecoach Group plc are pleased to present their report on the Group for the six months ended 31 October 2015. Description of the business Stagecoach Group plc is a public limited company that is incorporated, domiciled and has its registered office in Scotland. Its ordinary shares are publicly traded and it is not under the control of any single shareholder. The Company has its primary listing on the London Stock Exchange. Throughout this document, Stagecoach Group plc is referred to as “the Company” and the group headed by it is referred to as “Stagecoach” or “the Group”. The Group is a leading international public transport group, with extensive operations in the UK, continental Europe, the United States and Canada. A description of each of the Group’s operating divisions is given on pages 3 to 5 of its 2015 Annual Report. Overview The Group has delivered a good set of results for the six months. Our priority remains delivering safe, high quality and value-for-money travel for our customers, which should enable the Group to continue to grow and prosper. The Group has achieved further revenue and profit growth in the six months. Revenue for the period was up 27.5% at £1,970.4m (2014: £1,545.0m). Total operating profit (before intangible asset expenses and exceptional items) was up 11.4% at £144.6m (2014: £129.8m). Earnings per share before intangible asset expenses and exceptional items were 12.6% higher at 17.0p (2014: 15.1p). The increases include the contribution to the six-month results from Virgin Trains East Coast, which began operating the East Coast rail franchise in March 2015 and in which the Group has a 90% interest. Shareholders are benefitting from our financial performance and the interim dividend is up 9.4% to 3.5p per share (2014: 3.2p). This is consistent with our policy of generally setting the interim dividend per share at approximately one-third of the rate for the previous full financial year. The dividend is payable to shareholders on the register at 5 February 2016 and will be paid on 2 March 2016. Public transport is a shared responsibility between the public and private sectors. Strong partnerships between transport operators and central and local government are the best way to maximise the value in public transport for our communities and regional economies. Our record of significant investment, continued innovation, and low fares has delivered strong transport networks, high levels of passenger satisfaction and good financial returns. It is important this is matched by infrastructure investment by the public sector and measures to tackle worsening road congestion. The Group recently announced that non-executive director, Helen Mahy CBE, intends to step down from the Board at the end of February 2016 to become a non-executive director of SSE plc. The Board and its Nomination Committee has commenced a search for a new non-executive director. The Board would like to thank Helen for her contribution to the Group, particularly in respect of the health, safety and environmental governance of the Group. We remain proud of the commitment and professionalism of our employees across the Group. They are an important part of our success and the Board extends its thanks to them all. Around 97% of our UK employees are already paid above the new National Living Wage that will apply from April 2016 and the others will be paid at least that rate by then. We remain positive on the opportunities to develop further the Group’s business. In bus, we see prospects for further organic growth in our well-established businesses as well as opportunities to further invest in the expansion of our megabus.com inter-city coach operations, particularly in continental Europe. In rail, we expect opportunities to bid for a number of franchises over the next two years. Investment in these bus and rail opportunities is underpinned by the Group’s financial position and continued capital discipline. With that in mind, the Board remains satisfied with the Group’s capital structure and at this time, is not recommending payments to shareholders over and above the growing dividend payments. Since mid-November, we have seen a reduction in the rate of revenue growth in parts of our rail and inter-city coach operations in the UK and continental Europe. We believe that revenue has been adversely affected by the terrorist attacks in Paris discouraging people from travelling to major cities. We currently anticipate a recovery in those revenue growth rates. We have also recently seen softer than expected revenue at a number of our regional UK Bus businesses. As a result of these factors, we have modestly revised down our forecast of adjusted earnings per share for the year ending 30 April 2016. Notwithstanding these and other short-term challenges facing our sector, we have a strong portfolio of public transport businesses capable of delivering long-term value to our customers and shareholders.

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Summary of financial results Revenue by division is summarised below: REVENUE Six months to 31 October

2015 £m

2014 £m

UK Bus (regional operations)

530.8

527.1

£

530.8

527.1

UK Bus (London)

133.1

131.3

£

133.1

131.3

1.4%

North America

225.7

224.6

US$

349.2

373.9

(6.6%)

1,083.2

664.3

£

1,083.2

664.3

63.1%

(2.3)

4.3%

Functional currency

2015 2014 Functional currency (m)

Growth %

Continuing Group operations

UK Rail

(2.4)

Intra-Group revenue Group revenue

1,970.4

(2.3)

(2.4)

£

0.7%

1,545.0

Operating profit by division is summarised below: OPERATING PROFIT Six months to 31 October

2015 £m

2014 % margin

£m

% margin

Functional currency

2015 2014 Functional currency (m)

Continuing Group operations


62.7

11.8%

77.3

14.7%

£

62.7

77.3

UK Bus (London)

10.0

7.5%

10.2

7.8%

£

10.0

10.2

North America

18.5

8.2%

21.7

9.7%

US$

28.6

36.1

UK Rail

43.8

4.0%

14.4

2.2%

£

43.8

14.4

Group overheads

(6.9)

Restructuring costs Joint ventures – share of profit after tax Virgin Rail Group

(1.2)

(7.2) (0.5)

126.9

115.9

13.5

9.0

Citylink

1.1

0.8

Twin America

3.1

4.1

144.6

129.8

Total operating profit before intangible asset expenses and exceptional items Intangible asset expenses Exceptional items Total operating profit: Group operating profit and share of joint ventures’ profit after tax

(7.4) 137.2

(5.0) (1.3) 123.5

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The decrease in operating margin was built up as follows:

Financial performance The financial performance of the UK Bus (regional operations) Division for the six months ended 31 October 2015 is summarised below: Six months to 31 October

Revenue Like-for-like* revenue Operating profit* Operating margin*

Operating margin – 2014 Effect of megabus.com Europe Change in: Staff costs Fuel costs Other Operating margin – 2015

14.7% (2.0)% (1.4)% 1.3% (0.8)% 11.8%

2015 £m

2014 £m

Change

530.8 529.9 62.7

527.1 524.9 77.3

0.7% 1.0% (18.9)%

The main changes in the operating margin shown above are:

(290)bp



11.8%

14.7%

Start-up losses have increased from the continued expansion of megabus.com in Europe. Staff costs, including pension costs, rose by more than inflation, whereas revenue growth has been more modest. Fuel costs have reduced reflecting market fuel prices and our fuel hedging programme.

The figures above include the results of the rapidly expanding megabus.com inter-city coach business in continental Europe, which for the six months ended 31 October 2015, reported revenue of £8.4m (2014: £4.5m) and an operating loss of £9.2m (2014: £0.1m).



Like-for-like revenue was built up as follows:

Our costs remain generally well controlled, which has allowed us to keep fare increases to a minimum. Our fuel costs have reduced this year and are forecast to reduce again in 2016/17, reflecting the profile of our fuel hedging programme. Staff costs, which are the biggest component of our cost base, have increased in line with our expectations. Only a small minority of our employees receive a wage rate below the new National Living Wage that will apply from April 2016 and therefore, we do not expect the new National Living Wage to have a material, direct effect on our profitability. We are, however, mindful that the introduction of and subsequent increases in the National Living Wage could add to wage inflation generally across the UK. For us, this is most relevant to the UK Bus (regional operations) Division but at this stage, we anticipate that any increased wage inflation will be manageable over the coming years as part of our usual management of costs. We will also incur increased payroll tax costs when the new Apprentice Levy is imposed from April 2017. Given these cost pressures, it is imperative that in order to minimise bus service cuts and/or fare increases, that Government ensures that bus operators are properly and fairly paid for carrying concessionary passengers free of charge, and also that the support to bus passengers provided by the rebate of fuel duty (known as Bus Service Operators’ Grant or BSOG) is maintained.

Six months to 31 October

Commercial on and off bus revenue - megabus.com - other Concessionary revenue Tendered and school revenue Contract revenue Hires and excursions Like-for-like revenue

2015 £m

2014 £m

Change %

21.1 306.0 127.7

15.5 301.4 125.7

36.1% 1.5% 1.6%

54.5 18.8 1.8

57.3 21.7 3.3

(4.9)% (13.4)% (45.5)%

529.9

524.9

1.0%

Like-for-like revenue excludes the revenue earned in the prior year from contracts to provide transport for the Commonwealth Games in Glasgow. Overall like-for-like revenue grew 1.0% and estimated passenger journeys on an equivalent basis fell 0.3%. Consistent with recent trends, higher commercial revenue (i.e. revenue earned directly from fare-paying passengers) contributed most to overall revenue growth. Concessionary revenue growth remains modest. Revenue from tendered and school services provided under contract has continued to decline, as a result of local authorities reducing spending on supported services due to budget constraints.



Lower oil prices have reduced the marginal cost of operating a car and while the impact of that on the Division’s revenue has been less than we have seen in North America, anecdotal evidence indicates that there has been some adverse effect. Road works and increasing road congestion have also had some negative impact on revenue. The bus can help in addressing road congestion if local authorities work in partnership with bus operators including in respect of bus priority measures. Excluding concessionary volumes, like-for-like passenger journeys grew 0.4%. In some of our regional bus companies, growth was over 3%. We continue to see growth rates vary across the country with local economic conditions having a significant effect.

*

See definitions in note 22 to the condensed financial statements

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Enhanced customer experience

megabus.com Europe

We are continuing to invest in the quality of our services, and initiatives to further increase customer satisfaction. A new mobile website has been launched, as part of our digital investment programme. Stagecoach bus passengers are benefiting from easier journeys through the new website, which allows customers to check live running times for their services and buy travel straight from their smart phone. In 2016, we will also introduce a mobile app for our bus customers. Along with other major bus operators, we are set to deliver on our pledge to introduce smart multi-operator ticketing in all of England’s city regions by the end of 2015. We are also in discussions with the Scottish government and other bus operators about similar steps in Scotland. This builds on our own smart products, which are available across our regional bus companies.

Our expansion of the megabus.com inter-city coach operations in mainland Europe is progressing quickly and we remain positive about the growth opportunities in that market. There are now almost 150 destinations on the megabus.com network in Europe as a whole. We have a growing footprint across mainland Europe with international routes and also domestic networks in France, Germany and Italy. We have accelerated our expansion with the launch of domestic services in France following the French Government’s decision to liberalise inter-city bus routes of at least 100km in distance from August 2015. Taking account of up to date revenue trends, we now expect megabus.com Europe start-up losses of around £20m for the year ending 30 April 2016. However, our investment now will provide a strong base in what is a competitive market with significant growth opportunities.

Working in partnership

Outlook

The progress made to introduce smart multi-operator ticketing demonstrates what can be achieved by parties committed to improving public transport working together in partnership.

We remain excited by the prospects for the megabus.com business in continental Europe and are investing ahead of our original plans to secure the longterm growth opportunity we see there.

It is significant that the Tyne and Wear Quality Contracts Scheme Board recently found that the bus franchising scheme proposed by the North East Combined Authority (“NECA”), the only fully worked up proposal for bus franchising in the UK outside London, failed to meet the necessary statutory tests.

We continue to expect underlying revenue growth from our local bus services to remain modest in the shortterm. That reflects the effects of government spending pressure on concessionary and tendered revenue as well as the effects on commercial revenue of worsening road congestion in specific locations and economic challenges in some of the local markets in which we operate. However, modest revenue growth is balanced with costs continuing to be well controlled and with some further reduction in fuel costs anticipated next year.

The forthcoming Buses Bill must ensure that any future bus franchising proposals are subject to proper safeguards and a transparent public interest test. In the meantime, we would urge NECA to respect the findings of the Quality Contracts Scheme Board, and put passengers and local people first, by abandoning the misguided franchising plans. Instead, we believe a better approach is for it to work in partnership with bus operators to build on Tyne and Wear’s excellent bus network and give local people even better bus services. In the majority of the geographic areas served by the Division, there is no major pressure for bus franchising to be introduced. The areas of the business where the potential for franchising is most discussed by some politicians are Manchester, Merseyside, the North East of England and South Yorkshire, which together represent about a quarter of the Division’s revenue and around 6% of the Group’s annualised revenue. Any introduction of a significant bus franchising scheme appears some years away and by focussing instead on working in partnership, further improvements to customer service can be implemented sooner and more efficiently than would be possible via bus franchising. We believe that enhanced partnership between the public and private sectors, rather than franchising, is the best route to further improving the public transport offer in both major cities and other local authority areas, particularly against the background of the Government’s devolution agenda. Our view is that this approach should be actively encouraged in the forthcoming Buses Bill. This would retain innovation and competition in a dynamic commercially-driven market alongside meeting social and economic objectives.

Whilst we are currently seeing softer than expected revenues in parts of our bus and coach operations in the UK and continental Europe, we anticipate that these will improve in the balance of the year. UK Bus (London) Financial performance The financial performance of the UK Bus (London) Division for the six months ended 31 October 2015 is summarised below: Six months to 31 October

Revenue and like-forlike revenue Operating profit Operating margin

2015 £m

2014 £m

133.1

131.3

1.4%

10.0

10.2

(2.0)%

7.5%

7.8%

Change

(30)bp

Although traffic disruption from ongoing road works in London has continued to adversely affect the quality incentive income of the Division, the business has performed well. Since 1 May 2015, we have received the results of 15 tenders where we bid to retain services we already operate. We were disappointed to only retain 11 of these but we have also won 2 new contracts for services that we do not currently operate.

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The decrease in operating margin was built up as follows: Operating margin – 2014 Change in: Staff costs Fuel costs Other Operating margin – 2015

7.8% (1.5)% 2.1% (0.9)% 7.5%

The reduction in quality incentive income has impacted the Division’s operating margin. Staff, and certain other costs, that increase with the vehicle mileage operated have increased at a faster rate than revenue as a result of the reduced quality incentive income. The resulting reduction in margin has been partially offset by the lower fuel costs, which reflect market fuel prices and our fuel hedging programme. Outlook The outlook for the London Bus operations is positive with continuing good profitability expected from our portfolio of contracts with Transport for London. We continue to expect some decline in operating margin following the particularly strong margins of the last few years but still aim to deliver long-term operating margins in excess of 7%. Looking further ahead, we believe there may be opportunities from Transport for London’s plans to increase London bus mileage by around 5% by 2020/21 and we welcome this planned, further development of London bus services. North America Financial performance The financial performance of the North America Division for the six months ended 31 October 2015 is summarised below: Six months to 31 October

2015 US$m

2014 US$m

Change

Revenue Like-for-like revenue Operating profit

349.2 355.1 28.6

373.9 373.9 36.1

(6.6)% (5.0)% (20.8)%

Operating margin

8.2%

9.7%

(150)bp

The reduced scheduled service revenue includes the adverse effect on demand for some services resulting from the strong US dollar impacting the number of European visitors to the US and spending by those visitors. Our scheduled services to and from the major Woodbury Commons retail outlets centre, for example, have seen revenue decline. We have also seen some decline in revenue on certain scheduled, airport express services reflecting competition and reduced visitor numbers. The transit and commuter business includes transit contracts operated by us for local authorities, akin to the business of our UK Bus (London) Division. Some of those contracts were not retained when re-tendered resulting in reduced revenue but the contracts lost did not earn a significant profit. Charter revenue has increased slightly, reflecting some one-off projects during the period, partly offset by decreased volumes from a major customer in Canada. The sharp fall in sightseeing and tour revenue reflects weak trends in that market. Contract revenue also fell reflecting the non-recurrence of some one-off prior year contracts and the loss of some contracts at re-tender. More recently, we have secured some new contract work and therefore, the outlook for contract revenue and profit is improving. The decrease in the operating margin of the North America Division was built up as follows: Operating margin – 2014 Change in: Staff costs Fuel costs Depreciation Other Operating margin – 2015

megabus.com Scheduled service Transit and commuter Charter Sightseeing and tour School bus and contract Like-for-like revenue

2015 US$m

2014 US$m

96.9 67.9 52.2 72.4 21.6 44.1

103.5 74.5 56.3 71.8 23.6 44.2

(6.4)% (8.9)% (7.3)% 0.8% (8.5)% (0.2)%

355.1

373.9

(5.0)%





Change

The fall in oil prices has continued to impact demand adversely for our megabus.com inter-city coach services, with like-for-like revenue at megabus.com North America in the six months being 6.4% below the equivalent period last year. We have reduced the mileage operated by megabus.com in North America to better match supply with the reduced demand. However, we have not at this stage significantly decreased the size of the vehicle fleet, meaning that we can quickly respond to a recovery in demand by adding back mileage.

(1.0)% 1.0% (0.7)% (0.8)% 8.2%

The main changes in the operating margin shown above are:

Like-for-like revenue was built up as follows: Six months to 31 October

9.7%



Staff costs have declined at a slower rate than the fall in revenue. After adjusting for vehicle mile reductions, staff costs have increased in line with inflation. Depreciation costs have increased as expected, given we have largely maintained the size of our fleet, which provides us with the flexibility to increase mileage in response to market conditions and customer demand. Fuel costs have reduced reflecting market fuel prices and our fuel hedging programme.

Outlook Oil prices fell sharply towards the end of 2014 with a consequential adverse effect on megabus.com revenue. Now that it is over a year since the sharp fall in oil prices, we expect to see megabus.com revenue stabilise. While US “at the pump” gas prices remain below the prices of a year ago, the business remains profitable and we have operational plans in place to grow the business as we see revenue recover. We also expect the business to benefit from further reductions in its own fuel costs as more expensive fuel hedges expire.

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We continue to seek to improve the profitability of the rest of the North American business by remaining focused on further improving the customer experience. We see opportunities for new contracts wins but will remain disciplined in ensuring that our contract bids remain designed to deliver a satisfactory rate of return on capital. UK Rail Financial performance The financial performance of the UK Rail Division for the six months ended 31 October 2015 is summarised below: Six months to 31 October

Revenue Like-for-like revenue Operating profit Operating margin

2015 £m

2014 £m

Change

1,083.2 704.2 43.8

664.3 664.3 14.4

63.1% 6.0% 204.2%

4.0%

2.2%

180bp

The UK Rail Division continued to perform strongly during the six months and we have already revised our expected UK Rail operating profit up from the target we set before the start of the year. We have achieved further passenger revenue growth at our East Midlands Trains, South West Trains and Virgin Trains East Coast franchises, along with a continuing focus on strong cost control. We now have clarity around the timeline for each of our rail franchises and a business which extends through to 2023. We began operating the Virgin Trains East Coast franchise in March 2015, in which we have a 90% interest. The prior year figures did not therefore include the results of this business and the significant increase in both revenue and operating profit reflects that. Profit in the six months exceeded our initial expectations as a result of the continued good underlying performance of the Division but also because the cost of settling contractual matters at the end of the previous East Midlands Trains franchise in October 2015 was less than we had anticipated. East Midlands Trains In September 2015, the Group agreed a new East Midlands Trains franchise with the Department for Transport, which commenced on 18 October 2015 and is scheduled to run until 4 March 2018. The Department for Transport has the option to extend the contract by up to one year on commercial terms that have already been agreed. East Midlands Trains remains Britain’s most punctual long-distance train operator and passengers will benefit from around £13m of investment under the new agreement. Customers will benefit from a wide range of improvements, including better value fares, cleaner stations, an enhanced on-board service, new technology to help provide faster and better customer information when and where customers need it and a new automated refunds system. Taxpayers will also benefit from the agreement, with £150m of forecast premium payments to the Government between October 2015 and March 2018.

South West Trains At South West Trains, we have started the delivery of a £50m package of investment, which includes new technology and more personal customer service to make end-to-end journeys easier. The improvements, which will be delivered before 2017, also include the introduction of new customer ambassadors, more seats, and extra car parking. Customers will benefit from around 170 new easy-to-use ticket machines at stations across the network, more than half of which will provide a 24/7 video link allowing customers to talk directly to a member of staff. In August 2015, the rail regulator approved plans for extra services and new links to London for many communities across the West of England from December 2015. The Department for Transport is planning for the current franchise to end in June 2017 and will tender for a new long-term franchise to begin in 2017. As we previously stated, we expect the profitability of South West Trains to continue to decline over the remaining period of the franchise.

Virgin Trains East Coast Virgin Trains East Coast is progressing a £140m programme of investment to transform customer journeys. We have started a trial of paperless mTickets, which provide customers with a barcode that can be scanned directly from a smart phone or tablet. We are rolling out the Virgin Trains brand across the franchise and recently completed the rebranding of the entire train fleet. As previously reported, Virgin Trains East Coast and other train operators have applied to the Office of Rail and Road to operate additional train services on parts of the railway network where the Virgin Trains East Coast franchise operates. Virgin Trains East Coast plans to run significant additional services from 2019. If permission is granted for some or all of the services that other operators have applied for and/or Network Rail does not complete planned infrastructure works in time, then Virgin Trains East Coast might not be able to operate all of its planned train services and/or its financial performance could be adversely affected. To the extent that from May 2020, Virgin Trains East Coast is unable to operate the services that the Department for Transport specified as part of the franchise bidding process, then the business would be financially compensated under the terms of its contractual arrangements with the Department. The business would not necessarily be compensated for being unable to operate services prior to May 2020, being unable to operate services that it planned to provide over and above the minimum specified by the Department and/or for the effects of any increased competition on the services it is able to operate. We do not consider that the “open access” train services proposed by the other operators meet the criteria for approval. The Office of Rail and Road is continuing to consider our application and that of the other parties for train paths to run new services and we expect a decision on the matter in early 2016.

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Franchising update The Group has 40% of a joint venture with Abellio, which is shortlisted to bid for a new East Anglia rail franchise. We have been unable to reach an agreement with Abellio on elements of the proposed bid. As a result of that, and taking account of the other rail bidding opportunities that we anticipate over the next two years, we have decided not to proceed with an equity participation in the bid for the new East Anglia franchise. We have confirmed to Abellio our commitment to provide support and advice to the franchise if Abellio’s bid is successful. The Department for Transport has started consulting on the specification for a new South West Trains franchise and our detailed knowledge of that business places us in a strong position to bid for the new franchise.

In October 2015, West Coast Trains became the first train company to automatically compensate some customers if they are delayed. A customers who buys an Advance ticket through virgintrains.com or the app will automatically receive money directly back onto his or her payment card when their train service is delayed by 30 minutes or more. This is a fantastic example of private sector innovation delivering customer improvements commercially without the need for overly restrictive contractual commitments or government intervention. The franchise is performing significantly ahead of our expectations at the time the contract was agreed. The franchise agreement includes protections for taxpayers which limit the level of profit that the business can earn and as a result, there is limited scope for further profit growth.

Outlook Twin America As previously explained, we have seen a reduction in revenue growth in our UK Rail businesses in recent weeks, particularly on inter-city routes. We will continue to monitor revenue trends closely. Those recent revenue trends aside, the outlook for the UK Rail Division generally remains positive. Virgin Trains East Coast is due to run until at least 2023 and while we have set ourselves some challenging objectives for the franchise, we remain excited by the opportunity to further develop that business. Although both our South West Trains and East Midlands Trains franchises are due to expire within the next two and half years, we see opportunities to bid for new franchises. Group overheads Group overheads were broadly in line with last year at £6.9m in the six months ended 31 October 2015 compared to £7.2m in the six months ended 31 October 2014. Virgin Rail Group Financial performance The financial performance of the Group’s Virgin Rail joint venture for the six months ended 31 October 2015 is summarised below: 2015 £m 270.0

2014 £m 247.4

Operating profit

16.6

11.2

Net finance income Taxation

0.3 (3.4)

0.2 (2.4)

Profit after tax

13.5

9.0

Six months to 31 October 49% share:

Revenue and like-for-like revenue

Operating margin

6.1%

4.5%

Virgin Rail Group's West Coast rail franchise continues to perform strongly and that is benefitting taxpayers through profit share payments by the business to the UK Department for Transport. The Department for Transport has indicated that it plans for the current franchise, which commenced in June 2014, to run until 31 March 2018 on the commercial terms already agreed.

Financial performance The financial performance of the Group’s Twin America joint venture (excluding exceptional items) for the six months ended 31 October 2015 is summarised below: Six months to 31 October 60% share:

2015 US$m

2014 US$m

Change

Revenue

45.2

52.5

(13.9)%

Operating profit

5.2

7.0

(25.7)%

Net finance cost Taxation

(0.2) (0.2)

(0.2)

-

4.8

6.8

(29.4)%

11.5%

13.3%

(180)bp

Profit after tax Operating margin

Trading at our Twin America joint venture remains challenging. As part of a litigation settlement (see below), Twin America surrendered its rights from May 2015 to use certain bus stops and adjusted its service levels accordingly. That, together with the continued strong competition in the New York sightseeing market, is reflected in the year-on-year reduction in revenue. Our share of profit after tax from the joint venture during the six months to 31 October 2015 has reduced from US$6.8m to US$4.8m. The business continues to pursue a number of initiatives to boost revenue and save costs with the objective of returning the business to a more acceptable level of profitability. While we remain optimistic about the prospects for improving the financial performance of the business, the future profit and cash flow of the business will partly depend on competitive developments as well as any developments in the regulation of sightseeing bus services in New York. The carrying value of the Group’s interest in Twin America as at 31 October 2015 was £38.8m. While we do not currently consider that carrying value to be impaired, the forecasts which support the carrying value assume a steady recovery in the profitability of the business and if that recovery does not materialise, an impairment loss could arise in the future. We will next review the carrying value for impairment as at 30 April 2016.

9

In December 2012, the United States Department of Justice and the Attorney General of the State of New York initiated legal proceedings against Twin America and others alleging that the formation of Twin in 2009 was anticompetitive. Several private actions were also filed in relation to this matter. A settlement was reached with the private plaintiffs in 2014. A settlement was agreed with the US Department of Justice and the New York Attorney General's office earlier this year and has now received court approval. Related to the Twin America litigation involving the Group’s North America Division, the Department of Justice is continuing to investigate the conduct of company personnel in responding to discovery obligations in the investigation and litigation. The Department of Justice has not taken any enforcement action related to these issues, and the Group is co-operating with the investigation. EBITDA, depreciation and intangible asset expenses Earnings before interest, taxation, depreciation, intangible asset expenses and exceptional items (preexceptional EBITDA) amounted to £211.8m (2014: £190.2m). Pre-exceptional EBITDA can be reconciled to the financial statements as follows:


Total operating profit before intangible asset expenses and exceptional items Depreciation Add back joint venture finance income & tax Pre-exceptional EBITDA

12 months to 31 Oct 2015 £m


Finance costs, excluding exceptional items Interest payable and facility costs on bank loans, overdrafts and trade finance Hire purchase and finance lease interest payable Interest payable and other finance costs on bonds Unwinding of discount on provisions Interest charge on defined benefit pension schemes Finance income Interest receivable on cash Effect of interest rate swaps Net finance costs, excluding exceptional items

2015 £m

2014 £m

2.9

3.6

1.1

1.3

14.9 2.0

13.6 1.9

3.2 24.1

2.5 22.9

(0.8) (0.2) (1.0)

(0.8) (0.9) (1.7)

23.1

21.2

Taxation The effective tax rate for the six months ended 31 October 2015, excluding exceptional items, was 21.3% (2014: 21.8%). This is around 2.5% higher than our expected rate for the full year ending 30 April 2016 due to the seasonality of taxable profits in different tax territories.

2015 £m

2014 £m

144.6 63.6

129.8 57.9

241.9 125.8

The tax charge can be analysed as follows:

3.6 211.8

2.5 190.2

7.2 374.9

Six months to 31 October 2015

The income statement charge for intangible assets, increased from £5.0m to £7.4m. The increase is principally due to the amortisation of intangible assets in respect of the Virgin Trains East Coast franchise, which began in March 2015 and so was not included in the prior year period. Depreciation increased from the previous year reflecting continued capital investment, the commencement of Virgin Trains East Coast and the effect of foreign exchange movements on the sterling value of depreciation for the North America Division. Exceptional items A pre-tax exceptional loss of £23.3m was recognised in the six months ended 31 October 2015, which related to the re-financing of bonds as explained later in this report under the heading “Financial position and liquidity”. Net finance costs Net finance costs, excluding exceptional items, for the six months ended 31 October 2015 were £23.1m (2014: £21.2m) and can be further analysed as follows:

Excluding intangible asset expenses and exceptional items Intangible asset expenses Exceptional items Reclassify joint venture taxation for reporting purposes Reported in income statement

Pre-tax profit £m

125.3

Tax £m

Rate %

(26.1)

20.8%

1.0

13.5%

117.9

(7.4)

(25.1)

21.3%

(23.3)

4.7

94.6

(20.4)

(3.8)

3.8

90.8

(16.6)

21.6%

18.3%

Fuel costs The Group’s operations as at 31 October 2015 consume approximately 424.5m litres of diesel fuel per annum. As a result, the Group’s profit is exposed to movements in the underlying price of fuel. The Group’s fuel costs include the costs of delivery and duty as well as the costs of the underlying product. Accordingly, not all of the cost varies with movements in oil prices. The proportion of the Group’s projected fuel usage that is now hedged using fuel swaps is as follows: Year ending 30 April

2016

2017

2018

2019

2020

Total Group

90%

87%

53%

2%

1%

The Group has no fuel hedges in place for periods beyond 30 April 2020.

10

Cash flows and net debt Consolidated net debt has, as expected, increased from 30 April 2015, reflecting additional investment in our bus fleet, the acceleration of interest and premium payable associated with redeeming our 5.75% bonds and the reversal of some favourable UK Rail working capital timing differences in the previous financial year, partly offset by continued strong cash generation from operations. Net cash from operating activities before tax for the six months ended 31 October 2015 was £79.1m (2014: £176.2m) and can be further analysed as follows: Six months to 31 October

EBITDA of Group companies before exceptional items Loss on disposal of property, plant and equipment Equity-settled share based payment expense Working capital movements Net interest paid Dividends from joint ventures Net cash flows from operating activities before taxation

2015 £m

2014 £m

190.5

173.8

0.2

0.1

1.1 (92.2) (25.4) 4.9

1.2 6.8 (6.3) 0.6

79.1

Train operating companies £m

Other £m

The net impact on net debt of purchases and disposals of property, plant and equipment, split by division, was:

UK Bus (regional operations) UK Bus (London) North America UK Rail

Total £m

Fixed rate £m

Unrestricted cash Cash held within train operating companies Restricted cash Total cash and cash equivalents

0.2

0.9

1.1

(64.3)

(27.9)

(92.2)

(0.5)

(24.9)

(25.4)

Bank loans

-

4.9

4.9

(11.4)

90.5

79.1

Inter-company movements

(3.6)

3.6

-

Tax paid

(5.2)

(0.1)

(5.3)

Investing activities

(6.1)

(77.8)

(83.9)

Working capital movements Net interest paid Dividends from joint ventures Net cash flows from operating activities before taxation

53.2 -

2014 £m

40.2 1.2 37.9 4.6

63.1 1.3 21.3 (1.4)

83.9

84.3

The Group’s net debt at 31 October 2015 is further analysed below:

Sterling bond US Notes Sterling hire purchase and finance leases US dollar hire purchase and finance leases Loan notes

EBITDA of Group companies before exceptional items Loss on disposal of property, plant and equipment Equity-settled share based payment expense

2015 £m


176.2

Net debt (as analysed in note 18 to the condensed financial statements) increased from £381.3m at 30 April 2015 to £458.0m at 31 October 2015. The movement in net debt, showing train operating companies separately, was: Six months to 31 October 2015

The impact of purchases of property, plant and equipment for the six months on net debt was £103.5m (2014: £115.7m). This primarily related to expenditure on passenger service vehicles, and comprised cash outflows of £82.3m (2014: £109.6m) and new hire purchase and finance lease debt of £21.2m (2014: £6.1m). In addition, £19.6m (2014: £31.4m) cash was received from disposals of property, plant and equipment. Around £16.4m of this cash received related to the UK Rail Division where assets constructed or purchased by the Division were then sold to Network Rail.

137.3

190.5

0.2

0.2

Financing activities

-

(44.3)

(44.3)

Foreign exchange/other

-

(22.3)

(22.3)

Movement in net debt

(26.3)

(50.4)

(76.7)

Opening net debt

281.0

(662.3)

(381.3)

Closing net debt

254.7

(712.7)

(458.0)

The cash held by the train operating companies at any point in time is affected by the timing of rail industry cash flows, which can be individually substantial. There is a working capital outflow in the train operating companies of £64.3m during the period, which principally represents the reversal of favourable timing differences in the previous financial year. The working capital outflow of £27.9m in the rest of the Group arose mainly as a result of an increase in VAT receivable arising from the timing of VAT recoveries from the VAT authorities.

Net debt

Floating rate £m

Total £m

-

51.0

51.0

-

254.7

254.7

-

18.7

18.7

-

324.4

324.4

(293.2) -

(100.0) (96.8)

(393.2) (96.8)

(3.0)

(41.5)

(44.5)

(46.7)

-

(46.7)

-

(19.5)

(19.5)

-

(181.7)

(181.7)

(342.9)

(115.1)

(458.0)

The split between fixed and floating rate debt shown above takes account of the effect of interest rate swaps in place as at 31 October 2015. Financial position and liquidity The Group maintains a good financial position with investment grade credit ratings and appropriate headroom under its debt facilities. On 29 September 2015, the Group issued £400m of 10year bonds with an annual coupon of 4.00%. The Group subsequently redeemed the £400m of 5.75% bonds that were due to mature in December 2016. The premium payable to redeem the 5.75% bonds in excess of their par value, together with the cost of terminating interest rate swaps that became ineffective as a result of the refinancing, was £23.3m and has been reported as an exceptional item in the Group's consolidated income statement for the six months ended 31 October 2015. In addition to the bond re-financing, we extended the duration of £535m of committed, bi-lateral bank facilities by one year to October 2020.

11

We are pleased by the successful re-financing of bonds and the continuing support we receive from the debt capital markets. The new bond issue attracted a range of high quality investors. That issue, together with the one-year extension of bank facilities, ensures that the Group continues to have an appropriate mix of long-term debt enabling it to plan and invest with some certainty. The Group’s financial position remains strong and is evidenced by: 

Net assets Net assets at 31 October 2015 were £161.7m (30 April 2015: £95.0m). The increase in the net assets reflects good financial results for the six months ended 31 October 2015 and the actuarial gains on defined benefit pension schemes explained below. The effect of these positive factors on net assets was partly offset by dividends paid and net losses recognised in the cash flow hedging reserve on fuel derivatives as result of a fall in fuel prices in the six months.

The ratio of net debt at 31 October 2015 to preexceptional EBITDA for the twelve months ended 31 October 2015 was 1.2 times (2014: 1.2 times).

Retirement benefit obligations



Pre-exceptional EBITDA for the six months ended 31 October 2015 was 9.2 times (2014: 9.1 times) preexceptional net finance charges (including joint venture net finance income).



Undrawn, committed bank facilities of £289.6m at 31 October 2015 (30 April 2015: £298.8m) were available to be drawn as bank loans with further amounts available only for non-cash utilisation. In addition, the Group has available asset finance lines.

The reported net assets of £161.7m (30 April 2015: £95.0m), that are shown on the consolidated balance sheet are after taking account of net pre-tax retirement benefit liabilities of £81.5m (30 April 2015: £160.5m), and associated deferred tax assets of £18.4m (30 April 2015: £35.3m).



The three main credit rating agencies continue to assign investment grade credit ratings to the Group.

Capital structure As explained in the “Overview” section of this interim report, we remain positive on the opportunities to develop further the Group’s business. Investment in these opportunities is underpinned by the Group’s financial position and continued capital discipline. It remains the Group’s objective to maintain an investment grade credit rating and that underpins the Group’s financial strategy. With that in mind, the Board remains satisfied with the Group’s capital structure and it has no current plans to recommend payments to shareholders over and above the growing dividend payments. In particular, there are a number of UK rail franchise competitions underway or expected to be undertaken within the next two years. Those will include tenders for new South West, East Midlands and West Coast rail franchises, to succeed existing franchises in which the Group is currently involved. Significant value can be secured from winning a rail franchise. A new franchise can have a negative short-term effect on the measures of credit worthiness used by the major credit rating agencies and maintaining an investment grade credit rating should enable the Group to bid with confidence for new franchises. In addition, the Group continues to see strong potential in its small but rapidly growing megabus.com operations in continental Europe. As expected, those operations are currently incurring development and start-up losses which along with the capital expenditure on vehicles have a negative impact in the short-term on the measures of credit worthiness used by the major credit rating agencies. The Board see significant potential long-term value in megabus.com Europe and the development of that business is supported by the Group’s good financial position. The Board is continuing with its dividend policy of seeking to grow the rate of dividend per share over time. The Group will continue to regularly review its financial strategy and capital structure.

The Group recognised pre-tax actuarial gains of £80.0m in the six months ended 31 October 2015 (2014: pre-tax actuarial losses of £53.2m) on Group defined benefit schemes. The discount rate used to determine pension scheme liabilities is determined with reference to AA-rated bond yields. As AA-rated bond yields have generally increased in the six months ended 31 October 2015, the forecast future cash flows to settle pension scheme liabilities are now discounted at a higher rate. This is the principal reason for the pre-tax actuarial gains and the reduction in the pre-tax retirement benefit liabilities in the six months. Related parties Details of significant transactions with related parties are given in note 20 to the condensed financial statements. Principal risks and uncertainties Like most businesses, there is a range of risks and uncertainties facing the Group. A brief summary is given below of those specific risks and uncertainties that the Directors believe could have the most significant impact on the Group’s financial position and/or future financial performance. Pages 7 to 10 of the Group’s 2015 Annual Report set out specific risks and uncertainties in more detail. The matters summarised below are not intended to represent an exhaustive list of all possible risks and uncertainties. The focus below is on those specific risks and uncertainties that the Directors believe could have the most significant impact on the Group’s performance. In assessing the Group’s likely financial performance for the second half of the current financial year, these risks and uncertainties should be considered in addition to the matters referred to regarding seasonality in note 3 to the condensed financial statements, and the comments made later under the heading “Current trading and outlook”.  

Catastrophic events – there is a risk that the Group is involved (directly or indirectly) in a major operational incident. Terrorism – there is a risk that the demand for the Group’s services could be adversely affected by a significant terrorist incident.

12











 



 



 

Economy – the economic environment in the geographic areas in which the Group operates affects the demand for the Group’s bus and rail services. Rail cost base – a substantial element of the cost base of the UK Rail Division is essentially fixed as under its UK rail franchise agreements, the Group is obliged to provide a minimum level of train services and is less able to flex supply in response to changes in demand. Sustainability of rail profit – there is a risk that the Group’s revenue and profit could be significantly affected (either positively or negatively) as a result of the Group winning new UK rail franchises or failing to retain its existing franchises. Breach of franchise – if the Group fails to comply with certain conditions as part of its rail franchise agreements it may be liable to penalties including potential termination of one or more of the rail franchise agreements. Pension scheme funding – the Group participates in a number of defined benefit pension schemes, and there is a risk that the cash contributions required increase or decrease due to changes in factors such as investment performance, discount rates and life expectancies. Insurance and claims environment – there is a risk that the cost to the Group of settling claims against it is significantly higher or lower than expected. Regulatory changes and availability of public funding – there is a risk that changes to the regulatory environment or changes to the availability of public funding could affect the Group’s prospects. The current UK Government’s plans for greater devolution of powers within the UK could see the introduction of franchised bus networks in some areas, which could affect our commercialised bus operations. Management and Board succession – there is a risk that the Group does not recruit and retain sufficient directors and managers with the skills important to the operation of the business. Disease – there is a risk that demand for the Group’s services could be adversely affected by a significant outbreak of disease. Information technology – there is a risk that the Group’s capability to make sales digitally either fails or cannot meet levels of demand. There are also risks associated with IT systems failures and potential malicious attacks on systems. New technologies and business models could be disruptive threats to the Group’s business model. Litigation – there is a risk of commercial and consumer litigation arising from the legal environment in some markets, particularly North America. Competition – in certain of the markets we operate in, there is a risk of increased competitive pressures from existing competitors and new entrants. Treasury risks – the Group is affected by changes in fuel prices, interest rates and exchange rates.

Going concern On the basis of current financial projections and the facilities available, the Directors are satisfied that the Group has adequate resources to continue for the foreseeable future and, accordingly, consider it appropriate to adopt the going concern basis in preparing the condensed financial statements for the six months ended 31 October 2015. Current trading and outlook We see positive long-term prospects for public transport in our bus and rail markets in the UK, mainland Europe and North America. There is a large market opportunity for modal shift from cars to public transport against a backdrop of rising road congestion and increasing environmental awareness and regulation. We have an organic growth strategy built on continued investment, value-for-money travel and high customer satisfaction. As explained in the “overview” section earlier, we have seen a reduction in the rate of revenue growth of our UK and European businesses in recent weeks. As we currently anticipate a recovery in revenue growth rates, we have only modestly revised down our forecast of adjusted earnings per share for the year ending 30 April 2016.

Martin Griffiths Chief Executive 9 December 2015

13

Responsibility Statement We confirm that to the best of our knowledge: (a)

the condensed consolidated interim financial information contained in this document has been prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting” as adopted by the European Union;

(b)

the interim management report contained in this document includes a fair review of the information required by the Financial Conduct Authority’s Disclosure and Transparency Rules (“DTR”) 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c)

this document includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

By order of and on behalf of the Board

Martin Griffiths Chief Executive 9 December 2015

Ross Paterson Finance Director 9 December 2015

Cautionary statement The preceding interim management report has been prepared for the shareholders of the Company, as a body, and no other persons. Its purpose is to assist shareholders of the Company to assess the strategies adopted by the Company and the potential for those strategies to succeed and for no other purpose. The interim management report contains forward-looking statements that are subject to risk factors associated with, amongst other things, the economic, regulatory and business circumstances occurring from time to time in the countries, sectors and markets in which the Group operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables that could cause actual results to differ materially from those currently anticipated. No assurances can be given that the forward-looking statements will be realised. The forward-looking statements reflect the knowledge and information available at the date of preparation. Nothing in the interim management report should be considered or construed as a profit forecast for the Group. Except as required by law, the Group has no obligation to update forwardlooking statements or to correct any inaccuracies therein.

14

CONDENSED FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT

Notes

Unaudited

Unaudited

6 months to 31 October 2015


Performance pre intangibles and exceptional items

Intangibles and exceptional items (note 5)

Results for the period




£m

£m

£m

£m

£m

£m

1,970.4 (1,805.9)

1,545.0 (1,429.1)

(5.0)

1,545.0 (1,434.1)

119.5

115.9

(5.0)

110.9

17.7

13.9

(1.3)

12.6

Revenue Operating costs and other operating income

4(a)

1,970.4 (1,843.5)

(7.4)

Operating profit of Group companies Share of profit of joint ventures after net finance income and taxation

4(b)

126.9

(7.4)

4(c)

17.7

4(b) 5

144.6 -

(7.4) -

137.2 -

129.8 -

(6.3) (4.0)

123.5 (4.0)

Profit before interest and taxation Finance costs Finance income

144.6 (24.1) 1.0

(7.4) (23.3) -

137.2 (47.4) 1.0

129.8 (22.9) 1.7

(10.3) -

119.5 (22.9) 1.7

Profit before taxation Taxation

121.5 (22.3)

(30.7) 5.7

90.8 (16.6)

108.6 (22.1)

(10.3) 3.7

98.3 (18.4)

99.2

(25.0)

74.2

86.5

(6.6)

79.9

97.8

(24.6)

73.2

86.5

(6.6)

79.9

Total operating profit: Group operating profit and share of joint ventures’ profit after taxation Non-operating exceptional items

Profit from continuing operations and profit after taxation for the period

-

Attributable to: Equity holders of the parent Non controlling interests

1.4

(0.4)

1.0

-

-

-

99.2

(25.0)

74.2

86.5

(6.6)

79.9

Earnings per share from continuing and total operations - Adjusted basic/Basic

7

17.0p

12.8p

15.1p

13.9p

- Adjusted diluted/Diluted

7

17.0p

12.7p

15.0p

13.8p

The accompanying notes form an integral part of this consolidated income statement.

15

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Unaudited 6 months to 31 October 2015 £m

Profit for the period

Unaudited 6 months to 31 October 2014 £m

74.2

79.9

Items that may be reclassified to profit or loss Cash flow hedges: - Net fair value losses on cash flow hedges - Reclassified and reported in profit for the period - Share of other comprehensive expense on joint ventures’ cash flow hedges - Tax effect of cash flow hedges - Tax effect of other comprehensive expense on joint ventures’ cash flow hedges Foreign exchange differences on translation of foreign operations (net of hedging)

(58.1) 33.1 (0.6) 3.8 0.1

(21.2) 7.1 (1.0) 2.8 0.2

(3.3)

5.9

Total items that may be reclassified to profit or loss

(25.0)

(6.2)

80.0

(53.2)

(18.4) (1.4)

10.6 7.1

0.3

(1.4)

Total items that will not be reclassified to profit or loss

60.5

(36.9)

Other comprehensive income/(expense) for the period Total comprehensive income for the period

35.5 109.7

(43.1) 36.8

109.4

36.8

Items that will not be reclassified to profit or loss Actuarial gains/(losses) on Group defined benefit pension schemes Tax effect of actuarial (gains)/losses on Group defined benefit pension schemes Share of actuarial (losses)/gains on joint ventures’ defined benefit schemes Tax effect of actuarial losses/(gains) on joint ventures’ defined benefit pension schemes

Attributable to: Equity holders of the parent Non-controlling interests

0.3 109.7

36.8

16

CONSOLIDATED BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

Notes

ASSETS Non-current assets Goodwill Other intangible assets Property, plant and equipment Interests in joint ventures Derivative instruments at fair value Retirement benefit asset Other receivables

132.9 84.7 1,097.9 57.8 2.3 25.5 12.1

1,441.9

1,413.2

26.1 380.2 0.1 324.4

26.9 375.2 1.1 0.1 395.6

730.8

798.9

2,172.7

2,212.1

752.2 52.1 50.7 29.3 62.8

830.4 38.2 51.6 35.9 64.7

947.1

1,020.8

47.1 733.3 35.8 37.3 103.9 106.5

40.0 733.7 5.4 25.1 106.1 186.0

1,063.9

1,096.3

4(d)

2,011.0

2,117.1

4(d)

161.7

95.0

15

3.2 8.4 (186.8) 422.8 (34.3) (5.1) (47.7)

3.2 8.4 (279.6) 422.8 (32.1) (1.8) (26.8)

160.5

94.1

1.2

0.9

161.7

95.0

14

4(d)

LIABILITIES Current liabilities Trade and other payables Current tax liabilities Borrowings Derivative instruments at fair value Provisions

Non-current liabilities Other payables Borrowings Derivative instruments at fair value Deferred tax liabilities Provisions Retirement benefit obligations

Total liabilities Net assets EQUITY Ordinary share capital Share premium account Retained earnings Capital redemption reserve Own shares Translation reserve Cash flow hedging reserve

Audited As at 30 April 2015 £m

132.5 83.2 1,118.6 68.8 0.7 25.0 13.1

8 9 10 11

Current assets Inventories Trade and other receivables Derivative instruments at fair value Foreign tax recoverable Cash and cash equivalents

Total assets

Unaudited As at 31 October 2015 £m

14

Total equity attributable to the parent Non-controlling interests Total equity

The accompanying notes form an integral part of this consolidated balance sheet.

17

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Ordinary share capital £m

Share premium account £m

Retained earnings £m

Capital redemption reserve £m

(279.6)

422.8

(32.1)

Own shares £m

Translation reserve £m

Cash flow hedging reserve £m

Balance at 30 April 2015 and 1 May 2015

3.2

8.4


-

-

73.2

-

-

Other comprehensive income/(expense) net of tax

-

-

60.4

-

-

(3.3)

Total comprehensive income/(expense)

-

-

133.6

-

-

(3.3)

(20.9)

Own ordinary shares purchased

-

-

-

-

Credit in relation to equity-settled share based payments

-

-

1.1

-

(2.2) -

(1.8) -

Total Equity attributable to the parent £m

(26.8)

94.1

(20.9)

Noncontrolling interest £m

Total Equity £m

0.9

95.0

73.2

1.0

74.2

36.2

(0.7)

35.5

109.4

0.3

109.7

-

-

(2.2)

-

(2.2)

-

-

1.1

-

1.1

Dividends paid on ordinary shares

-

-

(41.9)

-

-

-

(41.9)

-

(41.9)

Balance at 31 October 2015

3.2

8.4

(186.8)

422.8

(34.3)

(5.1)

(47.7)

160.5

1.2

161.7

Balance at 30 April 2014 and 1 May 2014

3.2

8.4

(310.0)

422.8

(25.7)

(10.0)

(9.4)

79.3

-

79.3


-

-

79.9

-

-

-

-

79.9

-

79.9

Other comprehensive income/(expense) net of tax

-

-

(37.7)

-

-

5.9

(11.3)

(43.1)

-

(43.1)

Total comprehensive income/(expense)

-

-

42.2

-

-

5.9

(11.3)

36.8

-

36.8

Own ordinary shares purchased

-

-

-

-

-

-

(3.1)

-

(3.1)

Credit in relation to equity-settled share based payments

-

-

1.2

-

-

-

-

1.2

-

1.2

Dividends paid on ordinary shares

-

-

(37.9)

-

-

-

-

(37.9)

-

(37.9)

Balance at 31 October 2014

3.2

8.4

(304.5)

422.8

(28.8)

(20.7)

76.3

-

76.3

(3.1)

-

(4.1)

The accompanying notes form an integral part of this consolidated statement of changes in equity.

18

CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited 6 months to 31 October 2015 £m


99.6 (26.4) 1.0 4.9

181.9 (7.9) 1.6 0.6

Net cash flows from operating activities Tax paid

79.1 (5.3)

176.2 (17.9)

Net cash from operating activities after tax

73.8

158.3

Cash flows from investing activities Purchase of property, plant and equipment Disposal of property, plant and equipment Purchase of intangible assets Movement in loans with joint ventures

(82.3) 19.6 (5.9) 5.9

(109.6) 31.4 (3.4) 10.3

Net cash outflow from investing activities

(62.7)

(71.3)

(2.2)

(2.5)

(17.8) 170.0 (160.1) (400.0) (23.3) 393.5 (41.9) 0.2 (0.4)

(0.6) (15.2) 90.9 (71.0) (37.9) 0.2 (0.5)

Net cash used in financing activities

(82.0)

(36.6)

Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Exchange rate effects

(70.9) 395.6 (0.3)

50.4 240.3 1.0

Cash and cash equivalents at the end of the period

324.4

291.7

Notes

Cash flows from operating activities Cash generated by operations Interest paid Interest received Dividends received from joint ventures

Cash flows from financing activities Purchase of treasury shares Investment in own ordinary shares by employee share ownership trust Repayments of hire purchase and lease finance Drawdown of other borrowings Repayment of other borrowings Redemption of 5.75% sterling bond – principal Redemption of 5.75% sterling bond – exceptional items Issue of new 4.00% sterling bond Dividends paid on ordinary shares Sale of tokens Redemption of tokens

16

6

Cash and cash equivalents for the purposes of the consolidated cash flow statement comprise cash at bank and in hand, overdrafts and other short-term highly liquid investments with maturities at the balance sheet date of twelve months or less. The accompanying notes form an integral part of this consolidated statement of cash flows.

19

NOTES 1

BASIS OF PREPARATION

The condensed consolidated interim financial information for the six months ended 31 October 2015 has been prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom’s Financial Conduct Authority and International Accounting Standard 34, “Interim Financial Reporting”, as adopted by the European Union. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 30 April 2015, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The accounting policies and methods of computation applied in the consolidated interim financial information are consistent with those of the annual financial statements for the year ended 30 April 2015, as described on pages 63 to 70 of the Group’s 2015 Annual Report which can be found on the Stagecoach Group website at http://www.stagecoach.com/investors/financial-analysis/reports/. This condensed consolidated interim financial information for the six months ended 31 October 2015 has not been audited, nor has the comparative financial information for the six months ended 31 October 2014 but they have both been reviewed by the auditors. The comparative financial information presented in this announcement for the year ended 30 April 2015 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006 and does not reflect all of the information contained in the Company’s annual financial statements. The annual financial statements for the year ended 30 April 2015, which were approved by the Board of Directors on 24 June 2015, received an unqualified audit report, did not contain an emphasis of matter paragraph, did not contain a statement under section 498(2) or (3) of the Companies Act 2006 and have been filed with the Registrar of Companies. The Board of Directors approved this announcement, including the condensed consolidated interim financial information, on 9 December 2015. This announcement will shortly be available on the Group’s website at http://www.stagecoach.com/investors/financial-analysis/reports/. New standards, amendments to standards and interpretations that are mandatory for the first time for the financial year beginning 1 May 2015, do not have any significant effect on the consolidated financial statements of the Group.

2

FOREIGN CURRENCIES

The principal rates of exchange used to translate the results of foreign operations are as follows:

3



Year to 30 April 2015

US Dollar: Period end rate Average rate

1.5444 1.5471

1.5998 1.6647

1.5368 1.5988

Canadian Dollar: Period end rate Average rate

2.0206 1.9824

1.8037 1.8209

1.8614 1.8323

SEASONALITY

The Group’s North American bus operations and the Twin America joint venture typically earn higher operating profit for the first half of the financial year (i.e. the six months ended 31 October) than for the second half. This is because leisure customers generate an element of the revenue with demand being at its strongest in the summer months. From December 2012 until June 2014, Virgin Rail Group operated the West Coast rail franchise under a management contract and earning a pre-tax profit equivalent to 1% of revenue, with the UK Department for Transport taking virtually all of the risk that revenue and/or costs differed from those expected. The new West Coast rail franchise commenced in June 2014 and is operated under more normal commercial terms, with Virgin Rail Group at risk for variations in revenue and cost, and expecting to earn a commensurate return. This contractual change affected the seasonality of Virgin Rail Group’s profit in the year ended 30 April 2015.

20

4

SEGMENTAL ANALYSIS

The Group is managed, and reports internally, on a basis consistent with its four continuing operating segments, being UK Bus (regional operations), UK Bus (London), North America and UK Rail. The Group’s IFRS accounting policies are applied consistently, where appropriate, to each segment. The segmental information provided in this note is on the basis of four operating segments as follows: Segment name UK Bus (regional operations)

Service operated Coach and bus operations

UK Bus (London) North America UK Rail

Bus operations Coach and bus operations Rail operations

Countries of operation United Kingdom (and immaterial operations in mainland Europe) United Kingdom USA and Canada United Kingdom

The basis of segmentation and the basis on which segment profit is measured are consistent with the Group’s last annual financial statements for the year ended 30 April 2015. The Group has interests in four joint ventures: Virgin Rail Group and Anglia Rail that operate in UK Rail, Citylink that operates in UK Bus (regional operations) and Twin America that operates in North America. The results of these joint ventures are shown separately in note 4(c) where material. (a)

Revenue

Due to the nature of the Group’s business, the origin and destination of revenue (i.e. United Kingdom, mainland Europe or North America) is the same in all cases except in respect of an immaterial amount of revenue for services operated by UK Bus (regional operations) between the UK and mainland Europe. As the Group sells bus and rail services to individuals, it has few customers that are individually “major”. Its major customers are typically public bodies that subsidise or procure transport services – such customers include local authorities, transport authorities and the UK Department for Transport. Revenue split by segment was as follows: Unaudited 6 months to 31 October 2015 £m

Continuing operations UK Bus (regional operations) UK Bus (London) North America


530.8 133.1 225.7

527.1 131.3 224.6

Total bus operations UK Rail

889.6 1,083.2

883.0 664.3

Total Group revenue Intra-Group revenue – UK Bus (regional operations)

1,972.8 (2.4)

1,547.3 (2.3)

Reported Group revenue

1,970.4

1,545.0

21

4

SEGMENTAL ANALYSIS (CONTINUED)

(b)

Operating profit

Operating profit split by segment was as follows: Unaudited

Unaudited









£m

£m

£m

£m

£m

£m

Continuing operations UK Bus (regional operations) UK Bus (London) North America

62.7 10.0 18.5

-

62.7 10.0 18.5

77.3 10.2 21.7

-

77.3 10.2 21.7

Total bus operations UK Rail

91.2 43.8

-

91.2 43.8

109.2 14.4

-

109.2 14.4

135.0 (6.9) (1.2)

(7.4) -

135.0 (6.9) (7.4) (1.2)

123.6 (7.2) (0.5)

(5.0) -

123.6 (7.2) (5.0) (0.5)

126.9

(7.4)

119.5

115.9

(5.0)

110.9

Group overheads Intangible asset expenses Restructuring costs Total operating profit of Group companies Share of joint ventures’ profit after net finance income and taxation Total operating profit: Group operating profit and share of joint ventures’ profit after taxation

(c)

17.7

-

17.7

13.9

(1.3)

12.6

144.6

(7.4)

137.2

129.8

(6.3)

123.5

Joint ventures

The share of profit from joint ventures was further split as follows: Unaudited

Unaudited


Virgin Rail Group (UK Rail) Operating profit Finance income (net) Taxation

Citylink (UK Bus, regional operations) Operating profit Taxation

Twin America (North America) Operating profit Finance costs (net) Taxation

Share of profit of joint ventures after net finance income and taxation



£m

£m






£m

£m

£m

£m

16.6 0.3 (3.4)

-

16.6 0.3 (3.4)

11.2 0.2 (2.4)

-

11.2 0.2 (2.4)

13.5

-

13.5

9.0

-

9.0

1.4 (0.3)

-

1.4 (0.3)

1.0 (0.2)

-

1.0 (0.2)

1.1

-

1.1

0.8

-

0.8

3.3 (0.1) (0.1)

-

3.3 (0.1) (0.1)

4.2 (0.1)

(1.3) -

2.9 (0.1)

3.1

-

3.1

4.1

(1.3)

2.8

17.7

-

17.7

13.9

(1.3)

12.6

22

4

SEGMENTAL ANALYSIS (CONTINUED)

(d)

Gross assets and liabilities

Assets and liabilities split by segment were as follows: Unaudited As at 31 October 2015 Gross assets £m Continuing operations UK Bus (regional operations) UK Bus (London) North America UK Rail

Net assets/ (liabilities) £m

Gross liabilities £m

Audited As at 30 April 2015 Gross assets £m

Gross liabilities £m

Net assets/ (liabilities) £m

874.3 76.1 388.8 393.0

(297.9) (95.9) (127.0) (576.4)

576.4 (19.8) 261.8 (183.4)

866.7 80.5 372.0 415.1

(341.8) (99.1) (129.3) (660.6)

524.9 (18.6) 242.7 (245.5)

Central functions Joint ventures Borrowings and cash Taxation

1,732.2 47.2 68.8 324.4 0.1

(1,097.2) (40.4) (784.0) (89.4)

635.0 6.8 68.8 (459.6) (89.3)

1,734.3 24.3 57.8 395.6 0.1

(1,230.8) (37.7) (785.3) (63.3)

503.5 (13.4) 57.8 (389.7) (63.2)

Total

2,172.7

(2,011.0)

161.7

2,212.1

(2,117.1)

95.0

5

EXCEPTIONAL ITEMS AND INTANGIBLE ASSET EXPENSES

The Group separately highlights intangible asset expenses and exceptional items. Exceptional items are defined in note 22. The items shown in the column headed “Intangibles and exceptional items” on the face of the consolidated income statement for the six months ended 31 October 2015 and the six months ended 31 October 2014 can be further analysed as follows: Unaudited 6 months to 31 October 2015

Exceptional items £m

Intangible asset expenses £m

Unaudited 6 months to 31 October 2014

Intangibles and exceptional items £m

Exceptional items £m

(7.4)

-

Intangible asset expenses £m

Intangibles and exceptional items £m

Operating costs Intangible asset expenses

-

Share of profit of joint ventures Twin America litigation

-

-

-

(1.3)

-

(1.3)

Non-operating exceptional items Provision of onerous property lease Twin America litigation

-

-

-

(2.0) (2.0)

-

(2.0) (2.0)

Non-operating exceptional items

-

-

-

(4.0)

-

(4.0)

(21.3)

-

(21.3)

-

-

-

(2.0)

-

(2.0)

-

-

-

Finance costs

(23.3)

-

(23.3)

-

-

-

Intangible asset expenses and exceptional items Tax effect

(23.3) 4.7

(7.4) 1.0

(30.7) 5.7

(5.3) 2.1

(5.0) 1.6

(10.3) 3.7

Intangible asset expenses and exceptional items after taxation

(18.6)

(6.4)

(25.0)

(3.2)

(3.4)

(6.6)

(7.4)

(5.0)

(5.0)

Finance costs Premium on early redemption of bonds Cancellation of ineffective interest rate swaps

23

6

DIVIDENDS

Dividends on ordinary shares are shown below.

Amounts recognised as distributions in the period Dividends on ordinary shares: Final dividend in respect of the previous period Interim dividend in respect of the current period Amounts recognised as distributions to equity holders in the period Dividends declared or proposed but neither paid nor included as liabilities in the financial statements Dividends on ordinary shares: Final dividend in respect of the current period Interim dividend in respect of the current period

Unaudited

Unaudited

Audited

Unaudited

Unaudited

6 months to 31 October 2015 pence per share

6 months to 31 October 2014 pence per share

Year to 30 April 2015 pence per share



Year to 30 April 2015

£m

£m

£m

Audited

7.3 -

6.6 -

6.6 3.2

41.9 -

37.9 -

37.9 18.4

7.3

6.6

9.8

41.9

37.9

56.3

3.5

3.2

7.3 -

20.1

18.4

41.9 -

3.5

3.2

7.3

20.1

18.4

41.9

The interim ordinary dividend of 3.5p per ordinary share was declared by the Board of Directors on 9 December 2015 and has not been included as a liability as at 31 October 2015. It is payable on 2 March 2016 to shareholders on the register at close of business on 5 February 2016.

24

7

EARNINGS PER SHARE

Basic earnings per share (“EPS”) have been calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the period, excluding any ordinary shares held in treasury or by employee share ownership trusts. The diluted earnings per share was calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares in relation to share based payment arrangements and longterm incentive plans. Unaudited 6 months to 31 October 2015 No. of shares million

Unaudited 6 months to 31 October 2014 No. of shares million

Basic weighted average number of ordinary shares Dilutive ordinary shares - Long Term Incentive Plan - Executive Participation Plan

573.8

574.4

0.2 2.1

1.7 2.4

Diluted weighted average number of ordinary shares

576.1

578.5



Notes

Net profit attributable to equity holders of the parent (for basic EPS calculation) Intangible asset expenses Non-controlling interest in intangible asset expenses Exceptional items before tax Tax effect of intangible asset expenses and exceptional items Net profit attributable to equity holders of the parent for adjusted EPS calculation

5 5 5

73.2 7.4 (0.4) 23.3 (5.7)

79.9 5.0 5.3 (3.7)

97.8

86.5

Earnings per share before intangible asset expenses and exceptional items is calculated after adding back intangible asset expenses and exceptional items after taking account of taxation, as shown on the consolidated income statement. This has been presented to allow shareholders to gain a clearer understanding of underlying performance. 8

GOODWILL

The movements in goodwill were as follows: Unaudited 6 months to 31 October 2015 £m


Audited Year to 30 April 2015 £m

Net book value at beginning of period Foreign exchange movements

132.9 (0.4)

125.4 4.3

125.4 7.5

Net book value at end of period

132.5

129.7

132.9

25

9

OTHER INTANGIBLE ASSETS

The movements in other intangible assets were as follows: Unaudited 6 months to 31 October 2015 £m



Cost at beginning of period Additions Disposals Foreign exchange movements

133.4 5.9 (0.1)

79.7 3.4 1.5

79.7 73.3 (22.0) 2.4

Cost at end of period

139.2

84.6

133.4

Accumulated amortisation at beginning of period Amortisation charged to income statement Disposals Foreign exchange movements

(48.7) (7.4) 0.1

(57.1) (5.0) (1.1)

(57.1) (11.9) 22.0 (1.7)

Accumulated amortisation at end of period

(56.0)

(63.2)

(48.7)

Net book value at beginning of period

84.7

22.6

22.6


83.2

21.4

84.7




Cost at beginning of period Additions Disposals Foreign exchange movements Transferred to assets held for sale

1,913.1 110.9 (52.3) (6.0) -

1,806.6 114.9 (75.2) 21.5 (5.2)

1,806.6 203.0 (131.6) 35.1 -


1,965.7

1,862.6

1,913.1

10

PROPERTY, PLANT AND EQUIPMENT

The movements in property, plant and equipment were as follows:

Depreciation at beginning of period Depreciation charged to income statement Disposals Foreign exchange movements Transferred to assets held for sale Depreciation at end of period

(815.2) (63.6) 29.1 2.6 (847.1)

(765.7) (57.9) 43.7 (9.2) 1.3 (787.8)

(765.7) (120.1) 85.7 (15.1) (815.2)


1,097.9

1,040.9

1,040.9


1,118.6

1,074.8

1,097.9

26

11

INTERESTS IN JOINT VENTURES

The movements in the carrying values of interests in joint ventures were as follows: Unaudited 6 months to 31 October 2015 £m



Cost at beginning of period Share of recognised profit Share of actuarial (losses)/gains on defined benefit pension schemes, net of tax Share of other comprehensive expense on cash flow hedges, net of tax Share of foreign exchange differences on translation of foreign operations Dividends received in cash Foreign exchange movements

115.3 17.7 (1.1)

100.3 12.6 5.7

100.3 28.1 0.1


126.3

119.1

115.3

Amounts written off at beginning and end of period

(57.5)

(57.5)

(57.5)


57.8

42.8

42.8


68.8

61.6

57.8

(0.5) (4.9) (0.2)

(0.8) (0.6) 1.9

(1.8) (0.2) (14.5) 3.3

A loan payable to Scottish Citylink Coaches Limited of £1.7m (30 April 2015: £1.7m) is included within current liabilities under the caption “Trade and other payables”. A loan receivable from Twin America of £Nil (30 April 2015: £5.9m) is included within current assets under the caption “Trade and other receivables”. 12

BUSINESS COMBINATIONS AND DISPOSALS

The Group completed no material acquisitions or disposals in the six months ended 31 October 2015. Details of acquisitions and disposals completed in earlier periods are given in the Group’s annual reports for the relevant periods. 13

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

The Group is exposed to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. These condensed financial statements do not include all financial risk management information and disclosures required in the annual financial statements. They should be read in conjunction with the Group’s consolidated financial statements for the year ended 30 April 2015. There have been no material changes in any of the Group’s significant financial risk management policies since 30 April 2015. Liquidity risk During the six months ended 31 October 2015, the following significant changes to the contractual maturities of debt occurred:   

£400m of new sterling bonds were issued in September 2015 and are due for repayment in September 2025. £400m of sterling bonds due for repayment in December 2016 were repaid early in October 2015. Unsecured bank facilities that were due to mature in October 2019 were extended to October 2020. As at 31 October 2015, bank loans of £181.7m (30 April 2015: £172.1m) were drawn on these facilities.

There have been no other material changes since 30 April 2015 in the contractual undiscounted cash out flows for financial liabilities. Fair value estimation Financial instruments that are measured in the balance sheet at fair value are disclosed by level of the following fair value measurement hierarchy. Level 1 Level 2 Level 3

Quoted price (unadjusted) in active markets for identical assets or liabilities Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices) Inputs for the assets or liability that are not based on observable market data (that is, unobservable inputs)

27

13

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (CONTINUED)

For recurring fair value measurements using significant unobservable inputs (Level 3), there was no impact of the measurements on profit or loss or other comprehensive income for the six months ended 31 October 2015. The following table represents the Group’s financial assets and liabilities that are measured at fair value within the hierarchy at 31 October 2015. Unaudited Level 2 & Total £m Assets Derivatives used for hedging

0.7

Liabilities Derivatives used for hedging

(65.1)

The following table presents the Group’s financial assets and liabilities that are measured at fair value within the hierarchy at 30 April 2015. Audited Level 2 & Total £m Assets Derivatives used for hedging

3.4

Liabilities Derivatives used for hedging

(41.3)

There were no transfers between levels during the six months ended 31 October 2015. The table below provides a comparison of carrying amounts and fair values of the Group’s financial instruments. Unaudited Carrying Fair Value value 31 October 31 October 2015 2015 £m £m Loans and receivables - Non-current assets - Other receivables - Current assets

- Trade receivables, net of impairment - Accrued income - Loans to joint venture - Other receivables - Cash and cash equivalents

Total financial assets

Financial liabilities measured at amortised cost - Non-current liabilities - Accruals - Other payables - Borrowings - Current liabilities

Total financial liabilities Net financial liabilities

Trade payables Accruals Loans from joint ventures Borrowings

Audited Carrying Fair value value 30 April 2015 30 April 2015 £m

£m

0.2

0.2

0.2

0.2

200.5 52.4 21.5 324.4 599.0

200.5 52.4 21.5 324.4 599.0

201.9 50.9 5.9 22.0 395.6 676.5

201.9 50.9 5.9 22.0 395.6 676.5

(3.4) (0.5) (733.3)

(3.4) (0.5) (738.2)

(1.0) (0.5) (733.7)

(1.0) (0.5) (760.4)

(187.6) (393.1) (1.7) (50.7) (1,370.3)

(187.6) (393.1) (1.7) (50.7) (1,375.2)

(229.6) (439.9) (1.7) (51.6) (1,458.0)

(229.6) (439.9) (1.7) (51.6) (1,484.7)

(771.3)

(776.2)

(781.5)

(808.2)

28

13

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (CONTINUED)

Derivatives that are designated as effective hedging instruments are not shown in the above table. The fair values of financial assets and financial liabilities shown in the table are determined as follows: 

The carrying value of cash and cash equivalents, accrued income, trade receivables, loan to joint venture and other receivables is considered to be a reasonable approximation of fair value. Given the short average time to maturity, no specific assumptions on discount rates have been made. The effect of credit losses not already reflected in the carrying value as impairment losses is assumed to be immaterial.



The carrying value of trade payables, other payables, accruals and loans from joint venture is considered to be a reasonable approximation of fair value. Given the relatively short average time to maturity, no specific assumptions on discount rates have been made.



The fair value of fixed-rate notes (included in borrowings) that are quoted on a recognised stock exchange is determined with reference to the “bid” price at the balance sheet date.



The carrying value of fixed-rate notes that are not quoted on a recognised stock exchange and fixed-rate hire purchase and finance lease liabilities (included in borrowings) is considered to be a reasonable approximation of fair value taking account of the amounts involved in the context of total financial liabilities and the fixed interest rates relative to market interest rates at the balance sheet date.



The fair value of other borrowings on which interest is payable at floating rates is not considered to be materially different from the carrying value.

14

RETIREMENT BENEFITS

The Group contributes to a number of pension schemes. The principal defined benefit occupational benefit schemes are as follows: 

Stagecoach Pension Schemes (“SPS”) comprising the Stagecoach Group Pension Scheme and the East London and Selkent Pension Scheme;



The South West Trains section of the Railways Pension Scheme (“RPS”);



The Island Line section of the Railways Pension Scheme (“RPS”);



The East Midlands Trains section of the Railways Pension Scheme (“RPS”);



The East Coast Main Line section of the Railways Pension Scheme (“RPS”);and



A number of UK Local Government Pension Schemes (“LGPS”);

The Directors believe that separate consideration should be given to RPS as the Group has no rights or obligations in respect of sections of the scheme following expiry of the related rail franchises. In addition, under the terms of RPS, any fund deficit or surplus is shared by the employer (60%) and the employees (40%) in accordance with the shared cost nature of RPS. The employees’ share of the deficit (or surplus) is reflected as an adjustment to the RPS liabilities (or assets). Therefore the liability (or asset) recognised for the relevant sections of RPS reflects that part of the net deficit (or surplus) of each section that the employer is obliged to fund (or expected to recover) over the life of the franchise to which the section relates. The “franchise adjustment” is the portion of the deficit (or surplus) that is expected to exist at the end of the franchise and for which the Group will not be obliged to fund (or entitled to recover). Where the conditions relating to the award of a rail franchise require the Group to assume legal responsibility for any pension asset or liability that exists at the start of the franchise, the Group recognises a net pension asset or liability. When a net pension liability exists, a corresponding intangible asset is recognised, reflecting a cost in acquiring the right to operate the franchise. If a net pension asset exists, then a corresponding deferred income balance is recognised. The intangible asset or deferred income balance is amortised through the income statement on a straight-line basis over the period of the franchise. In including our interests in joint ventures in the financial statements, the same approach to railway pensions accounting is applied. In addition, the Group contributes to a number of defined contribution schemes covering UK and non-UK employees.

29

14

RETIREMENT BENEFITS (CONTINUED)

The movements for the six months ended 31 October 2015 in the net pre-tax liabilities recognised in the balance sheet were as follows:

Liability/(asset) at beginning of period Rail franchise changes Current service cost Administration costs Net Interest cost Unwinding of franchise adjustment Employers’ contributions Actuarial (gains)/losses Liability/(asset) at end of period

Unfunded plans £m

SPS £m

RPS £m

LGPS £m

Other £m

Total £m

171.7

(24.4)

6.6

2.6

4.0

160.5

10.5 0.5 3.5 (9.4) (82.8) 94.0

(5.3) 29.1 0.3 5.0 (5.5) (25.1) 2.8 (23.1)

0.6 0.1 (3.5) 3.8

0.5 (0.3) 2.8

0.1 (0.1) 4.0

(5.3) 40.7 0.8 8.7 (5.5) (38.4) (80.0) 81.5

The net liability at 31 October 2015 shown above is presented in the consolidated balance sheet as: Total £m

Retirement benefit asset Retirement benefit obligations Net retirement benefit liability

15

25.0 (106.5) (81.5)

ORDINARY SHARE CAPITAL

At 31 October 2015, there were 576,099,960 ordinary shares in issue (30 April 2015: 576,099,960). This figure includes 1,885,887 (30 April 2015: 1,371,639) ordinary shares held in treasury, which are treated as a deduction from equity in the Group’s financial statements. The shares held in treasury do not qualify for dividends. The Group operates two Employee Share Ownership Trusts: the Stagecoach Group Qualifying Employee Share Ownership Trust (“QUEST”) and the Stagecoach Group Employee Benefit Trust (“EBT”). Shares held by these trusts are treated as a deduction from equity in the Group’s financial statements. Other assets and liabilities of the trusts are consolidated in the Group’s financial statements as if they were assets and liabilities of the Group. As at 31 October 2015, the QUEST held 300,634 (30 April 2015: 300,634) ordinary shares in the Company and the EBT held no (30 April 2015: 891,396) ordinary shares in the Company. The trusts have waived dividends on the shares they hold and therefore received no dividends during the six months ended 31 October 2015 (six months ended 31 October 2014: £Nil). The trust deed for the EBT obliges the trustee to waive the right to any dividend on the shares unless and until they are vested in an individual. The trustee is confirmed not to be liable for any lost income as a result of that waiver. The QUEST deed requires the trustee to waive any dividends payable on the shares and the QUEST confirms that waiver within the deed. This can be reversed by a direction from the Company to the trustee but is otherwise ongoing. 16

RECONCILIATION OF OPERATING PROFIT TO CASH GENERATED BY OPERATIONS

The operating profit of Group companies reconciles to cash generated by operations as follows: Unaudited 6 months to 31 October 2015 £m


Operating profit of Group companies Depreciation Loss on disposal of property, plant and equipment Intangible asset expenses Equity-settled share based payment expense

119.5 63.6 0.2 7.4 1.1

110.9 57.9 0.1 5.0 1.2

Operating cashflows before working capital movements Decrease in inventories (Increase)/decrease in receivables Decrease in payables Decrease in provisions Differences between employer contributions and pension expense in operating profit

191.8 0.7 (17.9) (72.5) (5.6)

175.1 0.9 27.8 (17.6) (3.9)

Cash generated by operations

3.1 99.6

(0.4) 181.9

During the period, the Group entered into hire purchase and finance lease arrangements in respect of new assets with a total capital value at inception of the contracts of £21.2m (2014: £6.1m). After taking account of deposits paid up-front, new hire purchase and finance lease liabilities of £21.2m (2014: £6.1m) were recognised.

30

17

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

The movement in cash reconciles to the movement in net debt as follows: Unaudited 6 months to 31 October 2015 £m


(Decrease)/increase in cash Cash flow from movement in borrowings

(70.9) 37.7

50.4 (4.7)

New hire purchase and finance leases Foreign exchange movements Other movements

(33.2) (21.2) 0.8 (23.1)

45.7 (6.1) (8.7) -

Notes

(Increase)/decrease in net debt Opening net debt

18

(76.7) (381.3)

30.9 (461.6)

Closing net debt

18

(458.0)

(430.7)

18

ANALYSIS OF NET DEBT

IFRS does not explicitly define “net debt”. The analysis provided below therefore shows the analysis of net debt as defined in note 22. The analysis below further shows the other items classified as net borrowings in the consolidated balance sheet.

Opening £m

Cashflows £m

New hire purchase and finance leases £m

Foreign exchange movements £m

Charged to income statement/other £m

Closing £m

Cash and cash equivalents Cash collateral Hire purchase and finance lease obligations Bank loans and loan stock Bonds

376.8 18.8 (88.0) (191.6) (497.3)

(70.8) (0.1) 17.8 (9.9) 29.8

(21.2) -

(0.3) 0.2 0.3 0.6

(23.1)

305.7 18.7 (91.2) (201.2) (490.0)

Net debt Accrued interest on bonds Effect of fair value hedges on carrying value of borrowings

(381.3) (8.5)

(33.2) 22.2

(21.2) -

0.8 -

(23.1) (15.3)

(458.0) (1.6)

-

-

Net borrowings (IFRS)

(389.7)

(11.0)

(21.2)

0.1

0.8

(0.1) (38.5)

(459.6)

The cash collateral balance as at 31 October 2015 of £18.7m (30 April 2015: £18.8m) comprises balances held in trust in respect of loan notes of £18.3m (30 April 2015: £18.4m) and North America restricted cash balances of £0.4m (30 April 2015: £0.4m). In addition, cash includes train operating company cash of £254.7m (30 April 2015: £281.0m). Under the terms of the franchise agreements, other than with the UK Department for Transport’s consent, train operating companies can only distribute cash out of retained earnings and only to the extent they do not breach the financial covenants specified in applicable contracts. 19

COMMITMENTS AND CONTINGENCIES

(i)

Capital commitments Capital commitments at 31 October 2015 for the acquisition of property, plant and equipment were £76.2m (30 April 2015: £146.0m).

(ii)

Performance and season ticket bonds At 31 October 2015, the Group has provided performance bonds backed by bank facilities or insurance arrangements of £71.8m (30 April 2015: £87.3m) and season ticket bonds backed by bank facilities or insurance arrangements of £65.0m (30 April 2015: £70.0m) to the Department for Transport in relation to the Group’s rail franchise operations. £82.5m (30 April 2015: £82.5m) of an inter-company loan facility provided to a subsidiary train operating company is backed by a guarantee issued under a bank facility.

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19

COMMITMENTS AND CONTINGENCIES (CONTINUED)

(iii)

Legal actions The US Department of Justice and the New York Attorney General (together, "the Government plaintiffs") initiated litigation against Twin America and its joint venture partners ("the Defendants", which include two Stagecoach US subsidiaries) in 2012. The litigation alleged that the formation of the Twin America joint venture in 2009 was anti-competitive. A settlement has been agreed with the US Department of Justice and the New York Attorney General's office, and has now received court approval. Related to the Twin America litigation involving the Group’s North America Division, the Department of Justice is continuing to investigate the conduct of company personnel in responding to discovery obligations in the investigation and litigation. The Department of Justice has not taken any enforcement action related to these issues, and the Group is co-operating with the investigation. The Group and the Company are from time to time party to other legal actions arising in the ordinary course of business. Liabilities have been recognised in the financial statements for the best estimate of the expenditure required to settle obligations arising under such legal actions. As at 31 October 2015, the accruals in the consolidated financial statements for such claims total £0.1m (30 April 2015: £0.1m) in addition to the amounts recognised specifically in respect of the Twin America matters noted above. In addition, certain of the claims intended to be covered by insurance provisions are subject to or might become subject to litigation against the Group.

20

RELATED PARTY TRANSACTIONS

Details of major related party transactions during the six months ended 31 October 2015 are provided below, except for those relating to the remuneration of the Directors and management. (i)

Virgin Rail Group Holdings Limited - Non-Executive Directors Two of the Group’s directors are non-executive directors of the Group’s joint venture, Virgin Rail Group Holdings Limited. During the six months ended 31 October 2015, the Group earned fees of £30,000 (six months ended 31 October 2014: £30,000) from Virgin Rail Group Holdings Limited in this regard. As at 31 October 2015, the Group had £30,000 (30 April 2015: £60,000) receivable from Virgin Rail Group Holdings Limited in respect of this. In addition, the Group purchased £0.2m (six months ended 31 October 2014: £Nil) from the group headed by Virgin Rail Group Holdings Limited in respect of work undertaken on rail franchise bids and had an outstanding payable of £Nil as at 31 October 2015 (30 April 2015: £0.1m receivable) in this respect. The Group also earned £Nil (six months ended 31 October 2014: £0.3m) from Virgin Holdings Limited (which holds a 51% joint venture interest in Virgin Rail Group Holdings Limited), in respect of work undertaken on rail franchise bids and had an outstanding receivable of £Nil as at 31 October 2015 (30 April 2015: £Nil) in this respect.

(ii)

West Coast Trains Limited West Coast Trains Limited is a subsidiary of Virgin Rail Group Holdings Limited (see above). In the six months ended 31 October 2015, East Midlands Trains Limited (a subsidiary of the Group) had purchases totalling £0.1m (six months ended 31 October 2014: £0.1m) from West Coast Trains Limited, and sales to West Coast Trains Limited were immaterial (six months ended 31 October 2014: £Nil). The outstanding amounts payable as at 31 October 2015 and 30 April 2015 were immaterial. The Group had £0.3m receivable as at 31 October 2015 (30 April 2015: £1.4m).

(iii)

Alexander Dennis Limited Sir Brian Souter (Chairman) and Ann Gloag (Non-Executive Director) collectively hold, via companies that they control, 55.1% (30 April 2015: 55.1%) of the shares and voting rights in Alexander Dennis Limited. Noble Grossart Investments Limited (of which, Sir Ewan Brown (Non-Executive Director) is a director of its holding company) controls a further 33.2% (30 April 2015: 33.2%) of the shares and voting rights of Alexander Dennis Limited. None of Sir Brian Souter, Ann Gloag or Sir Ewan Brown is a director of Alexander Dennis Limited nor do they have any involvement in the management of Alexander Dennis Limited. Furthermore, they do not participate in deciding on and negotiating the terms and conditions of transactions between the Group and Alexander Dennis Limited. For the six months ended 31 October 2015, the Group purchased £30.9m (six months ended 31 October 2014: £27.3m) of vehicles from Alexander Dennis Limited and £3.9m (six months ended 31 October 2014: £4.7m) of spare parts and other services. As at 31 October 2015, the Group had £0.6m (30 April 2015: £0.8m) payable to Alexander Dennis Limited, along with outstanding orders of £34.2m (30 April 2015: £64.0m).

(iv)

Pension Schemes Details of contributions made to pension schemes are contained in note 14.

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20

RELATED PARTY TRANSACTIONS (CONTINUED)

(v)

Scottish Citylink Coaches Limited A non interest bearing loan of £1.7m (30 April 2015: £1.7m) was due to the Group’s joint venture, Scottish Citylink Coaches Limited, as at 31 October 2015. The Group earned £9.2m in the six months ended 31 October 2015 in respect of the operation of services subcontracted by Scottish Citylink Coaches Limited (six months ended 31 October 2014: £12.6m). As at 31 October 2015, the Group had a net £0.7m payable (30 April 2015: £0.7m receivable) from Scottish Citylink Coaches Limited, excluding the loan referred to above.

(vi)

Twin America LLC In the six months ended 31 October 2015, the Group’s joint venture, Twin America LLC, sold travel of £1.4m (six months ended 31 October 2014: £1.8m) for tour services operated by the Group. The commission received by Twin America from the Group was not material. As at 31 October 2015, the Group had £0.2m (30 April 2015: £0.5m) receivable from Twin America LLC in this regard. The Group had an outstanding receivable of £Nil as at 31 October 2015 (30 April 2015: £5.9m) in respect of a loan note to Twin America LLC. The interest receivable for the six months ended 31 October 2015 was £0.1m (six months ended 31 October 2014: £Nil), and accrued interest receivable by the Group as at 31 October 2015 was £Nil (30 April 2015: £Nil).

(vii)

East Coast Main Line Company Limited The Group owns 90% and Virgin Holdings Limited owns 10% of the ordinary shares in Inter City Railways Limited. East Coast Main Line Company Limited is 100% owned by Inter City Railways Limited and enters into various arm’s length transactions with other Group companies. In the six months ended 31 October 2015, other Group companies earned £7.7m from East Coast Main Line Company Limited in respect of the provision of certain services including train maintenance and rail replacement bus services (six months ended 31 October 2014: £Nil). Other Group companies had a net payable balance of £4.6m as at 30 April 2015 (30 April 2015: £1.2m). The ultimate parent company of the Group, Stagecoach Group plc, had an outstanding receivable of £35.0m as at 31 October 2015 in respect of a loan to East Coast Main Line Company Limited (30 April 2015: £35.0m). The interest receivable for the six months ended 31 October 2015 was £0.1m (six months ended 31 October 2014: £Nil). Related to that, the Group had an outstanding payable for £3.5m as at 31 October 2015 in respect of a loan from Virgin Holdings Limited (30 April 2015: £3.5m). In addition, in the six months ended 31 October 2015, East Coast Main Line Company Limited purchased services amounting to £1.5m from Virgin Holdings Limited (six months ended 31 October 2014: £Nil). The Group had a payable balance of £0.8m to Virgin Holdings Limited at 31 October 2015 in this respect (30 April 2015: £0.5m).

21

POST BALANCE SHEET EVENTS

Details of the interim dividend declared are given in note 6.

22

DEFINITIONS

The following definitions are used in this document: 

Adjusted earnings per share is calculated by dividing profit attributable to equity holders of the parent, excluding intangible asset expenses and exceptional items, by the basic weighted average number of shares in issue in the period.



Like-for-like amounts are derived, on a constant currency basis, by comparing the relevant year-to-date amount with the equivalent prior year period for those businesses and individual operating units that have been part of the Group throughout both periods.



Operating profit for a particular business unit or division within the Group refers to profit before net finance income/charges, taxation, intangible asset expenses, exceptional items and restructuring costs.



Operating margin for a particular business unit or division within the Group means operating profit as a percentage of revenue.



Exceptional items means items which individually or, if of a similar type, in aggregate need to be disclosed by virtue of their nature, size or incidence in order to allow a proper understanding of the underlying financial performance of the Group.



Gross debt is borrowings as reported on the consolidated balance sheet, adjusted to exclude accrued interest and the effect of fair value hedges on the carrying value of borrowings.



Net debt (or net funds) is the net of cash/cash equivalents and gross debt.

33

Independent review report to Stagecoach Group plc Report on the condensed consolidated interim financial statements

Responsibilities for the interim financial statements and the review

Our conclusion We have reviewed the condensed consolidated interim financial statements, in the half-yearly financial report of Stagecoach Group plc for the six months ended 31 October 2015. Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, ‘Interim Financial Reporting’, as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Our responsibilities and those of the directors The half-yearly financial report, including the condensed consolidated interim financial statements, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom’s Financial Conduct Authority

What we have reviewed The condensed consolidated statements, comprise:      

interim

financial

The Consolidated Income Statement for the six months ended 31 October 2015; The Consolidated Statement of Comprehensive Income for the six months ended 31 October 2015; The Consolidated Balance Sheet as at 31 October 2015; The Consolidated Statement of Changes in Equity for the six months ended 31 October 2015; The Consolidated Statement of Cash Flows for the six months ended 31 October 2015; Accompanying notes.

The condensed consolidated interim financial statements included in the half-yearly financial report have been prepared in accordance with International Accounting Standard 34, ‘Interim Financial Reporting’, as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom’s Financial Conduct Authority. As disclosed in note 1 to the condensed consolidated interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Our responsibility is to express a conclusion on the condensed consolidated interim financial statements in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of complying with the Disclosure and Transparency Rules of the United Kingdom’s Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What a review of interim financial statements involves We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated interim financial statements.

PricewaterhouseCoopers LLP Chartered Accountants 9 December 2015 Glasgow Notes: (a)

The maintenance and integrity of the Stagecoach Group plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.

(b)

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

34