Final Results

17th May 2006 07:00

Embargoed until 07:00hrs on Wednesday 17 May 2006 FIRSTGROUP PLC PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2006OPERATIONAL SUMMARY * Strong Group performance in challenging trading conditions * + Increased revenue and profit despite ‚£31m fuel cost increase + Dividend increased by 10% * Excellent performance in UK Rail * + Award of 2 new franchises - now the UK's largest rail operator + First ScotRail performance best in 5 years + First TransPennine Express strong passenger growth and introduction of new trains + First Great Western + 7.5% and FGW Link + 9.0% passenger income growth + Shortlisted for South Western Franchise * Continued growth in North America * + Record sales and earnings + First Student - revenue growth and contract renewals at improved margins + First Transit - retention of important contracts and expansion in light transit market + First Services - strong revenue and earnings growth and well placed to grow in federal market * Robust performance in UK Bus * + Strong on-bus revenue growth and increased passenger journeys + Focus on operational efficiencies and higher productivity + Launch of first `ftr' service in York this month + Investment in service reliability delivering benefits - mileage operated at highest level in 4 years FINANCIAL SUMMARY * Turnover ‚£3,030.9m (2005: ‚£2,693.4m) * Adjusted operating profit1 ‚£229.7m (2005: ‚£214.8m) * Operating profit ‚£210.7m (2005: ‚£204.0m) * EBITDA2 ‚£351.7m (2005: ‚£322.4m) * Adjusted profit before tax1 ‚£176.4m (2005: ‚£166.5m) * Profit before tax ‚£157.4m (2005: ‚£155.7m) * Adjusted basic earnings per share1 30.9p (2005: 28.9p) * Basic earnings per share 27.4p (2005: 27.1p) * Interest cover3 6.6x (2005: 6.7x) * Dividend per share 14.1p (2005: 12.815p) * Net debt at 31 March 2006 ‚£704.4m (2005: ‚£663.1m) 1 Before intangible asset amortisation, bid costs and profit on disposal offixed assets, as shown in the consolidated income statement page 24.2 Adjusted operating profit as defined plus depreciation.3 Calculated as EBITDA divided by the net of finance costs and investmentincome.Commenting, FirstGroup's Chief Executive, Moir Lockhead said:"I am pleased to report another strong set of results reflecting a verysuccessful year for the Group. Our record EBITDA has enabled us to invest forgrowth in the business, while increasing the dividend by 10% and returning ‚£23.0m to shareholders through the further repurchase of equity during theyear.""All of our divisions have delivered an extremely robust performance. Our UKRail Division continues to deliver strong passenger volume and income growth.Through the award of two new major franchises - Greater Western and Thameslink/Great Northern (now renamed First Capital Connect) - we have secured additionalrevenue of over ‚£1.0bn per annum for up to 10 years. We continue to grow inNorth America and the Board remains extremely pleased with the consistentreturns we have delivered from our businesses there. We have more than doubledEBITDA since we entered the North American market in 1999. In UK Bus we areencouraged to see increased passenger journeys and have delivered strongrevenue growth despite ongoing fuel price pressure. The first `ftr' service waslaunched in York this month and we continue to see encouraging growth in thoseareas where we can successfully develop partnerships with Local Authorities whoare committed to public transport and the reduction of traffic congestion.""The Group is well placed for further growth. It has strong and predictablecash flows with some 50% of our revenues coming from contracted business in theUK and North America. The Board is committed to increasing shareholder value bygrowing our core businesses, developing opportunities in new markets anddividend growth of 10% per annum for the foreseeable future, at least until2008. This will be supported, where appropriate, by share repurchases whilemaintaining a strong balance sheet. Trading in the new financial year hasstarted well and is in line with our expectations."Enquiries FirstGroup plc :Moir Lockhead, Chief Executive Tel: 020 7291 0512Dean Finch, Finance Director Tel: 020 7291 0512Rachael Borthwick, Corporate Communications Director Tel: 020 7291 0508PHOTOGRAPHS FOR THE MEDIA ARE AVAILABLE AT WWW.NEWSCAST.CO.UKNOTES TO EDITORS:FirstGroup plc is a UK based international transport company with a turnover ofover ‚£3 billion a year and some 74,000* employees throughout the UK and NorthAmerica. * The Group is Britain's largest bus operator running more than one in five of all local bus services. A fleet of some 9,000 buses carries over 2.8 million passengers a day in more than 40 major towns and cities. * The Group is the UK's largest rail operator with four passenger franchises - First Great Western, First Capital Connect, First TransPennine Express and First ScotRail - and one open access operator Hull Trains. * The Group operates one quarter of the UK passenger rail network, with a balanced portfolio of intercity, commuter and regional services, carrying over 250m passengers per annum. * The Group is shortlisted for the South Western franchise. * The Group operates freight services through GB Railfreight. * The Group operates Croydon Tramlink network which carries over 20 million passengers a year. * In North America the Group has three operating divisions: Yellow School Buses (First Student), Transit Contracting and Management Services (First Transit) and Vehicle Fleet Maintenance and Support Services (First Services). Headquartered in Cincinnati the businesses operate across the US and Canada. * First Student is the second largest provider of student transportation in North America with a fleet of over 21,000 yellow school buses, carrying nearly 2 million students every day across the US and Canada. * First Transit is one of the largest private sector providers of transit management and contracting, managing public transport systems on behalf of transit authorities in cities such as Los Angeles, Houston and Denver. We are one of the largest providers of airport shuttle bus services in the US, serving airports in cities such as Baltimore, Philadelphia and Miami. We also manage call centres, paratransit operations and other light transit activities. * First Services is the largest private sector provider of vehicle maintenance and ancillary support services in the US. We provide fleet maintenance for public sector customers such as the Federal Government, cities and fire and police departments. We also provide a range of support services including vehicle maintenance, logistics support and facilities management to public and private sector clients including the US Navy and US Air Force. * including new employees who joined the Group from Greater Western andThameslink/Great Northern franchisesChairman's statementThis year is marked by the bombings in London in July. On behalf of the Boardof FirstGroup plc and all of its employees I would like to express mycondolences to the injured and to the bereaved. Although our operations werenot directly affected, we are proud of the efforts our staff made to assistpassengers in extremely challenging circumstances. I would like to take thisopportunity to thank all of our staff involved for their courage and commitmentduring that very difficult time. The safety of our passengers and employees isour highest priority and we constantly strive to achieve the highest possiblestandards.I am pleased to report another year of good progress across the Group. Turnoverhas increased to ‚£3,030.9m (2005: ‚£2,693.4m) and adjusted profit before tax(before intangible asset amortisation, bid costs and profit on disposal offixed assets) increased to ‚£176.4m (2005: ‚£166.5m). Profit before tax increasedto ‚£157.4m (2005: ‚£155.7m). This is a particularly strong performance given theadditional cost increases faced by the Group during the year, specificallyincreases in fuel prices which impacted Group operating profit by ‚£31m. Cashgeneration was again strong. EBITDA (Group operating profit* plus depreciation)increased to a record ‚£351.7m (2005: ‚£322.4m). Adjusted basic earnings pershare has increased by 6.9% to 30.9p (2005: 28.9p) and basic earnings per shareincreased by 1.1% to 27.4p (2005: 27.1p). The Board has proposed a finaldividend, subject to approval by shareholders, of 9.55p making a full yearpayment of 14.1p, an increase of 10%. The dividend is covered 2.4 times, beforeintangible asset amortisation, bid costs and profit on disposal of fixedassets. It will be paid on 25 August 2006 to shareholders on the register on 21July 2006. The dividend increase reflects the Board's confidence in the Group'sstrong cash generation and growth prospects. The Board is confident that thislevel of dividend growth is sustainable for the foreseeable future, at leastuntil 2008.This year saw the Group build on its successful rail portfolio with the awardof two important rail franchises Greater Western and Thameslink/Great Northern(now renamed First Capital Connect). We were delighted to win both of thesefranchises as a result of substantial and comprehensive research and theexpertise of our bidding team. We are now the UK's largest passenger railoperator, providing services from the north east of Scotland right down to thesouth west of England, and look forward to building on our record of success.We are shortlisted for the South Western franchise and look forward tosubmitting a robust and innovative bid.Our North America division continues to perform well with high contractretention and new business won across all of our operations. These businesseshave delivered consistent growth since we entered the North American market in1999.We believe that the bus is the natural solution to the increasing problem ofcongestion affecting our towns and cities. We continue to promote and develop apartnership approach to tackle the problem of traffic congestion. We haveexperienced encouraging growth in those areas where we are able to developquality partnerships with Local Authorities to improve the services we offerpassengers through bus priority and other traffic management schemes.During the year we further strengthened the Board with two new appointments. InJuly Professor David Begg joined the Board as a Non-Executive Director. Davidhas vast experience and an impressive record in public transport and transportpolicy. Sid Barrie joined the Board as Commercial Director in August and hisappointment further strengthens our commercial team. Both bring extensiveexperience to the Group.I would like to take this opportunity to thank our staff for their continuedhard work and commitment in delivering another year of strong growth. I wouldalso like to welcome new employees including those at First Capital Connect andthe enlarged Greater Western franchise and staff who have joined our businessesin the UK and US during the period.We have a clear strategy to deliver value for shareholders by growing in ourcore businesses in the UK and North America and exploring opportunities todevelop in new markets. We will continue to invest for growth in our businesseswhile remaining committed to increasing the dividend by 10% per annum, at leastuntil 2008 and, where appropriate, share repurchases while maintaining ourstrong balance sheet.Martin GilbertChairman* Operating profit referred to throughout this document refers to operatingprofit before intangible asset amortisation, bid costs and profit on disposalof fixed assets.Chief Executive's operating reviewOVERVIEWSafetyThe safety and security of our passengers and staff is at the forefront ofeverything we do and we actively endorse a culture of `Safety First' throughoutour business. We continually assess our working practices and procedures toensure that we are doing everything we can to meet the highest possiblestandards of safety for our passengers and our staff. We have launched the`Injury Prevention Programme' across the Group and established the `FirstSafety Principles' to clearly set out the principles of safe working practicesthroughout the business. The simple message to all employees is `if you cannotdo it safely, don't do it'.ResultsI am pleased to report another successful year of growth in our businesses inthe US and UK with record results. Group turnover increased by 12.5% to ‚£3,030.9m (2005: ‚£2,693.4m). Adjusted operating profit was ‚£229.7m (2005: ‚£214.8m). I am particularly pleased with this creditable performance given thestrong headwinds we faced during the year, most notably the significant rise infuel costs. Operating profit was impacted by ‚£31m by additional fuel costs as aresult of the rise in global oil prices. The Group generated record EBITDA(adjusted operating profit plus depreciation) of ‚£351.7m (2005: ‚£322.4m)enabling us to continue to invest in the business as well as increasing thedividend by 10% and returning ‚£23.0m to shareholders through further repurchaseof equity during the year.UK RAILThe UK Rail division operates passenger and freight services in the UK.Passenger rail franchises consist of the new Greater Western franchise(incorporating First Great Western, First Great Western Link and WessexTrains), First Capital Connect (incorporating Thameslink and Great Northern),First TransPennine Express and First ScotRail. We also operate Hull Trains, anon-franchised open access intercity passenger train operator, and we providerail freight services through GB Railfreight. We are now the UK's largest railoperator carrying more than 250 million passengers per annum.ResultsI am very pleased with the excellent performance of our rail division duringthe year. Our current operations, excluding the new franchises which commencedoperation after the year end, performed strongly delivering record turnover andprofits. Turnover in the Group's rail division increased to ‚£1,164.9m (2005: ‚£1,059.7m) and operating profit increased by 23% to ‚£79.6m (2005: ‚£64.5m). Theoperating margin increased to 6.8% (2005: 6.1%). This is a particularly strongperformance, given the effect of the July terrorist attacks on London which hadan estimated adverse impact of ‚£9.0m on our rail franchises during the firsthalf of the year. We took a number of actions to encourage and promote railtravel and subsequently saw passenger journeys return to normal levels aspublic confidence recovered. These results demonstrate the strength of all ourrail franchises which have continued to deliver strong passenger volume growth.We have now secured additional longer-term revenue for up to 10 years acrossour UK rail portfolio with the award of two new enlarged rail franchises.New FranchisesWe were delighted to be awarded both the Greater Western and Thameslink/GreatNorthern (now renamed First Capital Connect) franchises worth over ‚£1bn ofrevenue per annum. We commenced operation of both franchises on 1 April with asmooth handover reflecting the considerable effort made by the rail teamsduring the rigorous mobilisation process. Both of these franchises present asignificant opportunity for the Group and complement our existing railportfolio. We are encouraged by the good start up of both franchises and areexperiencing strong revenue growth ahead of the projections made at the time ofthe bids. We are now the only operator to run every type of overground railservice in the UK, from high speed intercity trains and overnight sleepers tolocal branch lines, regional and commuter services and open access, light railand freight operations. We will continue to build on our strong reputation ofinnovation, investment and customer service.The Greater Western franchise, which combines First Great Western, First GreatWestern Link and Wessex Trains, operates services across the South and West ofEngland and South Wales. We have committed to a ‚£200m investment programme, thevast majority of which will be spent in the first 2 years. This investment willdeliver significant improvements across the franchise and customer benefitsincluding improved capacity, safety and service. We are upgrading the trainfleet to provide a step change in passenger comfort and facilities and toprovide over 30% more seats during the morning and evening peak. We are alsomaking a number of station improvements across the network including new ticketmachines, improved facilities for customers, new CCTV and help points and anadditional 1,700 car parking spaces, representing an increase of 25% on thecurrent mainline availability, and more cycle park facilities. In addition wewill work together with Network Rail, the infrastructure provider, to tacklethe deep-rooted performance issues on the Greater Western network. We have justcompleted our most comprehensive and widespread consultation in advance of theintroduction of the December 2006 timetable and have already responded tofeedback received with the provision of service revisions, and whereappropriate, additional services. We are delighted that Sir Chay Blyth hasjoined us to head the new board of Directors at First Great Western. Sir Chayis a regular user of our services in the region and we look forward to drawingon his vision and inspiration as we continue to grow and develop this importantfranchise.First Capital Connect operates across London and the South East. We havedelivered a successful start up of this new franchise and worked hard to ensurethat customers saw improvements to the service right from the outset. We areinvesting ‚£52m, the majority in the first three years of the franchise term, toimprove the service offered to passengers. We will be introducing a number ofimprovements from cleaner, smarter trains to enhanced station facilitiesincluding upgraded waiting areas and passenger information systems.Improvements to the timetable will substantially increase capacity at peaktimes, providing more seats for passengers in the morning and evening peak.Safety and security at our stations is key and we have already conducted amajor review of all stations and as a result a number of significantenhancements will be introduced. We are recruiting additional frontline staff,investing in new CCTV equipment, help points and a new control centre tomonitor security camera footage from a single central location. Revenueprotection is one of our key priorities for this new franchise and we will beproviding customers with improved ticketing facilities and will reduce revenueleakage through further ticket checks, additional revenue protection staff andthe installation of automatic ticket gates at a number of key stations acrossthe network. These initiatives aim to improve security, reduce ticketlesstravel and lessen vandalism.Current operationsFirst ScotRail continues to deliver a strong performance, reflecting thededication to providing service enhancements for passengers and ensuring thehighest possible standards of operation across the network. We have continuedto focus on minimising delays caused by train performance failures and asresult have seen delays for which we are responsible fall by 26%. Thisexcellent result far exceeds the franchise commitment of 2% reduction perannum. We are also pleased to see a marked improvement in the performance ofthe infrastructure. We are very pleased that reliability and punctuality is nowmore than 90%, the best performance in five years. Passenger volumes haveincreased by 11% since the start of the franchise in October 2004 and we weredelighted to achieve the highest levels of customer satisfaction recorded forsome time. Since we took over the franchise we have focused on improvingcustomer service across all areas. We opened a new customer service centre inFort William, creating 50 new jobs in rural Scotland, to provide general travelinformation, ticket sales, customer relations and assistance for disabledtravellers. We also introduced an innovative free text alert service forpassengers to provide advance warning if their train is expected to be delayed.We have improved training and development for employees and increased thenumber of frontline staff across the network. The personal safety of ourpassengers and staff is our main priority. As part of our commitment to safetymore than 100 stations across the ScotRail network are being fitted with CCTV,help points and improved car park lighting. The winter timetable we launched inDecember provided improved commuter services in to Glasgow and Inverness andenhancements to services in Aberdeenshire, the Highlands and Strathclyde.First TransPennine Express continues to outperform with passenger volumesacross the network increasing by 6.5% during the period, bringing the totalpassenger volume growth to 11% since the start of the franchise in February2004. We continue to benefit from increased road congestion on the commutercorridor between Leeds and Manchester with an estimated 5 million journeys ayear now made on this part of the rail network. Substantial volume growth of30% has been achieved on services to and from Manchester Airport, we now carry1.2m passengers per annum on this key route. We were delighted to expand ourFirst TransPennine network with the transfer of Manchester InternationalAirport - Blackpool North services from Northern Rail with effect from June2006. Passengers will benefit from the transfer of these services with theopportunity to travel on new rolling stock. This year a fleet of 51 new 100mphSiemens trains will be introduced on the network and the first of these newtrains entered passenger service in March. Passengers in the region willbenefit from the step change in quality and the many new features including airconditioning, improved seating, advanced passenger information systems, a firstclass section, on-board CCTV security cameras and improved access for all. InMay the Secretary of State for Transport, Douglas Alexander, opened a ‚£28mtrain-care depot in Manchester to service the new trains. This state of the artfacility is designed to deliver optimum train performance and standards ofcleanliness.At First Great Western growth has continued to be strong. Passenger income grewby 7.5% despite the impact of the London bombings in July. Passenger incomegrowth has exceeded 8% over the last four years and this encouraging trendprovides us with a strong platform for further growth in the new franchise.During the period we have worked hard with Network Rail and our industrypartners through the Joint Performance Improvement Plan to prioritise andtackle the issues which impede performance. We have reduced the operator delaysfor which we are responsible by 30% in the last 5 years. As part of ourcommitment to integrated transport, and to ensure that public transport is evenmore convenient and better value, further PlusBus schemes were introducedduring the year enabling passengers to switch between different modes oftransport using only one ticket. As a result we are encouraged that sales ofPlusBus tickets have more than trebled during 2005. During the year we werepleased to receive Secure Station status for a number of stations includingSlough, Newbury, Newton Abbott, Cholsey, Exeter St Davids, Plymouth, Totnes,Thatcham and Pangbourne bringing the total number of accredited stations in theregion to 27.At First Great Western Link passenger income increased by 9% demonstrating thestrong underlying performance of this railway despite the impact of theterrorist attacks in London last July. We invested in a refurbishment programmeto improve the travel experience for passengers. A number of stations acrossthe First Great Western Link network benefited from newly refurbished passengerfacilities such as waiting rooms and booking halls and improved customerinformation boards. We also launched a package of security and safetyimprovements, in partnership with Transport for London (TfL), helping to makerail travel safer across the capital. The ‚£400,000 investment programmedelivered improvements including new CCTV, help points and new anti-vandalshelters at stations. In March we were pleased to achieve Secure Station statusat Oxford station following the accreditation of a number of our other FirstGreat Western Link stations in the Thames Valley.Hull Trains, our non-franchised, open access intercity train company operatingbetween London Kings Cross and Hull, performed well during the year anddelivered strong revenue and passenger growth. We now operate six weekdayservices and have recently introduced new 125mph trains on to the network. Inresponse to demand we are currently expanding the First Class seating capacityoffered on our services. We were delighted to win the `Rolling Stock Excellenceof the Year Award' and come runner up in the `Rail Business of the Year'category at the recent Rail Business Awards. We also won the National FleetReliability Improvement Programme award for `Reliability of Rolling Stock'.GB RailfreightGB Railfreight (GBRf), our freight company, had another successful yearbuilding on its reputation for a high level of service combined with a flexiblebusiness model. A number of new contracts were won during the year for clientsincluding Royal Mail, Petrochem Carless, Knights Rail and Network Rail. InAugust GBRf will commence a significant 10-year contract with Metronet totransport infrastructure materials as part of the programme to renew the LondonUnderground network. In January we launched a new daily multi-modal servicefrom the Port of Felixstowe to Exel at Doncaster, providing a `turn up and go'service giving customers the flexibility to use it when they need to. A numberof new rolling stock orders such as locomotives and wagons were placed tosupport the new contracts. The growth of GBRf and its successful tender forthese contracts has taken thousands of heavy vehicles off already congestedroads as it transports goods and equipment by rail. We are pleased with thedevelopment of GBRf and confident that there is scope to further expand ourrail freight operations through this innovative and demand-responsive business.Franchise biddingWe are delighted to be shortlisted for the South Western franchise. We have anexcellent track record of innovation and investment and a highly experiencedbidding team. We look forward to consulting widely and working with all of thestakeholders to develop exciting proposals for this franchise. We will beseeking to pre-qualify for the North London Lines concession which will betendered by Transport for London later in the summer.Outlook UK RailThe strong performance of our rail operations reflects our expertise,innovation and the investment we have made in the businesses. We aim to delivera high level of service and performance to our existing customers and attractnew passengers on to the railways. This year has been particularly successfulwith the award of two major rail franchises to the Group and we look forward tobuilding on that success in forthcoming franchise rounds. We remain confidentabout the Group's future opportunities in UK railways.NORTH AMERICAIn North America the Group is the second largest operator of studenttransportation with over 21,000 yellow school buses carrying nearly 2 millionstudents every day across the US and Canada. We operate the largest transitcontracting and management business in North America and we have a growingservices division providing fleet maintenance and ancillary services to publicand private sector clients.ResultsOur North American division has performed well during the year. Turnover fromour three businesses increased to ‚£826.3m or $1,476.0m (2005: ‚£665.8m or$1,230.2m), an increase in dollar terms of 20.0%. Operating profit was ‚£67.1mor $120.2m (2005: ‚£62.4m or $115.4m). Operating profit was impacted by $10.0mas a result of increased fuel costs due to the rise in global oil prices and by$8.4m as a result of increasing our insurance reserves. This was partiallyoffset by the recovery of the `lost' operational days from 2004/05 in FirstStudent.Since we acquired our North American business we have delivered consistentreturns with EBITDA growth of approximately 13% per annum since 2000. The threebusinesses generate excellent returns with EBITDA of ‚£122.0m or $218.4m (2005:‚£109.3m or $202.1m) and remain self-financing in terms of maintenance capitalexpenditure, organic growth through new contract wins and acquisitions. Allinvestment for growth, whether it be contract bids or acquisitions, must meetthe Group's rigorous internal rate of return targets.First StudentThis year we are pleased to have continued the growth of our yellow school busbusiness despite ongoing fuel cost pressures. Strong contract retention remainsa feature of this business and we were pleased to retain over 90% of ourcontracts that came up for renewal during the period. US Dollar turnoverincreased by 19.6% but operating profit was down by 3.2% as a result of higherfuel costs and the cost of increasing our insurance reserves. During the periodwe successfully integrated Cardinal, the business we acquired last year, andthis continues to provide us with a good base for growth and synergies withinour Canadian operations. We continued to grow our market share through acombination of new business wins, organic growth and acquisitions. In additionto the new business won in the first half of the year, we were pleased to win anew contract in Saskatchewan, Canada and to make our first entry in to Arizona.We will be seeking to expand our presence in this new market. In addition wewere pleased to retain a number of important contracts including Washington andMassachusetts and we made four in-fill acquisitions in Wisconsin, New Jersey,Ohio and Vermont.Looking ahead we had a successful bidding season and have renewed contracts andwon new business on terms which better reflect the cost pressures we face. Weare focused on delivering margin enhancement in the business and will continueto drive efficiencies where appropriate and re-profile contracts as they comeup for re-tender. We are confident that we will be able to continue to grow ouryellow school bus business through our strategy to win new business combinedwith the organic growth of existing contracts and in-fill acquisitions at ourtarget margins.First TransitUS Dollar turnover increased by 13.5% and operating profit by 9.4%. We continueto focus on margin enhancement and during the period have implemented aprogramme of efficiencies which will also deliver further benefit in the newtrading year. During the year we continued to grow with the commencement of newcontracts including the provision of shuttle bus services at the University ofTexas, additional transit management and contracting services in Washington DCand additional paratransit business in Philadelphia. We were pleased to retaina number of important contracts that came up for renewal including transitmanagement and contracting business in Los Angeles and Denver. We continued toimplement our strategy to increase our share of the `light transit' market andwe are now one of the largest operators of airport shuttle services in the US,providing bus services at a number of major airports across the US. We recentlywon a contract to operate a further call centre in Indianapolis bringing ourcall centre operations to a total of eight in cities such as New York,Portland, Chicago, Denver and Hartford.We are confident that our Transit operation continues to provide opportunitiesfor further growth in the fast growing areas of call centre management,paratransit, logistics consultancy and private shuttle buses. We will continueto develop our management expertise in these areas to exploit futureopportunities to grow our presence in these markets.First ServicesOur Services division, which provides a range of outsourced vehiclemaintenance, operations and support services in the private and public sectors,performed well during the year. US Dollar turnover increased by 35.3% andoperating profit by 39.6%, reflecting a full year of strong trading performancefrom our services acquisition and also an improved operating margin.Our fleet maintenance business continued to grow with new business to providevehicle maintenance services to the State of Oklahoma and Commonwealth ofPennsylvania and a number of private sector customers. We also won newcontracts to provide specialist mobile communications equipment for bothFlorida and Tennessee State Highway Patrol. Our Services business, whichoperates in the large federal market, continued to grow through new businessand the securing of further contracted work from existing customers. In OctoberFirst Services successfully commenced operation of a substantial contract toprovide land-based support services to the US Navy.We are encouraged by the growth of our Services business and believe we arewell placed to develop further opportunities in the growing US Federal market.Outlook North AmericaOur North American division continues to deliver excellent returns forshareholders. We are confident that we can continue to grow and exploitopportunities in this large and fragmented market through our proven strategyof combining contract wins with well matched acquisitions at our targetmargins.UK BUSThe Group is the largest bus operator in the UK with a fleet of some 9,000buses, and a market share of approximately 23%. We carry over 2.8 millionpassengers every day.ResultsDuring the year on-bus revenue growth was strong, particularly in the secondhalf of the year where it increased by 7.7% year on year in the last quarter.We have seen an encouraging trend of increased passenger journeys for the busdivision overall. Total revenue increased to ‚£1,031.2m (2005: ‚£960.7m) as aresult of revenue and passenger growth initiatives, improved tender results andpricing. Operating profit before lease financing costs was ‚£108.6m (2005: ‚£115.2m). Significant cost increases, in particular fuel, continue to pressuremargins in UK Bus. Our aim is to drive down unit costs through operationalefficiencies and higher productivity. We are carrying out a detailed review ofroute profitability to ensure that we closely match service provision withdemand and manage our resources as efficiently as possible. While margins in UKBus remain under pressure, principally through increased fuel costs, ourpriority is to achieve sustainable growth in profits through high-qualitycustomer service and increased patronage.The new management team has been successful in driving a number of keyinitiatives through the business. `Performance with Pride' has been a coreobjective within our UK Bus division this year. We aim to meet customers'travel needs by providing a quality service that is sustainable, profitable andof which we are proud. Our continued focus on service quality together withactions taken by management have delivered improved vehicle reliability,increased mileage operated to its highest level in four years and eliminateddriver shortages. We are making significant investment in our maintenance andengineering functions and have rolled out improved processes and best practiceacross the division through Standard Operating Procedures. I am pleased toreport that we are beginning to see the benefit of this increased investmentand expect this to continue.LondonIn London our overall punctuality and reliability performance has improved overthe year. We are committed to improving our service quality and investing inadditional focused supervision of specific routes. We were delighted to beawarded the contract to operate one of the two Heritage Bus Routes on behalf ofTransport for London. The routes commenced operation in November and we areproud to be entrusted with operating this high profile contract.The Mayor of London has now approved plans to extend the Congestion Chargingzone westward in 2007. We are well placed with depot location and additionalcapacity to provide further services should they be required in order to meetthe needs of passengers.As a major British company, we are delighted that London has been selected tohost the 2012 Olympic Games. We have extensive experience of working with LocalAuthorities to deliver a successful public transport system for theCommonwealth Games in Manchester in 2002, and we look forward to working withthe Olympic Transport Authority and others on the development of innovative andcomprehensive plans to deliver a first class transport system for the Games.Outside LondonWe continue to promote and develop a partnership approach to tackle the growingproblem of traffic congestion affecting our towns and cities. We have seen goodgrowth where we are able to work with Local Authorities to meet passengers'requirements for punctual and reliable services. Our bus operations in Yorkcontinue to lead the industry's efforts to deliver improved services forpassengers through effective partnerships with Local Authorities. In June 2005our York operation won `Public Transport Operator of the Year' at the NationalTransport Awards. We are particularly proud that City of York Council nominatedus for the award.In May this year we launched ftr - our premium urban travel concept - in York.The ftr scheme introduces state-of-the-art articulated vehicles that look liketrams but have the flexibility of a conventional bus and use normal roads. Aspart of the partnership, City of York Council is introducing a programme ofimprovements to traffic lights, bus stops and shelters that will enable the ftrvehicles to move people around the city in comfort and without delay. Thesecond ftr service will begin in Leeds later this year and we are evaluatingplans for further schemes in cities such as Sheffield, Swansea, Reading, Bathand Glasgow.We are pleased to see continued passenger growth on the first `Showcase route'launched in partnership with the City Council in Bristol. The second Showcaseroute, supported by South Gloucestershire Council, is due to be launchedshortly. We are now working with the four Local Authorities in the area todeliver the Greater Bristol Bus Network, a comprehensive system to provide fastand reliable bus journey times along ten major corridors to compete effectivelywith the private car.In Glasgow our partnership with the City Council, Strathclyde PassengerTransport and the Scottish Executive delivered the first Statutory QualityPartnership in the UK. The Statutory Quality Partnership, known as`Streamline', will deliver improved bus information and signalling systems,traffic management measures on key corridors. Journey times on the firstStreamline route have been reduced by almost 10%, and the system is enablingimprovements in reliability. Early indications are that there is an encouragingincrease in passenger volumes in the initial months of this partnership scheme.We continue to develop Punctuality Improvement Partnerships (PIPs) with LocalAuthorities. Our first PIP, in partnership with Greater Manchester PassengerTransport Executive (GMPTE), continues to deliver improved bus services forpassengers with further benefits to come. In the Greater Manchester area thePIP process has been used on a number of routes as part of a rolling programmeto cover all services. The services have been intensively monitored and,working in partnership with GMPTE, we have drawn up prioritised action plans totackle key issues. We have revised timetables and implemented other operationalchanges to address issues within our direct control. We are encouraged thatthis has contributed to higher levels of customer satisfaction. On many issues,however we require help from our partners, for example, to enable prioritisedhighway solutions to be pursued. We are working with Local Authorities tointroduce PIPs around the country.Aircoach, which operates express coaches between Dublin city centre and theairport and contracted services for airport car parks, performed well duringthe year. On bus revenue growth was strong particularly in Dublin where we haveseen increased patronage on the airport route. A new yield management systemfor fares and a focus on sales and marketing helped to raise awareness andcontributed to increased patronage numbers on our services from Dublin to Corkand Belfast. We were pleased to be awarded the contract to operate park andride services at Belfast International Airport and continue to explore furtheropportunities in this marketplace.We are delighted that Brent Humphries, one of our drivers at First Cymru, wonthe `Bus Driver of the Year' award last year, coming first out of 120 entrantsselected from the very best bus and coach drivers across the country. Inaddition, we are pleased that three out of the top five runners up are driversemployed within our UK Bus division. Our Aberdeen team won the award forinnovation at this year's UK Bus Awards for a project aimed at changing youngpeople's attitudes towards bus travel helping to make it a safer and morepleasant experience for all passengers.InvestmentOur ongoing programme of investment and fleet renewal continued with capitalexpenditure of ‚£95.4m in the period on new vehicles. In Glasgow we have madesignificant investment in new vehicles to support the UK's first StatutoryQuality Partnership. In Manchester, during the period, we have invested in 158new buses where we can maximise passenger growth. Further investment has beentargeted in towns and cities with potential for passenger growth includingAberdeen, Bath, Bristol, Edinburgh and the Borders, Halifax, Huddersfield,Norwich and Stoke-on-Trent.Concessionary faresThe Government's new concessionary fares schemes offering free travel on localbus services for people over 60 and disabled people in England was launched on1 April 2006. Early indications show that the schemes are working well and thatconcessionary fares passengers are making additional journeys. Our experiencein Wales and Scotland indicates that free travel schemes offer substantialbenefits to concessionary fare passengers. In some cases the schemes havehelped to turn around a long-term decline in the number of bus passengerjourneys, resulting in an extension to existing services and the introductionof new ones. We welcome the Government's announcement that free local bustravel will be extended to a nationwide scheme in 2008 which means thoseentitled will be able to use local bus services anywhere in England.The new Scotland-wide free bus scheme for senior citizens and disabled peoplecame into effect on 1 April 2006 and, we believe, this will benefitconcessionaires. In March 2006 the Welsh Assembly Government launched pilotschemes for a half-fare bus travel scheme for 16 to 18 year olds in Bridgend,Wrexham, Denbighshire and Flintshire. As a major bus operator in Bridgend andacross South Wales we are delighted to be participating in this innovativescheme and are working with the Welsh Assembly Government and other partners toensure the success of the two-year pilot.Outlook UK BusOur UK Bus business continues to be robust generator of cash, despite costpressures. Revenue growth has been strong and we continue to demonstrate theeffectiveness of partnerships with Local Authorities to deliver improvedservices and passenger growth. Our focus on reliability and punctuality and ourinvestment in service quality has already delivered benefits and we expect thisto continue. We are optimistic about the opportunities to continue to grow thisbusiness with the introduction of innovative new products, improved servicequality and reliability while retaining a tight control on costs.CORPORATE RESPONSIBILITYCorporate Social Responsibility is at the core of our business. It is reflectedin our vision and values and our aim to transform the way people travel and howthey feel about public transport. How we manage key issues such as safety,environment, our relationships with customers and our employees is key toachieving our vision.As a public transport operator we recognise the vital role we play insupporting the needs of society to achieve more sustainable travel. Thedevelopment of public transport is essential if we are to reduce the growingnegative social impacts associated with society's continuing reliance on theprivate car. We are working hard to reduce these impacts by providing thesafest, most reliable service that we can to encourage more people to usepublic transport. We recognise the significant contribution we make to thecommunities we serve in providing important social and transport links. We alsohave an impact on the economy by providing an important and necessary publicservice, being a major employer both in the UK and North America andinfluencing the movement of people and goods through the services we provide.We believe that we have a responsibility to influence the views of policymakers by promoting partnerships, policies and initiatives that benefit publictransport.Full details of our activities and progress during the year can be found in ourCorporate Responsibility Report which can be downloaded at www.firstgroup.comSafetySafety is our highest priority. We are continuously developing and improvingour processes to ensure that a `Safety First' culture is embedded throughoutthe Group. We strive to make our services as safe as possible for ourpassengers and our staff.This year we have been working on a major safety initiative, the `InjuryPrevention Programme', that will drive a significant cultural change in safetyacross the Group. To support this initiative we have launched the First SafetyPrinciples. These set out in clear, concise terms the principles of safeworking practices and have been communicated and endorsed throughout thebusiness.The bombings in London on 7 July demonstrated that public transport remains atarget for terrorist attack and reinforced the need for vigilance andawareness. Within our business we have, where appropriate, undertakenindependent reviews by security experts to identify where we could implementfurther measures to improve overall security. We have enhanced our securityfunction through the appointment of a Group Head of Security who will lead thedevelopment of our security strategy. In particular, we are looking at the use of new technology to provider greater security on vehicles and at sites. Inour rail operations we are working to improve security for our passengers andstaff.EmployeesOur staff are the public face of our business and ambassadors for the Group. Iwould like to thank all our employees for their continued commitment to theGroup. We aim to be the employer of choice in our industry and offer our staffopportunities to develop and grow to reach their full potential. We believe itis vital to engage with staff and promote an ongoing dialogue to betterunderstand their views and concerns. We strive to continuously engage with ourstaff through a range activities including informal meetings at depot level toa more formal staff satisfaction survey. We make significant investment intraining and development of our employees across the Group.We have on-going programmes for employees working towards recognised trainingin the form of vocational qualifications in the UK including our pioneeringWorkplace Learning initiative, in partnership with the Transport and GeneralWorkers Union. We now have 40 learning centres reaching around 60% of our UKbus employees with plans to further increase the coverage so that more of ourUK employees can gain access to flexible, effective and valuable learningopportunities. In North America employees can participate in the AutomotiveService Excellence (ASE) Programme designed to train and test technicians. First Student has continued to promote the `Smith System of DefensiveDriving'. This specialist training provides the skills for school bus driversto perform their duties safely in all traffic conditions.The recruitment and retention of high quality staff is a key issue within ourindustry. We continue to implement a range of initiatives within our businessesto address this important issue. We were the first in the industry to recruitdrivers and engineers from Europe. We have recruited some 1000 employees,mainly drivers and some engineers, from Poland, the Czech Republic, Portugal,Malta and Slovakia which eliminated our driver shortage. We were pleased thatour initiative has been selected as an example of `best practice' indemonstrating in practical terms how job mobility can support the broader aimsof the European Employment Strategy.Environment and CommunityWe are pleased that our hard work has established an environmental managementframework within the Group. This year we have achieved significant reductionsin energy usage in the UK rail division and in water usage in the UK busdivision. In North America we have made significant progress in developing ourenvironmental reporting framework and are able to report on emissions and wastearising for the first time this year.We participate in a number of trials to promote and develop the use ofalternative fuels in public transport. In London we operate fuel cell buses aspart of a European-wide trial and are pleased that the reliability of thetechnology has exceeded initial expectations. We also operate a number of gasbuses and have been trialling hybrid vehicles. We will be working with BP, ourfuel supplier, to introduce, where appropriate, biofuels to the business tofurther reduce carbon dioxide emissions.We continue to work with `The CarbonNeutral Company' and this year we have beenworking with a number of schools to support them in understanding their carbonfootprint and developing ways to reduce it. In North America we recently joinedAmerican Forest an organisation that works to protect, restore and enhance thenatural capital of trees and forests. We are proud support the Outward Bound Trust, an educational charity thatencourages young people to fulfil their potential through challenging outdoorexperiences. Over the past ten years we have funded over 1,000 young people,between the ages of 11-18 years, to take part in an Outward Bound experience.As well as donations to support various fundraiser events for the charity wehave also provided workplace accommodation at our facility in Glasgow for theOutward Bound Metro team. The cost of equivalent facilities in the city wouldotherwise be prohibitive and this support has contributed to the development ofover 2000 young people, in 2004/5 alone.During the year the Group and its staff in the UK and North America havecontinued to support a number of local and national charities and initiativesto benefit their local communities. All of our operating companies supportlocal events either through donations, sponsorship or use of resources andfacilities made available to them by the Group.GROUP OUTLOOKWe remain confident about our future prospects. Our UK Rail division continuesto deliver strong passenger volume and income growth. Through the award of twonew major franchises - Greater Western and Thameslink/Great Northern - we havesecured additional revenue of over ‚£1.0bn per annum for up to 10 years. We lookforward to building on our success in UK Railways and are delighted to beshortlisted for the South Western Franchise in this current round. In UK Bus weare encouraged by strong revenue growth and increased passenger journeys. Wehave seen the benefits of our increased focus on operational performance,service quality and driver recruitment. The first `ftr' service was launched inYork in May 2006 and we continue to promote and develop a partnership approachwith Local Authorities who are committed to reducing traffic congestion tosupport successful, modern public transport systems to meet the needs ofpassengers. We continue to grow our North American businesses and believe thatthe market continues to offer substantial opportunities for the Group. We arepleased to have delivered consistent returns for shareholders and more thandoubled EBITDA since we made our first entry in to the North American market in1999. During the year we have continued to explore and develop opportunities inEurope. We have created a team to identify and bid for businesses, whichrepresent the right opportunity for entry for us.The Group is well placed for further growth. It has strong and predictable cashflows with some 50% of our revenues coming from contracted business in the UKand North America. The Board is committed to increasing shareholder value bygrowing our core businesses, developing opportunities in new markets anddividend growth of 10% per annum for the foreseeable future, at least until2008. This will be supported, where appropriate, by share repurchases whilemaintaining a strong balance sheet. Trading in the new financial year hasstarted well and is in line with our expectations."Moir LockheadChief ExecutiveFinance Director's reviewOverviewThe Group has a portfolio of businesses in the United Kingdom and North Americathat generate strong and predictable profits and cash flows. Our aim is toincrease shareholder value by investing these cash flows for growth, increasingdividends and repurchasing shares. Over the course of the year the marketcapitalisation of the group has increased by 22% from ‚£1.37 billion to ‚£1.67billion.2005/06 was a landmark year with Group turnover exceeding ‚£3 billion andadjusted operating profit exceeding ‚£220 million for the first time. Our UKRail and North American businesses have reported record earnings and EBITDA isthe highest we have ever achieved, up 9.1% year on year to ‚£351.7m.The year also saw the Group established as the UK's largest passenger railoperator with the award of two important rail franchises, Greater Western andCapital Connect which have combined turnovers of over ‚£1.0 billion per annum.We have now successfully commenced operation of both these franchises and thesewins mean that UK Rail profits are secure over the medium term.The pension deficit has decreased over the year by ‚£89m to ‚£132m partly due tofurther recovery of the stock market but also because of a major focus onreducing the cost of pension provision going forward and additional cashpayments into the schemes during the year.We have invested heavily in new buses during the year with a major fleetrenewal in the UK which has lowered the average bus age by 0.4 years.This is the first full year of reporting under International FinancialReporting Standards (IFRS) and a full reconciliation of the opening and closing2005 balance sheets and the profit and loss for 2005 will be set out in note 38of the Annual Report and Accounts 2006.ResultsTurnover was ‚£3,030.9m (2005: ‚£2,693.4m), an increase of 12.5% and profitbefore taxation was ‚£157.4m (2005: ‚£155.7m). Adjusted operating profit was ‚£229.7m (2005: ‚£214.8m), an increase of 6.9%. Rail profits have increasedconsiderably as a result of strong revenue growth. North American profits wereup reflecting a high level of contract retention and new contract wins acrossall the businesses. There were lower profits in UK Bus because of higher fuelcosts. For the Group as a whole, fuel costs were up ‚£31m year on year. Year to Year to 31 March 2006 31 March 2005 Divisional Turnover Adjusted Operating Turnover Adjusted Operatingresults ‚£m operating margin * ‚£m operating margin * profit * % profit * % ‚£m ‚£m UK Bus 1,031.2 108.6 10.5 960.7 115.2 12.0 UK Rail 1,164.9 79.6 6.8 1,059.7 64.5 6.1 North America 826.3 67.1 8.1 665.8 62.4 9.4 Financing - (10.2) - - (9.0) -element of leases ** Other *** 8.5 (15.4) - 7.2 (18.3) - Total Group 3,030.9 229.7 7.6 2,693.4 214.8 8.0 * Before intangible asset amortisation, bid costs and profit on disposal offixed assets** Financing element of UK PCV operating lease costs*** Tram operations, central management, Group information technology and otheritemsThroughout the financial review, operating profit, operating margin and EBITDAare defined as being before intangible asset amortisation, bid costs and profiton disposal of fixed assetsUK Bus turnover was ‚£1,031.2m (2005: ‚£960.7m), an increase of 7.3%. Operatingprofit was ‚£108.6m (2005: ‚£115.2m), a reduction of 5.7%. These results reflecta creditable performance against a backdrop of cost increases in particularfuel. Fuel costs were ‚£15.5m higher than last year reflecting the sharpincrease in commodity prices. Other cost increases were offset by revenuegrowth and other actions to mitigate costs. On-bus revenue growth grewparticularly strongly in the second half with quarter 4 growth of 7.7% comparedto 2004/05.UK Rail turnover was ‚£1,164.9m (2005: ‚£1,059.7m), an increase of 9.9%.Operating profit was ‚£79.6m (2005: ‚£64.5m), an increase of 23.4%. 2005/06 saw afull year of the ScotRail franchise which commenced in October 2004 and therewere strong performances by all existing Rail operations with the divisiondelivering record turnover and profit despite the disruption following theterrorist attacks last summer. We estimate that the London bombings had aconsequential adverse impact on operating profit of ‚£9m. The two new railfranchises have begun well and with Greater Western in particular continuing toenjoy strong demand.North American turnover was ‚£826.3m (2005: ‚£665.8m). At constant exchangerates, this represents an increase of 20.0%. Operating profit was ‚£67.1m (2005:‚£62.4m). In US Dollar terms this represents an increase of 4.2%. We havecontinued to grow our Yellow school bus operations and now operate in excess of21,000 buses. First Student revenue increased by 19.6% in US Dollar terms,however profits were down by 3.2% because of higher fuel and insurance costs.First Transit US Dollar revenue and profits were up 13.5% and 9.4% respectivelyreflecting a number of important contract retentions and further expansion intothe light transit market. First Services revenue increased by 35.3% in USDollars and profits were 39.6% higher than 2005/06 with growth in both vehiclemaintenance and services businesses. The services results were helped by a fullyear of SKE Support Services which was acquired in August 2004.Central costs were lower than last year due to a number of non-recurringinitiatives in 2004/05 including an upgrade of information technology systems,the International Financial Reporting Standards convergence project anddevelopment of new human resources policies and procedures.PropertyProperty gains on disposal of ‚£14.0m (2005: ‚£3.3m) were realised during theyear as part of the Group's ongoing programme of disposing of older UK Busdepots. The more significant disposals included bus depots in Leicester andMotherwell.Intangible asset amortisationThe intangible asset amortisation charge was ‚£4.5m (2005: ‚£2.2m) with theincrease due to a full year charge for the ScotRail pension intangible and ahigher charge for contract intangibles for acquisitions made either during theyear or the preceding financial year.Bid costs and other exceptional itemsBid costs of ‚£28.5m (2005: ‚£11.9m) were incurred during the year and comprisedprincipally rail refranchising costs for the Greater Western, Capital Connect,Docklands Light Railway and Integrated Kent franchises. This expenditurerepresents the full costs of bidding and completing two major rail franchisesthat are expected to be highly profitable. We do not anticipate incurring theselevels of expenditure in the foreseeable future.Interest payable and similar chargesThe net interest charge was ‚£53.3m (2005: ‚£48.3m) with the increase of ‚£5.0mresulting from a higher average level of net debt and the higher interest costson US Dollar denominated debt. The net interest charge is covered 6.6 times(2005: 6.7 times) by earnings before interest, taxation, depreciation andamortisation (EBITDA).TaxationThe taxation charge on profit before intangible amortisation, bid costs andother exceptional items was ‚£45.3m (2005: ‚£44.6m) representing an effectiverate of 26% (2005: 27%). Tax relief on US intangible amortisation, bid costsand other exceptional items, partly offset by deferred tax on property gains,reduced the tax charge to ‚£40.0m (2005: ‚£41.1m).The actual cash effect of taxation to the group was a credit of ‚£3.3m (2005: acharge of ‚£19.0m). The UK cash cost of taxation was reduced by increasedpension payments and by favourable UK tax settlements achieved during the year.It is anticipated that the tax to be paid for 2006/07 will remain minimal. Thegroup pays a minimal amount of tax on its profits in the US due to tax lossescarried forward and we believe that the level of the cash tax in the US willremain at a similar level for the medium term.DividendsThe final dividend of 9.55 pence per ordinary share together with the interimdividend of 4.55 pence per ordinary share, gives a full year dividend of 14.1pence, an increase of 10.0%. In accordance with IFRS the final dividend has notbeen provided for in the 2006 balance sheet. The final dividend will be paid on25 August 2006 to shareholders on the register of members at the close ofbusiness on 21 July 2006.EPSAdjusted basic EPS, before intangible asset amortisation, bid costs and profiton disposal of fixed assets, was 30.9 pence (2005: 28.9 pence), an increase of6.9%. Basic EPS was 27.4 pence (2005: 27.1 pence).EBITDAThe Group's businesses continue to generate strong operating profits which areconverted into cash. EBITDA for the year was ‚£351.7m (2005: ‚£322.4m) up 9.1%.EBITDA from North American operations was up 8.1% in US Dollar terms. EBITDA bydivision is set out below: Year to Year to 31 March 2006 31 March 2005 Turnover EBITDA EBITDA Turnover EBITDA EBITDA ‚£m ‚£m % ‚£m ‚£m % UK Bus 1,031.2 167.5 16.2 960.7 168.6 17.5 UK Rail 1,164.9 84.9 7.3 1,059.7 69.4 6.5 North America 826.3 122.0 14.8 665.8 109.3 16.4 Financing element - (10.2) - - (9.0) -of leases Other 8.5 (12.5) - 7.2 (15.9) - Total Group 3,030.9 351.7 11.6 2,693.4 322.4 12.0 Cash flowCash generated by operations increased to ‚£300.7m from ‚£247.2m last year due toa lower working capital outflow and a higher depreciation charge compared to2004/05. The working capital outflow of ‚£27.1m (2005: outflow of ‚£68.1m) wasdue to additional pension payments, over and above the profit and loss charge,of ‚£34m and growth in North America of ‚£13m partly mitigated by the earlyreceipt of cash from the First Capital Connect franchise of ‚£21m.Capital expenditure and acquisitionsCapital expenditure, as set out in note 6, was ‚£209.1m (2005: ‚£135.3m). Capitalexpenditure was predominantly in North American operations of ‚£65.6m (2005: ‚£36.5m), UK Bus operations of ‚£102.4m (2005: ‚£70.4m), UK Rail ‚£16.9m (2005: ‚£14.1m) and UK properties of ‚£15.4m (2005: ‚£11.7m).The acquisitions made in 2005/06 were four bolt-on yellow school bus operationsin North America and one small UK Bus operator. The total consideration for allacquisitions made during the year was ‚£12.4m and provisional goodwill arisingon all acquisitions amounted to ‚£10.3m.Funding and risk managementAt the year end, total bank borrowing facilities amounted to ‚£597m of which ‚£527m is committed. Of these committed facilities, ‚£316m were utilised at 31March 2006 leaving committed headroom of ‚£211m.The maturity profile of committed banking facilities is regularly reviewed andwell in advance of their expiry such facilities are extended or replaced.At 31 March 2006 the Group's debt maturity was 7.8 years (2005: 9.0 years).As the Group is a net borrower, it minimises cash and bank deposits, whicharise principally in the Rail companies. The Group can only withdraw cash andbank deposits from the Rail companies on a permanent basis to the lower ofretained profits or the amount determined by prescribed liquidity ratios. TheGroup limits deposits to short terms, and with any one bank to the maximum of ‚£30m, depending upon the individual bank's credit rating, which must not be lessthan "A" rated.The Group does not enter into speculative financial transactions and usesfinancial instruments for certain risk management purposes only.Interest rate riskWith regard to net interest rate risk, the Group reduces exposure by using acombination of fixed rate debt and interest rate derivatives to achieve anoverall hedged position over the medium term of between 75% to 100%.Commodity price riskIn the year, the UK was insulated from the rise in crude oil prices due to afully hedged position. Looking ahead, we now have 38% coverage of our UKrequirements for 2006/07 (total annual usage 2.6 million barrels) at an averagerate of $59 per barrel (2005/06: average of $38 per barrel). In North America(total annual usage 0.7m barrels) for 2006/07 we have 36% coverage on crude oilprice risk at an average price of $35 per barrel (2005/06: 64% hedged at $27per barrel).Foreign currency riskGroup policies on currency risk affecting cash flow and profits are maintainedto minimise exposures to the Group by using a combination of hedge positionsand derivative instruments where appropriate.With regard to balance sheet translation risk, the Group hedges part of itsexposure to the impact of exchange rate movements on translation of foreigncurrency net assets by holding currency swaps and net borrowings in foreigncurrencies. At 31 March 2006 foreign currency net assets were hedged 34% (2005:35%).Net debtThe Group's net debt at 31 March 2006 was ‚£704.4m and was comprised as follows:Analysis of net debt Fixed Variable Total ‚£m ‚£m ‚£m Cash - 54.9 54.9 Rail ring-fenced cash and deposits - 119.5 119.5 Sterling bond (2013 6.875%) * (295.9) - (295.9) Bond (2019 6.125%) * (250.3) - (250.3) Sterling bank loans and overdrafts - (246.2) (246.2) US dollar bank and other loans and overdrafts (0.5) (4.5) (5.0) Canadian dollar bank and other loans and (2.4) (36.2) (38.6)overdrafts Euro bank loans and overdrafts - (9.9) (9.9) HP and finance leases (4.7) (7.7) (12.4) Loan notes (8.7) (11.8) (20.5) Interest rate swaps,net (57.0) 57.0 - Total (619.5) (84.9) (704.4)* Excludes accrued interestBalance sheet and net assetsNet assets increased by ‚£107.4m over the year reflecting retained earnings(after the payment of ‚£52.0m of dividends) for the year of ‚£55.5m, actuarialgains on defined benefit pension arrangements (net of tax) of ‚£25.7m and a netincrease in the translation reserve of ‚£41.9m. These positive movements werepartly offset by a net increase in own shares held of ‚£7.7m and a charge toreserves of ‚£8.3m in respect of share options exercised during the year.Shares in issueDuring the year 5.7m shares were repurchased for a total consideration of ‚£23.0m and were initially held as treasury shares. In 2005/06 4.3m treasuryshares were used to satisfy the exercise of Save As You Earn (SAYE) options onthe maturity of the 2002 SAYE scheme. As at 31 March 2006 there were 392.0m(2005: 393.6m) shares in issue, excluding 6.6m (2005: 5.2m) shares held intreasury. The weighted average number of shares in issue for the purpose of EPScalculations (excluding own shares held in trust for employees and treasuryshares) was 392.6m (2005: 399.2m).Foreign exchangeThe results of the North American businesses have been translated at an averagerate of ‚£1:$1.79 (2005: ‚£1:$1.85). The period end rate was ‚£1:$1.74 (2005: ‚£1:$1.87).PensionsThe pensions deficit reduced over the course of the year by ‚£89m to ‚£132m. Thisreduction had three main elements being the additional cash contributions beingpaid into the UK Bus schemes, the continuing recovery of the stock market andUK Bus pay deals in many operating companies that cap pensionable pay goingforward and therefore reduces the Group's exposure to volatility in pensioncosts.Dean FinchFinance DirectorConsolidated income statementYear ended 31 March 2006 Notes Before Amortisation, Total Before Amortisation, Total amortisation, impairment 2006 amortisation, impairment 2005 impairment charges ‚£m impairment charges ‚£m charges and bid charges and bid and bid costs and bid costs costs 2006 costs 2005 2006 2005 ‚£m ‚£m ‚£m ‚£m Revenue Continuing operations 3,030.9 - 3,030.9 2,693.4 - 2,693.4 Operating costs before profit on disposal of fixed assets Continuing operations (2,801.2) (33.0) (2,834.2) (2,478.6) (14.1) (2,492.7) Operating profit before profit on disposal of fixed assets Continuing operations 229.7 (33.0) 196.7 214.8 (14.1) 200.7 Operating profit before 229.7 - 229.7 214.8 - 214.8amortisation, impairment charges and bid costs Amortisation and - (4.5) (4.5) - (2.2) (2.2)impairment charges Bid costs - (28.5) (28.5) - (11.9) (11.9) Operating profit 229.7 (33.0) 196.7 214.8 (14.1) 200.7 Profit on disposal of - 14.0 14.0 - 3.3 3.3fixed assets Operating profit 229.7 (19.0) 210.7 214.8 (10.8) 204.0 Investment income 8.5 - 8.5 4.3 - 4.3 Finance costs (61.8) - (61.8) (52.6) - (52.6) Profit before tax 176.4 (19.0) 157.4 166.5 (10.8) 155.7 Tax (45.3) 5.3 (40.0) (44.6) 3.5 (41.1) Profit for the period from 131.1 (13.7) 117.4 121.9 (7.3) 114.6continuing operations Attributable to: Equity holders of the 121.2 (13.7) 107.5 115.4 (7.3) 108.1parent Minority interest 9.9 - 9.9 6.5 - 6.5 131.1 (13.7) 117.4 121.9 (7.3) 114.6 Basic earnings per share 3 27.4p 27.1p Diluted earnings per share 3 27.1p 26.9pDividends of ‚£52.0m were paid during the year (2005: ‚£48.0m). Dividends of ‚£37.4m were proposed for approval during the year (2005: ‚£34.1m).Consolidated balance sheet Notes 2006 2005 ‚£m ‚£m Non-current assets Goodwill 4 503.1 465.8 Other intangible assets 5 30.0 29.4 Property, plant and equipment 6 926.5 835.0 Financial assets - derivative financial 13 8.5 -instruments 1,468.1 1,330.2 Current assets Inventories 7 54.2 40.1 Trade and other receivables 8 373.1 368.7 Financial assets - cash and cash equivalents 174.4 154.1 - derivative financial instruments 13 14.1 - 615.8 562.9 Non-current assets classified as held for sale 6.6 5.2 Total assets 2,090.5 1,898.3 Current liabilities Trade and other payables 9 545.1 507.3 Tax liabilities 47.8 52.8 Financial liabilities - obligations under 11 2.3 9.0finance leases - bank overdrafts and loans 10 30.9 51.4 - loan notes 12 2.8 0.5 - derivative financial instruments 13 1.8 - - current bond liability 10 23.1 - 653.8 621.0 Net current liabilities 38.0 58.1 Non-current liabilities Financial liabilities - bonds 10 553.2 527.9 - bank loans 10 268.8 192.8 - obligations under finance leases 11 10.1 15.1 - loan notes 12 17.7 20.5 - derivative financial instruments 13 0.8 - Retirement benefit obligation 132.0 221.1 Deferred tax liabilities 14 84.6 30.8 Long-term provisions 15 37.6 44.6 1,104.8 1,052.8 Total liabilities 1,758.6 1,673.8 Net assets 331.9 224.5 Equity Share capital 16 19.9 19.9 Share premium account 17 238.8 238.8 Hedging reserves 17 1.9 - Other reserves 17 4.6 4.6 Own shares 17 (26.6) (18.9) Translation reserves 18 27.7 (14.2) Retained earnings 17 52.9 (16.3) Equity attributable to equity holders of the 319.2 213.9parent Minority interests 12.7 10.6 Total equity 331.9 224.5Consolidated cash flow statementYear ended 31 March 2006 Notes 2006 2005 ‚£m ‚£m Net cash from operating activities 19 235.0 193.7 Investing activities Interest received 5.9 6.8 Proceeds of disposal of property, plant and 27.3 27.1equipment Purchases of property, plant and equipment (196.2) (124.3) Acquisition of businesses (12.4) (14.9) Acquisition of subsidiaries - (22.3) Net cash used in investing activities (175.4) (127.6) Financing activities Repurchase of ordinary share capital (23.0) (29.7) Share purchased by Employee Benefit Trust (1.4) (0.3) Monies received on exercise of options 8.4 - Dividends paid (52.0) (48.0) Dividends paid to minority shareholders (7.2) (3.1) Repayment of obligations under finance leases (11.8) (20.2) Repayment of loan notes (0.5) (0.3) Payment of new bank facility issue costs (1.0) - New bank loans raised 55.7 90.4 Net cash from financing activities (32.8) (11.2) Net increase in cash and cash equivalents 26.8 54.9 Cash and cash equivalents at beginning of 145.9 92.2year Effect of foreign exchange rate changes (2.8) (1.2) Cash and cash equivalents at end of year 169.9 145.9Cash and cash equivalents for cash flow 2006 2005statement purposes comprise: ‚£m ‚£m Cash and cash equivalents per balance sheet 174.4 154.1 Overdrafts (4.5) (8.2) 169.9 145.9Note to the consolidated cash flow statement - reconciliation of net cash flowsto movement in net debtYear ended 31 March 2006 2006 2005 ‚£m ‚£m Increase in cash and cash equivalents in year 26.8 54.9 Increase in debt and finance lease financing (43.4) (70.0) Debt acquired on acquisition of businesses - (20.6) Lease and hire purchase contracts acquired with (0.7) (2.2)business/franchise Fees on issue of new loan facility 1.0 - Other non-cash movements in relation to financial (1.9) (1.5)instruments Foreign exchange differences (23.1) 7.0 Movement in net debt in year (41.3) (32.4) Net debt at beginning of year (663.1) (630.7) Net debt at end of year (704.4) (663.1)General informationThe financial information set out above does not constitute the company'sstatutory accounts for the years ended 31 March 2006 or 2005, but is derivedfrom those accounts. Statutory accounts for 2005 have been delivered to theRegistrar of Companies and those for 2006 will be delivered following thecompany's annual general meeting. The auditors have reported on both sets ofaccounts; their reports were unqualified and did not contain statements unders. 237(2) or (3) Companies Act 1985.Copies of the Statutory Accounts for the year ended 31 March 2006 will be sentto all shareholders by early June and will be available thereafter at theRegistered Office of the Company at 395 King Street, Aberdeen, AB24 5RP.2. Business segmentsThe segment results for the year to 31 March 2006 are as follows: UK Bus UK Rail North Group Consolidated America items 2006 2006 2006 2006 2006 ‚£m ‚£m ‚£m ‚£m ‚£m Revenue 1,031.2 1,164.9 826.3 8.5 3,030.9 Segment results 108.6 79.6 67.1 (15.4) 239.9 Amortisation of intangible - (2.9) (1.6) - (4.5)assets Financing element of (10.2) - - - (10.2)operating leases Bid costs - (26.1) - (2.4) (28.5) Profit on disposal of fixed 14.0 - - - 14.0assets Operating profit 112.4 50.6 65.5 (17.8) 210.7 Investment income 8.5 Finance costs (61.8) Profit before tax 157.4 Tax (40.0) Profit for the period 117.42. Business segments (continued)The segment results for the year to 31 March 2005 are as follows: UK Bus UK Rail North Group Consolidated America items 2005 2005 2005 2005 2005 ‚£m ‚£m ‚£m ‚£m ‚£m Revenue 960.7 1,059.7 665.8 7.2 2,693.4 Segment results 115.2 64.5 62.4 (18.3) 223.8 Amortisation of intangible - (1.6) (0.6) - (2.2)assets Financing element of (9.0) - - - (9.0)operating leases Bid costs - (10.9) - (1.0) (11.9) Profit on disposal of fixed 3.3 - - - 3.3assets Operating profit 109.5 52.0 61.8 (19.3) 204.0 Investment income 4.3 Finance costs (52.6) Profit before tax 155.7 Tax (41.1) Profit for the period 114.63. Earnings per share (EPS)Basic EPS is calculated by dividing the profit attributable to equityshareholders of ‚£107.5m (2005: ‚£108.1m) by the weighted average number ofordinary shares of 392.6m(2005: 399.2m)Diluted EPS is calculated by dividing the profit attributable to equityshareholders of ‚£107.5m (2005: 108.1m) by the weighted average number ofordinary shares of 396.5m (2005: 402.0m). The difference in the number ofshares between the basic calculation and the diluted calculation represents theweighted average number of potentially dilutive ordinary shares. Areconciliation of the number of shares used in the basic and diluted measuresis set out below: 2006 2005 no. no. (m) (m) Weighted average number of shares used in basic 392.6 399.2calculation SAYE share options 3.0 2.6 Executive share options 0.9 0.2 396.5 402.03. Earnings per share (EPS) (continued)The adjusted basic EPS and adjusted cash EPS are intended to demonstraterecurring elements of the results of the Group before amortisation ofintangible assets, rail bid costs and profit on disposal of fixed assets. Areconciliation of the earnings used in the bases is set out below: 2006 2005 ‚£m Earnings ‚£m Earnings per share per share (p) (p) Profit for basic EPS calculation 107.5 27.4 108.1 27.1 Amortisation of intangible assets * 4.3 1.1 2.2 0.5 Bid costs 28.5 7.2 11.9 3.0 Profit on disposal of fixed assets (13.5) (3.4) (3.3) (0.8)** Taxation effect of adjustments (5.3) (1.4) (3.5) (0.9) Profit for adjusted basic EPS 121.5 30.9 115.4 28.9calculation Depreciation *** 121.6 31.0 107.4 26.9 Profit for adjusted cash EPS 243.1 61.9 222.8 55.8calculation * Amortisation charge of ‚£4.5m less ‚£0.2m (2005: ‚£2.2m less nil) attributableto equity minority interests.** Profit on disposal of fixed assets of ‚£14.0m less ‚£0.5m (2005: ‚£3.3m lessnil) attributable to equity minority interests.*** Depreciation charge of ‚£122.0m (2005: ‚£107.6m) per note 6 less ‚£0.4m (2005:‚£0.2m) ofdepreciation attributable to equity minority interests.4. Goodwill 2006 2005 ‚£m ‚£m Cost At 1 April 465.8 461.2 Additions 10.3 15.2 Exchange rate differences 27.0 (10.6) At 31 March 503.1 465.8 Accumulated impairment losses At 31 March 2005 and 31 March 2006 - - Carrying amount At 31 March 503.1 465.85. Other intangible assets Contracts Franchise Total acquired agreements ‚£m ‚£m ‚£m Cost At 1 April 2005 10.6 21.0 31.6 Additions 4.3 - 4.3 Exchange rate differences 0.8 - 0.8 At 31 March 2006 15.7 21.0 36.7 Amortisation At 1 April 2005 0.6 1.6 2.2 Charge for period 1.6 2.9 4.5 Exchange rate differences - - - At 31 March 2006 2.2 4.5 6.7 Carrying amount At 31 March 2006 13.5 16.5 30.0 Contracts Franchise Total acquired agreements ‚£m ‚£m ‚£m Cost At 1 April 2004 - 4.1 4.1 Additions 10.6 16.9 27.5 Exchange rate differences - - - At 31 March 2005 10.6 21.0 31.6 Amortisation At 1 April 2004 - - - Charge for period 0.6 1.6 2.2 Exchange rate differences - - - At 31 March 2005 0.6 1.6 2.2 Carrying amount At 31 March 2005 10.0 19.4 29.46. Property, plant and equipment Land and Passenger Other Total buildings carrying plant and ‚£m ‚£m vehicle equipment fleet ‚£m ‚£m Cost At 1 April 2005 149.1 1,228.7 161.4 1,539.2 Subsidiary undertakings and - 4.0 - 4.0businesses acquired Additions 16.2 155.5 37.4 209.1 Disposals (5.1) (64.2) (2.9) (72.2) Reclassifications (5.1) - 5.1 - Reclassified as held for - (27.3) - (27.3)sale Exchange rate differences 1.9 35.2 2.7 39.8 At 31 March 2006 157.0 1,331.9 203.7 1,692.6 Accumulated depreciation and impairment At 1 April 2005 23.7 581.2 99.3 704.2 Subsidiary undertakings and - - - -businesses acquired Charge for period 3.6 99.0 19.4 122.0 Disposals (0.6) (52.1) (2.3) (55.0) Reclassifications (5.1) - 5.1 - Reclassified as held for - (21.5) - (21.5)sale Exchange rate differences 0.5 14.5 1.4 16.4 At 31 March 2006 22.1 621.1 122.9 766.1 Carrying amount At 31 March 2006 134.9 710.8 80.8 926.5 Land and Passenger Other Total buildings carrying plant and ‚£m ‚£m vehicle equipment fleet ‚£m ‚£m Cost At 1 April 2004 141.5 1,156.3 154.6 1,452.4 Subsidiary undertakings and 2.9 29.5 2.4 34.8businesses acquired Additions 12.2 96.5 26.6 135.3 Disposals (6.9) (25.6) (21.1) (53.6) Reclassified as held for - (15.5) - (15.5)sale Exchange rate differences (0.6) (12.5) (1.1) (14.2) At 31 March 2005 149.1 1,228.7 161.4 1,539.2 Accumulated depreciation and impairment At 1 April 2004 21.5 536.8 102.5 660.8 Subsidiary undertakings and - - - -businesses acquired Charge for period 3.0 88.0 16.6 107.6 Disposals (0.7) (23.4) (19.2) (43.3) Reclassified as held for - (14.8) - (14.8)sale Exchange rate differences (0.1) (5.4) (0.6) (6.1) At 31 March 2005 23.7 581.2 99.3 704.2 Carrying amount At 31 March 2005 125.4 647.5 62.1 835.07. Inventories 2006 2005 ‚£m ‚£m Spare parts and consumables 41.7 30.7 Property development work in progress 12.5 9.4 54.2 40.18. Trade and other receivables 2006 2005 ‚£m ‚£m Amounts due within one year Trade debtors 279.3 258.2 Other debtors 38.8 61.1 Other prepayments and accrued income 55.0 49.4 373.1 368.79. Trade and other payables 2006 2005 ‚£m ‚£m Amounts falling due within one year Trade creditors 129.7 122.4 Other creditors 106.5 47.0 Accruals and deferred income 294.9 324.6 Season ticket deferred income 14.0 13.3 545.1 507.310. Financial liabilities - borrowings 2006 1 April 31 March ‚£m 2005 2005 ‚£m ‚£m Current financial liabilities Short-term bank loans 26.4 43.2 43.2 Bank overdrafts 4.5 8.2 8.2 30.9 51.4 51.4 Finance leases (note 11) 2.3 9.0 9.0 Loan notes (note 12) 2.8 0.5 0.5 Bond 6.875% (repayable 2013) - accrued 20.1 19.5 -interest Bond 6.125% (repayable 2019) - accrued 3.0 3.0 -interest 23.1 22.5 - Total current financial liabilities 59.1 83.4 60.9 Non-current financial liabilities Syndicated unsecured bank loans 264.9 180.0 180.0 Other loans 3.9 12.8 12.8 268.8 192.8 192.8 Finance leases (note 11) 10.1 15.1 15.1 Loan notes (note 12) 17.7 20.5 20.5 Bond 6.875% (2013) 295.9 296.1 296.0 Bond 6.125% (2019) 257.3 247.1 231.9 553.2 543.2 527.9 Total non-current financial liabilities 849.8 771.6 756.3 Total financial liabilities 908.9 855.0 817.2 Gross borrowings repayment profile Within one year or on demand 59.1 83.4 Between one and two years 21.1 25.6 Between two and five years 271.8 193.1 Over five years 556.9 552.9 908.9 855.0 11. Finance leasesThe Group had the following obligations under finance leases as at the balancesheet dates: 2006 2005 ‚£m ‚£m Maturing under 1 year 2.3 9.0 Maturing 1 - 2 years 2.2 2.6 Maturing 2 - 5 years 4.6 7.4 Maturing after 5 years 3.3 5.1 Total 12.4 24.112. Loan notesThe Group had the following loan notes issued as at the balance sheet dates: 2006 2005 ‚£m ‚£m Maturing in less than one year 2.8 0.5 Maturing 1 - 2 years 17.7 20.5 Total 20.5 21.013. Derivative financial instruments 2006 1 April ‚£m 2005 ‚£m Non-current assets Cross currency swaps (net investment hedge) - 16.7 Coupon swaps (fair value hedge) 8.1 - Interest rate collars (cash flow hedges) 0.4 - Fuel derivatives (cash flow hedge) - 3.6 8.5 20.3 Current assets Cross currency swaps (net investment hedge) - 3.5 Coupon swaps (fair value hedge) 3.3 - Fuel derivatives (cash flow hedges) 10.8 27.8 14.1 31.3 Total assets 22.6 51.6 Current liabilities Interest rate swaps (cash flow hedge) 0.9 0.7 Cross currency swaps (net investment hedge) 0.9 - Coupon swaps (fair value hedge) - 4.5 1.8 5.2 Non-current liabilities Interest rate swaps (cash flow hedge) 0.4 0.9 Cross currency swaps (net investment hedge) 0.4 - Coupon swaps (fair value hedge) - 1.5 0.8 2.4 Total liabilities 2.6 7.614. Deferred taxThe following are the major deferred tax liabilities and assets recognised bythe Group and movements thereon during the current and prior reporting period. Accelerated Other Tax Total temporary tax differences losses ‚£m depreciation ‚£m ‚£m ‚£m At 1 April 2004 124.8 (77.6) (41.1) 6.1 Charge/(credit) to income 11.5 11.5 (0.9) 22.1 Charge to equity - 5.4 - 5.4 Acquisition of subsidiary - (2.2) - (2.2) Exchange differences (2.0) (0.1) 1.5 (0.6) At 31 March 2005 134.3 (63.0) (40.5) 30.8 Adoption of IAS 39 - 9.9 - 9.9 At 1 April 2005 134.3 (53.1) (40.5) 40.7 Charge/(credit) to income 32.9 32.0 (21.6) 43.3 Charge to equity - 2.6 - 2.6 Acquisition of subsidiary - (3.6) - (3.6) Exchange differences 4.9 (0.3) (3.0) 1.6 As 31 March 2006 172.1 (22.4) (65.1) 84.6 15. Provisions Insurance Pensions Total claims * ‚£m ‚£m ‚£m At 1 April 2005 34.5 10.1 44.6 Provided in the period 25.4 0.2 25.6 Utilised in the period (37.4) (3.4) (40.8) Notional interest 6.1 - 6.1 Exchange rate differences 2.1 - 2.1 At 31 March 2006 30.7 6.9 37.6* Insurance claims accruals due within one year at 31 March 2006 amounted to ‚£50.0m (2005: ‚£39.8m) and are included in "accruals and deferred income" withinnote 20. The amount included within provisions represents the estimate ofamounts due after more than one year.16. Called up share capital 2006 2005 ‚£m ‚£m Authorised: Ordinary shares of 5p each 30.0 30.0 Allotted, called up and fully paid Ordinary shares of 5p each 19.9 19.9 No. ‚£m m At beginning and end of year 398.8 19.9 6,630,500 shares (2005: 5,200,000) shares were being held as treasury shares at31 March 2006.The Company has one class of ordinary shares which carry no right to fixedincome.17. Statement of changes in equity Hedging Share Own Retained shares earnings reserve premium ‚£m ‚£m ‚£m account ‚£m At 1 April 2004 - 238.8 (0.6) (82.5) Share repurchases - - - (12.0) Retained profit for the financial year - - - 108.1 Dividends paid - - - (48.2) Movement in EBT, QUEST and treasury - - (18.3) -shares during the year Actuarial gain on defined benefit pension - - - 20.8schemes Share based payments provision - - - 2.9 Deferred tax on actuarial gains - - - (6.3) Deferred tax on share based payments - - - 0.9 At 31 March 2005 - 238.8 (18.9) (16.3) Financial instrument recognition 37.0 - - (9.0) At 1 April 2005 (as restated) 37.0 238.8 (18.9) (25.3) Retained profit for the financial year - - - 107.5 Dividends paid - - - (52.0) Movement in EBT, QUEST and treasury - - (7.7) (8.3)shares during the year Current tax on share based payments - - - 1.8 Actuarial gain on defined benefit pension - - - 36.7schemes Deferred tax on actuarial gains - - - (11.0) Derivative hedging instrument movements (35.1) - - - Share based payments provision - - - 3.2 Deferred tax on share based payments - - - 0.3 At 31 March 2006 1.9 238.8 (26.6) 52.9 Capital Capital Total other redemption reserve reserves reserve ‚£m ‚£m ‚£m At 31 March 2006 and 31 March 2005 1.9 2.7 4.618. Translation reserves Total ‚£m At 1 April 2004 - Movement for the financial year (14.2) At 31 March 2005 (14.2) Reclassify to hedging reserve on financial instrument recognition (7.7) Movement for the financial year 49.6 At 31 March 2006 27.719. Notes to the consolidated cash flow statement 2006 2005 ‚£m ‚£m Operating profit 196.7 200.7 Adjustments for: Depreciation charges 122.0 107.6 Amortisation of intangible assets 4.5 2.2 Share based payments 3.2 2.9 Loss on disposal of property, plant and equipment 1.4 1.9 Operating cash flows before working capital 327.8 315.3 Increase in inventories (9.6) (2.6) Decrease/(increase) in receivables 3.9 (41.0) Decrease in payables (21.4) (24.5) Cash generated by operations 300.7 247.2 Corporation tax paid (3.5) (16.1) Interest paid (61.3) (35.1) Interest element of hire purchase contracts and finance (0.9) (2.3)lease payments Net cash from operating activities 235.0 193.7 ENDFIRSTGROUP PLC

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