Interim Results

10 December 2014

Stagecoach Group plc - Interim results for the six months ended 31 October 2014

Delivering value and pursuing new opportunities in bus and rail markets

· Adjusted earnings per share* up 3.4% to 15.1 pence (2013: 14.6 pence)

o No material change to our full year expectation

· Interim dividend per share up 10.3% to 3.2 pence (2013: 2.9 pence)

· Continued passenger volume growth in commercialised UK bus market

o Successful partnership working with government, investment and low fares

o Significant further investment in technology improvements for customers

o Working with other bus companies to deliver smart multi-operator ticketing in key city regions during 2015

· Expansion of megabus.com coach operations in Europe

· Commercial initiatives to further grow megabus.com in North America

· Encouraging momentum in UK rail sector

o New InterCity East Coast franchise due to commence in March 2015

o West Coast Trains franchise through to 2017 and performing strongly

o Planning for direct awards of new South West Trains and East Midlands Trains franchises in second-half of 2015

o One of three shortlisted bidders for TransPennine Express franchise

Financial summary

Commenting on the results, Chief Executive, Martin Griffiths, said: 

"These are a good set of results, reflecting the strength of our businesses in the UK, mainland Europe and North America. We have improved further the travel experience for our customers, provided value for money for taxpayers, invested in public transport and added value for our shareholders.

"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 for our regional economies. We are proud that our record of significant investment, innovation, and low fares has delivered strong transport networks and high levels of passenger satisfaction.

"Despite facing a number of challenges, our sector-leading commercial bus operations in the UK have continued to grow, helping support the economies of some of the country's biggest city regions. Working with other bus companies and building on our existing multi-million-pound digital strategy, we are planning to introduce smart multi-operator ticketing in key city regions during 2015. This transformational initiative demonstrates what can be achieved at local community level without the need for costly and unnecessary regulatory change.

"Our megabus.com branded coach services in the UK, mainland Europe and North America have helped create hundreds of new jobs. We have significantly expanded our footprint in mainland Europe and are encouraged by the opportunities in several countries, including moves to open up the inter-city coach market in France.

"There is encouraging momentum in the UK rail sector, with the award this year of several new franchises. We have opportunities to add value from both our existing franchises and new contracts, and to improve services for passengers. In particular, we are working closely with Government and Network Rail to provide new trains, extra capacity and a more reliable service for customers.

"We are delighted to have been selected to operate the new InterCity East Coast rail franchise along with our partner, Virgin. Our plans will deliver a transformation in travel for passengers, as well as value for money for the taxpayer. We are shortlisted for the TransPennine Express franchise and look forward to agreeing new franchises with the Department for Transport to extend our time at East Midlands Trains and South West Trains.

"Overall the Group is in excellent financial shape and we are well placed to drive value through new opportunities in our core bus and rail markets. While we have changed our view of the likely divisional mix of profit for the year ending 30 April 2015, with lower expected operating profit from our regional UK Bus and North America businesses broadly offset by other areas, we remain on course to achieve our expected adjusted earnings per share for the year."

Copies of this announcement are available on the Stagecoach Group website at http://www.stagecoach.com/investors/financial-analysis/reports/2014.aspx 

For further information, please contact:

Stagecoach Group plc www.stagecoachgroup.com

Investors and analysts

Media

Notes to Editors

Stagecoach Group

· Stagecoach Group is an international public transport group, with extensive operations in the UK, continental Europe, the United States and Canada. The Group employs around 35,000 people, and operates bus, coach, train, and tram services.

· Stagecoach is one of the UK's biggest bus and coach operators with around 8,300 buses and coaches. Around 2.8 million passenger journeys are made on Stagecoach's buses every day on a network stretching from south-west England to the Highlands and Islands of Scotland. 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 a 49% shareholding in Virgin Rail Group, which operates the West Coast rail franchise. It also has a 90% shareholding in Inter City Railways Limited, which has been awarded the contract to operate the East Coast rail franchise from March 2015.

· 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 links around 130 key locations in North America. Stagecoach is also involved in operating commuter, transit, contracted, charter and sightseeing services.

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 2014.

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, United States and Canada. A description of each of the Group's operating divisions is given on pages 4 to 6 of its 2014 Annual Report.

Overview

We are pleased to report good results for the six months ended 31 October 2014 that are consistent with our expectations. Our businesses across the UK, mainland Europe and North America have performed well.

The Group achieved further revenue and profit growth in the six months to 31 October 2014. Revenue for the period was up 4.8% at £1,545.0m (2013: £1,473.9m). Total operating profit (before intangible asset expenses and exceptional items) was up 2.6% at £129.8m (2013: £126.5m). Earnings per share before intangible asset expenses and exceptional items were 3.4% higher at 15.1p (2013: 14.6p).

The interim dividend is up 10.3% to 3.2p per share (2013: 2.9 pence). 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 6 February 2015 and will be paid on 4 March 2015.

The Group's ongoing investment in new vehicles, technology and other assets is a key part of sustaining our success. In the six months ended 31 October 2014, net capital expenditure was £84.3m (2013: £66.6m). Across all of its divisions, the Group is investing in a number of initiatives designed to deliver further benefits to customers and value to shareholders.

We believe our services, with commercial operators providing the capital for investment, the expertise and operational flexibility, are best placed to help governments and local authorities meet their objectives for economic growth, devolution and social mobility. We are assisting them in developing practical and appropriate policies to tackle the interconnected issues around travel costs, road congestion, rail capacity and investment in our road and rail infrastructure. We remain mindful of the current political debate in the UK around the best model to deliver public transport and the potential impact on our bus and rail businesses. We are engaging constructively with major UK political parties on this issue and continue to make a robust case for partnership working and the substantial benefits it brings for passengers and taxpayers.

We believe passionately that the benefits of public transport are best maximised by transport operators, central government and local government working together. We have invested heavily in transport operations over many years and a stable regulatory environment is critical to ensuring continued high investment and innovation. That combined with our innovation and low fares should enable us to maintain high levels of passenger satisfaction and good financial returns.

The Board of Directors is greatly saddened by the death of the Company's former Chairman, Bob Speirs, in October. Bob was a director of the Company from 1995 to 2010 and was hugely respected throughout the Stagecoach Group. He became Chairman at a difficult time for the business in 2002. Bob made an extraordinary contribution to the Group. As Chairman, he oversaw a significant revitalisation of the Group's fortunes. The Board extends its deepest sympathy and condolences to Bob's family.

The commitment and professionalism of our employees is a key part of our success. The Board extends its thanks to all those employees across the Group.

Stagecoach has made an overall satisfactory start to the second half of the current financial year and there has been no material change to our expected adjusted earnings per share for the year. In light of trading trends in recent weeks, we have changed our view of the likely divisional mix of profit and we are lowering our expectations of 2014/15 operating profit from our regional UK Bus and North America businesses but this is broadly offset by other areas, including the share of profit we expect from Virgin Rail Group. We do not expect the new East Coast rail franchise to have a material impact on 2014/15 earnings but we do expect it to make a significant contribution from 2015/16 onwards. We remain in a strong financial position, with opportunities for further growth.

Summary of financial results

Revenue by division is summarised below:

Operating profit by division is summarised below:

UK Bus (regional operations)

Financial performance

The financial performance of the UK Bus (regional operations) division for the six months ended 31 October 2014 is summarised below:

Our sector-leading regional bus operations continued to grow both passenger volume and revenue year-on-year. We offer the lowest fares of any major operator in Britain and we have continued to invest in the quality of our services, resulting in industry leading levels of customer satisfaction. Our objective is to encourage modal shift from the private car to greener, smarter bus travel. We operate in a competitive market, which helps ensure customers benefit from competitive bus fares and good quality services. The reported operating profit includes a significant year-on-year reduction in the profitability of our Manchester bus business, which partly reflects the competitive effects of changes in fares and increased bus services in the market. Nevertheless, we are pleased to have maintained the overall profitability of the Division as a whole and we are confident that over the longer term that we will compete successfully in each of the UK regions in which we operate.

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

Like-for-like revenue growth for the six months ended 31 October 2014 was 3.2% and excludes the revenue earned from contracts to provide transport for the Commonwealth Games in Glasgow. Passenger volume growth on an equivalent basis was 0.7%. Higher commercial revenue (i.e. revenue earned directly from fare-paying passengers) has contributed most to overall revenue growth, with concessionary, tendered and school revenue also growing. In the equivalent period last year, revenue was earned from providing additional bus services to replace train services that were affected by major railway resignalling work. Excluding revenue from contracts, like-for-like revenue growth was 3.6%. 

We continue to pursue further growth initiatives. We have introduced additional "development mileage" this year, including in areas where we have seen opportunities to replace services previously provided by other bus operators. Although such development mileage can be a drag on profit in the short-term, it provides scope for further growth over the medium-term.

The decrease in operating margin was built up as follows:

The main changes in the operating margin shown above are:

· Staff costs, including pension costs, have risen at a faster rate than revenue in the first half of the year. Vehicle miles operated increased year-on-year, partly due to new development mileage and an increase in the level of tendered services operated for local authorities. This resulted in staff costs increasing by more than inflation but revenue per mile increased by a lower rate. We will continue to review the services and mileage we operate and make appropriate adjustments to reflect customer demand and the long-term interests of the Group.

· Other operating income increased in the period due to a reassessment and reduction of the provision held for token redemptions.

· In April 2012, the proportion of fuel duty that is rebated to bus operators in the form of Bus Service Operators' Grant ("BSOG") was cut. Since April 2012, the rate of BSOG has remained stable meaning that the total BSOG received by the division has fallen as a percentage of revenue. In addition, from early 2014, bus operators in England no longer receive BSOG in respect of bus services tendered by local authorities and instead receive higher tender revenue.

Political developments

We were disappointed but not surprised at the decision by the North East Combined Authority in October 2014 to refer proposals to implement a bus contracting system in Tyne and Wear to a Quality Contracts Review Board. The proposals are to replace the successful, commercialised bus market in north east England with a system of bus contracts similar to London, where bus services are provided by private sector bus operators under contract to Transport for London ("TfL") under which TfL assumes the majority of the financial and commercial risks. We now expect these proposals to be subject to more rigorous examination by a properly constituted independent board that should not be motivated by political considerations and which we fully expect to take appropriate, impartial, professional advice in reaching a decision. The Review Board has a duty to determine whether the proposals meet the five statutory public interest criteria that have to be met to support the introduction of the contracting scheme. We do not believe these tests have been met and we will present robust evidence to the Review Board to demonstrate this. We are discussing with the Review Board the significant flaws in the proposed contracting scheme, and at the same time, we continue to review our legal options. The voluntary partnership agreement proposed by the local bus operators, where operators provide the capital and retain the commercial risks, would be far more effective at delivering customer service improvements and generating savings for the public sector without the huge financial risks of the proposed contracting scheme to the region's taxpayers.

We note the current UK Government's intention to devolve further powers and funding to Greater Manchester, including creating the potential for London-style bus franchising in the region. While this is subject to consultation, further evaluation and fundamental governance changes to introduce a mayor, we do not believe such a change in the model for the delivery of bus services in the region is necessary or in the interests of passengers and taxpayers. Greater Manchester already benefits from frequent, high quality and integrated bus services as well as the greenest bus fleet outside London. No changes will take place before the first mayoral election, which is expected to be held in 2017. In addition, we will use any consultation period to make a robust case that there is no benefit in changing the framework for bus services. Nevertheless, we do not see the transport elements of the announcement regarding Greater Manchester as necessarily signifying any major change to wider government policy on buses, which has consistently stressed the benefits of partnership between bus operators and local authorities.

On a similar theme, we note the announcement by the Labour Party that its manifesto for the 2015 UK General Election will include a commitment to give city and county regions more power over their public transport networks. The Party has suggested that this will give regions similar powers to regulate their bus services as those in London. We strongly oppose this uncosted and unnecessary Labour Party plan, which would land England's biggest city regions with an additional bill running to hundreds of millions of pounds, as well as leading to higher bus fares.

Potential regulatory change of the type explained above does present some risk to the future financial performance of the Group as well as presenting significant risks to the cost and quality of bus services provided to the public.

Enhanced customer experience

In early November 2014, the Group, along with the UK's other biggest bus operators, confirmed their commitment to introduce multi-operator smart ticketing in key city regions during 2015. Priority will be given to Greater Manchester and Tyne and Wear where we are already well advanced in agreement with NEXUS. This transformational initiative will also benefit Merseyside, South Yorkshire and West Yorkshire along with the city regions of Nottingham, Leicester and Bristol.

Our ongoing UK Bus "Digital Project" will deliver further significant technology-driven benefits for our customers. The project will provide a simpler way to search for bus journeys and nearby bus stops, comprehensive real-time information about journeys, a fare and ticket finder tool, personalised alerts and other benefits. A unified experience will be provided across all types of devices offering a more personalised service for customers. We are investing over £11m of capital and operating expenditure in the project over the next three years alone.

megabus.com Europe

The Group has been pleased with the progress of the megabus.com inter-city coach operations in mainland Europe. megabus.com now has a fleet of more than 130 coaches covering over 100 destinations in the UK, France, Belgium, the Netherlands, Luxembourg, Germany and Spain. Our mainland European services have already achieved significant growth and we are now planning to extend the network further. We will introduce more mainland European services over the remainder of the year ending 30 April 2015, building on the success of the megabus.com brand in the UK and North America. To support that expansion, we have also significantly strengthened the management team at the megabus.com business with a number of new appointments. This is an exciting prospect for the medium-term, but will result in several million pounds of new start-up losses in the year ending 30 April 2015 and around £20m of additional capital expenditure, primarily in acquiring new vehicles.

In addition to operating cross-border services, private operators are permitted to run commercial inter-city coach services in Germany, and France plans to allow commercial services from late 2015. We also see opportunities in other European countries that are at varying stages of allowing domestic commercial inter-city coach operations.

Outlook

The long-term outlook for our commercialised regional bus operations in the UK remains positive. We operate in a competitive market and so we look to continue to differentiate ourselves through low fares and a positive customer experience. By working in partnership with government and others, and supported by our ongoing investment, we believe we are well placed to grow the business in the context of rising population and increased road congestion. We remain alert to the political risks facing the Division and we will continue to highlight the benefits of the commercialised bus model for customers and taxpayers.

In the shorter term, however, profit in recent weeks has fallen short of our expectations for various reasons including continued strong competition in Manchester, and lower than anticipated revenue growth in certain other locations. We continue to closely monitor emerging revenue trends. In addition, we anticipate incurring some additional staff costs to minimise vacancy gaps arising as the economy continues to recover. While the development mileage referred to earlier adversely affects short-term profit, we still consider it appropriate to pursue these emerging growth opportunities. In light of these factors and along with the acceleration of the start up of megabus.com in mainland Europe, we have reassessed the Division's forecast operating profit for the year ending 30 April 2015 and consider it prudent to revise down our expectation.

Growth in concessionary revenue is likely to remain modest as government bodies seek to minimise the amounts paid to bus operators under concessionary fare schemes. The Division receives Bus Service Operators' Grant ("BSOG", a rebate of fuel duty to bus operators) and the rate of BSOG we receive remains relatively stable for the time being.

We expect our fuel costs to reduce in the year ending 30 April 2016. Each of our local bus businesses will take account of this when setting fares, bearing in mind that fuel costs are also falling for private cars as well as for other bus and transport operators. We therefore would not necessarily assume that changes in fuel costs result in an equivalent pound-for-pound change in our operating profit. Staff costs represent the majority of the Division's costs and we seek to balance rises in staff costs against increases in revenue.

UK Bus (London)

Financial performance

The financial performance of the UK Bus (London) division for the six months ended 31 October 2014 is summarised below:

Our UK Bus (London) division is continuing to perform well. During the period, we have retained four of the five contracts where we bid as the incumbent.

Revenue growth has generally been good during the period. Traffic disruption from ongoing road works has adversely affected our quality incentive income, which has moderated overall revenue growth. In light of this, we are continuing to discuss with TfL how service performance can be further improved.

As previously reported, from 1 October 2013 the division has no longer received BSOG. This is offset by a corresponding uplift in the contract prices paid to the business by TfL. Excluding the contract prices uplift, revenue increased by 9.3% during the six months to 31 October 2014.

The overall rate of revenue growth has reduced and we expect that it will reduce further reflecting (a) the year-on-year effect of the BSOG change referred to above being reflected in prior year revenue from 1 October and (b) the effect of new contracts that began during the year to 30 April 2014.

The decrease in operating margin was built up as follows:

The BSOG change explained above reduced operating margin by 40 basis points year-on-year because although it did not significantly affect reported profit, both revenue and operating costs increased by similar amounts as a result of the change, meaning profit fell as a percentage of revenue.

Lease costs further increased as a percentage of revenue as we continued our policy in London of obtaining most new vehicles on operating lease rather than purchasing them outright.

Although fuel costs increased slightly relative to last year, they increased at a lower rate than revenue reflecting market fuel prices and our fuel hedging programme.

Following the restructuring of the London bus business we acquired in 2010, one of the acquired depots was mothballed. This depot was later made available to our UK Bus (regional operations) Division to support the delivery of its contract work for the London 2012 Olympics. In November 2014, we completed a sale of the depot for £5m.

Outlook

The level of bus mileage contracted by TfL across the London market is relatively stable. Given that and in light of the competitive market for London bus contracts, we do not expect any growth in our London Bus operating profit to be significant over the next few years. However, we are satisfied with the rates of return that we achieve in London and our focus is on keeping costs under control and aiming to retain and win contracts on acceptable terms.

North America

Financial performance

The financial performance of the North America division for the six months ended 31 October 2014 is summarised below:

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

Revenue growth and the opportunities for further development in North America are encouraging. megabus.com is a key driver of growth in this market, with its low-cost inter-city coach services. Excluding megabus.com, like-for-like revenue was slightly lower than for the equivalent prior year period.

megabus.com increased revenue by 14.0% in the six months ended 31 October 2014. We are satisfied with the progress of our Florida megabus.com network, where operations began in May 2014. In the Chicago megabus.com network, where we have seen strong price competition from other coach operators in recent years, we are pleased that profitability has improved year-on-year. As well as targeting geographic expansion, we are also focused on maximising the commercial potential of our services. The successful introduction of our seat reservation system has delivered an additional revenue stream for the business and offers increased flexibility for passengers, and we will look for other opportunities which will deliver additional value to our customers and the business.

Overall, the financial performance of the non-megabus businesses, including our commuter services in and out of New York, remains satisfactory. We review our portfolio on an ongoing basis and, as we have done in the past, will consider opportunities for business acquisitions or the disposal of some units where these support our overall strategy for the North America division.

The increase in the operating margin of the North America division was built up as follows:

The changes in operating margin partly reflect the shift in the mix of business as megabus.com continues to grow at a faster rate than the other businesses. The Division has benefited from reduced fuel costs in the period under the Group's fuel hedging programme.

Outlook

The operating environment in North America is competitive and we modify our network to take account of the levels of demand, but we remain positive on the Division's long-term prospects and the market opportunity.

Weather conditions during November 2014, particularly around the high revenue Thanksgiving week, were very poor and worse than our previous forecasts had allowed for. In light of this weaker trading performance in November, and also taking account of the likely impact of falling fuel prices on demand for our services in an already competitive market, we consider it prudent to revise down our operating profit forecast for the remainder of the year.

We see further scope for revenue and profit growth from the megabus.com services and in particular, those services that have been launched over the last couple of years. We will consider opportunities to introduce megabus.com services to new parts of North America that are best suited to the concept. We anticipate that megabus.com will remain the primary source of any growth in our North America operating profit over the next few years.

UK Rail

Financial performance

The financial performance of the UK Rail division for the six months ended 31 October 2014 is summarised below:

The revenue growth rate of 7.2% during the period has been boosted by the effect of prior year resignalling work in the Nottingham area, but growth has been good even after that effect is excluded.

As we expected, operating margin fell year-on-year and the reduction was built up as follows:

The Group's two wholly-owned rail franchises, South West Trains and East Midlands Trains, have performed in line with our expectations. This reflects our focus on growing revenue and controlling costs to mitigate the substantial increases in premia payments we have committed to deliver to the Department for Transport ("DfT").

The significant changes shown above in amounts paid to/from DfT and in Network Rail charges include the effect of changes in the basis of Network Rail charges as determined by the Office of the Rail Regulator for the five-year period commencing 1 April 2014. The effect of the Regulator's decision on our Network Rail charges should be largely offset in the amounts we pay to the DfT. The final adjustments to the amounts payable to the DfT have yet to be agreed by the DfT and the results to date reflect our estimates of the relevant amounts.

The reduction in other costs includes lower bus hire and taxi costs reflecting the resignalling work in the prior year referred to earlier.

Enhanced customer experience

We are working closely with Government and Network Rail to deliver new trains, extra capacity and a more reliable service for customers. At our South West Trains franchise, passenger volumes have increased by more than 100% over the past two decades, with services particularly busy at peak times. During the period, we announced plans for a £210m fleet of new trains to boost capacity on services at South West Trains. The first of the 150 new carriages are due to begin arriving in 2017. The latest investment agreed with the DfT comes as South West Trains continues the roll-out of a £65m investment in 108 additional refurbished carriages for the network. Combined with the order for new trains, this should deliver a total peak-time capacity increase of around 30% by 2018.

Our Alliance between South West Trains and Network Rail, where one management team manages both trains and railway infrastructure, is helping deliver a more integrated and customer-focused railway. The new train order is part of a comprehensive five-year plan developed by the Alliance to transform services for passengers, incorporating longer platforms, full re-opening of platforms at the former Waterloo International Terminal and other associated infrastructure improvements.

We are pleased that East Midlands Trains was named Passenger Operator of the Year at the National Rail Awards in September 2014. Also, it has been independently recognised for its high level of customer service in a survey of companies across many sectors of the economy carried out by the Institute of Customer Service.

Franchising progress

There is encouraging momentum in the UK rail sector, with a number of franchise awards having been made by the DfT and other franchising authorities during the past 12 months. We incurred £2.3m in the six months ended 31 October 2014 in pursuing new rail franchise opportunities.

We are delighted to have been selected to operate the new InterCity East Coast rail franchise along with our partner, Virgin. The new franchise is due to begin in March 2015 and annual passenger revenue for the year ended 31 March 2014 was around £660m. The Competition and Markets Authority is required by law to carry out a "Phase 1" review of all UK rail franchise awards and will therefore undertake a review of the InterCity East Coast award.

We are also one of three bidders shortlisted for the TransPennine Express franchise. An announcement about the successful bidder is expected in autumn 2015, with the contract expected to start in February 2016.

We look forward to agreeing with the DfT the planned direct awards of new South West Trains and East Midlands Trains franchises. The DfT has previously announced that it plans to extend our tenure at South West Trains from February 2017 to April 2019. It has also indicated its intention to extend our tenure at East Midlands Trains from October 2015 through to October 2017. We expect these contracts to be concluded in the second half of 2015, subject to the agreement of commercial terms with the DfT.

Political developments

We are encouraged that having undertaken a full review of rail franchising in 2012 and 2013, the DfT is now delivering good momentum in the rail franchising process that in turn helps in ensuring continued investment in the railway for the benefit of customers. We would like to see that momentum maintained notwithstanding the UK General Election planned for May 2015. Some Labour Party politicians have suggested that a bidder owned by the UK public sector ought to be permitted to bid for UK rail franchises - while we see that as an unnecessary cost and distraction given the already competitive bidding market for franchises. If such a bidder were to bid for franchises, we will look to make sure that there is a "level playing field" which includes taking account of the value of risk transfer from the UK public sector to private sector operators.

Outlook

We have previously reported that as we approach the end of the existing period of our two wholly-owned franchises, the financial performance of the businesses becomes more challenging. We remain focused on growing revenue and controlling costs to offset increased premia payments, to the extent possible. We see opportunities in the planned direct awards of new South West Trains and East Midlands Trains franchises and in other new franchises. For example, the commencement of the new East Coast franchise in March 2015 has the potential to significantly add to the Group's UK Rail revenue and profit from 2015/16 onwards.

Group overheads

Group overheads were broadly in line with last year at £7.2m in the six months ended 31 October 2014 compared to £7.0m in the six months ended 31 October 2013.

Virgin Rail Group

Financial performance

The financial performance of the Group's Virgin Rail joint venture (excluding exceptional items) for the six months ended 31 October 2014 is summarised below:

The new West Coast Trains franchise commenced on 22 June 2014 and is planned to run until at least 31 March 2017. The DfT has the discretion to extend the contract, on pre-agreed terms, by an additional year to 31 March 2018. This is a commercial franchise where Virgin Rail Group takes the majority of revenue and cost risk. As a result of the significant transfer of risk to Virgin Rail Group, the business has the opportunity to earn a commercial return. The franchise has benefited from lower than expected fuel and electric traction (EC4T) costs as well as good passenger revenue. Under the terms of the contract, the DfT benefits from this good performance as part of a profit share agreement.

In 2012, the DfT cancelled the competition for a new long-term West Coast Trains franchise. As a temporary measure, Virgin Rail Group operated the West Coast franchise under a management contract from December 2012 to June 2014. Under this temporary arrangement, Virgin Rail Group contractually earned a management fee equivalent to 1% of revenue from the West Coast rail franchise. As a result, prior year profitability was unusually low. Profit in the current year is more consistent with other commercial rail franchises, taking account of the transfer of risk to Virgin Rail Group as a result of the new franchise that began in June 2014.

Twin America

Financial performance

The financial performance of the Group's Twin America joint venture (excluding exceptional items) for the six months ended 31 October 2014 is summarised below:

Trading at our Twin America joint venture remains challenging as a result of an increasingly competitive New York sightseeing market. Competitors include major international bus operators such as Big Bus and RATP. As a result, our share of profit after tax from the joint venture during the six months to 31 October 2014 has reduced from US$12.3m to US$6.8m.

In December 2012, the United States Department of Justice ("DoJ") and the Attorney General of the State of New York ("NYAG") initiated legal proceedings against Twin America, Stagecoach subsidiaries and others alleging that the formation of Twin America in 2009 was anticompetitive. We fundamentally disagree with their allegations and their assessment of the joint venture. Private actions were also filed in relation to this matter.

As previously reported, the defendants in the case have not admitted any liability but have agreed a cash settlement of US$19m (c.£12m) with the private plaintiffs to fully resolve the private litigation. We are pleased that settlement has now received final court approval. We remain in dialogue with the DoJ and the NYAG regarding the Twin America joint venture and we are exploring whether a settlement of the matters raised can be reached.

Depreciation and intangible asset expenses

Earnings before interest, taxation, depreciation, intangible asset expenses and exceptional items (pre-exceptional EBITDA) amounted to £190.2m (2013: £185.7m). Pre-exceptional EBITDA can be reconciled to the financial statements as follows:

Depreciation fell slightly from the equivalent prior year period due to the effect of foreign exchange rate movements on the sterling value of depreciation for the North America Division and the reassessment of the useful economic lives of assets in the UK Rail Division.

The income statement charge for intangible assets, decreased from £7.2m to £5.0m, principally due to certain intangible assets becoming fully amortised during the six months to 31 October 2014.

Exceptional items

A pre-tax exceptional loss of £5.3m was recognised in the six months ended 31 October 2014, which related to the following items:

· One of our US businesses failed to retain certain contracts to operate bus services on behalf of a local authority when those contracts were re-tendered. As a result, it now expects to cease operations at one of its depots, which is leased. A provision of £2.0m has been recorded in respect of the leased depot as that lease is now determined to be onerous because the forecast, unavoidable costs of meeting the Group's obligations under the lease exceed the forecast economic benefits forecast to be received as a result of the lease.

· We have previously expensed amounts as exceptional items in respect of the anticipated legal costs and settlement amounts related to Twin America litigation. As a result of the prolonged nature of the litigation process and the ongoing settlement discussions, we now anticipate further legal costs in excess of those previously expensed. Additional expenses of £3.3m have therefore been recognised in the Group's consolidated income statement for the six months ended 31 October 2014.

Finance costs

Net finance costs for the six months ended 31 October 2014 were £21.2m (2013: £20.9m) and can be further analysed as follows:

Taxation

The effective tax rate for the six months ended 31 October 2014, excluding exceptional items, was 21.8% (2013: 20.8%). This is around 2.2% higher than our expected rate for the full year ending 30 April 2015 due to the seasonality of taxable profits in different tax territories.

The tax charge can be analysed as follows:

Fuel costs

The Group's operations as at 31 October 2014 consume approximately 399.2m 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 (excluding any fuel required by a new East Coast rail franchise) that is now hedged using fuel swaps is as follows:

The Group has no fuel hedges in place for periods beyond 30 April 2018.

Cash flows and net debt

Net cash from operating activities before tax for the six months ended 31 October 2014 was £176.2m (2013: £154.3m) and can be further analysed as follows:

The Group's profit for the period has supported further investment in the business and dividend payments to shareholders. Net debt (as analysed in note 18 to the condensed financial statements) decreased from £461.6m at 30 April 2014 to £430.7m at 31 October 2014. The movement in net debt, showing train operating companies separately, was:

Cash in our train operating companies as at 31 October 2014 was higher than we anticipated and as a result, consolidated net debt of £430.7m was lower than we expected. This was due to the £41.4m working capital inflow shown above, reflecting the timing of rail cash flows, with the train operating companies making significant payments shortly after the balance sheet date. The £34.6m working capital outflow shown above in relation to the other businesses principally relates to the timing of cash flows over the course of the financial year and we expect it to mostly reverse by 30 April 2015.

For the year as a whole to 30 April 2015, we expect consolidated net debt to increase from that at 30 April 2014. The expected increase takes account of our ongoing investment plans, including the planned capital expenditure to support megabus.com growth in mainland Europe, and forecast working capital outflows in the train operating companies including the anticipated effects of an increase in revenue support receivables, cash expenditure in the current year for which funding was received in previous years and the timing of rail industry cash flows.

The impact of purchases of property, plant and equipment for the six months on net debt was £115.7m (2013: £86.1m). This primarily related to expenditure on passenger service vehicles, and comprised cash outflows of £109.6m (2013: £83.1m) and new hire purchase and finance lease debt of £6.1m (2013: £3.0m). In addition, £31.4m (2013: £19.5m) cash was received from disposals of property, plant and equipment. Around £30m of this cash received related to the UK Rail Division where assets constructed or purchased by the division were then sold to Network Rail.

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

The Group's net debt at 31 October 2014 is further analysed below:

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 2014.

Liquidity and bank re-financing

The Group's financial position remains strong and is evidenced by:

· The ratio of net debt at 31 October 2014 to pre-exceptional EBITDA for the twelve months ended 31 October 2014 was 1.2 times (2013: 1.5 times).

· Pre-exceptional EBITDA for the six months ended 31 October 2014 was 9.1 times (2013: 9.0 times) net finance charges (including joint venture net finance income).

· Undrawn, committed bank facilities of £383.2m at 31 October 2014 (30 April 2014: £342.1m) 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 three main credit rating agencies continue to assign investment grade credit ratings to the Group.

The Group entered into £535m of new bank facilities in October 2014. The new facilities have been committed for a period of five years to October 2019 with the potential for them to be extended by up to a further two years. These facilities replace previous bank facilities that were due to expire in February 2016.

Capital structure

It is the Group's objective to maintain an investment grade credit rating. The Group is currently rated investment grade by three major, independent credit rating agencies. That enhances our ability to access cost-effective funding on a timely basis and enables us to demonstrate financial strength when bidding for UK rail franchises and other contracts. The financial standing of interested parties is considered by government in determining the short list of bidders for a UK rail franchise.

The Group has no current plan to return additional funds to shareholders. It keeps its capital structure under review and has increased the interim dividend by over 10%.

Business combinations and disposals

The Group completed no acquisitions or disposals in the six months ended 31 October 2014.

Franchise award

A Stagecoach subsidiary, Inter City Railways Limited ("ICR"), has been awarded a contract to operate the InterCity East Coast rail franchise from March 2015. Stagecoach holds 90% of the share capital of ICR and Virgin holds the remaining 10%. Stagecoach will continue to account for ICR as a subsidiary in its consolidated financial statements and Virgin's interest in ICR will be presented as a minority interest in those consolidated financial statements. Under the terms of the franchise award, it is expected that ICR will purchase the entire share capital of East Coast Main Line Company Limited ("East Coast") for a consideration of c.£11m, to be settled in cash. East Coast is the current train operating company for the East Coast franchise. We expect the purchase to complete by March 2015.

Net assets

Net assets at 31 October 2014 were £76.3m (30 April 2014: £79.3m) with actuarial losses on pension schemes and fair value losses on derivatives used for cash flow hedges offsetting the strong results for the six months.

Retirement benefit obligations

The reported net assets of £76.3m (30 April 2014: £79.3m), that are shown on the consolidated balance sheet are after taking account of net pre-tax retirement benefit liabilities of £171.1m (30 April 2014: £115.8m), and associated deferred tax assets of £34.2m (30 April 2014: £23.1m).

The Group recognised pre-tax actuarial losses of £53.2m in the six months ended 31 October 2014 (2013: £6.9m) on Group defined benefit schemes.

The increase in the net pension obligation over the six month period principally reflects an increase in pension liabilities arising from a reduction in the discount rate applied to the estimated future cash payments of pensions. The accounting standard requires the discount rate to be equivalent to that on a high-quality bond of comparable currency and duration to the liabilities as at the balance sheet date. Yields on AA-rated sterling bonds have fallen during the six month period, resulting in a lower discount rate for the purposes of calculating our pension liabilities and hence, the increase in the net pension obligation.

Related parties

Details of significant transactions and events in relation to 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 8 to 12 of the Group's 2014 Annual Report set out specific risks and uncertainties in more detail. That discussion included risks related to potential changes to regulatory environments. As explained elsewhere in this interim management report, we have since seen further developments in relation to regulatory risks. In particular, the political debate has intensified on whether London-style bus contracting systems should be introduced to other parts of the UK, with that largely being part of a wider debate around greater devolution within the UK.

Although not a new risk to the Group, the risk of litigation has been added to those risks considered to be most significant to the Group. While the Group looks to minimise litigation risk, the ongoing litigation relating to its Twin America joint venture exemplifies the risk and we continue to see a particularly litigious environment in the United States.

Again, while it is not a new risk to the Group, the risk of competition has been added to those risks considered to be most significant to the Group. The Group's businesses operate in competitive markets and competition is considered as part of the description and strategy of each business segment on pages 4 to 6 of the Group's 2014 Annual Report. Private cars are a key source of competition. In addition, other transport operators also compete with our businesses and examples of that are referred to elsewhere in this interim management report in relation to the changes in the competitive environment in which our Manchester bus business operates and also, the highly competitive New York entertainment market faced by our Twin America joint venture.

The matters summarised below are not intended to represent an exhaustive list of all possible risks and uncertainties. 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.

· 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. Such changes may arise as a result of the outcome of the 2015 UK General Election, where there are election manifesto proposals to devolve power over public transport networks to cities and regions. This may lead to bus services being regulated similarly to London, which could adversely affect the Group's financial performance.

· 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.

· Competition - in certain of the markets we operate in, there is a risk of increased competitive pressures from existing competitors and new entrants.

· Litigation - there is a risk of commercial and consumer litigation arising from the legal environment in some markets, particularly North America.

· 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 Internet sales either fails or cannot meet levels of demand. There are also risks associated with IT systems failures and potential malicious attacks on systems.

· 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 2014.

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 a proven organic growth strategy built on continued investment, good value travel and high customer satisfaction.

At the same time, our sector faces challenges ahead. We are planning prudently in view of the ongoing pressure on public sector spending, including on transport expenditure such as concessionary fares schemes. While our fuel costs will be lower in 2015/16, falling fuel prices also affect the relative cost of travel by private car and the linked demand for bus and rail travel. We remain mindful of the UK political environment, the debate around the best model to deliver public transport and the potential impact on our bus and rail businesses. We will continue to make a robust case for partnership working and the benefits it delivers for customers and taxpayers.

As explained earlier, we have revised our view of the expected divisional mix of profit in the year ending 30 April 2015, lowering our expectations of operating profit from our regional UK Bus a nd North America businesses but with that being offset by other areas, including the share of profit we expect from Virgin Rail Group. Overall current trading is satisfactory and we are on course to meet our expectation of adjusted earnings per share for the year.

Martin Griffiths

Chief Executive

10 December 2014

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 Ross Paterson

Chief Executive Finance Director

10 December 2014 10 December 2014

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 forward-looking statements or to correct any inaccuracies therein.

CONDENSED FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENT

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

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

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

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

CONSOLIDATED STATEMENT OF CASH FLOWS

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.

NOTES

The condensed consolidated interim financial information for the six months ended 31 October 2014 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 2014, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union. Except to the extent described below, 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 2014, as described on pages 67 to 74 of the Group's 2014 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 2014 has not been audited, nor has the comparative financial information for the six months ended 31 October 2013 but they have both been reviewed by the auditors. The comparative financial information presented in this announcement for the year ended 30 April 2014 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 2014, which were approved by the Board of Directors on 25 June 2014, 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 10 December 2014. 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 2014, and which include IFRS 10 'Consolidated Financial Statements', IFRS 11 'Joint Arrangements' and IFRS 12 'Disclosure of Interests in Other Entities', do not have any significant effect on the consolidated financial statements of the Group.

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

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 DfT taking virtually all of the risk that revenue and/or costs differ 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 could affect the seasonality of Virgin Rail Group's profits in the year ending 30 April 2015.

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:

The basis of segmentation is consistent with the Group's last annual financial statements for the year ended 30 April 2014.

The Group has interests in three joint ventures: Virgin Rail Group that operates 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).

Due to the nature of the Group's business, the origin and destination of revenue 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:

Operating profit split by segment was as follows:

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

Assets and liabilities split by segment were as follows: