Interim results for half-year ended 27 Oct 2018

5 December 2018

Stagecoach Group plc - Interim results for the half-year ended 27 October 2018

Financial highlights

· Adjusted earnings ahead of expectations, principally reflecting:

o Positive resolution of contractual matters for the former South West Trains franchise

o Strong profitability at Virgin Rail Group

· Adjusted earnings per share 12.9 pence (H1 2018: 13.6 pence)

o Prior year includes strong contribution from the South West Trains franchise that ended in August 2017

· Statutory loss per share 5.5 pence (H1 2018: earnings per share 13.6 pence)

o £85.4m non-cash exceptional impairment charge in respect of North America goodwill

· Interim dividend maintained at 3.8 pence per share

· Full-year adjusted earnings will reflect the rail out-performance in the first half of the year

Operational highlights

· Continuing innovation and leadership

o Trial of autonomous buses carrying passengers between Edinburgh and Fife, with £4.35m Innovate UK funding

o Second largest "contactless transit merchant" in Europe, after Transport for London

o New initiatives on enhanced use of data and demand responsive transport

· Encouraging performance from UK Bus (regional operations)

o Commercial initiatives delivering passenger revenue growth

o Like-for-like revenue per vehicle mile up 4.4%

· Good profitability and further opportunities in UK rail

o Involved in shortlisted bids for three new franchises

o Good progress on negotiation of new Direct Award franchise at East Midlands Trains through to at least August 2019

· North America strategic review

o First half performance in North America in line with revised expectations

o No significant change since September trading update in expected 2018/19 profit, but £85.4m non-cash goodwill impairment recorded to reflect a revised view on long-term profitability

o Reviewing strategic options and in discussions regarding a possible sale of all or part of the business

o Focus on growing scheduled service (including megabus.com) and contract parts of business

Financial summary

Chief Executive, Martin Griffiths, said: 

"I am pleased to report positive half-year financial results, ahead of expectations.

"Our strategy is designed to grow our core business, to support innovation, and to position the Group to benefit from future opportunities.

"We have delivered encouraging results at our UK regional bus business, where we continue to deliver high customer satisfaction. Targeted fleet and technology investment is helping to enhance operational delivery and improve cost efficiency. We continue to innovate across a range of areas including autonomous buses, contactless payment, data analytics and demand responsive transport.

"We are well positioned in UK rail, with three live contract bids and more than 20 years' experience of delivering innovation and investment for customers. We welcome the UK Government's rail review as an opportunity to deliver better value and day-to-day performance for passengers, a partnership structure and contracting system which is sustainable for the long-term, and reform of outdated regulations which are holding back customer-focused improvements.

"While we recognise the competitive challenges in some of our markets in the UK and North America, we are confident that public transport will be central to delivering Government priorities to grow the economy, connect people and communities, reduce road congestion and improve air quality. We are reviewing strategic options for the North America Division and that includes ongoing discussions regarding a possible sale of all or part of the business.

"The Group is focused on making further progress in the second half of the year and we have increased our expectation of full-year adjusted earnings per share to reflect the above-forecast rail earnings in the first half of the year."

Copies of this announcement are available on the Stagecoach Group website at http://www.stagecoach.com/investors/financial-analysis/reports/2018.aspx

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation ("MAR"). Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

The person responsible for arranging the release of this announcement on behalf of Stagecoach Group plc is Mike Vaux, Company Secretary.

For further information, please contact:

Stagecoach Group plc www.stagecoach.com

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Notes to editors

Stagecoach Group

· Stagecoach Group is a leading international public transportation group, with extensive operations in the UK, the United States and Canada. The Group employs around 31,000 people.

· Stagecoach is one of the UK's biggest bus and coach operators with over 8,000 buses and coaches 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.

· Stagecoach is a major UK rail operator, running the East Midlands Trains network and holding a 49% shareholding in Virgin Rail Group, which operates the West Coast rail franchise.

· Stagecoach operates the Supertram light rail network in Sheffield.

· In North America, Stagecoach operates around 2,100 buses and coaches in the United States and Canada. megabus.com operates a network of inter-city coach services in North America. Stagecoach is also involved in operating commuter, transit, contracted, charter, airport shuttle and sightseeing services.

Interim management report

The Directors of Stagecoach Group plc are pleased to present their report on the Group for the half-year ended 27 October 2018.

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 operations in the UK, the United States and Canada. A description of each of the Group's operating divisions is given on pages 5 to 7 of its 2018 Annual Report.

Overview

We are pleased to report financial results for the half-year ended 27 October 2018 ahead of expectations. The Group's strategic focus on providing safe, reliable, good quality transport services is reflected in the high levels of customer satisfaction we are delivering. We continue to innovate as we look to drive future growth and value, and later in this report, we set out a number of examples of that innovation.

Adjusted earnings for the half-year ended 27 October 2018 are ahead of expectations, principally reflecting the positive resolution of contractual matters for the former South West Trains franchise and strong profitability at our Virgin Rail Group joint venture. Revenue for the period was £1,230.8m (H1 2018 restated: £1,794.0m), which is lower than the prior year period principally due to our South West Trains franchise ending in August 2017 and our Virgin Trains East Coast franchise ending in June 2018. Total operating profit, before exceptional items, reduced to £103.4m (H1 2018: £114.8m) with the reduction reflecting the strong prior year contribution from the now expired South West Trains franchise. The unadjusted total operating loss for the half-year was £6.2m (H1 2018: £114.8m profit), mainly reflecting the impact of a £85.4m non-cash impairment of North America goodwill. Earnings per share before exceptional items were 12.9p (H1 2018: 13.6p). The basic, unadjusted loss per share was 5.5p (H1 2018: earnings of 13.6p).

We have maintained the interim dividend at 3.8p per share, the same rate as the prior year consistent with guidance in June 2018. The 3.8p dividend is payable to shareholders on the register at 25 January 2019 and will be paid on 6 March 2019. Shareholders who wish to participate in the dividend re-investment plan for this dividend should elect to do so by sending their requests to the Company's registrars to arrive by 13 February 2019.

We are actively working to shape the future of travel and have joined the UK's Intelligent Mobility Accelerator as part of our drive to spark further innovation within the transport industry. This gives the Group access to partner with emerging innovative mobility start ups. In addition, we are currently investigating locations for new pilot demand responsive transport services in the UK. We have also joined forces with car hire company, Enterprise Holdings, to establish the Urban Mobility Partnership. This is focused on engaging a range of stakeholders to develop practical multi-modal policy solutions and we believe mass transit will be central to the future of urban mobility.

In the UK bus market, we have delivered an encouraging performance at our regional bus operations in the first half of the year. We are making progress on a range of commercial initiatives around marketing, ticketing, new revenue streams and on pricing. We remain proud that independent research confirms we are viewed by customers as the best value major bus operator in Britain, with discounted ticketing initiatives to help young people, students and jobseekers.

While we have achieved tendered revenue growth in the regions, the competitive environment in the franchised London bus market is challenging. Nevertheless, we continue to see positive opportunities to improve the revenue and profitability of the Division over the longer term. We will maintain our discipline in bidding for new contracts as well as focusing on strong operational delivery and further cost efficiencies.

Our North America Division remains profitable and our expectation of its 2018/19 operating profit has not significantly changed since the time of our September trading update. However, as noted in that trading update, like-for-like revenue has declined. Year-to-date profit has been below our internal budget, reflecting a number of factors including increased competition in some of the markets in which we operate. In light of that, we have revised our short-term and medium-term financial forecasts for the Division, as well as our view on the Division's long-term growth rate. As a result, we have recorded an £85.4m non-cash impairment of goodwill. After taking account of the goodwill impairment, the net assets of the North America business (excluding cash, debt, tax and inter-company balances) at 27 October 2018 were US$249.0m (£194.2m).

We are reviewing strategic options for the North America Division and while that includes ongoing discussions regarding a possible sale of all or part of the business, there is no certainty of a sale at this time. In the meantime, the divisional management's focus is on growing the scheduled service (including megabus.com) and contract parts of the business. We have made some management changes to support our growth plans in these areas. We have invested in resource to build our contract business and we are hopeful that will boost future profits through new contract wins. Demand for megabus.com and other scheduled services should benefit from further, planned investment in technology to support growth in these businesses.

The Group is well-positioned in UK rail, with involvement in three live bids for new franchises covering the South Eastern, East Midlands and West Coast Partnership networks. Decisions on those opportunities are expected during the first half of 2019. We have also submitted proposals at the request of the Department for Transport which would see us continue to operate the East Midlands network under a Direct Award franchise through to at least August 2019.

We welcome the rail review announced by the UK Government earlier this year. Private sector innovation and investment has helped transform Britain's railway for customers, taxpayers, communities and our economy. However, we believe the review presents a clear opportunity to deliver a more customer-focused and partnership driven railway, which addresses the strains in the system, unlocks innovation and is sustainable for the long-term.

The rail out-performance in the first half of the year is expected to flow through to full-year adjusted earnings.

During the first half of the 2018/19 financial year, Julie Southern stepped down from the Board to take up an appointment as a non-executive director of easyJet plc. We are currently looking to add another non-executive director to our Board.

As a major international public transport group, we are proud of the role of our employees across the Group in providing excellent services for our customers, supporting our communities and helping our business grow. From a transport start-up with family origins, we have grown to become a major British company on an international stage. Over the past four decades, we have challenged convention, championed new ideas, built strong partnerships, and given our people the freedom to innovate and take appropriate risks.

Looking ahead, we believe that approach will serve the Group well and we believe the outlook is positive for mass transit. We are harnessing our talent and developing new ideas to shape and transform the future of travel for everyone, as well as offering solutions to the challenges of climate change, road congestion and declining air quality.

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 half-year ended 27 October 2018 is summarised below, with operating profit 5.8% ahead of last year:

Our UK Bus (regional operations) Division has performed well during the first half of the year, reflecting a range of management initiatives to deliver sustainable growth and enhance the experience for our customers. The Division has also benefitted from the favourable summer weather throughout the country and rail replacement work undertaken in relation to the recent resignalling work at Derby railway station. Our expectation is that revenue growth will moderate over the remainder of the year, reflecting these one-off benefits in the first half of the year.

Like-for-like vehicle miles operated in the first half of the year were 0.9% lower than in the equivalent period last year. Like-for-like revenue per vehicle mile grew 4.4% and like-for-like revenue per journey increased 4.3%.

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

Commercial revenue growth has been encouraging, reflecting the progress on management's various growth initiatives. Our yield per journey has continued to improve, which is partially due to the favourable summer weather, and we continue to adjust our bus networks to best match customer demand.

Our megabus.com business in the UK has continued its good performance from the second half of the prior year, growing revenue and profit by capitalising on the network changes made and marketing enhancements.

Although concessionary revenue continues to be adversely impacted by the effects of government changes in the age of eligibility for free bus travel by older people, passenger journeys were stronger than expected over the summer months, due to the favourable weather conditions.

The increase in tender revenue reflects our growth in market share as some smaller operators have exited the market. We continue to work with local authorities to maximise the value for local communities from the financial support councils can provide for socially desirable transport services.

Higher contract and other revenue include the effects of rail replacement work associated with the Derby railway station resignalling work, in addition to year-on-year changes in the amount and timing of other one-off contract and events work.

The movement in operating margin was built up as follows:

The main changes in the operating margin shown above are:

· As mentioned earlier, the Division undertook work in the half-year in relation to a railway resignalling project at Derby. Some of this work was sub-contracted and resulted in sub-contractor costs that did not occur in the prior year period. That also meant that less of our own employees' time was involved in generating the revenue and contributed to a year-on-year fall in staff costs as a percentage of revenue. Despite the increase in auto-enrolment pension costs, overall staff costs have increased broadly in line with revenue. Staff retention rates and wage awards remain stable and well-controlled.

· Fuel costs have reduced, reflecting our fuel hedging programme.

· Materials and consumables costs have increased year-on-year as a result of some price increases and additional maintenance work at certain locations.

· Other costs have increased, including higher IT and digital costs as we advance our investment in technology enhancements.

Health and safety

Across the whole Group, safety is and always will be our first concern, and we take our responsibilities extremely seriously. For that reason, we deeply regret and will never forget the tragic events involving one of our bus companies in Coventry in 2015 in which two people lost their lives. The court case related to the accident concluded in November and the thoughts of everyone at Stagecoach remain with those affected, their families, friends and colleagues. We have made it our continuing priority to work closely with the authorities to help fully understand and learn detailed lessons from what has happened, both for our own company and the wider bus industry.

Innovation and investment

The Group and its employees won 13 accolades at the 2018 UK Bus Awards, more than any other group.

Later in this report under the heading, "Innovation", we report on how we are continuing to innovate and position the Group in a changing landscape. In addition to the range of technology-based initiatives set out there, a number of pilot initiatives are being trialled in different locations in the coming months to explore the benefits of simplifying our commercial ticket range. We are also exploring a number of potential new income streams incremental to the existing UK Bus business, including B2B/corporate sales opportunities, as well as partnerships with airports, festivals and events around the UK. Stagecoach provided all transport for the athletes at the Special Olympics GB Anniversary Games in Stirling over the summer, building on our experience in delivering transport for other major sporting events.

In addition, a study is underway into future growth potential for inter-urban bus services. We have also tested the potential for coach/taxi through ticketing as part of a partnership initiative in the south-west of England.

Earlier this year, Stagecoach London and megabus.com partnered to launch our megasightseeing.com product in London. It offers tickets from £1 for a two-hour non-stop tour of around 50 London tourist landmarks. After a successful first summer season, the product is to run over the winter and into next summer.

Outlook

We are pleased with the performance of our UK Bus (regional operations) Division in the first half of the year, and our expectation of the Division's operating profit for the year ending 27 April 2019 is unchanged.

We welcome measures announced in the recent UK Budget to help rejuvenate high streets, including funding to improve transport links. Healthy high streets and vibrant bus networks are closely related, with around 30% of retail spend in city centres by bus passengers. However, we believe more fundamental action is required by local and national government to address road congestion, which is damaging regional economies, undermining bus networks and causing serious health problems linked to poor air quality.

UK Bus (London)

Financial performance

The financial performance of the UK Bus (London) Division for the half-year ended 27 October 2018 is summarised below:

The lack of growth in like-for-like revenue is disappointing, and reflects the strong competition in the markets we operate in, contributing to the lower operating profit in the first half of the year.

The decrease in operating margin was built up as follows:

The main changes in the operating margin shown above are:

· Insurance and claims costs have reduced due to lower costs on the self-insured portion of claims. Our strong focus on safety and claims management continues.

· Staff costs rose by more than revenue, reflecting higher pension costs and the impact of contracts lost in the prior year.

· The rise in lease costs reflects more vehicles held on operating lease. This was partly offset by lower depreciation costs.

· Fuel costs have increased as a proportion of revenue, due to higher hedged prices and the lag in fuel price rises being reflected in contract revenue.

Outlook

Although our financial performance is disappointing and margin pressure is expected to continue in the short-term, we continue to see positive opportunities to improve the revenue and profitability of the Division over the longer term and we will maintain our discipline in bidding for new contracts as well as focusing on strong operational delivery.

Bus use in London has now fallen around 8% to 10% between its quarterly peak in January-March 2014 and mid-2018. Since 2016, cycling has been prioritised in central London, removing significant bus capacity from key bus routes. In addition, other factors have contributed to increased central London road congestion. Transport for London is planning significant cuts in bus services reflecting the changes in bus use and budgetary pressures. While it is clear that presents short-term risks to our London bus business, we see market opportunities in the medium to long-term.

In 2019/20, around 14% (by peak vehicle requirement) of our existing London bus services are due for re-tender. We will work hard to retain these services on acceptable terms and we also expect to tender for a significant number of services that we do not currently operate. We are undertaking a detailed re-evaluation of our bid models, financial forecasts, contract pricing and cost efficiency to identify opportunities to improve the competitiveness of our contract bids.

Significant housing developments are planned in and around London in the coming years and a considerable proportion of them will be in or adjacent to areas in which our UK Bus (London) Division currently operates. We expect new housing developments to result in new bus services and Transport for London is also examining the potential for bus transit schemes. We continue to monitor our depot capacity balancing such future growth potential with possible opportunities to release capital.

North America

Financial performance

The financial performance of the North America Division for the half-year ended 27 October 2018 is summarised below:

The rate of reduction in like-for-like revenue is disappointing, and includes the effects of strong competition in certain of the markets we operate in, contributing to the lower operating profit in the first half of the year.

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

The like-for-like revenue decline of 3.0% for the Division includes 1.7% decline for megabus.com North America. megabus.com revenue per mile for the period was up 0.2%. Like-for-like revenue at the other businesses decreased by 3.5%, partly reflecting the benefit in the equivalent period last year from rail replacement contracts linked to train disruptions on New Jersey Transit and Long Island Rail Road.

Recognising the increasingly competitive market environment, and the associated financial impact, we consider it appropriate to revise our view on the long-term profitability of the Division. As a result, we have recorded a £85.4m non-cash impairment of the Division's goodwill, which we have presented as an exceptional charge. We have not significantly changed our forecast of 2018/19 profitability, and will continue to focus on growing the scheduled service (including megabus.com) and contract parts of the business, while also reviewing strategic options for the Division that include a possible sale of all or part of the business.

The movement in the operating margin of the North America Division was built up as follows:

The main changes in the operating margin shown above are:

· We have seen positive progress on claims costs, reflecting the benefits of our continued investment in training and leading edge safety technology.

· Fuel costs have increased reflecting market fuel prices and our fuel hedging programme.

· Staff costs, as anticipated, have continued to rise, and not all headcount varies with vehicle miles.

· Depreciation costs have increased as a proportion of revenue as expected, given we have largely maintained the size of our fleet, while moderating mileage in response to market conditions.

· Other costs have generally increased below or in line with inflation, but have risen as a proportion of our lower revenue base.

Business Development

Our North America business continues to pursue a range of actions to grow, including new opportunities to enhance our current portfolio of services and to extend or expand existing contracts. We continue to see the benefits of our focus on safety and investment in safety enhancing technology. Our innovative driver recruitment initiatives and comprehensive driver training programmes have helped ensure the business is in a better position than other companies being affected by the national shortage of drivers in the bus and trucking sector. Competition in the inter-city bus market remains robust and, while our megabus.com brand has strong customer recognition, competition is particularly intense in the North-East corridor of the United States and on the West Coast.

Outlook

Although we have revised our view on the business' long-term profitability, our expectation of the Division's operating profit for the year ending 27 April 2019 has not significantly changed.

We continue to see growth opportunities from the Division in new contract wins but will remain disciplined in ensuring that we bid for contract opportunities at prices consistent with delivering appropriate rates of return.

UK Rail

Financial performance

The financial performance of the UK Rail Division for the half-year ended 27 October 2018 is summarised below:

The reported revenue for the prior year period includes revenue at the South West Trains franchise which expired in August 2017 and the Virgin Trains East Coast franchise which ended in June 2018. The substantial fall in reported revenue reflects the end of these franchises.

The like-for-like revenue includes the ongoing East Midlands Trains and Sheffield Supertram businesses.

As expected, like-for-like revenue growth has been suppressed during the period, due to the effects on the East Midlands Trains franchise of both the revised timetable necessary to accommodate changes to the Thameslink network effective May 2018 and the current year resignalling programme at Derby railway station. While these changes have adversely affected East Midlands Trains' revenue, the contractual arrangements in place mean that they have had no significant negative impact on profit.

The operating profit for the half-year to 27 October 2018 reflects continued good profitability at East Midlands Trains, in addition to favourable outcomes from concluding industry charges and contractual matters associated with the South West Trains franchise. The year-on-year reduction in operating profit principally reflects the expiry of the South West Trains franchise referred to above.

The UK Rail Division's reported profit reflects the utilisation of the onerous contract provision in respect of the Virgin Trains East Coast franchise. In the period up to the transfer of train services on 24 June 2018, the franchise continued to incur trading losses, which have been applied against the onerous contract provision.

East Midlands Trains

Strong operational performance and high levels of customer satisfaction continue to underpin our success at East Midlands Trains, which has maintained its position as the most punctual long distance UK rail operator for more than nine years. This has been maintained during a period following the introduction of a major new timetable in May 2018 in support of the industry's wider Thameslink programme and the extensive resignalling work at Derby railway station.

East Midlands Trains has worked closely with Network Rail and other partners on the delivery of these projects. The May timetable change required different departure times, quicker journey times for some routes and extended times for others. Linked to the changes, an additional three High Speed Trains were refurbished in Derby.

We recognise that timely, accurate information on our services is crucial for our customers. In a world first for the rail industry, we have launched a trial of communicating tailored service information through Facebook Messenger. East Midlands Trains has also worked to offer more sustainable integrated journeys by supporting the largest electric bike scheme in the UK with new e-bike docks at Derby station.

Sheffield Supertram

We have worked with Network Rail and the Department for Transport to pioneer the UK's first Tram Train service at Stagecoach Supertram. Launched in October 2018, these services operate with special vehicles that can run on both Sheffield's existing tram lines and a section of railway for passengers travelling into Rotherham.

Rail contract market and Williams review

Stagecoach has been a key and innovative partner in the development of the UK rail market for more than two decades. Private sector innovation and investment has helped transform Britain's railway for customers, taxpayers, communities and the economy. Both individually and with our rail partners we have been instrumental in delivering some of the biggest investments in new trains, a better journey experience for customers, a more joined up railway, and initiatives to help deliver better value for passengers and taxpayers.

We are pleased to be part of shortlisted bids for the new South Eastern, East Midlands and West Coast Partnership franchises and we expect to hear a decision from the Department for Transport on the successful bidder for each of these during the first half of 2019. At the Department for Transport's request, we have also submitted plans for a further Direct Award franchise at East Midlands Trains. We expect a decision on these plans shortly, which would continue our operation of the network until at least August 2019.

We welcome the Government's rail review led by Keith Williams. Despite the significant improvements to the UK railway over the past two decades and delivering the safest major network in Europe, we believe the time is right for a wide-ranging review to address the short-term fixes and strains in the system that have built up over many years so we deliver a railway that is fit for the future. There needs to be evidence-based decisions which best serve the interests of the customers and communities which depend on the railway. At the same time, we need a system that ensures that the sector is financially sustainable and can thrive.

We have played a leading role in arguing the case for urgent and radical reform of the rail fares system and are supporting the Rail Delivery Group's fares reform consultation. We are also working with other train companies to deliver the new 26-30 railcard and we are planning to test innovations in the near future which will offer better value travel for millions of rail customers across the UK.

Outlook

We have increased our expected 2018/19 UK Rail operating profit to take account of the performance in the first half of the year. We expect the Division to remain profitable in the second half of the year with continuing good profitability at East Midlands Trains.

We will continue to consider other rail opportunities where we believe we can deliver benefits to passengers and add value for our investors.

Virgin Rail Group

Financial performance

The financial performance of the Group's Virgin Rail joint venture for the half-year ended 27 October 2018 is summarised below:

Virgin Rail Group's West Coast rail franchise is continuing to deliver strong profitability with revenue up 5.1% in the half-year. While, as expected, the level of profitability has fallen year-on-year as a result of the business moving onto new contractual terms, the operating margin remains good. The current franchise runs to at least March 2019, with the option for an up to one-year extension at the discretion of the Department for Transport. The successor West Coast Partnership franchise is currently scheduled to begin in September 2019 and so an extension of the current franchise until at least then is likely. The strong performance is supported by the continuing focus on innovations to make travel easier for customers. During the summer, Virgin Rail Group became the first train operator to introduce digital season tickets for use on mobile devices, as well as offering a print at home facility. It is also the first travel company in the world to sell tickets through the Amazon Alexa platform.

In addition, Virgin Rail Group has led the rail industry in permanently removing all peak-hour restrictions on its trains that travel on Friday afternoons from London Euston station. The move, which has been widely welcomed, helps customers save money and eases overcrowding on services to destinations such as Birmingham, Manchester and Liverpool.

Pre-exceptional EBITDA, depreciation and intangible asset amortisation

Earnings before interest, taxation, depreciation, intangible asset amortisation and exceptional items (pre-exceptional EBITDA) amounted to £176.2m (H1 2018: £189.9m). Pre-exceptional EBITDA can be reconciled to the financial statements as follows:

Intangible asset amortisation reduced from £5.5m to £4.4m, reflecting the end of our Virgin Trains East Coast rail franchise in June 2018.

Depreciation reduced from the previous year reflecting the end of our South Western and Virgin Trains East Coast rail franchises.

Exceptional items

North America goodwill impairment

As explained in the North America section, a non-cash, exceptional pre-tax expense of £85.4m has been recorded as an impairment of goodwill in the half-year ended 27 October 2018.

Guaranteed minimum pension equalisation

A pre-tax exceptional expense of £24.2m has been recorded in the half-year ended 27 October 2018 as a past service cost in respect of the equalisation of guaranteed minimum pension ("GMP") benefits.

On 26 October 2018, the High Court handed down a judgement involving Lloyds Banking Group defined benefit pension schemes. The judgement concluded that the schemes should equalise pension benefits for men and women in relation to GMP benefits. The judgement has implications for many defined benefit schemes, including those in which the Stagecoach Group participates. We have worked with our actuarial advisors to understand the implications of the judgement for the schemes in which the Group participates and the £24.2m pre-tax exceptional expense reflects our best estimate of the effect on our reported pension liabilities.

Net finance costs

Net finance costs for the half-year ended 27 October 2018 were £16.4m (H1 2018: £18.1m) and are further analysed below. The decrease in net finance costs is principally due to lower interest expense on defined benefit pension schemes arising from changes in market-driven assumptions used to determine pension amounts.

Taxation

The effective tax rate for the half-year ended 27 October 2018, excluding exceptional items, was 18.0% (H1 2018: 21.7%). The tax charge can be analysed as follows:

Fuel costs

The Group's operations as at 27 October 2018 consume approximately 346m litres of diesel fuel per annum. As a result, the Group's profit is exposed to movements in the underlying price of fuel. The Group's fuel costs include the costs of delivery and duty as well as the costs of the underlying product. Accordingly, not all of the cost varies with movements in oil prices.

The proportion of the Group's projected fuel usage that is now hedged using fuel swaps is as follows:

The Group has no fuel hedges in place for periods beyond April 2022.

Cash flows and net debt

Consolidated net debt has, as expected, increased from 28 April 2018, reflecting the transfer of cash following the expiry of the Virgin Trains East Coast franchise, additional capital investment, the timing of interest payments associated with our 4.00% bonds, partly offset by continued cash generation from other operations.

Net cash from operating activities before tax for the half-year ended 27 October 2018 was £2.7m (H1 2018: £44.2m) and can be further analysed as follows:

Net debt (as analysed in note 18 to the condensed financial statements) increased from £395.8m at 28 April 2018 to £461.2m at 27 October 2018. The movement in net debt, showing train operating companies separately, was:

* East Midlands Trains and Virgin Trains East Coast

The movement in net debt shown for train operating companies is principally in relation to Virgin Trains East Coast, with the closing cash balances at East Midlands Trains broadly in line with the opening position.

The expiry of the Virgin Trains East Coast franchise has increased our net debt in the period by around £40m. We would anticipate a further net cash outflow in this respect of around £45m as we conclude open matters. That is consistent with the guidance on Virgin Trains East Coast cash flows previously given in our 2018 Annual Report.

The £26.5m increase in other net debt includes working capital outflows of approximately £5m for rail bids costs accrued last financial year but settled in this financial year, £19m for the net payment by the Group in respect of the Virgin Trains East Coast performance bond and of approximately £10m relating to a double up of VAT receivables due to the timing of VAT settlements relative to the balance sheet date. We expect that £10m outflow to reverse in the second half of the year to April 2019. The £26.5m also includes approximately £10m of net outflows for the settlement of assets and liabilities relating to our former South West Trains franchise.

The impact of purchases of property, plant and equipment for the half-year on net debt was £74.8m (H1 2018: £89.5m). This primarily related to expenditure on passenger service vehicles, and comprised cash outflows of £65.3m (H1 2018: £60.8m) and new hire purchase and finance lease debt of £9.5m (H1 2018: £28.7m). In addition, £30.6m (H1 2018: £30.7m) of cash was received from disposals of property, plant and equipment.

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

In addition to the amounts shown in the table above, the impact of purchases of intangible assets and other investments was £1.8m (H1 2018: £10.9m). In addition, £28.1m (H1 2018: £2.7m) of cash was received from disposals of intangible assets, principally relating to the end of the Virgin Trains East Coast franchise, and which is included in the overall approximately £40m net cash outflow referred to above in respect of the franchise.

Financial position and liquidity

The Group maintains a solid financial position with investment grade credit ratings and appropriate headroom under its debt facilities.

The Group continues to have an appropriate mix of long-term debt enabling it to plan and invest with some certainty.

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

· The ratio of net debt at 27 October 2018 to pre-exceptional EBITDA for the year ended 27 October 2018 was 1.4 times (year ended 28 October 2017: 1.4 times).

· Pre-exceptional EBITDA for the half-year ended 27 October 2018 was 11.0 times (H1 2018: 10.6 times) net finance charges (including joint venture net finance income).

· Undrawn, committed bank facilities of £430.3m at 27 October 2018 (28 April 2018: £433.4m) 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.

Net assets

Net assets at 27 October 2018 were £179.3m (28 April 2018: £181.7m). The decrease in the net assets reflects the loss for the half-year ended 27 October 2018 and dividends paid, partly offset by actuarial gains on defined benefit pension schemes and fair value gains on cash flow hedges.

Retirement benefits

The reported net assets of £179.3m (28 April 2018: £181.7m), that are shown on the consolidated balance sheet are after taking account of net pre-tax retirement benefit liabilities of £151.5m (28 April 2018: £142.2m), and associated deferred tax assets of £26.0m (28 April 2018: £24.9m). The increase reflects the £24.2m exceptional pre-tax expense referred to earlier in respect of the equalisation of Guaranteed Minimum Pensions ("GMP").

We are pleased that, excluding the change in respect of GMP equalisation, our net retirement benefit obligations would have reduced in the half-year, reflecting good investment returns on pension scheme assets. The Group recognised pre-tax actuarial gains of £15.2m in the half-year ended 27 October 2018 (H1 2018: pre-tax actuarial gains of £184.6m) on Group defined benefit schemes.

Innovation

As mentioned earlier, our strategy is designed to grow our core business, to support innovation and to position the Group to benefit from future opportunities. Below we give some examples of how we are continuing to innovate and positioning the Group in a changing landscape.

UK Bus investment in customer facing technology

In our regional UK Bus businesses, we continue to make targeted investment in fleet and technology enhancements which will make travel easier and help attract more people to bus travel. All our buses in Scotland, England and Wales now accept contactless card payments, the UK bus industry's biggest deployment of contactless ticketing. Contactless now accounts for around 20% of our regional on-bus sales and continues to grow in popularity.

A key focus has been digital retail and the functionality and customer experience of our websites and smartphone apps. In addition to our existing mobile ticketing offer, we are planning to introduce mobile ticketing on bus through QR codes in the first half of 2019. A major redesign of the website for Oxford Tube, Europe's most frequent express coach service, is also due for completion before summer 2019.

Enhanced use of data

Across the Group, we are exploring how we can enhance our use of data to improve our customers' experience, drive cost efficiencies and grow our businesses.

For example, we have partnered with Irish start-up, City Swifter, to use predictive demand analytics to adjust bus schedules to better respond to customer demand, improve punctuality and deliver cost efficiencies. We are working with City Swifter to trial this on four major bus corridors in Oxford where we introduced new bus schedules in September. The initial focus on the trial routes is to deliver improved punctuality.

Work is underway to consolidate our in-house data for our bus and coach operations, initially concentrating on e-commerce data, in order to improve the ease with which we can access and analyse data to support the business.

Using data, we now have improved segmentation and understanding of our bus and coach customers in the UK and North America, and we are using that to, among other things, communicate with our customers in a more tailored way.

Demand responsive transport

Working with Prospective Labs (an organisation founded by researchers from University College London, Cambridge University and the Alan Turing Institute), we have identified four locations in our English bus networks where we see opportunities for commercially viable demand responsive transport. Existing bus services are being redesigned to generate increased demand for our transport services. An initial pilot area has been selected and to progress this further, we have agreed commercial terms for a strategic relationship with a technology provider.

Hindsight rail app

The Group is a 20% shareholder in Global Travel Ventures, which is testing a retrospective pricing app in the UK rail market. The app, which will be free of charge for customers to use, allows customers to retrospectively pay for the journeys they take over the course of a week rather than having to assess in advance what journeys they think they will make in order to select the best value fare. The website for the app is at https://gethindsight.com/

Autonomous and other new vehicle technology

We have partnered with bus manufacturer, Alexander Dennis Limited, and technology company, Fusion Processing, to trial the UK's first full-sized single deck autonomous bus within a depot environment, to carry out movements such as parking and moving into the fuelling station and bus wash.

We are delighted that our proposal for a self-driving passenger bus trial is set to go ahead in Scotland and take passengers across the Forth Road Bridge. The UK Government-funded trial will see five autonomous single-deck vehicles running between Edinburgh and Fife but regulations mean a driver will remain on board during all journeys. Work on the project is expected to get underway during the second quarter of 2019, with services operating from 2020.

We have also announced an ambitious £56m proposal to deliver Europe's largest single investment in electric buses, which would see more than 100 vehicles delivered in Greater Manchester through joint funding from Stagecoach and the Government's Ultra-Low Emission Bus Scheme.

Future mobility opportunities

We are working with leading tech and digital companies to develop new products and improve existing services to respond to changing consumer priorities. We have joined the Intelligent Mobility Accelerator in Milton Keynes, which attracts disruptive start-ups with high-growth potential into the UK transport industry.

We are also working with other transport partners to influence future mobility policy. Along with car rental provider, Enterprise Holdings, we have founded the Urban Mobility Partnership, which will work with key stakeholders to promote practical local and national policy solutions around urban mobility. We believe this initiative will support the transition away from car ownership to a multimodal transport future in UK cities where mass transit is central to people's travel choices.

Investment in people

To support our ongoing innovation, we have been investing in our people. During 2018, we have appointed experienced professionals from outside the Group to the roles of Group Chief Information Officer, Group Delivery & Change Director and Group Service Delivery Director. These appointments to senior roles in our Technology & Change team have been supplemented by new appointments in supporting roles. Recognising the need to maintain strong controls around information security as we continue to develop new ideas and systems, we have also recently appointed a new Group Chief Information Security Officer and re-shaped our information security team with a number of other new appointments.

In addition to strengthening our Technology & Change team, we have also strengthened our divisional teams, most notably adding commercial capability in a number of areas of our UK Bus business.

Joint venture innovation

Our Virgin Rail Group joint venture continues to lead the UK rail industry with its innovation, reflecting the entrepreneurial heritage of both of its shareholders. Current and recent examples include:

· It is implementing a digitally enabled change of journey function on its app to allow customers to more easily amend their tickets. It is also removing the fee that normally applies to changing rail tickets.

· It continues to use digital innovations to increase digital ticket adoption and encourage customers to move away from the traditional "orange tickets". Such initiatives include industry firsts like selling tickets via Amazon Alexa and advance texting.

· On train wi-fi on the West Coast Trains services is being upgraded and the first upgraded wi-fi train is now in service, with the wi-fi performing even better than expected.

· Virgin Rail Group is also exploring the potential for a simple cheap single price for travel in certain hours of the day and how best to enable all customers to reserve seats digitally.

Related parties

Details of significant transactions with related parties are given in note 21 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 9 to 13 of the Group's 2018 Annual Report set out specific risks and uncertainties in more detail.

The matters summarised below are not intended to represent an exhaustive list of all possible risks and uncertainties. The focus below is on those specific risks and uncertainties that the Directors believe could have the most significant impact on the Group's position or performance. In assessing the Group's likely financial performance for the second half of the current financial year, these risks and uncertainties should be considered in addition to the matters referred to regarding seasonality in note 3 to the condensed financial statements, and the comments made later under the heading "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. The ongoing negotiation of the terms of the UK leaving the European Union may lead to economic, consumer and political uncertainty. That may in turn affect asset values and foreign exchange rates, which have a bearing on the amounts of our pensions, financial instruments and other balances. UK policy following the UK leaving the European Union may affect the UK economy, including the availability and cost of staff.

· 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 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.

· Changing customer habits - There is a risk that changes in people's working patterns, shopping habits and/or other preferences affect demand for the Group's transport services, which could in turn affect the Group's financial performance and/or financial position.

· 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. New legislation introduced and planned in the UK could see the introduction of franchised bus networks in some areas, which could affect our bus operations.

· Management and Board succession - there is a risk that the Group does not recruit and retain sufficient directors and managers with the skills important to the operation of the business.

· Disease - there is a risk that demand for the Group's services could be adversely affected by a significant outbreak of disease.

· Information security - there is a risk that potential malicious attacks on our systems lead to a loss of data or disruption to operations.

· Information technology - there is a risk that the Group's capability to make sales digitally either fails or cannot meet levels of demand.

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

· Treasury risks - the Group is affected by changes in fuel prices, interest rates and exchange rates.

Use of non-GAAP measures

Our reported interim financial information is prepared in accordance with International Financial Reporting Standards as adopted by the European Union and applied in accordance with the provisions of the Companies Act 2006. In measuring our financial performance and position, the financial measures that we use include those which have been derived from our reported results in order to eliminate factors which distort period-on-period comparisons and/or provide useful information to stakeholders. These are considered non-GAAP financial measures, and include measures such as like-for-like revenue, pre-exceptional EBITDA and net debt. We believe this information, along with comparable GAAP measurements, is useful to shareholders and analysts in providing a basis for measuring our financial performance and position. Note 23 to the condensed financial statements provides further information on these non-GAAP financial measures.

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 half-year ended 27 October 2018.

Outlook

The rail out-performance in the first half of the year is expected to flow through to full-year adjusted earnings for the year ending 27 April 2019.

We continue to see positive long-term prospects for public transport. There is a large market opportunity for modal shift from cars to public transport against a backdrop of technological advancements, rising road congestion and increasing environmental awareness.

Martin Griffiths

Chief Executive

5 December 2018

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

5 December 2018 5 December 2018

Cautionary statement

The preceding interim management report has been prepared for the shareholders of the Company, as a body, and for 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 statement of cash flows 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 half-year ended 27 October 2018 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 28 April 2018, 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 otherwise the same as those of the annual financial statements for the year ended 28 April 2018, as described on pages 81 to 90 of the Group's 2018 Annual Report which can be found on the Stagecoach Group website at http://www.stagecoach.com/investors/financial-analysis/reports/.

The figures for this half-year include the results for all divisions for the 26 weeks to 27 October 2018. The comparative figures for the half-year ended 28 October 2017 include the results for all divisions for the 26 weeks ended 28 October 2017.

This condensed consolidated interim financial information for the half-year ended 27 October 2018 has not been audited, nor has the comparative financial information for the half-year ended 28 October 2017 but they have both been reviewed by the auditors. The comparative financial information presented in this announcement for the year ended 28 April 2018 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 28 April 2018 were approved by the Board of Directors on 28 June 2018, were reported on by the auditors under sections 495 and 496 of the Companies Act 2006, 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 5 December 2018. This announcement will be available on the Group's website at http://www.stagecoach.com/investors/financial-analysis/reports/.

New accounting standards adopted during the period

IFRS 15, Revenue from Contracts with Customers

The Group has adopted IFRS 15, "Revenue from Contracts with Customers" from 30 April 2017, applying the full retrospective approach. The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration (payment) to which the entity expects to be entitled in exchange for those goods or services. In both our rail and bus divisions, performance obligations are clear and transaction prices are even over the period to which they relate and are time apportioned. There have been no judgements taken in the implementation of IFRS 15 which significantly affect the amount or timing of the recognition of revenue.

Implementing IFRS 15 has not had a material impact on the consolidated financial statements, with the exception of the reclassification of certain customer compensation amounts which were previously treated as operating costs. Under IFRS 15, customer compensation is treated as a reduction in revenue, and for the half-year ended 28 October 2017, retrospectively applying IFRS 15 has resulted in a decrease in revenue of £6.4m, offset by an equivalent reduction in operating costs. For the half-year ended 27 October 2018, customer compensation of £4.0m has been treated as a reduction in revenue, with an equivalent reduction in operating costs. As there is no net impact on the income statement from implementing IFRS 15, there is no adjustment to prior year opening retained earnings.

ln the UK, the Group receives concessionary revenue from public bodies, such as local authorities, for transporting disabled and older people free of charge to the passenger. Although the revenue is received from a party other than the person receiving the service, the Group accounts for such revenue in accordance with IFRS 15 with the performance obligation being the provision of the free travel to those eligible.

Note 4 sets out a disaggregation of revenue in accordance with the disclosure requirements of the new standard, with an explanation of the types of revenue included in the note set out below:

Passenger revenues

Passenger revenues primarily relate to ticket sales through UK Bus (regional operations), UK Rail and North America. Passenger revenue is recognised in the income statement in the period in which the related travel occurs. This can involve some estimation - for example, revenue from the sale of season tickets and travelcards, that entitle individuals to use certain of our services during a specified period of time, is deferred within liabilities and recognised in the income statement over the period covered.

Contract revenues

Contract revenues mainly relate to UK Bus (London) contracts with Transport for London and contracts with customers in North America. Revenue receivable from government bodies and others as payment to us for operating transport services under contract is recognised in the income statement in the period that the contracted services relate to. In general, the revenue in respect of any particular period can be clearly determined from the contract. Where there is a contingent element to contract revenue (for example, where additional amounts are payable or receivable based on the punctuality of transport services and/or other operational measures), revenue is recognised based on the applicable operational measures when the amount of revenue can be reliably estimated and it is highly probable that the economic benefits will flow to the Group.

IFRS 9, Financial Instruments

The Group has adopted IFRS 9, "Financial Instruments", prospectively from 29 April 2018. The standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. There have been no significant changes to the classification and measurement of financial assets and liabilities and no changes were required to the hedge accounting applied as a result of IFRS 9.

IFRS 9 requires a new impairment model with impairment provisions based on expected credit losses rather than incurred credit losses under IAS 39. For trade and other receivables, we have applied the simplified approach under the standard and determined expected credit losses for significant portfolios of receivables. The transitional increase in the impairment allowance as a result of adopting this policy is immaterial.

Under IFRS 9, the Group has elected to recognise its investments, previously classified as available for sale, at fair value through other comprehensive income (with no recycling). At 27 October 2018, the carrying value of those investments was £2.7m (28 April 2018: £2.7m).

New accounting standards not yet applied

IFRS 16, Leases

The Group will adopt IFRS 16, "Leases", on 28 April 2019, which replaces IAS 17, and establishes principles for the recognition, measurement, presentation and disclosure of leases. IFRS 16 eliminates the classification of leases as either operating leases or finance leases and, instead, introduces a single lessee accounting model. Applying that model, a lessee is required to recognise: assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and depreciation of lease assets separately from interest.

The Directors expect the application of IFRS 16 to have a material effect on the consolidated financial statements. In particular, the accounting for the Group's railway rolling stock operating lease commitments will be affected by the application of the new standard.

On adopting IFRS 16, the Group expects to recognise substantial new assets and new liabilities in respect of those leases currently classified as operating leases. The Group intends to apply the modified retrospective approach to transition.

The Group's assessment of the impact of this standard is ongoing, and therefore it is not possible to disclose the value of right of use assets and liabilities that will be recognised on adoption of the standard. However, the standard will affect primarily the accounting for operating leases. As at 28 April 2018, the total minimum contractual lease payments were £1,595.2m. Of that, £1,433.2m related to Virgin Trains East Coast under its original franchise agreement, which was scheduled to run until at least March 2023 but ended in June 2018 and the Group was released from those lease commitments around that time. The Group's non-rail operations had total minimum contractual lease payments at 28 April 2018 of £128.5m, primarily relating to properties and vehicles.

Other new standards, amendments to standards and interpretations that are mandatory for the first time for the financial year beginning 29 April 2018, 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 typically earn higher operating profit for the first half of the financial year (i.e. the half-year to the end of 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.

The Group is managed, and reports internally, on a basis consistent with its four operating segments, being UK Bus (regional operations), UK Bus (London), North America and UK Rail. The Group's 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 and the basis on which segment profit is measured are consistent with the Group's last annual financial statements for the year ended 28 April 2018.

The Group has interests in two material joint ventures: Virgin Rail Group that operates in UK Rail and Citylink that operates in UK Bus (regional operations). 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 (i.e. United Kingdom or North America) is the same in almost all cases. 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 class and 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:

Central assets and liabilities include interest payable and receivable and other net assets of the holding company and other head office companies. Segment assets and liabilities are determined by identifying the assets and liabilities that relate to the business of each segment but excluding intra-Group balances, cash, borrowings, taxation, interest payable and interest receivable.

The Group separately highlights non-software intangible asset amortisation and exceptional items. Exceptional items are defined in note 23.

The exceptional items recognised in the half-year ended 27 October 2018 were as follows:

The estimated value in use of the North America cash generating unit reported in the Group's consolidated financial statements as at 28 April 2018 was £499.4m (US$689.0m). That estimate has been revised to £289.5m (US$371.1m) as at 27 October 2018 to take account of financial performance in the intervening period and changes in forecast financial performance. This change in estimate has resulted in a £85.4m impairment of goodwill being reported in the half-year ended 27 October 2018.

The non-current assets of cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the carrying value of such assets may be impaired. If the recoverable amount of the non-current assets is less than their carrying amount, then the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future pre-tax cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the cash generating unit. Any impairment of goodwill is recognised immediately in the income statement.

The carrying values of the non-current assets of cash generating units to which goodwill has been allocated as at 28 April 2018 were reviewed for impairment in accordance with our accounting policy and as set out in the Group's consolidated financial statements for the year then ended.

Since those reviews, we have seen indications of potential impairment of assets at the North America cash generating unit. Year-to-date profit at the North America Division has been below its internal budget and like-for-like revenue has declined. Like-for-like revenue fell 3.0% in the half-year ended 27 October 2018, when compared to the equivalent prior year period. Trading has been adversely affected by a number of factors, including increased competition in certain of the markets in which the Division operates. Accordingly, a further review for impairment of the carrying values of that cash generating unit's assets has been carried out based on the assets' carrying values as at 27 October 2018.

The North America business operates a variety of different types of transportation services over a wide area of North America. Its financial performance is influenced by various different factors, many of which are specific to the individual markets and locations in which it operates. Among the factors that can affect financial performance are changes in local economies, local competition, fuel prices, working patterns, shopping patterns, traffic conditions, cost pressures including the availability of sufficient suitable staff, and regulatory change. Any forecast of financial performance is therefore subjective.

Taking account of available updated information, including year-to-date performance, expected continuation of the increased competition and a recent fall in fuel prices, the forecast for the North America Division for the year ending 27 April 2019 has been revised resulting in a reduction in forecast profit relative to the forecast forming part of the review of asset carrying values as at 28 April 2018. For the half-year ended 27 October 2018, North America revenue was US$11.0m (3.3%) below that forecast, operating expenses were US$2.9m (1.0%) below that forecast, resulting in operating profit US$8.1m (27.6%) below that forecast. The current year under-performance versus budget also led the Directors to review the forecast revenue growth rates and profit margins over the medium-term, and these were revised down relative to the assumptions applied to the review of asset carrying values as at 28 April 2018. The long-term growth rate used to extrapolate forecast cash flows beyond the period of the management plan was also reviewed in light of the under-performance and was revised down from 3.9% per annum to 2.2% per annum. The discount rate was reviewed and increased from the pre-tax discount rate of 9.4% applied in the previous impairment review to 10.4%.

As a result of the revised forecasts and assumptions explained above, an £85.4m impairment of North America goodwill has been reflected in the results for the half-year ended 27 October 2018. That impairment has been calculated to reduce the carrying value of the relevant assets to the estimated value in use of the cash generating unit, noting that the Directors do not consider fair value less costs to sell of the assets to be greater than the estimate of value in use. After this impairment, the carrying value of North America non-current assets at 27 October 2018 is £289.5m (US$371.1m), of which £10.2m (US$13.1m) relates to goodwill.

The most critical estimates in assessing the value in use of the North America cash generating unit are:

· The forecast growth in the Division's earnings before interest, tax, depreciation and amortisation ("EBITDA") over the next few years, which in turn reflects assumptions on the forecast changes in revenue and costs for the various operations in North America. Over the period of the four-year management plan to April 2022, the forecast rate of compound annual revenue growth has been revised down from 4.3% to 1.3% and the forecast rate of compound annual cost growth has been revised down from 3.5% to 0.9%.

· The discount rate, which has increased from 9.4% to 10.4%.

· The long-term growth in the Division's net cash flows, which has been revised down from 3.9% per annum to 2.2% per annum.

Applying alternative assumptions would result in a different amount of value in use and impairment loss at 27 October 2018, albeit bearing in mind the fair value less cost to sell of the assets may limit the extent of any increase in the impairment loss. The effect of changes in assumptions on the value in use as at 27 October 2018 is illustrated below:

On 26 October 2018, the High Court handed down a judgement involving Lloyds Banking Group defined benefit pension schemes. The judgement concluded that the schemes should equalise pension benefits for men and women in relation to guaranteed minimum pension ("GMP") benefits. The judgement has implications for many defined benefit schemes, including those in which the Stagecoach Group participates.

We have worked with our actuarial advisors to understand the implications of the High Court judgement for the schemes in which the Group participates and have recorded a £24.2m pre-tax exceptional expense to reflect our best estimate of the effect on our reported pension liabilities.

The change in pension liabilities recognised in relation to GMP equalisation involves estimation uncertainty. It is expected that there will be follow-on court hearings to further clarify the application of GMP equalisation in practice. Also, it is not yet known whether Lloyds Banking Group will appeal the High Court judgement. The judgement was made one day prior to the Group's balance sheet date of 27 October 2018 and the Group is one of the first companies to publish financial statements with a balance sheet date after the date of the judgement. Accordingly, the Directors have had limited time to consider the full implications of the judgement and while the financial statements reflect the best estimate of the impact on pension liabilities, that estimate reflects a number of assumptions. As the outcome of future court hearings cannot be reliably predicted, it is not practical to quantify the extent of the estimation uncertainty but the best estimate reflects the information currently available. The Directors will continue to monitor any further clarifications or court hearings arising from the Lloyds case and consider the impact on pension liabilities accordingly.

The Directors have made the judgement that the estimated effect of GMP equalisation on the Group's pension liabilities is a past service cost that should be reflected through the consolidated income statement and that any subsequent change in the estimate of that should be recognised in other comprehensive income. The judgement is based on the fact that the reported pension liabilities for the Stagecoach Group Pension Scheme as at 28 April 2018 did not include any amount in respect of GMP equalisation.

Dividends on ordinary shares are shown below.