Preliminary Results

24 June 2015

Stagecoach Group plc - Preliminary results for the year ended 30 April 2015

Investing for growth

Highlights

· Adjusted earnings per share+ in line with expectations, up 2.7% to 26.7 pence (2014: 26.0 pence)

· Dividend per share up 10.5% to 10.5 pence (2014: 9.5 pence)

· New Virgin Trains East Coast rail franchise to 2023

· Bid submitted for TransPennine Express rail franchise

· Joint venture shortlisted to bid for East Anglia rail franchise

· Continued organic growth in UK Bus

· Significant investment in new vehicles, digital technology and customer service across bus and rail

· Growing network of inter-city coach services in Europe and North America

Financial summary

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

"These are a solid set of results notwithstanding continued tight central and local government spending, and increased competition for public transport from the private car driven by lower fuel prices.

"We have a strong set of bus and rail businesses in the UK, mainland Europe and North America. Our successful strategy is focused on providing a good value, high quality travel experience for our customers, and investing for growth over the medium to long-term.

"Our commercial bus services in the UK have been independently recognised by passengers as offering the best value travel in our sector. We are seeking to attract more passengers by investing over a further £80m in new greener buses, many equipped with free wi-fi, for our regional bus operations in 2015/16. Along with other major UK bus operators, we are well advanced in delivering on our pledge to introduce smart multi-operator ticketing in key English city regions by the end of 2015.

"The key to securing the future of Britain's buses is for operators, government and local authorities to work together to deliver properly planned and sustainable bus networks.

"We have achieved further growth in our megabus.com branded coach services in the UK, mainland Europe and North America. In recent months, we have launched new domestic networks in Germany and Italy and new services within France. Our passenger volumes in mainland Europe have increased by more than 60% in the past year. Looking ahead, we see further opportunities in Europe to increase our share of a growing market as countries take steps to liberalise inter-city coach services.

"The prospects in the UK rail sector are encouraging, with a franchise model focused on a combination of taxpayer value, quality service for customers and an appropriate balance of reward and risk for operators. We are pleased to have started the new Virgin Trains East Coast franchise and look forward to delivering a brand new fleet of technologically advanced Hitachi trains and £140m of improvements during the franchise to transform the experience for customers. The Virgin Trains West Coast franchise is performing well, we have submitted an exciting bid for the TransPennine Express franchise and our joint venture with Abellio has been shortlisted for the East Anglia franchise.

"The Group is in good financial shape and overall we have delivered on our expectations for the year. We have made a satisfactory start to the 2015/16 financial year and look forward to building further on the Group's achievements."

Copies of this announcement are available on the Stagecoach Group website at http://www.stagecoach.com/investors/financial-analysis/reports/2015.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, mainland Europe, the United States and Canada. The Group employs around 39,000 people, and operates around 13,000 buses, coaches, trains and trams.

Stagecoach is one of the UK's biggest bus and coach operators with around 8,400 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 and mainland 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 Virgin Trains East Coast, which operates the East Coast rail franchise.

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, airport shuttle and sightseeing services.

Preliminary management report for the year ended 30 April 2015

Description of the business

Stagecoach Group plc is a public limited company that is incorporated, domiciled and has its registered office in Scotland. Its ordinary shares are publicly traded and it is not under the control of any single shareholder. The Company has its primary listing on the London Stock Exchange. Throughout this document, Stagecoach Group plc is referred to as "the Company" and the group headed by it is referred to as "Stagecoach" or "the Group".

The Group is a leading international public transport group, with extensive operations in the UK, continental Europe, 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, and an updated version will be provided in the 2015 Annual Report.

Introduction and overview of financial results

We are pleased to report a solid set of results for the year ended 30 April 2015. Revenue was up 9.4% at £3,204.4m (2014: £2,930.0m). Operating profit (before intangible asset expenses and exceptional items) was up 1.7% at £227.1m (2014: £223.3m). Earnings per share before intangible asset expenses and exceptional items were 2.7% higher at 26.7p (2014: 26.0p), in line with expectations.

The Directors are proposing a final dividend for the year of 7.3p per share (2014: 6.6p) which, if approved, would give a total dividend for the year up 10.5% to 10.5p per share (2014: 9.5p). The proposed final dividend would be payable on 30 September 2015 to shareholders on the register at 28 August 2015.

The operating profit of our wholly-owned bus operations fell a little short of the targets we set ourselves at the start of the year but this was offset by a strong performance in UK Rail and particularly from our Virgin Rail Group joint venture. As a result, we achieved our overall earnings per share target for the year.

The sharp reduction in oil prices during the year resulted in a fall in car operating costs. The increased competitive advantage this gave to cars affected the profitability of some of our businesses, most notably our megabus.com inter-city coach operations in North America.

We are seeing strong growth in the UK Rail market and are pleased to have strengthened our participation in the rail sector. This follows our Virgin Rail Group joint venture securing a new West Coast rail franchise to at least 2017 and the Group winning the new East Coast rail franchise due to run to at least 2023. We are actively involved in seeking to secure several other UK rail franchises.

The strengthening of our rail business has helped to further diversify the Group's portfolio of activities, enabling our participation in the fast-growing rail market whilst building on and growing our historically robust bus businesses. We are also expanding geographically through the growth of our megabus.com inter-city coach operations in continental Europe.

The Group's ongoing investment in new vehicles, technology and other assets is a key part of sustaining our success. In the year ended 30 April 2015, net capital expenditure was £140.9m (2014: £118.9m). Across all of its divisions, the Group is investing in initiatives designed to improve our service to customers and deliver future growth.

Public transport is central to local communities and their aspirations for economic growth. In the UK, we support the devolution of more powers to local level to allow for tailored local investment and solutions. By working more effectively together, transport operators and regional authorities can achieve even stronger, more integrated transport systems at better value for taxpayers. In an era of continued limited public spending, commercial operators' access to capital, operational expertise and customer understanding is critical to delivering affordable and accessible public transport.

We have led our sector in pursuing a low fares strategy to drive modal shift and give communities affordable access to work, education, health and leisure. It is important that there is visibility of government spending plans for transport. Policy commitments, such as concessionary fares schemes, must be properly funded for the long-term to avoid increasing the cost and undermining the reach of public transport.

Every day, our people are key to the delivery of our services. The Board extends its thanks to all employees across the Group for their contribution throughout the year.

Stagecoach has made a satisfactory start to the new 2015/16 financial year and we are in good financial shape. We face a number of challenges but believe that there are opportunities ahead as we continue to invest for growth.

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 year ended 30 April 2015 is summarised below:

Our regional UK Bus operations have grown both like-for-like passenger volumes and revenue year-on-year. This has been achieved against a background of tight government spending, a variable economy across the country and increased competition to public transport from the private car as a consequence of lower fuel prices.

The slight decline in the Division's operating profit includes the effects of our expanding megabus.com inter-city coach services in continental Europe. The operating loss from the European business increased by around £4m year-on-year, reflecting the investment in developing this exciting growth opportunity. The profit for the year is also after taking account of a significant reduction in the operating profit of our Manchester bus business (principally as a result of increased competition), and the ongoing legal and other costs related to the proposals to implement a bus contracting system in Tyne and Wear, described further below.

We offer the lowest fares of any major bus operator in Britain. Our fuel costs are forecast to fall in the year ending 30 April 2016 and this has enabled us to keep fare increases for the year ahead to a minimum, consistent with our long-term organic growth strategy.

We have continued to invest in improving the quality of our services, resulting in high levels of customer satisfaction. Our focus remains on building and maintaining sustainable bus networks through constructive partnerships with local authorities. At the same time, we believe action is needed to address the worsening effects of traffic congestion in our towns and cities to deliver more reliable public transport and ensure buses can fully support the growth strategy for our regional economies.

Like-for-like revenue, which excludes the revenue earned from contracts to provide transport for the Commonwealth Games in Glasgow, was built up as follows:

The Division's good like-for-like revenue growth continues to come principally from commercial on and off bus revenue, which is revenue that we receive directly from passengers for travel on our bus services. While we have seen a slightly lower rate of growth in commercial revenue in the second half of the financial year, reflecting a slowing in the rate of growth in the number of passenger journeys, commercial revenue is still the main driver of revenue growth for the Division.

Growth in concessionary revenue continues to be modest. Concessionary revenue is received from local authorities and devolved governments to compensate us for fulfilling our legal obligation to provide free travel to pensioners and people with disabilities. The rate of concessionary revenue we receive per passenger journey across the UK has grown by proportionately less than the increase in our cost base. We continue to press the relevant authorities to ensure we are properly reimbursed for the bus services we provide.

Revenue from tendered and school services provided under contract to local authorities increased for the year as a whole but fell in the second half of the year. This was as a result of local authorities reducing spending on supported services due to budget constraints.

As expected, there was a decrease in revenue from contracts to provide bus services because the previous year's figure included revenue from specific contract work undertaken to provide buses to replace rail services that were affected by major engineering work.

The decrease in operating margin was built up as follows:

The main changes in the operating margin shown above are:

Customer experience

We announced in March 2015 that our passengers are to benefit from an investment of more than £80m in around 470 new buses and coaches for services in the UK and mainland Europe during 2015/16. Many of these vehicles will be equipped with free wi-fi as we recognise the added value this provides to customers over travelling by car.

Independent research published by Transport Focus in March 2015 found that bus passengers rated Stagecoach the best value major bus operator in Britain. The Group's overall satisfaction rating of 88% was amongst the highest in the industry. Our own research has confirmed that catching the bus remains significantly cheaper than commuting to work by car despite the fall in fuel prices. "At the pump" fuel prices fell to their lowest level for four years, but a Stagecoach survey of around 40 key commuter corridors in England, Scotland and Wales found that the bus was still cheaper than the combined cost of fuel and car parking.

This summer we are planning to launch a package of new digital tools for our customers, which we believe will provide a strong platform for future growth in bus use. This investment is part of our £11m three-year digital project to transform how we engage with our customers. Passengers will benefit from a range of easy-to-use digital tools to find and buy tickets, search for journeys and stops, access comprehensive real-time information about journeys and receive personalised alerts. A unified experience will be provided across all types of devices offering a more personalised service for customers.

The commitment by Stagecoach and the UK's other biggest bus operators to introduce multi-operator smart ticketing in key city regions in England during 2015 is progressing well. Initial schemes are already live in Tyne and Wear and Merseyside, with planning also well advanced in Greater Manchester and South Yorkshire. This transformational initiative will also benefit West Yorkshire along with the city regions of Birmingham, Nottingham, Leicester and Bristol. We are investigating similar opportunities in cities across the UK.

Political developments

Buses provide important transport services to many people across the UK. As part of a wider network of public transport, bus services help address challenges such as road congestion and threats to the natural environment. There has always been a range of views on what the balance of public sector and private sector involvement in providing bus services should be and debates on that will undoubtedly continue. We firmly believe that the key to securing the future of Britain's buses is for operators, government and local authorities to work together to deliver properly planned and sustainable networks.

In recent times, there have been renewed calls for the commercialised bus market in parts of the UK other than London to be replaced by a system of bus contracts, whereby bus operators bid to operate contracts for the provision of bus services let by a local authority. We strongly believe that a stronger, more integrated transport system can be achieved best and at lower cost to taxpayers within the current regulatory framework than would result from franchising of bus services. We would tend to agree that the devolution of powers within the UK can enhance local decision-making on transport matters but in doing so, it is unnecessary to introduce bus contracting or franchising to meet local objectives for bus services. We are already developing new proposals that will meet the aspirations of city regions such as Greater Manchester for stronger bus networks, while retaining the clear benefits of the commercial approach to delivering services.

We understand that the recently elected UK Government is generally supportive of the current regulatory framework for UK bus services outside of London. However, local authorities might still seek to introduce bus contracting using existing legislation or by securing greater power over bus services through devolution of powers from central government. The devolved governments in Scotland and Wales already have devolved powers over bus services. We continue to make the case at both national and local level for partnership working within the existing commercialised markets.

Proposals to implement a bus contracting system in Tyne and Wear using existing legislation were referred to a Quality Contracts Review Board by the North East Combined Authority in October 2014. The Review Board will shortly hold hearings as part of its duty to determine whether the proposals meet the five statutory public interest criteria required to support the introduction of the contracting scheme. The Review Board expects to issue its opinion in October 2015. We do not believe the statutory tests have been met and we continue to present robust evidence to the Review Board to demonstrate this. We are clear that a system where bus operators provide the capital and retain the commercial risks would be far more effective at delivering further customer service improvements at lower cost for the public sector while leaving the region's taxpayers free from the huge financial uncertainty of the proposed contracting scheme.

Inter-city coach services

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, Italy and Spain. We believe we have a strong brand in a European market with significant opportunities.

The Group has ordered more than £20m of new coaches to support the development of megabus.com services in mainland Europe. We have recently commenced domestic megabus.com coach services within Germany, establishing a network which now covers 16 destinations. In May 2015, we also started a new Cologne-Lyon-Barcelona service. We launched our first domestic service in France in March 2015, with a link between Paris and Toulouse, and are pleased at plans by the French government to fully deregulate inter-city coach journeys over 200km. Most recently, earlier in June 2015, we launched a domestic megabus.com network in Italy. In the short-term, as we continue the expansion of our promising megabus.com business, we would expect operating losses to increase from around £4m in 2014/15 to around £10m in 2015/16. This is based on our previous experience of megabus.com start-up operations, where we invested in expanding the business in the early years of megabus.com in each of the UK and North America, which are now strong, profitable businesses.

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, concern for the natural environment and increased road congestion. In addition to this positive outlook in the UK, we are excited by the opportunities we see to develop a substantial inter-city coach business in continental Europe and we are continuing to invest in growing that business.

Growth in concessionary and tendered revenue is likely to be minimal in the short-term as government bodies seek to manage budget constraints, including minimising the amounts paid to bus operators under concessionary fare schemes for the free travel we provide. We are pleased that the forecast reduction in our fuel costs in the year ending 30 April 2016 has enabled us to keep fare increases for the year ahead to a minimum, consistent with our long-term objective to grow passenger volumes through our value fares strategy and notwithstanding increases to staff and other costs.

UK Bus (London)

Financial performance

The financial performance of the UK Bus (London) Division for the year ended 30 April 2015 is summarised below:

The Division continues to perform well and we are satisfied with the rates of return that we achieve in London. Our focus is on keeping costs under control and aiming to retain and win contracts on acceptable terms.

The operating profit of £26.3m is higher than our recent expectations. That reflects that outcome of our normal year-end review of our insurance provisions. Although the review did not result in a material change to the overall insurance provision for the Group, a re-assessment of the level of provision held in respect of historic claims for the UK Bus (London) Division resulted in a release from the provision of £3.0m. This was offset by adjustments to the insurance provisions of other divisions, notably North America. These adjustments are not forecast to recur.

Revenue growth has generally been good during the year. 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 Transport for London. Excluding the contract prices uplift, revenue increased by 5.1% during the year. Also as previously reported, traffic disruption from road works has adversely affected our quality incentive income, which has moderated overall revenue growth. In light of this, we have implemented service performance measures in conjunction with Transport for London and we are continuing to discuss with Transport for London how service performance can be further improved.

The improvement in operating margin was built up as follows:

The reduction in quality incentive income referred to earlier has affected operating margin. Certain costs, such as staff costs, that increase with the vehicle miles operated have increased at a faster rate than revenue as a result of the reduced quality incentive income.

The BSOG change explained above reduced operating margin by 20 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.

Staff costs increased relative to revenue reflecting wage inflation and also the deflationary effect of fuel price adjustments on contract revenue with no corresponding adjustment to staff costs.

Fuel costs reduced relative to last year, reflecting market fuel prices and our fuel hedging programme.

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.

The change in insurance and claims costs reflects the re-assessment of the insurance provisions referred to earlier.

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 the sale of the depot for £5m.

Bus drivers across London took strike action in February 2015 as part of seeking harmonisation of pay rates across London bus operators. Although no further strike action has taken place, the dispute has not been formally resolved, and any further industrial action could affect the financial performance of the UK Bus (London) Division, as well as that of other London bus operators.

Outlook

The outlook for the London Bus operations is positive with continuing good profitability expected from our portfolio of contracts with Transport for London. We continue to expect some decline in operating margin following the particularly strong margins of the last few years but still aim to deliver long-term operating margins in excess of 7%.

The decline in fuel prices is not forecast to significantly affect the Division's profit in the year to 30 April 2016 due to the broadly offsetting effects on fuel costs and contract revenue, with changes in revenue being partly linked contractually to changes in fuel prices. That also means that revenue growth for year to 30 April 2016 is likely to be modest.

Looking further ahead, we believe there may be opportunities from Transport for London's plans to increase London bus mileage by around 5% between now and 2020/21 and we welcome this planned, further development of London bus services.

North America

Financial performance

The financial performance of the North America Division for the year ended 30 April 2015 is summarised below:

The operating profit of US$35.3m (£22.1m) is lower than our recent expectations. That reflects that outcome of our normal year-end review of our insurance provisions. Although the review did not result in a material change to the overall insurance provision for the Group, a re-assessment of the level of provision held in respect of historic claims for the North America Division resulted in an adjustment to increase the provision by £3.1m. This was offset by adjustments to the insurance provisions of other divisions, notably UK Bus (London). These adjustments are not forecast to recur.

Even excluding the year-end insurance provision adjustment, revenue growth and operating profit fell short of the target we had at the start of the financial year. The sharp fall in fuel prices adversely affected demand for our megabus.com inter-city coach services. Megabus.com competes with private cars, as well as other public transport operators, for inter-city journeys and the fall in fuel prices made cars more cost-competitive. Nevertheless, megabus.com remains profitable and over the longer term, we see opportunities to further grow that business.

Like-for-like revenue growth for the Division was 0.9%, which includes 7.6% for megabus.com. In April 2015, we completed the successful introduction of our megabus.com seat reservation system, which 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 was satisfactory. We continue to focus on good cost control and in April 2015 we started the roll-out of GreenRoad eco-driving technology across our vehicle fleet in North America, following the success of the system in reducing fuel consumption in our UK operations.

The decrease in operating margin was built up as follows:

The Division has benefited from reduced fuel costs in the year, reflecting market prices and the Group's fuel hedging programme.

The change in insurance and claims costs reflects the re-assessment of the insurance provisions referred to earlier.

Outlook

Revenue growth in North America has slowed in recent months and we remain cautious on the short-term prospects for megabus.com revenue growth as the year-on-year fuel price drop persists. We expect, however, to also see cost savings in each of the years ending 30 April 2016 and 30 April 2017 from lower fuel prices. We are not planning any significant expansion of our North America megabus.com operations in the coming months but will re-assess the further growth opportunities for the business in the second half of the year ending 30 April 2016.

The performance of the non-megabus business across its various service types remains steady. The non-megabus business does face a number of trading challenges including the impact of the lower fuel prices referred to above on the demand for some services, strong competition in US sightseeing markets, and the effect of the strong US dollar on the number of European visitors to the US and spending by those visitors. However, overall North America operating profit for May 2015 was satisfactory and so, at this early stage in the financial year, trading is as expected. A continued focus on a positive experience and value for money for customers will be crucial as we seek to mitigate trading challenges over the coming months.

UK Rail

Financial performance

The financial performance of the UK Rail Division for the year ended 30 April 2015 is summarised below:

We were delighted to begin operating the new Virgin Trains East Coast rail franchise from 1 March 2015 and we are pleased with its progress so far. The reported revenue and operating profit above includes 100% of the new Virgin Trains East Coast franchise from 1 March. Virgin's 10% minority interest in the profit after tax of the franchise is separately reported in the consolidated income statement.

The Group's other two major 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.

Revenue growth in UK Rail has been strong with like-for-like revenue up 8.7%. This partly reflects the recovery of revenue foregone at East Midlands Trains in the prior year as a result of major engineering work in the Nottingham area but also reflects good growth in underlying passenger volumes.

As expected, the operating margin fell in the year. This is consistent with comments we have made in previous years 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 compared to that forecast in the original bids for the franchises. This reflects substantial increases in the like-for-like amounts payable to the Department for Transport.

Customer experience

In March 2015, the Group's South West Trains business agreed a Deed of Amendment to its franchise with the Department for Transport. The Deed of Amendment provides for accelerated investment of around £50m to deliver passenger improvement initiatives between now and February 2017. It means customers do not have to wait for a new franchise to benefit from these initiatives, while taxpayers will gain better value from public investment. Further details of the benefits for customers were set out in our announcement of 25 March 2015.

Our East Midlands Trains business launched a new improved timetable between Lincoln and Nottingham in May 2015 in partnership with the Department for Transport, local authorities, business clubs and two local enterprise partnerships. The new timetable provides faster journey times and more services. We have launched a new complimentary breakfast offer at our five main First Class Lounges at stations and also introduced a new passenger shuttle service linking East Midlands Parkway railway station with East Midlands Airport. A new £60m transport hub has been opened at Nottingham Station, providing an interchange with different forms of transport, connecting trains, a 950-space multi-storey car park and Nottingham's tram network.

Work has started to deliver a transformation of the customer experience at Virgin Trains East Coast as part of a £140m investment programme for the franchise. We have already implemented a 10% cut in Standard Anytime fares on long-distance journeys to and from London and work is underway on a £21m refresh of the existing train fleet. Recently we launched a pilot of paperless mobile ticketing, allowing passengers to travel using a barcode held on a smartphone or tablet, and we have plans to expand the system to more routes if successful. We look forward to delivering further benefits as the franchise develops, including more seats, new connections, new trains and faster journey times.

CMA Review of Virgin Trains East Coast

The Competition and Markets Authority ("CMA") is required to review all awards of new rail franchises in the UK and so, undertook a review of the award of the Virgin Trains East Coast franchise. The CMA has now accepted undertakings that we offered on the pricing of certain bus and train services to address the limited issues identified by the CMA in respect of the franchise. This brings the review to a close.

East Coast open access applications

Other train operators have applied to the Office of Rail and Road to operate train services on parts of the railway network where the Virgin Trains East Coast franchise operates. If permission for some or all of these services is granted, then Virgin Trains East Coast might not be able to operate all of its planned train services and/or its financial performance could be adversely affected. To the extent that from May 2020, Virgin Trains East Coast is unable to operate the services that the Department for Transport specified as part of the franchise bidding process, then the business would be financially compensated under the terms of its contractual arrangements with the Department. The business would not necessarily be compensated for being unable to operate services prior to May 2020, being unable to operate services that it planned to provide over and above the minimum specified by the Department and/or for the effects of any increased competition on the services it is able to operate. We do not consider that the proposed open access services meet the criteria for approval and at this stage, while acknowledging the risk, we have not materially changed our forecasts for the business as a result of the progress of the open access applications.

Franchising programme

There is encouraging momentum in the UK rail sector, with a number of UK franchises having been awarded over the last two years and several due to be open for competition over the next few years.

We recently submitted our bid for the new TransPennine Express franchise where we are one of three bidders shortlisted for the contract. An announcement of the successful bidder is expected later in 2015, with the contract expected to start in February 2016.

Earlier this month, June 2015, the Group's joint venture with Abellio was shortlisted by the Department for Transport to bid for the new East Anglia franchise. The current Greater Anglia franchise has been operated by Abellio since February 2012. Abellio East Anglia Limited ("AEAL") is one of three bidders shortlisted for the franchise. Stagecoach holds a 40% share of Anglia Rail Holdings Limited ("ARHL"), the 100% parent company of AEAL, with Abellio holding 60% of ARHL. Shortlisted bidders are expected to be invited to submit detailed proposals later this year and the new operator will take over managing the franchise in October 2016.

The Group has also submitted proposals to the Department for Transport as part of previously announced government plans for direct awards at East Midlands Trains and South West Trains. Our proposals for both franchises seek to build on the improvements delivered to date, providing more benefits for customers, good value for taxpayers and an appropriate return for investors. The East Midlands Trains franchise is due to end in October 2015 and negotiations are continuing in respect of a direct award of a new franchise to at least October 2017. The current South West Trains franchise is due to end in February 2017 and as long ago as March 2013, the Department for Transport announced its plans for the direct award of a new franchise to April 2019. Progress in agreeing that direct award has been disappointingly slow. We are still not close to concluding an agreement and indeed, there is no certainty that an agreement will be reached.

We will continue to evaluate opportunities to bid for UK rail franchises on a case-by-case basis. We seek new opportunities that offer the right balance of risk and reward, provide scope for us to improve services to customers, and which are compatible with maintaining an acceptable balance of the Group's portfolio between bus and rail businesses.

Alliance with Network Rail

South West Trains and Network Rail have pioneered over the past three years the first deep alliance on the UK rail network, which has sought to deliver greater integration between train operations and infrastructure management. The close working relationship between the two parties has enabled an improved, more customer-focused railway as well as some efficiency savings. Based on what both parties have learned over this period, South West Trains and Network Rail are now re-shaping their relationship. The objective is to continue to work closely and collaboratively in the areas that most benefit the railway and its customers, while discontinuing aspects of the current Alliance where the benefits are less clear. The existing formal Alliance governance structures, including the Alliance Governance Board and the single joint management team, will shortly be replaced with new arrangements in the specific areas which we and Network Rail believe will continue to deliver the most benefits. Under the previous financial arrangements, variances relative to agreed financial baselines were shared between the parties. Moving forward, new appropriate commercial arrangements will be put in place to reflect the re-shaped relationship. The new arrangements reflect the current regulatory framework that applies to UK railways and the different operating models of the two parties. We are confident that these changes will prioritise the right areas, reduce unnecessary bureaucracy and allow South West Trains and Network Rail to focus on working together on the matters that are most likely to offer the greatest benefits to customers.  

Outlook

We have participated in the UK rail market and reported a profit every year since the market was privatised in the 1990s. We expect to continue to play a major part in UK Rail over the long-term notwithstanding the potential for individual rail franchises to be won and lost. Following the agreement of the new Virgin Trains East Coast franchise, we now have a substantial rail business in place for at least the next eight years. The new franchise is expected to make a significant operating profit contribution in the year ending 30 April 2016, reflecting our programme of investment to grow the business by transforming the customer experience.

As explained earlier, we are negotiating with the Department for Transport to finalise a new East Midlands Trains franchise for the period through to at least October 2017.

We have previously reported that as we approach the end of the existing period of our South West Trains franchise, the financial performance of the business becomes more challenging. We remain focused on growing revenue and controlling costs to offset increased premia payments, to the extent possible.

The new Virgin Trains East Coast franchise, as well as the potential direct award of new East Midlands Trains and South West Trains franchises, present profitable opportunities to further enhance the customer experience and deliver value for money to Government. We will, in addition, assess the opportunity to bid for other franchises as these are tendered over the coming years.

Joint Ventures

Virgin Rail Group

Financial performance

The financial performance of the Group's Virgin Rail Group joint venture (excluding exceptional items) for the year ended 30 April 2015 is summarised below:

Virgin Rail Group is seeing a continuing strong performance from its West Coast rail franchise. The new commercial franchise commenced in June 2014 and is planned to run until at least 31 March 2017. Furthermore, we continue to believe there is a compelling case for the Department for Transport to exercise the discretion that it has to extend the contract, on pre-agreed terms, by one additional year to 31 March 2018. The commercial franchise replaced a management contract, which was in place from December 2012 to June 2014. Under the commercial franchise, Virgin Rail Group takes the majority of revenue and cost risk. The business has achieved good passenger revenue growth and taxpayers benefit through profit share payments to the Department for Transport. Under the temporary management contract 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.

The Group's share of the results of Virgin Rail Group is based on the management accounts of Virgin Rail Group to the period end that falls closest to the Group's balance sheet date of 30 April. The Group's results for the year ended 30 April 2015 incorporate its share of Virgin Rail Group's results for the period from 27 April 2014 to 2 May 2015. The impact on the Group's share of Virgin Rail Group's profit and net assets of using this period rather than the year ended 30 April 2015 is not material. However, the revenue figure reported above includes the benefit of an extra week in Virgin Rail Group's results for 2014/15 versus 2013/14. Excluding this, the estimated revenue growth was 7.7%.

Business developments

During the year, Virgin Rail Group has delivered further improvements for passengers. This has included the launch of two new direct Virgin Trains services between London and Blackpool, and London and Shrewsbury. Work is also well underway on a programme to convert one first class carriage in each of 21 nine-carriage Pendolino trains to Standard Class. The project, which is expected to be completed in September 2015 and includes a major interior refresh and deep clean of the trains, will create significant additional standard class seating capacity for customers.

The upgrade to onboard wi-fi is almost complete and is already providing a significantly improved service to passengers. In addition, Virgin Rail Group continues to pursue the possibility of trackside wi-fi infrastructure which would provide free and fast wi-fi to all customers.

Passengers booking via the Virgin Trains website or mobile app now earn Nectar points on their purchases, and more than £20m is being spent on station improvements such as refreshed waiting rooms, more passenger information help points and an improved website.

Outlook

We expect Virgin Rail Group to continue to perform strongly and we will see the full-year effect of the new franchise in the year ending 30 April 2016.

Twin America

Financial performance

The financial performance of the Group's Twin America joint venture (excluding exceptional items) for the year ended 30 April 2015 is summarised below:

Twin America has faced tough trading conditions as a result of a competitive New York sightseeing market, among other factors, and that is reflected in the decline in profit reported above.

Litigation

In December 2012, the United States Department of Justice and the Attorney General of the State of New York initiated legal proceedings against Twin America and others alleging that the formation of Twin in 2009 was anticompetitive. Several private actions were also filed in relation to this matter.

In March 2014, Twin America and lawyers for the private plaintiffs reached agreement on a settlement of US$19m (without any admission of liability by Twin America). The court has approved this settlement. The settlement binds all claimants except those that expressly opted out of the class of plaintiffs. The deadline for opt-outs and for objections to the settlement has passed. Four individuals opted out, and there were no objections.

We are pleased that a settlement has now also been agreed in principle with the US Department of Justice and the New York Attorney General's office. That settlement is subject to court approval. The settlement envisages cash payments by the defendants of US$7.5m and the relinquishment of certain bus stop rights. We have previously recognised costs associated with the litigation as exceptional items. We have recognised an exceptional pre-tax charge of £2.5m in the second half of the year ended 30 April 2015 in respect of the Group's share of the additional costs associated with this litigation. For the year as a whole, the Group has recorded exceptional pre-tax charges of £5.8m in respect of litigation related to Twin America. Related to the Twin America litigation involving the Group's North America Division, the Department of Justice is continuing to investigate the conduct of company personnel in responding to discovery obligations in the investigation and litigation. The Department of Justice has not taken any enforcement action related to these issues, and the Group is co-operating with the investigation.  

Trading remains challenging in the highly competitive New York tourism and sightseeing market and Twin America's management will now focus on seeking to re-build the business.

EBITDA, depreciation and intangible asset expenses

Earnings from continuing operations before interest, taxation, depreciation, intangible asset expenses and exceptional items (pre-exceptional EBITDA) amounted to £353.3m (2014: £340.2m). Pre-exceptional EBITDA can be reconciled to the condensed financial statements as follows:

The income statement charge for intangible assets decreased from £14.0m to £11.9m, principally due to certain intangible assets becoming fully amortised during the year, partly offset by the amortisation of intangible assets in respect of the new Virgin Trains East Coast franchise.

Exceptional items

The following exceptional items were recognised in the year ended 30 April 2015:

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 ceased operations at one of its depots, which is leased. A provision of £2.1m has been recorded in respect of the leased depot as, following the cessation of operations at the depot, the lease was determined to be onerous because the forecast, unavoidable costs of meeting the Group's obligations under the lease exceeded the forecast economic benefits forecast to be received as a result of the lease.

We expensed amounts in previous years as exceptional items in respect of the anticipated legal costs and settlement amounts related to the Twin America litigation explained earlier in the section headed "Twin America". As a result of the prolonged nature of the litigation process, we incurred or expect to incur further legal costs in excess of those previously expensed. In addition, as explained earlier, we have now reached a settlement agreement in principle with the US Department of Justice and the New York Attorney General's office. Additional pre-tax expenses of £5.8m have therefore been recognised in the Group's consolidated income statement for the year ended 30 April 2015.

Net Finance costs

Net finance costs for the year ended 30 April 2015 were £42.1m (2014: £42.6m) and can be further analysed as follows:

Taxation

The effective tax rate for the year ended 30 April 2015, excluding exceptional items, was 19.0% (2014: 16.8%). The prior year effective tax rate was depressed by adjustments in respect of the utilisation of previously unrecognised tax losses and the impact of the reduction in the rate at which deferred tax is calculated. As a result, the effective tax rate increased in the year to closer to the new standard rate of UK corporation tax of 20%. The tax charge for continuing operations can be analysed as follows:

Fuel costs

The Group's operations as at 30 April 2015 consume approximately 406.0m 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 30 April 2020.

Cash flows and net debt

Net debt (as analysed in note 17 to the condensed financial statements) decreased from £461.6m at 30 April 2014 to £381.3m at 30 April 2015, due to the Group's continued strong cash generation and the timing of rail cash flows.

The cash held by the train operating companies at any point in time is affected by the timing of rail industry cash flows, which can be individually substantial. As a result of that, the consolidated net debt as at 30 April 2015 is lower than a "normalised" level of net debt. In the first few days of May 2015, the train operating companies made cash payments of approximately £100m.

Net cash from operating activities before tax for the year ended 30 April 2015 was £346.4m (2014: £268.5m) and can be further analysed as follows:

Net cash from operating activities before tax was £346.4m (2014: £268.5m) and after tax was £315.5m (2014: £248.3m). Net cash outflows from investing activities were £151.5m (2014: £121.8m), which included £Nil (2014: £5.5m) in relation to the acquisition of businesses. Net cash used in financing activities was £11.5m (2014: £146.3m).

The net impact of purchases of property, plant and equipment for the year on net debt was £188.8m (2014: £160.9m). This primarily related to expenditure on passenger service vehicles, and comprised cash outflows of £182.4m (2014: £154.2m) and new hire purchase and finance lease debt of £6.4m (2014: £6.7m). In addition, £47.9m (2014: £42.0m) cash was received from disposals of property, plant and equipment.

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

The purchases in the UK Bus (regional operations) Division include £14.4m spent on vehicles for the expanding megabus.com inter-city operations in continental Europe.

The movement in net debt, showing train operating companies separately, was:

The Group's net debt at 30 April 2015 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 30 April 2015.

Liquidity

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

· The ratio of net debt at 30 April 2015 to pre-exceptional EBITDA for the year ended 30 April 2015 was 1.1 times (2014: 1.4 times).

· Pre-exceptional EBITDA for the year ended 30 April 2015 was 8.4 times (2014: 8.0 times) net finance charges (including joint venture finance income and finance costs).

· Undrawn, committed bank facilities of £298.8m at 30 April 2015 (2014: £342.1m) were available to be drawn as bank loans with further amounts available only for non-cash utilisation. In addition, the Group continues to have available asset finance lines.

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

Major financing transactions

During the year, the Group entered into various hire purchase and finance lease arrangements for new assets as described in note 16 to the condensed financial statements.

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.

The Group is already progressing plans to re-finance its £400m bonds due to mature in December 2016.

The Group assumed significant new rolling stock operating lease commitments in the year related to the new Virgin Trains East Coast rail franchise.

Net assets

Net assets at 30 April 2015 were £95.0m (2014: £79.3m).

Retirement benefits

The reported net assets of £95.0m (2014: £79.3m) that are shown on the consolidated balance sheet are after taking account of net pre-tax retirement benefit liabilities of £160.5m (2014: £115.8m), and associated deferred tax assets of £35.3m (2014: £23.1m).

The Group recognised pre-tax actuarial losses of £65.5m in the year ended 30 April 2015 (2014: £Nil) on Group defined benefit schemes. The actuarial losses and the increase in net pre-tax retirement benefit liabilities principally reflects the fall in corporate bond yields in the year, which in turn affect the discount rate used to discount pension scheme liabilities. The return on pension scheme assets for the year was good but not sufficient to fully offset the impact of the reduced discount rate.

Related parties

Details of significant transactions and events in relation to related parties are given in note 19 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 preliminary management report, we have since seen further developments in relation to regulatory risks. The current UK Government's plans for greater devolution of powers within the UK could see the introduction of franchised bus networks in areas which vote to introduce metro mayors, which could affect our commercialised bus operations. Further information and updates will be provided in the 2015 Annual Report.

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 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 preliminary management report.

The matters summarised below are not intended to represent an exhaustive list of all possible risks and uncertainties. The focus below is on those specific risks and uncertainties that the Directors believe could have the most significant impact on the Group's performance.

Current trading and outlook

The Group has had a satisfactory start to its financial year ending 30 April 2016, and while it is still early in the financial year, overall trading for the financial year to date is consistent with our expectations.

The long-term outlook for public transport remains positive. Increasing public transport use can help address challenges such as rising road congestion and the impact of transport on the natural environment. That is all consistent with our strategy of seeking to deliver further organic growth in our passenger volumes, including through offering high quality, value for money, bus and rail services as alternatives to travelling by car.

Martin Griffiths

Chief Executive

24 June 2015

Cautionary statement

The preceding preliminary 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 preliminary management report contains forward-looking statements that are subject to risk factors associated with, amongst other things, the economic 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 preliminary 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

These results are extracts of consolidated financial statements that have been prepared in accordance with International Financial Reporting Standards ("IFRS") and International Financial Reporting Interpretations Committee ("IFRIC") interpretations as adopted by the European Union (that therefore comply with Article 4 of the EU IAS Regulation), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Except to the extent described below, the accounting policies and methods of computation adopted are consistent with those used in the last set of published financial statements.

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 material effect on the consolidated financial statements of the Group.

The Board of Directors approved this announcement on 24 June 2015.

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

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 the 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 four joint ventures: Virgin Rail Group and Anglia Rail that operate in UK Rail, Citylink that operates in UK Bus (regional operations) and Twin America that operates in North America. The results of these joint ventures are shown separately in note 3(c) where material.

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 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: