The Go-Ahead Group plc full year results 2019

THE GO-AHEAD GROUP PLC

("GO-AHEAD OR THE GROUP")

FULL YEAR RESULTS FOR THE YEAR ENDED 29 JUNE 2019

05 September 2019

Business overview

• Group operating result slightly ahead of expectations

• Good progress made against all three strategic pillars: protect and grow the core; win new bus and rail contracts; develop for the future of transport

• Bus operating profit pre-exceptional items up 4.7% at £95.7m (2018: £91.4m); improvement driven by strong operational performance in London & International division, regional bus achieved highest ever passenger satisfaction score of 92%

• Rail operating profit at £25.4m (2018: £44.5m); prior year included part year of London Midland franchise

• Record punctuality levels in both in GTR and in Southeastern, and improved customer satisfaction of 81% and 80% respectively

• Southeastern rail franchise extended to April 2020

• Four new international contracts won; started operating our first two German rail contracts and our first bus contract in Ireland

• Improved free cash generation of £74.1m (2018: £57.7m) and balance sheet remains strong

• Maintained full year dividend of 102.08p (2018: 102.08p)

Financial summary

* Adjusted net debt is net cash less restricted cash

CEO comment

David Brown, Group Chief Executive, commented:

"I'm pleased to report full year results slightly ahead of our expectations in both bus and rail divisions. Strong performance in our London & International bus division more than offset a lower result in our regional bus business. Rail operating profit was slightly ahead of expectations, driven by strong performance at Southeastern, but was lower than the prior year which included a part year of operating the London Midland franchise.

"Our commitment to provide better services for our customers has delivered improvements in reliability and satisfaction in our bus and rail businesses, many of which reached record levels during the year. In rail, Southern's customer satisfaction increased by 12 percentage points to 81 per cent while our regional bus business, once again, topped the league tables with an industry record of 92 per cent satisfaction. Also in regional bus, we were pleased to drive up our passenger journey growth of 3.3 per cent in a challenging UK market. Bus travel brings great benefits to the economy, society and the environment and we are calling for a national bus strategy to maximise these benefits.

"During the year, we began contracts in three new countries and won four more international contracts. Our continual focus on innovation resulted in the introduction of the UK's first air-filtering bus and passenger benefits being developed through our Billion Journey Project incubator. Our balance sheet remains strong and we have maintained our dividend.

"We are disappointed that the DfT took the decision to terminate the new South Eastern franchise competition. We submitted a strong bid designed to provide value for passengers and taxpayers and to build on the significant improvements we have delivered in our 13 years of operating the franchise. We will continue to focus on delivering excellent service for our customers as we operate the contract under an extension up until 1 April 2020, and we are engaging with the DfT regarding the future of the franchise beyond this point.

"Overall for 2020, we are confident that the Group will deliver another robust performance in line with our expectations as we continue to execute our clear and well-defined strategy; strengthening our core business, diversifying into international markets and developing new ways of responding to a changing world."

Chairman's letter

Creating value for all our stakeholders

This will be my last statement as your Chairman as I will be retiring from the Board at the AGM in October after 11 years, including six as Chairman.

In my first report to you in 2013, I wrote that the Group had strong and experienced management, a clear strategy, good values and high integrity, a strong commitment to high standards of health and safety and considerable opportunity for the future. Building on this strong foundation, my time as Chairman has indeed seen a period of opportunity and also of challenge for Go-Ahead. The Group has developed a new strategy for growth, moved into international markets and reinvigorated its purpose and culture. We have positioned ourselves for the future of transport, whilst facing the most challenging period in the history of our rail business as we have supported the major Thameslink infrastructure changes needed to build resilience and facilitate growth in a key part of the UK's rail network.

This has all been made possible by the people within Go-Ahead who diligently strive to deliver better service, greater value for all our stakeholders, and a more sustainable business. Without their outstanding commitment, the one billion journeys made on our services every year would not be possible.

Today, the Group is in a strong position. We have an important and worthwhile purpose, strong values and culture, a clear strategy addressing the short, medium and longer term, a well defined business model serving the interests of all our stakeholders, a robust balance sheet, and a strong leadership team, all of which position us well for the opportunities and challenges that lie ahead.

A changing world

At Go-Ahead we have a set of values that we live and breathe each day, underpinning everything we do. They are designed for a world of rapid change and increasing demand for high quality services. Now is a time of great political transformation, which creates uncertainty for businesses, individuals and society alike. The way people live and work continues to change and the way they engage with businesses is different to even a few years ago. These changes, together with increasing customer expectations, more engaged colleagues and accelerating climate change, require us to evolve our business at the same pace. We see public transport as an important contributor and force for good in this changing world, a prospect we face with commitment and enthusiasm.

We place great importance on innovation in all we do. This often involves working in collaboration with industry partners, experts in new markets and young, entrepreneurial businesses, such as those participating in our Billion Journey Project, which I've been proud to support.

It is our sustained focus on customer experience and innovation that enables us to deliver the services that make us Britain's most loved bus operator, with levels of customer satisfaction unseen by some industries at 92%. This approach has also enabled us to significantly improve the performance of our GTR and Southeastern rail franchises.

As well as recognising the value we bring to individuals and society through our convenient and reliable services, it is critical that decision makers at local and national levels understand the role we, as mass transit providers, can play in tackling climate change and improving air quality. By attracting more people on to public transport, we can significantly reduce the number of cars on the roads, thereby minimising the adverse environmental impact associated with travel.

Of course we recognise that our operations themselves have an environmental impact. We are therefore continually investing in upgrading our bus fleet and working practices to increase the net environmental benefit our activities create. These actions have resulted in our carbon emissions per vehicle mile reducing by 35% over four years.

Looking after the interests of our stakeholders and creating sustainable value

Looking after the interests of all our stakeholders is inextricably linked to creating long term value for our shareholders. When we talk about operating in a sustainable way, we mean that in the broadest sense of the word; our actions and approaches today determine the success of our business into the future. In my experience, doing the right thing for one stakeholder group results in better outcomes for all. Our business model (set out on pages 20 to 21 of the 2019 Annual Report and Accounts) illustrates how we deliver financial and non-financial value to all our stakeholders through our strategy and by doing business in the right way. It is a model that gives me great confidence that Go-Ahead will continue to provide excellent transport solutions for the long term.

The Board has long understood the value and importance of dividends to our shareholders, who have provided capital to support the Group, and for this reason Go-Ahead has never reduced its dividend. In line with our dividend policy, the Board is recommending a final dividend of 71.91p per share, bringing the full year dividend to 102.08p per share reflecting the resilient performance for the year and the Board's confidence in the Group's outlook.

Subject to shareholder approval, the final dividend will be paid on 22 November 2019 to shareholders on the register on 1 November 2019.

Board changes

I welcome Clare Hollingsworth, who joined the Board on 1 August 2019 as Non-Executive Chairman Designate and will succeed me as your Chairman with effect from the conclusion of our Annual General Meeting (AGM) on 31 October 2019. Clare brings a wide range of experience from both within and outside the transport sector and I have every confidence that she will be an excellent Chairman.

I am also very pleased to welcome Elodie Brian to the Board as Group Chief Financial Officer. Elodie's experience, intellect and style will be of great value to the Group and I am particularly pleased that we have been able to make an internal appointment for this important role, demonstrating our successful succession planning in action.

Katherine Innes Ker has served more than nine years on the Board and must now be considered as not independent.

She will be replaced by Adrian Ewer as Senior Independent Director and by Leanne Wood as Remuneration Committee Chair after the 2019 AGM. Katherine will, however, remain on the Board as a non-independent non-executive director for a further period to ensure continuity following my retirement and to support the transition of Chairman, whose recruitment process she led.

Inclusion and diversity

We have a diverse Board, comprising directors with a broad spectrum of complementary skills, personalities and competencies. With the recent changes to Board composition, our female representation has increased from 29% to 50%, exceeding the 33% target set by the Hampton-Alexander Review. This will further increase to 57% when I step down from the Board.

The Board remains committed to improving diversity in all its forms and it has been encouraging to see the wide range of inclusion and diversity initiatives and strategy now being embedded across the business.

Effective corporate governance

The importance of strong and effective corporate governance both at Board level and throughout the Group is not underestimated by the Board and we pride ourselves on clear and transparent reporting. Our corporate governance report on pages 56 to 119 of the 2019 Annual Report and Accounts sets out our robust governance framework and describes the excellent progress we have made in adopting early many provisions of the new UK Corporate Governance Code 2018. Additionally, it sets out the results of the internal Board evaluation led by the Group Company Secretary and our progress against outputs from last year's review such as the development of a new Board Mandate.

Looking to the future

I believe the Group's strong foundations in the UK will provide a solid base to respond to changing social, political and environmental factors, whilst also enabling the Group to develop and thrive in new international markets. I am absolutely convinced that private operation of public transport with close community and local authority partnerships can and should be a force for good in society and that Go-Ahead will continue to be a vital part of the communities it serves into the future.

It has been a privilege to be your Chairman. I have been extremely well supported by an excellent Board and by dedicated colleagues across the Group. I have also been fortunate to work with a Chief Executive, who has strong values, integrity and resilience. I would like to thank David and all colleagues at Go-Ahead for their support and wish them good luck and future success.

I am leaving Go-Ahead in good shape and I look forward to watching the Group's progress as it continues on its journey.

Chief Executive's review

Adapting to a changing world

"As well as our continual focus on providing attractive returns for our shareholders, we take our corporate responsibilities seriously and are committed to providing both financial and non-financial value to all our stakeholders."

I am pleased to report the good progress we have made during the year. Our commitment to provide better services for our customers has delivered improvements in reliability and satisfaction in both our bus and rail divisions, many of which reached record levels during the period. We began contracts in three new countries and won four more international contracts. Our financial performance for the year exceeded our initial expectations in both our bus and rail businesses, and our balance sheet remains strong.

Operating responsibly

As well as our continual focus on providing attractive returns for our shareholders, we take our corporate responsibilities seriously and are committed to providing both financial and non-financial value to all our stakeholders.

Safety is our priority and our policies and processes throughout the Group reflect this.

Playing our part in protecting the environment is also of paramount importance to us. Not only do our services minimise emissions and congestion through reducing car journeys, but we are also active in lowering our own carbon footprint, and over the last four years we have reduced carbon emissions per vehicle mile by 35%. We are the largest operator of electric buses in the UK and run an all-electric bus garage in London. We will be introducing 30 new electric buses next year in our Brighton & Hove and Go North East bus businesses.

In Southampton, we operate the UK's first air filtering bus which cleans the air as it travels and we will be introducing more of these buses into our fleet in the next few months. I was pleased to be awarded European CEO of the Year for Sustainable Transportation in the 2019 CEO Magazine Awards, which is recognition of the commitment with which we all approach sustainability across the Group and across our supply chains.

Customer and community focus

We aim to innovate in all areas of our business and use technology to deliver improvements for customers, drive efficiencies and position us for the future. In Brighton, we will soon be launching a pilot Pay As You Go bus payment system outside of London. This allows passengers to pay by tapping their phone or bank card on the reader, simplifying the customer experience and speeding up the boarding process.

Our businesses are at the heart of the communities they serve; connecting people with friends and family, work and leisure, and supporting local economies. We promote health, wellbeing and inclusion and during the year launched a range of initiatives, such as 'Active Travel' and 'Chatty Bus' which support better physical and mental health.

Our people

Our ability to meet the needs of our stakeholders is only possible through the hard work and dedication of our people. I would like to thank my 29,000 colleagues across the Group who are integral to the success of our business. Colleague engagement is a key focus for us and we continue to invest in training and development.

We want to be considered as a great company that people want to work for. Our inclusive culture plays a big part in this and we're working hard to make a career in public transport a great choice for all irrespective of gender, age, ethnicity, sexual orientation, religion or disability. In particular, there's a lot of great work taking place around the Group to redress the gender imbalance in bus and rail. We are heavily involved in the industry wide Women In Rail movement and recently launched our own Women In Bus network.

Protect and grow the core

Our core bus and rail activities, which take care of more than a billion passenger journeys a year, remain at the heart of the Group. We are the largest bus operator in London and have a well established regional bus business. We are responsible for around 30% of all train journeys in the UK and have a growing presence in international markets. The first pillar of our strategy centres around protecting and growing these activities through a collaborative and agile culture, an intense customer focus and by using our financial strength to continue investing in these businesses to ensure long term success.

Bus

Operating profit before exceptional items in our bus division grew to £95.7m (2018: £91.4m) with a significant improvement in our London & International bus division offsetting a slightly lower result in our regional bus business.

Regional bus

In regional bus, we increased like for like growth in passenger journeys by 3.3%, with each of our operating companies reporting higher volumes than last year. Once again, this represented a clear outperformance against the broader UK bus market which saw a 0.7% decline in volumes for the year to March 2019.

We have introduced targeted campaigns to grow passenger volumes often aimed at younger passengers to get them into the bus habit so they continue using our services as they get older. We have invested in a number of initiatives including utilising cleaner vehicles and technology, rolling out Lean engineering, and introducing new routes and frequencies where volumes and revenues take time to build. These initiatives will all help to deliver an improved performance in the future, but during this implementation period, they impacted regional bus operating profit which reduced to £44.5m before exceptional items this year (2018: £45.8m).

We have plans in place to gradually improve yields whilst continuing to grow our passenger numbers alongside active management of our cost base.

Our approach to target attractive markets serving local communities with customer focused services delivered the industry's highest ever customer satisfaction score of 92% in the annual survey by Transport Focus, with Go-Ahead topping the league table for punctuality and journey time.

Towards the end of the year, we completed the acquisition of the Queens Road bus depot, along with 163 buses, in Manchester. This acquisition, under the new branding Go North West, provides us with an exciting opportunity to participate in Britain's second largest urban area. We look forward to working in partnership with Transport for Greater Manchester (TfGM) to deliver operational excellence, innovation and great customer service. It also provides us with a platform to explore further opportunities in the region.

We continually consider opportunities for growth in the regional bus market ensuring alignment with our risk appetite and strong financial discipline. East Yorkshire, acquired in June 2018, is performing well and in the year made a positive contribution to our profitability that was ahead of our initial expectations, demonstrating our ability to improve the performance of our newly acquired businesses.

London & International bus

Our London & International bus division, which comprises our contracted bus activities in London, Singapore and Ireland, reported an operating profit before exceptional items of £51.2m (2018: £45.6m), with its pre-exceptional operating margin expanding to 9.0% (2018: 8.3%).

In London, our operated mileage reduced as anticipated due to previous contract losses. The impact of this was more than offset by better service performance leading to an increase in Quality Incentive Contract income (QICs). Far less of our own contracted mileage and revenues was retendered during the reporting period than in the previous two financial years, so our bidding activity has focused on new contracts. We continue to bid with financial discipline and have had an encouraging level of success. In the coming year we expect operating mileage to return to levels similar to those in the second half of 2018.

During the year, our London bus operations supported the major rail infrastructure works on the Brighton mainline, keeping passengers moving on replacement bus services.

Our bus operation in Singapore also performed well in the year, with improvements in both operational and financial performance.

On-time performance during the year improved by over four percentage points to 93.5% and we have contributed to the significant improvement in bus customer satisfaction in Singapore over the past three years.

In Ireland, the first of our two contracts, which operates 24 routes, began in September 2018 and made a small positive contribution to operating profitability in the year. Our second contract, covering a further six commuter routes around Dublin, is planned to start at the end of the calendar year.

Rail

As expected operating profit in our rail division at £25.4m (2018: £44.5m) declined significantly from last year primarily due to the expiry of the London Midland franchise in December 2017.

Following the year end, we were disappointed that the Department for Transport (DfT) took the decision to terminate the new South Eastern franchise competition. We submitted a strong bid designed to provide value for both passengers and taxpayers and to build on the significant improvements we have delivered in our period of operating the franchise. In our 13 years of operation passenger numbers have grown 36%, and we have added 5,000 extra seats. Customer satisfaction as reported in the latest National Rail Passenger Survey (NRPS) for Spring 2019 also improved by five percentage points to 80% as we grew passenger journeys by 3.7%.

The existing Southeastern franchise has been extended to 1 April 2020 and we are engaging with the DfT about the future of the franchise beyond that date. We continue to focus on colleague engagement, punctuality, reliability and excellent customer service. We are also strengthening our partnership with Network Rail which is the most integrated and collaborative in the industry, operating on one of the UK's most complex networks.

GTR reached agreement with the DfT during the year to settle contractual issues, significantly reducing the uncertainty over the future of the franchise and providing funding for £15m of passenger benefits. Through focused interventions on operational and customer service delivery we have seen significant improvements, with punctuality reaching a record level of 89.3% in April 2019. Southern services achieved a year on year increase in customer satisfaction of 12 percentage points in the latest NRPS to 81% whilst Gatwick Express also improved further to reach its highest level for seven years. Customer satisfaction on Thameslink services was also at its second highest ever level.

Looking ahead, we await the details of the rail industry review being led by Keith Williams and we hope to see reforms that will deliver value for money for passengers and taxpayers, and improvements for customers.

Win new bus and rail contracts

We have had a busy year in our international markets and made good progress with our strategy in this area. We were pleased to secure several new contracts, including our fourth and fifth rail contracts in Germany. The fourth contract covers the E-Netz Allgau routes and the fifth covers the Augsburger Netze routes awarded by the Bavarian rail authority and the Baden-Württemberg public transport authority. These two awards will run almost 10 million train kilometres per year using electric trains. When the final contract commences in 2022, the five German rail contracts that we have secured to date will operate around 20 million train kilometres per year.

In October, we were awarded our first contract in Norway to run the Oslo South package of rail services - the first rail contract to be let by the country. It covers a combination of long distance and suburban routes comprising 5.5 million train kilometres. Mobilisation is well underway for operations to begin in December 2019.

In December, we were awarded our first contract in Australia, bringing our extensive expertise in signalling and train control systems to New South Wales by supporting the Network Rail Consulting team. Work on this modernisation programme, which will improve frequency and reliability for passengers of Sydney Trains, began in January.

The first two of our five German rail contracts started operating in June 2019. Mobilisation continued for our third German rail contract, our first rail contract in Norway, and our second bus contract in Ireland, all of which are scheduled to begin at the end of the calendar year.

To date, we have secured ten international contracts across five countries. We expect these to deliver combined annualised turnover of over £400m when they are all fully operational. There remains a strong pipeline of contract opportunities in our target markets, and our international development teams are continuing to pursue these in line with our well defined framework for overseas activity. We are making good progress towards our goal of generating 15-20% of our Group operating profit from international activities by 2022.

Develop for the future of transport

As a forward looking business, we believe being prepared for the future of transport, and helping to shape changes in travel patterns, are crucial to our long term sustainability. We continue to invest in innovation to ensure that we remain relevant to customers as their lifestyles and mobility needs evolve.

Our Demand Responsive Transport (DRT) trial in Oxford, PickMeUp, celebrated its first anniversary in June. During the first year, it provided more than 140,000 rides for its customers whilst contributing to a reduction of traffic, noise and carbon pollution in the Oxford area. PickMeUp currently has over 30,000 registered users and is averaging around 600 rides per day. On the back of this successful pilot, we are working with TfL and ViaVan on a year long contract to trial an on-demand bus service across the London borough of Sutton which began operating in May.

Our Billion Journey Project, which is the largest privately funded transport accelerator programme in Europe, has partnered with eight small companies to develop a raft of innovative new services for passengers.

We are piloting Citi Logik which provides crowding information to Thameslink passengers as well as Airportr which provides a service that collects and carries air travellers' luggage from home to their destination.

We are developing a pilot of Mobility as a Service that will provide customers with more convenient access to multi-mode journeys in and around Brighton. Hammock, our consulting business that specialises in retail solutions for the transport sector, completed several projects in the year.

The Group continues to explore new ways of meeting changing customer needs and improving the use of digitisation across the business.

Outlook

The world is changing rapidly and so is the way that we get around. With a rise in flexible working, working from home and self-employment, the traditional daily commute is increasingly no longer the norm. Markets for online shopping, take-away food deliveries and home entertainment mean people are making fewer journeys in their free time. It is vital that we adapt our services to meet the changing travel patterns of our customers.

Amidst these changes, climate change and air quality are moving up the public and political agenda and the volume of traffic on the roads is having a detrimental effect on the environment. Public transport has an important role to play in tackling these challenges, providing a solution by carrying more people in fewer vehicles.

We are calling for a national bus strategy to address these issues and collectively leverage the benefits bus travel can bring to the UK. Go-Ahead is committed to remaining at the forefront of public transport provision and I am confident that we are well positioned to face the opportunities and challenges ahead.

My confidence is underpinned by a portfolio of bus businesses that have again demonstrated resilience during the year. In our regional bus businesses, we will concentrate on delivering excellent service to our customers and converting passenger growth to the bottom line. In our new Manchester business, we will focus on providing better services to passengers and attracting more people onto our buses. In London bus, amidst the backdrop of TfL's budgetary constraints, we have good visibility for 2020 and we expect the route wins, which we have secured during the past year, to contribute to an increase in volumes and revenues. Overall, we expect to deliver consistent profitability from the bus division compared with 2019.

In rail, we are focused on building on the operational improvements that we have made in the past year in both Southeastern and GTR. While Southeastern's profitability will be lower year on year, GTR is expected to generate a modest profit margin in 2020. Over its franchise term, GTR is still expected to achieve an operating margin of between 0.75 and 1 percent.

We are engaging with the DfT regarding the future of the Southeastern franchise beyond 1 April 2020.

Internationally, we will continue to progress against our strategy for growth. In the first half of the year, our emphasis will be on the start of new operations and the introduction of additional services in Ireland, Norway and Germany. In conjunction with those activities, our bid teams continue to pursue other targeted opportunities.

Our Chairman, Andrew Allner, will retire from the Board in October 2019. I would like to thank Andrew for his contribution to the Group, especially bringing our values to life at Board level. I wish him all the best for the future. Clare Hollingsworth will succeed Andrew as Chairman. I am pleased to welcome Clare to the Board and look forward to working with her. She brings

a wide range of experience that will be invaluable as we continue to deliver value for all our stakeholders. Overall for 2020, we expect the Group to deliver another robust performance as we continue to execute our clear and well defined strategy; strengthening our core business, diversifying into international markets and developing new ways of responding to a changing world. By striving to deliver our strategy and by doing business in the right way we can provide the best possible services for customers and generate sustainable value for all our of stakeholders. We have strong management teams across the business, leading our people and inspiring commitment and passion as we position ourselves for the future and move closer to achieving our vision.

Business and finance review

All references to operating profit, EBITDA and margins are on a pre-exceptional basis unless otherwise detailed. A full reconciliation between pre- and post-exceptional operating profit is shown within the income statement and associated notes.

Financial overview

Revenue for the year was £3,807.1m, up £345.6m, or 10.0%, on last year (2018: £3,461.5m). This increase was primarily attributable to additional services operated by GTR within the rail division partially offset by the end of the London Midland franchise.

Excluding exceptional items, profits attributable to shareholders decreased by £5.2m or 6.7% to £72.8m (2018: £78.0m) and earnings per share by 6.7% to 169.4p (2018: 181.6p). Profit attributable to shareholders for the year decreased by £30.2m, or 33.9%, to £58.8m (2018: £89.0m) and earnings per share fell by 34.0% to 136.8p (2018: 207.2p) with exceptional losses following the GMP equalisation in bus pensions and lower rail profit. The prior year had included an exceptional gain relating to a change in the reference inflation index for the purpose of annual increases to the majority of pensions payable by the Group's bus pension schemes.

Adjusted net debt (excluding restricted cash) at the year end was £270.3m (2018: £289.0m), as reconciled below the cashflow statement on page 135 in the 2019 Annual Report and Accounts. The lower net debt largely reflects improved free cash generation, lower capital expenditure reflecting the timing of contract renewal commitments in London, vehicle purchases in regional bus and working capital requirements in the rail business. The adjusted net debt (excluding restricted cash) to EBITDA ratio of 1.32x (2018: 1.30x) remains below our target range of 1.5x to 2.5x.

Group overview

Bus

Go-Ahead is a leading bus operator. Over two million passenger journeys are made on our services every day in the UK, Singapore and Ireland.

Bus overview

* Miles operated does not include operations in Singapore and Ireland.

Overall bus performance

Total bus revenue increased by 7.3%, or £68.0m, to £1,002.2m (2018: £934.2m) including the contribution of acquisitions and nine months of trading in Ireland. While operating profit was ahead of the prior year at £95.7m (2018: £91.4m), the operating profit margin decreased slightly by 0.3ppts to 9.5%. This reflected a good performance in London & International bus and a lower level of profit in the regional bus business.

Regional bus

Regional bus revenue was £433.0m (2018: £383.7m), up £49.3m, or 12.8%, including the contribution of acquisitions. Like for like revenue growth of 4.0% was broadly in line with our expectations reflecting our local yield management strategies. Growth in passenger journeys across all businesses delivered an increase in like for like passenger volumes of 3.3%. Reported growth in revenue and passenger journeys was 12.8% and 11.6% respectively following the acquisitions of Go North West in June 2019, East Yorkshire in June 2018 and Oxford City Sightseeing in December 2017.

Operating profit in the regional bus division fell £1.3m, or 2.8%, to £44.5m (2018: £45.8m), with operating profit margin down 1.6ppts to 10.3% (2018: 11.9%). The lower level of operating profit in regional bus compared to last year reflects passenger yields rising by less than the aggregate of general net cost inflation including higher engineering costs and additional depreciation resulting from our continued investment.

London & International bus

Results for the London & International bus division include our bus operations in London, Singapore and Ireland. Divisional revenue grew by 3.4%, to £569.2m in the year (2018: £550.5m).

Operating profit in the London & International bus division was £51.2m (2018: £45.6m), up £5.6m, or 12.3%, with operating profit margin slightly higher at 9.0% (2018: 8.3%). Quality Incentive Contract bonuses (QICs) in London rose to £18.3m (2018: £13.2m) as a result of improved performance against quality targets. This has been achieved through a further strengthening of our service control capabilities and TfL's approach to implementing more bus prioritisation measures and fewer roadworks on our routes. As anticipated, like for like mileage for the division decreased by 3.4% mainly due to the timing of contract renewals and TfL's route restructuring. We also benefited from some additional contract work contributing around £2.0m that is not expected to repeat in the following year. Our bus operations in Singapore continue to perform well, both operationally and financially. We also successfully began bus operations in Ireland during the year which have made a small positive contribution to the reported result.

Capital expenditure and depreciation

The average age of our buses is 7.3 years (2018: 6.5 years). In London, the purchase of 14 new buses (2018: 135 buses) reflects the timing of contract renewals. In regional bus, in line with our commitment to maintain a young and increasingly greener fleet, 109 new buses (2018: 173 buses) were bought.

Depreciation for the division was £65.1m (2018: £61.8m), reflecting the increased capital spend in recent years.

In 2020, we expect total capital expenditure for the bus division to be around £90m with a higher level in London due to the timing of known contract wins and renewals as well as continued investment in our regional bus services including improvements in our recent acquisitions in East Yorkshire and Manchester.

Fuel

In the year, the bus division required around 143 million litres of fuel, with a net cost of £103.2m.

Bus fuel hedging prices

We have continued our bus fuel hedging programme which uses fuel swaps to fix the price of our diesel fuel in advance. Our core policy is to be fully hedged for the next financial year before the start of that year, at which point we aim to have also fixed 50% of the following year and 25% of the year after that. This hedging profile is then maintained on a month by month basis.

The table below reflects the year end position; no significant purchases have been made following the year end.

At each period end, the fuel hedges are marked to market price.

Bus financial outlook

In regional bus, we expect market conditions to remain challenging. We will also face some external cost pressures, for example, on fuel. However, with our focus on gradual yield improvement and cost containment, we expect to mitigate those headwinds and deliver a similar operating result.

Within London & International bus, our London bus business has already secured all its expected revenue for the current year through successful contract bidding. While this remains a challenging and competitive market, new contract awards during 2019 are expected to result in an increase in mileage and revenues for 2020. We also have the opportunity to bid for around £20m of additional annual revenue in 2020, most of which will begin to be realised in the following year.

In Singapore, we remain focused on building on the improved operational and financial performance we have delivered to date.In Ireland, we look forward to introducing our second contractin late 2019 and will see a full year of operating the first contract.

Overall, we expect the London & International bus division to deliver an operating result in 2020 that is consistent with the level achieved in 2019.

Rail

Go-Ahead's rail operations carry more train journeys than any other operator in the UK, responsible for around 30% of all passenger journeys.

Rail performance

The rail division has delivered a financial result slightly ahead of the Board's expectations, but behind that of the prior year. Overall margins have remained at historically low levels, impacted in particular by GTR.

Rail overview

Revenue

Total revenue increased by 11.0%, or £277.6m, to £2,804.9m (2018: £2,527.3m), consisting of:

* Southern revenue support relates to the Southern franchise which ended in July 2015.

Premium, profit share and revenue share payments

Core premium, profit share and revenue share payments to the DfT are included in operating costs.

Operating profit

Operating profit in the rail division was down £19.1m at £25.4m (2018: £44.5m), with the operating profit margin decreasing to 0.9% (2018: 1.8%) as expected. The operating profit reduction was driven by the London Midland franchise ending in December 2017 and the impact of the GTR settlement with the DfT with a resulting passenger enhancement charge. These factors were partially offset by an improvement in Southeastern following continued strong passenger growth and operational performance.

Individual franchise performance

GTR

The business reported like for like growth in passenger journeys of 7.7% (2018: 2.1%) and in passenger revenue of 8.0% (2018: 7.7% rise).

Agreement was reached in December 2018 with the Department for Transport (DfT) regarding contractual matters. This agreement resolved the matters relating to the industry wide failures concerning the introduction of the May 2018 timetable, as well as bringing to a close, discussions around other outstanding contractual variations.

As part of the agreement, a plan for the remainder of the franchise term to September 2021 was agreed, aimed at building on recent performance improvements and delivering a better customer experience. As part of this agreement GTR provided for £15m of funding during the year for passenger enhancements and separately accounted for the fine from the Office of Rail and Road (ORR).

A profit-sharing mechanism with the DfT is now in place for the remainder of the franchise. As part of this mechanism, no profit was made in the year. The operating profit margin over the whole franchise term is expected to be between 0.75 and 1 per cent.

Southeastern

Southeastern recorded good trading performance and has delivered excellent operating performance in recent months, with a marked improvement in customer satisfaction and punctuality.

On a like for like basis, passenger revenue rose by 6.0% (2018: 3.8%) while passenger numbers increased by 3.7% (2018: 1.4%). The improvement was supported by a full year of complete service operation through London Bridge station from January 2018, following three years of partial closure.

Southeastern's strong financial performance enabled a contribution of £19.7m to be made to the DfT during the year through the contract's profit sharing mechanism included in the directly awarded contract that it has operated under since October 2014.

Bidding and international developments

Bidding and international development cost in the year were £16.0m (2018: £15.9m), primarily relating to bidding for Southeastern, bids in Germany and Nordic countries, and preparation for the start of secured rail contracts in Germany and Norway.

Capital expenditure and depreciation

Capital expenditure for the rail division was £22.6m (2018: £27.1m), predominantly relating to the building of a depot in Germany as part of the mobilisation of the first two contracts there. Depreciation was £14.2m (2018: £20.9m), reflecting the timing of capex which is being depreciated over the life of the franchises.

In 2020, capital expenditure for the rail division is expected to be around £20m, including mobilisation of and continued investment in our international rail operations.

Rail financial outlook

In August 2019, we were informed by the DfT of its decision to terminate the competition for the new South Eastern franchise Following the DfT's decision to extend the current Southeastern franchise term, we will operate the franchise until 1 April 2020. We are engaging with the DfT regarding the future of the operation beyond that date. Passenger journeys and revenue growth for Southeastern is expected to continue the improvement shown in the second half of 2019.

GTR is expected to return a modest operating profit margin for 2020 following the breakeven result reported in 2019. Over its franchise term, GTR is still expected to achieve an operating margin of between 0.75 and 1 per cent.

In Germany, following a four year mobilisation period, two of the five secured rail contracts have now started operating. In December 2019, additional services associated with these first two contracts will begin, along with the introduction of the third contract. In the same month we will also begin operating rail services in Norway.

Overall for the rail division, we expect lower operating profit for 2020 with increased profitability at GTR being more than offset by a reduction in Southeastern reflecting its new contractual arrangements and a part year of operation.

Financial review

Earnings per share

Excluding exceptional items, earnings were £72.8m, resulting in decrease of pre-exceptional earnings per share from 181.6p in 2018 to 169.4p. Earnings were £58.8m (2018: £89.0m), resulting in a decrease in earnings per share from 207.2p to 136.8p. The weighted average number of shares was 43.0 million and the number of shares in issue, net of treasury shares, was 43.1 million.

* Pre-exceptional items.

Dividend

The Board is proposing a total dividend for the year of 102.08p per share (2018: 102.08p), consistent with the prior year. This includes a proposed final payment of 71.91p per share (2018: 71.91p) payable on 22 November 2019 to shareholders registered at the close of business on 1 November 2019. Dividends of £43.8m (2018: £43.8m) paid in the year represent the payment of the prior year's final dividend of 71.91p per share (2018: 71.91p) and the interim dividend in respect of this year of 30.17p per share (2018: 30.17p). Dividends paid to non-controlling interests were £12.7m (2018: £13.9m), and dividend payout was 60% (2018: 56%) on a pre-exceptional earnings basis.

Summary cashflow

* Adjusted net debt is net cash less restricted cash.

Cashflow

Cash generated from operations before tax and excluding movements in restricted cash was £209.9m (2018: £232.8m). This decrease of £22.9m is largely due to reduction in EBITDA due to the London Midland franchise ending. Tax paid of £32.5m (2018: £28.7m) comprised payments on account in respect of the current and prior years' liabilities. Net interest paid of £9.5m (2018: £13.3m) was higher than the net charge for the period of £6.8m (2018: £14.2m) including the impact of non-cash interest on pensions, the unwinding of discounting on provisions and the payment of the interest accrued on the HMRC Capital Allowances settlement. Capital expenditure, net of sale proceeds, was £38.1m lower in the year at £81.1m (2018: £119.2m), predominantly due to lower investment in our London bus fleet from the prior year's elevated level, and timing of vehicle purchases in regional bus. Net Group capital investment is expected to be around £110m in 2020.

During the year, as part of a planned programme of monthly share purchases to satisfy future share awards, the Group purchased 56,482 ordinary shares for a total consideration of £1.0m (2018: 64,012 ordinary shares for a total consideration of £1.1m).

At the year end, significant medium-term finance was available through a £280m five year syndicated facility, and a £250m sterling bond. The syndicated facility had a maturity of July 2023 with two one year extension options. On 9 July 2019, one of the additional one year extensions was exercised extending the maturity of the facility to July 2024.

Capital expenditure

Expenditure on capital during the year can be summarised as:

Net cash

Net cash of £214.6m (2018: £149.9m) comprised debt arising from the £250m sterling bond, amounts drawn down against the £280m five year syndicate facility of £144.7m (2018: £136.0m), amounts drawn down against the Euro loan facilities of £15.4m (2018: £11.2m), and hire purchase and lease agreements of £6.1m (2018: £9.4m), offset by cash and short term deposits of £630.8m (2018: £556.5m) including £484.9m of restricted cash in rail (2018: £438.9m). There were no overdrafts in use at the year end (2018: £nil).

Our primary financial covenant under the syndicated facility is an adjusted net debt to EBITDA ratio of not more than 3.5x. Adjusted net debt (excluding restricted cash) to EBITDA of 1.32x (2018: 1.30x) remains below the target range of 1.5x to 2.5x.

Capital structure

Investment grade ratings from Moody's (Baa3, stable outlook) and Standard & Poor's (BBB-, stable outlook) were reconfirmed recently and remain unchanged.

Exceptional items

On 26 October 2018, the High Court ruled that Guaranteed Minimum Pensions (GMP) should be equalised between men and women. As a result, pension scheme trustees will be obliged to adjust benefit payments in order that benefits received by male and female members with equivalent age, service and earnings histories are equal. The judgement has implications for many defined benefit schemes, including those in which the Group participates.

We have worked with our actuarial advisors to understand the implications of the judgement and the £16.8m pre-tax exceptional, non-cash expense in the year reflects our best estimate of the effect on our reported pension liabilities.

The exceptional gain in the prior year of £25.1m relates to changes made by the Group and the Trustee of The Go-Ahead Group Pension Plan in relation to the reference inflation index for the purpose of annual increases to the majority of pensions payable by the bus pension schemes and to the carrying value of goodwill and associated tangible assets on its regional bus businesses.

Amortisation

The amortisation charge for the year was £4.8m (2018: £3.3m), which relates to the non-cash cost of amortising software costs, franchise mobilisation costs and customer contracts.

Net finance costs

Net finance costs for the year were lower than the prior year at £6.8m (2018: £14.2m) including finance costs of £11.9m (2018: £16.7m) less finance revenue of £5.1m (2018: £2.5m). Finance costs do not include any exceptional items (2018: £2.6m cost in respect of a HMRC enquiry). The average net interest rate for the period was 3.4% (2018: 4.1%).

Taxation

Net tax for the year was £21.9m (2018: £36.4m), equivalent to an effective rate of 22.6% (2018: 25.0%). A provision in the prior year in relation to a HMRC enquiry was shown as exceptional and was

settled during the current year. Excluding the impact of this one-off provision and the impact of exceptional items, the prior year tax rate would have been 21.0%. In the reporting period, the effective tax rate was higher due to the non-deductible items such as bid costs in Germany and other international areas.

The statutory rate in the UK will reduce to 17.0% in 2020. We expect our effective tax rate to be 2% to 3% above the UK statutory rate in future years.

Non-controlling interest

The non-controlling interest in the income statement of £16.3m (2018: £20.3m) arises from our 65% holding in Govia Limited, which owns 100% of our current UK rail operations and therefore represents 35% of the profit after taxation of these operations.

Pensions

Operating profit includes the net cost of the Group's defined benefit pension plans for the year of £35.3m (2018: £35.5m) consisting of bus costs of £2.0m (2018: £1.8m) and rail costs of £33.3m (2018: £33.7m). Group contributions to the schemes totalled £41.5m (2018: £40.3m).

An exceptional charge of £16.8m (2018: £35.2m gain) was recognised in the year as explained above.

Bus pensions

Under accounting valuations, the net surplus after taxation on the bus defined benefit schemes was £40.2m (2018: a surplus of £30.3m), consisting of pre-tax assets of £48.7m (2018: assets of £36.8m) less a deferred tax liability of £8.5m (2018: deferred tax liability of £6.5m). The pre-tax asset consisted of assets of £858.8m (2018: £829.3m) less estimated liabilities of £810.1m (2018: £792.5m). The percentage of assets held in higher risk, return seeking assets was 35.3% (2018: 48.5%).

Rail pensions

As the long term responsibility for the rail pension schemes rests with the DfT, the Group only recognises the share of surplus or deficit expected to be realised over the life of each franchise. As a result, our pre-tax liability continues to be £nil (2018: £nil).

IFRS 16

A new accounting standard has been introduced that will have a significant impact on the financial statements going forward. IFRS 16 'Leases' will affect the accounting for the Group's operating leases and will result in an increase in the number of leases being recognised on the balance sheet as the distinction between operating and finance leases is removed and operating leases will be recognised as right-of-use assets. Prior periods will not be retrospectively restated.

The new standard will come into effect for the Group for the accounting year ending 27 June 2020. On the date of implementation, right-of-use assets and lease liabilities of around £0.8bn were recognised. Based on the current lease portfolio, this is expected to be closer to £0.4bn at 27 June 2020, and the impact on EBITDA is expected to be an increase of around £350m and operating profit to be higher by less than £10m. Further details are provided in note 2 in the 2019 Annual Report and Accounts.

Principal risks and uncertainties

The principal risks described in the Group's Annual Report for the year ended 29 June 2019 (2019 Annual Report and Accounts) have been summarised below. Further information on these risks, including their potential impact and changes to the risks during the year, can be found within the 2019 Annual Report and Accounts on pages 51 to 55, available on our website.

External risks

1. Economic environment and society

Lower economic growth or reduction in economic activity, changing travel patterns.

Mitigating actions

• Continue to focus our operations in more resilient geographical areas

• Local management constantly assesses the needs of local markets and directs services and products accordingly

• Provide attractive services and products such as young people fares, smart ticketing and contactless technology

• Focus on driving volumes through innovative and targeted marketing

• Generate customer loyalty and establish travel habits through initiatives such as smart ticketing

• Proactive cost control and back-office synergies

• Make public transport easier to access and use

• Robust bid modelling considering differing economic scenarios, including the UK's exit from the European Union

2. Political and regulatory framework

Changes to the legal and regulatory framework, the implementation of the Bus Services Act 2017, and the impact of the UK leaving the EU.

Mitigating actions

• Maintain strong levels of punctuality and customer satisfaction

• Limit exposure to local authority funding, through largely commercial operations

• Active participation in key industry, trade and government steering and policy development groups, including the Williams Rail Review

• Collaboration and partnership working with local authorities

• Devise strategy for bus franchising

Strategic risks

3. Sustainability of rail profits or loss of franchise

Failure to retain Southeastern franchise on acceptable terms and deliver target profit range in GTR.

Mitigating actions

• Flexible and experienced management team which responds quickly and expertly to changing circumstances

• Shared risk through the Govia joint venture, which is 65% owned by Go-Ahead and 35% by Keolis

• Invest in performance improvements

• Work constructively with industry partners, such as Network Rail and the DfT, to deliver long term economic and infrastructure benefits

• Regular Board review of rail performance, and Board approval of overall rail bidding strategy

• Compliance with franchise conditions closely monitored

• Reduce head office costs

• Develop international rail profit stream

4. Inappropriate investment

Failure to deliver strategy or make appropriate investment decisions.

Mitigating actions

• Comprehensive strategic discussions with main Board and advisors

• Extensive valuation and due diligence, supported by external expertise

• Maintain strong financial discipline when assessing viability of opportunities

• Cautious approach to investment opportunities overseas and outside our core operating areas

• The Board has a clear stated risk appetite that governs the acceptable level of risk in pursuit of objectives

5. Competition

Competition from existing and new market participants, loss of business to other modes and threats from market disruptors.

Mitigating actions

• Disciplined and focused bidding

• Adapt to changing customer requirements and technological advancements

• Foster close relationships with stakeholders to ensure we are meeting requirements including service quality and price

• Work in partnership with local authorities and other operators

• Promote multi-modal travel, improving the overall door-to-door experience for passengers

• Remain at the forefront of promoting and introducing inter-operable ticketing schemes

• Focus on customer needs and expectations, including more channels for ticket purchase and journey planning

Operational risks

6. Catastrophic incident or severe infrastructure failure

An incident, such as a major accident, an act of terrorism, a pandemic, or a severe failure of rail infrastructure.

Mitigating actions

• Rigorous, high profile health and safety programme throughout the Group

• Promotion of safety culture and Go-Ahead Safety Conference held in December 2018

• Crisis management policy updated and rolled out across the operating companies

• Appropriate and regularly reviewed and tested contingency and disaster recovery plans

• Thorough and regular training of colleagues

• Work closely with our industry partners, such as rail infrastructure provider Network Rail and government agencies

• We have maintained high levels of safety performance, demonstrating our continuing efforts to minimise this risk

7. Large scale infrastructure projects

Large scale infrastructure projects on and around the networks on which we operate, such as the Thameslink Programme, HS2 and major roadworks.

Mitigating actions

• Work constructively with industry partners, such as Network Rail, to minimise the impact of any disruption on our passengers

• Strong engagement with stakeholders, including our customers, to enable effective communication, especially during structural change programmes and disruption to the service

• Good relationships with local authorities and industry bodies, such as the DfT

8. Employee relations, resource planning and talent management

Failure to effectively engage with our people and trade unions in managing costs and driving change. Failure to attract, retain and develop talent.

Mitigating actions

• Work to maintain good relationships with colleagues and trade unions

• Robust workforce planning with skill requirements identified

• Robust and regularly reviewed recruitment and retention policies, training schemes, resource planning and working practices

• Experienced approach to wage negotiations

• Proactive management of pension risks

• Employee engagement surveys across all businesses to identify and address issues

• Engaging all our people in the Group's vision, beliefs and attitudes

• Apprenticeship, graduate and leadership development programmes

• Widening the recruitment pool through initiatives aimed at attracting diverse talent, for example the launch of the Women in Bus network and active recruitment of female drivers

9. Information technology failure/interruption/security breach

Prolonged or major failure of the Group's IT systems, a significant cyber attack or data breach.

Mitigating actions

• Implementation of the Group-wide GDPR project, to ensure compliance

• Appointment of a Group Data Protection Officer with data protection officers now in place in all operating companies

• Robust processes and procedures in place to ensure compliance with the relevant laws and best practices

• Process standardisation and continued investment in best practice systems

• Design Authority Board in place for change control

• Clear and tested business continuity plans

• Achieved Cyber Essentials, a Government backed cyber security certification scheme, and undertaking external maturity assessment

• GTR and Southeastern successfully audited against the NIS framework

• Continued investment in and maintenance of IT systems across the Group

• Test scenarios conducted across the Group

• Adoption of a cyber security strategy and information security management system (ISMS) framework across the Group, with the publication of monthly KPIs measuring mitigating measures (laptop encryption, USB port lockdown, anti-virus protection, etc)

10. Mobilisation of international rail contracts

Failure to fully mobilise contracts within contractual timescales, especially driver recruitment and delivery of rolling stock.

Mitigating actions

• Experienced local teams

• Strong governance processes in place

• Building strong relationships with local authorities

• Compliance with strong local regulation, established Safety Management Systems and Group Safety Audits

Consolidated income statement

for the year ended 29 June 2019

Consolidated statement of comprehensive income

for the year ended 29 June 2019

Consolidated statement of changes in equity

for the year ended 29 June 2019

Consolidated balance sheet

as at 29 June 2019

Consolidated cashflow statement

for the year ended 29 June 2019

Cash balances of £484.9m (2018: £438.9m) were restricted at 29 June 2019; further details are shown in note 17.

Notes to the consolidated financial statements

1. Basis of preparation and directors' responsibility statement

Basis of preparation

The financial information set out herein does not constitute the Company's statutory accounts for the years ended 29 June 2019 or 30 June 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered in due course. The auditor's reports on the 2019 and 2018 accounts were unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The 2019 Annual Report has been authorised for issue and signed by the Board of directors at the time of this announcement.

Directors' responsibility statement

The responsibility statement has been prepared in connection with the preparation of the company's full annual report for the 52 week period ended 29 June 2019. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

1. the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

2. the Chairman's Statement, Group Chief Executive's Review, and the Finance Review will form part of the Strategic Report and will be incorporated into the directors' report. They include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole.

The announcement was approved by the Board of directors on 4 September 2019 and is signed on its behalf by:

David Brown, Group Chief Executive

Elodie Brian, Group Chief Financial Officer

2. Critical accounting judgements and key sources of estimation uncertainty

The preparation of the financial statements requires management to make judgements, estimates and assumptions. Although these judgements and estimates are based on management's best knowledge, actual results ultimately may differ from these estimates.

No areas of critical accounting judgements or key sources of estimation uncertainty have been identified in relation to Brexit.

The following are the critical judgements, apart from those involving estimations, that the directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the financial statements:

Exceptional operating items

In certain years the Group presents as exceptional operating items on the face of the income statement material items of revenue or expense which, because of the size or the nature and expected infrequency of the events giving rise to them, merit separate presentation to allow better understanding of financial performance. The determination of whether items merit treatment as exceptional in a particular year is therefore a matter of judgement.

During the year, a charge in relation to the impact of the Guaranteed Minimum Pensions (GMP) ruling on the Group defined benefit schemes has been classified as exceptional and further details are given in note 6. In the comparative year, a gain on the change in pension plan assumptions from RPI to CPI, certain goodwill and asset impairments and provisions in respect of an HMRC capital allowances taxation enquiry were classified as exceptional.

Accounting for the rail pension schemes

The UK train operating companies participate in the Railways Pension Scheme (RPS), a defined benefit pension scheme which covers the whole of the UK rail industry. In contrast to the pension schemes operated by most businesses the RPS is a shared cost scheme which means that costs are formally shared 60% employer 40% employee. The Group only recognises amounts in relation to its share of costs in the income statement. The RPS is partitioned into sections and the Group is responsible for the funding of these sections whilst it operates the relevant franchise. At the end of the franchise term, responsibility for the funding, and consequently any deficit or surplus existing at that date, is passed to the next franchisee. At each balance sheet date a franchise adjustment is recognised to the IAS 19 net pension asset or liability to reflect that portion expected to pass to the next franchisee.

The directors view this arrangement as synonymous to the circumstances described in paragraphs 92-94 of IAS19 Employee Benefits (Revised), with a third party taking on the obligation for future contributions. As there is no requirement to make contributions to fund the current deficit, then it is assumed that all of the current deficit will be funded by another party and hence none of the deficit is attributable to the current franchisee. In respect of the future service costs, there is currently no pension obligation in respect of those costs. When the costs are recognised in the income statement, the extent to which the committed contributions fall short determines the amount that is to be covered by contributions of another party in the future, which is recognised as an adjustment to service cost in the income statement. As a result, any portion of service cost not expected to be covered by contributions paid during the franchise but expected to transfer at the end of the franchise is treated as an adjustment to the income statement. Under circumstances where contributions are renegotiated, for example, following a statutory valuation, an adjustment will be recognised in the income statement, whilst changes in actuarial assumptions continue to be recognised through the statement of other comprehensive income.

The directors deem this to be the most appropriate interpretation of IAS19 to reflect the specific circumstances of the RPS where the franchise commitment is only to pay contributions during the period in which we run the franchise. An alternative approach would involve not limiting the measurement of the service cost through the recognition of an income statement franchise adjustment, but recognising all movements on the franchise adjustment as a movement in a reimbursement right in other comprehensive income. For the year ended 29 June 2019 the impact of this alternative treatment, on a post tax basis, would be an increase in costs of £59.5m (2018: £69.8m)to the income statement and a debit to other comprehensive income of £74.5m (2018: credit of £112.5m). Since the franchise contract only refers to the contribution requirements during the franchise term, and not any reimbursement rights, the directors consider that viewing the treatment as contribution sharing with the next franchisee is most appropriate.

Uninsured claims

The measurement of uninsured liabilities is based on an assessment of both the expected settlement of known claims and of the cost of claims not yet reported to the Group, as detailed in note 23. In order to assess the appropriate level of provisions the Group engages with its brokers and claims handlers to ensure external expertise is adequately factored into the provision for known claims.

Key sources of estimation uncertainty

The key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying value of assets and liabilities within the next financial year are in relation to:

Contract and franchise accounting

The commercial entities in the UK rail industry were created at the time of privatisation and the relationships between them are governed by a number of contracts between the major participants, the DfT, Network Rail and train operating companies. These contracts include detailed performance regimes which determine the allocation of financial responsibility relating to the attribution of delays. The processes for attribution, whilst well understood, require detailed assessment and can take significant time to resolve, particularly in unusual circumstances.

The Group makes provision for income and costs relating to performance regimes and contractual obligations relating to operating delays caused by Network Rail, or caused by our own operating companies. This process can be based primarily on previous experience of settling such claims, or, in certain circumstances, based on management's view of the most likely outcome of individual claims. The Group has significant internal expertise to assess and manage these aspects of the agreements and the issues relating to delay attribution to enable management to assess the most probable outcomes; nonetheless significant judgements are required, which can have material impacts on the financial statements.

Accordingly judgements in these and other areas are made on a continuing basis with regard to amounts due and the recoverable carrying value of related assets and liabilities arising from franchises and other contracts. Regular reviews are performed on the expected outcome of these arrangements, which require assessments and judgements relating to the expected level of revenues and costs.

As previously announced, an agreement was reached with the DfT during the year regarding contractual matters in relation to the GTR franchise. This agreement resolved matters relating to the industry-wide failures concerning the introduction of the May 2018 timetable, as well as bringing to a close the discussions around other outstanding contractual variations. As part of the agreement, a plan for the remainder of the franchise term to 2021 was agreed, aimed at building on recent performance improvement and improving customer journeys. GTR has provided £15m of funding this year for passenger enhancements and separately accounted for the impact of the fine from the Office of Rail and Road (ORR). The agreement reduces uncertainty around the future of the GTR franchise and its financial performance. A profit-sharing mechanism with the DfT has been introduced for the remainder of the franchise. The margin over the franchise term is now expected to be between 0.75 to 1 per cent (previously 0.75 to 1.5 per cent), with no profit expected in the current financial year.

Contract and franchise accounting specific to the rail business is disclosed in the segmental analysis in note 3.

Measurement of franchise commitments

The measurement of franchise commitments, comprising dilapidation provisions on rolling stock, depots and stations and also income claims from other rail franchise operators, is set out in note 23. Significant elements of the provisions required are subject to interpretation of franchise agreements and rolling stock agreements. The Group has significant internal expertise to assess and manage these aspects of the agreements and to enable management to assess the most probable outcomes. Where appropriate, and specifically in assessing dilapidation provisions, this process is supported by valuations from professional external advisors to support provision levels. If the estimations were to change by 10% the impact would be c£6.4m.

Retirement benefit obligations - bus schemes

The measurement of defined benefit pension obligations requires the estimation of future changes in salaries, inflation, longevity of current and deferred members and the selection of a suitable discount rate, as set out in note 27. The Group engages Willis Towers Watson, a global professional services company whose specialisms include actuarial advice, to support the process of establishing reasonable bases for all of these estimates, to ensure they are appropriate to the Group's particular circumstances. Management also benchmark these assumptions on a periodic basis with other professional advisors. Sensitivity analysis on the bus retirement defined benefit schemes are detailed in note 27.

3. Segmental analysis

The Group's businesses are managed on a divisional basis. Selected financial data is presented on this basis below.

For management purposes, the Group is organised into three reportable segments: regional bus, London & International bus and rail. Operating segments within those reportable divisions are combined on the basis of their long term characteristics and similar nature of their products and services, as follows:

The regional bus division comprises UK bus operations outside London.

The London & International bus division comprises bus operations in London under the control of Transport for London (TfL), rail replacement and other contracted services in London, bus operations in Singapore under the control of the Land Transport Authority (LTA) of Singapore and bus operations in Ireland under the control of the National Transport Authority (NTA) of Ireland. These are aggregated as a segment for internal management purposes given the similar contractual nature of the businesses.

The rail division comprises UK and overseas rail operations. The UK rail operation, through an intermediate holding company, Govia Limited, is 65% owned by Go-Ahead and 35% by Keolis and comprises two rail franchises: Southeastern and GTR. The division is aggregated for the purpose of segmental reporting under IFRS 8 as each operating company has similar objectives, to provide passenger rail services and achieve a modest profit margin through its franchise arrangements with the Department for Transport (DfT). Each company targets similar margins, has similar economic risks and is viewed and reacted to as one segment by the chief operating decision maker, considered to be the Group Chief Executive. The registered office of Keolis (UK) Limited is in England and Wales.

Overseas rail operations commenced on 9 June 2019 in Germany. A further three contracts in Germany and contracts in the Nordics are currently being mobilised. These operations are 100% owned by Go-Ahead. The international rail franchises are included with the UK rail operations for reporting purposes and will be considered in further detail during the next financial year.

The information reported to the Group Chief Executive in his capacity as chief operating decision maker does not include an analysis of assets and liabilities and accordingly IFRS 8 does not require this information to be presented. Segment performance is evaluated based on operating profit or loss, on a pre and post exceptional basis below.

Transfer prices between operating segments are on an arm's length basis similar to transactions with third parties.

The following tables present information regarding the Group's reportable segments for the year ended 29 June 2019 and the year ended 30 June 2018.

Year ended 29 June 2019

The exceptional operating items relate to central activities and therefore cannot be allocated between the operating segments.

At 29 June 2019, there were non-current assets included within the London & International bus segment of £12.1m (2018: £7.2m) relating to operations in Singapore and Ireland. Operations in Singapore generated a revenue of £59.6m (2018: £52.1m) during the year. Operations in Ireland commenced in September 2018 and were fully operational by the end of the year. The revenue generated during the period of operation was £16.5m.

Non-current assets included within rail of £37.7m (2018: £11.0m) relate to operations being mobilised in Germany and the Nordics. Operations in Germany commenced on 9 June 2019 and the revenue generated in the period to 29 June 2019 was £2.6m

We have two major customers which individually contribute more than 10% of Group revenue, one of which contributed £1,643.6m (2018: £1,278.5m), and the other contributed £486.2m (2018: £491.8m).

Year ended 30 June 2018

4. Operating costs

Detailed below are the key amounts recognised in arriving at our operating costs. For accounting policies see 'Profit and revenue sharing/support agreements', 'Property, plant and equipment', 'Government grants' and 'Franchise set-up costs' in the notes to the 2019 Annual Report and Accounts.

Further analysis of the above operating costs is as follows:

1. The total lease and sublease payments recognised as an expense (excluding rail access charges) are made up of minimum lease payments of £727.3m (2018: £696.4m), net of sublease payments of £12.4m (2018: £13.6m) relating to other rail leases.

2. The total lease and sublease payments recognised as an expense (including rail access charges) are made up of minimum lease payments of £1,259.6m (2018: £1,178.8m), net of sublease payments of £12.4m (2018: £13.6m) relating to other rail leases.

3. Other non-audit services of £0.1m (2018: £0.1m) are detailed in page 89 of the 2019 Annual Report and Accounts.

Government grant income of £2.7m (2018: £4.7m) is mainly attributable to the release of grants received to support the mobilisation of international business operations and service improvements including smart ticketing, deliverable over a period of up to five years.

5. Employee costs

This note shows total employment costs, inclusive of share based payment charges. We have a number of share plans used to award shares to directors and employees. A charge is recognised over the vesting period in the consolidated income statement, based on the fair value of the award at the date of grant. The note also shows the average number of people employed by the Group during the year. For accounting policies see 'Share based payment transactions' in the notes to the 2019 Annual Report and Accounts.

The average monthly number of employees during the year, including directors, was:

The information required by Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 is provided in the directors' remuneration report.

Sharesave scheme

Shareholder approval was obtained at the 2013 AGM for Savings-Related Share Option Scheme, known as The Go-Ahead Group plc 2013 Savings-Related Share Option Scheme (the Sharesave scheme) for employees of the Group and its operating companies.

The Sharesave scheme is open to all full time and part time employees (including executive directors) who have completed at least six months of continuous service with a Go-Ahead Group company at the date they are invited to participate in a scheme launch. To take part, qualifying employees have to enter into a savings contract for a period of three years under which they agree to save a monthly amount, from a minimum of £5 to a maximum (not exceeding £500) specified by the Group at the time of invitation. For the February 2016 launch (Sharesave 2016), the maximum monthly savings limit set by the Group was £50. Participants were given the choice of taking their money back, or to purchase Go-Ahead Group Shares at a 20% discount of the market price set at the date of invitation. Sharesave 2016 participants have six months from the maturity date to exercise their options. Sharesave 2016 matured on 1 May 2019.

The fair value of equity-settled share options granted is estimated as at the date of grant using the Black-Scholes model, taking into account the terms and conditions upon which the options were granted. The key assumptions input into the model are future share price volatility, future dividend yield, future risk-free interest rate, forfeiture rate and option life.

There are savings-related options at 29 June 2019 as follows:

The expense recognised for the scheme during the year to 29 June 2019 was £nil (2018: £0.6m).

The following table illustrates the number and weighted average exercise price (WAEP) of share options for the Sharesave scheme:

The weighted average exercise price at the date of exercise for the options exercised in the period was £19.11 (2018: £17.36).

At the year end 174,606 (2018: no options) were exercisable and the weighted average exercise price of the options was £19.11 (2018: £nil).

The options outstanding at the end of the year have a weighted average remaining contracted life of nil years (2018: 0.83 years).

Long Term Incentive Plans

The executive directors participate in The Go-Ahead Group Long Term Incentive Plan 2015 (LTIP). The LTIP provides for executive directors to be awarded nil cost shares in the Group conditional on specified performance conditions being met over a period of three years. Refer to the directors' remuneration report for further details of the LTIP.

The expense recognised for the LTIP during the year to 29 June 2019 was £0.4m (2018: £0.8m).

The fair value of LTIP options granted is estimated as at the date of grant using a Monte Carlo model, taking into account the terms and conditions upon which the options were granted. The inputs to the model used for the options granted in the year to 29 June 2019 and 30 June 2018 were:

The following table shows the number of share options for the LTIP:

The LTIP award granted to the Group Chief Executive in November 2016 will lapse in full from November 2019 as none of the performance measures were achieved following the three-year performance period ending 29 June 2019. The weighted average share price of the options at the year end was £19.72 (2018: £15.88).

The weighted average fair value of options granted during the year was £15.74 (2018: £12.92). The weighted average remaining contractual life of the options was 1.10 years (2018: 1.25 years). The weighted average exercise price at the date of exercise for the options exercised in the period was £nil (2018: £16.23).

The estimated amounts due to the relevant tax authorities in relation to the above transactions are detailed in the Directors' remuneration report in the accounts.

Deferred Share Bonus Plan

The Deferred Share Bonus Plan (DSBP) provides for executive directors and certain other senior employees to be awarded shares in the Group conditional on the achievement of financial and strategic targets. The shares are deferred over a three-year period. Refer to the directors' remuneration report for further details of the DSBP. The DSBP options are not subject to any market based performance conditions. Therefore the fair value of the options is equal to the share price at the date of grant.

The expense recognised for the DSBP during the year to 29 June 2019 was £0.6m (2018: £0.8m).

The following table shows the number of share options for the DSBP:

The weighted average fair value of options granted during the year was £15.74 (2018: £16.30). At the year end, 21,956 options related to DSBP awards, which vested before the year end, which have not yet been exercised by participants. Of these 21,956 options, 942 options related to the award granted in November 2013, 4,941 related to the award granted in November 2014 and 16,073 related to the award granted in November 2015. 34,254 options, relating to the DSBP award granted in November 2016, will be eligible to vest from November 2019 following the end of a three-year deferral period. The weighted average share price of the options at the year end was £19.72 (2018: £15.88).

The weighted average remaining contractual life of the options was 1.02 years (2018: 0.67 years). The weighted average exercise price at the date of exercise for the options exercised in the period was £17.72 (2018: £16.01).

Share incentive plans

The Group operates a share incentive plan, known as The Go-Ahead Group plc Share Incentive Plan (SIP). The SIP is open to all Group employees (including executive directors) who have completed at least six months' continuous service with a Group company at the date they are invited to participate in the plan.

The SIP permits the Group to make four different types of awards to employees (free shares, partnership shares, matching shares and dividend shares), although the Group has, so far, made awards of partnership shares only. Under these awards, the Group invites qualifying employees to apply between £10 and £150 per month in acquiring shares in the Group at the prevailing market price. Under the terms of the scheme, certain tax advantages are available to the Group and employees.

6. Exceptional items

This note identifies items of an exceptional nature that have a significant impact on the results of the Group in the period. For accounting policies see 'Exceptional items' in the notes to the 2019 Annual Report and Accounts.

Year ended 29 June 2019

Total exceptional operating items in the year comprised a charge of £16.8m to the income statement.

On 26 October 2018, the High Court ruled that Guaranteed Minimum Pensions (GMP) should be equalised between men and women. As a result, pension scheme trustees will be obliged to adjust benefit payments in order that benefits received by male and female members with equivalent age, service and earnings histories are equal. The judgement has implications for many defined benefits schemes, including those in which the Go-Ahead Group participates.

We have worked with our actuarial advisors to understand the implications of the judgement and the £16.8m pre-tax exceptional expense in the year (2018: £nil) reflects our best estimate of the effect on our reported pension liabilities.

Year ended 30 June 2018

Total exceptional operating items in the year were £25.1m.

During the year ended 30 June 2018, The Go-Ahead Group Pension Plan (the Go-Ahead Plan) changed the reference inflation index used to estimate the annual increases to the majority of pensions payable. From 1 April 2018, the Consumer Price Index (CPI) has been used to increase pensions in payment rather than the Retail Price Index (RPI). The change reduced the financial risks of the Go-Ahead Plan and enhances the long term sustainability of the scheme, providing an improvement in the security of Plan members' benefits. A one-off gain of £35.2m was recognised in respect of this change.

During the year ended 30 June 2018, goodwill of £8.4m was impaired relating to Konectbus, Thames Travel and Carousel bus operations, following a period of underperformance in all three individual cash-generating units. The carrying value of the goodwill in Konectbus, Thames Travel and Carousel is now £nil. Assets with a carrying value of £2.4m were also deemed to be impaired within the East Anglian and Oxford bus operations.

During the year, negative goodwill of £0.7m arose on the business combinations in the year.

The tax impact of the above exceptional items plus accrued amounts relating to an HMRC taxation enquiry was £11.5m. In addition, an accrued amount of £2.6m was provided for within finance costs in relation to the interest payable on the enquiry. The enquiry was closed and fully settled during the year ended 29 June 2019.

7. Finance revenue and costs

Finance revenue mainly comprises interest received from bank deposits. Finance costs mainly arise from interest due on the bond and bank loans. For accounting policies see 'Finance revenue' and 'Interest-bearings loans and borrowings' in the notes to the 2019 Annual Report and Accounts.

In the prior year, other interest payable included an exceptional accrued interest charge of £2.6m in relation to an HMRC taxation enquiry. The enquiry was closed and fully settled in the current year.

8. Taxation

This note explains how our Group tax charge arises. The deferred tax section of the note sets out the deferred tax assets and liabilities held across the Group. For accounting policies see 'Taxation' in the notes to the 2019 Annual Report and Accounts.

The Group taxation policy can be found at www.go-ahead.com.

a. Tax recognised in the income statement and in other comprehensive income

Tax relating to items charged or credited in the income statement:

The tax reported in the consolidated income statement includes exceptional amounts arising on the GMP equalisation charge. In the prior year it included exceptional amounts arising on the change in RPI/CPI assumptions on The Go-Ahead Group Pension Plan (the Go-Ahead Plan) and amounts in relation to the HMRC enquiry. See note 6 for further details.

Tax relating to items charged or credited outside of the income statement:

b. Reconciliation

A reconciliation of income tax applicable to accounting profit before taxation, at the statutory tax rate, to tax at the Group's effective tax rate for the years ended 29 June 2019 and 30 June 2018 is as follows:

The Group had subsidiary companies in Germany, Ireland, the Nordics and Singapore during the year. The tax residencies of these companies are the same as the countries of incorporation, which are disclosed in note 28.

Singapore and Ireland profits are generated through the provision of bus passenger services and have been taxed at the appropriate local taxation rates of 17.0% and 12.5% respectively and have been included in the total statutory tax charge. Germany commenced trading on 9 June 2019 and its trading result for the financial year is immaterial. The Nordics are currently in mobilisation and so have not made a profit in the financial year.

The Group has not recognised a deferred tax asset of £5.1m (2018: £1.1m) based on a taxation rate of 30.0% (2018: 30.0%) in respect of losses incurred in Germany carried forward.

c. Reconciliation of current tax liabilities

A reconciliation of the current tax liability is provided below:

d. Deferred tax

The deferred tax included in the balance sheet is as follows:

The deferred tax asset is recognised as it is considered probable that there will be future taxable profits available.

The deferred tax liabilities and assets included in the balance sheet have been calculated using applicable enacted rates.

The movements in deferred tax in the income statement and other comprehensive income for the years ending 29 June 2019 and 30 June 2018 are as follows:

Year ended 29 June 2019

Year ended 30 June 2018

The deferred tax included in the Group income statement is as follows:

e. Factors affecting tax charges

The standard rate of UK corporation tax reduced from 20% to 19% from 1 April 2017. A rate of 19% therefore applies to the current tax charge arising during the year ended 29 June 2019.

Further reductions in the rate to 17% from 1 April 2020 were substantively enacted prior to the balance sheet date and have been applied where applicable to the Group's deferred tax balance at the balance sheet date.

The deferred tax relating to origination and reversal of temporary differences includes a movement of £2.8m which relates to the exceptional charge arising on the impact of the GMP equalisation ruling on the Group's bus pension schemes. The prior year included movements in relation to an exceptional gain arising on the change in RPI/CPI assumptions on The Go-Ahead Group Pension Plan and adjustments in respect of deferred tax of previous years in relation to an HMRC taxation enquiry.

In addition, in the prior year, the current tax charge reported in the consolidated income statement of £37.2m included amounts provided for in relation to this HMRC enquiry. The HMRC enquiry was closed and fully settled during the current year.

9. Earnings per share

Basic earnings per share is the amount of profit generated for the financial year attributable to equity shareholders divided by the weighted average number of shares in issue during the year.

Basic and diluted earnings per share