UK Bus (regional operations)

Financial performance

The financial performance of the UK Bus (regional operations) Division for the year ended 27 April 2019 is summarised below:

Our UK Bus (regional operations) Division has performed well during the year, reflecting a range of management initiatives to deliver sustainable growth and enhance the experience for our customers. The Division has also benefitted from the favourable summer 2018 weather throughout the country and rail replacement work undertaken in relation to resignalling work at Derby railway station.

Like-for-like vehicle miles operated were 0.4% lower than in the previous year. Revenue per vehicle mile grew 3.8% and revenue per journey increased 3.4%. Around 10% of sales in the year to fare paying customers were through digital channels. Like-for-like revenue was built up as follows:

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

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

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

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

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

The movement in operating margin was built up as follows:

The main changes in the operating margin shown above are:

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

·      The increase in insurance and claims costs reflects the non-recurrence of a credit arising in the prior year from a reassessment of the insurance provision held.  We continue to make positive progress on underlying claims costs.

·      Fuel costs reduced, reflecting market fuel prices and our fuel hedging programme.

·      Property gains were lower in the year, reflecting relatively few disposals compared to last year

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

Investment and innovation

The Group is continuing to invest in the latest technology to support our objective of providing greener and smarter travel for customers and communities. Stagecoach is already the UK's biggest investor in hybrid-electric bus technology and has invested more than £1bn in new greener buses over the past decade. We have recently announced an investment of over £80m in more than 350 new buses and coaches for our UK bus and coach operations in 2019/20.

Stagecoach will deliver one of Europe's largest single investments in electric buses.  The investment for Greater Manchester is after winning support funding from the Government under the Ultra-Low Emission Bus Scheme ("ULEBS"), which is aimed at cutting emissions and ensuring cleaner and greener journeys. A combined investment of £16.5m will deliver a new 32-vehicle fleet of zero emissions buses and associated infrastructure over the next two years. The first of the planned double-decker e-buses are expected to go into service later in 2019. In addition, a £6.5m project will deliver a new 16-vehicle fleet of zero emission buses and associated infrastructure over the next two years in Caerphilly in South Wales. The project, which has also won ULEBS funding, is part of a wider ambitious plan to create an all-electric passenger transport network for Caerphilly.

Earlier this year, we launched depot-based trials of the UK's first full-sized autonomous bus in Manchester in partnership with bus manufacturer, Alexander Dennis, and technology company, Fusion Processing. The trial includes the bus being used in autonomous mode for parking and moving into the bus wash. The software being used in the pilot vehicle also forms the basis for a further significant autonomous vehicle trial due to get underway in 2020 when a fleet of five Stagecoach autonomous buses will carry passengers between Fife and Edinburgh, across the Forth Road Bridge. The project - whose partners include Transport Scotland, Alexander Dennis, Fusion Processing, Edinburgh Napier University and University of West of England - is supported by more than £4m in funding from the UK Government's Innovate UK fund.

In addition to steps by Stagecoach to invest in new cleaner vehicles, several local authorities in whose area we operate services - including Manchester, Liverpool, Sheffield, Newcastle and Oxford - have been successful in winning support from the Government's Clean Bus Technology Fund. The fund supports projects to upgrade existing buses to low emissions standards.

Our investment in GreenRoad telematics technology is also continuing to improve the safety, sustainability and efficiency of our bus operations, as well as helping reduce insurance claims. Nearly 4,500 Stagecoach drivers have been awarded elite status under the GreenRoad driving assessment programme, which covers professional drivers in Europe, the Middle East, America, Australia and New Zealand. It is the fifth year in a row that Stagecoach has achieved the most drivers with elite status.

Customer satisfaction and commercial developments

We are pleased that we are continuing to deliver high levels of passenger satisfaction across our regional bus operations in the UK. The latest independent research by consumer watchdog, Transport Focus, found that 90% of Stagecoach bus customers in England and 92% in Scotland were satisfied with their journey. Satisfaction has improved across a number of areas, including journey time, the friendliness of the driver, and the availability of seating. Our relentless focus on customer service also contributed to Stagecoach and its employees winning 13 accolades at the 2018 UK Bus Awards, more than any other group.  And earlier this month, our East Scotland bus business was named Public Transport Operator of the Year at the 2019 Scottish Transport Awards.

For many years, independent research has confirmed Stagecoach as the best value major bus operator in Britain. We are continuing to develop our ticketing offer, which already includes discounted travel to help young people, students and jobseekers. As well as taking steps to simplify our commercial ticket range and increase the proportion of our revenues secured through digital channels, we are exploring potential new income streams, including B2B/corporate sales opportunities, and partnerships with airports, festivals and events around the UK. We are also investigating the future growth potential for inter-urban bus services, as well as demand-responsive transport.

At the end of 2018, we completed the biggest deployment of bus contactless ticketing technology in the UK following a multi-million pound investment for customers. Stagecoach now offers contactless payments on every single one of its buses across the UK.

We are working with a range of technology and other partners on opportunities to develop the future of mobility, and we have joined the UK's Intelligent Mobility Accelerator as part of our drive to spark further innovation within the transport industry. Our objective is to provide customers with travel solutions which fit their working and leisure time lifestyles. This includes leveraging our own multi-modal expertise to offer integrated door-to-door journeys or by working with other partners to deliver this through technology platforms. We are working with Enterprise Holdings, for example, on a Mobility as a Service pilot in Greater Manchester and will be studying the results and their wider potential applicability closely.

Partnership initiatives and policy development

We have worked with other bus operators in Greater Manchester to develop a ground-breaking partnership blueprint to revolutionise the region's bus network and deliver on its world-class ambitions. These plans would deliver better connectivity for local communities, ease the cost of travel and tackle the region's growing road congestion and air pollution crisis. This collaborative approach, which is consistent with the new powers in the Bus Services Act, would both improve bus services for customers and support politicians' aspirations for economic growth. We are also working with other bus operators to develop proposals to build on the achievements of partnership in South Yorkshire and support the vision of the Mayor for the Sheffield city region around improved connectivity. 

The Sheffield Bus Partnership has delivered passenger growth trends which have outperformed the industry average, along with rising customer satisfaction. This has followed joint investment in bus fleets and infrastructure, integrated smart ticketing, lower ticket prices, a coordinated and stable bus network, and joint marketing. A similar partnership approach in Merseyside is also continuing to deliver positive results. Overall, there has been a 16% increase in fare-paying passenger journeys in five years including strong growth among young people. Data from Transport Focus shows satisfaction of 91% among fare-paying customers in Merseyside, the joint highest of any metropolitan area in England.

As part of our strategy to shape the future of travel, we have joined forces with car hire company, Enterprise Holdings, and Bosch UK to establish the Urban Mobility Partnership ("UMP"). It is focused on engaging a range of stakeholders to develop practical multi-modal policy solutions. We believe mass transit will be central to the future of urban mobility. With finite road space and even with the development of autonomous and electric technology, tough decisions will be needed to improve journeys in our biggest cities and towns. We are pleased that the concept of "mobility credits", championed by UMP, is included in the potential approaches which could win support from the Department for Transport's Future of Mobility Fund. The "mobility credits" proposal would allow people to move away from inefficient car ownership to flexible use of public transport, car and bike hire.

Outlook

We anticipate our vehicle mileage in 2019/20 to be broadly in line with 2018/19, with a continuation in modest revenue growth in the short-term. Notwithstanding the forecast increase in our fuel costs for the year ahead, our costs are generally well controlled.

We have not significantly changed our expectation of the Division's operating profit for the year ending 2 May 2020 since our last update on trading.

UK Bus (London)

Financial performance

The financial performance of the UK Bus (London) Division for the year ended 27 April 2019 is summarised below:

Revenue in the year was similar to the previous year, reflecting the strong competition in the markets we operate in, contributing to the lower operating profit. 

Competition for new contracts with Transport for London remains strong in the areas of London in which we operate.  Some of our bids to retain certain of the services we operate were unsuccessful during the year and, while we successfully won contracts to run services we did not already operate, those were insufficient to fully offset the work we lost.  As a result, we expect the Division's revenue and operating profit to reduce in the year ending 2 May 2020.

The movement in operating margin was built up as follows:

The main changes in the operating margin shown above are:

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

·      Staff costs, including pension costs, rose by more than inflation, whereas revenue was broadly flat, reflecting the impact of contracts lost in the prior year.

·      The rise in lease costs reflects more vehicles held on operating lease and the recognition of an onerous lease provision on a property occupied by the business.  This is partly offset by reduced depreciation with fewer vehicles owned outright.

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

·      Other costs have increased, including rent and rates, where costs do not vary with vehicle miles

Outlook

Bus use across London has now fallen for four consecutive years and Transport for London is taking steps to address a £700m operating deficit in the franchised bus network. In addition, road congestion is increasing in central London, partly as a result of the reallocation of road space to cycling. Transport for London's business plan envisages further significant cuts to bus services in the short-term. In 2019/20, around 14% (by peak vehicle requirement) of our existing London bus services are due for re-tender.

As a result of these factors, we have undertaken a detailed review of our bid models, contract pricing and cost efficiency to identify opportunities to improve our performance on tenders for Transport for London contracts. We will continue to tender at contract prices designed to deliver financial returns that reflect the capital investment required.

With that approach, we continue to see positive market opportunities to improve the revenue and profitability of the Division over the longer term. Significant housing developments are planned in and around London in the coming years and a considerable proportion of them will be in or adjacent to areas in which our UK Bus (London) Division currently operates. We expect new housing developments to result in new bus services and Transport for London is examining the potential for bus transit schemes. We continue to monitor our depot capacity balancing such future growth potential with possible opportunities to release capital.

UK Rail

Financial performance

The financial performance of the UK Rail Division for the year ended 27 April 2019 is summarised below:

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

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

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

The operating profit for the year reflects strong profitability at East Midlands Trains, in addition to continued progress in achieving favourable outcomes from concluding industry charges and contractual matters associated with the expired South West Trains franchise.

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

Rail contract update and Williams review

We were surprised and disappointed to be informed by the Department for Transport in April 2019 that three rail franchise bids in which the Group was involved with had been disqualified for being non-compliant, principally in respect of pensions risk. We refused to accept all of the substantial pension risks that the Department for Transport asked operators to bear as part of these bids. We believe the rail system should be about appointing the best operator for customers and tax payers, not about passing unquantifiable, unmanageable and inappropriate risk to train companies or taking decisions which create uncertainty for rail workers over their pensions. We are challenging the Government's disqualification decisions and seeking to have these overturned. Our objective is to encourage a more sensible risk profile for rail contracts and restore confidence in the procurement process. Keith Williams, who is leading the independent review of the rail system, has already made clear that the current franchising model is not fit for purpose.

East Midlands Trains

Strong operational performance and high levels of customer satisfaction continue to underpin our success at East Midlands Trains, which has maintained its position as the most punctual long distance UK rail operator for around a decade. Latest independent research from Transport Focus found that 84% of customers were satisfied with their journeys, higher than the average for the long-distance sector. This has been achieved during a period following the introduction of a major new timetable in May 2018 in support of the industry's wider Thameslink programme and the extensive resignalling work at Derby railway station. East Midlands Trains worked closely with Network Rail and other partners on the delivery of these projects.

In February 2019, Stagecoach agreed a new Direct Award contract with the Department for Transport to continue to operate the East Midlands rail network until 18 August 2019. Stagecoach has operated the East Midlands Trains franchise successfully since 2007, and it has delivered industry-leading levels of performance during that time.

In the final months of our current East Midlands franchise, we are continuing to work hard to deliver a safe, high quality and professional service to our customers, meet our obligations and ensure a smooth transition to the new operator. We are most grateful to all our employees and partners who have been involved in delivering our transformation of the East Midlands rail network over the past 12 years, as well as those who contributed to our strong, deliverable bid for the new franchise. We know they share our disappointment in the result.

Sheffield Supertram

Sheffield Supertram has achieved the joint highest customer satisfaction rating in the latest Transport Focus tram passenger survey. It found that 97% of customers were satisfied with the service, up from 95% in the previous year.

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

Outlook

Our UK Rail operating profit for 2019/20 is expected to be minimal, reflecting the end of the East Midlands Trains franchise in August 2019.

Over more than 20 years, we have delivered industry-leading performance, record passenger growth, excellent industrial relations, and the highest levels of customer satisfaction in the sector. We will continue to focus on delivering high quality services for our customers at our existing rail businesses. However, we have no intention to bid for new UK rail franchises on the current risk profile offered by the Department for Transport.

North America

Financial performance

The financial performance of the North America Division for the year ended 27 April 2019 is summarised below:

As previously reported, we have now successfully completed the disposal of the North America Division to the private equity firm, Variant Equity Advisors, LLC.

The 2019 figures shown above are for the period from 29 April 2018 until the disposal of the business on 16 April 2019.

The disposal represented an opportunity to realise an attractive valuation for the business whilst refocusing Stagecoach's portfolio on the UK. The cash proceeds were used to reduce consolidated net debt. The management of the North America Division have remained with that business following the disposal.

Virgin Rail Group

Financial performance

The financial performance of the Group's Virgin Rail Group joint venture for the year ended 27 April 2019 is summarised below:

Virgin Rail Group's West Coast rail franchise is continuing to deliver strong growth and profitability. In the last financial year, there were around 40m journeys, nearly triple the 14m in 1997 when Virgin took over the West Coast route. While, as expected, the level of profitability has fallen year-on-year as a result of the business moving onto new contractual terms, the operating margin remains good.

This success has followed more than two decades of partnership between the private and public sector on the routes to deliver industry-leading innovation and investment. As well as modernising Victorian infrastructure, improvements have included new tilting train fleets, successfully introducing one of the biggest timetable changes since privatisation, and transforming the offer to customers.

Recent research by the Campaign for Better Transport found that these improvements have achieved not just better journeys and increased passenger numbers, but also regional and local economic growth, less congested roads and lower carbon emissions from transport. Between 2006 and 2018, Virgin Trains journeys grew by 105%, compared with growth of 59% across all train operators and 62% in the long-distance sector.

During the year to 27 April 2019, Virgin Rail Group became the first train operator to introduce digital season tickets for use on mobile devices, as well as offering a print at home facility. It has also led the rail industry in permanently removing all peak-hour restrictions on its trains that travel on Friday afternoons from London Euston station. The move helps customers save money and eases overcrowding on services to destinations such as Birmingham, Manchester and Liverpool. Virgin Trains is the first travel company in the world to sell tickets through the Amazon Alexa platform. Customers who require travel assistance can also now book JourneyCare via Alexa-enabled devices, including the Amazon Echo. In addition, Virgin Trains became the first rail operator to adopt the JAM card scheme outside of Northern Ireland.  The card is designed to support anyone who has a communication barrier to travel or use other services by discreetly letting the member of staff know that they require "just a minute".

The current West Coast franchise is expected to run until November 2019, although the contractual terms allow for it to run through to March 2020.

Pre-exceptional EBITDA, depreciation and intangible asset amortisation

Earnings before interest, taxation, depreciation, intangible asset amortisation and exceptional items (pre-exceptional EBITDA) amounted to £327.0m (2018: £334.4m). Pre-exceptional EBITDA can be reconciled to the consolidated financial statements as follows:

Intangible asset amortisation reduced from £12.7m to £9.6m, reflecting the end of our Virgin Trains East Coast rail franchise in June 2018.

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

Exceptional items

The following exceptional items were recognised in the year ended 27 April 2019:

·      In the half-year ended 27 October 2018, a non-cash, exceptional pre-tax expense of £85.4m was recorded as an impairment of North America goodwill and when retranslated at the average rate for year is reported as an impairment loss of £86.2m. Subsequently, a net loss of £7.4m has been recognised, representing the net effect of the loss on disposal of the Division and the depreciation "saving" arising from this ceasing from 20 December 2018, being the date the Division was classified as held for sale and held at the lower of the carrying amount and fair value less costs to sell.

·      On 18 October 2012, the Group issued US$150m of 4.36% Notes as a private placement.  The Notes were due to be redeemed at their principal amount on 18 October 2022.    The cash proceeds from the sale of the North America business were applied towards the early repayment of the Notes.  Consistent with the terms of the Notes, in repaying the Notes earlier than their scheduled redemption date, the Group paid a "make whole" premium of US$7.9m (£6.1m) in excess of the US$150m principal amount.  That "make whole" premium has been reported as an exceptional item in the year ended 27 April 2019.

·     
A pre-tax exceptional expense of £25.3m has been recognised as a past service cost in respect of the equalisation of guaranteed minimum pension ("GMP") benefits. On 26 October 2018, the High Court handed down a judgement involving Lloyds Banking Group defined benefit pension schemes. The judgement concluded that the schemes should equalise pension benefits for men and women in relation to GMP benefits. The judgement has implications for many defined benefit schemes, including those in which the Stagecoach Group participates. We have worked with our actuarial advisors to understand the implications of the judgement for the schemes in which the Group participates and the £25.3m pre-tax exceptional expense reflects our best estimate of the effect on our reported pension liabilities.

·      The Group reported pre-tax losses in previous years in relation to its subsidiary, East Coast Main Line Company Limited ("ECML") and the franchised rail services that ECML operated until June 2018.  Since then, we have made progress with unwinding ECML's affairs, settling its liabilities and realising its assets.  As part of that process, we have progressed the company's tax affairs and in the consolidated financial statements for the year ended 27 April 2019, we have recognised a tax credit of £17.1m.

The net effect of exceptional items from continuing and discontinued operations was a pre-tax loss of £125.0m (2018: £49.5m).

Net finance costs

Net finance costs from continuing operations, excluding exceptional items, for the year ended 27 April 2019 were £28.4m (2018 restated: £31.4m) and can be further analysed as follows:

The decrease in net finance costs is principally due to lower interest expense on bank loans, trade finance and defined benefit pension schemes from continuing operations.  The decrease in respect of pensions arises from changes in market-driven assumptions used to determine pension amounts.

Taxation

Our share of profit from joint ventures is reported after tax in arriving at the profit before tax from continuing operations in the consolidated income statement. To better understand the Group's effective tax rate, we show below the Group's tax charge from continuing operations including our share of joint ventures' tax relative to the Group's profit before tax from continuing operations excluding joint ventures' tax. On that basis, the effective tax rate for the year ended 27 April 2019, excluding exceptional items and non-software intangible asset amortisation, was 20.0% (2018: 15.7%).

The tax charge on profit from continuing operations can be analysed as follows:

The effective tax rate on profit from continuing operations, excluding exceptional items and non-software intangible asset amortisation, of 20.0% is marginally higher than the 19.0% rate of UK corporation tax for the year. Assuming the composition of the Group remains broadly unchanged and that there are no significant changes to expected corporate tax rates or laws in the UK, we expect the Group's future effective tax rate (excluding exceptional items) to be between 17% and 20%.

The cash tax paid in the year of £17.8m (2018: £16.3m) compares to the tax credit for continuing and discontinued Group companies of £0.1m (2018: charge of £31.5m). The largest difference relates to the £22.5m tax credit where not all of the related effects on cash tax fall in the year ended 27 April 2019.

The areas where the Group sees greatest uncertainty around the amount of tax that is payable relate to the financing of, and transactions with, overseas operations. Liabilities of £13.3m are held as at 27 April 2019 (2018: £16.3m) in respect of these uncertain tax positions. The liabilities include amounts in respect of the legacy financing of overseas operations, whereby the Group has benefitted from the Finance Company Exemption contained in UK Controlled Foreign Company legislation. Whilst the Group has complied with all the requirements of UK tax law, the European Commission has confirmed its view that the UK exemptions are partly contrary to EU State Aid rules.  On 13 June 2019, Her Majesty's Revenue and Customs ("HMRC") applied to annul the decision of the European Commission, and there remains uncertainty regarding how matters will progress over the coming months.

Fuel costs

The Group's operations as at 27 April 2019 consume approximately 348m litres of diesel fuel per annum. As a result, the Group's profit is exposed to movements in the underlying price of fuel. The Group's fuel costs include the costs of delivery and duty as well as the costs of the underlying product. Accordingly, not all of the cost varies with movements in oil prices.

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

The Group has no fuel hedges in place for periods beyond April 2025.

Cash flows and net debt

Consolidated net debt (as analysed in note 17 to the condensed financial statements) has reduced in the year, principally due to the disposal of the North America Division. Consolidated net debt at 27 April 2019 was £253.3m (2018: £395.8m) and non-rail net debt was £374.9m (2018: £567.0m). The balance at 27 April 2019 includes £36.9m of Virgin Trains East Coast cash, which we expect will reduce to £Nil in the year to 2 May 2020. We also expect further net cash outflows in respect of South West Trains as we conclude open matters relating to that expired franchise and net cash outflows in respect of East Midlands Trains as we unwind that business' affairs following the expected end of its rail franchise in August 2019. We expect a modest increase in non-rail net debt in the year to 2 May 2020, reflecting the Group's previously announced share buyback programme.

Net cash from operating activities before tax for the year ended 27 April 2019 was £124.7m (2018: £208.8m) and can be further analysed as follows:

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

* East Midlands Trains and Virgin Trains East Coast

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

The expiry of the Virgin Trains East Coast franchise has increased our net debt in the year by around £50m. We would anticipate a further net cash outflow in this respect of around £35m as we conclude open matters.

The £192.1m reduction in other net debt reflects the disposal of the North America Division, partly offset by working capital outflows including £19m for the net payment by the Group in respect of the Virgin Trains East Coast performance bond, in addition to the £6.1m premium paid to redeem the 4.36% private placement Notes in excess of their par value.

The net impact of purchases and sales of property, plant and equipment for the year on net debt ("net capital expenditure") was £61.6m (2018: £100.4m). This primarily related to expenditure on passenger service vehicles, and comprised cash outflows of £102.4m (2018: £111.7m) and new finance lease debt of £9.4m (2018: £27.2m). In addition, £50.2m (2018: £38.5m) cash was received from disposals of property, plant and equipment, of which £17.0m relates to the end of the Virgin Trains East Coast franchise.

Net capital expenditure, split by division, was:

In addition to the amounts shown in the table above, the impact of purchases of intangible assets and other investments was £4.4m (2018: £18.7m). In addition, £28.1m (2018: £3.1m) of cash was received from disposals of intangible assets, principally relating to the end of the Virgin Trains East Coast franchise, and which is included in the overall approximately £50m net cash outflow referred to above in respect of the franchise.

Financial position and liquidity

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

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

The Group's good financial position is evidenced by:

·      The ratio of net debt at 27 April 2019 to pre-exceptional EBITDA from continuing operations for the year ended 27 April 2019 was 1.0 times (2018: 1.2 times from all operations).

·      Pre-exceptional EBITDA from all operations for the year ended 27 April 2019 was 10.4 times (2018: 9.6 times) pre-exceptional net finance charges (including joint venture net finance income).

·      Undrawn, committed bank facilities of £444.8m at 27 April 2019 (2018: £433.4m) were available to be drawn as bank loans with further amounts available only for non-cash utilisation. In addition, the Group has available asset finance lines.

·      Two major credit rating agencies continue to assign investment grade credit ratings to the Group.

Year-end financial position of the Group

Net assets

Net assets at 27 April 2019 were £128.4m (2018: £181.7m).

The reduction in the net assets reflects the impairment and subsequent disposal of the North America Division and dividends paid, partly offset by the underlying profit for the year.

Retirement benefits

The reported net assets of £128.4m (2018: £181.7m) that are shown on the consolidated balance sheet are after taking account of net pre-tax retirement benefit liabilities of £197.7m (2018: £142.2m), and associated deferred tax assets of £33.9m (2018: £24.9m). The increase reflects the £25.3m exceptional pre-tax expense referred to earlier in respect of the equalisation of Guaranteed Minimum Pensions ("GMP"), and pre-tax actuarial losses of £36.2m in the year (2018: £106.7m actuarial gains). The Pensions Regulator takes an active interest in the main pension schemes in which we participate and the relevant trustees continue to discuss the appropriateness of scheme valuations and contribution rates with the Regulator.

Dividend policy

The Board has proposed a final dividend of 3.9p, which will result in a full year dividend of 7.7p per share for the year ended 27 April 2019.

The Group takes account of its performance, financial position and prospects when setting dividends. It does not have a prescribed formula for determining each year's dividends and has not set specific targets for dividend growth or dividend cover ratios for the following reasons:

·      The Group does not wish such targets to be viewed as a commitment or promise by the Board which, in turn, could act as pressure to pay certain levels of dividend in the future even when at that future point in time, that might not be in the best interests of the Company and its stakeholders.

·      The appropriate pay-out ratio may vary based on many factors including factors affecting the outlook that are not reflected in the historically reported figures.

·      Earnings may be volatile from year-to-year. We would look for dividend rates to be more stable and not to fluctuate as significantly as earnings simply to achieve target cover ratios.

As at 27 April 2019, the Company's distributable reserves totalled £309.6m (2018: £211.5m), which compares to dividends paid in cash in the year ended 27 April 2019 of £44.1m (2018: £68.3m). In addition, we consider that the Company's distributable reserves could be further increased through dividends from subsidiary companies and/or changes in the Group structure. The Group considers there to be a low risk that the level of distributable reserves will be a constraining factor on dividend payments for the foreseeable future.

The Group has significant undrawn, committed bank facilities as explained in the "Financial position and liquidity" section of this report. The Group considers there to be a low risk that the level of available liquidity/cash resources will be a constraining factor on dividend payments for the foreseeable future.

The Directors are focused on maintaining an investment grade credit rating and two major credit rating agencies continue to assign investment grade credit ratings to the Group. Where the Group was no longer investment grade rated or there was a significant risk of that, the Board would review the level of the dividend.

In April 2019, the Group announced a share buyback programme to buy back shares with an aggregate market value of up to £60m.  The Stagecoach Board believes that following the recent announcements regarding UK Rail coupled with the successful completion of the sale of the North America business, it is an  appropriate use of the Group's cash at this time to buy back its own equity.  The intention is to complete the buy back over the 12 months to April 2020.  However, the Board will keep the form and quantum of the programme under review.

The purpose of the buyback programme is to reduce the share capital of the Company and it is being conducted within the limitations of the authority granted to the Board of Stagecoach at the Annual General Meeting, held on 31 August 2018, pursuant to which the maximum number of shares to be bought back was 50,000,000. The buyback is also being conducted within the parameters prescribed by the Market Abuse Regulation 596/2014, the Commission Delegated Regulation (EU) 2016/1052 and Chapter 12 of the Listing Rules. The repurchased ordinary shares are being held in treasury.

From the commencement of the programme on 25 April 2019 until 24 June 2019 inclusive, the Group has purchased 6,695,775 shares at a total cost of £8.7m, of which 165,779 shares at a cost of £0.2m were purchased in the year ended 27 April 2019.

The Group will continue to regularly review its financial strategy and capital structure.

Adoption of new accounting standard for leases

The Group will adopt International Financial Reporting Standard 16 ("IFRS 16"), Leases, with effect from 28 April 2019.  The condensed financial statements for the year ended 27 April 2019 are prepared in accordance with International Accounting Standard 17 ("IAS 17"), Leases, and so do not reflect all of the requirements of IFRS 16.  More information on the adoption of IFRS 16 and its expected impact on the consolidated financial statements is provided in note 1 to the condensed financial statements.

Related parties

Details of significant transactions and events in relation to related parties are given in note 19 to the condensed financial statements.

Principal risks and uncertainties

Like most businesses, there is a range of risks and uncertainties facing the Group.  A brief summary is given below of those specific risks and uncertainties that the Directors believe could have the most significant impact on the Group's financial position and/or future financial performance.  Pages 9 to 13 of the Group's 2018 Annual Report set out specific risks and uncertainties in more detail.  Further information and updates will be provided in the 2019 Annual Report. 

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

·      Catastrophic events - there is a risk that the Group is involved (directly or indirectly) in a major operational incident.

·      Economy - the economic environment in the geographic areas in which the Group operates affects the demand for the Group's services.  The ongoing negotiation of the terms of the UK leaving the European Union may lead to continuing economic, consumer and political uncertainty.  That may in turn affect asset values and foreign exchange rates, which have a bearing on the amounts of our pensions, financial instruments and other balances.  UK policy following the UK leaving the European Union may affect the UK economy, including the availability and cost of staff.

·      Terrorism - there is a risk that the demand for the Group's services could be adversely affected by a significant terrorist incident.

·      Sustainability of rail profit - there is a risk that the Group's revenue and profit could be significantly affected (either positively or negatively) as a result of the Group winning new UK rail franchises or failing to retain its existing franchises.

·      Breach of franchise - if the Group fails to comply with certain conditions as part of its rail franchise agreements it may be liable to penalties including potential termination of one or more of the rail franchise agreements.

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

·      Pension scheme funding - the Group participates in a number of defined benefit pension schemes, and there is a risk that the cash contributions required increase or decrease due to changes in factors such as regulatory approach, investment performance, discount rates and life expectancies.

·      Insurance and claims environment - there is a risk that the cost to the Group of settling claims against it is significantly higher or lower than expected.

·      Regulatory changes and availability of public funding - there is a risk that changes to the regulatory environment or changes to the availability of public funding could affect the Group's prospects.  New legislation introduced and planned in the UK could see the introduction of franchised bus networks in some areas, which could affect our bus operations.

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

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

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

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

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

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

Use of non-GAAP measures

Our reported preliminary financial information is extracted from the Group's consolidated financial statements prepared in accordance with International Financial Reporting Standards as adopted by the European Union and applied in accordance with the provisions of the Companies Act 2006. In measuring our financial performance, the measures that we use include those which have been derived from our reported results in order to eliminate factors which distort period-on-period comparisons and those that provide additional useful information to stakeholders. These are considered non-GAAP financial measures, and include measures such as like-for-like revenue, pre-exceptional EBITDA and net debt. We believe this information, along with comparable GAAP measurements, is useful to shareholders and analysts in providing a basis for measuring our financial performance and position. Note 22 to the condensed financial statements provides further information on these non-GAAP financial measures.

Going concern

On the basis of current financial projections and the facilities available, the Directors are satisfied that the Group has adequate resources to continue for the foreseeable future and, accordingly, consider it appropriate to adopt the going concern basis in preparing the condensed financial statements for the year ended 27 April 2019.

Current trading and outlook

We have made a satisfactory start to the year ending 2 May 2020 and have not significantly changed our expectation of adjusted earnings per share for the year.

We see positive long-term prospects for public transport. There is a large market opportunity for modal shift from cars to public transport against a backdrop of technological advancements, rising road congestion and increasing environmental awareness. We have a growth strategy built on continued investment, value-for-money travel and high customer satisfaction.

Martin Griffiths

Chief Executive

26 June 2019