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Stagecoach Group PLC - Interim results for half year ended 26 Oct 2019

RNS Number : 4333W
Stagecoach Group PLC
11 December 2019
 

11 December 2019

 

Stagecoach Group plc - Interim results for the half-year ended 26 October 2019

 

Financial summary

 

 

"Adjusted" results1

"Statutory" results

 

H1 2020

H1 2019

(restated2)

H1 2020

H1 2019 (restated2)

CONTINUING OPERATIONS3

 

 

 

 

Revenue (£m)

800.2

1,009.9

800.2

1,009.9

Total operating profit (£m)

79.6

87.5

77.0

63.3

Net finance charges (£m)

(13.0)

(14.4)

(11.1)

(14.4)

Profit before taxation (£m)

66.6

73.1

65.9

48.9

Earnings per share (pence)

10.0p

10.5p

9.9p

7.0p

TOTAL OPERATIONS

 

 

 

 

Earnings per share (pence)

10.0p

12.9p

9.8p

(5.5)p

Interim dividend per share (pence)

3.8p

3.8p

3.8p

3.8p

 

 

Financial highlights

 

·      Solid financial results reflecting business initiatives and the reduction in the scale of the Group over the last eighteen months

·      Adjusted earnings per share4 10.0 pence (H1 2019: 12.9 pence)

·      Statutory earnings per share 9.8 pence (H1 2019: loss per share 5.5 pence)

·      London Bus profit ahead of our start-of-year expectations and regional bus revenue growth rate recovering

·      Net debt £392.6m (27 April 2019 adjusted to include £89.0m lease debt arising on IFRS 16 adoption: £342.3m) includes effect of share buy-backs

·      Interim dividend maintained at 3.8 pence per share

·      No change to our expectation of 2019/20 earnings per share

 

 

Strategic and operational highlights

 

·      Board changes separately announced today

Ray O'Toole to succeed Sir Brian Souter as Chairman from 1 January 2020

Sir Brian Souter to become a non-executive director from 1 January 2020

Dame Ann Gloag and Sir Ewan Brown stepping down as non-executive directors on 31 December 2019

·      Simpler and more focused business

·      Updated strategy

Maximise our core business' potential in a changing market

§  Driving growth in the UK

§  Progressing commercial priorities around new bus and coach services in growth markets, multi-journey fares capping, corporate sales and re-branding

Manage change through our people and technology to make it simpler and better

§  Investing in improving customers' experience, back office systems and processes, and cleaner vehicles

Grow by diversifying to balance the portfolio and open up new markets

§  Target markets and specific bidding opportunities already identified based on clear criteria

§  Consistent with those criteria, shortlisted bidder for operation of Roslagsbanan rail system in Stockholm County, Sweden

·      Significant potential for growth

Public transport key to addressing environmental challenges and growing urban populations

UK Government pro-bus policy and funding commitments

 

1 The “adjusted” results are the results for the relevant period excluding separately disclosed items as detailed in note 6 to the condensed financial statements.
2 The results shown for the half-year ended 27 October 2018 have been restated from those previously reported to: (i) remove the results of the discontinued North America operations where appropriate and (ii) restate revenue and other operating income for amendments made to the implementation of  IFRS 15 for the year ended 27 April 2019 (see note 1 for details).
3 Continuing operations include all operations other than the North America business that was sold in April 2019.
Adjusted measures of profit exclude separately disclosed items as detailed in note 6 to the condensed financial statements.

 

Martin Griffiths, Stagecoach Group Chief Executive, said: 

 

"We are pleased to have delivered a solid set of financial results and further improvements for our customers over the first half of the financial year.

 

"Our updated strategy is based on three key objectives: maximise our core business potential, manage change through our people and technology, and grow by diversifying.  We have designed the strategy to deliver a sustainable business, diversify our exposure to risk and create value for all of our investors, customers, employees, communities and the environment.  Our strategy will continue to be underpinned by a clear focus on safety and customer service.

 

"Investment is underway to up-skill our teams, improve our back-office systems and make our business more agile. We are also at the forefront of industry-leading innovation in greener vehicles, autonomous technology, contactless travel, and app-based ticketing and information.

 

"We welcome recent Government pro-bus policy and funding commitments. Combined with our own initiatives and our support for the wider UK bus industry strategy, we are well placed to benefit from the global drive for better mobility, cleaner air and action to protect the future of our planet.

 

"Our expectation of full-year adjusted earnings per share remains unchanged."

 

For further information, please contact:

 

Stagecoach Group plc                                                        www.stagecoach.com

 

Investors and analysts

Ross Paterson, Finance Director

01738 442111

Bruce Dingwall, Group Financial Controller

01738 442111

                                                                                                                                               

Media

Steven Stewart, Director of Communications

01738 442111 or 07764 774680

John Kiely, Smithfield Consultants

020 3047 2476

 

Notes to editors

 

Stagecoach Group

·      Stagecoach is a leading public transport company, with operations in England, Scotland and Wales.

·      We employ around 24,000 people and operate more than 8,300 buses, coaches and trams.

·      Stagecoach is Britain's biggest bus and coach operator and it runs the Supertram light rail network in Sheffield.

Interim management report

 

The Directors of Stagecoach Group plc are pleased to present their report on the Company for the half-year ended 26 October 2019.

 

Description of the business

 

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

 

Overview

 

We are pleased to have delivered a solid set of financial results for the first half of the 2019/20 financial year.  The results reflect the changes in the shape of the Group over the last eighteen months.  Our business is now simpler and more focused with an updated strategy and objectives.

 

Our regional bus operations in the UK have delivered a robust performance, despite poor weather, supported by our continued investment in our people and technology to deliver better journeys for our customers. In the London franchised bus market, we have delivered new contract wins as we focus on cost control and operating performance.

 

Our operation of the East Midlands rail franchise ended in August 2019 and we worked collaboratively with the new operator to ensure the smooth transition of the train services.  In addition, this month (December 2019), our joint venture, Virgin Rail Group, completed its operation of the West Coast rail franchise, also working collaboratively with the new operator on the transfer of responsibility for the train services.  We are continuing to progress the unwinding and settlement of contractual matters in relation to these and other former rail franchises.  Our rail operations are now limited to our Sheffield Supertram tram and tram-train operations.

 

Financial results

 

Revenue from continuing operations was £800.2m (H1 2019 restated: £1,009.9m), reflecting the end of the Virgin Trains East Coast franchise in June 2018 and the end of the East Midlands Trains franchise in August 2019.  Adjusted total operating profit5 from continuing operations was £79.6m (H1 2019 restated: £87.5m).  The change in operating profit reflects lower UK Bus profit because of various factors including 2018's exceptionally good summer weather contrasting with this summer's poorer weather and the non-recurrence of prior year revenue from operating bus services related to rail re-signalling work in the Derby area.  Unadjusted operating profit from continuing operations was £77.0m (H1 2019 restated: £63.3m), with the increase principally due to the non-recurrence of prior year expenses for the equalisation of guaranteed minimum pension benefits.  Adjusted earnings per share were 10.0p (H1 2019: 12.9p), reflecting the change in adjusted operating profit from continuing operations, explained above.  Basic, unadjusted earnings per share were 9.8p (H1 2019: loss of 5.5p) with the year-on-year improvement principally due to a prior year impairment loss in respect of the North America business that was sold in April 2019.

 

IFRS 16, the new accounting standard on leases, was implemented for the first time in the half-year and the effect of that was a £0.4m reduction in profit after tax.

 

Dividend

 

We have maintained the interim dividend at 3.8p per share. The 3.8p dividend is payable to shareholders on the register at 24 January 2020 and will be paid on 4 March 2020. Shareholders who wish to participate in the dividend re-investment plan for this dividend should elect to do so by sending their requests to the Company's registrars to arrive by 12 February 2020.

 

Business strategy

 

The Board has reviewed the strategy of the business and we are now focused on three objectives:

 

·      Maximise our core business' potential in a changing market

·      Manage change through our people and technology to make it simpler and better

·      Grow by diversifying to balance the portfolio and open up new markets 

5 Adjusted measures of profit exclude separately disclosed items as detailed in note 6 to the condensed financial statements.

Transport policy

 

We welcome the UK Government's recent commitment to a national bus strategy and its announcement of new funding for buses. Whatever the result of the General Election, there is a real opportunity to leverage the potential of the bus to support economic growth and improved connectivity in our communities, as well as addressing the major challenges of road congestion and air quality which blight our biggest towns and cities. We are supporting the strategy of the wider bus industry to get a billion more passenger journeys by bus in England by 2030.

 

UK franchised rail market

 

We are continuing to manage effectively our exit from UK rail franchises.  This month, we exited the UK franchised rail market after more than 20 years of delivering industry-leading performance and customer satisfaction both individually and with our partners. We were proud our East Midlands Trains operation was named Passenger Operator of the Year at the 2019 National Rail Awards and we would like to thank our former employees and customers across all of our rail businesses, including Virgin Trains, for their contribution to our success. While the current rail franchise model is subject to ongoing assessment by the Williams Review, as indicated previously we have no intention to bid for new UK rail contracts on the current risk profile offered by the Department for Transport.

 

Rail litigation

 

We continue to pursue our claims against the Secretary of State for Transport regarding his decisions to disqualify us from three rail franchise competitions. The High Court is due to hear the three cases in early 2020.

 

Share buy-back programme

 

We have completed the share buy-back programme that we announced earlier this year. In line with the Company's strong capital discipline, we indicated that we would continue the programme until we had bought back around £30m of shares. We are satisfied that the programme has achieved its objective of making appropriate use of our cash, whilst retaining a good financial position and maintaining an investment grade credit rating.

 

Our people

 

Our employees continue to play a critical role in delivering our long-term growth strategy and providing excellent services for our customers every day. We are pleased that our most recent employee engagement survey has shown further increased response rates and levels of staff satisfaction. We are continuing to invest in the training and development of our people at all levels within the business, as well as promoting diversity and inclusion in our teams, to build on these positive results.

 

We have separately announced today a number of planned changes to our Board of Directors.  Sir Brian Souter will step down as Chairman on 31 December 2019 and will continue on the Board as a Non-Executive Director from 1 January 2020.  Ray O'Toole, Non-Executive Director, who has several decades experience in senior public transport sector roles, will become the independent Chairman of the Company from 1 January 2020.  Dame Ann Gloag and Sir Ewan Brown, both long-serving Non-Executive Directors, will retire from the Board on 31 December 2019.

 

Outlook

 

Looking ahead, as Britain's biggest bus and coach operator, we have clear opportunities to grow our business and contribute to thriving communities. We continue to believe that by working together, the private sector and our local authority partners can deliver the public transport services our customers and communities want. Beyond our existing core operations, we have identified opportunities overseas as part of our strategy to diversify the business. The investment we are making in our people and in new technology means we are well placed to navigate the changing world and help address the drive for better mobility, cleaner air and action to protect our planet.
 

Summary of financial results

 

Revenue from continuing operations, split by segment, is summarised below:

 

 

REVENUE

H1 2020

 

H1 2019

(restated)

Growth

 

£m

£m

%

Continuing Group operations

 

 

 

UK Bus (regional operations)

535.1

527.7

1.4%

UK Bus (London)

120.6

128.6

(6.2)%

UK Rail

146.3

359.3

(59.3)%

Intra-Group revenue

(1.8)

(5.7)

 

Group revenue

800.2

1,009.9

 

 

Operating profit from continuing operations, split by segment, is summarised below:

 

 

OPERATING PROFIT

H1 2020

H1 2019 (restated)

 

£m

% margin

£m

% margin

Continuing Group operations

 

 

 

 

UK Bus (regional operations)

57.1

10.7%

65.2

12.4%

UK Bus (London)

5.1

4.2%

6.1

4.7%

UK Rail

11.6

7.9%

11.5

3.2%

Group overheads

(6.1)

 

(8.1)

 

Restructuring costs

(0.4)

 

-

 

Operating profit before separately disclosed items

67.3

 

74.7

 

 

 

 

 

 

Joint ventures - share of profit after tax

 

 

 

 

Virgin Rail Group

10.8

 

11.4

 

Citylink

1.5

 

1.4

 

Total operating profit before separately disclosed items

79.6

 

87.5

 

Non-software intangible asset amortisation

(0.2)

 

-

 

Other separately disclosed items

(2.4)

 

(24.2)

 

Total operating profit: Group operating profit and share of joint ventures' profit after taxation

77.0

 

63.3

 

           

Strategic and operating review

 

Strategic background and market environment

 

During 2019, we have refocused the business on our core UK bus operations with the successful divestment of our North American operations and our withdrawal from the UK rail franchised market. We have restructured the way we operate to support the core business and ensure we are in a strong position to seek new commercial opportunities, including suitable potential bus and rail developments in overseas markets.

 

We are operating in a changing world, which brings both headwinds and tailwinds as we seek to deliver sustainable growth.  There are strong economic fundamentals, with a growing UK population, greater proportions of younger and older people, and further urbanisation, as well as increasing employment and rising disposable incomes. These are positive contributors to the UK public transport sector.  At the same time, changing social and working patterns and the growth of the digital economy are contributing to fewer trips across all modes of transport. There is also a greater desire among consumers for flexibility between modes, and there is currently an uncertain public policy and funding environment. Nevertheless, the biggest opportunity lies in driving modal shift from the car to mass transit as governments across the globe face growing expectations from citizens to address climate change, poor air quality and crippling road congestion.  According to the National Travel Survey, only 4% of the distance travelled within Great Britain in 2018 by residents of England was by bus while 77% was by car.  The market for sustainable modal shift from car to bus is therefore substantial.

 

A greener alternative

 

Surface transport is the single largest producer of carbon emissions in the UK and the only sector where these are growing.  While that arguably in part reflects a shifting of manufacturing and industry overseas, the UK Government has introduced a "net zero" target for Green House Gas ("GHG") emissions by 2050 and has set aside a £2.45 billion Transforming Cities Fund to help drive productivity and prosperity through investment in public and sustainable transport. Targets being set by government to address these environmental and economic challenges are unachievable without a major switch from pollutive private transport to sustainable public transport.

 

Stagecoach has invested more than £1 billion in new greener vehicles in the past decade. New Euro 6 buses emit fewer emissions overall than a Euro 6 car, as well as having up to 20 times the carrying capacity.  Overall Stagecoach GHG emissions decreased by 2% in 2018/19, compared to 2017/18 (excluding South West Trains and Virgin Trains East Coast to give a more like-for-like figure). Analysis  carried out by the Centre  for Economics and Business Research also shows that without Stagecoach bus services, there would be an annual increase of 0.19 million tonnes of CO2 through passengers using alternative modes of transport, principally the car. We will shortly introduce into service one of the biggest orders of new electric buses in Europe as we expand our all-electric bus fleet to around 100 buses in 2020. The Confederation of Passenger Transport ("CPT"), which we are a member of, has set out a vision for every new bus in the UK from 2025 to be ultra-low or zero emission.  CPT's vision is also for all new buses in large urban areas to be ultra-low or zero emission from 2023, with both goals to be supported by funding from government.

 

Safety always

 

Safety always is at the heart of our company values. We have an approach based on fostering the right culture, which goes beyond strict compliance with policies and procedures. We have a collaborative approach to safety, working with employees and trade union representatives through safety forums at our local operating companies. This year, we have taken further steps to enhance our commitment to a strong safety culture across the business. We are the first national bus business to have become a member of Confidential Incident Reporting and Analysis System ("CIRAS") across all our operations to enhance health and safety reporting by providing our people with an additional channel to raise any issues of concern. In addition, we have progressed new initiatives around risk profiling and hazard perception, as well as rolling out new training to our team of professional drivers around doing the right thing. We are pleased that these initiatives continue to have a positive impact on both our safety key performance indicators and employee perception that we take safety seriously.

 

Strategic objectives and initiatives

 

Maximise our core business' potential

 

Maintaining high customer satisfaction

 

Our core business is built on having a clear focus on our customers and continuing to anticipate ways that we can make travel simpler and better. We are proud to have some of the highest levels of customer satisfaction in the UK public transport sector. Independent research by Transport Focus shows customer satisfaction among Stagecoach bus passengers is 90% in England and 92% in Scotland. However, we continue to explore ways to improve our product offering and maximise the potential of the business.

 

Multi-journey fares capping

 

We continue to focus on modernising retailing and fares to open up new channels, secure customer loyalty and attract new passengers. Research shows that fare simplification can improve customer perception of value for money and help drive increased patronage. We are progressing work on single operator day and weekly fares capping using contactless payment technology. We are also working with other operators to progress multi-operator bus and tram fares capping.  Contactless payment facilities cover all of Stagecoach's vehicle fleet following the biggest roll-out of the technology by any bus operator in Britain. Looking ahead, this will also give us the platform to introduce multi-operator price-capped tickets in urban areas across the country.

 

New bus and coach services

 

There are significant opportunities for us to both grow and diversify our risk profile by developing new service propositions in our core market. As travel patterns and lifestyles change, we see growing areas of demand to support new bus and coach services.

 

For example, we are investigating the potential for more new services linked to the growing air passenger market and demand for inter-urban travel.

 

Corporate sales

 

In many locations across the UK, we have identified a market for direct corporate sales. We are looking to focus on business parks and major employers in rapidly growing cities with constrained parking, particularly companies with a growing emphasis on demonstrating they are responsible employers. There is also an opportunity to deliver ready-made solutions in areas that may be investigating the introduction of workplace charging levies. To access these markets, we are looking to develop a simple corporate product structure and booking tool which will allow us to build relationships direct.

 

Brand and marketing

 

We are ready to roll out a new over-arching brand proposition for Stagecoach. This is about far more than a new identity for our vehicles. It incorporates a new brand vision and values, the roll out of commercial initiatives, and an extensive marketing campaign. Stagecoach research has shown that by increasing brand awareness and relevance and implementing a coordinated marketing and customer strategy, we can improve the end-to-end customer experience and increase our passenger revenue through modal shift. Our marketing activity has tended to be locally driven and focused.  While we intend to continue with our local marketing activity, we see significant potential from complementing that with centrally co-ordinated branding and marketing activity, optimising our position as the UK's largest bus and coach operator.  We have been encouraged by the returns on investment that we have achieved from initial central marketing activity during 2019 and are looking to build on that.  Our plans include a mix of short-term tactical marketing activity to drive near term sales, as well as generating long-term revenue and profit growth through brand building. We are increasing our UK Bus brand and marketing spend from c.£8m per annum to c.£13m per annum to target passenger revenue growth.

 

Growing our UK portfolio

 

In November 2019, we acquired the business and assets of South Gloucestershire Bus & Coach Company Limited. This will enable further growth by providing access into Bristol, one of the UK's fastest growing cities, which is predicted to see its 16-25 year old population expand by 20% in the next five years.

 

Megabus coach services

 

Megabus, our low cost inter-city brand, provides links to around 90 key towns and cities across the UK and continues to maintain a strong presence in the leisure travel market. We have now introduced reserved seating on our megabus coach services, allowing customers to book specific seats on journeys across the country. This gives customers the added benefit that they can sit with friends and family or plan whether they would like front, aisle or window seating. We have had positive feedback from customers from this enhancement and it is already generating strong additional revenue. Megabus is now also retailing using its live inventory on a number of third party websites, predominantly targeted at overseas customers who are looking to travel while on visits to the UK.  We have also enhanced our customer service offer, providing a 24/7 customer helpline and extended social media presence at the busiest times.

 

Government bus policy and investment

 

We are pleased at the increased importance placed on buses in recent Government announcements. We welcome the additional funding proposed to support the effective and sustainable delivery of current and future bus services. This includes the UK Government announcement of plans for a long-term funding package for buses to be announced as part of the 2020 spending review; support for local authorities to improve current or restore lost bus services; a greater emphasis on bus priority measures in new road schemes, and backing for electric bus fleets and pilots of on-demand services in rural areas. In Scotland, we welcome the £500m funding package announced for bus priority and congestion busting schemes. It is essential that these pledges be followed through with clear and practical action on the ground by local transport authorities to tackle the problem of unsustainable car use, which is responsible for undermining bus networks and air quality. Addressing this problem can deliver significant bus passenger growth through modal shift.

 

We welcome the UK Government's announcement of £95m of funding to help regenerate high streets in 69 towns and cities in England, including support for projects aimed at turning disused buildings into shops, houses and community centres.  We operate bus services in a number of the towns and cities covered by this initiative and support efforts to regenerate their high streets.

 

Stagecoach is progressing, with its bus operator partners, a bold new industry strategy to work with local and central government to get a billion more passenger journeys by bus in England by 2030. It would see every new bus being an ultra-low or zero emission vehicle from 2025. Job seekers and apprentices would benefit from reduced travel costs. Price-capped daily and weekly tickets across multiple operators would mean simpler ticketing for people in urban areas. The industry has also pledged to work with government to develop innovative, sustainable transport solutions in rural areas that have been heavily impacted by public sector cuts in recent years.

 

Regulatory developments

 

In October 2019, Greater Manchester Combined Authority ("GMCA") launched a public consultation on proposals for a bus franchise scheme in the region. The published plans show that the bus network would be no bigger in scope under franchising, there would be significant fares increases for customers and higher bills for local taxpayers, with around one in four current bus journeys being lost. We continue to believe that partnership can deliver the improvements people want at lower cost, lower risk and more quickly. Indeed, GMCA's own figures show that partnership delivers a better benefit to cost ratio than franchising. 

 

In addition to the current all-operator partnership proposal for the region, Stagecoach is considering other options to maximise the potential of the bus network and deliver the improvements our customers and communities need. We are proud of our record of running high quality, successful bus services in Manchester for over 20 years and we want to continue working alongside the Mayor, Greater Manchester Combined Authority and Transport for Greater Manchester to help deliver on their wider strategy for the region. The consultation closes in January 2020 and we currently expect the Mayor and GMCA to decide on the way forward for buses in March 2020.

 

The annual revenue of our Manchester bus business is around £125m.  Consistent with the high quality bus services we provide there, the significant investment we have made in those services over many years and our capable management team, our operating profit margin in Manchester exceeds the average margin we see for our overall regional UK Bus operations.  We recognise that any change in the model for delivering bus services in Manchester, including the introduction of bus franchising and/or commitments under partnership arrangements, will likely put some downward pressure on our Manchester bus profits.

 

MSPs in Scotland have passed the Transport (Scotland) Act 2019, providing local authorities with a toolkit of options to help improve bus services in their areas, including Bus Service Improvement Partnerships. While the legislation provides for franchising, we believe there is little appetite for councils in Scotland to pursue a route that would add a significant additional financial burden and risk to taxpayers. The Act also allows councils to operate bus services directly, although we do not believe such steps are necessary and in any case local authorities should be obliged to operate on a level playing field with commercial bus operators. Provisions in the Act for councils to introduce a workplace parking levy are a positive step that could help generate modal shift to the bus.

 

The various political parties have set out differing policies on public transport ahead of the UK General Election on 12 December.  Whatever the outcome of the General Election, we would encourage all of our political leaders to work with the private sector to seize the opportunity for public transport to meaningfully contribute to efforts to reduce both greenhouse gas emissions and road congestion.  We believe that by working in partnership, we can together deliver change faster and more cost effectively than will be possible through ideologically driven changes to the ownership and commercial regulation of transport services.

 

London bus market

 

In London, where we operate around 13% of the scheduled bus network on behalf of Transport for London ("TfL"), we remain focused on maintaining good operational and customer service, controlling costs and ensuring we have a portfolio of contracts that offer an appropriate balance of risk and reward.

 

We are pleased that our East London bus business has been consistently top of the TfL quality of service tables for reliability of bus services across the capital in the half-year (measured as scheduled mileage less miles not operated due to the bus operator's fault, as a percentage of the scheduled mileage - average 99.74%), with our Selkent business consistently second or third (average 99.67%). This has improved our penalty payments year-on-year. In addition, as part of our contracts with TfL, there are Quality Incentive Contract ("QICs") provisions which result in operators qualifying for either bonuses or deductions linked to the quality of service provided. Reliability, along with punctuality, is a key driver of QICs payments. We are pleased that the focus we have brought to this over the past year is flowing through to improved QICs income.

 

As previously reported, we have maintained a disciplined approach to bidding for bus contracts in London, which we believe is in the long-term interests of our business, customers and taxpayers. In the year-to-date, we have retained all of the re-tendered routes we currently operate and have won two routes previously run by other operators. This has resulted in us securing additional work involving a peak vehicle requirement of more than 50 buses. The two routes we have won will commence in May and July 2020, and we expect to see the financial benefit reflected in the 2020/21 financial year.

 

Manage change through our people and technology

 

The way people live their lives is changing, including how consumers access goods and services. How we operate as a business also needs to change by implementing best practice and innovative improvements to underpin our growth strategy.

 

Investing in our people

 

Our people continue to be our most important asset and they have been fundamental to our success over the past four decades. Our starting point is to focus on getting the basics right, ensuring our high standards of safety, operation and customer service are maintained through enhancing our processes.  We have also been progressing changes to ensure our organisational structure is fit for the future, making sure we have the right skills and people in place.

 

To support the delivery of our business strategy, we have introduced a new structure for the senior leadership of our operating companies, which will keep us focused on our strong operational performance as well as helping us become more forward thinking and agile. We have appointed a Chief Operating Officer, supported by four Regional Directors, to drive our bus, coach and tram businesses. Our new Regional Directors include a mix of senior executives with bus experience and new talent from commercial sectors outside the industry who will bring a new perspective and focus to help lead our teams through this period of change.

 

We are reviewing our HR systems and processes, including recruitment, on-boarding and performance management, to ensure we access and retain the best skilled and motivated people, as well as giving managers the tools they need to manage their people to a high and consistent standard.

 

We are continuing to see positive results from this investment in our people. The response rate from our annual employee engagement survey was 80% in 2019, with improved results across key areas such as recognition, communication, customer service and safety. We are progressing action plans to build on these positive scores and address areas for further improvement.

 

Harnessing technology to support our customers and our business

 

We recently launched a new enhanced version of our Stagecoach bus app. The app's features include a new online travel-planning tool that provides customers with real-time tracking of their bus service on an interactive map. The new Stagecoach bus app is the only travel app that combines a live map of all buses, an interactive journey planner and the ability to buy and use mobile tickets all in one place.

 

We have launched a new Mobility as a Service ("MaaS") pilot in Manchester that allows people to plan, book and pay for travel across bus, tram and train journeys, as well as car hire and car clubs, via their smartphone. The joint project is a collaboration between Urban Mobility Partnership members, Stagecoach and Enterprise. It uses Fleetondemand's Mobilleo platform that powers an app called iMove, which puts all travel options into one place, removing barriers to shared and active travel. The initial pilot project is targeted to help people who work in and around Manchester Airport use the most effective mode of transport to get to their destinations. Longer term it is designed to help change travel habits, encouraging people to leave their own car at home and use shared or public transport, walking and cycling. The pilot, which is being supported by Transport for Greater Manchester, will also help improve the way that different modes of transport work together in the city, enhance air quality, reduce congestion and encourage active travel.

 

As well as using technology to improve our customer proposition and experience, we are taking steps to use technology to improve the way our business operates. This includes streamlining and modernising our back office systems, and a project to introduce a new asset management system by the end of 2020.

 

A key element of our plans is developing sustainable vehicle technology to meet the long-term needs of the business. This will ensure we are well placed to manage and benefit from government commitments on climate change and steps being taken by local authorities around the country to put in place Clean Air Zones. We welcome the UK Government funding for a city to feature an all-electric bus fleet and we are already making major investment in this technology. In the first quarter of 2020, we will introduce around 50 new electric buses in Manchester and South Wales. Stagecoach is investing more than £13m in what is one of the biggest orders of new electric buses in Europe. The projects are also benefitting from support funding of nearly £10m from the Department for Transport. Investment is also being made in delivering infrastructure and power requirements at depot level. Intelligent chargers will be used to limit loadings on the electricity supply and maximise vehicle availability. The new fleets are in addition to a fleet of nine electric buses introduced by Stagecoach in Guildford on park and ride services to the town centre.

 

We are continuing to progress our industry-leading trials of innovative autonomous bus technology in partnership with bus manufacturer, Alexander Dennis, and technology partner, Fusion Processing.  Earlier this year, we successfully completed a live trial of the first full-size autonomous bus within a depot environment at Sharston, Manchester. The vehicle carried out basic movements such as parking and moving into the fuelling station and bus wash. Using self-driving vehicles more widely within bus depots could help improve safety, efficiency and space-utilisation within the depot. This autumn, there was a first public demonstration of the vehicle in operation at the Coach & Bus UK show where it operated at autonomous level 4 standard. Planning is now well underway for the next phase of our proof of the technology in passenger service as part of an Innovate UK pilot in Scotland. The trial, which goes live in mid-2020, will include five autonomous single-decker vehicles, which will navigate a 15-mile route between Fife and Edinburgh, crossing the Forth Road Bridge and connecting with Edinburgh Park train and tram interchange. The buses will operate autonomously to level 4 standard, with a driver on board in line with UK regulations. Buses on the corridor are scheduled every 20 minutes, which could enable an estimated 10,000 weekly journeys.

 

Grow by diversifying

 

With the disposal of our North American operations and our exit from UK rail franchises, the core of our business is now largely focused on our profitable and successful bus operations in the UK. Nevertheless, consistent with our track record over the past four decades, we continue to seek out opportunities to grow and diversify our business in new markets. We have undertaken assessments of overseas markets to establish the potential for value adding public transport services that would enhance our current portfolio.

 

The markets we are focusing on are those where we see relatively low political/regulatory risk, contract opportunities that offer an appropriate risk-reward balance, a positive economic outlook and positive demographic factors.  We see potential to earn a higher return on capital than we were achieving in North America.

 

We recently submitted a bid for the 12.5-year contract to operate Sweden's Roslagsbanan commuter railway running into Stockholm, one of the most densely populated cities in the European Union. The contract would see passenger revenue risk remain with the local authority. The contract includes responsibility for putting a new fleet of trains into service in the early part of the franchise, which is similar to projects we have successfully managed on major franchises in the UK. We are expecting a decision on the preferred operator in spring 2020, with operations due to start in spring 2021.

 

In line with our considered approach over many years, we will continue to evaluate options for growth closely and pursue opportunities that have an appropriate balance of risk and potential reward for our stakeholders.
 

Financial Review

 

UK Bus (regional operations)

 

Summary

·      Solid financial performance in challenging market conditions

·      Like-for-like revenue up 1.6%

·      Revenue per vehicle mile up 1.0%

 

Financial performance

 

The financial performance of the UK Bus (regional operations) segment for the half-year ended 26 October 2019 is summarised below:

 

 

H1 2020

£m

H1 2019

(restated)

£m

Change

Revenue

535.1

527.7

1.4%

Like-for-like6 revenue

535.1

526.7

1.6%

Operating profit

57.1

65.2

(12.4)%

Operating margin

10.7%

12.4%

(170)bp

 

6 See definitions in note 24 to the condensed financial statements.

 

Our UK Bus (regional operations) business has delivered a solid performance during the first half of the year.

 

Like-for-like revenue growth of 1.6% is lower than anticipated at the start of the year. Growth is below the rate we reported last year, reflecting various factors including 2018's exceptionally good summer weather contrasting with this summer's poorer weather and the non-recurrence of prior year revenue from operating bus services related to rail resignalling work in the Derby area. Our expectation is that revenue growth will accelerate over the remainder of the year, reflecting these one-off benefits in the first half of the previous year.

 

Vehicle miles operated in the first half of the year were 0.4% higher than in the equivalent period last year. Revenue per vehicle mile grew 1.0% and revenue per journey increased 3.0%.

 

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

 

 

H1 2020

£m

H1 2019

(restated)

£m

Change

%

Commercial on and off bus revenue

 

 

 

  - Megabus

14.2

13.9

2.2%

  - other

320.6

314.8

1.8%

Concessionary revenue

128.5

126.1

1.9%

Commercial & concessionary revenue

 

463.3

 

454.8

 

1.9%

Tendered and school revenue

 

50.2

 

48.5

 

3.5%

Contract and other revenue

 

21.6

 

23.4

 

(7.7)%

Like-for-like revenue

535.1

526.7

1.6%

 

Commercial revenue growth has been more modest than last year, and we continue to see regional variations in performance, with patronage trends typically strongest in urban areas and the southern half of the country. We continue to adjust our bus networks to reflect customer demand.

 

Our megabus business in the UK has continued to deliver revenue growth, with our focus on marketing enhancements and customer initiatives, including the introduction of seat reservations.

 

Concessionary revenue continues to be adversely affected by the effects of government changes in the age of eligibility for free bus travel by older people.  However, the introduction of the Our Pass concessionary fare scheme for 16-18 year olds in Manchester has added concessionary revenue (offset by a decline in commercial revenue).

 

The increase in tender revenue reflects a wider trend of smaller operators exiting the market, resulting in further market consolidation. 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.

 

The reduction in contract and other revenue is principally attributable to the effects of rail replacement work undertaken in the prior year associated with the Derby railway station resignalling.

 

The movement in operating margin was as follows:

 

 

Operating margin - H1 2019

12.4%

Change in:

 

Staff costs

(1.9)%

Fuel costs

(0.6)%

Sub-contract costs

0.3%

Other

0.4%

IFRS 16 leases

0.1%

Operating margin - H1 2020

10.7%

 

The main changes in the operating margin shown above are:

 

·    Although staff retention rates and wage awards remain stable and well controlled, staff costs, including pension costs, rose at a faster rate than revenue. Vehicle miles operated increased year-on-year, which resulted in staff costs increasing by more than inflation but revenue per mile increased by a lower rate.

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

·     A significant component of the prior year work undertaken in relation to the railway resignalling project at Derby was sub-contracted, resulting in non-recurring sub-contractor costs.

·     Other costs have decreased, including lower insurance and claims costs.

·     The adoption of the new lease accounting standard, IFRS 16, results in a different pattern of expense within the income statement. The IAS 17 operating lease expense for certain leases is replaced by depreciation and interest charges, although the net effect on the regional bus operating margin is small.

 

Outlook

 

We expect market conditions in rural areas and the northern half of the country to remain challenging, with a continuation in modest overall revenue growth in the short-term. However, we do anticipate some acceleration of revenue growth in the second half of the year.

 

Looking further ahead, we recognise that any change in the model for delivering bus services in Manchester, or elsewhere in the country, including the introduction of bus franchising and/or commitments under partnership arrangements, will likely put some downward pressure on our existing bus profits.

 

There nevertheless remains a major opportunity for the business in driving modal shift from the car to bus as governments across the globe face growing expectations from citizens to address climate change, poor air quality and crippling road congestion.  Positive public policy decisions would support the drive for modal shift to bus.

 

We remain focused on initiatives to grow revenue over the longer term.  We are exploring potential new income streams, including partnerships with airports, festivals and events around the UK.

 

UK Bus (London)

 

Summary

·      Tender results encouraging

·      Strong operational and financial performance, with increase in Quality Incentive Contract income

·      Longer term prospects remain positive

 

Financial performance

 

The financial performance of the UK Bus (London) business for the half-year ended 26 October 2019 is summarised below:

 

 

H1 2020

£m

H1 2019

£m

 

Change

Revenue and like-for-like revenue

120.6

128.6

(6.2)%

Operating profit

5.1

6.1

(16.4)%

Operating margin

4.2%

4.7%

(50)bp

 

As anticipated, operating profit decreased relative to the prior year.  However, the business has out-performed our start-of-year expectations and we are pleased with its operational and financial performance during the period. Quality Incentive Contract income increased by £1.8m from the equivalent prior year period, reflecting favourable service performance and fewer roadworks on our routes.

 

The movement in like-for-like revenue is consistent with the reduction in operating mileage associated with the impact of contracts lost in the prior year. 

 

The movement in operating margin was as follows:

 

Operating margin - H1 2019

4.7%

Change in:

 

Quality Incentive Contract income

Fuel costs

1.5%

1.2%

Materials and consumables

(1.3)%

Staff costs

(1.0)%

Insurance and claims costs

(1.0)%

Other

(0.2)%

IFRS 16 leases

0.3%

Operating margin - H1 2020

4.2%

 

The main changes in the operating margin shown above are:

 

·      Quality Incentive Contract income has increased reflecting improved performance against quality targets.

·      Fuel costs have decreased as a proportion of revenue, due to lower hedged prices.

·      Materials and consumables costs have increased year-on-year as a result of some price increases and a non-recurring prior year reduction in the liabilities held to undertake maintenance work on leased vehicles to meet contractual requirements.

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

·      Insurance and claims costs have increased reflecting higher costs on the self-insured portion of claims.

·      The adoption of the new lease accounting standard, IFRS 16, results in a different pattern of expense within the income statement. The IAS 17 operating lease expense for certain leases is replaced by depreciation and interest charges.

 

Outlook

 

We are encouraged with our performance on current year tenders for Transport for London contracts. Through the contract tenders on which the outcomes were confirmed during the first half of our financial year, we have secured a net 5.3% increase in contracted annual bus mileage. These tender wins should benefit our revenue in the next financial year, 2020/21.

 

We continue to see positive opportunities to improve the revenue and profitability of the London business over the longer term and we will maintain our discipline in bidding for new contracts as well as focusing on strong operational delivery.

 

UK Rail

 

Summary

·      Strong financial performance at East Midlands Trains in the final months of its franchise to August 2019

·      Continuing positive progress in resolving open contractual matters in respect of expired rail franchises

 

Financial performance

 

The financial performance of the UK Rail business for the half-year ended 26 October 2019 is summarised below:

 

 

 

H1 2020

£m

H1 2019

(restated)

£m

Change

Revenue

146.3

359.3

(59.3)%

Like-for-like revenue

7.8

6.5

20.0%

Operating profit

11.6

11.5

0.9%

Operating margin

7.9%

3.2%

470bp

 

The reported revenue for the prior year period includes revenue at the Virgin Trains East Coast franchise that ended in June 2018 and the East Midlands Trains franchise that ended in August 2019.  The substantial fall in reported revenue reflects the end of these franchises.
 

The like-for-like revenue represents the ongoing Sheffield Supertram business.

 

The operating profit for the half-year to 26 October 2019 principally reflects continued good profitability in the final few months of East Midlands Trains, as we progressed with concluding contractual matters associated with that franchise. The reported profit includes the costs of our commercial and business development team, the majority of whose work is focused on unwinding our former rail franchises and evaluating future rail opportunities.

 

Outlook

 

The second half of the 2019/20 year will reflect the end of the East Midlands Trains franchise in August 2019 and the costs of bidding for new opportunities.

 

While we have no intention to bid for new UK rail franchises on the current risk profile offered by the Department for Transport, we will continue to evaluate and pursue opportunities that offer an appropriate balance of risk and potential reward for our investors.

 

Virgin Rail Group

 

Summary

·      Good financial performance in the final months of the West Coast rail franchise

·      Record levels of market share on Anglo-Scottish services

 

Financial performance

 

The financial performance of the Group's Virgin Rail joint venture for the half-year ended 26 October 2019 is summarised below:

 

49% share:

H1 2020

£m

H1 2019

£m

Revenue and like-for-like revenue

316.5

303.2

Operating profit

13.0

13.7

Net finance income

0.3

0.4

Taxation

(2.5)

(2.7)

Profit after tax

10.8

11.4

Operating margin

4.1%

4.5%

 

Virgin Rail Group's West Coast rail franchise delivered strong growth and profitability during the period with revenue up 4.4%. Industry-leading innovation and investment continued to drive increased passenger numbers, with the number of people opting to travel on Virgin Trains' Anglo-Scottish services instead of flying reaching record levels, contributing to a drop in carbon emissions. In the 12 months to July 2019, 29% of passengers chose to travel with Virgin Trains as opposed to flying between Glasgow and London, the UK's second busiest domestic air route.

 

The current franchise ran until 8 December 2019, with the successor West Coast Partnership franchise commencing from that date. Accordingly, we expect to report lower profit from the West Coast rail franchise in the second half of the year.

 

In the final months of Virgin Rail Group's West Coast franchise, the management team has continued to work hard to deliver a safe, high quality and professional service to customers, meet contractual obligations and ensure a smooth handover to the new operator. Virgin and we are most grateful to all our employees and partners who have been involved in delivering the revolution of the West Coast rail network over the past 22 years.

 

Adjusted EBITDA, depreciation and intangible asset amortisation

 

Adjusted earnings before interest, taxation, depreciation, and intangible asset amortisation ("adjusted EBITDA") amounted to £137.4m (H1 2019: £176.2m).  Adjusted EBITDA can be reconciled to the financial statements as follows:

 

 

 

 

H1 2020

£m

 

H1 2019

£m

Year to

26 Oct 2019

£m

Total operating profit - continuing operations

77.0

63.3

149.4

Total operating (loss)/profit - discontinued operations

-

(69.5)

19.3

Separately disclosed items (see notes 5 and 6 to the condensed financial statements)

2.6

109.6

(11.9)

Software amortisation

2.2

4.4

7.4

Depreciation*

53.1

65.5

119.0

Impairment losses*

-

0.3

0.2

Add back joint venture finance income & tax

2.5

2.6

4.8

Adjusted EBITDA

137.4

176.2

288.2

* Excluding any amounts already added back within "separately disclosed items"

 

The adjusted EBITDA of £137.4m for the half-year ended 26 October 2019 reflects the effect of implementing International Financial Reporting Standard 16 ("IFRS 16") in respect of the accounting for leases.  The implementation of IFRS 16 results in higher EBITDA, higher depreciation and higher finance costs when compared to the basis on which we previously accounted for leases.  The adjusted EBITDA of £176.2m for the half-year ended 27 October 2018 has not been re-stated for IFRS 16.  The adjusted EBITDA for the half-year ended 26 October 2019, determined on the same basis as applied for the half-year ended 27 October 2018, is £124.4m.  The year-on-year decrease in that measure of EBITDA principally reflects the sale of the North America business in April 2019.

 

Intangible asset amortisation and depreciation reduced from the equivalent period in the previous year principally due to the sale of the Group's North America Division in April 2019.

 

Separately disclosed items

 

The Directors believe that there are certain items that we should separately disclose to help explain the consolidated results.  We summarise those "separately disclosed items" in note 6 to the condensed financial statements and further explain them below.

 

Non-software intangible asset amortisation

 

We separately disclose non-software intangible asset amortisation because analysts have told us that they find separate disclosure helpful, a number of our peers separately disclose such costs and the costs generally arise from business acquisitions and/or contract wins.

 

Non-software amortisation for the half-year ended 26 October 2019 amounted to £0.2m (H1 2019: £Nil).

 

Re-organisation costs

 

In April 2019, there were two significant events relevant to the Group's overall strategy: the sale of the Group's North America Division and the UK Department for Transport's decision to disqualify the bids that the Group was involved in for new UK rail franchises. In light of those, the Group subsequently reshaped its management structure and reduced overheads to reflect the reduced scope of the business. The restructuring costs associated with those changes amounted to £2.4m in the half-year ended 26 October 2019.

 

Change in fair value of Deferred Payment Instrument

 

We received a Deferred Payment Instrument as deferred consideration for the sale of the North American business. The instrument, which is accounted for at fair value through profit or loss, has a maturity date of November 2024 and due to the credit and other recoverability risks associated with the instrument, its carrying value is at a discount to its face value. The Group's exposure to the purchaser of the North American business is unsecured and ranks behind all their secured lenders. The carrying value of the instrument was £22.3m as at 27 April 2019. We estimated the carrying value of the instrument to be £24.2m as at 26 October 2019, resulting in a gain of £1.9m recognised in finance income in the half-year ended 26 October 2019.

 

Net finance costs

 

Adjusted net finance costs from continuing operations for the half-year ended 26 October 2019 were £13.0m (H1 2019: £14.4m) and are further analysed below.  The decrease in net finance costs is principally due to the Group's repayment of debt following the disposal of the North America Division, partly offset by the interest expense associated with the adoption of IFRS 16.

 

 

H1 2020

£m

H1 2019

(restated)

£m

Finance costs

 

 

Interest payable and facility costs on bank loans, overdrafts and trade finance

1.0

1.6

Hire purchase and lease interest payable

1.4

0.1

Interest payable and other finance costs on bonds

8.0

11.0

Unwinding of discount on provisions

0.6

0.7

Interest expense on defined benefit pension schemes

2.5

1.8

 

13.5

15.2

Finance income

 

 

Interest receivable on cash

(0.5)

(0.6)

Effect of interest rate swaps

-

(0.2)

 

(0.5)

(0.8)

Adjusted net finance costs

13.0

14.4

 

Taxation

 

The effective tax rate of continuing operations for the half-year ended 26 October 2019, excluding separately disclosed items, was 19.3% (H1 2019: 20.7%). The tax charge on profit from continuing operations can be analysed as follows:

 

 

Half-year to 26 October 2019

Pre-tax profit/

(loss)

£m

 

Tax

£m

 

Rate

%

Excluding separately disclosed items

69.4

(13.4)

19.3%

Non-software intangible asset amortisation

(0.2)

-

 

Other separately disclosed items

(0.5)

0.1

 

With joint venture taxation gross

68.7

(13.3)

19.4%

Reclassify joint venture taxation for reporting purposes

(2.8)

2.8

 

Reported in income statement

65.9

(10.5)

 

 

Fuel costs

 

The Group's operations as at 26 October 2019 consume approximately 233m 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:

 

Year ending April/May

2020

2021

2022

2023

2024

2025

2026

Total Group

86%

83%

55%

26%

1%

1%

<1%

 

The Group has no fuel hedges in place for periods beyond April 2026.

 

Cash flows and net debt

 

Consolidated net debt has, as expected, increased from 27 April 2019, reflecting the impact of adopting the new lease accounting standard, IFRS 16 the effect of share buy-backs, the transfer of cash following the expiry of the East Midlands Trains franchise and additional capital investment, partly offset by continued cash generation from other operations.

 

Net cash from operating activities before tax for the half-year ended 26 October 2019 was £69.9m (H1 2019: £2.7m) and can be further analysed as follows:

 

 

H1 2020

£m

H1 2019

£m

Adjusted EBITDA of Group companies

122.6

160.8

Cash effect of current period separately disclosed items

 

(2.4)

 

-

(Gain)/loss on disposal of property, plant and equipment

 

(1.6)

 

0.7

Share based payment movements

(0.2)

0.4

Working capital movements

(40.9)

(145.2)

Net interest paid

(17.5)

(20.0)

Dividends from joint ventures

9.9

6.0

Net cash flows from operating activities before taxation

 

69.9

 

2.7

 

The working capital outflows principally relate to the expiry of the East Midlands Trains franchise, which has increased our net debt in the period by around £36.5m.

 

Net debt (as analysed in note 19 to the condensed financial statements) increased from £253.3m at 27 April 2019 to £392.6m at 26 October 2019. The movement in net debt was:

 

Half-year to 26 October 2019

£m

Net cash flows from operating activities before taxation

69.9

Tax paid

(8.9)

Investing activities

(59.0)

Financing activities

(51.9)

Other

(0.4)

Movement in net debt in the half-year

(50.3)

Opening net debt

(253.3)

Adoption of IFRS 16

(89.0)

Closing net debt

(392.6)

 

The £139.3m increase in net debt includes the impact of implementing IFRS 16, where lease liabilities of £89.0m have been recognised on transition.

 

By the half-year end date of 26 October 2019, all of the major rail franchises previously operated by Group subsidiaries had ended. Therefore, as at 26 October 2019, there is no restricted cash held by train operating companies. However, the settlement of the train operating company assets, liabilities and contractual positions continues for some time following the end of the relevant franchises. As at 26 October 2019, the consolidated net assets included net liabilities (excluding cash) of £110.5m in respect of such items. Accordingly, if all items were to be settled at their 26 October 2019 carrying values, consolidated net debt would increase by £110.5m. Consolidated net debt plus outstanding train operating company liabilities as at 26 October 2019 was £503.1m, and including our £21.6m share of Virgin Rail Group's undistributed net assets was £481.5m.

 

The net impact of purchases and sales of property, plant and equipment for the half-year on net debt ("net capital expenditure") was £54.1m (H1 2019: £44.2m).  This primarily related to expenditure on passenger service vehicles, and comprised cash outflows of £54.9m (H1 2019: £65.3m) and new lease debt of £7.6m (H1 2019: £9.5m).  In addition, £8.4m (H1 2019: £30.6m) of cash was received from disposals of property, plant and equipment. 

 

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

 

 

H1 2020

£m

H1 2019

£m

UK Bus (regional operations)

52.8

38.9

UK Bus (London)

4.7

11.0

North America

-

9.2

UK Rail

(3.4)

(14.9)

 

54.1

44.2

 

In addition to the amounts shown in the table above, the impact of purchases of intangible assets and other investments was £1.9m (H1 2019: £1.8m). In addition, £0.1m (H1 2019: £28.1m) of cash was received from disposals of intangible assets.

 
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 26 October 2019 to adjusted EBTIDA from continuing operations for the year ended 26 October 2019 was 1.4 times (year ended 27 October 2018 from all operations: 1.4 times).

·   Adjusted EBITDA from all operations for the half-year ended 26 October 2019 was 10.8 times (H1 2019: 11.0 times) adjusted net finance charges (including our share of joint venture net finance income).

·   Undrawn, committed bank facilities of £463.6m at 26 October 2019 (27 April 2019: £470.1m) were available to be drawn as bank loans with further amounts available only for non-cash utilisation. In addition, the Group has available asset finance lines.

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

 

The Group's principal bi-lateral, committed bank facilities are due to expire in October 2021.  Work is already underway to replace those with new facilities during 2020.

 

Half year-end financial position of the Group

 

Net assets

 

Net assets at 26 October 2019 were £48.3m (27 April 2019: £128.4m).  The decrease in the net assets reflects the actuarial losses on defined benefit pension schemes, the effects of share buy-backs and dividends paid, partly offset by the profit for the half-year ended 26 October 2019. 

 

Retirement benefits

 

The reported net assets of £48.3m (27 April 2019: £128.4m), that are shown on the consolidated balance sheet are after taking account of net pre-tax retirement benefit liabilities of £285.2m (27 April 2019: £197.7m), and associated deferred tax assets of £48.7m (27 April 2019: £33.9m).  

 

The Group recognised pre-tax actuarial losses of £87.5m in the half-year ended 26 October 2019 (H1 2019: pre-tax actuarial gains of £15.2m) on Group defined benefit schemes.

 

The discount rate used to determine pension scheme liabilities is determined with reference to AA-rated bond yields. As AA-rated bond yields have generally decreased in the half-year ended 26 October 2019, the forecast future cash flows to settle pension scheme liabilities are now discounted at a lower rate. This is the principal reason for the pre-tax actuarial losses and the increase in the pre-tax retirement benefit liabilities in the half-year.

 

Related parties

 

Details of significant transactions with related parties are given in note 22 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 2019 Annual Report set out specific risks and uncertainties in more detail. 

 

The matters summarised below are not intended to represent an exhaustive list of all possible risks and uncertainties.  The focus below is on those specific risks and uncertainties that the Directors believe could have the most significant impact on the Group's position or performance. In assessing the Group's likely financial performance for the second half of the current financial year, these risks and uncertainties should be considered in addition to the matters referred to regarding seasonality in note 3 to the condensed financial statements, and the comments made later under the heading "Outlook".

 

·      Pension scheme funding - the Group participates in a number of defined benefit pension schemes, and there is a risk that the cash contributions required increase or decrease due to changes in factors such as investment performance, discount rates and life expectancies. The intervention of the Pensions Regulator and/or changes in applicable regulation could also result in increases in required cash contributions.

·      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.

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

·    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.

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

·     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.

·     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 - A significant outbreak of disease could adversely affect demand for the Group's services.

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

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

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

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

 

Use of non-GAAP measures

 

Our reported interim financial information is prepared in accordance with International Financial Reporting Standards as adopted by the European Union and applied in accordance with the provisions of the Companies Act 2006. In measuring our financial performance and position, the financial measures that we use include those that we have derived from our reported results in order to eliminate factors that distort period-on-period comparisons and/or provide useful information to stakeholders. These are considered non-GAAP financial measures, and include measures such as like-for-like revenue, adjusted 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 24 to the condensed financial statements provides further information on these non-GAAP financial measures.

 

Going concern

 

On the basis of current financial projections and the facilities available, the Directors are satisfied that the Group has adequate resources to continue for the foreseeable future and, accordingly, consider it appropriate to adopt the going concern basis in preparing the condensed financial statements for the half-year ended 26 October 2019.

 

Outlook

 

Our expectation of adjusted earnings per share for the year ending 2 May 2020 is unchanged.

 

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

 

Martin Griffiths

Chief Executive

11 December 2019

Responsibility Statement

 

We confirm that to the best of our knowledge:

 

(a)       the condensed consolidated interim financial information contained in this document has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting" as adopted by the European Union;

 

(b)       the interim management report contained in this document includes a fair review of the information required by the Financial Conduct Authority's Disclosure and Transparency Rules ("DTR") 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

 

(c)       this document includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

 

By order of and on behalf of the Board

 

 

Martin Griffiths                                                                                     Ross Paterson

Chief Executive                                                                                   Finance Director

11 December 2019                                                                             11 December 2019

 

Cautionary statement

 

The preceding interim management report has been prepared for the shareholders of the Company, as a body, and for no other persons.  Its purpose is to assist shareholders of the Company to assess the strategies adopted by the Company and the potential for those strategies to succeed and for no other purpose.  The interim management report contains forward-looking statements that are subject to risk factors associated with, amongst other things, the economic, regulatory and business circumstances occurring from time to time in the countries, sectors and markets in which the Group operates.  It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables that could cause actual results to differ materially from those currently anticipated.  No assurances can be given that the forward-looking statements will be realised.  The forward-looking statements reflect the knowledge and information available at the date of preparation.  Nothing in the interim management report should be considered or construed as a profit forecast for the Group.  Except as required by law, the Group has no obligation to update forward-looking statements or to correct any inaccuracies therein.

 

CONDENSED FINANCIAL STATEMENTS

 

CONSOLIDATED INCOME STATEMENT

 

 

 

 

Unaudited

Unaudited

 

 

 

Half-year to 26 October 2019

Half-year to 27 October 2018

(restated)

 

 

 

Performance excluding separately disclosed items

Separately disclosed items

(note 6)

Results for the period

Performance excluding separately disclosed items

Separately disclosed items

(note 6)

Results for the period

 

 

Notes

£m

£m

£m

£m

£m

£m

 

CONTINUING OPERATIONS

 

 

 

 

 

 

 

 

Revenue

4(a)

800.2

-

800.2

1,009.9

-

1,009.9

 

Operating costs and other operating income

 

(732.9)

(2.6)

(735.5)

(935.2)

(24.2)

(959.4)

 

Operating profit of Group companies

4(b)

67.3

(2.6)

64.7

74.7

(24.2)

50.5

 

Share of profit of joint ventures after finance costs, finance income and taxation

4(c)

12.3

-

12.3

12.8

-

12.8

 

Total operating profit: Group operating profit and share of joint ventures' profit after taxation

4(b)

79.6

(2.6)

77.0

87.5

(24.2)

63.3

 

Finance costs

 

(13.5)

-

(13.5)

(15.2)

-

(15.2)

 

Finance income

 

0.5

1.9

2.4

0.8

-

0.8

 

Profit before taxation

 

66.6

(0.7)

65.9

73.1

(24.2)

48.9

 

Taxation

 

(10.6)

0.1

(10.5)

(12.8)

4.1

(8.7)

 

Profit from continuing operations

 

56.0

(0.6)

55.4

60.3

(20.1)

40.2

DISCONTINUED OPERATIONS

 

 

 

 

 

 

 

 

Profit/(loss) after taxation for the period from discontinued operations

5

-

(0.6)

(0.6)

13.5

(85.4)

(71.9)

 

 

 

 

 

 

 

 

 

 

TOTAL OPERATIONS

 

 

 

 

 

 

 

 

Total profit/(loss) for the period, all attributable to equity holders of the parent

 

56.0

(1.2)

54.8

73.8

(105.5)

(31.7)

 

 

EARNINGS/(LOSS) PER SHARE

 

 

 

 

 

 

 

 

Continuing operations

 

 

 

 

 

 

 

 

   -  Adjusted basic/Basic

8

10.0p

 

9.9p

10.5p

 

7.0p

 

   -  Adjusted diluted/Diluted

8

9.9p

 

9.8p

10.5p

 

7.0p

 

 

Discontinued operations

 

 

 

 

 

 

 

 

   -  Adjusted basic/Basic

8

-

 

(0.1)p

2.4p

 

(12.5)p

 

   -  Adjusted diluted/Diluted

8

-

 

(0.1)p

2.3p

 

(12.5)p

 

Total operations

 

 

 

 

 

 

 

 

   -  Adjusted basic/Basic

8

10.0p

 

9.8p

12.9p

 

(5.5)p

 

   -  Adjusted diluted/Diluted

8

9.9p

 

9.7p

12.8p

 

(5.5)p

                     

 

 

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

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

Unaudited

Unaudited

 

Half-year to

26 October

2019

Half-year to

27 October

2018

(restated)

 

£m

£m

 

 

 

Profit/(loss) for the period

54.8

(31.7)

Items that may be reclassified to profit or loss

 

 

Continuing operations

 

 

Cash flow hedges:

 

 

-     Net fair value (losses)/gains on cash flow hedges

(12.4)

33.8

-     Reclassified and reported in profit/(loss) for the period

(7.1)

(17.5)

-     Share of other comprehensive expense on joint ventures' cash flow hedges

(0.3)

(0.2)

-     Tax effect of cash flow hedges

3.6

(3.2)

 

 

 

Discontinued operations

 

 

Cash flow hedges:

 

 

-     Net fair value gains on cash flow hedges

-

3.5

-     Reclassified and reported in profit/(loss) for the period

-

(2.2)

-     Tax effect of cash flow hedges

-

(0.2)

Foreign exchange differences arising in period on translation of foreign operations (net of hedging)

-

5.7

Total items that may be reclassified to profit or loss

(16.2)

19.7

Items that will not be reclassified to profit or loss

 

 

Continuing operations

 

 

Actuarial (losses)/gains on Group defined benefit pension schemes

(87.5)

13.7

Tax effect of actuarial losses/(gains) on Group defined benefit pension schemes

14.8

(2.3)

Share of actuarial gains/(losses) on joint ventures' defined benefit schemes, net of tax

6.1

(0.1)

 

 

 

Discontinued operations

 

 

Actuarial gains on Group defined benefit pension schemes

-

1.5

Tax effect of actuarial gains on Group defined benefit pension schemes

-

(0.3)

Total items that will not be reclassified to profit or loss

(66.6)

12.5

Other comprehensive (expense)/income for the period

(82.8)

32.2

Total comprehensive (expense)/income for the period, all attributable to equity holders of the parent

(28.0)

0.5

 

 

CONSOLIDATED BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

 

 

Unaudited

Audited  

 

 

 

Notes

As at

26 October 2019

£m

As at

27 April 2019

£m

ASSETS

 

 

 

Non-current assets

 

 

 

Goodwill

9

51.2

51.2

Other intangible assets

10

9.1

9.7

Property, plant and equipment

11

896.6

834.0

Interests in joint ventures

12

28.1

19.9

Derivative instruments at fair value

 

2.2

14.2

Deferred tax asset

 

4.6

-

Retirement benefit assets

15

0.2

1.8

Other receivables

 

41.3

34.6

 

 

1,033.3

965.4

Current assets

 

 

 

Inventories

 

10.1

14.3

Trade and other receivables

 

107.4

133.3

Derivative instruments at fair value

 

7.7

13.5

Cash and cash equivalents

 

114.3

170.4

 

 

239.5

331.5

Total assets

4(d)

1,272.8

1,296.9

LIABILITIES

 

 

 

Current liabilities

 

 

 

Trade and other payables

 

291.9

392.6

Current tax liabilities

 

20.7

19.0

Borrowings

 

45.1

21.8

Derivative instruments at fair value

 

2.0

0.2

Deferred tax liabilities

 

-

0.2

Provisions

20

48.7

36.8

 

 

408.4

470.6

Non-current liabilities

 

 

 

Other payables

 

4.3

4.5

Borrowings

 

463.1

411.2

Derivative instruments at fair value

 

5.0

1.8

Deferred tax liabilities

 

-

13.7

Provisions

20

58.3

67.2

Retirement benefit obligations

15

285.4

199.5

 

 

816.1

697.9

Total liabilities

4(d)

1,224.5

1,168.5

Net assets

4(d)

48.3

128.4

EQUITY

 

 

 

Ordinary share capital

16

3.2

3.2

Share premium account

 

8.4

8.4

Retained earnings

 

(319.4)

(285.4)

Capital redemption reserve

 

422.8

422.8

Own shares

 

(69.6)

(39.4)

Cash flow hedging reserve

 

2.9

18.8

Total equity, all attributable to the parent

 

48.3

128.4

 

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

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

 

Notes

Ordinary share capital

£m

Share premium

account

£m

 

Retained earnings

£m

Capital redemption reserve

£m

 

 

Own shares

£m

 

Translation reserve

£m

Cash flow hedging reserve

£m

Total

equity attributable to the parent

£m

Non-controlling interest

£m

 

Total

equity

£m

Balance at 27 April 2019

 

3.2

8.4

(285.4)

422.8

(39.4)

-

18.8

128.4

-

128.4

Profit for the period

 

-

-

54.8

-

-

-

-

54.8

-

54.8

Other comprehensive expense net of tax

 

-

-

(66.9)

-

-

-

(15.9)

(82.8)

-

(82.8)

Total comprehensive expense

 

-

-

(12.1)

-

-

-

(15.9)

(28.0)

-

(28.0)

Ordinary shares purchased into treasury

 

-

-

-

-

(30.2)

-

-

(30.2)

-

(30.2)

Cash paid to settle share based payments originally intended to be equity-settled

 

-

-

(0.4)

-

-

-

-

(0.4)

-

(0.4)

Credit in relation to equity-settled share based payments

 

-

-

0.2

-

-

-

-

0.2

-

0.2

Dividends paid on ordinary shares

7

-

-

(21.7)

-

-

-

-

(21.7)

-

(21.7)

Balance at 26 October 2019

 

3.2

8.4

(319.4)

422.8

(69.6)

-

2.9

48.3

-

48.3

 

 

 

 

 

 

 

 

 

 

 

 

Balance at 28 April 2018

 

3.2

8.4

(228.6)

422.8

(38.0)

2.9

30.1

200.8

(19.1)

181.7

Loss for the period

 

-

-

(31.7)

-

-

-

-

(31.7)

-

(31.7)

Other comprehensive income net of tax

 

-

-

12.3

-

-

5.7

14.2

32.2

-

32.2

Total comprehensive (expense)/income

 

-

-

(19.4)

-

-

5.7

14.2

0.5

-

0.5

Credit in relation to equity-settled share based payments

 

-

-

0.4

-

-

-

-

0.4

-

0.4

Shareholder transactions with non-controlling interest

 

-

-

-

-

-

-

-

-

19.1

19.1

Dividends paid on ordinary shares

7

-

-

(22.4)

-

-

-

-

(22.4)

-

(22.4)

Balance at 27 October 2018

 

3.2

8.4

(270.0)

422.8

(38.0)

8.6

44.3

179.3

-

179.3

 

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

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Unaudited

Unaudited

 

 

Half-year to

26 October

2019

Half-year to

27 October

2018

 

Notes

£m

£m

Cash flows from operating activities

 

 

 

Cash generated by operations

17

77.5

16.7

Interest paid

 

(18.0)

(22.4)

Interest received

 

0.5

2.4

Dividends received from joint ventures

 

9.9

6.0

Net cash flows from operating activities before tax

 

69.9

2.7

Tax paid

 

(8.9)

(16.8)

Net cash from operating activities after tax

 

61.0

(14.1)

Cash flows from investing activities

 

 

 

Cash outflow associated with disposals of subsidiaries

 

(3.1)

-

Purchase of property, plant and equipment

 

(54.9)

(65.3)

Disposal of property, plant and equipment

 

8.4

30.6

Purchase of intangible assets

 

(1.9)

(1.8)

Disposal of intangible assets

 

0.1

28.1

Net cash outflow from investing activities

 

(51.4)

(8.4)

Cash flows from financing activities

 

 

 

Purchase of own ordinary shares into treasury

 

(30.2)

-

Repayments of principal portion of lease debt

 

(13.7)

(11.2)

Drawdown of other borrowings

 

-

109.0

Repayment of other borrowings

 

(0.1)

(100.0)

Dividends paid on ordinary shares

7

(21.7)

(22.4)

Redemption of tokens

 

-

(0.1)

Net cash used in financing activities

 

(65.7)

(24.7)

Net decrease in cash and cash equivalents

 

(56.1)

(47.2)

Cash and cash equivalents at beginning of period

 

170.4

238.2

Exchange rate effects

 

-

2.1

Cash and cash equivalents at end of period

 

114.3

193.1

 

Cash and cash equivalents for the purposes of the consolidated statement of cash flows comprise cash at bank and in hand, overdrafts and other short-term highly liquid investments with maturities at the balance sheet date of twelve months or less.

 

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

NOTES

 

1

BASIS OF PREPARATION

 

(a) Basis of preparation

 

The condensed consolidated interim financial information for the half-year ended 26 October 2019 has been prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority and International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 27 April 2019, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union. Except to the extent described below, the accounting policies and methods of computation applied in the consolidated interim financial information are otherwise the same as those of the annual financial statements for the year ended 27 April 2019, as described on pages 82 to 94 of the Group's 2019 Annual Report which can be found on the Stagecoach Group website at http://www.stagecoach.com/investors/financial-analysis/reports/.

 

The figures for this half-year include the results for all segments for the 26 weeks to 26 October 2019. The comparative figures for the half-year ended 27 October 2018 include the results for all segments for the 26 weeks ended 27 October 2018.

 

This condensed consolidated interim financial information for the half-year ended 26 October 2019 has not been audited, nor has the comparative financial information for the half-year ended 27 October 2018 but they have both been reviewed by the auditors. The comparative financial information presented in this announcement for the year ended 27 April 2019 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006 and does not reflect all of the information contained in the Company's annual financial statements. The annual financial statements for the year ended 27 April 2019 were approved by the Board of Directors on 26 June 2019, received an unqualified audit report from the auditors, did not contain an emphasis of matter paragraph, did not contain a statement under section 498(2) or (3) of the Companies Act 2006 and have been filed with the Registrar of Companies.

 

The Board of Directors approved this announcement, including the condensed consolidated interim financial information, on 11 December 2019. This announcement will be available on the Group's website at http://www.stagecoach.com/investors/financial-analysis/reports/.

 

(b) Discontinued operations

 

The Group disposed of its North America segment on 16 April 2019.  The segment is therefore presented as discontinued operations.  Previously reported figures for the half-year ended 27 October 2018 have been re-presented and restated to show the North America segment as discontinued.

 

Note 5 provides details of discontinued operations.

 

(c) New accounting standards adopted during the period

 

IFRS 16, Leases

The Group leases many assets including properties, passenger service vehicles, company cars and office equipment.

 

The Group has adopted International Financial Reporting Standard 16 ("IFRS 16"), "Leases", from 28 April 2019.  IFRS 16 has changed how lessees are required to account for leases previously accounted for as operating leases. For such leases, IFRS 16 generally requires the recognition of an asset, representing the right to use the leased item, and a liability, representing obligations to make future lease payments. Lease costs are recognised as depreciation and interest, rather than entirely as an operating cost.

 

The Group has chosen to apply the practical expedient under IFRS 16 to 'grandfather' its previous assessment of which existing contracts are, or contain, leases.  The Group has not applied IFRS 16 to contracts previously identified as not containing leases under International Accounting Standard 17 ("IAS 17"), Leases, and International Financial Reporting Interpretations Committee Interpretation 4 ("IFRIC 4"), "Determining whether an Arrangement contains a Lease". The Group has applied the IFRS 16 definition of a lease to assess whether contracts entered into from 28 April 2019 contain leases.  The Group has also elected to rely on previous assessments of whether leases are onerous as an alternative to performing an impairment review, with any previous onerous lease provision deducted from the carrying value of the related right-of-use asset as at 28 April 2019.

 

Contracts may contain both lease and non-lease components.  For the Group's current leases, the Group has chosen to apply the practical expedient under IFRS 16 not to separate lease and non-lease components, accounting for these as a single lease component.

 

Lease liabilities represent the net present value of fixed lease payments. 

 

1

BASIS OF PREPARATION (CONTINUED)

 

The Group has adopted the modified retrospective approach, whereby each right-of-use asset recognised at the transition date of 28 April 2019 is initially equal to the corresponding lease liability recognised at the transition date.  The value of the right-of-use assets have then been adjusted for any lease incentives, prepayments and accruals of lease payments, and onerous lease provisions recognised immediately before the date of initial application. Initial direct costs have been excluded at the date of initial application. There has been no change to how the Group accounts for dilapidations on leased items. Under the modified retrospective approach, the comparative information is not restated.

 

Right-of-use assets are generally depreciated on a straight-line basis over the shorter of the underlying asset's useful life and the lease term. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset's useful life.

 

The Group has elected to apply a single discount rate to assets with similar characteristics. The Group has also elected not to recognise right-of-use assets and lease liabilities for short-term leases or low-value assets.  The Group will continue to expense the lease payments associated with these leases on a straight-line basis over the remaining lease term.

 

Due to the short remaining duration of the Group's current rail franchises, all of the lease contracts in the Group's train operating companies have been accounted for as short-term leases on transition.  These include leases for rolling stock but exclude contracts with Network Rail for access to the railway infrastructure (track, stations and depots), which do not meet the definition of a lease under IFRS 16, reflecting the fact that Network Rail, rather than the franchise train operator, directs how and for what purposes the assets are used.

 

The Group is the lessee of certain properties where the applicable lease agreements provide the Group with the right to end the lease prior to the end of the full contractual term of the lease.  Judgement was required in assessing whether and when the Group was likely to end each lease early.  The Group expects to end three property leases at the next rent-break dates and the Group has accounted for those leases accordingly.   The Group expects all other leases to continue to the end of their contractual terms.

 

The table below summarises the transition adjustments recorded as at 28 April 2019 on the adoption of IFRS 16.

 

Unaudited

Recognition of leases previously classified as operating leases

Reclassification of prepaid lease rentals

Reclassification of onerous lease liabilities

Reclassification of lease incentives

Reclassification of accrued lease rentals

Net impact of adopting IFRS 16

 

£m

£m

£m

£m

£m

£m

Non-current assets:

 

 

 

 

 

 

Property, plant and equipment: right-of-use assets

89.0

1.1

(0.9)

(0.9)

(0.2)

88.1

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Trade and other receivables: prepayments

-

(1.1)

-

-

-

(1.1)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Borrowings: lease liabilities

(23.9)

-

-

-

-

(23.9)

Trade and other payables: accruals

-

-

-

0.9

0.2

1.1

Provisions: onerous contracts

-

-

0.7

-

-

0.7

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

 

Borrowings: lease liabilities

(65.1)

-

-

-

-

(65.1)

Provisions: onerous contracts

-

-

0.2

-

-

0.2

Net assets

-

-

-

-

-

-

 

The Group recognised additional right-of-use assets £88.1m and lease liabilities of £89.0m.  The right-of-use assets recognised on transition on 28 April 2019 are summarised in the following table:

 

Unaudited

£m

Right-of-use assets included within land and buildings

33.6

Right-of-use assets included within passenger service vehicles

50.1

Right-of-use assets included within other plant and equipment

4.4

Total right-of-use assets included within property, plant and equipment (note 11)

88.1

 

 

1

BASIS OF PREPARATION (CONTINUED)

 

When measuring lease liabilities under IFRS 16 for leases that were previously classified as operating leases under IAS 17, the Group discounted lease payments using each lessee's incremental borrowing rate (if the interest rate implicit in the lease is not readily determinable). This rate is the interest rate the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value over a similar term and with similar security to the right of use asset in a similar economic environment.  The incremental borrowing rate applied to the lease liabilities as at 28 April 2019 ranged from 2.5% to 3.5% and the Group's weighted average incremental borrowing rate was 3.1%.  The lease liabilities recognised as at 28 April 2019 can be reconciled as follows:

 

Unaudited

£m

Operating lease commitments disclosed under IAS 17 as at 27 April 2019

110.2

Short-term lease commitments straight-line expensed under IFRS 16

(13.3)

Low value lease commitments straight-line expensed under IFRS 16

(0.4)

Re-assessment of operating lease options to terminate lease

14.0

Right-use-assets made available to the Group on or after 28 April 2019 and committed as an operating lease at 27 April 2019

 

(4.0)

Effect of discounting

(17.5)

Lease liabilities recognised as at 28 April 2019 for leases formerly accounted for as operating leases

89.0

Hire purchase liabilities recognised under IAS 17 at 27 April 2019

9.3

Lease liabilities recognised as at 28 April 2019

98.3

 

In respect of leases that would previously have been classified as operating leases, the Group has recognised £83.5m right-of-use assets and £84.8m of lease liabilities as at 26 October 2019.  In relation to such leases, the Group has recognised depreciation and interest costs, instead of operating lease expenses. During the half-year ended 26 October 2019, the Group recognised £12.2m of depreciation charges and £1.3m of interest costs from such leases.

 

IFRS 16 has had a negligible impact on profit before tax but increases the Group's interest costs by £1.3m and increases the Group's operating profit by £0.8m in the half-year ended 26 October 2019. For leases that have been straight-line expensed under the IFRS 16 exemption for leases with terms of less than 12 months, the Group recognised £13.7m in rental costs in the half-year ended 26 October 2019.

 

Other new standards

Other new standards, amendments to standards and interpretations that are mandatory for the first time for the financial year beginning 28 April 2019, do not have any significant effect on the financial statements of the Group.  Details of the changes that are mandatory in the current reporting period can be found in the 2019 Annual Report in note 1 to the consolidated financial statements for the year ended 27 April 2019.

 

(d) Restatements - revenue and discontinued operations

 

The Group has adopted IFRS 15, "Revenue from Contracts with Customers", from 30 April 2017, applying the full retrospective approach. Full disclosure of the change in policy and the impact on the revenue for the year to 28 April 2018 has been reported in the 2019 Annual Report in note 1 to the consolidated financial statements for the year ended 27 April 2019. 

 

The Group has other miscellaneous sources of income comprising of income incidental to the Group's principal activities. They include amounts receivable from Network Rail under performance regimes, commissions receivable, advertising income, maintenance income, railway station access income, railway depot access income, fuel sales and property income.   When preparing the annual financial statements for the year to 27 April 2019, the Group classified commissions receivable, maintenance income and fuel sales as revenue, in line with its interpretation of the requirements of IFRS 15.  Applying this classification to the previously reported figures under IFRS 15 for the half-year to 27 October 2018 has resulted in a £24.8m increase in revenue and a corresponding £24.8m increase in operating costs and other operating income. 

 

As there is no net profit impact from this reclassification, there is no adjustment to previously reported retained earnings. The consolidated income statement for the half-year ended 27 October 2018 has been restated and there is no impact on any of the other primary statements that have previously been reported.

 

1

BASIS OF PREPARATION (CONTINUED)

 

(d) Restatements - revenue and discontinued operations (continued)

 

The following table shows the impact of IFRS 15 on the previously reported results along with the impact of the discontinued operations (see note 5) to arrive at the comparative figures appearing in the consolidated income statement.

 

 

Half-year ended 27 October 2018 (unaudted)

IFRS 15 restatement and impact of discontinued operations

As previously reported

Restated

Impact of discontinued operations (note 5)

As restated and appearing in consolidated income statement

 

£m

£m

£m

£m

£m

Revenue

1,230.8

24.8

1,255.6

(245.7)

1,009.9

Operating costs and other operating income

(1,249.8)

(24.8)

(1,274.6)

315.2

(959.4)

Operating (loss)/profit of Group companies

(19.0)

-

(19.0)

69.5

50.5

 

 

2

FOREIGN CURRENCIES

 

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

 

 

Half-year to

26 October

2019

Half-year to

27 October

2018

Year to

27 April

2019

US Dollar:

 

 

 

Period end rate

1.2836

1.2820

1.2935

Average rate

1.2522

1.3158

1.3047

Canadian Dollar:

 

 

 

Period end rate

n/a

1.6814

1.7423

Average rate

n/a

1.7144

1.7182

 

3

SEASONALITY

 

The discontinued North American bus operations typically earned a higher operating profit for the first half of the financial year than for the second half.  That was because leisure customers generated an element of the revenue with demand being at its strongest in the summer months. 

 

The expiry of the Group's East Midlands Trains franchise in August 2019 and the expiry of Virgin Rail Group's West Coast franchise in December 2019 will affect the phasing of the Group's profit in the year ending 2 May 2020.

 

4

SEGMENTAL ANALYSIS

 

The Group disposed of its North America segment, which operated coach and bus operations in the United States and Canada, on 16 April 2019. That segment is therefore presented as discontinued operations. Previously reported figures have been re-presented and restated to exclude the discontinued North America segment where appropriate.

 

The Group is now managed, and reports internally, on a basis consistent with its three continuing operating segments, being UK Bus (regional operations), UK Bus (London), and UK Rail.  The Group's accounting policies are applied consistently, where appropriate, to each segment.


The segmental information provided in this note is on the basis of those three operating segments as follows:

 

Segment name

Service operated

Countries of operation

UK Bus (regional operations)

Coach and bus operations

United Kingdom

UK Bus (London)

Bus operations

United Kingdom

UK Rail

Rail operations

United Kingdom

 

The basis of segmentation and the basis on which segment profit is measured are consistent with the Group's last annual financial statements for the year ended 27 April 2019.

 

The Group has interests in two material joint ventures: Virgin Rail Group that operates in UK Rail and Citylink that operates in UK Bus (regional operations).  The results of these joint ventures are shown separately in note 4(c). 

 

4

SEGMENTAL ANALYSIS (CONTINUED)

 

(a) Revenue

 

Due to the nature of the Group's continuing business, the origin and destination of revenue (the United Kingdom) is the same in almost all cases.  As the Group predominately sells bus and rail services to individuals, it has few customers that are individually "major".  Its major customers are typically public bodies that subsidise or procure transport services - such customers include local authorities, transport authorities and the UK Department for Transport.

 

Reflecting the reduced scope of the business, the classes of revenue previously reported have been extended to better align the reporting between this segmental analysis and the financial review, and to more align this analysis with how management categorises revenue for internal management reporting.

 

Revenue, from continuing operations, split by class and segment, was as follows:

 

 

Unaudited

 

Half-year to 26 October 2019

 

Commercial passenger revenue

Concessionary revenue

Tendered & school revenue

Contract & other revenue

 

Total

 

£m

£m

£m

£m

 

£m

UK Bus (regional operations)

334.8

128.5

50.2

21.6

 

535.1

UK Bus (London)

0.1

-

-

120.5

 

120.6

Total bus operations

334.9

128.5

50.2

142.1

 

655.7

UK Rail

129.0

-

-

17.3

 

146.3

Total Group revenue

463.9

128.5

50.2

159.4

 

802.0

Intra-Group revenue - UK Bus (regional operations)

-

-

-

(1.8)

 

(1.8)

Reported Group revenue

463.9

128.5

50.2

157.6

 

800.2

 

 

Unaudited

 

Half-year to 27 October 2018 (restated - see note 1(d))

 

Commercial passenger revenue

Concessionary revenue

Tendered & school revenue

Contract & other revenue

 

Total

 

£m

£m

£m

£m

 

£m

UK Bus (regional operations)

329.5

126.3

48.5

23.4

 

527.7

UK Bus (London)

0.2

-

-

128.4

 

128.6

Total bus operations

329.7

126.3

48.5

151.8

 

656.3

UK Rail

335.1

-

-

24.2

 

359.3

Total Group revenue

664.8

126.3

48.5

176.0

 

1,015.6

Intra-Group revenue - UK Bus (regional operations)

-

-

-

(5.7)

 

(5.7)

Reported Group revenue

664.8

126.3

48.5

170.3

 

1,009.9

 

(b) Operating profit

 

Operating profit, from continuing operations, split by segment, was as follows:

 

 

Unaudited

Unaudited

 

Half-year to 26 October 2019

Half-year to 27 October 2018 (restated)

 

Performance excluding separately disclosed items

Separately disclosed items

(note 6)

Results for the period

Performance excluding separately disclosed items

Separately disclosed items

(note 6)

Results for the period

 

£m

£m

£m

£m

£m

£m

UK Bus (regional operations)

57.1

(1.0)

56.1

65.2

(18.2)

47.0

UK Bus (London)

5.1

-

5.1

6.1

(5.0)

1.1

Total bus operations

62.2

(1.0)

61.2

71.3

(23.2)

48.1

UK Rail

11.6

(0.8)

10.8

11.5

(0.4)

11.1

 

73.8

(1.8)

72.0

82.8

(23.6)

59.2

Group overheads

(6.1)

(0.8)

(6.9)

(8.1)

(0.6)

(8.7)

Restructuring costs

(0.4)

-

(0.4)

-

-

-

Total operating profit of Group companies

67.3

(2.6)

64.7

74.7

(24.2)

50.5

Share of joint ventures' profit after net finance income and taxation

12.3

-

12.3

12.8

-

12.8

Total operating profit: Group operating profit and share of joint ventures' profit after taxation

79.6

(2.6)

77.0

87.5

(24.2)

63.3

 

4

SEGMENTAL ANALYSIS (CONTINUED)

 

(c) Joint ventures

 

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

 

 

 

Unaudited

Unaudited

 

 

Half-year to

26 October 2019

Half-year to

27 October 2018

 

 

£m

£m

Virgin Rail Group (UK Rail)

 

 

 

Operating profit

 

13.0

13.7

Finance income (net)

 

0.3

0.4

Taxation

 

(2.5)

(2.7)

 

 

10.8

11.4

Citylink (UK Bus, regional operations)

 

 

 

Operating profit

 

1.8

1.7

Taxation

 

(0.3)

(0.3)

 

 

1.5

1.4

Share of profit of joint ventures after finance costs, finance income and taxation

 

12.3

12.8

 

(d) Gross assets and liabilities

 

Assets and liabilities split by segment were as follows:

 

 

Unaudited

Audited

 

As at 26 October 2019

As at 27 April 2019

 

Gross assets

Gross liabilities

Net

assets/

(liabilities)

Gross assets

Gross liabilities

Net

assets/

(liabilities)

 

£m

£m

£m

£m

£m

£m

UK Bus (regional operations)

961.2

(363.0)

598.2

931.8

(321.6)

610.2

UK Bus (London)

114.8

(173.4)

(58.6)

74.0

(144.7)

(70.7)

UK Rail

11.2

(129.3)

(118.1)

50.3

(207.3)

(157.0)

 

1,087.2

(665.7)

421.5

1,056.1

(673.6)

382.5

Central functions

38.6

(29.9)

8.7

50.5

(29.0)

21.5

Joint ventures

28.1

-

28.1

19.9

-

19.9

Borrowings and cash

114.3

(508.2)

(393.9)

170.4

(433.0)

(262.6)

Taxation

4.6

(20.7)

(16.1)

-

(32.9)

(32.9)

Total

1,272.8

(1,224.5)

48.3

1,296.9

(1,168.5)

128.4

 

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

 

 

5

DISCONTINUED OPERATIONS

 

The results for the North American business are presented as discontinued operations, and were as follows:

 

 

Unaudited

Unaudited

 

Half-year to 26 October 2019

Half-year to 27 October 2018 (restated)

 

Performance excluding separately disclosed items

Separately disclosed items

(see below)

Results for the period

Performance excluding separately disclosed items

Separately disclosed items

(see below)

Results for the period

 

£m

£m

£m

£m

£m

£m

Discontinued operations

 

 

 

 

 

 

Revenue

-

-

-

245.7

-

245.7

Operating costs and other operating income

-

-

-

(229.6)

(85.4)

(315.0)

Operating profit/(loss) before restructuring costs

-

-

-

16.1

(85.4)

(69.3)

Restructuring costs

-

-

-

(0.2)

-

(0.2)

 

 

 

 

 

 

 

Profit/(loss) before interest and taxation

-

-

-

15.9

(85.4)

(69.5)

Finance costs

-

-

-

(2.0)

-

(2.0)

 

 

 

 

 

 

 

Profit/(loss) before taxation

-

-

-

13.9

(85.4)

(71.5)

Taxation

-

-

-

(0.4)

-

(0.4)

 

-

-

-

13.5

(85.4)

(71.9)

Loss on disposal of North American business

-

(0.6)

(0.6)

-

-

-

(Loss)/profit after tax from discontinued items

-

(0.6)

(0.6)

13.5

(85.4)

(71.9)

 

The sale of the North American business was concluded prior to 27 April 2019.  As a result, there are no discontinued operations in the half-year to 26 October 2019. 

 

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

 

The tax charge on discontinued operations is lower than the standard rate of corporate income tax in North America (of approximately 26%) applied to the profit before tax, due to the utilisation of previously unrecognised tax losses in the US.

 

The net cash flows of the North American business in the half-year ended 27 October 2018 were as follows:

 

 

Unaudited

 

Half-year to

27 October 2018

 

£m

 

 

Net cash generated by operating activities

18.7

Net cash from investing activities

0.6

Net cash used in financing activities

(19.0)

Net cash inflows for the period

0.3

 

6

SEPARATELY DISCLOSED ITEMS

 

(a) Summary of separately disclosed items

 

The Group highlights amounts before certain "separately disclosed items" as defined in note 24.

 

The items in respect of continuing operations shown in the columns headed "Separately disclosed items" on the face of the consolidated income statement can be further analysed as follows:

 

 

Unaudited

Unaudited

 

Half-year to 26 October 2019

Half-year to 27 October 2018 (restated)

 

Non-software intangible asset amortisation

Other separately disclosed items

Total separately disclosed items

Non-software intangible asset amortisation

Other separately disclosed items

Total separately disclosed items

 

£m

£m

£m

£m

£m

£m

CONTINUING OPERATIONS

 

 

 

 

 

 

Operating costs and other operating income

 

 

 

 

 

 

Non-software intangible asset amortisation

(0.2)

-

(0.2)

-

-

-

Re-organisation costs

-

(2.4)

(2.4)

-

-

-

Equalisation of guaranteed minimum pension benefits

-

-

-

-

(24.2)

(24.2)

 

(0.2)

(2.4)

(2.6)

-

(24.2)

(24.2)

Finance income

 

 

 

 

 

 

Change in fair value of Deferred Payment Instrument

-

1.9

1.9

-

-

-

 

 

 

 

 

 

 

Separately disclosed items before taxation

(0.2)

(0.5)

(0.7)

-

(24.2)

(24.2)

Tax effect

-

0.1

0.1

-

4.1

4.1

Separately disclosed items after taxation

(0.2)

(0.4)

(0.6)

-

(20.1)

(20.1)

 

(b) Re-organisation costs

 

In April 2019, there were two significant events relevant to the Group's overall strategy: the sale of the Group's North America Division and the UK Department for Transport's decision to disqualify the bids that the Group was involved in for new UK rail franchises.  In light of those, the Group subsequently reshaped its management structure and reduced overheads to reflect the reduced scope of the business. The re-organisation costs associated with those changes amounted to £2.4m in the half-year ended 26 October 2019.

 

(c) Change in fair value of Deferred Payment Instrument

 

A Deferred Payment Instrument was received as deferred consideration for the sale of the North American business in April 2019.  The instrument, which is accounted for as fair value through profit or loss, has a maturity date of November 2024 and due to credit and other recoverability risks associated with the instrument, its carrying value is at a discount to its face value.  The Group's exposure to the purchaser of the North American business is unsecured and ranks behind all of its secured lenders.  The carrying value of the instrument was £22.3m as at 27 April 2019.  At 26 October 2019, the carrying value of the instrument was estimated to be £24.2m, resulting in a gain of £1.9m being recognised as finance income in the half-year ended 26 October 2019. 

 

Changes in the fair value of the Deferred Payment Instrument may occur in several consecutive financial years until the holder of the instrument discharges it in full.   The Deferred Payment Instrument is part of the consideration received for the sale of a business and it does not relate to the ongoing operating activities of the Group.  The Directors therefore consider that it is helpful for understanding the Group's financial performance to disclose separately changes in the fair value of the Deferred Payment Instrument.

 

(d) Guaranteed minimum pension equalisation

 

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

 

We worked with our actuarial advisors to understand the implications of the High Court judgement for the schemes in which the Group participates and recorded a £24.2m pre-tax expense in the half-year to 27 October 2018 to reflect our best estimate of the effect on our reported pension liabilities.

 

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

 

7

DIVIDENDS

 

Dividends on ordinary shares are shown below.

 

 

Unaudited

Unaudited

Audited

Unaudited

Unaudited

Audited

 

Half-year to 26 October 2019

Half-year to 27 October 2018

Year to

27 April 2019

Half-year to 26 October 2019

Half-year to 27 October 2018

Year to

27 April 2019

 

pence per share

pence per share

pence per share

£m

£m

£m

Amounts recognised as distributions

 

 

 

 

 

 

Dividends on ordinary shares:

 

 

 

 

 

 

Final dividend in respect of the previous year

3.9

3.9

3.9

21.7

22.4

22.4

Interim dividend in respect of the current year

-

-

3.8

-

-

21.7

Amounts recognised as distributions to equity holders

3.9

3.9

7.7

21.7

22.4

44.1

Dividends declared or proposed but neither paid nor included as liabilities in the financial statements

 

 

 

 

 

 

Dividends on ordinary shares:

 

 

 

 

 

 

Final dividend in respect of the current year

-

-

3.9

-

-

22.3

Interim dividend in respect of the current year

3.8

3.8

-

20.9

21.8

-

 

3.8

3.8

3.9

20.9

21.8

22.3

 

The interim ordinary dividend of 3.8p per ordinary share was declared by the Board of Directors on 11 December 2019 and has not been included as a liability as at 26 October 2019.  It is payable on 4 March 2020 to shareholders on the register at close of business on 24 January 2020.

 

During the half-year ended 26 October 2019, a total amount of £21.7m was paid in respect of the final dividend of 3.9p per ordinary share for year ended 27 April 2019.  That amount is less than the £22.3m shown for the proposed final dividend in the consolidated financial statements for the year ended 27 April 2019.  The difference is due to the purchase by the Company of some of its own ordinary shares during the half-year ended 26 October 2019.  That resulted in fewer ordinary shares being eligible for the final dividend than was assumed in preparing the consolidated financial statements for the year ended 27 April 2019.

 

8

EARNINGS PER SHARE

 

Basic earnings per share ("EPS") have been calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the period, excluding any ordinary shares held in treasury.

 

The diluted earnings per share was calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares in relation to executive share plans and long-term incentive plans. 

 

 

Unaudited

Unaudited

 

 

Half-year to

26 October 2019

Half-year to

27 October 2018

 

 

No. of shares

Million

No. of shares

Million

Basic weighted average number of ordinary shares, excluding treasury shares

 

560.7

573.4

Dilutive ordinary shares

 

 

 

   - Long Term Incentive Plan

 

2.1

-

   - Executive Participation Plan

 

2.9

2.4

Diluted weighted average number of ordinary shares

 

565.7

575.8

 

Adjusted EPS is calculated by adding back separately disclosed items (after taking account of taxation) as shown on the consolidated income statement.  This has been presented to allow shareholders to gain a further understanding of the underlying performance.  The reconciliation of net profit/(loss) for the basic EPS calculation to net profit for the adjusted EPS calculation is shown below.

 

 

Unaudited

Unaudited

 

 

Half-year to 26 October 2019

Half-year to 27 October 2018

 

 

Continuing operations

Discontinued operations

Total of all operations

Continuing operations

Discontinued operations

Total of all operations

 

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

Profit/(loss) attributable to ordinary equity holders of the parent for basic EPS calculation

55.4

(0.6)

54.8

40.2

(71.9)

(31.7)

Non-software intangible asset amortisation (note 6)

0.2

-

0.2

-

-

-

Other separately disclosed items before tax (notes 5 and 6)

0.5

0.6

1.1

24.2

85.4

109.6

Tax effect of separately disclosed items (note 6)

(0.1)

-

(0.1)

(4.1)

-

(4.1)

Profit for adjusted EPS calculation

56.0

-

56.0

60.3

13.5

73.8

               

 

9

GOODWILL

 

The movements in goodwill were as follows:

 

 

Unaudited

Unaudited

Audited

 

Half-year to

26 October

2019

Half-year to

27 October

2018

Year to

27 April

2019

 

£m

£m

£m

Net book value at beginning of period

51.2

142.1

142.1

Acquired through business combinations

-

-

0.3

Disposal of subsidiaries

-

-

(10.1)

Impairment charged to income statement (see note 5)

-

(85.4)

(86.2)

Foreign exchange movements

-

4.6

5.1

Net book value at end of period

51.2

61.3

51.2

 

10

OTHER INTANGIBLE ASSETS

 

The movements in other intangible assets were as follows:

 

 

Unaudited

Unaudited

Audited

 

Half-year to

26 October

2019

Half-year to

27 October

2018

Year to

27 April

2019

 

£m

£m

£m

Cost at beginning of period

34.3

136.6

136.6

Additions

1.9

1.8

4.4

Disposals

(5.6)

(96.6)

(98.2)

Disposals of subsidiaries

-

-

(9.0)

Foreign exchange movements

-

0.6

0.5

Cost at end of period

30.6

42.4

34.3

Accumulated amortisation at beginning of period

(24.6)

(92.2)

(92.2)

Amortisation charged to income statement

(2.4)

(4.4)

(9.6)

Disposals

5.5

68.4

70.1

Disposals of subsidiaries

-

-

7.5

Foreign exchange movements

-

(0.5)

(0.4)

Accumulated amortisation at end of period

(21.5)

(28.7)

(24.6)

Net book value at beginning of period

9.7

44.4

44.4

Net book value at end of period

9.1

13.7

9.7

 

11

PROPERTY, PLANT AND EQUIPMENT

 

The movements in property, plant and equipment were as follows:

 

 

Unaudited

Unaudited

Audited

 

Half-year to

26 October

2019

Half-year to

27 October

2018

Year to

27 April

2019

 

£m

£m

£m

Cost at beginning of period

1,578.6

2,143.5

2,143.5

Recognition of right-of-use assets on adoption of IFRS 16, "Leases"

88.1

-

-

 

1,666.7

2,143.5

2,143.5

 

 

 

 

Additions - purchased assets

26.8

65.8

117.2

Additions - right-of-use assets

7.6

-

-

Disposals

(64.4)

(76.5)

(119.3)

Disposals of subsidiaries

-

-

(591.1)

Foreign exchange movements

-

40.3

28.3

Cost at end of period

1,636.7

2,173.1

1,578.6

Depreciation at beginning of period

(744.6)

(1,006.4)

(1,006.4)

Depreciation charged to income statement

 

 

 

Underlying depreciation charge

(53.1)

(65.5)

(131.4)

"Saving" in depreciation during the period that the North America business was accounted for as "held for sale"

-

-

16.4

Impairment charged to income statement

-

(0.3)

(0.5)

Disposals

57.6

47.0

69.2

Disposals of subsidiaries

-

-

322.9

Foreign exchange movements

-

(22.9)

(14.8)

Depreciation at end of period

(740.1)

(1,048.1)

(744.6)

Net book value at beginning of period

834.0

1,137.1

1,137.1

Net book value at end of period

896.6

1,125.0

834.0

 

12

INTERESTS IN JOINT VENTURES

 

The movements in the carrying values of interests in joint ventures were as follows:

 

 

Unaudited

Unaudited

Audited

 

Half-year to

26 October

2019

Half-year to

27 October

2018

Year to

27 April

2019

 

£m

£m

£m

Net book value at beginning of period

19.9

25.2

25.2

Share of recognised profit

12.3

12.8

23.3

Share of actuarial gains/(losses) on defined benefit pension schemes, net of tax

6.1

(0.1)

(2.8)

Share of other comprehensive expense on cash flow hedges, net of tax

(0.3)

(0.2)

(0.4)

Dividends received in cash

(9.9)

(6.0)

(25.4)

Net book value at end of period

28.1

31.7

19.9

 

A loan payable to joint venture, Scottish Citylink Coaches Limited, of £1.7m (27 April 2019: £1.7m) is included within current liabilities under the caption "Trade and other payables".

 

 

13

BUSINESS COMBINATIONS AND DISPOSALS

 

The Group completed no material business combinations or business disposals in the half-year to 26 October 2019. 

 

On 16 November 2019, the Group acquired the trade and certain assets of the South Gloucestershire Bus & Coach Company Limited for a cash consideration of £2.2m.

 

Details of acquisitions and disposals completed in earlier periods are given in the Group's annual reports for the relevant periods.

 

 

14

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

 

The Group is exposed to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk.

 

These condensed financial statements do not include all financial risk management information and disclosures required in the annual financial statements.  They should be read in conjunction with the Group's consolidated financial statements for the year ended 27 April 2019.  There have been no material changes in any of the Group's significant financial risk management policies since 27 April 2019.

 

Liquidity risk

 

There have been no material changes since 27 April 2019 in the contractual undiscounted cash outflows for financial liabilities.

 

Fair value estimation

 

Financial instruments that are measured in the balance sheet at fair value are disclosed by level of the following fair value measurement hierarchy.

 

Level 1       Quoted price (unadjusted) in active markets for identical assets or liabilities

Level 2       Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices)

Level 3       Inputs for the assets or liabilities that are not based on observable market data (that is, unobservable inputs)

 

The following table represents the Group's financial assets and liabilities that are measured at fair value within the hierarchy at 26 October 2019.

 

 

 

Unaudited

 

 

Level 2

Level 3

Total

 

£m

£m

£m

Assets

 

 

 

Deferred Payment Instrument from disposal of subsidiaries

-

24.2

24.2

Financial derivatives

9.9

-

9.9

Other debtors - embedded derivative

1.6

-

1.6

Total assets

11.5

24.2

35.7

Liabilities

 

 

 

Financial derivatives

(7.0)

-

(7.0)

Total liabilities

(7.0)

-

(7.0)

 

14

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (CONTINUED)

 

The following table represents the Group's financial assets and liabilities that are measured at fair value within the hierarchy at 27 April 2019.

 

 

 

Audited

 

 

Level 2

Level 3

Total

 

£m

£m

£m

Assets

 

 

 

Deferred Payment Instrument from disposal of subsidiaries

-

22.3

22.3

Financial derivatives

27.7

-

27.7

Total assets

27.7

22.3

50.0

Liabilities

 

 

 

Financial derivatives

(2.0)

-

(2.0)

Accruals - embedded derivative

(0.7)

-

(0.7)

Total liabilities

(2.7)

-

(2.7)

 

The Level 2 assets shown in the above tables comprise financial derivatives and embedded derivatives.  The fair value of each financial derivative is determined by the third-party financial institution with which the Group holds the instrument, in line with the market value of similar financial instruments.  The terms of the embedded derivatives mirror those of certain of the financial derivatives.  Accordingly, the fair value of each embedded derivative is determined with reference to the corresponding financial derivative.

 

The embedded derivatives and the corresponding financial derivatives are accounted for at fair value through profit or loss.  The aggregate net effect of these items on the profit for the half-year ended 26 October 2019 was £Nil (half-year ended 27 October 2018: £Nil).  The Group applies relevant hedge accounting to all of its other financial derivatives outstanding as at 26 October 2019. All designated hedge relationships were effective under IFRS 9.

 

The consideration receivable by the Group for the sale of its North American business in April 2019 included a US$65m interest-bearing Deferred Payment Instrument, which is the level 3 asset shown in the tables above.  The Deferred Payment instrument is accounted for as fair value through profit or loss.  The amount of cash that the Group will receive under that Deferred Payment Instrument will be affected by the financial performance of the business sold and the creditworthiness of the purchaser. The contractual value of the instrument is US$65m and the range of values that the Group could recover varies from US$Nil to US$65m plus interest.

 

The Deferred Payment Instrument carries a term of 66 months and a compounding payment in kind interest rate of 6% per annum.  It falls due for payment only on (a) 16 November 2024 or (b) in part, after distributions of US$30m have been made to the purchaser. It is secured by a pledge of shares held in the underlying investment vehicle. Early repayment provisions apply in the event that the purchaser sells all of its shareholding, albeit still subject to the US$30m shareholder distribution priority and in such circumstances, all or part of the Deferred Payment Instrument may never be repaid. If the purchaser sells down below 50% but retains some shares, the whole outstanding amount becomes immediately payable.

 

As at 27 April 2019, the Group recognised the Deferred Payment Instrument as an asset at a carrying value of US$29.2m (£22.3m).  The carrying value has been re-assessed as at 26 October 2019 and adjusted to US$31.1m (£24.2m), with the movement in the carrying value recognised in the consolidated income statement for the half-year ended 26 October 2019.  The carrying value has been determined by discounting forecast cash flows to November 2024. The valuation of the asset takes account of the expected future performance of the business sold and the creditworthiness of the purchaser, and involves significant estimation uncertainty.  The Group's exposure to the purchaser of the North American business is unsecured and ranks behind all of its secured lenders.  As a result, the discount rate applied to the Group's exposure on this instrument is higher than the cost of the Group's secured funding.  The cost of second lien/mezzanine debt has been considered a more appropriate estimate for the credit risk of the instrument.  The key sensitivities within the valuation relate to the projected ongoing cashflows of the business sold and the discount rate applied to these cashflows (10%). Adjusting the cashflows by +/-US$2m (£1.6m) per annum over the forecast period would result in an adjustment to the carrying value of the Deferred Payment Instrument of +/-US$3.9m (£3.0m). Adjusting the discount rate by +/- 100bp would result in an adjustment to the carrying value of the Deferred Payment Instrument of -/+ US$0.5m (£0.4m).

 

14

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (CONTINUED)

 

The Group has no other financial instruments with fair values that are determined by reference to significant unobservable inputs i.e. those that would be classified as level 3 in the fair value hierarchy.

 

There were no transfers between levels during the half-year ended 26 October 2019.

 

The table below provides a comparison of carrying amounts and fair values of the Group's financial instruments.

 

 

 

Unaudited

Audited

 

 

Carrying value

Fair Value

Carrying value

Fair Value

 

 

26 October 2019

26 October 2019

27 April 2019

27 April 2019

 

 

£m

£m

£m

£m

 

 

 

 

 

 

Financial assets

 

 

 

 

 

Financial assets measured at fair value through profit or loss

 

 

 

 

 

-  Non-current assets

 

 

 

 

 

-   Other receivables: Deferred Payment Instrument

 

24.2

24.2

22.3

22.3

-  Current assets

 

 

 

 

 

-   Other receivables

 

1.6

1.6

-

-

Financial assets measured at amortised cost

 

 

 

 

 

-  Non-current assets

 

 

 

 

 

- Other receivables

 

17.1

17.1

12.3

12.3

-  Current assets

 

 

 

 

 

- Accrued income

 

30.0

30.0

32.9

32.9

- Trade receivables, net of impairment

 

24.6

24.6

36.6

36.6

- Other receivables

 

7.0

7.0

5.6

5.6

- Cash and cash equivalents

 

114.3

114.3

170.4

170.4

Total financial assets

 

218.8

218.8

280.1

280.1

Financial liabilities

 

 

 

 

 

Financial liabilities measured at fair value through profit or loss

 

 

 

 

 

-  Current liabilities

 

 

 

 

 

-  Accruals

 

-

-

(0.7)

(0.7)

Financial liabilities measured at amortised cost

 

 

 

 

 

-  Non-current liabilities

 

 

 

 

 

- Borrowings

 

(463.1)

(495.4)

(411.2)

(428.1)

-  Current liabilities

 

 

 

 

 

- Trade payables

 

(24.0)

(24.0)

(59.8)

(59.8)

- Accruals

 

(180.1)

(180.1)

(265.7)

(265.7)

- Loan from joint venture

 

(1.7)

(1.7)

(1.7)

(1.7)

- Borrowings

 

(45.1)

(45.2)

(21.8)

(21.8)

Total financial liabilities

 

(714.0)

(746.4)

(760.9)

(777.8)

Net financial liabilities

 

(495.2)

(527.6)

(480.8)

(497.7)

 

Financial derivatives with bank counterparties are not shown in the above table.

 

The fair values of financial assets and financial liabilities shown in the table are determined as follows:

 

·      The determination of the fair value of the Deferred Payment Instrument is described earlier in this note 14.

                                                                                               

·      The carrying value of cash and cash equivalents, accrued income, trade receivables, and other receivables (excluding the Deferred Payment Instrument) is considered to be a reasonable approximation of fair value.  Given the short average time to maturity, no specific assumptions on discount rates have been made.  The effect of credit losses not already reflected in the carrying value as impairment losses is assumed to be immaterial.  

 

·      The carrying value of trade payables, accruals and loan from joint venture is considered a reasonable approximation of fair value.  Given the relatively short average time to maturity, no specific assumptions on discount rates have been made.

                                                                                               

·      The fair value of fixed-rate notes (included in borrowings) that are quoted on a recognised stock exchange is determined with reference to the "bid" price at the balance sheet date.

 

·      The carrying value of fixed-rate hire purchase and lease liabilities (included in borrowings) is considered a reasonable approximation of fair value taking account of the amounts involved in the context of total financial liabilities and the fixed interest rates relative to market interest rates at the balance sheet date.

 

·      The fair value of other borrowings on which interest is payable at floating rates is not considered to be materially different from the carrying value.

 

 

15

RETIREMENT BENEFITS

 

(a) Overview

 

The Group contributes to a number of pension schemes.  The principal defined benefit pension schemes are as follows:

 

·

The Stagecoach Group Pension Scheme ("SPS");

·

The East Midlands Trains section of the Railways Pension Scheme, although the Group's participation in that ceased in August 2019 ("RPS");

·

The East Coast Main Line section of the Railways Pension Scheme ("RPS"), although the Group's participation in that ceased in June 2018; and

·

A number of UK Local Government Pension Schemes ("LGPS");

 

In addition, the Group contributes to a number of defined contribution schemes.

 

(b) Movements in net pre-tax retirement benefit liabilities

 

The movements for the half-year ended 26 October 2019 in the net pre-tax retirement benefit liabilities recognised in the balance sheet were as follows:

 

Unaudited

SPS

£m

RPS

£m

LGPS

£m

Other

£m

Unfunded plans

£m

Total

£m

Liability/(asset) at beginning of period

187.7

(1.8)

6.6

1.0

4.2

197.7

Current service cost

4.3

0.4

0.7

-

7.7

Administration costs

-

-

-

-

0.4

Net interest expense

0.6

0.1

-

0.1

3.1

Unwinding of franchise adjustment

(0.6)

-

-

-

(0.6)

Employers' contributions

(3.0)

(3.7)

(0.5)

(0.2)

(10.6)

Recognised in the consolidated statement of comprehensive income

0.5

1.0

1.1

0.2

87.5

Liability at end of period

274.2

-

4.4

2.3

4.3

285.2

 

The net liability shown above is presented in the consolidated balance sheet as:

 

 

Unaudited

Audited

 

As at 26 October 2019

£m

As at 27 April 2019

£m

Retirement benefit assets

0.2

1.8

Retirement benefit obligations

(285.4)

(199.5)

Net retirement benefit liability

(285.2)

(197.7)

 

(c) Scheme valuations

 

The latest actuarial valuations of the two sections of SPS were completed as at 30 April 2017.  The combined deficit across the two sections on the Trustees' technical provisions basis was £19.1m, comprising scheme assets of £1,398.3m less benefit obligations of £1,417.4m.  The weighted average discount rate applied in determining the value of those benefit obligations was 4.5%.  The discount rate reflects the asset allocation of SPS and its strong track record of investment returns.

 

The latest actuarial valuations of the relevant LGPS schemes were completed as at 31 March 2016.  The combined deficit across those schemes on the Trustees' technical provisions basis was £44.6m, comprising scheme assets of £292.7m less benefit obligations of £337.3m.  The weighted average discount rate applied in determining the value of those benefit obligations was 3.4%.

 

The latest actuarial valuations of the relevant franchise train operating company sections of RPS were completed as at 31 December 2016.  The weighted average discount rate applied in determining the value of the benefit obligations for the purpose of those valuations was 6.1%.

 

Neither the valuations on the Trustees' technical provisions basis nor the net liabilities reflected in the financial statements reflect the amounts at which the Group could "buy out" its pension obligations.  A "buy out" of the obligations would cost the Group substantially more than the figures reflected in the financial statements. 

 

16

ORDINARY SHARE CAPITAL

 

At 26 October 2019, there were 576,099,960 ordinary shares in issue (27 April 2019: 576,099,960).  This figure includes 25,912,949 (27 April 2019: 3,458,907) ordinary shares held in treasury, which are treated as a deduction from equity in the Group's financial statements.  The shares held in treasury do not qualify for dividends.

 

In April 2019, the Group announced a share buyback programme to buy back shares with an aggregate market value of up to £60m.  In line with the Company's strong capital discipline, the Board decided in October 2019 to conclude the programme when around £30m of shares had been bought back.  The Board was by then satisfied that the programme had largely achieved its objective of making appropriate use of the Group's cash, whilst retaining a good financial position and maintaining an investment grade credit rating.  In the year ended 27 April 2019, the Group purchased 165,779 ordinary shares pursuant to the programme, at a total cost of £0.2m.  Since then, during the half-year ended 26 October 2019, the Group purchased 22,920,256 ordinary shares pursuant to that programme, at a total cost of £30.2m.   The Group concluded the programme on 9 October 2019 having invested £30.4m under the programme in acquiring a total of 23,086,035 ordinary shares.  The shares are held in treasury.

 

17

RECONCILIATION OF OPERATING PROFIT/(LOSS) TO CASH GENERATED BY OPERATIONS

 

The operating profit/(loss) of Group companies reconciles to cash generated by operations as follows:

 

 

Unaudited

Unaudited

 

Half-year to

26 October

2019

Half-year to

27 October

2018

 

£m

£m

Operating profit/(loss) of Group companies

 

 

- Continuing operations

64.7

50.5

- Discontinued operations

-

(69.5)

 

64.7

(19.0)

Separately disclosed items

2.6

109.6

Depreciation

53.1

65.5

Software amortisation

2.2

4.4

Impairment of property, plant and equipment

-

0.3

EBITDA of Group companies before separately disclosed items ("Adjusted EBITDA")

122.6

160.8

Cash effect of current period separately disclosed items

(2.4)

-

Gain/(loss) on disposal of property, plant and equipment

(1.6)

0.7

Share based payment movements

(0.2)

0.4

Operating cashflows before working capital movements

118.4

161.9

Decrease in inventories

4.2

3.7

Decrease in receivables

34.0

50.6

Decrease in payables

(79.9)

(150.1)

Increase/(decrease) in provisions

3.3

(47.8)

Differences between employer contributions and pension expense in adjusted operating profit

 

(2.5)

 

(1.6)

Cash generated by operations

77.5

16.7

 

18

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

 

The movement in cash and cash equivalents reconciles to the movement in net debt as follows:

 

 

 

Unaudited

Unaudited

 

 

Half-year to

26 October

2019

Half-year to

27 October

2018

 

Notes

£m

£m

Decrease in cash and cash equivalents

 

(56.1)

(47.2)

Cash flow from movement in borrowings

 

13.8

2.2

 

 

(42.3)

(45.0)

Recognition of lease liabilities on adoption of IFRS 16

1

(89.0)

-

New leases in period

 

(7.6)

(9.5)

Foreign exchange movements

 

-

(10.5)

Other movements

 

(0.4)

(0.4)

Increase in net debt

 

(139.3)

(65.4)

Net debt at beginning of period

19

(253.3)

(395.8)

Net debt at end of period

19

(392.6)

(461.2)

 

In the half-year ended 26 October 2019, the Group recognised new lease liabilities of £7.6m in addition to the £89.0m recognised as at 28 April 2019 on transition to IFRS 16, "Leases".  During the half-year ended 27 October 2018, the Group entered into finance lease arrangements in respect of assets with a total capital value at inception of the contracts of £9.5m, as a result of which, new finance lease liabilities of £9.5m were recognised. 

 

19

NET DEBT AND CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES

 

The Group considers its liabilities arising from financing activities to be those items included within borrowings shown on the consolidated balance sheet.  The table below summarises the changes in liabilities arising from financing activities.

 

The table below also summarises the changes in cash and net debt (as defined in note 24). 

 

 

 

 

 

Unaudited: Half-year ended 26 October 2019

Opening

£m

Impact of adoption of IFRS 16

£m

Cashflows

£m

New leases

£m

Charged to income statement

£m

Closing

£m

Liabilities arising from financing activities

 

 

 

 

 

 

Borrowings

 

 

 

 

 

 

Lease liabilities

(9.3)

(89.0)

13.7

(7.6)

-

(92.2)

Bank loans and loan notes

(18.2)

-

0.1

-

-

(18.1)

Bonds

 

 

 

 

 

 

- Principal

(400.0)

-

-

-

-

(400.0)

- Unamortised costs & discount on issue

3.8

-

-

-

(0.4)

3.4

Gross debt

(423.7)

(89.0)

13.8

(7.6)

(0.4)

(506.9)

Accrued interest on bonds

(9.3)

-

16.0

-

(8.0)

(1.3)

Total liabilities arising from financing activities

(433.0)

(89.0)

29.8

(7.6)

(8.4)

(508.2)

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

Cash and cash equivalents - pledged as collateral

18.1

-

-

-

-

18.1

Cash and cash equivalents - other

152.3

-

(56.1)

-

-

96.2

Total cash and cash equivalents

170.4

-

(56.1)

-

-

114.3

 

 

 

 

 

 

 

Net debt (total gross debt shown above less total cash and cash equivalents shown above)

(253.3)

(89.0)

(42.3)

(7.6)

(0.4)

(392.6)

 

The total liabilities arising from financing activities shown above are presented as borrowings in the consolidated balance sheet as follows:

 

 

Unaudited

Audited

 

As at 26 October 2019

£m

As at 27 April 2019

£m

Current liabilities: borrowings

45.1

21.8

Non-current liabilities: borrowings

463.1

411.2

Total liabilities arising from financing activities

508.2

433.0

 

The cash collateral balance as at 26 October 2019 of £18.1m (27 April 2019: £18.1m) comprises balances held in respect of loan notes of £18.1m (27 April 2019: £18.1m). 

 

By the half-year end date of 26 October 2019, all of the major rail franchises previously operated by Group subsidiaries had ended. Therefore, as at 26 October 2019, there is no cash (27 April 2019: £121.6m) held by train operating companies. However, the settlement of train operating company assets, liabilities and contractual positions continues for some time following the end of the relevant franchises. As at 26 October 2019, the consolidated net assets included £110.5m of net liabilities in respect of such items. Accordingly, if all such items were to be settled at their 26 October 2019 carrying values, consolidated net debt would increase by £110.5m.   Consolidated net debt plus outstanding train operating company liabilities as at 26 October 2019 was £503.1m and including the Group's share of Virgin Rail Group's undistributed net assets was £481.4m.

 

20

PROVISIONS

 

The Group's provisions at each of 27 April 2019 and 26 October 2019 principally relate to insurance provisions on incurred accidents where claims have not been fully settled.

 

The total provision for uninsured claims of £102.1m (27 April 2019: £97.0m) has increased during the half-year, reflecting the latest assessment of the required provision for claims on major incidents.  This provision contains £17.1m (27 April 2019: £12.2m) which is recoverable from insurance companies and is included within other receivables.  The Group engages with third party actuarial professionals to assist in the calculation of these provisions.

 

21

COMMITMENTS AND CONTINGENCIES

 

(i)

Capital commitments

Capital commitments contracted for the purchase of property, plant and equipment but not provided for at 26 October 2019 were £39.7m (27 April 2019: £61.3m).

 

(ii)

Rail bonds

At 26 October 2019, the Group has provided performance bonds backed by bank facilities or insurance arrangements of £10.0m (27 April 2019: £10.0m) and season ticket bonds backed by bank facilities or insurance arrangements of £Nil (27 April 2019: £7.5m) to the Department for Transport in relation to the Group's rail franchise operations.  Liabilities for deferred season ticket income, which the season ticket bonds are intended to cover, are reflected in the consolidated balance sheet.    

 

(iii)

Legal actions

On 27 February 2019, class action proceedings were filed with the UK Competition Appeal Tribunal ("CAT") against Stagecoach South Western Trains Limited ("SSWT"), a subsidiary of the Company that formerly operated train services under franchise.  The prospective claimant representative has applied to the CAT for a collective proceedings order, which, if it were granted, would allow his claim to proceed to a full trial.  Equivalent claims have been brought against First MTR South Western Trains Limited, which succeeded SSWT as the operator of the South Western franchised train services, and London & South Eastern Railway.  It is alleged that SSWT and the other defendants breached their obligations under competition law, by (i) failing to make available, or (ii) restricting the practical availability of, boundary fares for Transport for London ("TfL") Travelcard holders wishing to travel outside TfL fare zones.  The proposed claim seeks compensation for all those who have allegedly been affected by the train operating companies' allegedly anti-competitive behaviour.  The total sought from SSWT and First MTR South Western Trains Limited is around £57m.  SSWT is arguing against the granting of a collective proceedings order.  The case has been stayed by the CAT pending the Supreme Court's decision in Merricks v Mastercard, which will clarify the test to be applied by the CAT in determining whether a collective proceedings order should be granted or denied. That case is due to be heard in May 2020.  No provision is held as at 26 October 2019 (27 April 2019: £Nil) in respect of this matter.

 

The Group was surprised and disappointed to be informed by the Department for Transport in April 2019 that bids it was involved with for three new rail franchises had been disqualified for being non-compliant, principally in respect of pensions risk. The Group is pursuing claims against the Secretary of State for Transport regarding his decisions to disqualify it from the rail franchise competitions. The three cases are due to be heard in the High Court in early 2020.  In the event that the Group's claims were unsuccessful, the Court is likely to require the Group to pay significant costs.  No provision is held as at 26 October 2019 (27 April 2019: £Nil) in respect of any liability for such a costs order.  The Group estimates that its maximum liability for those costs would be £7.3m.

 

The Group and the Company are from time to time party to other legal actions arising in the ordinary course of business.  Liabilities have been recognised in the financial statements for the best estimate of the expenditure required to settle obligations arising under such legal actions.

 

 

 

 

21

COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

(iv)

Contingent liabilities re former North America Division

The Group sold its North American business in April 2019.  The Group provided warranties and indemnities in connection with the sale, under which the Purchaser can, in certain circumstances, make claims against the Group.  Except for matters for which liabilities are recorded in the consolidated balance sheet, no claims have been notified to the Group or are expected by the Group under those warranties and indemnities.  In addition, the Group has the following contingent liabilities in respect of its former North American business:

 

 

·      The North American business receives claims in respect of traffic incidents and employee incidents. It protects against the cost of such claims through third party insurance policies. An element of the claims is not insured because of the "excess" or "deductible" on insurance policies (the "Uninsured Element").  The North America business is liable for costs of settling the Uninsured Element of claims.  In the event that the business was unable to meet its liabilities for claims then the insurers would be responsible for meeting those liabilities for the Uninsured Element of claims.  To protect themselves against that risk (being, essentially the credit risk of the North America business), the insurers demand collateral typically in the form of letters of credit and guarantees.  In connection with the sale of the North America business, the Group agreed to continue to arrange the letters of credit required by the insurers in respect of claims relating to periods ending on or before April 2019.  The Group indemnifies the banks that issue those letters of credit against any losses suffered by the banks.  The Group has also provided continuing guarantees to the insurers in respect of claims relating to periods ending on or before 30 April 2019.  As at 26 October 2019, the North America business had provided for £61.5m in respect of claims to which the letters of credit and Stagecoach Group guarantees would apply and for which no liability is reflected in the consolidated balance sheet (27 April 2019: £68.2m). 

 

·      The Group continues to guarantee the North American business' obligations under certain vehicle lease arrangements.  The estimated amount guaranteed by the Group in respect of such arrangements as at 26 October 2019 for which no liability is reflected in the consolidated balance sheet was  £1.4m (27 April 2019: £1.5m).

 

 

22

RELATED PARTY TRANSACTIONS

 

Details of major related party transactions during the half-year ended 26 October 2019 are provided below, except for those relating to the remuneration of the Directors and management.

 

(i)

Virgin Rail Group Holdings Limited

Two of the Group's directors are non-executive directors of the Group's joint venture, Virgin Rail Group Holdings Limited.  During the half-year ended 26 October 2019, the Group earned fees of £0.1m (half-year ended 27 October 2018: less than £0.1m) from Virgin Rail Group Holdings Limited in this regard.  As at 26 October 2019, the Group had £0.1m (27 April 2019: £0.1m) receivable from Virgin Rail Group Holdings Limited in respect of this.  In addition, the Group net purchased £1.1m (half-year ended 27 October 2018: £1.8m) from the group headed by Virgin Rail Group Holdings Limited and as at 26 October 2019 had £0.4m (27 April 2019: £0.4m) payable in this respect.

 

(ii)

Alexander Dennis Limited

Until May 2019, when they sold their holdings, Sir Brian Souter (Chairman) and Dame Ann Gloag (Non-Executive Director) collectively held, via companies that they control, 55.1% of the shares and voting rights in Alexander Dennis Limited. Noble Grossart Investments Limited (of which Sir Ewan Brown (Non-Executive Director) was a director of its holding company until 3 January 2019) controlled a further 33.2% of the shares and voting rights of Alexander Dennis Limited. None of Sir Brian Souter, Dame Ann Gloag or Sir Ewan Brown was a director of Alexander Dennis Limited nor did they have any involvement in the management of Alexander Dennis Limited. Furthermore, they did not participate in deciding on and negotiating the terms and conditions of transactions between the Group and Alexander Dennis Limited.

 

For the period from 28 April 2019 to 28 May 2019, the Group purchased £5.0m (half-year ended 27 October 2018: £32.8m) of vehicles from Alexander Dennis Limited and £1.5m (half-year ended 27 October 2018: £4.7m) of spare parts and other services. As at 27 April 2019, the Group had £0.2m payable to Alexander Dennis Limited.

 

 

(iii)

Pension Schemes

Details of contributions made to pension schemes are contained in note 15.

 

 

 

 

22

RELATED PARTY TRANSACTIONS (CONTINUED)

 

 

(iv)

Scottish Citylink Coaches Limited

A non-interest bearing loan of £1.7m (27 April 2019: £1.7m) was due to the Group's joint venture, Scottish Citylink Coaches Limited, as at 26 October 2019.  The Group earned £11.2m in the half-year ended 26 October 2019 in respect of the operation of services subcontracted by Scottish Citylink Coaches Limited (half-year ended 27 October 2018: £10.7m).  The Group also collected revenue of £9.5m on behalf of Scottish Citylink Coaches Limited in the half-year ended 26 October 2019 (half-year ended 27 October 2018: £8.5m).  As at 26 October 2019, the Group had a net £1.8m receivable (27 April 2019: £1.5m payable) from Scottish Citylink Coaches Limited, excluding the loan referred to above.

 

 

(v)

East Coast Main Line Company Limited 

The Group owns 90% and Virgin Holdings Limited owns 10% of the ordinary shares in Inter City Railways Limited. East Coast Main Line Company Limited is 100% owned by Inter City Railways Limited and entered into various arm's length transactions with other Group companies. In the half-year ended 26 October 2019, other Group companies earned £0.3m from East Coast Main Line Company Limited in respect of the provision of certain services (half-year ended 27 October 2018: £2.8m). Other Group companies had a net receivable balance of £0.1m from East Coast Main Line Company Limited as at 26 October 2019 (27 April 2019: £0.3m net payable).

 

As previously reported, an inter-company loan was provided by Stagecoach Group plc to East Coast Main Line Company Limited but as at 28 April 2018, the loan was not expected to be recovered by Stagecoach Group plc and provision was made against the full receivable in the separate financial statements of the parent company.  A loan from Virgin Holdings Limited to Stagecoach Group plc, and the related accrued interest, was only repayable by Stagecoach Group plc to the extent of 10% of any amounts recovered by Stagecoach Group plc of its loan to East Coast Main Line Company Limited.  During the half-year ended 27 October 2018, Stagecoach Group plc settled its loan amount due to Virgin Holdings Limited through the assignment of 10% of its receivable due from East Coast Main Line Company Limited.  As East Coast Main Line Company Limited was unable to settle any of the loans, all amounts were treated as irrecoverable and released on cessation of the Virgin Trains East Coast franchise.  Furthermore, Stagecoach Group plc paid £21m to the Department of Transport in respect of the Virgin Trains East Coast performance bond, of which £2.1m was funded by a payment to Stagecoach Group plc from Virgin Holdings Limited in respect of its 10% share.  The £19.1m effect of the payment from Virgin Holdings Limited in respect of the bond and the release of its loan to East Coast Main Line Company Limited is shown in the Consolidated Statement of Changes in Equity as shareholder transactions with non-controlling interest. In addition, Stagecoach Group plc paid £1.7m to Virgin Holdings Limited in the year ended 27 April 2019 in relation to East Coast Main Line Company Limited and the end of its franchise, and the Group had a payable of £0.6m as at 27 April 2019 in respect of that.

 

 

23

POST BALANCE SHEET EVENTS

 

Details of the interim dividend declared are given in note 7.

 

As disclosed in note 13, the Group acquired the trade and certain assets of the South Gloucestershire Bus & Coach Company Limited for a cash consideration of £2.2m on 16 November 2019.  

 

24

DEFINITIONS

 

(a) Alternative performance measures

 

The Group uses a number of alternative performance measures in this document to help explain the financial performance and financial position of the Group.  More information on the definition of these alternative performance measures and how they are calculated is provided below.  All of the alternative performance measures explained below have been calculated consistently for the half-year ended 26 October 2019 and for comparative amounts shown in this document for prior periods.

 

Adjusted earnings per share 

Adjusted earnings per share is calculated by dividing profit attributable to equity holders of the parent, excluding separately disclosed items, by the basic weighted average number of shares in issue in the period.

 

For the half-year ended 26 October 2019 and the comparative prior year period, the numerators for the calculations (i.e. the adjusted profit) are shown clearly on the face of the consolidated income statement in the columns headed "performance excluding separately disclosed items".  The denominators for the calculations (i.e. the weighted average number of shares in issue) and further details of the calculations are shown in note 8 to the condensed financial statements.

 

Basic earnings per share and adjusted earnings per share are also separately reported for each of the continuing operations and the discontinued operations.  Details of how these are calculated are also provided in note 8. 

 

Like-for-like amounts

Like-for-like amounts are derived by comparing the relevant year-to-date amount with the equivalent prior year period for those businesses and individual operating units that have been part of the Group throughout both periods.

 

Like-for-like revenue growth for the half-year ended 26 October 2019 is calculated by comparing the revenue for the current and comparative periods, each adjusted as described above.  The revenue of each continuing segment is shown in note 4(a) to the condensed financial statements.  Where applicable, the reconciliation to the adjusted revenue figures for the purposes of calculating like-for-like revenue growth is shown below:

 

 

 

 

Unaudited

 

 

 

Half-year to 26 October 2019

 

 

 

Reported revenue

Exclude expired rail franchises

Like-for-like revenue

UK Bus (regional operations)

£m

 

535.1

-

535.1

UK Bus (London)

£m

 

120.6

-

120.6

UK Rail

£m

 

146.3

(138.5)

7.8

 

 

 

Unaudited

 

 

Half-year to 27 October 2018 (restated)

 

 

Reported revenue

Exclude effect of business closed

Exclude expired rail franchises

Like-for-like revenue

UK Bus (regional operations)

£m

527.7

(1.0)

-

526.7

UK Bus (London)

£m

128.6

-

-

128.6

UK Rail

£m

359.3

-

(352.8)

6.5

 

The figures for the half-year to 27 October 2018 have been restated to reflect the amendment to the previously reported impact of applying IFRS 15 (see note 1(d)).

 

Operating profit 

Operating profit for the Group as a whole is profit before non-operating separately disclosed items, finance costs, finance income, taxation and non-controlling interests. Operating profit of Group companies is operating profit on that basis, excluding the Group's share of joint ventures' profit/loss after taxation. For continuing operations, both total operating profit and operating profit from Group companies are shown on the face of the consolidated income statement.  For discontinued operations, operating profit/(loss) is shown in note 5.

 

Operating profit (or loss) for a particular business unit or segment within the Group refers to profit (or loss) before net finance income/charges, taxation, non-controlling interests, separately disclosed items and restructuring costs.  The operating profit (or loss) for each continuing segment is directly identifiable from note 4(b) to the condensed financial statements and for discontinued operations, from note 5.

 

Operating margin 

Operating margin for a particular business unit or segment within the Group means operating profit (or loss) as a percentage of revenue.  The revenue and operating profit (or loss) for each segment is directly identifiable from the financial statements - see notes 4(a), 4(b) and 5 to the condensed financial statements.  The revenue, operating profit (or loss) and operating margin for each continuing segment are also shown on page 5 of this document.
 

24

DEFINITIONS (CONTINUED)

 

Adjusted EBITDA

Adjusted EBITDA is earnings before interest, taxation, depreciation, software amortisation and separately disclosed items.

 

A reconciliation of adjusted EBITDA for the half-year ended 26 October 2019, and the comparative prior year period, to the financial statements is shown on page 12 of this document.

 

Adjusted EBITDA from Group companies

Adjusted EBITDA from Group companies is earnings before interest, taxation, depreciation, software amortisation and separately disclosed items from Group companies (i.e. the parent company and all of its subsidiaries consolidated but excluding share of profit from joint ventures).

 

Adjusted EBITDA from Group companies is directly identifiable from the financial statements - see note 17 to the condensed financial statements.

 

Net finance charges

Net finance charges are finance costs less finance income, each as shown on the face of the consolidated income statement for continuing operations and in note 5 for discontinued operations.

 

Adjusted net finance charges

Adjusted net finance charges are net finance charges (see above) excluding separately disclosed items.

 

Gross debt 

Gross debt is borrowings as reported on the consolidated balance sheet, adjusted to exclude accrued interest on bonds and the effect of fair value hedges on the carrying value of borrowings.

 

The components of gross debt are shown in note 19 to the condensed financial statements, which also reconciles net debt to the net borrowings (cash less borrowings) shown on the face of the consolidated balance sheet.

 

Gross debt as at 26 October 2019 includes lease liabilities in respect of leases that prior to the adoption of IFRS 16 would be regarded as operating leases.  No such lease liabilities are reflected in gross debt as at 27 April 2019.

 

Net debt 

Net debt (or net funds) is the net of cash/cash equivalents and gross debt (see above).

 

The components of net debt are shown in note 19 to the condensed financial statements, which also reconciles net debt to the net borrowings (cash less borrowings) shown on the face of the consolidated balance sheet.

 

Net capital expenditure

Net capital expenditure is the impact of purchases, new leases and sales of property, plant and equipment on net debt.  Its reconciliation to the consolidated financial statements is explained on page 14 of this document.

 

In the half-year ended 26 October 2019 (but not for the half-year ended 27 October 2018), net capital expenditure includes new lease liabilities arising in the period on leases that prior to the adoption of IFRS 16 would have been regarded as operating leases.

 

(b) Other definition

 

The following other definition is also used in this document:

 

Separately disclosed items

Separately disclosed items means:

 

·      Non-software intangible asset amortisation;

·      Items which individually or, if of a similar type, in aggregate need to be separately disclosed by virtue of their nature, size or incidence in order to allow a proper understanding of the underlying financial performance of the Group; and

·      Changes in the fair value of the Deferred Payment Instrument received in relation to the sale of the North America Division in April 2019 (see note 6).

 

Changes in the fair value of the Deferred Payment Instrument may occur in several consecutive financial years until the holder of the instrument discharges it in full.   The Deferred Payment Instrument is part of the consideration received for the sale of a business and it does not relate to the ongoing operating activities of the Group.  The Directors therefore consider that it is helpful for understanding the Group's financial performance to disclose separately changes in the fair value of the Deferred Payment Instrument.

 

Independent review report to Stagecoach Group plc

 

Introduction

 

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 26 October 2019 which comprises:

 

·      The Consolidated Income Statement for the half-year ended 26 October 2019;

·      The Consolidated Statement of Comprehensive Income for the half-year ended 26 October 2019;

·      The Consolidated Balance Sheet as at 26 October 2019;

·      The Consolidated Statement of Changes in Equity for the half-year ended 26 October 2019,

·      The Consolidated Statement of Cash Flows for the half-year ended 26 October 2019;

·      The related explanatory notes.

 

We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

 

Directors' Responsibilities

 

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

 

Our Responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of Review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 26 October 2019 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

Ernst & Young LLP

Glasgow

11 December 2019

Notes:

(a)    The maintenance and integrity of the Stagecoach Group plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial information since they were initially presented on the web site.

 

(b)    Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.
 
END
 
 
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