UK Bus (regional operations)

 

Summary

·      Revenue per vehicle mile up 2.7% ·      Journeys per vehicle mile up 0.3% ·      Investment in enhancing customer experience ·      Fastest growing contactless transit scheme in Europe ·      No change to expected full year profit

 

Financial performance

 

The financial performance of the UK Bus (regional operations) Division for the half-year ended 28 October 2017 is summarised below, with operating profit slightly below last year:

 

	H1 2018 £m	H1 2017 (Restated) £m	Change
Revenue	512.4	513.9	(0.3)%
Like-for-like revenue	512.3	512.9	(0.1)%
Operating profit*	61.6	64.9	(5.1)%
Operating margin*	12.0%	12.6%	(60)bp

 

Early in 2017, we took action to adjust our pricing and services to respond to changes in customer demand and protect the profitability of the business.  We continue to focus on operating the right routes with prices and service frequencies that offer good value for money and reflect the pattern of customer demand.  Vehicle miles operated in the first half of the year were 2.9% lower than in the equivalent period last year.  The vehicle miles we operate on a commercial basis were reduced by 1.5% with greater reductions in the mileage tendered by local authorities and operated under contract.  Reflecting the actions taken, revenue per vehicle mile grew 2.7%, journeys per vehicle mile grew 0.3% and revenue per journey increased 2.4%.

 

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

 

	H1 2018 £m	H1 2017 £m	Change %
Commercial on and off bus revenue
- megabus.com	11.2	11.2	-
- other	307.8	303.5	1.4%
Concessionary revenue	125.9	127.5	(1.3)%
Commercial & concessionary revenue	444.9	442.2	0.6%
Tendered and school revenue	47.6	49.7	(4.2)%
Contract and other revenue	19.8	21.0	(5.7)%
Like-for-like revenue	512.3	512.9	(0.1)%

 

The growth in commercial revenue reflects the actions we have taken, with improvement in the yield per journey.  Our low-fares strategy remains central to our customer offer.  Combined with a focus on operational excellence and continued investment, that underpins our strategy for growth.  Reflecting that emphasis on operational excellence, we operated 99.6% of our scheduled mileage in the half-year.

 

We are starting to see improving trends at our megabus.com business in the UK after a period of disappointing performance in the half-year reflecting weakness in the wider inter-city coach market. We are addressing this through improved yield management, reviewing our network and operational plans, and modifying our commercial and marketing strategy.

 

The decline in concessionary revenue includes the continuing effects of changes in the age of eligibility for free bus travel by older people, as we have previously reported.  We have also seen a reduction in the concessionary reimbursement rate paid to bus operators in Manchester and lower financial support in Wales for bus travel by young people.

 

We continue to work with local authorities to maximise the community value from the financial support they can provide for socially desirable transport services.  The decline in tender revenue mainly reflects further reductions by local authorities in the tendered bus services that they support.  We do not believe the bottom of this cycle has yet been reached and we anticipate some further cuts in tender services over the next year or so.

 

While relatively small, the movements in contract and other revenue include the effects of year-on-year changes in the amount and timing of one-off contract and events work.

 

The movement in operating margin was built up as follows:

 

Operating margin - H1 2017 (restated)	12.6%
Change in:
Staff costs	(0.9)%
Fuel costs	0.6%
Other	(0.3)%
Operating margin - H1 2018	12.0%

 

The main changes in the operating margin shown above are:

 

·      As expected, staff costs have continued to rise, and not all headcount varies with vehicle miles.  The half-year staff costs include over £1m in respect of the new Apprenticeship Levy applied by the UK Government to fund new apprenticeships.  However, staff costs remain under control with wage awards in the period being in line with our forecast assumptions and stable staff retention rates.

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

·      Other costs have increased, including higher depreciation as a result of our continued fleet investment.

 

Enhanced customer experience

 

We are continuing to make significant investment to further enhance customers' experience.  We are harnessing technology to make travel easier for our customers. Stagecoach bus passengers across the UK can now pay on the bus for their travel using a contactless credit or debit card, Apple Pay or Android Pay. The £12m programme is the fastest growing contactless transit scheme in Europe through 2017. We have added the Scottish Citylink coach network to an expanded national roll-out programme which will see the technology installed on all of our buses across the UK by the end of 2018.

 

In July 2017, we launched a blueprint to help ensure bus services can effectively serve new housing developments being planned across the country. Failure to integrate public transport to new developments results in a greater cost to the economy in lost productivity, poorer air quality, longer working days because of extra commuting time and a less safe living environment with more cars on the road.

 

We are continuing to improve our product offer in our local bus networks for young people, who are a key element of our customer base now and in the future. There is an opportunity to use new technology to make bus travel more attractive to Millennials, who research shows are less likely to aspire to car ownership and are more open to the 'sharing economy'.

 

Commercial initiatives for growth

 

In addition to the developments explained above, our restructured UK Bus commercial team is pursuing a number of other commercial initiatives to support the growth of the Division, examples of which are as follows:

 

·      Reflecting changes in travel patterns, we have seen stronger growth on our urban and inter urban networks.  Additional areas of potential growth in these parts of the business have been identified and implementation plans are being developed.

·      Linked to that, we are evaluating opportunities for more demand responsive services in a number of locations.

·      Building on work to understand the segmentation of our existing and potential customer base, we are exploring the development and implementation of a new customer relationship management ("CRM") system to engage and improve customer loyalty and yield.

·      Our work on customer segmentation will also inform improved marketing to drive revenue growth, placing less emphasis on the traditional sector approach of "publicity" and developing closer engagement with prospective customers.

·      While we are thinking about the changing travel landscape, we are also ensuring we continue to perform the basics well.  We are re-visiting how we communicate our offers across all of our offline and online channels, including how we deliver understandable information on journeys and fares.

·      We are reviewing price elasticities, price points and ticketing structures to simplify our ticket offering while continuing to offer value for money and meet customers' expectations.  We are aiming to evolve our ticket offering to reflect changing travel, shopping and working patterns.

·      We see opportunities to increase the volume of work we undertake to support events, festivals and other businesses, where new technology can support an increased capability to grow revenue in these areas.

 

Outlook

 

We are encouraged that the effects of the management actions undertaken at the start of 2017 have been in line with our expectations.  Our expectation of the Division's operating profit for the year ending 28 April 2018 is accordingly unchanged.

UK Bus (London)

 

Summary

·      Positive tender results ·      Maintaining sustainable contract pricing

 

Financial performance

 

The financial performance of the UK Bus (London) Division for the half-year ended 28 October 2017 is summarised below:

 

	H1 2018 £m	H1 2017 £m	Change
Revenue and like-for-like revenue	128.4	131.5	(2.4)%
Operating profit	6.5	9.1	(28.6)%
Operating margin	5.1%	6.9%	(180)bp

 

We are pleased that through the contract tenders on which the outcomes were confirmed during the first half of our financial year, we have achieved a net 4.5% increase in contracted annual bus mileage.  That should benefit our revenue in the next financial year, 2018/19.  The revenue impact of contracts lost in the prior year is reflected in this year's financial performance and is weighted towards the second half of the financial year.

 

The decrease in operating margin was expected and was built up as follows:

 

Operating margin - H1 2017	6.9%
Change in:
Staff costs	(0.8)%
Other operating income	(0.4)%
Operating lease costs	(0.4)%
Other	(0.2)%
Operating margin - H1 2018	5.1%

 

Consistent with the UK Bus (regional operations), the new Apprenticeship Levy has added to the UK Bus (London) Division's staff costs in the half-year.  The current year staff costs also reflect pay awards and the implementation of previously disclosed plans to increase starting rates of pay for bus drivers.

 

Advertising income fell year-on-year, reflecting lower yields for on-bus advertising experienced by London bus operators more generally.  This is reflected in the reduction in other operating income shown in the table above.  Operating lease costs have moved as a percentage of revenue, principally due to year-on-year changes in end of lease vehicle return costs.

 

We see significant differences in the level of bus depot capacity versus the demand from Transport for London for bus services across the different areas of London.  We are exploring the extent to which that presents us with opportunities for growth and/or possible re-deployment of capital.

 

Outlook

 

Although our 2017/18 operating margin is likely to be below our long-term aspiration of around 7%, we are encouraged by tender results so far this year.  While Transport for London's plans to reduce contracted bus mileage in London presents a risk to the Division, we will aim to maintain our contract pricing at a sustainable level where service quality can be maintained and the financial returns reflect the capital invested.

 

North America

 

Summary

·      Improved revenue trends ·      Innovative technology use to manage safety risks ·      New megabus.com website performing well ·      On course to grow profit in 2017/18

 

Financial performance

 

The financial performance of the North America Division for the half-year ended 28 October 2017 is summarised below:

 

	H1 2018 US$m	H1 2017 (Restated) US$m	Change
Revenue	333.9	338.4	(1.3)%
Like-for-like revenue	333.3	332.9	0.1%
Operating profit	27.6	22.8	21.1%
Operating margin	8.3%	6.7%	160bp

 

The growth in like-for-like revenue reflects the improving trend we have seen in the first half of the year and is reflected in increased operating profit along with the benefit of lower fuel costs.

 

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

 

	H1 2018 US$m	H1 2017 US$m	Change
Megabus.com	97.0	101.7	(4.6)%
Scheduled service
-   Commercial revenue	81.4	80.8	0.7%
-   Support from local authorities	6.1	7.0	(12.9)%
Charter	61.0	66.5	(8.3)%
Contract services	72.0	58.7	22.7%
Sightseeing and tour	15.8	18.2	(13.2)%
Like-for-like revenue	333.3	332.9	0.1%

 

Trading at our megabus.com inter-city coach business in North America continues to show some signs of improvement. Revenue per vehicle mile increased 3.2% year-on-year reflecting the changes we made to our network to better match our services with customer demand.  

 

Trading at the other businesses in North America remains in line with our expectations. Like-for-like revenue at these businesses increased by 2.2%. We have been encouraged by further additional revenue generated from our focus on contract opportunities. In the first half of the year, we have benefitted from rail replacement contracts linked to train disruptions on New Jersey Transit and Long Island Rail Road as a result of track repair work at Pennsylvania Station in New York.  This has contributed to the reduction in charter revenue as we deployed some vehicles on the rail contract work that would otherwise have been available for charter.  Elsewhere, weak sightseeing markets have impacted some of our services, and we see potential to restructure our sightseeing operations to improve profitability.

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

 

Operating margin - H1 2017 (restated)	6.7%
Change in:
Staff costs	(0.5)%
Fuel costs	1.8%
Insurance and claims costs	0.4%
Other	(0.1)%
Operating margin - H1 2018	8.3%

 

The main changes in the operating margin shown above are:

 

·      Staff costs have continued to rise as a proportion of our revenue base.  That includes increased overtime levels at some locations, where we are working to recruit new drivers to reduce the need for overtime working.  In addition, we continue to see above-inflation increases in the cost of US healthcare benefits and the improved financial performance of the Division is reflected in higher staff incentive costs.

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

·      The change in insurance and claims costs reflects our latest assessment of the required provision for claims on major incidents.  Our relentless focus on safety and reducing accident rates also brings financial benefits through reduced insurance and claims cost.  We see opportunities to further reduce claims costs, including through technology investment.  For example, we are trialling "seeing machines" capable of monitoring for driver fatigue and distraction in real-time.

 

Customer experience

 

The investment we have made in our new megabus.com website has improved our customers' experience and is supporting our growth.  The new website provides a much improved experience for those visiting the website on a mobile device.  For those visiting on a desktop device, we have seen an 11% improvement in the conversion rate in the US, and a 22% improvement in the conversion rate in Canada, for the half-year compared to the equivalent period last year. We have also seen improvements in the bounce rate, being the percentage of visitors who leave the site without any interaction.  In the half-year, this is 13% down year-on-year for the US and 46% down for Canada.  The website also brings new functionality that has allowed us to improve our search engine rankings.  We have used these to create route and destination pages that drive organic traffic to the site from unbranded searches.  We saw a 42% increase in sessions from organic search from September 2016 to September 2017.

 

Our ongoing refinement of yield management at megabus.com has allowed us to maintain our reputation for good value for money while improving yield based on patterns of demand.

 

Outlook

 

We remain on course to grow the Division's operating profit in 2017/18, reflecting our targeted pursuit of contract opportunities, and management action to match our services with customer demand at our megabus.com inter-city coach business.

 

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

 

UK Rail

 

Summary

·      Good profits from South West Trains and East Midlands Trains ·      Progressing negotiations with Department for Transport on new contract at Virgin Trains East Coast ·      East Midlands Trains franchise extended to March 2019 with plans for a further direct award franchise beyond that time ·      Bids for new franchises ·      UK rail franchises moving to a more balanced risk profile ·      Limited exposure to long-term rail revenue risk

 

Financial performance

 

The financial performance of the UK Rail Division for the half-year ended 28 October 2017 is summarised below:

 

	H1 2018 £m	H1 2017 (Restated) £m	Change
Revenue	905.6	1,092.3	(17.1)%
Like-for-like revenue	596.6	579.0	3.0%
Operating profit	21.7	19.5	11.3%
Operating margin	2.4%	1.8%	60bp

 

Our UK Rail business continues to see growth in revenue, with like-for-like revenue up 3.0% year-on-year, reflecting 3.0% growth at each of East Midlands Trains and Virgin Trains East Coast.

 

The profit for the half-year principally reflects good profitability at East Midlands Trains and South West Trains.  The South West Trains franchise expired in August 2017; its profitability in the period was strong and included the resolution of a number of contractual matters as part of the transition of the train operations to a new operator.  There remain a number of matters to finalise in respect of the South West Trains franchise and we continue to press for a timely resolution of those.  Consistent with our other franchises, the outcome on open contractual matters could result in adjustments to our current estimates of assets and liabilities.

 

The UK Rail Division's reported profit reflects the utilisation of the onerous contract provision recorded at April 2017 in respect of the current contractual arrangements at Virgin Trains East Coast. As forecasted, Virgin Trains East Coast continues to incur trading losses under the current contract, which have been applied against the onerous contract provision.

Virgin Trains East Coast - contractual arrangements

 

We welcome the Secretary of State for Transport's recent announcement on the planned new direction for the UK rail network, which is consistent with a vision for the railway that we have championed over many years.  As part of that, we and the Department for Transport are discussing new terms for the East Coast franchise and we are hopeful of reaching an agreement within the next few months.  Our objective is to address the changed circumstances affecting the franchise, deliver value for money for taxpayers, provide innovative solutions to drive better outcomes for customers, and secure a fair deal for investors. There is no change to either the estimate of the onerous contract provision reported in June or the extent of the maximum financial commitments of the parent company in respect of the current franchise contract.  The onerous contract provision is based on a forecast that assumes the £165m loan commitment is funded in full.

 

Virgin Trains East Coast - investment and customer satisfaction

 

Virgin Trains East Coast is continuing the transformation of its services for customers.  As well as investing in our fleet of trains, we have made our website more personalised and easier to navigate. We have introduced improved features such as new tools to search for the best fares, and the ability to buy season tickets online. Customers can take advantage of easy-to-use mtickets and can now book tickets 24 weeks before travel.

 

Innovation is continuing to improve the journey experience for customers before, during and after travel. Virgin Trains' revolutionary new on-train entertainment streaming service, BEAM, has been well received by customers, along with a range of on-train catering improvements. We also recently launched an industry first tool, TrainMapper, aimed at helping customers avoid rail disruption on their journey and get to their destination. The new Seatfrog app allows customers to bid for first class upgrades on trains where space permits.

 

These improvements have helped drive a historic shift in travel patterns as more Scotland-London passengers are now choosing train over plane than at any time in more than 20 years. Virgin Trains East Coast has achieved strong customer ratings, with 91% satisfaction in the latest National Rail Passenger Survey. Net advocacy scores have also increased significantly.

 

We are introducing 24 new services on Saturdays, bringing that day's level of service more in line with our Monday-Friday operation and allowing us to put 6,000 additional cheap tickets on sale every week. In early 2018, new sensors will detect which seats on our trains are occupied. This will provide us with data to inform customers about spare seats on our services and also enable more dynamic on-the-day pricing.

 

East Midlands Trains

 

Like-for-like revenue at East Midlands Trains grew by 3.0% for the period, with growth in the early months of the period adversely affected by the terrible terrorist events in London and Manchester.  The business continues to deliver good levels of profitability.

 

The Department for Transport has exercised its pre-contracted option to extend the East Midlands Trains franchise to March 2019, with plans for a further Direct Award franchise beyond that time.  We look forward to the next competitively tendered East Midlands franchise which the Department for Transport has indicated will be operated by a joint team overseeing both train operations and rail infrastructure management.

 

Consistent with our drive for operational excellence, East Midlands Trains continues to deliver amongst the best punctuality for customers of any inter-city rail franchise. We are continuing to invest in improvements for customers, including better value ticketing, improved information and station developments.  In summer 2017, we introduced a new app and mobile website to make booking easier. We have introduced purchase on the day for Advance tickets on selected routes to offer better value fares, building on lower Advance Purchase fares that we are already making available on quieter trains to London. In August, East Midlands Trains launched a new ticket tool offering customers email alerts as soon as Advance tickets become available on a particular route on their chosen travel date. We have also started the roll-out of mobile ticketing, with the facility already live in Derby, Nottingham, and London St. Pancras.

 

Passengers have responded well to the launch of our most frequent ever Sunday services on the route between Lincoln and Nottingham, with new hourly services for most of the day. The new Ilkeston station - which incorporates fully accessible platforms, modern waiting areas and car park - has expanded commuter and leisure travel options, as well as exceeding forecasts for passenger demand and revenue.

 

East Midlands Trains recently invested more than £300,000 in new train driver simulator technology at our Derby training academy, which will revolutionise driver training, briefings and assessments.  We have also completed a highly successful recruitment campaign to employ additional drivers. In addition, we are working closely with Network Rail on planning for a major Derby station remodelling and signalling system upgrade. The work will remove a bottleneck which often results in trains waiting outside of the station. The bulk of the work will take place in 2018.

 

Most recent independent research shows that 89% of customers at East Midlands Trains are satisfied with their service, equalling the best ever results and marking a 3% year-on-year improvement. 

 

South West Trains

 

In August, we completed the delivery of our South Western rail franchise, working collaboratively with the new operator and industry partners to ensure a smooth transition.

 

Sheffield Supertram

 

The first passenger service of the new Citylink vehicles to be used for the innovative Tram Train project took place at Sheffield Supertram in September.  The project, which will improve journeys between Sheffield and Rotherham, is the first of its kind in the country and due for completion in 2018. We are also making the first changes to the Supertram timetable in 15 years to improve reliability following a significant increase in traffic on roads across Sheffield.

Franchising update

 

We are working on new opportunities in the UK franchised rail market.  We are shortlisted to bid for the South Eastern franchise and we are also bidding for the West Coast Partnership franchise jointly with Virgin Group and SNCF.

 

We are encouraged by indications of an improving risk-reward balance in new franchise competitions.  The Department for Transport is looking to move to a more comprehensive sharing of revenue risk on new franchises and while this will likely vary from franchise to franchise, we expect to see the return of arrangements where the Department shares in revenue variances versus the relevant bid irrespective of the causes of those variances.  We expect such an arrangement to apply to the new South Eastern franchise.  While the train operating company will still bear some revenue risk on most new franchises awarded by the Department, we anticipate that its exposure to revenue risk will be significantly less than on franchises awarded in the last few years, such as the Virgin Trains East Coast franchise.  We are also encouraged to see signs of moderation in the level of capital put at risk on individual franchises.  While we recognise the importance that franchise bids are backed with significant risk capital, we continue to believe that the level of risk capital should be commensurate with the potential financial returns.

 

We have delivered good investor returns from UK rail over more than 20 years and some of the biggest returns for taxpayers. We are focussed on ensuring that any bid for a new franchise is designed to achieve an acceptable balance of risk and expected reward and based on the emerging re-balancing of risk in UK rail franchises, we are optimistic that we can deliver satisfactory financial returns from UK rail.

 

Outside the UK, we were one of five bidders shortlisted for an early train operator contract for a new high-speed railway being constructed in California. However, following the receipt of more information, we decided not to progress the bid based on weighing up the risks and opportunities.  Nevertheless, we do not rule out pursuing other rail opportunities outside the UK.

 

Outlook

 

Revenue growth in the UK rail sector has, in recent years, been below the levels typically seen since privatisation in the 1990s.  That said, revenue has continued to grow and we aim to support a growing, vibrant rail network in the UK.  From our own perspective, our financial returns are driven less by the outlook for rail revenue growth in general and more by how actual revenue growth compares to that assumed in our relevant franchise bid.  At this time, we are therefore relatively content to have limited further exposure to long-term rail revenue growth, reflecting that:

 

·      We expect to conclude a new contract at Virgin Trains East Coast within the next few months and have the opportunity to ensure that any revenue risk that remains with us is acceptable.

·      The current East Midlands Trains franchise has only around 15 months to run and Virgin Rail Group's current West Coast franchise has only a few months to run.  Both continue to report good levels of profit.  We can take account of recent revenue trends, assess revenue risk sharing arrangements and form a view on longer term revenue expectations as part of agreeing any new contracts.

·      In our bids for new franchises, we will assess revenue trends, revenue risk sharing arrangements and longer term revenue expectations to ensure we do not take unacceptable long-term rail revenue risk.  Developments in the Department for Transport's thinking on revenue risk sharing are welcome.

 

Any UK Rail operating profit for the second half of 2017/18 is expected to be modest, reflecting the end of our South West Trains franchise and higher rail bidding costs, partially off-setting the expected profitability at East Midlands Trains.

 

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

 

Group overheads

 

Group overheads were £7.9m in the half-year ended 28 October 2017 compared to £6.3m in the equivalent prior year period.  The overheads include the cost of some digital projects we are working on outside of the core operating divisions.

 

Virgin Rail Group

 

Summary

·      Continuing good financial performance ·      High customer satisfaction ·      Progressing towards new direct award franchise

 

Financial performance

 

The financial performance of the Group's Virgin Rail joint venture for the half-year ended 28 October 2017 is summarised below:

 

49% share:	H1 2018 £m	H1 2017 £m
Revenue and like-for-like revenue	288.5	280.1
Operating profit	14.8	17.1
Net finance income	0.2	0.3
Taxation	(2.9)	(3.5)
Profit after tax	12.1	13.9
Operating margin	5.1%	6.1%

 

Although Virgin Rail Group's operating profit has fallen slightly year-on-year, its West Coast rail franchise continues to perform well, with like-for-like revenue growth of 3.0% for the half-year ended 28 October 2017, and a good profit margin. That good performance continues to benefit taxpayers through profit share payments by the business to the UK Department for Transport.  The reduction in profit reflects a lower rate of revenue growth being more than offset by cost increases and the premia payable to the Department.

 

Virgin Rail Group is continuing to drive improvements for customers as it celebrates 20 years of operating the West Coast route. Virgin Trains has broken new records for passengers travelling between Liverpool and London. Sales of digital tickets have more than trebled in a year, with around 20% of Virgin Trains customers now choosing this form of ticket on the West Coast route. Customer satisfaction remains amongst the highest in the UK, with the latest National Rail Passenger Survey showing an overall satisfaction score of 92%.

 

Virgin Rail Group is making good progress towards agreeing a new direct award contract with the Department for Transport to run from April 2019.  We are hopeful that this will be concluded shortly.

 

Pre-exceptional EBITDA, depreciation and intangible asset amortisation

 

Earnings before interest, taxation, depreciation, intangible asset amortisation and exceptional items (pre-exceptional EBITDA) amounted to £189.9m (H1 2017: £191.0m).  Pre-exceptional EBITDA can be reconciled to the financial statements as follows:

 

	H1 2018 £m	H1 2017 £m	Year to 28 Oct 2017 £m
Total operating profit	114.8	108.9	181.9
Intangible asset amortisation	5.5	8.1	14.2
Depreciation	66.7	70.5	141.7
Add back joint venture finance income & tax	2.9	3.5	6.5
Pre-exceptional EBITDA	189.9	191.0	344.3

 

Intangible asset amortisation reduced from £8.1m to £5.5m, reflecting the write-down in intangible assets at Virgin Trains East Coast in the year to 29 April 2017.

 

Depreciation reduced from the previous year reflecting the cessation of our South Western rail franchise.

 

Exceptional items

 

There were no exceptional items recognised in the half-year ended 28 October 2017.

 

Net finance costs

 

Net finance costs for the half-year ended 28 October 2017 were £18.1m (H1 2017: £16.6m) and are further analysed below.  The small increase in net finance costs is principally due to higher interest expense on defined benefit pension schemes arising from changes in market-driven assumptions used to determine pension amounts.

 

	H1 2018 £m	H1 2017 £m
Finance costs
Interest payable and facility costs on bank loans, overdrafts and trade finance	1.9	2.2
Hire purchase and finance lease interest payable	0.8	1.0
Interest payable and other finance costs on bonds	10.9	10.9
Unwinding of discount on provisions	1.8	1.8
Interest expense on defined benefit pension schemes	3.4	1.9
	18.8	17.8
Finance income
Interest receivable on cash	(0.3)	(0.7)
Unwinding of discount on receivable	-	(0.5)
Effect of interest rate swaps	(0.4)	-
	(0.7)	(1.2)
Net finance costs	18.1	16.6

 

 

Taxation

 

The effective tax rate for the half-year ended 28 October 2017, excluding exceptional items, was 21.7% (H1 2017: 21.3%). The tax charge can be analysed as follows:

 

Half-year to 28 October 2017	Pre-tax profit £m	Tax £m	Rate %
With joint venture taxation gross	99.8	(21.7)	21.7%
Reclassify joint venture taxation for reporting purposes	(3.1)	3.1	-
Reported in income statement	96.7	(18.6)	19.2%

 

Fuel costs

 

The Group's operations as at 28 October 2017 consume approximately 391m 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	2018	2019	2020	2021
Total Group	83%	74%	58%	23%

The Group has no fuel hedges in place for periods beyond April 2021.

 

Cash flows and net debt

 

Consolidated net debt has, as expected, increased from 29 April 2017, reflecting operating cash outflows at Virgin Trains East Coast, the transfer of cash following the expiry of the South West Trains franchise, additional capital investment, the timing of interest payments associated with our 4.00% bonds, partly offset by continued cash generation from other operations.

 

Net cash from operating activities before tax for the half-year ended 28 October 2017 was £44.2m (H1 2017: £142.9m) and can be further analysed as follows:

 

	H1 2018 £m	H1 2017 £m
EBITDA of Group companies before exceptional items	174.1	172.5
(Gain)/loss on disposal of property, plant and equipment	(0.4)	0.4
Equity-settled share based payment expense	0.3	1.0
Working capital movements	(112.9)	(20.7)
Net interest paid	(20.3)	(21.1)
Dividends from joint ventures	3.4	10.8
Net cash flows from operating activities before taxation	44.2	142.9

 

Net debt (as analysed in note 18 to the condensed financial statements) increased from £409.4m at 29 April 2017 to £482.8m at 28 October 2017. The movement in net debt, showing train operating companies separately, was:

 

Half-year to 28 October 2017	Train operating companies £m	Other £m	Total £m
EBITDA of Group companies before exceptional items	34.1	140.0	174.1
(Gain)/loss on disposal of property, plant and equipment	0.1	(0.5)	(0.4)
Equity-settled share based payment expense	0.1	0.2	0.3
Working capital movements	(127.1)	14.2	(112.9)
Net interest paid	(1.0)	(19.3)	(20.3)
Dividends from joint ventures	-	3.4	3.4
Net cash flows from operating activities before taxation	(93.8)	138.0	44.2
Inter-company movements	(12.7)	12.7	-
Tax paid	(5.4)	0.4	(5.0)
Investing activities	3.2	(70.2)	(67.0)
Financing activities	-	(47.6)	(47.6)
Foreign exchange/other	-	2.0	2.0
Movement in net debt	(108.7)	35.3	(73.4)
Opening net debt	219.4	(628.8)	(409.4)
Closing net debt	110.7	(593.5)	(482.8)

 

The expiry of the South West Trains franchise has increased our net debt in the period by around £50m.  We would anticipate a further net cash outflow in this respect of up to £30m as we conclude open matters.  The closing cash balance of £110.7m for train operating companies shown in the table above excludes South West Trains.

 

The working capital movements in the half-year are principally due to the expiry of the South West Trains franchise referred to above and the previously provided for cash losses at Virgin Trains East Coast.

 

The impact of purchases of property, plant and equipment for the half-year on net debt was £89.5m (H1 2017: £138.6m).  This primarily related to expenditure on passenger service vehicles, and comprised cash outflows of £60.8m (H1 2017: £108.9m) and new hire purchase and finance lease debt of £28.7m (H1 2017: £29.7m).  In addition, £30.7m (H1 2017: £13.1m) of cash was received from disposals of property, plant and equipment.  Around £22.5m (H1 2017: £11.0m) of this cash received related to the UK Rail Division, which include South West Trains' assets sold to the new franchise operator.

 

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

 

	H1 2018 £m	H1 2017 £m
UK Bus (regional operations)	31.4	83.0
megabus Europe	(1.7)	-
UK Bus (London)	0.7	0.8
North America	34.9	30.9
UK Rail	(6.5)	10.8
	58.8	125.5

 

In addition to the amounts shown in the table above, a further net £8.2m (H1 2017: £8.5m) was invested in software and a technology business.

 

Financial position and liquidity

 

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

 

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

 

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

·     The ratio of net debt at 28 October 2017 to pre-exceptional EBITDA for the year ended 28 October 2017 was 1.4 times (year ended 29 October 2016: 1.4 times). 

·     Pre-exceptional EBITDA for the half-year ended 28 October 2017 was 10.6 times (H1 2017: 11.7 times) net finance charges (including joint venture net finance income).

·     Undrawn, committed bank facilities of £387.7m at 28 October 2017 (29 April 2017: £333.8m) were available to be drawn as bank loans with further amounts available only for non-cash utilisation. In addition, the Group has available asset finance lines.

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

 

Net assets

 

Net assets at 28 October 2017 were £272.0m (29 April 2017: £68.5m).  The increase in the net assets reflects the good financial results for the half-year ended 28 October 2017, actuarial gains on defined benefit pension schemes and fair value gains on cash flow hedges, partly offset by dividends paid. 

 

Retirement benefits

 

We are pleased that our net retirement benefit obligations have reduced in the half-year, reflecting good investment returns on pension scheme assets, higher interest rates, changes in inflation assumptions and experience gains on the Stagecoach Group Pension Scheme.  The Group recognised pre-tax actuarial gains of £184.6m in the half-year ended 28 October 2017 (H1 2017: pre-tax actuarial losses of £137.1m) on Group defined benefit schemes. 

 

The reported net assets of £272.0m (29 April 2017: £68.5m), that are shown on the consolidated balance sheet are after taking account of net pre-tax retirement benefit liabilities of £57.8m (29 April 2017: £232.5m), and associated deferred tax assets of £14.9m (29 April 2017: £44.4m).

 

Related parties

 

Details of significant transactions with related parties are given in note 21 to the condensed financial statements.

 

Principal risks and uncertainties

 

Like most businesses, there is a range of risks and uncertainties facing the Group.  A brief summary is given below of those specific risks and uncertainties that the Directors believe could have the most significant impact on the Group's financial position and/or future financial performance.  Pages 10 to 14 of the Group's 2017 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 performance. In assessing the Group's likely financial performance for the second half of the current financial year, these risks and uncertainties should be considered in addition to the matters referred to regarding seasonality in note 3 to the condensed financial statements, and the comments made later under the heading "Outlook".

 

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

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

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

·      Rail cost base - a substantial element of the cost base of the UK Rail Division is essentially fixed as under its UK rail franchise agreements, the Group is obliged to provide a minimum level of train services and is less able to flex supply in response to changes in demand.

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

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

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

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

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

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

 

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

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

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

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

·      Litigation - there is a risk of commercial and consumer litigation arising from the legal environment in some markets, particularly North America.

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

 

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 performance, the financial measures that we use include those which have been derived from our reported results in order to eliminate factors which distort period-on-period comparisons. These are considered non-GAAP financial measures, and include measures such as like-for-like revenue, pre-exceptional EBITDA and net debt. We believe this information, along with comparable GAAP measurements, is useful to shareholders and analysts in providing a basis for measuring our financial performance. Note 23 to the condensed financial statements provides further information on these non-GAAP financial measures.

 

Updating definition of adjusted earnings per share

 

As well as reporting earnings per share in accordance with Generally Accepted Accounting Principles, we also report an adjusted earnings per share measure to help explain the financial performance of the Group. For some years, our measure of adjusted earnings per share has been calculated with reference to profit excluding intangible asset expenses and exceptional items.

 

In our preliminary results announcement of 28 June 2017, we noted our intention to discuss with analysts and investors whether adjusting our definition of adjusted earnings per share to include software amortisation would provide them with a more useful measure of performance, reflecting the growth in these costs as we have invested in our digital programmes. We confirmed in our trading statement of 28 September 2017 that based on those discussions and consistent with emerging market practice, we will now report adjusted earnings per share inclusive of software amortisation. The adjusted earnings per share of 13.6p that we have reported for the half-year ended 28 October 2017 has been determined on that basis.

 

The effect on previously reported amounts of including these costs within adjusted earnings per share is set out below:

 

Half-year ended 29 October 2016	Build-up of adjusted EPS	Software amortisation	Revised build-up of adjusted EPS
	£m	£m	£m
UK Bus (regional operations)	66.6	(1.7)	64.9
megabus Europe	(4.6)	-	(4.6)
UK Bus (London)	9.1	-	9.1
North America	17.5	(0.5)	17.0
UK Rail	20.5	(1.0)	19.5
Group overheads and restructuring costs	(7.1)	-	(7.1)
Joint ventures	15.0	-	15.0
Finance costs (net)	(16.6)	-	(16.6)
Taxation	(17.9)	0.6	(17.3)
Non-controlling interests	(0.1)	-	(0.1)
Profit for adjusted earnings per share	82.4	(2.6)	79.8
	Pence	Pence	Pence
Adjusted earnings per share	14.4p	(0.5)p	13.9p

 

Year ended 29 April 2017	Build-up of adjusted EPS	Software amortisation	Revised build-up of adjusted EPS
	£m	£m	£m
UK Bus (regional operations)	121.1	(4.1)	117.0
megabus Europe	(4.3)	-	(4.3)
UK Bus (London)	18.4	-	18.4
North America	19.3	(1.1)	18.2
UK Rail	31.0	(2.5)	28.5
Group overheads and restructuring costs	(18.9)	-	(18.9)
Joint ventures	26.2	-	26.2
Finance costs (net)	(34.1)	-	(34.1)
Taxation	(20.7)	1.4	(19.3)
Non-controlling interests	1.7	0.1	1.8
Profit for adjusted earnings per share	139.7	(6.2)	133.5
	Pence	Pence	Pence
Adjusted earnings per share	24.4p	(1.1)p	23.3p

 

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 28 October 2017.

 

Outlook

 

Our expectation of adjusted earnings per share for the year ending 28 April 2018 is unchanged.

 

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

 

 

 

 

Martin Griffiths

Chief Executive

6 December 2017