SGC.L Regulatory News (SGC)

8 December 2010

Stagecoach Group plc - Interim results for the six months ended 31 October 2010

Business highlights

·; Adjusted earnings per share* up 35.6% to 12.2p

·; Interim dividend up 10.0% to 2.2p

·; Strong organic growth across Group portfolio

·; Sector-leading profit margin and organic passenger volume growth at UK Bus

·; Significant turnaround opportunity from London bus acquisition

·; Excellent operational delivery and high customer satisfaction underpin strong UK Rail performance

·; megabus.com expansion driving revenue growth in North America

·; Growth in business and leisure revenue at Virgin Rail Group

Financial summary

Commenting on the results, Chief Executive, Brian Souter, said: 

"These are a strong set of results and we are encouraged by the increased demand for our services in the UK and North America. Our focus on value-for-money bus and rail travel and targeting organic growth has been the right strategy for the right time, benefitting our customers and our shareholders.

"We have delivered further revenue and passenger volume growth at our sector-leading UK Bus operations. Our investment in greener, high quality buses and the introduction of smartcard technology across our entire UK fleet means we can remain at the forefront of modal shift from car to public transport. We are pleased to have re-entered the London bus market and we believe we can deliver good value to our shareholders from the turnaround opportunity.

"Excellent operational performance and high customer satisfaction have underpinned strong revenue growth in our commuter and long-distance UK rail businesses. Our joint venture, Virgin Rail Group, has delivered further high levels of passenger revenue growth from both the business and leisure travel markets.

"Our budget inter-city coach brand, megabus.com, is driving growth in our North American business and we are excited about the prospects for further expansion.

"The Group has a strong financial position and we remain focused on robust cost control. We have made a good start to the second half of the financial year and current trading remains in line with management expectations. While we continue to monitor closely the rate and sustainability of economic recovery, we look forward with confidence and believe the outlook is positive for our bus and rail services."

Enquiries to:

Martin Griffiths, Stagecoach Group +44 (0) 1738 442111

Steven Stewart, Stagecoach Group +44 (0) 1738 442111 or +44 (0) 7764 774680

John Kiely, Smithfield Consultants +44 (0) 20 7360 4900

Copies of this announcement are available at www.stagecoachgroup.com/scg/ir/finanalysis/reports/2010

Chairman's statement

I am pleased to report that the Group has achieved a strong set of results and we are continuing to grow our bus and rail operations in the UK and North America. Our strategy of targeting organic growth has given us a sound base to benefit from improving market conditions.

We are committed to providing safe, good value travel, delivering high levels of performance and satisfaction to our customers. We are seeing positive growth trends in all of our businesses and we are confident we can continue to deliver long-term value to our shareholders.

Following the announcement of the UK Government's Comprehensive Spending Review earlier this year, we have some clarity on the funding position for UK public transport in the medium-term. While the changes announced will have an impact on the cost and delivery of bus and rail services, we are working hard to minimise the effect on the business and its customers. At the same time, we are focused closely on cost control and operational efficiency, and we believe we are well placed to manage the impact of the changes on our business.

The Group is in a strong financial position and we have achieved good revenue and profit growth in the first half of the year. Revenue for the six months ended 31 October 2010 was £1,133.6m (2009: £1,081.4m). Total operating profit (before intangible asset expenses and exceptional items) was up 33.4% at £124.7m (2009: £93.5m), reflecting increased profit in all divisions. Earnings per share before intangible asset expenses and exceptional items were 35.6% higher at 12.2p (2009: 9.0p).

Our sector-leading UK bus operations have achieved further revenue and passenger volume growth as a result of our value pricing strategy. We have now completed the introduction of smartcard technology at all of our UK bus regional operations, which will deliver further commercial opportunities and support our marketing campaigns to encourage modal shift to public transport. In October, we announced we were re-entering the London bus market with the acquisition of our former operations. This has given the Group a 15% market share in London and complements our successful regional bus operations in the UK. We look forward to addressing the significant turnaround opportunity to deliver good value to our shareholders and the people of London.

We are pleased at the strong revenue growth in our commuter and long-distance rail operations at South Western Trains and East Midlands Trains, as well as the performance of our joint venture, Virgin Rail Group. Our programme of fleet and station investments is delivering a better service to passengers, who are also benefitting from high levels of operational performance and customer service.

In North America, our budget coach brand, megabus.com, is the engine for growth as we expand the range of destinations in the United States and Canada. Revenue has stabilised at our other North American businesses, despite the challenging economy and continuing high levels of unemployment.

In line with the Group's good performance, the Directors have declared an interim dividend of 2.2p per share (2009: 2.0p), a 10% increase. The interim dividend is payable on 9 March 2011 to shareholders on the register at 11 February 2011. Stagecoach has made a good start to the second half of our financial year and current trading remains in line with our expectations.

As previously announced, after almost sixteen years as a director, I will retire from the Board on 31 December 2010 and Sir George Mathewson, the Senior Independent Non-Executive Director, will become Chairman. I am proud of the leading role Stagecoach and its employees have taken over that period and throughout the past 30 years in transforming public transport. I am leaving with the business in excellent health and well placed to benefit from significant opportunities ahead. I am confident the Group will continue to deliver good value to our shareholders and provide good quality bus and rail services for our customers.

Robert Speirs

Chairman 8 December 2010

Interim management report

The Directors of Stagecoach Group plc are pleased to present their report on the Group for the six months ended 31 October 2010.

Description of the business

Stagecoach Group plc is a public limited company that is incorporated, domiciled and has its registered office in Scotland. Its ordinary shares are publicly traded and it is not under the control of any single shareholder. The Company has its primary listing on the London Stock Exchange.

Throughout this document, Stagecoach Group plc is referred to as "the Company" and the group headed by it is referred to as "Stagecoach" or "the Group".

The Group is a leading international public transport group, with extensive operations in the UK, United States and Canada. The Group employs around 34,000 people, and operates bus, coach, train, and tram services. The Group has four main divisions - UK Bus (regional operations), UK Bus (London), UK Rail and North America.

Cautionary statement

The interim management report and the preceding Chairman's statement have been prepared for the shareholders of the Company, as a body, and no other persons. Their 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. This interim management report and the preceding Chairman's statement contain forward-looking statements that are subject to risk factors associated with, amongst other things, the economic and business circumstances occurring from time to time in the countries, sectors and markets in which the Group operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables that could cause actual results to differ materially from those currently anticipated. No assurances can be given that the forward-looking statements will be realised. The forward-looking statements reflect the knowledge and information available at the date of preparation. Nothing in the Chairman's statement or 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.

Overview of financial results

The Group has achieved continued strong financial and operational performance in the six months ended 31 October 2010. All divisions have reported increased revenue and operating profit.

Revenue by division is summarised below:

Operating profit by division is summarised below:

UK Bus (regional operations)

Our UK Bus regional operations connect communities in more than 100 towns and cities across the UK on networks stretching from the Highlands and Islands of Scotland to south-west England. These include major city bus operations in Liverpool, Newcastle, Hull, Manchester, Oxford, Sheffield and Cambridge.

Financial performance

Revenue from our UK Bus regional operations for the six months ended 31 October 2010 was up 2.8% to £445.1m, compared to £433.0m in the prior year. Like-for-like revenue growth was 2.3%, principally from increased passenger volumes. Operating profit was £73.3m (2009: £58.9m). Operating margin was 16.5%, compared to 13.6% in 2009.

We have delivered further revenue and passenger volume growth at our UK Bus regional operations. Over a number of years, our UK Bus volume growth and profit margins have been the best in the sector and we also offer the best value fares of any major UK operator. Our value fares strategy and focus on organic growth has ensured we have maintained a strong customer base. The revenue growth in the six months is consistent with our plan for modest fare rises in 2010-11 and we believe we are well placed to benefit from the improving economy. Road congestion, higher fuel pump prices and increasing Government "green taxes" on road transport also support modal shift to public transport.

Our UK Bus regional operations are benefitting from lower fuel costs in 2010-11, compared to the previous year. Diesel fuel costs for the six months ended 31 October 2010 were around £7m below the equivalent prior year period and other costs continue to be closely managed.

As part of the Comprehensive Spending Review, the UK Government announced a 20% reduction in Bus Service Operators Grant ("BSOG") from April 2012. The decision to make no immediate change to BSOG will give operators time to plan and make adjustments to take account of this reduced public investment. We will take the changes into account when making future decisions on bus services, tenders and fares. The bus industry through the Confederation of Passenger Transport is continuing to engage with the Department for Transport ("DfT") regarding its proposed changes to concessionary bus travel, particularly in relation to the potential impact on levels of reimbursement.

Regulatory developments

Stagecoach, along with the rest of the UK bus industry, continues to assist the Competition Commission with its consideration of the local bus market. We believe strongly that our experience of attracting more passengers to bus travel through high quality services and low fares demonstrates that the commercial regional bus market is operating effectively and that bus operators face strong competition from the private car. We expect the Competition Commission to publish its preliminary findings at the end of January 2011, and to complete the inquiry in summer 2011.

Outlook

We expect UK Bus revenue growth in the second half of the financial year to 30 April 2011 to remain relatively modest, reflecting our decision to minimise fare increases during a period of economic recovery. After taking account of the year-on-year savings in fuel costs, the UK Bus regional operations remain well placed to report increased operating profit for the year as a whole. Fuel costs will increase in the financial year to 30 April 2012 and we will consider this when making decisions on fare increases for that year. Longer term, the growth prospects for the UK Bus regional operations remain strong with increasing environmental awareness, rising road congestion and broadly supportive government policy.

UK Bus (London)

We are the third largest operator in the London bus market, with an estimated 15% share of that market. The business operates bus services under contract to Transport for London, receiving a fixed fee (subject to adjustment for certain inflation indices) and taking the cost and capital risk. The business operates from 10 depots and has a fleet of around 1,400 buses serving routes in and around east and south-east London.

Financial performance

In October 2010, the Group completed the acquisition of the bus business formerly owned by East London Bus Group Limited (in administration), acquiring four companies that together operate the business. The cash paid in respect of the acquisition was £59.5m, inclusive of amounts to settle inter-company liabilities payable by the acquired business to its former parent company. The closing enterprise value (being the aggregate of the consideration paid and the net debt assumed with the acquisition) on the date of completion was £56.0m, taking account of the cash in the acquired business at completion.

We operated a successful and profitable bus business in London for several years and are pleased to re-enter the London bus market at an attractive price. We believe there is an opportunity to add value through a turnaround of the under-performing business and through synergies with the rest of the Group. Our turnaround plan is focused on addressing the structurally high cost base and bidding contracts to earn a satisfactory return. New vehicles for the business will be financed primarily through operating leases. We do not underestimate the challenges we face in driving up the financial performance of the acquired business, and our strategy to improve profitability may result in some revenue shrinkage. Our long-term aspirations are for mid to upper single-digit operating margins and we are confident we can apply our expertise in managing UK bus businesses to create value from a turnaround situation.

North America

Stagecoach provides a range of transport services in North America. Our businesses include the budget coach brand, megabus.com, commuter/transit services, inter-city services, tour and charter, and school bus operations.

Financial performance

Revenue from our North American operations for the six months to 31 October 2010 was up 7.2% at US$237.3m (2009: US$221.4m), and the equivalent like-for-like revenue was up by 7.5%. Operating profit was US$23.1m (2009: US$13.5m), resulting in an operating margin of 9.7%, compared to 6.1% the previous year. The increased profit and margin reflects the benefits of revenue growth and reduced fuel costs. Converted to sterling, revenue for the six months to 31 October 2010 was £155.1m (2009: £136.6m). Operating profit for the six months was £15.1m (2009: £8.3m).

megabus.com continues to be the growth engine of our business in North America. Passenger demand is strong and we are continuing to expand our range of destinations. megabus.com now covers nearly 50 cities from hubs in Chicago, New York, Philadelphia, Washington D.C. and Toronto. The market for budget travel has bucked the trend of the wider economy and we have created more than 250 jobs over the past two years. More than 7.7 million passengers have now travelled with the service in the United States and Canada since the concept was exported from the UK in 2006, and the service is now carrying more than 250,000 passengers a month. Moving forward, we expect megabus.com to account for an increasing proportion of our North American business.

We continue to take steps to match services to demand in the non-megabus.com parts of our business, as well as focusing on cost control. While the economic environment remains challenging, we have seen further stabilisation in revenue. We have a flexible business model and have taken action to reduce costs and miles operated, with vehicles in charter operations redeployed as part of our megabus.com growth strategy.

Outlook

The North America Division is well positioned to deliver increased operating profit for the financial year ending 30 April 2011 with continued strong growth at megabus.com, improving revenue trends in the rest of the business and reduced year-on-year fuel costs. Consistent with the UK Bus Division, fuel costs for North America will increase in the year to 30 April 2012 but the outlook remains positive with the prospect of further megabus.com expansion and ongoing recovery in the other businesses.

UK Rail

The Group has major rail operations in the UK, operating both the South Western and East Midlands rail franchises. South Western incorporates the South West Trains and Island Line networks. South West Trains runs around 1,700 train services a day in south-west England out of London Waterloo railway station, while Island Line operates on the Isle of Wight. The South Western franchise is expected to run until February 2017. The East Midlands Trains franchise comprises main line train services running to London St Pancras, regional rail services in the East Midlands area and inter-regional services between Norwich and Liverpool. The franchise will run until 31 March 2015 assuming the Group meets agreed performance targets.

Stagecoach is also Britain's biggest light rail operator. The Group runs Supertram, a 28km light rail network incorporating three routes in the city of Sheffield, on a concession running until 2024. We also operate and maintain the Manchester Metrolink tram network under a 10-year contract with Greater Manchester Passenger Transport Executive ("GMPTE") which commenced in July 2007.

Financial performance

Revenue from our UK Rail subsidiaries for the six months to 31 October 2010 was up by 2.4% to £525.0m (2009: £512.9m). On a like-for-like basis, revenue excluding our tram operations is up 6.4%. Operating profit was £22.9m (2009: £14.9m), giving an operating margin of 4.4% (2009: 2.9%). We have benefitted from improving passenger trends at our South Western Trains and East Midlands Trains franchises. South Western Trains, which makes premium payments to the DfT, qualifies for revenue support payments under the terms of its contract as revenues remain below that forecast when the contract was originally awarded. The first revenue support payments are expected to be received in March 2011, which will cover the period from 1 April 2010. As expected, East Midlands Trains has made a loss in the first half of the year and qualifies for revenue support from November 2011.

Operational performance

Operational performance at our East Midlands Trains and South Western Trains franchises is consistently amongst the highest of the UK train operators. East Midlands Trains has been the best performing long distance train operator since January 2009, as well as being named the most improved regional train operator. The most recent figures show that the moving annual average for punctuality at South Western Trains is 93% on what is Britain's largest and most complex rail network. Satisfaction amongst our passengers also remains high. The latest National Passenger Survey, carried out during Spring 2010, shows overall satisfaction of 85% at South Western Trains and 86% at East Midlands Trains.

Regulatory developments

As part of the Comprehensive Spending Review, the Government has retained the Retail Price Index ("RPI") +1% formula for regulated fare increases for January 2011. However, this will change to RPI +3% from January 2012 as part of a wider policy to shift the funding of the railways more towards the passenger, so that the taxpayer pays less. All additional income raised by the decision will be passed through by train operating companies to Government. Regulated fares account for roughly half of all rail journeys and we will continue to offer a range of good value fares to suit the different budgets of our customers.

The Group has continued to engage with the DfT on the way forward for reform of the industry. There are significant opportunities to deliver a more efficient and more passenger focused railway that provides better value to taxpayers and an appropriate return on the investment by shareholders.  We are analysing the interim conclusions of Sir Roy McNulty's value for money review of the rail industry, and we expect the final report in April 2011.  We believe there needs to be radical reform to address the structure, revenues and costs of the wider industry, including Network Rail. It is our view that targeted testing of vertical integration where train operators are responsible for both train operations and infrastructure maintenance is part of the solution.

We note the Government's announcement of 7 December 2010 of its plan for implementing rail franchise reform and its intention for the tendering of specific franchises. We look forward to proposals in 2011 for rail industry reform and we will continue to evaluate franchise opportunities as they emerge in light of these policy decisions. We believe the Government needs to be clear about what it wants to "buy" and the risks it is prepared to take if it is to get best value from the private sector. Future franchising should be determined on output specification based on service levels, operational performance, crowding and passenger service. We would also support longer franchises on the right terms, reduced fares regulation and appropriate risk-sharing between train companies and the Government. More control for train companies over costs and inputs, as well as a more commercial approach to financial commitments, will also deliver a better railway for all stakeholders.

Tram

Stagecoach is Britain's biggest tram operator and the light rail systems we operate in Manchester and Sheffield are important to their local communities. We have recently appointed a new management team for our light rail operations, which will play a role in delivering further improvements and continuing to work successfully with our Passenger Transport Executive partners.

Supertram continues to deliver exceptional levels of service reliability and has achieved good revenue growth. At Metrolink, trams now serve the major employment centre at Media City in Salford Quay and further track extensions are scheduled to be completed next year.

Outlook

The actions we took to reduce costs and protect revenues will enable the UK Rail Division to deliver a good operating profit for the year ending 30 April 2011 notwithstanding the effects of the recession. Excluding any new franchise wins, the Division could see reduced operating profit in subsequent years but with the protection of revenue support, it should continue to earn a satisfactory return.

Virgin Rail Group

The Group has a 49% shareholding in Virgin Rail Group ("VRG"), which operates the West Coast Trains rail franchise. The other shareholder in VRG is the Virgin Group of Companies. The current franchise runs through until 2012.

Financial performance

Our share of VRG's profit after tax for the six-month period was £10.0m (2009: £9.3m). Our share of operating profit was £13.7m (2009: £12.8m), our share of finance income was £0.1m (2009: £0.1m) and our share of taxation charges was £3.8m (2009: £3.6m).

VRG has continued to maintain the strong passenger revenue growth achieved following the introduction of its high frequency timetable in December 2008, particularly on Anglo-Scottish services where customers whose travel arrangements were affected by the volcanic ash cloud have chosen to travel increasingly by rail. Passenger volume growth has been well ahead of other long-distance train operators and annual customer numbers are now more than double the level in 2004.

Business and First Class traffic has grown in recent months, supported by an improved economic environment and better infrastructure performance leading to more reliable services. Customer satisfaction is also at its highest level, with the Spring 2010 National Passenger Survey results showing 90% of passengers are satisfied with their overall travel experience. Investment has continued to improve the Virgin Trains website, provide more fast ticket machines and increase the number of car parking spaces at stations to meet the growing demand.

Business development

We are disappointed that the DfT has not accepted VRG's compelling proposal for a two-year extension to the current West Coast franchise and we look forward to understanding the Government's detailed proposals for the next West Coast franchise, which is to run until 2026.

Outlook

VRG expects to continue to report good profit through to the end of the existing West Coast franchise in March 2012 and will evaluate opportunities to bid for major inter-city rail franchises, including the new West Coast franchise.

Twin America

In North America, Stagecoach operates a joint venture, Twin America LLC, with CitySights NY. The joint venture, which was established on 31 March 2009, operates sightseeing services in New York under both the Gray Line and CitySights brands. The Group holds 60% of the economic rights and 50% of the voting rights in the joint venture. Twin America LLC is headed by a Chief Executive and overseen by a joint Board.

Financial performance

We are pleased by the strong financial performance of our Twin America joint venture in the six months ended 31 October 2010. The business has benefited from an increased number of visitors to New York City. Our share of operating profit for the six months increased to US$13.9m (2009: US$12.8m) driven by a 10.7% increase in revenue. The outlook for Twin America remains positive and we are confident of further growth in its revenue and profit.

The tax treatment of our share of profit is such that the joint venture's own profit is partially taxed but an additional tax charge falls on the joint venture partners and the effect of that on the Group is included within "taxation" in the consolidated income statement.

Depreciation and intangible asset expenses

Earnings from continuing operations before interest, taxation, depreciation, intangible asset expenses and exceptional items (pre-exceptional EBITDA) amounted to £171.7m (2009: £147.9m). Depreciation increased from £38.2m to £42.6m. The income statement charge for intangible assets decreased from £5.7m to £4.4m, of which £2.5m (2009: £2.5m) related to joint ventures.

Pre-exceptional EBITDA can be reconciled to the condensed financial statements as follows:

Exceptional items

A pre-tax gain of £18.5m was recognised in the six months ended 31 October 2010 in relation to the release of liabilities related to previous disposals of businesses.

A pre-tax gain of £4.6m was recognised in the six months ended 31 October 2010 being the revision to the estimated insurance provision in relation to pre-acquisition liabilities.

A pre-tax loss of £0.6m was recognised in the six months ended 31 October 2010 being expenses incurred in relation to the acquisition of our UK Bus (London) operations.

Taxation

The tax charge for continuing operations can be analysed as follows:

The effective tax rate for the six months ended 31 October 2010, excluding exceptional items, was 23.4% (2009: 19.1%).

Earnings per share

Earnings per share before intangible asset expenses and exceptional items for the six months ended 31 October 2010 increased 35.6% to 12.2p, from 9.0p in the prior year. Basic earnings per share increased from 8.5p to 14.6p.

Fuel costs

The Group's operations as at 31 October 2010 consume approximately 370.5m litres of diesel fuel per annum. As a result, the Group's profit is exposed to movements in the underlying price of fuel.

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

The Group has no fuel hedges in place for periods beyond 30 April 2014.

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.

Cash flows

Net cash from operating activities before tax for the six months ended 31 October 2010 was £116.6m (2009: £67.4m) and can be further analysed as follows:

Net cash from operating activities before tax was £116.6m (2009: £67.4m) and after tax was £110.8m (2009: £78.0m). The £35.0m (2009: £53.0m) working capital movement is principally due to revenue support accrued by South Western Trains as receivable but not due to be received in cash until March 2011. Although the revenue support will be collected in March, we still expect a working capital outflow for the full year to 30 April 2010 mainly due to the settlement of amounts payable to the DfT relating to the rail regulatory Control Period 4. Net cash outflows from investing activities were £125.2m (2009: £34.3m), which included £56.7m (2009: £0.5m) in relation to acquisitions in the period, and net cash used in financing activities was £19.1m (2009: £86.9m).

Net debt

Net debt (as analysed in note 19 to the condensed financial statements) increased from £296.7m at 30 April 2010 to £313.4m at 31 October 2010, which includes a £56.6m increase in net debt from the acquisition of the London bus operations.

The Group's net debt at 31 October 2010 is further analysed below.

* The split between fixed rate and floating rate sterling bonds is after taking account of the effect of interest rate derivatives that synthetically convert £150.0m of fixed rate debt to floating rate debt.

The net impact of purchases of property, plant and equipment for the six months on net debt was £83.3m (2009: £87.4m). This primarily related to expenditure on passenger service vehicles, and comprised cash outflows of £78.0m (2009: £52.3m) and new hire purchase and finance lease debt of £5.3m (2009: £35.1m). In addition, £9.6m (2009: £15.8m) cash was received from disposals of property, plant and equipment.

Liquidity and bank re-financing

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

·; The ratio of net debt at 31 October 2010 to pre-exceptional EBITDA for the twelve months ended 31 October 2010 was 1.0 times (2009: 1.1 times).

·; Pre-exceptional EBITDA for the six months ended 31 October 2010 was 10.8 times (2009: 8.3 times) net finance charges (including joint venture net finance income).

·; Undrawn, committed bank facilities totalled £337.0m at 31 October 2010 (30 April 2010: £345.9m) including £31.3m (30 April 2010: £24.9m) that is only available for non-cash utilisation. In addition, the Group continues to have available asset finance lines.

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

The Group's main bank facilities are committed through to 2012. We have begun the process to replace these facilities and we expect to have new facilities in place by the end of the current financial year.

Capital expenditure

Additions to property, plant and equipment for the six-month period were:

The differences between the amounts shown above and the impact of capital expenditure on net debt arose from movements in fixed asset deposits and creditors.

Business combinations

On 14 October 2010, Stagecoach Bus Holdings Limited ("SBHL"), a Group subsidiary, completed the acquisition of the bus business formerly owned by East London Bus Group Limited (in administration). SBHL acquired 100% of the voting equity interests in four companies that together operate the acquired business. The acquired business is the third largest bus operator in the London market, and has an estimated 15% share of that market. 99% of its revenue is from Transport for London. The business operates bus services under contract to Transport for London whereby it receives a fixed fee (subject to adjustment for certain inflation indices) for operating the services and takes the cost and capital risk.

The cash paid in respect of the acquisition was £59.5m, comprising £5.4m for the entire share capital of the acquired companies and £54.1m to settle inter-company liabilities payable by the acquired companies to their former parent company. The Group believes that there is a compelling rationale for acquiring the business at the price paid. Building on recent steps to improve operational performance, there is an opportunity to add value through a turnaround of the under-performing business and through synergies with the wider Group. Further details are given in note 14 to the condensed financial statements.

The Group has made no other material acquisitions in the six months ended 31 October 2010.

Net assets

Net assets at 31 October 2010 were £152.1m (30 April 2010: £12.7m) with the increase in net assets primarily reflecting the strong results for the six months and actuarial gains on defined benefit pension schemes of £54.5m after tax, partly offset by after-tax movements on cash flow hedges of £14.9m.

Retirement benefit obligations

The reported net assets of £152.1m (30 April 2010: £12.7m) that are shown on the consolidated balance sheet are after taking account of pre-tax net retirement benefit liabilities of £110.4m (30 April 2010: £202.1m).

The Group recognised pre-tax actuarial gains of £74.7m in the six months ended 31 October 2010 (2009: pre-tax actuarial losses £173.5m). During the six months ended 31 October 2010 the UK Government announced its intention to change the inflation measure that it uses for public sector pensions and for statutory revaluation and indexation of occupational pension schemes. It is expected that elements of the Group's defined benefit obligations will in future be linked to increases in the consumer price index ("CPI") rather than the retail price index ("RPI"). The effect of this change represents a reduction of around £65m in retirement benefit obligations during the six-month period, which is included in the £74.7m of net pre-tax actuarial gains.

Seasonality

The Group's North American bus operations and the Twin America joint venture typically earn higher operating profit for the first half of the financial year (i.e. the six months ended 31 October) than for the second half. This is because leisure customers generate an element of the revenue with demand being at its strongest in the summer months.

Principal risks and uncertainties

Like most businesses, there are a range of risks and uncertainties facing the Group. A brief summary of these risks is given below. The principal risks and uncertainties facing the Group have not changed since the publication of the Group's 2010 Annual Report, where a more detailed explanation of the risks and uncertainties can be found on pages 15 and 16. These matters are not intended to be an exhaustive list of all possible risks and uncertainties. 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 above under "seasonality" and the comments made later under the heading "current trading and outlook".

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.

·; 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.

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

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

·; 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.

·; 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.

·; Management and board succession - succession planning for the Directors and senior management is an important issue.

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

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

Related parties

Related party disclosures are given in note 22 to the condensed financial statements.

Current trading and outlook

The Group has made a good start to the second half of its financial year to 30 April 2011 and current trading remains in line with our expectations. We are encouraged by the growth at our bus and rail operations in the UK and the improving revenue trends in North America. Our strategy remains centred on organic growth supplemented by targeted acquisition opportunities which will deliver value to our shareholders. We believe our customer offer of greener, smarter, good value services provides significant growth opportunities as the economy continues to improve. Road congestion and green taxes on cars and air travel will support our efforts to drive modal shift to more sustainable public transport. The prospects for the Group remain positive and we are confident we can continue to deliver long-term value to our shareholders.

Brian Souter

Chief Executive 8 December 2010

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 ("IAS 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 Services 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

Brian Souter Martin Griffiths

Chief Executive Finance Director

8 December 2010 8 December 2010

Independent review report to Stagecoach Group plc

Introduction

We have been engaged by the Company to review the consolidated set of financial statements in the interim results report for the six months ended 31 October 2010, which comprises the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated statement of cash flows and related notes. We have read the other information contained in the interim results report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated financial statements.

Directors' responsibilities

The interim results report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim results report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1 to the condensed consolidated financial statements, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated financial statements included in this interim results 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 consolidated financial statements in the interim results report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

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 Ireland) 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 consolidated financial statements in the interim results report for the six months ended 31 October 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

PricewaterhouseCoopers LLP

Chartered Accountants

141 Bothwell Street

GLASGOW

8 December 2010

Notes:

(a) The maintenance and integrity of the Stagecoach Group plc website 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 statements since they were initially presented on the website.

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

CONDENSED FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENT

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

* The estimated share of actuarial gains on joint ventures' defined benefit pension schemes for the six months ended 31 October 2010 and the six months ended 31 October 2009 is not material to the Group.

CONSOLIDATED BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

The retained earnings deficit of £273.4m (30 April 2010: £433.5m) is the consolidated position. The holding company's distributable reserves as at 31 October 2010 under UK GAAP were £382.5m (30 April 2010: £390.1m).

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

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

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

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

NOTES

The condensed consolidated interim financial information for the six months ended 31 October 2010 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services 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 30 April 2010, which have been prepared in accordance with IFRSs as adopted by the European Union. Except as described below, the accounting policies applied are consistent with those of the annual financial statements for

the year ended 30 April 2010, as described on pages 46 to 53 of the Group's 2010 annual report which can be found on the Stagecoach Group website at http://www.stagecoachgroup.com/scg/ir/finanalysis/reports/.

This condensed consolidated interim financial information for the six months ended 31 October 2010 has not been audited, nor has the comparative financial information for the six months ended 31 October 2009 but they have both been reviewed by the auditors. The comparative financial information presented in this announcement for the year ended 30 April 2010 does not constitute statutory accounts as defined in section 435 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 30 April 2010, which were approved by the Board of Directors on 23 June 2010, received an unqualified audit report, did not contain an emphasis of matter paragraph, did not contain a statement under section 434 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 8 December 2010. This announcement will shortly be available on the Group's website at http://www.stagecoachgroup.com/scg/ir/finanalysis/reports/.

The following new standard has been applied by the Group for the first time for the financial year beginning 1 May 2010:

·; IFRS 3 (revised), 'Business combinations'. The revised standard continues to apply the acquisition method to business combinations but with some significant changes compared with the previous version of IFRS 3. For example, all acquisition-related costs should be expensed. The standard was applied to the acquisition of the East London bus business on 14 October 2010. Acquisition-related costs of £0.6m have been recognised in theconsolidated income statement, which previously would have been included in the consideration for the business combination.

The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 May 2010, but do not have any significant effect on the consolidated financial statements of the Group:

·; IFRS 1 (revised), 'First time adoption of IFRSs - revised and restructured'

·; IFRS 1 (amended), 'First time adoption of IFRSs - amendments relating to oil and gas assets and determining whether an arrangement contains a lease'

·; IFRS 2 (amended), 'Share-based payment - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IFRS 2 (amended), 'Share-based payment - amendments relating to group cash-settled share-based payment transactions'

·; IFRS 5 (amended), 'Non-current assets held for sale and discontinued operations - amendments arising from May 2008 Annual Improvements to IFRSs'

·; IFRS 8 (amended), 'Operating segments - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IAS 1 (amended), 'Presentation of financial statements - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IAS 7 (amended), 'Statement of cash flows - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IAS 17 (amended), 'Leases - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IAS 27 (amended), 'Consolidated and separate financial statements - consequential amendments arising from amendments to IFRS 3'

·; IAS 28 (amended), 'Investments in associates - consequential amendments arising from amendments to IFRS 3'

·; IAS 31 (amended), 'Investments in joint ventures - consequential amendments arising from amendments to IFRS 3'

·; IAS 32 (amended), 'Financial instruments: presentation - amendments relating to classification of rights issues'

·; IAS 36 (amended), 'Impairment of assets - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IAS 38 (amended), 'Intangible assets - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IAS 39 (amended), 'Financial instruments: recognition and measurement - amendments for eligible hedged items'

·; IAS 39 (amended), 'Financial instruments: recognition and measurement - amendments for embedded derivatives when reclassifying financial instruments'

·; IAS 39 (amended), 'Financial instruments: recognition and measurement - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IFRIC 9 (amended), 'Reassessment of embedded derivatives - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IFRIC 16 (amended), 'Hedges of a net investment in a foreign operation - amendments arising from April 2009 Annual Improvements to IFRSs'

·; IFRIC 17, 'Distributions of non-cash assets to owners'

·; IFRIC 18, 'Transfers of assets from customers'

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

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

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

The basis of segmentation is consistent with the Group's last annual financial statements for the year ended 30 April 2010, except that the new UK Bus (London) operating segment consists of the East London bus business acquired by the Group in October 2010. Management has determined that the East London bus business should be treated as a separate operating segment as it is managed separately to our UK Bus regional operations and is reported separately to the Board of Directors, reflecting the different risk profile of the business.

The Group has interests in three trading joint ventures: Virgin Rail Group that operates in UK Rail, Citylink that operates in UK Bus (regional operations) and Twin America LLC that operates in North America. The results of these joint ventures are shown separately in note 3(C). The Group has an interest in a non-trading joint venture, New York Splash Tours LLC, which operated in North America until trading ceased in the year ended 30 April 2010.

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