Disciplined

The past year has seen unprecedented turmoil in the financial markets, highlighting the importance of financial discipline and strong cash management.

Operating profit

Operating profit* for the year was £123.6m, 14.7% below last year (2008: £144.9m) primarily due to a particularly strong prior year in our rail division. Adjusted earnings per share* followed a similar trend, down 12.9% to 152.3p per share (2008: 174.8p). Basic earnings per share were 14.7p per share (2008: 128.8p per share) as a result of significant exceptional items.

Cash conversion

Cash conversion was excellent, with cashflow generated from operations of £233.4m (2008: £192.5m) compared to operating profit before depreciation, amortisation and exceptional items (EBITDA) of £173.3m (2008: £194.0m). Most of this improvement came from favourable working capital movements in our rail division which are expected to reverse next year.

Summary income statement

	2009 (£m)	2008 (£m)	Increase / (decrease) (£m)	Increase / (decrease) (%)
Operating profit*	123.6	144.9	(21.3)	(14.7)%
Net finance costs	(11.5)	(13.8)	2.3	16.7%
Profit before tax*	112.1	131.1	(19.0)	(14.5)%
Amortisation	(12.4)	(11.6)	(0.8)	(6.9)%
Exceptional items	(57.7)	(16.4)	(41.3)	(251.8)%
Profit before tax	42.0	103.1	(61.1)	(59.3)%
Total tax expense	(23.7)	(26.3)	2.6	9.9%
Profit for the year	18.3	76.8	(58.5)	(76.2)%
Minority interest	(12.0)	(20.8)	8.8	42.3%
Profit attributable to members	6.3	56.0	(49.7)	(88.8)%
Adjusted profit attributable to members*	65.4	76.0	(10.6)	(13.9)%
Weighted average number of shares (m)	42.9	43.5	(0.6)	(1.4)%
Adjusted earnings per share* (p)	152.3	174.8	(22.5)	(12.9)%

• * Before amortisation and exceptional items.

Balance sheet

Our balance sheet and financing remains strong. Adjusted net debt to EBITDA was 1.57x at June 2009 (June 2008: 1.65x) and remains well within our target range of 1.5x-2.5x through the cycle. Our funding is secured to November 2012 through a five year syndicated loan facility and at June 2009 we had headroom within this facility of £101.0m.

Operating profit before depreciation, amortisation and exceptional items (EBITDA)

EBITDA was £173.3m (2008: £194.0m), consisting of operating profit* of £123.6m (2008: £144.9m) and depreciation of £49.7m (2008: £49.1m).

Pensions

Operating profit* included the net cost of the Group’s defined benefit pension plans of £36.1m (2008: £24.9m).The increase of £11.2m comprised an additional £8.5m in rail, of which £2.6m was due to a full year of London Midland, and £2.7m was non-rail costs (primarily bus). Company cash contributions to the schemes were £2.8m higher than the net cost in the income statement, totalling £38.9m (2008: £41.7m, inclusive of a £7.5m additional contribution).

The total net pension deficit after tax was £60.1m (2008: £42.8m), consisting of a total pre-tax liability of £83.5m (2008: £59.4m) less a deferred tax asset of £23.4m (2008: £16.6m).

The net deficit before taxation on the non-rail defined benefit schemes was £76.0m (2008: £59.4m), consisting of estimated liabilities of £428.7m (2008: £436.2m) less assets of £352.7m (2008: £376.8m).

The net deficit before taxation on the rail schemes was £7.5m (2008: £nil). The nature of these schemes means that we only recognise the share of deficit (or surplus) expected to be funded (or received) over the franchise period.

Goodwill and intangible amortisation

The charge for the period of £12.4m (2008: £11.6m) represents the non-cash cost of amortising goodwill, intangibles including assets associated with pension accounting for the rail franchises and computer costs. The increase against the prior period reflects a full year of ownership of the London Midland franchise.

Net finance costs

The net finance costs for the period reduced to £11.5m (2008: £13.8m) due to a reduction in average levels of net debt and lower interest rates towards the end of the period. The average net interest rate was 5.0% (2008: 6.4%) for the period and the proportion of gross debt held under fixed interest agreements at 27 June 2009 was 47.2% (2008: 30.2%).

Exceptional items

Exceptional items were significant in the year, totalling £57.7m before taxation, of which £49.8m was recognised in the first half. Most of the items were non-cash, with cash items totalling £10.1m. The largest item was a first half, non-cash impairment charge of £38.4m reflecting the challenging conditions in aviation services. This reduced the carrying value of the ground handling and cargo operations within the aviation services division to approximately £20m at December 2008 and remains appropriate at the year end.

Non-cash exceptional items also included £6.9m relating to the fair value of part of the current year bus fuel hedge (designated as ineffective under IAS 39 ‘Financial Instruments: Recognition and Measurement’), £0.8m in respect of accelerated depreciation on articulated buses in London with a further exceptional charge of around £3m expected in relation to this issue over the next two years, and £1.5m of provision for onerous contracts in our Meteor parking operations.

Exceptional cash costs totalled £10.1m, consisting of restructuring and reorganisation costs of £5.4m in aviation services and £4.7m in rail.

Taxation

The net taxation charge in the income statement of £23.7m (2008: £26.3m) included underlying tax on ordinary activities of £26.6m (2008: £29.1m), equivalent to an effective rate of 26.7% (2008: 24.4%).The increase in effective rate compared to the decrease in UK statutory rate for the period of 28.0% (2008: 29.5%) reflects the reduced availability of cost effective, tax efficient asset finance arrangements in the period.

The charge also included an exceptional, non-cash tax charge of £8.6m (following the UK Government’s abolition of industrial buildings allowances announced in July 2008) and a tax benefit of £11.5m (2008: £2.8m) resulting from the exceptional costs.

Minority interest

The minority interest in the income statement of £12.0m (2008: £20.8m) arises from our 65% holding in Govia Limited (which owns our rail operations) and therefore represents 35% of the profit after taxation of the rail division.

Adjusted earnings per share

Adjusted profit attributable to members* was £65.4m (2008: £76.0m). This consisted of a profit attributable to members of £6.3m (2008: profit £56.0m) adjusted to add back members’ share of post tax amortisation of £6.9m (2008: £6.4m), and members’ share of exceptional items of £52.2m (2008: £13.6m).

The weighted average number of shares reduced to 42.9 million (2008: 43.5 million) due to the repurchase of shares during last year. The closing number of shares in issue, net of treasury shares, was 42.9 million (2008: 42.8 million).

Adjusted earnings per share* decreased by 12.9% or 22.5p per share to 152.3p per share (2008: 174.8p per share).

Dividends

The Board is proposing a total dividend for the year of 81.0p per share, unchanged from last year and including a proposed final payment of 55.5p payable on 20 November 2009 to shareholders on the register at the close of business on 6 November 2009. The is equivalent to a total payment of £34.7m, based on 42.9 million shares.

Dividends paid in the period represents the payment of last year’s final dividend of 55.5p (2008: 55.5p) and the interim dividend in respect of this year of 25.5p per share (2008: 25.5p).

Dividend cover for the year was 1.9x adjusted earnings per share* (2008: 2.2x).

Cashflow

Cash generated from operations before taxation was £233.4m, an increase of £40.9m against the same period last year (2008: £192.5m). Favourable working capital movements of £72.4m, most of which are expected to reverse next year and which primarily related to the phasing of debtor and creditor payments in rail, offset other cash outflows of £12.3m which included exceptional cash costs of £10.1m.

Tax paid of £11.4m (2008: £18.1m) was primarily the current portion of the tax charge of £23.7m, of which £8.6m was a non-cash charge relating to the abolition of industrial buildings allowances, less a refund of £5.2m in respect of prior years. Net interest paid of £11.9m (2008: £14.0m) is in line with the charge in the income statement for the period of £11.5m (2008: £13.8m). Capital expenditure, net of sale proceeds, was similar to last year at £56.2m (2008: £54.7m), equivalent to 113% of depreciation (2008: 111%).

Dividends paid to parent company shareholders amounted to £34.8m (2008: £31.4m) and dividends to minority interests were £12.3m (2008: £16.7m). During the period the company has repurchased 13,615 shares at a cost of £0.2m (2008: 3,571,000 shares at a cost of £87.3m) and 50,000 shares were issued (2008: 523,000 shares) on exercise of share options for proceeds of £0.6m (2008: £6.4m).

“Cash generated from operations before taxation was £233.4m, an increase of £40.9m against the same period last year.”

Summary cashflow

	2009 (£m)	2008 (£m)	Increase/ (Decrease) (£m)	Increase/ (Decrease) (%)
EBITDA+	173.3	194.0	(20.7)	(10.7)%
Working capital/other	60.1	(1.5)	61.6	n/a
Cashflow generated from operations	233.4	192.5	40.9	21.2%
Tax paid	(11.4)	(18.1)	6.7	37.0%
Net interest paid	(11.9)	(14.0)	2.1	15.0%
Net capital investment	(56.2)	(54.7)	(1.5)	(2.7)%
Free cashflow	153.9	105.7	48.2	45.6%
Net acquisitions (incl. acquired debt) less disposals	–	(3.3)	3.3	n/a
Franchise transfer	(0.4)	(26.7)	26.3	98.5%
Dividends paid	(47.1)	(48.1)	1.0	n/a
Share issues less share buybacks	0.4	(80.9)	81.3	n/a
Decrease / (increase) in net debt	106.8	(53.3)	160.1	n/a
Opening net debt	(197.8)	(144.5)	n/a	n/a
Closing net debt	(91.0)	(197.8)	n/a	n/a

• +Operating profit before interest, tax, depreciation, amortisation and exceptional items.

Capital structure

	2009 (£m)	2008 (£m)
Five year syndicated facility Dec 2012	340.0	340.0
Amount drawn down at year end	239.0	262.0
Balance available	101.0	78.0
Restricted cash	181.3	122.9
Net debt	91.0	197.8
Adjusted net debt	272.3	320.7
EBITDA+	173.3	194.0
Adjusted net debt / EBITDA+	1.57x	1.65x

• +Operating profit before interest, tax, depreciation, amortisation and exceptional items

Balance sheet

Net debt reduced in the year by £106.8m (2008: increase £53.3m) to £91.0m (2008: £197.8m).

Net debt consisted of amounts drawn down against the £340.0m five year syndicated loan facility of £239.0m (2008: £262.0m); other bank loans of £36.0m (2008: £52.8m); hire purchase and lease agreements of £18.1m (2008: £34.3m) and overdrafts of £5.0m (2008: £5.8m), partly offset by cash and short term deposits of £207.1m (2008: £157.1m) which included restricted cash in rail of £181.3m (2008: £122.9m).

Most of the increase in restricted cash reflects the working capital movements in rail which are expected to reverse next year. Adjusted net debt, consisting of net debt excluding restricted cash, was £272.3m (2008: £320.7m), equivalent to 1.57x EBITDA (2008: 1.65x), well within our target range of 1.5x to 2.5x through the cycle.

In addition, amounts provided to the DfT for rail bank guaranteed performance bonds were £131.7m (2008: £96.5m) and season ticket bonds of £110.2m (2008: £97.9m).

The Group had net liabilities of £9.5m, primarily due to the low level of capital employed within the rail operations. The reduction of £77.0m compared to net assets of £67.5m at 28 June 2008 consisted of profit for the period of £18.3m plus proceeds of shares issued of £0.6m and share based payment credits of £0.5m, less: losses on financial instruments of £29.9m net of tax; an increase in pension scheme liabilities of £19.4m net of tax and dividends paid of £47.1m.

Distributable reserves in the parent company used to pay dividends were £443.3m (2008: £446.0m) which is equivalent to 12.8 times the current full year proposed dividend of £34.7m.

Financial outlook

We expect our financial position over the next twelve months to remain strong. The favourable working capital movements in rail are expected to reverse in the year, increasing net debt but reducing restricted cash by a similar amount. Capital investment is expected to increase by around £20m compared to 2009, reflecting the investment in the new Southern franchise. We have recently secured additional three year loan facilities of £30m to refinance payments of medium term debt made last year which will preserve funding headroom under our five year syndicated facility.

Overall, we will maintain our strong financial discipline to deliver shareholder value.

Nick Swift,
Group Finance Director
2 September 2009