Final Results

Embargoed until 07:00hrs on Wednesday 11 May 2005 FIRSTGROUP PLC PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2005 GROUP HIGHLIGHTS * Strong performance * + Turnover up 8.6% + Adjusted basic earnings per share1 up 3.3% + Dividend up 10.0% + £30m share buy backs + £115m returned to shareholders through share buy backs over last 5 yrs * Excellent UK Rail division performance * + Solid operating performance at all of our Train Operating Companies + Commenced operation of First ScotRail in October + New franchises performing ahead of expectations + Shortlisted for 4 new franchises - worth up to £1.1bn turnover * Continued growth in North America * + Student - acquisition of Cardinal - now operating >20,000 school buses + Transit - successfully growing in call centre, paratransit and shuttle markets + Services - earnings growth almost doubled during the period, successful integration of SKE - platform for growth in Federal services market * UK Bus overall revenue growth +6% * + Good growth in urban Quality Partnership areas + Launch of `f t r' + Focus on service reliability FINANCIAL SUMMARY * Turnover £2,693m (2004: £2,479m) * Operating profit1 £211.6m (2004: £204.1m) * EBITDA2 £319.2m (2004: £307.1m) * Profit before tax £128.9m (2004: £122.8m) * Profit on ordinary activities after tax £96.2m (2004: £92.2m) * Adjusted basic earnings per share1 28.2p (2004: 27.3p) * Basic earnings per share 22.5p (2004: 22.3p) * Interest cover3 6.6x (2004: 7.2x) * Dividend per share 12.815p (2004: 11.65p) * Net debt £663.1m (2004: £630.7m) 1Before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets, as shown in the consolidated profit and loss account on page 22. 2Group operating profit before goodwill amortisation, bid costs and other exceptional items plus depreciation. 3Calculated as EBITDA divided by net interest payable and similar charges before exceptional items. Commenting, FirstGroup's Chief Executive, Moir Lockhead said: 'I am pleased to report another solid set of results. The UK Rail division continues to outperform. Our First ScotRail and First Great Western Link franchises have been successfully integrated and we continue to focus on improving the service offered to passengers. In North America, our student business has continued to expand and I am particularly pleased with the performance of our Services division which has almost doubled in size and earnings growth during the period. In UK Bus overall revenue growth has been strong and we continue to see good passenger growth in those areas where we are able to work with Local Authorities to provide bus priority and other traffic management measures. We continue to bear down on costs and focus on service reliability. We are delighted to be shortlisted for four new rail franchises: Integrated Kent, Greater Western, Thameslink/Great Northern and Docklands Light Railway and we look forward to consulting widely and working with all of the stakeholders to develop our exciting proposals for the future of these franchises. The Group has strong and predictable cash flows with 50% of our revenues coming from contracted business in the UK and North America. The Board is committed to increasing shareholder value by growing our core business and through a programme of progressive dividend growth and share repurchase. Over the last five years we have returned £115 million to shareholders by way of share buy backs. Trading in the new financial year has started well and is in line with our expectations.' Enquiries FirstGroup plc : Moir Lockhead, Chief Executive Tel: 020 7291 0512 Dean Finch, Finance Director Tel: 020 7291 0512 Rachael Borthwick, Head of Corporate Communications Tel: 020 7291 0508 PHOTOGRAPHS FOR THE MEDIA ARE AVAILABLE AT WWW.NEWSCAST.CO.UK NOTES TO EDITORS: FirstGroup plc is a UK based international transport company with a turnover of £2.7 billion a year and over 67,000 employees throughout the UK and North America.  The Group is Britain's largest bus operator running more than one in five of all local bus services. A fleet of some 9,300 buses carries 2.8 million passengers a day in more than 40 major towns and cities.  The Group is also one of the UK's largest rail operators with four passenger franchises - First Great Western, First Great Western Link, First TransPennine Express and First ScotRail - and one open access operator Hull Trains.  The Group operates nearly one-sixth of the UK passenger rail network, with a balanced portfolio of intercity, commuter and regional services.  The Group is shortlisted for the new Integrated Kent, Greater Western, Thameslink/Great Northern and Docklands Light Railway franchises.  The Group also operates freight services through GB Railfreight.  The Group holds the operating contract for the Croydon Tramlink network, which carries over 20 million passengers a year.  In North America the Group has three operating divisions: Yellow School Buses (First Student), Transit Contracting and Management Services (First Transit) and Vehicle Fleet Maintenance and Support Services (First Services). Headquartered in Cincinnati the businesses operate across the US and Canada.  First Student is the second largest provider of student transportation in North America with a fleet of over 20,000 yellow school buses, carrying nearly 2 million students every day across the USA and Canada.  First Transit is one of the largest private sector providers of transit management and contracting, managing public transport systems on behalf of transit authorities in cities such as Atlanta, Los Angeles, Houston and Seattle. We are one of the largest providers of airport shuttle bus services in the USA, serving airports in cities such as Cincinnati, Miami and Philadelphia. We also manage call centres, paratransit operations and other light transit activities.  First Services is the largest private sector provider of vehicle maintenance and support services in the US. We provide fleet maintenance for public sector customers such as the Federal Government, cities and fire and police departments. We also provide a range of support services including vehicle maintenance, logistics support and facilities management to public and private sector clients including the US Navy and US Air Force. Chairman's statement The accident at Ufton Nervet in November, in which one of our First Great Western trains collided with a vehicle obstructing the line at a level crossing, resulted in the tragic loss of seven lives, including our train driver. On behalf of the Board of FirstGroup plc and all of our employees I would like to express our condolences to the families of the bereaved and to the injured. The safety of passengers and staff is our highest priority. Buses and trains remain among the safest ways to travel and we continuously strive to improve our performance to achieve the highest standards. I am pleased to report another year of good progress across the Group. Turnover has increased to £2,693m (2004: £2,479m) and profit before tax increased to £ 128.9m (2004: £122.8m). EBITDA (Group operating profit* plus depreciation) increased to £319.2m (2004: £307.1m). Adjusted basic earnings per share has increased to 28.2p (2004: 27.3p) and the Board has proposed a final dividend, subject to approval by shareholders, of 8.69p making a full year payment of 12.815p, an increase of 10%. Before goodwill amortisation and exceptional items, the dividend is covered 2.2 times and will be paid on 26 August 2005 to shareholders on the register on 22 July 2005. The dividend increase reflects the Board's confidence in the Group's strong cash generation and growth prospects. The Board is confident that this level of dividend growth is sustainable for the medium term. A number of strategic acquisitions and rail franchise wins occurred during the year which further strengthened our core business. In October we commenced operation of First ScotRail, Scotland's national railway and the UK's largest rail franchise, providing over 2,000 passenger services a day. We have also been shortlisted for four new rail franchises; Greater Western, Integrated Kent, Thameslink/Great Northern and Docklands Light Railway. In North America we made the strategic acquisition, through First Services, of SKE Support Services Inc. enabling us to enter the large Federal services market and almost doubling the size of our existing services operation. I am pleased to report the successful integration of this business which we expect to be able to expand further. During the year we made a significant acquisition in our North American student business adding a further 1,900 school buses to our fleet. Dr Mike Mitchell, previously Business Change Director, who stepped down from the Board last year prior to his planned retirement, left the Group in April 2005 and subsequently took up the post of Director General of Railways at the Department for Transport. I would like to thank Mike for his contribution to the Group and wish him every success in his new role. I would like to take this opportunity to thank our employees for their continued hard work and commitment in delivering another year of strong growth and earnings, including those employees at First North Western who left the Group during the year. I would also like to welcome new employees including those at First ScotRail and First Great Western Link and staff who joined through acquisitions made in North America. Our UK Bus business continues to generate strong cash flows and we are actively working with Government and Local Authorities to introduce services that meet the needs of the communities, alongside bus priority schemes and other measures to reduce traffic congestion. We look forward to building on our strong record of delivery in the rail industry and submitting our exciting proposals for the development of new franchises. In North America we continue to grow our Student, Transit and Services businesses. Since we entered the market six years ago we have grown First Student by some 10,000 buses and overall we have increased earnings in our North American businesses by over 70%. Our strategy remains to increase shareholder value by continuing to grow in our core businesses and explore opportunities to develop in new markets. While we continue to invest for growth we remain committed to a progressive dividend policy and share repurchases of up to £30 million per annum, while retaining our BBB credit rating. Martin Gilbert Chairman *Operating profit referred to in this statement and in the Chief Executive's Review and Financial Review refers to operating profit before goodwill amortisation, bid costs and other exceptional items.Chief Executive's operating review OVERVIEW Safety The safety and security of our passengers and staff is at the forefront of everything we do and we continue to promote a culture of `Safety First' throughout our business. We continually assess our processes and working practices and strive to meet the highest possible standards. I am pleased to report that during the period we have again seen some encouraging trends in key safety indicators and we will continue to ensure that we build on these improvements. The separate Corporate Responsibility Report details the progress we have made to further improve our performance in respect of safety, environmental management and other key areas of our business. Results I am very pleased to report another successful year with expansion in our core markets in the US and UK. Group turnover increased by 8.6% to £2,693m (2004: £ 2,479m). Operating profit was £211.6m (2004: £204.1m). The Group generated EBITDA (operating profit plus depreciation) of £319.2m (2004: £307.1m) enabling us to continue to invest in the business as well as increasing the dividend by 10% and returning £29.7m to shareholders through the further repurchase of equity during the year. Since the acquisition of our North American business and the growth of our UK rail operations the Group's revenue profile has substantially altered. Some 80% of the revenue in our North American operations is secured under medium term contracts. The Group has contracts with government agencies and other large organisations in both North America and the UK representing a secure revenue stream worth £4.9 billion. As we expand our North American businesses and continue to grow our UK rail operations we expect this figure to increase significantly. UK RAIL The UK Rail division operates passenger and freight services in the UK. Passenger rail franchises consist of First Great Western, First Great Western Link, First TransPennine Express and First ScotRail. We also operate Hull Trains, a non-franchised open access intercity passenger train operator, and we provide rail freight services through GB Railfreight. Results Turnover in the Group's rail division increased to £1,059.7m (2004: £945.0m) and operating profit was £67.7m (2004: £49.8m). These excellent results reflect the strong operating performance and increased passenger volumes across all of our train operating companies and the commencement of First ScotRail in October 2004. Current operations On 17 October we commenced operation of First ScotRail. The handover went smoothly and, despite the adverse weather at the start of the year, operator delays have been reduced by 5% on the comparable period last year. This reflects the enormous effort and investment being applied to fleet reliability and performance. Passenger journeys have increased by 8% on the comparable period last year and we have introduced an improved timetable to provide increased capacity and cleaner, more frequent services. In April we introduced the final delivery of new Class 170 Turbostar trains, funded by the Scottish Executive and Strathclyde Passenger Transport, which will provide longer trains and extra seats on a number of routes. In February we launched JourneyCheck, the UK's first fully integrated train information service, enabling passengers to receive instant information on how services are running and details of planned engineering works using real time information via website, WAP and PDA phones and through SMS text messaging. First TransPennine Express, which commenced operation on 1 February 2004, has performed well with passenger income increased by 11.5%. Passenger volumes are running ahead of our expectations as a result of increased road congestion on the main commuter corridor between Manchester and Leeds. A new timetable was introduced in December offering passengers faster journey times, additional services and extra capacity. In March work commenced to build a new train-care depot in Manchester with a second new depot planned for York. In spring 2006 we will introduce 51 new Siemens trains for the franchise, offering passengers in the region a modern, high performance intercity fleet and a step-change in the quality of service we are able to offer. Operational performance on First Great Western has continued to improve. In January we opened a new First Class business lounge at London Paddington for First Great Western passengers. Our investment in the new lounge recognises that the ability to `work on the move' is a key attraction of train travel and provides a range of facilities including a meeting room, internet access as well as complimentary newspapers and refreshments. In February First Great Western launched the redesigned High Speed Train carriages in preparation for the Greater Western franchise bid. A number of improvements have been made to the exterior including a striking new livery. The interior has been redesigned, with customer input, to create a contemporary and modern on-board environment with improved customer services such as an updated buffet facility and Wi-Fi technology. We were delighted that First Great Western's Chippenham Station won the award for `Station Excellence' at the HSBC Rail Awards. This award, which has been won by Great Western for the last two years, follows a significant investment in the refurbishment of the station. On 1 April 2004 we commenced operation of the First Great Western Link franchise which operates surburban services from London Paddington. In December we launched an integrated timetable for First Great Western and First Great Western Link. This major overhaul to the scheduling of services enables us to offer up to 20% increased capacity on surburban services and improved long distance services to Wales and the South West. In June we will launch the new Heathrow Connect service, in partnership with British Airports Authority, calling at intermediate stops between London Paddington and Heathrow using new electric trains. Hull Trains, our non-franchised, open access intercity train company operating between London Kings Cross and Hull, performed well during with the year with passenger growth of 20%. In June we introduced a new weekday service and received further regulatory approval in December for an additional Saturday service. GB Railfreight GB Railfreight (GBRf), our rail freight company, has continued to show encouraging growth. New business was won during the year including contracts for Royal Mail and the Tarmac Group. During the period GBRf took delivery of new container wagons and refurbished locomotives to support the new contracts. We were delighted that GBRf won `Rail Business of the Year' and picked up the `Rolling Stock Excellence' award at the HSBC Rail Awards in February this year. We believe that there is scope to further expand this business by offering a high level of service and a flexible business model. Franchise bidding We are delighted to be shortlisted for a further four new enlarged rail franchises; Integrated Kent, Greater Western, Thameslink/Great Northern and Docklands Light Railway. We have an excellent track record of delivery and operation of various types of railway franchises including intercity, London commuter, suburban and regional railways. In addition we have managed and implemented the introduction of new rolling stock across four of our rail franchises. We have a highly experienced team in place and look forward to consulting widely and working with all of the stakeholders to develop exciting proposals for the future of these franchises. Outlook UK Rail The strong performance of our rail operations reflects the innovation and investment we have put in to the business. Our aim is to bring a consistently high standard of service at affordable prices to our passengers. We have an active programme of new franchise bids underway which offer excellent prospects for the future growth of the division. NORTH AMERICA In North America the Group is the second largest operator of student transportation with over 20,000 yellow school buses carrying nearly 2 million students every day across the US and Canada. We operate the largest transit contracting and management business in North America and we have an expanding services division. Results This has been another year of strong growth within our North American Division. Turnover from our three businesses increased to £665.8m or $1,230.2m (2004: £ 620.7m or $1,051.6m), an increase in dollar terms of 17%. Operating profit was £61.2m or $113.2m (2004: £63.5m or $109.2m). Operating profit in First Student was impacted by $5.2m as a result of fewer trading days in the year due primarily to a late Labor Day in the calendar, which meant that the North Eastern and mid Atlantic regions of the US had a later school start, and the early occurrence of Easter this year. The lost revenue days will be added to the end of the school year and therefore will be recognised in our results in 2005/06. Our three North American businesses continue to generate excellent returns with EBITDA of £108.1m or $199.9m (2004: £107.1m or $183.7m) and remain self- financing for maintenance capital expenditure, organic growth and in-fill acquisitions. First Student I am pleased with the performance of this business during the year. During the period we retained over 90% of our current business that came up for renewal. US Dollar turnover increased by 9.4%. Operating profit was impacted by the reduced number of trading days this period, as outlined above, which will be added to 2005/06. In addition we also experienced an increase in State employer's payroll taxes in the states in which we operate. We now operate over 20,000 yellow school buses in the USA and Canada. The increase in the period is largely due to the acquisition of Cardinal Coach Lines, made in the last quarter of the year, which operates some 1,900 school buses in the provinces of Alberta, British Columbia, Ontario and the North West Territories of Canada and Los Angeles, California. We continued to make good progress throughout the year gaining contracts to operate approximately 700 buses gained through new business wins, in-fill acquisitions and organic growth within existing contracts. Looking forward we are confident that we will be able to continue to grow through a combination of organic growth, share shift, conversions and acquisitions at our target margins. First Transit US Dollar turnover increased by 15.2% and operating profit by 3.7%. We won new contracts to operate and manage transit systems in Virginia, Massachusetts, Ohio, New Hampshire, Idaho, Georgia, California, Pennsylvania, New Jersey, Texas, Arkansas, South Carolina and North Carolina. During the year we were very pleased to retain the contract to operate the largest paratransit call centre in New York and to win two further contracts for call centres in Portland, Oregon. In November we acquired a small business in New York providing paratransit services in the Greater Buffalo area. We have significantly developed our shuttle business, providing buses at airports, universities and for corporate organisations. We are now one of the largest operators of airport shuttle services in the US, providing bus services at airports in cities such as Cincinnati, Miami, Houston and Philadelphia. During the year we were pleased to win further shuttle service contracts to serve Baltimore Airport and for the University of Texas. First Transit's strategy is to focus on the higher margin, faster growing call centre, paratransit, logistics consultancy and public/private shuttle bus services markets where we can utilise our management expertise and continue to profitably expand these businesses. First Services This has been a very successful year for our Services division, which provides a range of outsourced vehicle maintenance, operations and support services to the public and private sectors. US Dollar turnover increased by 67.6% and operating profit by 96.1% reflecting eight months trading contribution from our support services business acquired in August, together with strong growth in First Vehicle Services. We were very pleased to retain all of our contracts that came up for renewal during the period. In addition we won new business to provide vehicle maintenance services to customers including the State of Virginia, City of Pittsburgh and McGuire Air Force Base in New Jersey. We were particularly pleased that two of our vehicle maintenance contracts received recognition, from leading industry publications, in the categories of `Best Fleets' and `Top Fleet Managers' in the US. In August we acquired SKE Support Services Inc, now First Support Services, which has annualised turnover of $88 million and provides a range of services including vehicle fleet maintenance, logistics support and facilities management to the US Federal Government and the private sector. In December First Support Services, with their joint venture partners The Day and Zimmerman Group Inc and Parsons Corporation, won the substantial contract to provide a range of land-based support services to the US Navy. We are delighted with the performance of this strategic acquisition which has integrated well and provides us with entry to the growing US Federal market, one of North America's largest procurers of support services. Investment Our North American business is self-funding for capital expenditure and growth through contract wins and in-fill acquisitions. Each new investment, including new contract bids, must meet our internal rate of return targets. All of the acquisitions made by this division have delivered excellent returns reinforcing our rigorous criteria for investment. Outlook North America We are extremely pleased with the performance of our North American division which continues to deliver excellent returns for shareholders. We are confident that further growth will be achieved through our proven strategy of combining organic growth with well matched acquisitions. UK BUS The Group is the largest bus operator in the UK with a fleet of 9,300 buses, and a market share of approximately 23%. We carry some 2.8 million passengers every day. Results Turnover increased to £960.7m (2004: £906.2m) and operating profit before lease financing costs was £107.1m (2004: £111.2m). Operating profit was impacted by £ 5.0m as a result of a strike in South Yorkshire that was settled in the summer. We continue to focus on service quality with the aim of improving vehicle reliability and minimising lost mileage. During the year we have made significant investment in our maintenance and engineering functions. We expect to see the full benefit of this increased investment over the next few years and are encouraged to see that during the period lost mileage was significantly reduced. While margins remain under pressure in UK Bus our focus is to achieve sustainable growth in profits through high-quality customer service and increased patronage. Contracted bus services We have continued to see good growth in our London bus operations. Growth in the London tendered bus market is moderating following the successful implementation of the congestion charge in 2003 and the substantial increase in buses introduced to meet the additional service requirements. We are well placed with enlarged depot facilities at Willesden Junction that will enhance our competitive advantage if the congestion charge is extended to West London. Similarly we are developing a facility in Dagenham that will provide increased capacity and position us well for the significant demographic growth anticipated in the Thames Gateway area. In addition to developing our commercial services we have grown our contracted bus and coach operations. Private Hire and Contract business is now organised on a national basis and a dedicated sales and delivery team is in place. During the period contracts were secured with customers including Network Rail, Virgin Trains, National Express Coaches and Manchester Metrolink. We operated contract services in connection with special events such as the Glastonbury Festival, York Railfest and Royal Ascot. Urban areas In urban operations outside London, which represent almost 60% of UK Bus turnover, we continue to see growth in those areas where we are able to work with Local Authorities to provide traffic management measures to improve congestion. Passenger growth continues to be driven by a mixture of marketing initiatives and partnerships with Local Authorities to develop bus priority schemes. Our policy is to target capital investment to those areas where there is a clear commitment to support the use of public transport. Passenger growth was strong in areas such as Bristol and York where we have Quality Partnerships in place. The Overground, our successful simplified route and fares structure, continues to provide growth in areas such as Leicester and Leeds where passenger growth has increased by up to 60% on individual routes since introduction. In York, where we have seen passenger growth of up to 40% on individual routes, we now operate five park and ride schemes. During the year we carried over 3 million passengers in our Park & Ride operations across the city. In March we launched our premium urban travel concept known as f t r. The Secretary of State for Transport joined over 175 key stakeholders, including Local Authorities, to launch the `Streetcar' vehicle which will be used to deliver the f t r package. We developed Streetcar in partnership with the Wright Group and Volvo after consulting extensively with customers, engineers and drivers. It is designed to offer an economical alternative to light rail services, giving passengers an exceptionally high-quality, light rail-like, product with dedicated road space in congested areas, but with the route flexibility of a bus. The advantage of f t r is that it can be introduced quickly, without major upheaval on roads and at a fraction of the cost of a light rail scheme. The first f t r service will begin in York later this year and detailed plans are being developed for other schemes in cities such as Leeds, Sheffield, Swansea, Reading, Bath and Glasgow. We continue to develop new initiatives to promote our services to a wide range of customers. During the year we successfully piloted a high-frequency, low fare shuttle service using mid-life vehicles to link lower-income inner city suburbs with the city centre in Leicester. This proved extremely successful with encouraging passenger and revenue growth and we plan to extend this trial to other targeted areas during 2005. Rural operations In our rural operations, which represent approximately 20% of our UK Bus business, we are developing projects that will meet the Government's joint objectives of social inclusion and reducing traffic congestion. Kickstart funding, which provides support for services which have the potential to become commercially viable, is already active in Scotland and has recently been introduced in England and Wales with further schemes expected later in the year. We continually look for innovative ways in which we can better serve the rural communities in which we operate. Our dial-a-ride service operating in Carmarthenshire recently won the `Community Transport Award' at the Welsh Transport Awards. In the South West we have worked with Plymouth and Cornwall councils to provide a new fleet of specially branded buses for operation on the ferry bus corridor between South East Cornwall and Plymouth, a key travel to work corridor. Yellow school bus During the year we were pleased to commence operation of two further yellow school bus operations in Northampton and Carmarthenshire. This initiative continues to attract interest and it is our view that, with support from Government and Local Authorities, there is significant potential to develop this business. Investment We have continued to focus our capital expenditure on areas of high passenger growth in urban areas such as Glasgow, Portsmouth, Halifax and Huddersfield. During the year £66.2 million was spent on new, low-floor, easy access vehicles and £11.7 million has been spent on facilities, including a new depot in Chelmsford. New buses have also been ordered for Aberdeen, Bath, Edinburgh, Leicester, Manchester, Northampton and Swansea and will be delivered later this year. Costs This was a year of significant investment in our engineering function with the continued roll out of standardised maintenance procedures across all companies and depots, new approaches to the timing of inspection and repair, together with greater emphasis on staff training. We expect these reforms to reduce unit costs over the medium term. Lost mileage, our principal measure of service quality, improved during the year and we have targeted further reductions for 2005/06. Towards the end of last year the Traffic Commissioners and Department for Transport published new standards for bus service punctuality, and Local Authorities in England were given new duties to take account of bus services under the Traffic Management Act. We are currently developing Punctuality Improvement Partnerships with local highway authorities to progress these changes which we believe will give further impetus to bus priority measures. Outlook UK Bus We welcome the Government's announcement that free concessionary travel for pensioners and disabled people will be introduced in England from April 2006. We will be reviewing our networks in advance of the introduction to enable concessionary fare passengers to benefit from the new travel opportunities that will be created. Our UK business continues to generate strong cash flow. Overall revenue growth has been strong and we expect this to continue in the current year. Our focus remains on increasing passenger volumes, continuing to develop the business in other areas such as contracted bus services, while maintaining a rigorous cost control and process improvement programme. EMPLOYEES We further strengthened the Executive Management Team with the appointments of Nicola Shaw, formerly Managing Director of Operations at the Strategic Rail Authority and Andrew Haines, formerly Managing Director of South West Trains. Nicola, who joins as Business Change Director, will focus on the Group's bus operations. Andrew will become Managing Director of the Rail Division. Both are highly respected within the industry and I am confident that they will make a significant contribution to the Group. I would like to thank all our staff for their continued commitment to the Group. Our aim is to offer our staff opportunities to develop and grow to reach their full potential. We continually engage with our staff to better understand their views and concerns through a range of informal meetings at depot level to a more formal staff satisfaction survey. The recruitment and retention of high quality staff is a key issue within our industry. We continue to implement a range of initiatives within our operating companies to address this important issue. In our UK Bus division we were the first in the industry to source drivers and engineers from alternative labour markets primarily in Eastern Europe. We have recruited some 350 staff from Poland, the Czech Republic, Portugal, Malta and Slovakia. We are pleased that employee turnover in our North American division has reduced again this year. We continue to encourage our staff to further their development and careers within the Group. During the year we extended our National Vocational Qualification (NVQ) and BTEC programmes in the UK. Some 16% of bus drivers are now qualified to NVQ level 2 in Road Passenger Transport and within the last year 60 supervisors and managers gained qualifications in Team Leadership. We are actively developing workplace learning centres, in partnership with the Transport and General Workers Union, and now have 32 learning centres reaching 30% of employees in the UK. We have plans to significantly increase the coverage over the next two years so that more of our UK employees can gain access to workplace learning. In the US both First Transit and First Vehicle Services participate in the Automotive Service Excellence (ASE) programme for training and testing technicians. Within First Transit 35% of eligible employees hold ASE certificates and within First Vehicle Services the figure is 70%. First Vehicle Services continues to support staff development through non-vocational training and encourages employees in self-development activities. At First Student we have introduced the `Smith System of Defensive Driving' to enable school bus drivers to perform their duties safely in all traffic conditions. In FirstGroup America we continue to develop our management training programmes. First Student implemented two new programmes this year. The first is designed to update managers on communication techniques, interviewing and recruitment, financial reporting and customer service skills. The second programme has been designed for new Contract Managers and covers First Student's approach to safety, operations management and human resources such as the importance of diversity in the workplace. First Transit continues to train frontline supervisors in an intensive four-day training course through `First Transit University' which teaches new and existing managers the company's approach to safety, operations management, client relations and human resources. First Transit has also formed a General Managers Advisory Group with representatives from eight contract locations. The Group provides a focus group to discuss specific issues for feedback to the Board. ENVIRONMENT AND COMMUNITY Our environmental management framework is now well established and all our companies and depots are audited against the requirements of the Group environmental management system. During the year we established the Group Environment Forum to set the minimum performance standards for each operating company and identify key objectives and targets for improvement. As a result of local depot initiatives, an environmental awareness campaign and incentives for staff, energy usage in our depots continued to reduce during the year. For example water usage fell by a further 4.4% and energy consumption by 6% in our UK bus division alone. Our bus operating companies reduced the overall general waste arising by a further 5%. As part of our ongoing awareness campaign an additional 7,027 staff have received environmental training over the past 12 months. During the year we continued to support Future Forests 'carbon neutral' tree planting initiative to offset CO2 emissions. Through our support 1,500 trees have been planted in Devon. In connection with Future Forests we also supported an awareness campaign for primary school children in the South West to promote the environmental benefits associated with public transport. We are pleased to feature in the FTSE4Good Environmental Index as well as in the Business in the Community Corporate Social Responsibility Index, covering the broader corporate social responsibility issues. In recognition of our commitment to improving the environment we were delighted to receive the National Green Apple Award for the fourth consecutive year as well as environmental awards from Network Rail, the Bus Industry Awards and the Railway Industry Innovation Awards. During the year the Group and its staff in the UK and North America have continued to support a number of local and national charities. All of our operating companies support local events either through donations, sponsorship or use of resources and facilities made available to them by the Group. Further details of all these activities can be found in our Corporate Responsibility Report which is published separately and is available on our website www.firstgroup.com. GROUP OUTLOOK I look forward to continued growth in our three North American businesses all of which have highly dependable revenue streams of which approximately 80% are covered by medium-term contracts. In UK Rail we are well positioned to benefit from rail re-franchising having been shortlisted for four new rail franchises, worth up to £1.1 billion of turnover, in the current round. In UK Bus we are seeing further growth in areas where we can work with Local Authorities to implement bus priority and other traffic management measures and we continue to focus on cost control and process improvements. Our strategy remains to use the Group's strong free cash flows to invest in the business and explore opportunities for growth in new markets, increase dividends and buy back shares while maintaining a strong balance sheet. I am confident about our future prospects. Trading in the new financial year has started well and is in line with our expectations. Moir Lockhead Chief Executive Finance Director's review Overview The Group has a portfolio of businesses in the UK and North America which generate strong and predictable revenue streams with 48% of turnover arising from contracts with government and statutory bodies in the UK and North America. The Group's strong free cash flows are used to increase shareholder value by investing for growth, increasing dividends and repurchasing shares. The results for the year to 31 March 2005 have to be taken in the context of the changes in rail franchises. First Great Eastern and Anglia were exited at the start of the year and First Great Western Link commenced on 1 April 2004. Subsequently we lost the First North West Trains franchise. However the award of the First ScotRail franchise together with a very strong performance by First TransPennine Express resulted in UK Rail exceeding last year's operating profit by £17.9m. The overall results represent a 5.0% improvement in profit before tax with operating profit and adjusted basic EPS up by 3.7% and 3.3% respectively despite a 9.5% drop in the average US$ exchange rate compared to 2003/04. The final dividend has been set at 8.69 pence per share which together with the interim dividend of 4.125 pence gives a full year dividend of 12.815 pence, an increase of 10% on 2003/04. We are confident that this level of dividend growth can be sustained in the medium term. Dividend cover, pre goodwill amortisation and exceptional items, was 2.2 times. In addition during 2004/05 we have invested over £170m in capital expenditure and acquisitions and have returned £ 29.7m to shareholders through share repurchase. Over the last five years the group has returned £115m to shareholders by way of share buy-backs. The group has a strong balance sheet backed by a secure long-term financial structure with an average debt duration of 9.0 years at 31 March 2005. The financial structure was further enhanced in March 2005 with the signing of a new committed £520m five year bank facility which significantly improved pricing and terms and increased the duration of the group's medium term committed borrowing facilities. Results Turnover was £2,693.4m (2004: £2,479.0m), an increase of 8.6%. Operating profit was £211.6m (2004: £204.1m), an increase of 3.7% and profit before tax was up 5.0%. The results for the year reflect a particularly strong performance from the Rail division where the performances of all our new franchises have exceeded expectations. There were lower profits in UK Bus due to a strike in South Yorkshire and North American profits were down due to a lower number of operating days during the year, increased costs of unemployment taxes and adverse foreign exchange movements year on year. Year to Year to 31 March 2005 31 March 2004 Divisional Turnover Operating Operating Turnover Operating Operating results £m profit * Margin * £m profit * Margin * £m % £m % UK Bus 960.7 107.1 11.1 906.2 111.2 12.3 UK Rail 1,059.7 67.7 6.4 945.0 49.8 5.3 North America 665.8 61.2 9.2 620.7 63.5 10.2 Financing - (9.0) - - (8.3) - element of leases ** Other *** 7.2 (15.4) - 7.1 (12.1) - Total Group 2,693.4 211.6 7.9 2,479.0 204.1 8.2 * Before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets ** Financing element of UK PCV operating lease costs *** Tram operations, central management, Group information technology and other items Throughout the financial review, operating profit, operating margin and EBITDA are defined as being before goodwill amortisation, bid costs and other exceptional items UK Bus turnover was £960.7m (2004: £906.2m), an increase of 6.0%. Operating profit was £107.1m (2004: £111.2m), a reduction of 3.7%. In our London division we successfully increased activity by starting contracts to operate 91 additional buses and revenues have increased by 13% when compared to last year. UK Bus results were hit by a strike in South Yorkshire that had a profit impact of approximately £5m. The year also saw a £7m investment in engineering that has already led to improved reliability and lower lost mileage. This investment is supported by the arrival of over 300 new buses during the first quarter of 2005/06. Consequently we anticipate another strong year of revenue growth. UK Rail turnover was £1,059.7m (2004: £945.0m), an increase of 12.1%. Operating profit was £67.7m (2004: £49.8m), an increase of 35.9%. Inclusion of the operating results for a full year of First TransPennine Express and First Great Western Link franchises and the commencement of the First ScotRail franchise more than made up for the loss of the First Great Eastern and First North Western franchises. The first full year of First TransPennine Express saw an 11.5% increase in passenger revenue. Similarly First ScotRail has started well with strong revenue growth. North American turnover was £665.8m (2004: £620.7m). At constant exchange rates, this represents an increase of 17.0%. Operating profit was £61.2m (2004: £63.5m). In US Dollar terms this represents an increase of 3.7%. During the year, both First Transit and First Services delivered improved profits. First Services operating profit increased year on year by 96.1% and included the successful acquisition of SKE, gaining entry to the important federal market. First Student earnings were adversely affected by £2.8m due to a lower number of operating days in the year compared to 2003/04 which is expected to be recovered in 2005/06. In addition First Student results were impacted by £3.6m due to higher costs for State Unemployment Taxes in many of the States in which it operates. This reflects changes in the way that the rules are applied. The Cardinal acquisition sees the number of yellow school buses operated rise to 20,200 and this coupled with the reversal of the 2004/05 operating days issue means that prospects for 2005/06 remain excellent. Central costs were higher than last year due to a number of non-recurring initiatives including an upgrade of information technology systems, the International Financial Reporting Standards convergence project and development of new human resources policies and procedures. Property Property gains on disposal of £3.3m (2004: £19.6m) were realised during the year as part of the Group's ongoing programme of disposing of older UK Bus depots in high value city centre locations and re-investing in out of town brownfield sites with more modern and efficient facilities. Goodwill The goodwill amortisation charge was £25.8m (2004: £25.9m) with favourable foreign exchange movements of £0.8m offsetting £0.7m of incremental goodwill on acquisitions made either during 2004/05 or the preceding financial year. Bid costs and other exceptional items Bid costs of £11.9m (2004: £6.7m) were incurred during the year and comprised principally rail refranchising costs for the ScotRail, Integrated Kent, East Coast and Greater Western franchises. There were no other costs categorised as exceptional during the year (2004: £6.8m). Interest payable and similar charges The net interest charge was £48.3m (2004: £42.8m) with the increase of £5.5m principally due to a higher average level of net debt and an increase in the notional interest charge on long-term insurance provisions. The net interest charge is covered 6.6 times (2004: 7.2 times) by earnings before interest, taxation, depreciation and amortisation (EBITDA). There was no exceptional interest charge during 2004/05 whereas in 2003/04 there was an exceptional charge of £18.7m in relation to the cancellation of certain interest rate swaps. Taxation The taxation charge on profit before goodwill amortisation, bid costs and other exceptional items was £44.4m (2004: £48.4m) representing an effective rate 27.2% (2004: 30.0%). The reduction in the effective rate reflects favourable settlements achieved during the year and it is anticipated that these benefits will extend into 2005/06. Tax relief on US goodwill, bid costs and other exceptional items reduced the tax charge to £32.7m (2004: £30.6m). No tax has been provided on property gains as it is not envisaged that tax will become payable on these gains. The actual cash cost of taxation to the group was £19.0m (2004: £21.3m) which is 15% (2004: 17%) of profit before tax. The group pays a minimal amount of tax on its profits in the US. At 31 March 2005, in excess of $200m of accumulated tax losses were carried forward to be used against future profits in the US. We therefore believe that the level of the cash tax in the US will remain at a minimal level for the medium term. Dividends The final dividend of 8.69 pence per ordinary share together with the interim dividend of 4.125 pence per ordinary share, gives a full year dividend of 12.815 pence, an increase of 10.0%. The final dividend will be paid on 26 August 2005 to shareholders on the register of members at the close of business on 22 July 2005. EPS Adjusted basic EPS, before goodwill amortisation, bid costs, other exceptional items and profit on disposal of fixed assets, was 28.2 pence (2004: 27.3 pence), an increase of 3.3%. Basic EPS was 22.5 pence (2004: 22.3 pence). Cash flow The Group's businesses continue to generate strong operating profits which are converted into cash. EBITDA for the year was £319.2m (2004: £307.1m) up 3.9%. EBITDA from North American operations was up 8.8% in US Dollar terms. EBITDA by division is set out below: Year to Year to 31 March 2005 31 March 2004 Turnover EBITDA EBITDA Turnover EBITDA EBITDA £m £m % £m £m % UK Bus 960.7 160.5 16.7 906.2 163.4 18.0 UK Rail 1,059.7 72.6 6.9 945.0 55.2 5.8 North America 665.8 108.1 16.2 620.7 107.1 17.3 Financing element - (9.0) - - (8.3) - of leases Other 7.2 (13.0) - 7.1 (10.3) - Total Group 2,693.4 319.2 11.9 2,479.0 307.1 12.4 During the period there was a working capital outflow of £62.0m of which the largest element was the working capital outflow on the loss of the First Great Eastern and First North Western franchises. Offsetting this was an inflow of a similar magnitude on the commencement of the First Great Western Link and First ScotRail franchises. In addition there was a working capital outflow of £17m in relation to cash settlements with the SRA and a £12m outflow from the reversal of the First TransPennine position from last year. Pension payments of £12m were made during the year over and above the profit and loss charge and growth in both the UK and North America accounted for £17m of the working capital outflow. Capital expenditure and acquisitions Capital expenditure, as set out in note 11 to the financial statements, was £ 135.3m (2004: £164.7m). Capital expenditure was predominantly in North American operations of £36.7m, UK Bus operations of £70.4m, UK Rail £14.1m and UK properties £11.7m. All the acquisitions made in 2004/05 were in North America. The principal acquisitions during the year were SKE Support Services Inc, which gained the Group entry into the Federal market, and Cardinal Coach Lines Limited which operates 1,900 yellow school buses. In addition three smaller yellow school bus businesses and one Call Centre were acquired. The total consideration for all acquisitions made during the year was £37.2m and provisional goodwill arising on all acquisitions amounted to £25.8m. Funding and risk management In February 2005 the Group's BBB stable rating was reconfirmed by Standard and Poors. At the year end, total bank borrowing facilities amounted to £595.9m of which £ 526.6m is committed. Of these £526.6m committed facilities, £213.6m were utilised at 31 March 2005, of which £180.2m was drawn in cash and the balance of £33.4m drawn in letters of credit. The maturity profile of committed banking facilities is regularly reviewed and well in advance of their expiry such facilities are extended or replaced. In March 2005 the group entered into a new five year £520m bank facility provided by a strong bank group. At 31 March 2005 the Group's debt maturity profile was 9.0 years (2004: 9.7 years). As the Group is a net borrower, it minimises cash and bank deposits, which arise principally in the Rail companies. The Group can only withdraw cash and bank deposits from the Rail companies on a permanent basis to the extent of retained profits. The Group limits deposits to short terms, and with any one bank to the maximum of £30m, depending upon the individual bank's credit rating, which must not be less than 'A' rated. The Group does not enter into speculative financial transactions and uses financial instruments for certain risk management purposes only. Interest rate risk With regard to net interest rate risk, the Group reduces exposure by using a combination of fixed rate debt and interest rate derivatives to achieve an overall hedged position over the medium term of between 75% to 100%. Commodity price risk In the year, the UK was insulated from the rise in crude oil prices due to a fully hedged position. North America also benefited from having 80% of its requirements hedged against crude oil price risk. Looking ahead, we now have over 80% coverage of our UK requirements for 2005/06 (total annual usage 2.5 million barrels) at an average rate of $36 per barrel (2003/04: average of $25 per barrel). In North America (total annual usage 0.7m barrels) for 2005/06 we have 64% coverage on crude oil price risk at an average price of $27 per barrel (2003/04: average of $27 per barrel). We anticipate that the impact of rising fuel prices will be partly mitigated by future pricing/yield activities. Foreign currency risk Group policies on currency risk affecting cash flow and profits are maintained to minimise exposures to the Group by using a combination of hedge positions and derivative instruments where appropriate. With regard to balance sheet translation risk, the Group hedges part of its exposure to the impact of exchange rate movements on translation of foreign currency net assets by holding currency swaps and net borrowings in foreign currencies. At 31 March 2005 foreign currency net assets were hedged 35% (2004: 34%). Net debt The Group's net debt at 31 March 2005 was £663.1m and was comprised as follows: Analysis of net debt Fixed Variable Total £m £m £m Cash - 83.8 83.8 Rail ring-fenced cash and deposits - 70.3 70.3 Sterling bond (2013 6.875%) (296.0) - (296.0) Bond (2019 6.125%) * (231.9) - (231.9) Sterling bank loans and overdrafts - (227.1) (227.1) US dollar bank and other loans and overdrafts (0.9) (1.1) (2.0) Canadian dollar bank and other loans and (6.9) (8.2) (15.1) overdrafts HP and finance leases (13.7) (10.4) (24.1) Loan notes (8.7) (12.3) (21.0) Interest rate swaps,net (57.0) 57.0 - Total (615.1) (48.0) (663.1) * The 2019 bond was swapped to US Dollars, and is shown net of arrangement costs and foreign exchange gains on translation to Sterling at year-end. Balance sheet and net assets Net assets increased by £3.2m over the year principally reflecting retained earnings for the year of £39.1m, net movement in minority interest (net of dividends paid to minority shareholders) for the year of £8.5m. These positive movements were partly offset by unfavourable foreign exchange movements of £ 14.2m and share repurchases of £29.7m. Shares in issue During the year 9.4m shares were repurchased for a total consideration of £ 29.7m. Of these 4.2m shares were cancelled during the year whereas 5.2m shares were held as treasury shares at year end. As at 31 March 2005 there were 393.6m (2004: 403.0m) shares in issue excluding treasury shares. The weighted average number of shares in issue for the purpose of EPS calculations (excluding own shares held in trust for employees and treasury shares) was 399.2m (2004: 410.0m). Foreign exchange The results of the North American businesses have been translated at an average rate of £1:$1.85 (2004: £1:$1.69). The period end rate was £1:$1.87 (2004: £1: $1.81). Pensions Pensions and post retirement costs have continued to be accounted for on a SSAP 24 basis. The total charge to the profit and loss account was £47.0m (2004: £ 34.2m). The group has continued to apply the transitional rules and disclosures under FRS 17. At 31 March 2005, after taking account of deferred taxation, the FRS 17 net deficit in the group pension funds, excluding Rail franchises, was approximately £139m (2004: £162m). In addition it should be noted that a post-tax deficit of £43m (2004: £28m) relates to Rail franchises where the group has an obligation to fund the pension scheme during the franchise period but does not have any liability beyond the end of the franchise. International Financial Reporting Standards (IFRS) The Group is well advanced in the conversion to IFRS and will report under IFRS for the first time in the Interim results for financial year 2005/06. The principal differences in accounting treatment under IFRS are considered to be pensions, goodwill, intangible assets, dividends, taxation, financial instruments and share based payments. Although the impact will vary by division, we do not anticipate a material impact on group operating profit. Accounting policies The Group has adopted UITF 38 'Accounting for ESOP Trusts'. Investments in own shares are now deducted from shareholders' funds whereas previously such investments were treated as fixed assets. Further details are set out in note 1 to the financial statements. Dean Finch Finance Director Consolidated profit and loss account For the year ended 31 March 2005 Notes Before Goodwill Total Before Goodwill Total goodwill amortisation 2005 goodwill amortisation, 2004 amortisation and £m amortisation, bid costs and £m and bid costs bid costs and exceptional bid costs 2005 exceptional items 2005 £m items 2004 £m 2004 £m £m Turnover Continuing 2,649.0 - 2,649.0 2,479.0 - 2,479.0 operations Acquisitions 44.4 - 44.4 - - - Group turnover 2 2,693.4 - 2,693.4 2,479.0 - 2,479.0 Operating profit Continuing 204.7 (37.0) 167.7 204.1 (39.4) 164.7 operations Acquisitions 6.9 (0.7) 6.2 - - - Group operating 2 211.6 (37.7) 173.9 204.1 (39.4) 164.7 profit Group operating 211.6 - 211.6 204.1 - 204.1 profit before goodwill amortisation and exceptional items Goodwill 2 - (25.8) (25.8) - (25.9) (25.9) amortisation Bid costs 4 - (11.9) (11.9) (6.7) (6.7) Other exceptional 4 - - - - (6.8) (6.8) items Group operating 2 211.6 (37.7) 173.9 204.1 (39.4) 164.7 profit Profit on disposal - 3.3 3.3 - 19.6 19.6 of fixed assets Profit on ordinary 2 211.6 (34.4) 177.2 204.1 (19.8) 184.3 activities before interest Net interest 6 (48.3) - (48.3) (42.8) (18.7) (61.5) payable and similar charges Profit on ordinary 163.3 (34.4) 128.9 161.3 (38.5) 122.8 activities before taxation Tax on profit on 7 (44.4) 11.7 (32.7) (48.4) 17.8 (30.6) ordinary activities Profit on ordinary 118.9 (22.7) 96.2 112.9 (20.7) 92.2 activities after taxation Equity minority (6.5) - (6.5) (0.9) - (0.9) interests Profit for the 112.4 (22.7) 89.7 112.0 (20.7) 91.3 financial year Equity dividends 8 (50.6) - (50.6) (47.3) - (47.3) paid and proposed Retained profit for 19 61.8 (22.7) 39.1 64.7 (20.7) 44.0 the financial year Adjusted Actual Adjusted Actual Basic earnings per 9 28.2p 22.5p 27.3p 22.3p share Cash earnings per 9 55.1p - 52.4p - share Diluted earnings - 22.3p - 22.2p per share Consolidated balance sheet At 31 March 2005 Notes 2005 2004 £m (restated *) £m Assets employed: Fixed assets Goodwill 10 450.6 461.2 Tangible fixed assets 11 840.2 797.6 1,290.8 1,258.8 Current assets Stocks 12 40.1 35.1 Debtors 13 437.8 394.7 Investments 14 7.5 30.3 Cash at bank and in hand 15 146.6 94.9 632.0 555.0 Creditors: amounts falling due within one 16 (660.8) (647.9) year Net current (liabilities)/assets Amounts due within one year (87.0) (143.0) Amounts due after more than one year 13 58.2 50.1 Net current liabilities (28.8) (92.9) Total assets less current liabilities 1,262.0 1,165.9 Creditors: amounts falling due after more 16 (756.3) (682.8) than one year Provisions for liabilities and charges 17 (147.5) (128.1) 358.2 355.0 Financed by: Capital and reserves Called up share capital 19.9 20.1 Share premium account 19 238.8 238.8 Revaluation reserve 19 1.8 3.4 Other reserves 19 4.6 4.4 Own shares 19 (18.9) (0.6) Profit and loss account 19 101.4 86.8 Equity shareholders' funds 347.6 352.9 Equity minority interests 10.6 2.1 358.2 355.0 * see note 1 Consolidated cash flow statement For the year ended 31 March 2005 Notes 2005 2004 £m £m Net cash inflow from operating activities 20(a) 247.2 312.3 Returns on investment and servicing of finance 20(b) (33.7) (65.2) Taxation Corporation tax paid (16.1) (23.7) Capital expenditure and financial investment 20(c) (97.2) (147.3) Acquisitions and disposals 20(d) (37.2) (49.7) Equity dividends paid (48.0) (45.9) Cash inflow/(outflow) before use of liquid 15.0 (19.5) resources and financing Management of liquid resources Decrease in liquid bank deposits 22.8 15.4 Financing 20(e) 39.9 46.2 Increase in cash in year 77.7 42.1 Reconciliation of net cash flows to movement in net debt For the year ended 31 March 2005 Notes 2005 2004 £m £m Increase in cash in year 77.7 42.1 Cash inflow from increase in debt and HP contract (70.0) (75.4) and finance lease financing Debt acquired on acquisition of businesses (20.6) - Lease and hire purchase contracts acquired with (2.2) - new franchise Movement in current asset investments (22.8) (15.4) Fees on issue of Bond and loan facility - 1.3 Amortisation of debt issuance fees (1.5) (0.8) Foreign exchange differences 7.0 41.9 Movement in net debt in year (32.4) (6.3) Net debt at beginning of year 21 (630.7) (624.4) Net debt at end of year 21 (663.1) (630.7) Consolidated statement of total recognised gains and losses For the year ended 31 March 2005 2005 2004 £m £m Profit for the financial year 89.7 91.3 Foreign exchange differences (14.2) (63.0) Total recognised gains for the year 75.5 28.3 Reconciliation of movements in equity shareholders' funds For the year ended 31 March 2005 2005 2004 £m (restated *) £m Profit for the financial year 89.7 91.3 Dividends (50.6) (47.3) 39.1 44.0 Shares issued to QUEST (0.5) - Own shares purchased and cancelled (11.9) (29.2) Movement in EBT, QUEST and treasury shares during the (17.8) 0.1 year Foreign exchange differences (14.2) (63.0) Net reduction in equity shareholders' funds (5.3) (48.1) Equity shareholders' funds at beginning of year 352.9 401.0 Equity shareholders' funds at end of year 347.6 352.9 * see note 1 No note of historical cost profits and losses is given as there are no material differences between the results as set out in the consolidated profit and loss account, and their historical cost equivalents. 1 Principal accounting policies The financial information set out herein does not constitute the Group's Statutory Accounts but has been extracted from the accounts for the years ended 31 March 2004 and 2005. The accounts for the year ended 31 March 2004 have been delivered to the Registrar of Companies and the accounts for the year ended 31 March 2005 will be delivered to the registrar of Companies in due course. The auditors have reported on both sets of accounts; their reports were unqualified and did not contain a statement under section 237 (2) or (3) of the companies Act 1985. The accounts for the year ended 31 March 2005 have been prepared using the same accounting policies as were used in the preparation of the accounts for the year ended 31 March 2004, except as set out below. UITF 38 'Accounting for ESOP Trusts' has been adopted. Investments in own shares are now deducted from shareholders' funds whereas previously such investments were treated as an asset. The impact of this restatement is to reduce shareholders' funds at 31 March 2004 by £0.6m. Copies of the Statutory Accounts for the year ended 31 March 2005 will be sent to all shareholders by early June and will be available thereafter at the Registered Office of the Company at 395 King Street, Aberdeen, AB24 5RP. 2 Profit and loss account analysis Continuing Acquisitions Total Total * and segmental information operations 2005 2004 £m £m £m £m Group turnover 2,649.0 44.4 2,693.4 2,479.0 Group operating costs - General (2,444.3) (37.5) (2,481.8) (2,274.9) - Goodwill amortisation (25.1) (0.7) (25.8) (25.9) - Bid costs and other exceptional (11.9) - (11.9) (13.5) items (note 4) Total Group operating costs (note 3) (2,481.3) (38.2) (2,519.5) (2,314.3) Group operating profit 167.7 6.2 173.9 164.7 * Acquisitions during the year to 31 March 2005 relate entirely to the North America division. Segmental information is as Turnover Operating Net assets/ follows: profit before (liabilities) goodwill and exceptional items 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m UK Bus 960.7 906.2 107.1 111.2 232.5 228.3 UK Rail 1,059.7 945.0 67.7 49.8 7.2 (4.4) North America 665.8 620.7 61.2 63.5 450.9 435.8 Financing element of UK Bus - - (9.0) (8.3) - - leases Group items 7.2 7.1 (15.4) (12.1) (332.4) (304.7) 2,693.4 2,479.0 211.6 204.1 358.2 355.0 Bid costs (note 4) (11.9) (6.7) Other exceptional items - (6.8) (note 4) Goodwill amortisation (note (25.8) (25.9) 10) Group operating profit 173.9 164.7 Profit on disposal of fixed 3.3 19.6 assets Profit on ordinary 177.2 184.3 activities before interest All of the Group turnover and Group operating profit for the year was generated in the United Kingdom, except that shown above as being generated in North America. 3 Operating costs Continuing Acquisitions Total Total operations £m 2005 2004 £m £m £m Materials and consumables 264.4 14.1 278.5 258.9 Staff costs (note 5) 1,215.6 15.8 1,231.4 1,099.9 External charges 869.8 6.4 876.2 826.6 Depreciation, amortisation and other 131.5 1.9 133.4 128.9 amounts written off fixed assets 2,481.3 38.2 2,519.5 2,314.3 4 Exceptional items, net Rail Other Total Total £m £m 2005 2004 £m £m Restructuring costs - - - 6.8 Bid costs 10.9 1.0 11.9 6.7 10.9 1.0 11.9 13.5 The tax effect in 2005 was a credit of £3.6m (2004: credit of £4.1m). 5 Employees' and Directors' remuneration 2005 2004 No. No. The average number of persons employed by the Group (including Directors) during the year was as follows: Operational 61,585 56,483 Administration 5,782 5,414 67,367 61,897 The aggregate payroll costs of these persons were as 2005 2004 follows: £m £m Wages and salaries 1,101.5 996.4 Social security costs 82.9 69.3 Other pension costs 47.0 34.2 1,231.4 1,099.9 6 Net interest payable and similar charges 2005 2004 £m £m Bond and bank facilities 43.3 37.5 Loan notes 1.6 1.5 Finance charges payable in respect of hire purchase 2.2 3.3 contracts and finance leases 47.1 42.3 Income from short-term deposits and other investments (4.3) (2.4) Notional interest on provisions 5.5 2.9 Net interest payable and similar charges before exceptional 48.3 42.8 items Cancellation of interest rate swaps - 18.7 48.3 61.5 7 Tax on profit on ordinary activities £m 2005 £m 2004 £m £m Current taxation UK corporation tax charge for the year 21.8 20.3 Adjustment in respect of prior years (3.5) 0.2 18.3 20.5 Overseas taxation charge Current year 0.7 0.8 Total current taxation 19.0 21.3 Deferred taxation (see note 18) Origination and reversal of timing 17.5 10.0 differences Adjustment in respect of prior years (3.8) (0.7) 13.7 9.3 32.7 30.6 8 Equity dividends 2005 2004 £m £m Ordinary shares of 5p each - Interim paid 4.125p (2004: 3.75p) per share 16.4 15.5 - Final proposed 8.69p (2004: 7.9p) per share 34.2 31.8 50.6 47.3 9 Earnings per share (EPS) Basic EPS is based on earnings of £89.7m (2004: £91.3m) and on the weighted average number of ordinary shares of 399.2m (2004: 410.0m) in issue. Diluted EPS is based on the same earnings and on the weighted average number of ordinary shares of 402.0m (2004: 411.5m). A reconciliation of the number of shares used in the basic and diluted measures is set out below: 2005 2004 Number Number (m) (m) Weighted average number of shares used in basic calculation 399.2 410.0 SAYE share options 2.6 1.5 Executive share options 0.2 - 402.0 411.5 9 EPS (continued) The adjusted basic EPS and adjusted cash EPS measures are intended to demonstrate recurring elements of the results of the Group before goodwill amortisation and exceptional items. Both the adjusted basic and cash measures of EPS use the same weighted average number of ordinary shares as the basic EPS measure. A reconciliation of the earnings used in these measures is set out below: £m 2005 £m 2004 Earnings Earnings per share per share (p) (p) Profit for basic EPS calculation 89.7 22.5 91.3 22.3 Goodwill amortisation 25.8 6.4 25.9 6.3 Taxation effect of this adjustment (8.1) (2.0) (8.1) (2.0) Bid costs and other exceptional items 11.9 3.0 13.5 3.3 Taxation effect of this adjustment (3.6) (0.9) (4.1) (1.0) Exceptional interest rate charge - - 18.7 4.6 Taxation effect of this adjustment - - (5.6) (1.4) Profit on disposal of fixed assets (3.3) (0.8) (19.6) (4.8) Profit for adjusted basic EPS 112.4 28.2 112.0 27.3 calculation Depreciation * 107.4 26.9 103.0 25.1 Profit for adjusted cash EPS calculation 219.8 55.1 215.0 52.4 * Depreciation charge of £107.6m per note 11 less £0.2m of depreciation attributable to equity minority interests. 10 Goodwill £m Cost At 1 April 2004 562.6 Additions 25.8 Exchange rate differences (13.9) At 31 March 2005 574.5 Amortisation At 1 April 2004 101.4 Charge for year 25.8 Exchange rate differences (3.3) At 31 March 2005 123.9 Net book value At 31 March 2005 450.6 At 31 March 2004 461.2 11 Tangible fixed assets Land and Passenger Other Total buildings carrying plant and £m £m vehicle equipment fleet £m £m Cost or valuation At 1 April 2004 141.5 1,174.0 154.6 1,470.1 Subsidiary undertakings and 2.9 29.5 2.4 34.8 businesses acquired Additions 12.2 96.5 26.6 135.3 Disposals (6.9) (32.9) (21.1) (60.9) Exchange rate differences (0.6) (13.0) (1.1) (14.7) At 31 March 2005 149.1 1,254.1 161.4 1,564.6 Depreciation At 1 April 2004 21.5 548.5 102.5 672.5 Subsidiary undertakings and - - - - businesses acquired Charge for year 3.0 88.0 16.6 107.6 Disposals (0.7) (29.4) (19.2) (49.3) Exchange rate differences (0.1) (5.7) (0.6) (6.4) At 31 March 2005 23.7 601.4 99.3 724.4 Net book value At 31 March 2005 125.4 652.7 62.1 840.2 At 31 March 2004 120.0 625.5 52.1 797.6 The net book value of land and buildings comprises: 2005 2004 £m £m Freehold 104.2 101.0 Long leasehold 17.2 15.6 Short leasehold 4.0 3.4 125.4 120.0 12 Stocks 2005 2004 £m £m Spare parts and consumables 30.7 24.0 Property development work in progress 9.4 11.1 40.1 35.1 There is no material difference between the balance sheet value of stocks and their replacement cost. 13 Debtors 2005 2004 £m £m Amounts due within one year Trade debtors 258.2 233.9 Other debtors 61.1 52.7 Pension funds' prepayments 12.1 10.4 Other prepayments and accrued income 48.2 47.6 379.6 344.6 Amounts due after more than one year Pension funds' prepayments 57.0 48.7 Other prepayments and accrued income 1.2 1.4 58.2 50.1 437.8 394.7 14 Current asset investments 2005 2004 £m £m Ring-fenced bank deposits 7.5 30.3 15 Cash at bank and in hand 2005 2004 £m £m Ring-fenced cash 62.8 68.7 Other cash 83.8 26.2 146.6 94.9 16 Creditors 2005 2004 £m £m Amounts due within one year Bank loans and overdrafts 49.6 52.0 Other loans 1.8 - Obligations under hire purchase contracts and finance 9.0 20.8 leases Loan notes 0.5 0.3 Trade creditors 122.4 156.4 Corporation tax 28.2 25.1 Other tax and social security 24.6 21.2 Other creditors 42.2 15.9 Pension funds' creditors 9.5 11.7 Accruals and deferred income 324.6 271.8 Season ticket deferred income 13.3 40.3 Proposed dividends 35.1 32.4 660.8 647.9 16 Creditors (continued) 2005 2004 £m £m Amounts falling due after more than one year Bank loans - Due in more than one year but not more than two years 1.3 - - Due in more than two years but not more than five years 182.5 110.6 - Due in more than five years 3.1 - Other loans - Due in more than one year but not more than two years 1.3 - - Due in more than two years but not more than five years 3.3 - - Due in more than five years 1.3 - Obligations under hire purchase contracts and finance leases - Due in more than one year but not more than two years 2.5 7.7 - Due in more than two years but not more than five years 7.5 3.6 - Due in more than five years 5.1 4.8 Loan notes - Due in more than one year but not more than two years 20.5 21.0 £300.0m Sterling bond - 6.875% 2013 296.0 295.5 £250.0m bond - 6.125% 2019 231.9 239.6 756.3 682.8 17 Provisions for liabilities and Deferred Insurance Pensions Total charges tax claims £m £m £m £m At 1 April 2004 96.4 25.8 5.9 128.1 Provided in the year 13.7 20.9 - 34.6 Utilised in the year - (17.6) (0.2) (17.8) Subsidiary undertakings acquired (2.2) - - (2.2) Notional interest - 5.5 - 5.5 Exchange rate differences (0.6) (0.1) - (0.7) At 31 March 2005 107.3 34.5 5.7 147.5 18 Deferred tax 2005 2004 £m £m Capital allowances in excess of depreciation 134.3 124.8 Other timing differences 13.5 12.7 Trading losses (40.5) (41.1) Deferred tax provision 107.3 96.4 19 Reserves Share Revaluation Own Profit premium reserve shares and loss account account £m £m £m £m At 1 April 2004 238.8 3.4 - 86.8 Prior year adjustment on adoption of - - (0.6) - UITF 38 At 1 April 2004 as restated 238.8 3.4 (0.6) 86.8 Cancellation of shares - - - (11.9) Retained profit for the year - - - 39.1 Movement in EBT,Quest and Treasury - - (18.3) - shares during the year Foreign exchange differences - - - (14.2) Transfer of realised revaluation - (1.6) - 1.6 reserve At 31 March 2005 238.8 1.8 (18.9) 101.4 Between 14 May 2004 and 14 September 2004, 4,200,000 shares were repurchased at a total cost of £11.8m and cancelled. In addition between 22 September 2004 and 23 March 2005 5,200,000 shares were repurchased for a total cost of £17.9m and are being held as Treasury Shares at 31 March 2005. Capital Capital Total other redemption reserve reserves reserve £m £m £m At 1 April 2004 1.7 2.7 4.4 Cancellation of shares 0.2 - 0.2 At 31 March 2005 1.9 2.7 4.6 20 Notes to the consolidated cash flow statement 2005 2004 £m £m (a) Reconciliation of operating profit to net cash inflow from operating activities Operating profit 173.9 164.7 Depreciation and other amounts written off tangible fixed 107.6 103.0 assets Amortisation charges 25.8 25.9 Loss on sale of non-property fixed assets 1.9 1.3 Increase in stocks (2.6) (1.3) Increase in debtors (51.0) (49.4) (Decrease)/increase in creditors and provisions (8.4) 68.1 Net cash inflow from operating activities 247.2 312.3 (b) Returns on investments and servicing of finance Interest received 6.8 2.4 Interest paid (35.1) (44.3) Minority interest dividends paid (3.1) - Cancellation of interest rate swaps - (18.7) Interest element of hire purchase contracts and finance (2.3) (3.3) lease payments Fees on issue of bond and loan facilities - (1.3) Net cash outflow from returns on investments and (33.7) (65.2) servicing of finance (c) Capital expenditure and financial investment Purchase of tangible fixed assets (124.3) (179.8) Sale of fixed asset properties 22.9 25.4 Sale of other tangible fixed assets 4.2 7.1 Net cash outflow from capital expenditure and financial (97.2) (147.3) investment (d) Acquisitions and disposals Purchase of subsidiary undertakings (25.3) (33.7) Purchase of businesses (15.4) (26.4) Net cash acquired with purchase of subsidiary 3.5 10.4 undertakings and businesses Net cash outflow from acquisitions and disposals (37.2) (49.7) (e) Financing Own shares repurchased (29.7) (29.2) Bond 2019 - 250.0 Shares purchased by Employee Benefit Trust and Quest (0.3) - New bank loans 90.4 - Repayments of amounts borrowed: - Bank loans - (149.2) - Loan notes (0.3) (0.6) New hire purchase contracts and finance leases - 10.2 Capital element of hire purchase and finance lease (20.2) (35.0) payments Net cash inflow from financing 39.9 46.2 21 Analysis of net debt At Cash flow Other At 31 March 31 March £m non-cash 2005 2004 changes £m £m £m Cash at bank and in hand 94.9 52.9 (1.2) 146.6 Bank overdrafts (33.0) 24.8 - (8.2) Cash 61.9 77.7 (1.2) 138.4 Current asset investments 30.3 (22.8) - 7.5 Bank and other loans due within (19.0) (21.1) (3.1) (43.2) one year Bank and other loans due after one (110.6) (69.4) (12.8) (192.8) year Sterling bond 2013 (295.5) - (0.5) (296.0) Sterling bond 2019 (239.6) - 7.7 (231.9) Obligations under hire purchase (36.9) 20.2 (7.4) (24.1) contracts and finance leases Loans and loan notes (21.3) 0.3 - (21.0) Financing (722.9) (70.0) (16.1) (809.0) Net debt (630.7) (15.1) (17.3) (663.1) Current asset investments represent unencumbered bank deposits of maturity of less than one year.

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