SGC.L Regulatory News (SGC)

22 July 2020

Stagecoach Group plc - Preliminary results for the year ended 2 May 2020

Decisive management actions, creditable financial performance and progress in delivery of business strategy through a challenging period for our sector and the communities we serve

Financial summary

Financial highlights - 53 weeks ended 2 May 2020

· Adjusted earnings per share of 13.5p (2019: 22.1p): excluding 53rd week, also 13.5p (2019: 22.1p)

· Statutory earnings per share of 6.4p (2019: 3.8p) reflecting non-recurrence of prior year charges relating to the impairment and disposal of the discontinued North America business

· Substantial available liquidity: over £800m of undrawn, committed bank facilities and available cash/deposits

· Cost reduction programme, taking account of COVID-19 situation

· In the short-term, management actions and continuing support of government should ensure we remain EBITDA positive and poised to benefit from any new opportunities

Operational highlights

· Good progress in line with the strategy announced in December 2019

o Maximise our core business' potential in a changing market

o As expected, regional bus revenue trends were improving pre-COVID

· 2.7% like-for-like revenue growth in 14 weeks ended 1 February 2020

o 90% plus customer satisfaction

o New branding launched with supportive marketing developed

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

o Projects to implement new people systems underway

o 46% of 2019/20 bus commercial revenue sold via contactless and digital channels

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

o Shortlisted to bid for two Dubai bus contracts

o Shortlisted for one rail and four bus opportunities in Sweden

· Strengthened long-term prospects

o Renewed societal focus on health, wellbeing and the environment

o Public transport can play a major role in tackling climate change and road congestion with strong government action to reduce car use

o Swift, decisive action taken to respond to the COVID-19 pandemic and plan for the future

o 41% of bus fleet (June 2019: 33%) now Euro 6 clean diesel, ultra-low emission or zero emission

o Greenhouse gas emissions down 4% in 2019/20 on a like-for-like basis

o Nearing completion of a new sustainability strategy with a roadmap to a zero carbon business

o Without Stagecoach buses, UK CO2 emissions would be around 200,000 tonnes per annum higher

Environmental, social and governance ("ESG") measures

· Positive ESG ratings:

o "Low risk" rating from Sustainalytics

o "A" rated by MSCI

o FTSE4Good percentile rating of 98 out of a maximum of 100

· One of only c.86 listed companies to receive the London Stock Exchange Green Economy Mark

Martin Griffiths, Stagecoach Group Chief Executive, said: 

"We have achieved a creditable set of financial results in what has been one of the most challenging and sobering periods for citizens, communities and economies across the globe in living memory.

"Throughout these difficult times, our priority has firmly remained the safety and wellbeing of our people and our customers and protecting the long-term sustainability of our business. We are proud of the incredible response of our people and other key workers to the COVID-19 pandemic and the part they have played in getting the country through the worst. Our thoughts are with the families of our transport colleagues and others who we have lost to COVID-19.

"Prior to the COVID-19 pandemic, the business was on track to meet its expectations for the full year. We made good progress in delivering on our three key strategic objectives: to maximise our core business potential, manage change through our people and technology, and grow by diversifying, while maintaining our relentless focus on safety and customer service.

"In responding to the more recent global challenges, we have taken decisive action so that the business remains in as strong a position as possible and well placed to secure the significant long-term opportunities we see for public transport.

"Supportive short-term actions by government and our local authority partners have helped protect public transport networks, which are critical to the country. We have also been encouraged by the good momentum created by the positive direction of government bus policy and investment.

"Despite recent events, it is critical that all partners continue to work together to prioritise better mobility, maintain the cleaner air and take action to protect the future of our planet as part of the plan for global recovery. We are ready and committed to play our part in creating further value for our investors, customers, employees, communities and the environment."

ENDS

For further information, please contact:

Stagecoach Group plc www.stagecoach.com

Investors and analysts

Media

A pre-recorded presentation in relation to the results announcement will be available from 7:30am on 22 July 2020 at:

https://www.investis-live.com/stagecoach/5ef1fea57b676e1e00c1e404/elele

Notes to editors

Stagecoach Group

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

· We employ around 25,000 people and operate more than 8,300 buses, coaches and trams.

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

Preliminary management report for the year ended 2 May 2020

The Directors of Stagecoach Group plc are pleased to present their report on the Company for the year ended 2 May 2020.

Description of the business

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

Overview

In common with many businesses, we have been significantly impacted by the COVID-19 pandemic and the necessary measures put in place by government, which have affected travel patterns since March. Setting aside this unprecedented factor, we delivered a creditable financial performance for the year ended 2 May 2020 as we progressed our updated strategy and objectives.

We have continued to prioritise the safety and wellbeing of our people and our customers during this unprecedented period, and have taken decisive action to protect the long-term sustainability of the business. We are proud of the incredible response of our people and other key workers to the COVID-19 pandemic and the part they have played in getting the country through the worst.

Prior to the COVID-19 pandemic, our regional bus operations were performing well. We are pleased that the most recent independent customer satisfaction research by Transport Focus shows that we are continuing to deliver industry-leading quality of service and value for money to our passengers. In our London bus operations, where we operate services on behalf of Transport for London, we are amongst the top performing contractors and have delivered new tender wins.

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

With a simpler and more focused business in place, we are actively exploring opportunities to diversify our portfolio. Public transport will remain critical to the country's economy and communities, and will be a key part of the recovery ahead.

Financial results

The results are for the 53 weeks ended 2 May 2020. To improve comparability to the 52 weeks ended 27 April 2019, we also present some measures excluding the 53rd week.

Revenue from continuing operations was £1,417.6m, and excluding the 53rd week, was £1,404.2m (2019: £1,878.9m). The lower revenue reflects the end of the Virgin Trains East Coast franchise in June 2018 and the end of the East Midlands Trains franchise in August 2019. Adjusted total operating profit from continuing operations was £119.7m, and excluding the 53rd week, was £119.4m (2019: £161.3m). The change in operating profit reflects the adverse effect of the COVID-19 situation on the operating profit of the regional bus operations since March and the end of the East Midlands and West Coast rail franchises. Unadjusted operating profit from continuing operations was £87.2m (2019: £135.7m), reflecting the reduction in adjusted operating profit and an increase in the costs from separately disclosed items due to the COVID-19 situation. Adjusted earnings per share were 13.5p (2019: 22.1p), with the change including the reduction in adjusted operating profit partly offset by a lower taxation expense. Basic, unadjusted earnings per share were 6.4p (2019: 3.8p) with the increase principally reflecting the non-recurrence of charges relating to the impairment and disposal of the North America business being partially offset by COVID-19 related separately disclosed items.

Dividend

We maintained the interim dividend for 2019/20 at 3.8p per share and this was paid on 4 March 2020. Given the uncertainties caused by the impact of COVID-19, we announced in March that no further dividends will be proposed in respect of the year ended 2 May 2020. We recognise the importance of dividends to many shareholders and it is our ambition to resume dividend payments in due course. We anticipate that being when our profit and cash flow generation have returned to a level, which relative to our net debt and pension liabilities, supports the resumption of dividend payments.

Business strategy

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

· Maximise our core business' potential in a changing market

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

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

While our short and medium-term priorities have changed to reflect the COVID-19 situation, the above strategic objectives that we established in late 2019 remain in place. We will continue to review and adjust our strategy to take account of changes that emerge as the UK and our business recovers from the COVID-19 pandemic.

Transport policy

We remain encouraged by the UK Government's commitment to delivering a national bus strategy and we are helping to shape the planned priorities. Combined with significant new funding to support the growth of the bus market in the years ahead, we see a clear opportunity to leverage the potential of the bus to support economic growth and improved connectivity in our communities, as well as addressing the major challenges of road congestion and air quality in our towns and cities. Along with our industry partners, we are progressing a sector strategy to deliver a billion more passenger journeys a year by bus in England by 2030, with a commitment to work in partnership with government and local authorities to also grow bus patronage in Scotland and Wales.

UK franchised rail market

In late 2019, we exited the UK franchised rail market after more than 20 years of delivering industry-leading performance and customer satisfaction both individually and with our partners. We were proud our railway stewardship was recognised with the last of our operations, East Midlands Trains, being named Passenger Operator of the Year at the 2019 National Rail Awards. We would like to thank our former employees and customers across all of our rail businesses for their contribution to our success. We have continued to progress outstanding contractual matters as part of the unwind of these rail operations. While the current rail franchise model is subject to ongoing assessment by the Williams Review, as indicated previously we have no intention to bid for new UK rail contracts on the current risk profile offered by the Department for Transport.

Funding

In March 2020, we completed a re-financing of our core, bi-lateral bank facilities. We have entered into £325m of new, bi-lateral bank facilities committed through to March 2025 with the potential for those to be extended by up to two years. In May 2020, we issued £300m of commercial paper as an eligible issuer under the UK Government and Bank of England's Covid Corporate Financing Facility. The current issuances are due to mature in February and March 2021. The undrawn amounts on committed bank facilities, together with available surplus cash and deposit balances, are now over £800m and we continue to review our funding options in light of the emerging outlook for the business.

Our people

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

We appreciate the understanding and support of our people as we deal with the challenges of the COVID-19 situation. In reducing costs to partly offset the reduction in revenue, we took the decision to furlough a significant number of our people under the Government's Coronavirus Job Retention Scheme ("CJRS"). As we have built back up our bus and tram service levels, many of the furloughed employees have returned to work.

During the year, there were a number of changes to our Board of Directors. Sir Brian Souter stepped down as Chairman on 31 December 2019 and continues to serve on the Board as a non-executive director. Ray O'Toole, Non-Executive Director, who has several decades' experience in senior public transport sector roles, became the independent Chairman of the Company from 1 January 2020. Dame Ann Gloag and Sir Ewan Brown, both long-serving Non-Executive Directors, retired from the Board on 31 December 2019 and we thank them for their good counsel and major contribution to the business.

Will Whitehorn stepped down from the Board and as Deputy Chairman on 30 June 2020, having served for approximately nine years as an independent non-executive director. We thank Will for his wide range of insights and significant contribution to the Group during those nine years.

We are delighted that Lynne Weedall will join the Board with effect from 1 August 2020. Lynne is an experienced director who has worked in a number of large organisations, bringing key expertise in business strategy, organisation design, strategic change management and employee engagement. We look forward to welcoming Lynne to the Board.

Outlook

With the continuing uncertainty of the COVID-19 situation and the UK's recovery, it remains difficult to reliably predict profit for the new financial year ending 1 May 2021. In the short-term, the actions we have taken and the continuing support of government should ensure we continue to generate positive EBITDA (earnings before interest, tax, depreciation and amortisation) and avoid significant operating losses, and we are working to re-build profitability over time.

We expect a lasting effect of the COVID-19 pandemic on travel patterns with an acceleration in trends of increased working from home, shopping from home, telemedicine and home education. We anticipate that it will be some time before demand for our public transport services returns to pre-COVID levels and we are planning for a number of scenarios. We are continuing to review our cost base, to reduce overheads and plan for adjustments to direct and semi-direct costs across a range of scenarios. At the same time, we see positive drivers for our business from a renewed societal focus on health, wellbeing and the environment. Public transport can play a major role in a cleaner, greener and more resilient economy and society, tackling climate change with strong government action to reduce car use.

As Britain's biggest bus and coach operator, we have clear opportunities to grow our business and contribute to thriving communities. We continue to believe that by working together, the private sector and our local authority partners can deliver the public transport services our customers want.

Beyond our existing core operations, we have identified opportunities overseas as part of our strategy to diversify the business. We are investing in our people and in new technology to navigate our changing and challenging world. Challenge brings opportunity and we believe our track record of innovation, collaborative working, and commitment to excellence will help deliver the solutions needed to ensure better mobility, cleaner air and a more sustainable future for our communities.

Summary of financial results

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

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

Strategic and operating review

Strategic background and market environment

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

We are operating in a changing world, which brings both headwinds and tailwinds as we seek to deliver sustainable growth. There are positive contributors to the UK public transport sector, with a growing UK population, greater proportions of younger and older people, and further urbanisation.

At the same time, changing social and working patterns and the growth of the digital economy are contributing to fewer trips across all modes of transport. We expect that lasting effects of the COVID-19 situation will include an acceleration in trends of more working from home, shopping from home, telemedicine, and online education. There is also a greater desire among consumers for flexibility between modes, and there is currently an uncertain public policy and funding environment. Nevertheless, the biggest opportunity lies in driving modal shift from the car to mass transit as governments across the globe face growing expectations from citizens to address climate change, poor air quality and crippling road congestion. According to the National Travel Survey, only 4% of the distance travelled within Great Britain in 2018 by residents of England was by bus while 77% was by car or van. The market for sustainable modal shift from car to bus is therefore substantial.

Supporting our economy and communities

Our transport services remain critical to the future prosperity of our economy and communities. In February, we and the Centre for Economics and Business Research ("Cebr") published a new report, which shows that our transport services contribute over £1.6 billion a year in Gross Value Added to the UK economy. As well as providing direct employment for around 25,000 people, around a further 10,000 jobs are supported nationally. We help support 7,000 small, medium and large businesses, investing over £580m a year through our supply chain. The new research carried out by Cebr also provides a breakdown of our impacts by region and details the wider health, safety and environmental benefits of our transport services. This includes more than £44m saved annually in costs associated with road traffic accidents, around £13m in reduced healthcare costs, some £12m saved in emissions costs, and up to £343m in potential road congestion-related savings from a reduction of more than 1.2 billion miles of traffic.

A more sustainable alternative

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

We are proud to have received positive environmental, social and governance ratings from several assessment bodies, including being "A" rated by MSCI and classed as "low risk" by Sustainalytics. In addition, we achieved two prestigious benchmarks for commitment to responsible business and driving the green economy. The business is one of around only 86 companies publicly listed in the UK who have received the new London Stock Exchange Green Economy Mark. The benchmark is for companies that generate over 50% of their total annual revenues from products and services that contribute to the global green economy. The Green Economy Mark identifies sectors that are contributors to a greener, more sustainable economy such as through climate change mitigation and adaptation. In addition, we achieved the FTSE4Good global corporate responsibility standard for the 19th consecutive year. Constituents in the FTSE4Good Index Series have been independently assessed as meeting stringent environmental, social and governance criteria. We were rated as having a percentile rating of 98 out of a maximum of 100, putting us in the top 3% of companies in the Travel and Leisure sector.

We have invested more than £1 billion in new greener vehicles in the past decade. New Euro 6 buses emit fewer emissions overall than a Euro 6 car, as well as having up to 20 times the carrying capacity. 41% of our vehicle fleet across the UK is now Euro 6, ultra-low emission or zero emission. Our overall GHG emissions decreased by 4% in 2019/20 (excluding North America and expired rail franchises to give a more like-for-like figure). Analysis carried out by Cebr also shows that without Stagecoach bus services, there would be an annual increase of 0.19 million tonnes of CO2 through passengers using alternative modes of transport, principally the car. The Confederation of Passenger Transport ("CPT"), of which we are a member, has set out a vision for every new bus in the UK from 2025 to be ultra-low or zero emission. CPT's vision is also for all new buses in large urban areas to be ultra-low or zero emission from 2023, supported by funding from government.

Safety always

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

COVID-19 impact and response

The COVID-19 situation has had a significant impact on the business. Our priority has been to protect the health and wellbeing of our people and our customers, while taking action so that the business emerges from this period in as strong a position as possible and well placed for the significant long-term opportunities that we still see for public transport. We extend our thanks to our employees, other public transport staff, the country's healthcare professionals and other key workers for the huge efforts and sacrifices they have been making as part of the national effort to tackle the situation.

Our transport services and those of other organisations have played a critical role in getting key workers, such as healthcare and other staff, to work during the pandemic as well as ensuring people can access medical care, food and other essentials. We have undertaken a number of specific initiatives as part of the national effort to deal with the COVID-19 crisis, in addition to following government and public health advice across our operations. This has included dedicated shuttles and demand responsive transport for healthcare workers and other measures to support local communities, the supply chain and distribution networks.

We welcome the measures put in place by the respective governments in England, Scotland and Wales and our local authority partners to protect the continuity of bus and tram services during a period when passenger volumes were as much as 90% lower and the normal public transport networks were paused.

COVID-related government payments have been available to bus operators in respect of periods from mid-March. In each of Scotland, England and Wales, we have seen a continuation to a large extent of payments to regional bus operators of concessionary revenue, tendered revenue and Bus Service Operators Grant at pre-COVID levels. Regional bus operators in England have also been able to access COVID-19 Bus Services Support Grant ("CBSSG"). The amounts receivable by bus operators for periods from mid-March are subject to a reconciliation process, which has not yet been completed and therefore gives rise to some uncertainty in estimating our income for the year ended 2 May 2020 and thereafter.

As COVID-related restrictions have been relaxed, we have restored services and our regional bus vehicle mileage is now at around 80% of prior year levels. Nevertheless, with ongoing physical distancing requirements placing a capacity constraint on our vehicles and government advice influencing public transport use in the short-term, government is continuing payments to bus operators for the increased level of services. We are discussing with the relevant authorities how these arrangements will evolve. We expect the current or replacement arrangements for regional bus operators to continue until at least 14 October 2020 in England and 17 August 2020 in Scotland.

In London, where bus operators provide bus services under contract to Transport for London, Transport for London has generally maintained contract revenue payments to operators, adjusted down to reflect any variable cost savings achieved by operators from running a reduced level of service.

Additional government funding has been provided to Sheffield City region to help underpin the operation of the Sheffield Supertram network from mid-March and we expect the current funding arrangement to continue until at least 3 August 2020.

These measures helped underpin our own extensive internal actions to respond to the unprecedented situation, which have included:

• pay sacrifices for all Board directors and other executives.

• furloughing of a significant proportion of bus drivers, engineers and other staff as part of the UK Government's Coronavirus Job Retention Scheme.

• significant reductions in service levels and vehicle mileage in our regional bus and tram networks, and the temporary suspension of all megabus.com inter-city coach services in England and Wales.

• reduction in fuel hedging to take account of the lower regional bus mileage and associated fuel consumption.

• reduction in our previously planned 2020/21 capital expenditure.

• reductions in other discretionary costs.

Strategic objectives and initiatives

Notwithstanding the unprecedented environment caused by the COVID-19 pandemic, we see significant long-term opportunities in our key markets as the pressing challenges they need to address remain. Our strategic objectives and initiatives remain focused on the business actions we believe will best realise these opportunities.

Maximise our core business' potential

Maintaining high customer satisfaction

Our core business is built on having a clear focus on our customers and continuing to anticipate ways that we can make travel simpler and better. We are proud to have some of the highest levels of customer satisfaction in the UK public transport sector. The latest independent research published by Transport Focus in March 2020 shows customer satisfaction among Stagecoach bus passengers in England was 91%, the highest level achieved by any major bus operator. Stagecoach was also first among major operators on value for money and bus journey time measures in England. In Scotland, we achieved customer satisfaction of up to 95%. However, we continue to explore ways to improve our product offering and maximise the potential of the business.

All our customers' claims for refunds related to COVID-19 have been fulfilled.

Value travel

Stagecoach offers the lowest average weekly bus fares of Britain's four main national operators, according to the sixth National Bus Fares Survey undertaken by transport consultants, TAS. It found that Stagecoach weekly bus travel was nearly £1 cheaper than the UK average and over £4 cheaper than weekly capped bus travel in London.

Multi-journey fares capping

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

Development of a scheme to deploy a pilot in Peterborough to offer Contactless Tap In/Tap Out with daily/weekly capping for multiple journeys was well progressed when measures to mitigate the impact of COVID-19 were introduced in March. We have developed a technical solution with our technology partner to deliver a customer proposition that was in the final stages of testing. When restrictions are sufficiently relaxed and market conditions are appropriate, we will look to progress the scheme.

New bus and coach services

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

A new partnership between Stagecoach East Midlands and Sherwood Forest NHS Foundation Trust will provide employees with more than 30% off bus travel when they join the 'smartcommute' scheme. The scheme aims to collaborate with businesses in the region to provide a viable cost-effective bus travel option which will help reduce road congestion, pollution and car parking issues. It has already been successfully implemented with several employers.

In February 2020, we started to operate a new state-of-the-art on-demand mobility service in Tees Valley. Tees Flex, operated on behalf of the Tees valley Combined Authority, aims to help residents in more isolated communities across the region access essential services, as well as training and employment opportunities. Nine high-quality minibuses are being used for the pilot, with passengers able to pre-book the bus via a smartphone app, a website or over the telephone. The pilot, which will run for three years, has the potential to be extended across the region if successful.

Additionally, in the East Midlands, in May 2020, we launched Stagecoach Connect, the UK's first dedicated app-based demand responsive bus service for NHS workers. We introduced the initiative at Sherwood Forest NHS Trust in partnership with the Trust, Nottinghamshire County Council, and technology provider, ViaVan. We developed it from concept to delivery in just two weeks to help the COVID-19 response. We see potential to roll this out to other parts of the NHS across the UK, as well as there being a key role for targeted on demand solutions as part of future public transport plans.

We have also been selected to operate a new major contract to operate commuter, shuttle and park and ride services on behalf of the Sellafield site in Cumbria. We took over the contract on 1 April 2020.

Corporate sales

In many locations across the UK, we have identified a market for direct corporate sales. We are looking to focus on business parks and major employers in rapidly growing cities with constrained parking, particularly those with a growing emphasis on demonstrating they are responsible employers. There is also an opportunity to deliver ready-made solutions in areas that may be investigating the introduction of workplace charging levies. To access these markets, we have developed a simple and bespoke corporate product structure and booking tool via our app, which allow us to build relationships direct. Our first two customers, Aberdeen City Council and University of Kent, will launch this proposition in early August 2020.

We look forward to resuming conversations with other potentially significant new corporate customers when COVID-19 restrictions are sufficiently relaxed.

Brand and marketing

In early 2020, we launched a new brand and associated values as part of a wider commitment to simplify, modernise and enhance the customer experience. It includes a new design for our buses based on customer research around what would make people use public transport more regularly. The findings highlighted that 69% of customers often found it confusing to find the bus they wanted, with a further 37% stating they would use the bus more often if it was simpler and more modern. We have introduced a simplified colour coded service offer - Local, Longer, and Specialist - to reflect the types of journeys our customers make. Under the banner "Proud to Serve", the changes are designed to complement the multi-million-pound investments we are making in greener buses, smart technology, and better journeys. By increasing brand awareness and relevance and implementing a coordinated marketing and customer strategy, we can improve the end-to-end customer experience and increase our passenger revenue through modal shift. Our marketing activity has tended to be driven and focused locally. While we intend to continue with our local marketing activity, we see significant potential from complementing that with centrally coordinated branding and marketing activity, optimising our position as the UK's largest bus and coach operator. We have been encouraged by the returns on investment that we have achieved from initial central marketing activity during 2019 and are looking to build on that. Our plans include a mix of short-term tactical marketing activity to drive near term sales, as well as generating long-term revenue and profit growth through brand building. We previously reported our intention to increase marketing spend from c.£8m per annum to c.£13m per annum to target passenger revenue growth. We continue to see an opportunity from this element of our strategy and, while the phasing has been changed and some initiatives put on hold as a result of the COVID-19 pandemic, we plan to revisit these.

Government bus policy and investment

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

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

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

These initiatives are now of even greater importance as the country recovers from the COVID-19 pandemic.

Regulatory developments

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

In addition to the all-operator partnership proposal for the region, we published an alternative option of a 10-year partnership in south Manchester between GMCA and bus operators, which could be integrated with any partnership or franchise system in the north of the region. Under the partnership plan, there would be a package of London-style improvements to deliver a further step-change in the region's bus network, improving connectivity, delivering cleaner air, ensuring better value for taxpayers, and supporting a stronger economy

We are proud of our record of running high quality, successful bus services in Manchester for over 20 years and we want to continue working alongside the Mayor, GMCA and Transport for Greater Manchester to help deliver on their wider strategy for the region. Mayoral elections previously planned for May 2020 have been postponed until 2021 because of the COVID-19 pandemic and it is unclear at this stage when a decision will be made on bus reform in Greater Manchester.

In June 2020, GMCA said the majority of responses to the consultation were in favour of the bus franchising proposal. However, further work is to be undertaken to assess the impact of COVID-19 on the region's bus market, the assessment and the outcome of the consultation. A report will be submitted to GMCA later in the year on these impacts and next steps. 

We believe that franchising is now even more unaffordable for Greater Manchester's taxpayers than when the consultation was undertaken. Instead, we should build on the strong partnership working between the private and public sector during the COVID-19 situation to maximise the potential of the bus as a solution to the region's economic, social and environmental challenges and opportunities. We have plans in place to deliver simpler ticketing, better value fares, easier and faster journeys, and improved connectivity for all customers, including young people and other priority groups. We stand ready to work with stakeholders across Greater Manchester on the future design of the region's bus network and encourage people to switch from the car to more sustainable public transport and other forms of active travel.

Excluding the more recent effect of the COVID-19 situation, the annual revenue of our Manchester bus business is around £125m. Consistent with the high quality bus services we provide there, the significant investment we have made in those services over many years and our capable management team, our operating profit margin in Manchester has generally in recent years exceeded the average margin we see for our overall regional UK Bus operations. We recognise that any change in the model for delivering bus services in Manchester, including the introduction of bus franchising and/or commitments under partnership arrangements, will likely put some downward pressure on our Manchester bus profit.

We are also seeking to shape the reviews of bus services underway in the South Yorkshire and Merseyside metropolitan areas, where strong partnerships have resulted in more robust networks than in many other parts of the country. With public funding likely to be under pressure following the steps taken to respond to the COVID-19 pandemic, we believe that partnership continues to offer the quickest and best value approach to improving services and attracting more passengers on board buses.

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

In March 2020, the Welsh Government published an updated Bus Services Bill intended to provide local authorities with options to improve local bus services and deliver a more integrated public transport system. This includes both partnership and franchising options, as well as powers for councils to operate their own bus companies. Other measures include powers to improve passenger information. We believe that any strategy to improve bus services in Wales requires meaningful action to tackle road congestion to speed up worsening journey times. This factor, rather than the regulatory environment, is the key reason people choose not to take the bus. It will also require significant investment from the Welsh Government in bus priority measures in towns and cities to support the ongoing investment by bus operators to improve services. The Bill is continuing its progress through the parliamentary process.

We would encourage all of our political leaders to work with the private sector to seize the potential for public transport to contribute meaningfully to efforts to reduce both greenhouse gas emissions and road congestion. We believe that by working in partnership, we can together deliver change faster and more cost effectively than will be possible through ideologically driven changes to the ownership and commercial regulation of transport services.

London bus market

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

We are pleased that our strong operational performance in the first half of 2019/20 has continued into the second half. Our London bus business has been consistently towards the top of the Transport for London quality of service tables for reliability of bus services across the capital.

As previously reported, we have maintained a disciplined approach to bidding for bus contracts in London, which we believe is in the long-term interests of our business, customers and taxpayers. In the year ended 2 May 2020, we retained 90% of the re-tendered peak vehicle requirement that we already operated and have won six routes previously run by other operators. This has resulted in us securing additional work involving a peak vehicle requirement of more than 60 buses. The routes are all due to commence in the first half of 2020/21.

Manage change through our people and technology

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

Investing in our people

Our people continue to be our most important asset and they have been fundamental to our success over the past four decades.

We are upgrading our people systems and processes, including recruitment, on-boarding and performance management, to ensure we access and retain the best skilled and motivated people, as well as giving managers the tools they need to manage their people to a high and consistent standard. As part of that project, we accelerated work to provide our colleagues with electronic payslips and P60s during the COVID-19 pandemic.

Britain's Most Admired Companies 2019 survey rated us Britain's top public transport company for diversity and inclusion. We have already taken some significant steps in building a more gender diverse workforce with more female representation in our graduate scheme.

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

Harnessing technology to support our customers and our business

We continue to enhance our use of technology to support our customers and our business. For example, during the year, we:

· Launched a new enhanced version of the Stagecoach bus app for customers.

· Began a new Mobility as a Service ("MaaS") pilot in Manchester that allows people to plan, book and pay for travel across bus, tram and train journeys, as well as car hire and car clubs, via their smartphones.

· Progressed the streamlining and modernisation of our back office systems.

Plans have been developed for a new enterprise asset management system to further enhance the way we maintain our bus fleet, ensuring greater availability and reducing service delays. We already operate one of the most reliable bus fleets in the country with 99.4% regional bus service reliability, but the new system will enable us to further improve that.

Work continues on developing sustainable vehicle technology to meet the long-term needs of the business. This will ensure we are well placed to manage and benefit from government commitments on climate change and the steps being taken by local authorities around the country to put in place Clean Air Zones. We welcome the UK Government funding for a city to feature an all-electric bus fleet and we have been working with local authority partners on the submission of bids for this initiative. We are already making major investment in this technology. In the first quarter of 2020, we introduced the first double-decker electric buses in Greater Manchester. The 32 electric buses connect Manchester city centre, Manchester Airport, five hospitals and three universities. These zero emission buses, which benefit from support funding by the Department for Transport, can travel 190 miles on a single charge and will help to ease pollution on some of Europe's busiest roads. We are also investing in delivering infrastructure and power requirements at depot level.

We are continuing to progress our industry-leading trials of innovative autonomous bus technology in partnership with bus manufacturer, Alexander Dennis, and technology partner, Fusion Processing. Last year, we successfully completed a live trial of the first full-size autonomous bus within a depot environment at Sharston, Manchester. The vehicle carried out basic movements such as parking and moving into the fuelling station and bus wash. Using self-driving vehicles more widely within bus depots could help improve safety, efficiency and utilisation of space. Planning is now well underway for the next phase of our proof of the technology in passenger service as part of an Innovate UK pilot in Scotland. Later this year, five autonomous single-decker vehicles will navigate a 15-mile route between Fife and Edinburgh, crossing the Forth Road Bridge and connecting with Edinburgh Park train and tram interchange. The buses will operate autonomously to level 4 standard, with a driver on board in line with UK regulations.

Grow by diversifying

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

The markets we are focusing on are those where we see relatively low political/regulatory risk, contract opportunities that offer an appropriate risk-reward balance, a positive economic outlook, supportive public transport policies and positive demographic factors. We see potential to earn a higher return on capital than we were achieving in North America. Our approach to these markets involves using a combination of our own highly skilled UK-based business development team and experienced domestic consultants in each market.

We were disappointed that our bid for the 12.5-year contract to operate Sweden's Roslagsbanan commuter railway was unsuccessful. However, we have learnt a great deal from the bid and have not been discouraged from pursuing other opportunities.

To this end, we have been shortlisted to bid for the Mälartåg railway operating between Stockholm and the regions of Stockholm County, Sörmland, Uppsala, Västmanland, Örebro County and Östergötland. We are also shortlisted for four bus tenders in the Skåne Municipality (South West/Malmo) region of Sweden.

The four Skåne bus opportunities would involve the operators assuming limited passenger revenue risk and cover a contract period of eight years, with a potential two-year extension. The Mälartåg railway contract is for eight years and has no passenger revenue risk with expected bid submission in early autumn. The combined Skåne and Mälartåg contract values are expected to exceed £1bn over the contract lengths.

We have completed detailed market assessments of the United Arab Emirates, a market which fits our profile, and we are actively looking at capital light and low revenue risk opportunities in the region, particularly Dubai, where we are pleased to have prequalified to participate in the forthcoming Dubai Bus Outsourcing project tender commencing in quarter one of 2021. We anticipate forthcoming opportunities in the wider Gulf region coming to market over the course of the next twelve months and we are well placed to pursue these.

We are also evaluating potential bus and metro contract opportunities in some other overseas markets where they fit into our profile and experience.

In addition to these overseas opportunities, we are actively exploring new contract opportunities in the UK which include building on our successful rail replacement business as well as building bespoke solutions for local authorities and other clients.

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

Financial Review

UK Bus (regional operations)

Financial performance

The financial performance of the UK Bus (regional operations) for the year ended 2 May 2020 is summarised below:

Having delivered a solid performance for the most of the year, the UK Bus (regional operations) business has been adversely impacted by the substantial fall in passenger demand for public transport in response to the COVID-19 pandemic.

Like-for-like revenue decline of 3.8% reflects the effect of the COVID-19 situation, and the related government advice discouraging travel, on customer demand in the final two months of the year. Up to this point, revenue growth had strengthened from the reported growth of 1.6% at the half-year, with like-for-like revenue growth of 2.1% for the 44 weeks ended 29 February 2020.

Like-for-like vehicle miles operated were 4.0% lower than the prior year. Mileage in the final weeks of the year was down significantly year-on-year reflecting an overall reduction in mileage of around 60% in response to the COVID-19 situation. Like-for-like revenue per mile grew by 0.3% and like-for-like revenue per journey increased 6.9%. The relatively high increase in the like-for-like revenue per journey is principally due to the continuation of concessionary revenue payments at close to pre-COVID revenue rates despite the significant drop off in concessionary journey numbers from mid-March 2020.

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

Commercial revenue was significantly impacted by a fall in customer demand in response to COVID-19. At the end of the year, commercial sales across our companies were at around 15% of prior year levels. 46% of 2019/20 commercial revenue was sold via contactless and digital channels. Passenger demand is gradually returning as COVID-related restrictions are relaxed, with commercial revenue now at around 40% of the prior year level.

As the Department for Transport COVID-19 related payments for bus services do not cover inter-city coach operations, we took the decision to temporarily wind-down our megabus.com services in England and Wales, with services suspended from 5 April.

Revenue receivable from public authorities in respect of concessionary, tendered and school revenue has been more robust, with that revenue generally continuing at around pre-COVID levels despite reductions in vehicle mileage and patronage.

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

The movement in operating margin was built up as follows:

The main changes in the operating margin shown above are:

· Other operating income has increased significantly, reflecting government payments to protect jobs and to ensure the continuation of bus services and support their critical role in getting key workers to work, as well as ensuring people can access medical care, food and other essentials. We have recognised grant income under the Coronavirus Job Retention Scheme ("CJRS") and COVID-19 Bus Services Support Grant ("CBSSG").

· As the largest component of our cost base, staff costs as a proportion of revenue increased significantly towards the end of the year. A substantial element of this increase in staff costs is offset by the higher other operating income, with the costs of employees on furlough (included in staff costs) being largely offset by CJRS grant income (included in other operating income).

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

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

Outlook

With the continuing uncertainty of the COVID-19 situation and the UK's recovery, it remains difficult to reliably predict financial performance for the new financial year ending 1 May 2021. In the short-term, the actions we have taken and the payments from government for continuing bus services should ensure we continue to generate positive EBITDA and avoid significant operating losses.

As COVID-related restrictions have been relaxed, we have restored services and our regional bus vehicle mileage is now at around 80% of prior year levels. Nevertheless, with ongoing physical distancing requirements placing a capacity constraint on our vehicles and government advice discouraging public transport use in the short-term, government is continuing payments to bus operators for the increased level of services.

Looking further ahead, we expect a lasting effect of the COVID-19 pandemic on travel patterns with an acceleration in trends of increased working from home, shopping from home, telemedicine and home education. We anticipate that it will be some time before demand for our regional bus services returns to pre-COVID levels and we are planning for a number of scenarios. We are continuing to review our cost base, to reduce overheads and plan for adjustments to direct and semi-direct costs across a range of scenarios. At the same time, we see positive drivers for the business from a renewed societal focus on health, wellbeing and the environment. Buses across the UK can play a major role in a cleaner, greener and more resilient economy and society, tackling climate change with strong government action to reduce car use.

As Britain's biggest bus and coach operator, we have clear opportunities to grow our regional bus business and contribute to thriving communities. We continue to believe that by working together, the private sector and our local authority partners can deliver the bus services our customers want.

UK Bus (London)

Financial performance

The financial performance of UK Bus (London) for the year ended 2 May 2020 is summarised below:

We are delighted with the strong operational and financial performance of our London business, in a year where we expected to see a reduction in operating profit arising from contracts lost in the prior year. Quality Incentive Contract income increased by £3.9m from the prior year, reflecting favourable service performance and fewer roadworks on our routes.

The movement in like-for-like revenue partly reflects the reduction in operating mileage associated with the impact of contracts lost in the prior year. It also reflects that in the latter part of the year, we reduced our vehicle mileage in agreement with Transport for London in response to the COVID-19 situation. We agreed with Transport for London that the contract payments we receive from it would be reduced by the amount of savings in variable costs achieved as a result of operating less mileage.

The increase in operating margin was built up as follows:

The main changes in the operating margin shown above are:

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

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

· Insurance and claims costs have increased reflecting our latest assessment of the self-insured portion of claims.

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

· Other operating income has increased, reflecting grant income recognised under CJRS for employees furloughed as we reduced contract mileage at the request of Transport for London. Any benefit from the grant income was effectively passed to Transport for London through reductions in contract revenue.

· The adoption of the new lease accounting standard, IFRS 16, results in a different pattern of expense within the income statement. The IAS 17 operating lease expense for certain leases is replaced by depreciation and interest charges. A significantly greater proportion of the London bus fleet is leased than of the regional bus fleet, meaning that the application of IFRS 16 has a proportionately greater effect on the London bus operating margin.

· Other costs have reduced, principally due to a one-off rates rebate at one of our depots during the year and our fleet size reducing by a greater proportion than our fall in revenue.

Outlook

Transport for London has generally maintained contract revenue payments to London bus operators, adjusted down to reflect any variable cost savings achieved by operators from running a reduced level of service. The method for determining contract payments for the period up until 22 August 2020 has been agreed with Transport for London and discussions are continuing on the determination of contract payments for periods thereafter. Those ongoing discussions include considerations of how best to --manage the risk that, as a result of the COVID-19 situation, the inflation adjustments to contract payments might not remain a good reflection of operators' actual underlying cost inflation.

Our vehicle mileage should increase in 2020/21 as we begin to operate the new contracts we secured in 2019/20.

We continue to see good prospects for the London business and we will maintain our discipline in bidding for new contracts as well as focusing on strong operational delivery.

UK Rail

Financial performance

The financial performance of UK Rail for the year ended 2 May 2020 is summarised below:

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

The like-for-like revenue is in respect of the ongoing Sheffield Supertram business, and includes the adverse effect of the COVID-19 situation on revenue since March 2020.

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

We were disappointed that our claims against the Secretary of State for Transport regarding his decisions to disqualify us from three rail franchise competitions were unsuccessful. Our share of the estimated costs of the litigation are included within operating profit.

Outlook

We have previously indicated that we have no intention to bid for new UK rail franchises with the Department for Transport on the current risk profile. Furthermore, it is not clear if and when the Department will invite bids for further UK rail franchises. In light of those factors, we see no near-term prospect of us participating in UK rail franchise bids and we have accordingly notified the Department for Transport that we surrender our passport to bid for such franchises.

Our Sheffield Supertram business is receiving payments from government to ensure the continuation of tram services and support their critical role in getting key workers, such as healthcare and other staff, to work as well as ensuring people can access medical care, food and other essentials.

Virgin Rail Group

Financial performance

The financial performance of the Group's Virgin Rail Group joint venture for the year ended 2 May 2020 is summarised below:

Virgin Rail Group's West Coast rail franchise ran until 8 December 2019, with the change in operating profit from the prior year reflecting the end of the franchise during the year. Profitability remained satisfactory in the final few months of the franchise, and the focus is now on concluding outstanding contractual matters.

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

Adjusted EBITDA, depreciation and intangible asset amortisation

Earnings before interest, taxation, depreciation, software amortisation and separately disclosed items (adjusted EBITDA) amounted to £237.3m (2019: £327.0m). Adjusted EBITDA can be reconciled to the condensed financial statements as follows:

The adjusted EBITDA of £237.3m for the year ended 2 May 2020 reflects the effect of implementing International Financial Reporting Standard 16 ("IFRS 16") in respect of accounting for leases. The implementation of IFRS 16 results in amounts previously recognised as operating lease rentals being reclassified as depreciation and finance costs in the income statement. The effect is to increase adjusted EBITDA by £26.6m for the year ended 2 May 2020. Comparative amounts have not been re-stated for IFRS 16. The year-on-year decrease in adjusted EBITDA principally reflects the disposal of the North America business in April 2019 and the end of the East Midlands Trains franchise in August 2019.

Software amortisation and depreciation reduced from the prior year principally due to the sale of the Group's North America Division in April 2019.

Separately disclosed items

The Directors believe that there are certain items that we should separately disclose to help explain the consolidated results. We summarise those "separately disclosed items" in note 4 to the condensed financial statements and further explain them below.

Non-software intangible asset amortisation

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

Non-software amortisation for the year ended 2 May 2020 amounted to £0.7m (2019: £0.3m).

Re-organisation costs

In April 2019, there were two significant events relevant to the Group's overall strategy: the sale of the Group's North America Division and the UK Department for Transport's decision to disqualify the bids that the Group was involved in for new UK rail franchises. In light of those, the Group subsequently reshaped its management structure and reduced overheads to reflect the reduced scope of the business. The re-organisation costs associated with those changes amounted to £2.4m in the year ended 2 May 2020.

Asset impairment and onerous contract provision

Taking account of the effects of the COVID-19 situation, the Group has assessed its assets for impairment and reviewed for onerous contracts. Based on that review, a cumulative separately disclosed expense of £16.5m was recorded for the year ended 2 May 2020.

Discontinued fuel hedges

The Group significantly reduced its vehicle mileage in light of reduced customer demand from March 2020 as the public followed government advice to avoid all but essential travel in light of the COVID-19 pandemic. As a result, the Group significantly reduced its forecast of the level of future fuel consumption that it considered to be highly probable and hedge accounting was discontinued in mid-March 2020 for certain of the fuel hedges covering the period from mid-March 2020 to April 2021.

Amounts previously recognised in the statement of comprehensive income in respect of those now discontinued hedges were transferred to the income statement with effect from March 2020 to the extent that the forecast fuel consumption was no longer expected to occur. The income statement expense of £12.9m for that, and subsequent movements in the fair value of fuel derivatives that are no longer effective hedges, has been presented as a separately disclosed item.

Changes in the fair value of Deferred Payment Instrument

A Deferred Payment Instrument was received as deferred consideration for the sale of the North American business in April 2019. The instrument, which is accounted for as fair value through profit or loss, has a maturity date of October 2024 and due to credit and other recoverability risks associated with the instrument, its carrying value is at a discount to its face value. The Group's exposure to the purchaser of the North American business ranks behind all of its secured lenders. The carrying value of the instrument was £22.3m as at 27 April 2019. At 2 May 2020, the fair value of the instrument was estimated to be £4.5m, resulting in a loss of £17.8m being recognised as finance costs for the year ended 2 May 2020.

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

Tax credit

The net effect of separately disclosed items from continuing and discontinued operations was a pre-tax loss of £51.6m (2019: £125.3m).

The separately disclosed tax credit of £12.8m for the year ended 2 May 2020 (2019: £22.5m) includes the tax effect of the pre-tax separately disclosed items, as well as a tax credit of £3.4m in respect of tax losses relating to expired rail franchises.

Net finance costs

Net finance costs from continuing operations, excluding separately disclosed items, for the year ended 2 May 2020 were £28.8m (2019: £28.4m) and can be further analysed as follows:

The increase in adjusted net finance costs is principally as a result of interest on leases following the adoption of IFRS 16, and the costs of arranging the Group's new bank facilities. This increase is partially offset by the Group's repayment of debt following the disposal of the North America Division.

Taxation

Our share of profit from joint ventures is reported after tax in arriving at the profit before tax from continuing operations in the consolidated income statement. To better understand the Group's effective tax rate, we show below the Group's tax charge from continuing operations including our share of joint ventures' tax relative to the Group's profit before tax from continuing operations excluding joint ventures' tax. On that basis, the effective tax rate for the year ended 2 May 2020, excluding separately disclosed items, was 21.1% (2019: 20.0%).

The tax charge on profit from continuing operations can be analysed as follows:

The effective tax rate on profit from continuing operations, excluding separately disclosed items, of 21.1% is higher than the 19.0% rate of UK corporation tax for the year, principally due to the revaluation of deferred tax balances following the reversal of the UK corporation tax rate reduction from 19.0% to 17.0%. Assuming the composition of the Group remains broadly unchanged and that there are no significant changes to expected corporate tax rates or laws in the UK, we expect the Group's future effective tax rate (excluding separately disclosed items) to be between 18.0% and 20.0%.

The cash tax paid in the year of £Nil (2019: £17.8m) compares to the tax charge for continuing and discontinued Group companies of £3.2m (2019: credit of £0.1m).

The areas where the Group sees greatest uncertainty around the amount of tax that is payable relate to the financing of, and transactions with, overseas operations. Liabilities of £10.7m are held as at 2 May 2020 (2019: £13.3m) in respect of these uncertain tax positions. The liabilities include amounts in respect of the legacy financing of overseas operations, whereby the Group has benefitted from the Finance Company Exemption contained in UK Controlled Foreign Company legislation. Whilst the Group has complied with all the requirements of UK tax law, the European Commission has confirmed its view that the UK exemptions are partly contrary to European Union State Aid rules. On 13 June 2019, Her Majesty's Revenue and Customs ("HMRC") applied to annul the decision of the European Commission, and in November 2019, the Group, in line with a number of UK corporates, made a similar appeal.

Cash flows and net debt

Consolidated net debt (as analysed in note 17 to the condensed financial statements) has, as expected, increased from 27 April 2019, reflecting the impact of adopting the new lease accounting standard, IFRS 16, the effect of share buy-backs, the transfer of cash following the expiry of the East Midlands Trains franchise and additional capital investment, partly offset by continued cash generation from other operations.

Net cash from operating activities before tax for the year ended 2 May 2020 was £164.6m (2019: £124.7m) and can be further analysed as follows:

Net debt increased from £253.3m at 27 April 2019 to £352.1m at 2 May 2020. The movement in net debt was:

The £98.8m increase in net debt includes the impact of implementing IFRS 16, where lease liabilities of £89.0m have been recognised on transition.

As at 2 May 2020, all of the major rail franchises previously operated by Group subsidiaries had ended. Therefore, as at 2 May 2020, there is no restricted cash held by train operating companies. However, the settlement of the train operating company assets, liabilities and contractual positions continues for some time following the end of the relevant franchises. As at 2 May 2020, the consolidated net liabilities included net liabilities (excluding cash) of £101.0m in respect of such items. Accordingly, if all items were to be settled at their 2 May 2020 carrying values, consolidated net debt would increase by £101.0m. Consolidated net debt plus those outstanding train operating company net liabilities as at 2 May 2020 was £453.1m.

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

In addition to the amounts shown in the table above, the impact of purchases of intangible assets and other investments was £5.5m (2019: £4.4m). In addition, £0.5m (2019: £28.1m) of cash was received from disposals of intangible assets.

The actions we have taken in response to the impact of the COVID-19 situation on the business include reducing our planned capital expenditure. Prior to COVID-19 having an effect on the business, our capital expenditure plans for 2020/21 envisaged around £105m of cash capital expenditure and around £38m of new leases. As we previously announced, we have scaled down that planned expenditure to around £54m of cash capital expenditure and around £20m of new leases.

Financial position and liquidity

The Group was in a good financial position pre-COVID and we have taken action to ensure it is well positioned to manage during this period of increased uncertainty. In particular:

· We continue to have available liquidity of over £800m. We monitor our liquidity and cash flow daily.

· In March 2020, we re-financed our core bank facilities and entered into £325m of new bank facilities, committed through until at least 2025.

· In June 2020, we secured waivers of the net debt to EBITDA and EBITDA to interest covenant tests in those £325m of facilities. The waivers cover the years ending 31 October 2020 and 1 May 2021. As things stand, the next testing of those covenants will be in respect of the year ending 30 October 2021. In the meantime, the Group has agreed with the banks to maintain a minimum level of available liquidity.

· In May 2020, we issued £300m of commercial paper as an eligible issuer under the UK Government and Bank of England's Covid Corporate Financing Facility.

· We engaged with the credit rating agencies on the effect of the COVID-19 situation on our business. Moody's (Baa3) and S&P (BBB-) have since reaffirmed our investment grade credit ratings, whilst also revising the rating outlooks to negative from stable.

· We restructured our fuel hedging portfolio to take account of changes in our vehicle mileage.

Since our regulatory announcement of 28 May 2020, we have seen further positive cash flow (excluding movements in borrowings) of approximately £26m. As at 20 July 2020, our consolidated liquidity position was as follows:

Year-end financial position of the Group

Net (liabilities)/assets

Net liabilities at 2 May 2020 were £130.2m (2019: net assets of £128.4m).

The reduction in the net assets reflects the actuarial losses on defined benefit pension schemes, the effects of share buy-backs and dividends paid, partly offset by the profit for the year ended 2 May 2020.

Retirement benefits

The reported net liabilities of £130.2m (2019: net assets of £128.4m) that are shown on the consolidated balance sheet are after taking account of net pre-tax retirement benefit liabilities of £413.1m (2019: £197.7m), and associated deferred tax assets of £78.5m (2019: £33.9m).

The Group recognised pre-tax actuarial losses of £220.1m in the year (2019: £36.2m). The discount rate used to determine pension scheme liabilities is determined with reference to AA-rated bond yields. The discount rate and asset values have been volatile over the COVID-19 period.

A provisional estimate of the deficit on the main scheme as at 2 May 2020 on the trustees' funding basis is £53m, compared to £404.1m on an accounting basis (included in the £413.1m above). That reflects the long-term rates of return that the trustees expected from the scheme's investments. The Pensions Regulator takes an active interest in the main pension schemes in which we participate and the relevant trustees continue to discuss the appropriateness of scheme valuations and contribution rates with the Regulator. We forecast employer defined benefit cash contributions for 2020/21 of £13.9m (2019/20: £20.7m) and we do not expect any material changes to these before 2021/22, when the funding position of the main scheme will be assessed in light of an updated triennial valuation.

Dividend policy

The Board has proposed no final dividend in respect of the year ended 2 May 2020.

The Group takes account of its performance, financial position and prospects when setting dividends. It does not have a prescribed formula for determining each year's dividends and has not set specific targets for dividend growth or dividend cover ratios for the following reasons:

· The Group does not wish such targets to be viewed as a commitment or promise by the Board which, in turn, could act as pressure to pay certain levels of dividend in the future even when at that future point in time, that might not be in the best interests of the Company and its stakeholders.

· The appropriate pay-out ratio may vary based on many factors including factors affecting the outlook that are not reflected in the historically reported figures.

· Earnings may be volatile from year-to-year. We would look for dividend rates to be more stable and not to fluctuate as significantly as earnings simply to achieve target cover ratios.

As at 2 May 2020, the Company's distributable reserves totalled £164.8m (2019: £309.6m), which compares to dividends paid in cash in the year ended 2 May 2020 of £42.6m (2019: £44.1m).

The Group continues to have substantial available liquidity and it is our ambition to resume dividend payments in due course. We anticipate that being when our profit and cash flow generation have returned to a level, which relative to our net debt and pension liabilities, supports the resumption of dividend payments. While the current uncertainty caused by the COVID-19 situation makes it difficult to accurately forecast the timing and extent of profit recovery, we continue to see good long-term opportunities for the Group and a major role in a cleaner, greener and more resilient economy and society, tackling climate change with strong government action to reduce car use.

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

The Group will continue to regularly review its financial strategy and capital structure.

Adoption of new accounting standard for leases

The Group has adopted International Financial Reporting Standard 16 ("IFRS 16"), Leases, with effect from 28 April 2019. The condensed financial statements for the year ended 27 April 2019 are prepared in accordance with International Accounting Standard 17 ("IAS 17"), Leases, and so do not reflect all of the requirements of IFRS 16. More information on the adoption of IFRS 16 and the impact on the financial statements is provided in note 1 to the condensed financial statements.

Related parties

Details of significant transactions and events in relation to related parties are given in note 19 to the condensed financial statements.

Principal risks and uncertainties

Like most businesses, there is a range of risks and uncertainties facing the Group. A brief summary is given below of those specific risks and uncertainties that the Directors believe could have the most significant impact on the Group's financial position and/or future financial performance. Pages 9 to 13 of the Group's 2019 Annual Report set out specific risks and uncertainties in more detail. Further information and updates will be provided in the 2020 Annual Report.

The matters summarised below are not intended to represent an exhaustive list of all possible risks and uncertainties. The focus below is on those specific risks and uncertainties that the Directors believe could have the most significant impact on the Group's position or performance.

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

· Economy - the economic environment in the geographic areas in which the Group operates affects the demand for the Group's services. The ongoing effects of the COVID-19 situation and the negotiation of the terms of the UK leaving the European Union may lead to continuing economic, consumer and political uncertainty. That may in turn affect asset values and foreign exchange rates, which have a bearing on the amounts of our pensions, financial instruments and other balances. UK policy following the UK leaving the European Union may affect the UK economy, including the availability and cost of staff.

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

· Changing customer habits - There is a risk that changes in people's working patterns, shopping habits and/or other preferences affect demand for the Group's transport services, which could in turn affect the Group's financial performance and/or financial position. It is likely that COVID-19 will accelerate trends of increased home working, home shopping, telemedicine and home schooling. To the extent the effects of that on travel patterns are not offset by modal shift to bus/tram, there will be a longer term adverse effect on the Group's revenue and potentially its financial performance and/or financial position.

· Pension scheme funding - the Group participates in a number of defined benefit pension schemes, and there is a risk that the cash contributions required increase or decrease due to changes in factors such as regulatory approach, 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. New legislation introduced and planned in the UK could see the introduction of franchised bus networks in some areas, which could affect our bus operations. The extent to which COVID-19 related payments from government continue will affect the Group's future profitability and cash flow.

· People and culture - The is a risk that the Group is unable to attract, develop and retain an appropriately skilled, diverse and responsible workforce and leadership team, and maintain a healthy business culture which encourages and supports ethical behaviours and decision-making.

· Disease - there is a risk that demand for the Group's services could be adversely affected by a significant outbreak of disease. This was identified by the Board as a principal risk some years ago but the COVID-19 situation is a clear and substantial crystallisation of the risk.

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

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

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

· Climate change - we see public transport as a critical part of the battle against climate change. At the same time, we recognise that climate change presents a number of risks to the Group.

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

Use of non-GAAP measures

Our reported preliminary financial information is extracted from the Group's consolidated financial statements prepared in accordance with International Financial Reporting Standards as adopted by the European Union and applied in accordance with the provisions of the Companies Act 2006. In measuring our financial performance, the measures that we use include those which have been derived from our reported results in order to eliminate factors which distort period-on-period comparisons and those that provide additional useful information to stakeholders. These are considered non-GAAP financial measures, and include measures such as like-for-like revenue, adjusted EBITDA and net debt. We believe this information, along with comparable GAAP measurements, is useful to shareholders and analysts in providing a basis for measuring our financial performance and position. Note 22 to the condensed financial statements provides further information on these non-GAAP financial measures.

Going concern

On the basis of current financial projections and the facilities available, the Directors are satisfied that the Group has adequate resources to continue for at least the next 12 months and, accordingly, consider it appropriate to adopt the going concern basis in preparing the condensed financial statements for the year ended 2 May 2020. Although the COVID-19 situation has increased the level of uncertainty facing the Group, we have not identified a material uncertainty regarding the Group's ability to continue as a going concern for at least the next 12 months. Further details of our going concern and longer term viability assessments will be provided in our 2020 Annual Report. As explained in note 21 to the condensed financial statements, the report of the auditors on the financial statements for the year ended 2 May 2020 was unqualified.

Outlook

We see a lasting effect of the COVID-19 pandemic on travel patterns with an acceleration in trends of increased working from home, shopping from home, telemedicine and home education. We anticipate that it will be some time before demand for our public transport services returns to pre-COVID levels and we have planned for a number of scenarios.

However, we continue to see positive long-term prospects for public transport. There is a large market opportunity to lock in the reduced volume of car traffic and lower carbon emissions seen during the COVID-19 pandemic and secure long-term economic, social, health and environmental benefits for the country. Critical to maximising this window of opportunity is delivering modal shift from private cars to active travel and more sustainable public transport.

We are ready for our greener transport services to play a leading role in helping government achieve its long-term objectives for the country.

Martin Griffiths

Chief Executive

22 July 2020

Cautionary statement

The preceding preliminary management report has been prepared for the shareholders of the Company, as a body, and for no other persons. Its purpose is to assist shareholders of the Company to assess the strategies adopted by the Company and the potential for those strategies to succeed and for no other purpose. The preliminary management report contains forward-looking statements that are subject to risk factors associated with, amongst other things, the economic, regulatory and business circumstances occurring from time to time in the countries, sectors and markets in which the Group operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables that could cause actual results to differ materially from those currently anticipated. The ongoing COVID-19 situation means that the level of forward-looking uncertainty is higher than usual. 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 preliminary management report should be considered or construed as a profit forecast for the Group. Except as required by law, the Group has no obligation to update forward-looking statements or to correct any inaccuracies therein.

CONDENSED FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENT

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

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

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

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

CONSOLIDATED STATEMENT OF CASH FLOWS

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

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

NOTES

The Group reports its annual results based on a financial year ending on the Saturday nearest to 30 April. This report therefore sets out the Group's results for the 53-week period from 28 April 2019 to 2 May 2020. Prior year comparatives are for the 52-week period from 29 April 2018 to 27 April 2019.

These results are extracts of consolidated financial statements that have been prepared in accordance with International Financial Reporting Standards ("IFRS") and International Financial Reporting Interpretations Committee ("IFRIC") interpretations as adopted by the European Union (that therefore comply with Article 4 of the EU IAS Regulation), and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The accounting policies and methods of computation applied in the condensed financial statements are the same as those of the consolidated financial statements for the year ended 27 April 2019 with the exception of the new accounting standards set out below.

The Board of Directors approved this announcement on 22 July 2020. This announcement will be available on the Group's website at http://www.stagecoachgroup.com/investors/financial-analysis/reports/

New accounting standards adopted during the year

(i) IFRS 16, Leases

The Group has adopted IFRS 16, Leases, from 28 April 2019, but has not restated comparatives for the year to 27 April 2019, as permitted under the specific transition provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 28 April 2019. IFRS 16 replaces International Accounting Standard 17 ("IAS 17"), Leases, and establishes new principles for the recognition, measurement, presentation and disclosure of leases. IFRS 16 eliminates the classification of leases by lessees as either operating leases or finance leases and, instead, introduces a single lessee accounting model. Applying that model, a lessee is required to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. Lease costs are recognised as depreciation and interest, rather than entirely as an operating cost.

Accounting policy for leases under IAS 17 prior to 28 April 2019

Until 27 April 2019, the Group classified leases for property, plant and equipment as either finance leases or operating leases under IAS 17.

Assets acquired under hire purchase and finance lease arrangements, where substantially all the risks and rewards of ownership of the asset passed to the Group, were capitalised at the commencement of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Fixed lease payments were apportioned between the finance costs and the reduction of the lease liability, so as to achieve a constant rate of interest on the remaining balance of the liability. Finance costs were charged directly against income and were reported within finance costs in the consolidated income statement.

Assets capitalised under finance leases and other similar contracts were depreciated over the shorter of the lease terms and their useful economic lives. Assets capitalised under hire purchase contracts were depreciated over their useful economic lives.

Rentals under operating leases were generally charged on a straight-line basis over the lease term. Any contingent rentals, principally being rental adjustments related to inflation indices, were accounted for in the period they were incurred.

Accounting policy for leases from 28 April 2019

The Group leases many assets including properties, passenger service vehicles, company cars and office equipment. Rental contracts are typically made for a fixed period of 6 months to 100 years. Certain leases have extension options which the Group may choose to exercise.

For contracts that convey the right to control the use of an identified asset for a period of time in exchange for consideration, the Group recognises lease liabilities to make lease payments, and right-of-use assets representing the right to use the underlying asset.

Contracts can contain lease and non-lease components. For all property leases, the Group has separated lease and non-lease components. For all other leases, the Group has elected not to separate lease and non-lease components but instead accounts for these as a single lease component.

Lease terms are negotiated lease by lease resulting in a wide range of terms and conditions. The lease agreements do not generally impose any financial covenants. The principal restriction on assets held under lease or hire purchase agreements is a restriction on the right to dispose of the assets during the period of the agreement.

Measurement of lease liabilities under IFRS 16

Liabilities arising from a lease are initially measured at present value. Lease liabilities include the net present value of the following lease payments:

· Fixed lease payments, less any lease incentives receivable;

· Amounts expected to be payable by the Group under residual value guarantees;

· The exercise price of a purchase option if the Group is reasonably certain to exercise that option;

· Payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option;

· Payments to be made under reasonably certain extension options;

· Variable lease payments that are based on an index or rate, initially measured using the index or rate at the commencement date.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the Group's incremental borrowing rate is used, being the rate that the individual Group company would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.

To determine the incremental borrowing rate, the Group:

· uses recent third party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received;

· makes adjustments to the rate to reflect the terms and conditions specific to the lease. These will include adjustment for items such as the lease term and the right-of-use asset being leased.

The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset. There are no leases with other forms of variable payment.

Lease payments are allocated between principal and finance cost. The finance cost is charged to the consolidated income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Right-of-use assets under IFRS 16

Right-of-use assets are measured at cost comprising the following:

· the amount of the initial measurement of the lease liability;

· any lease payments made at or before the commencement date less any lease incentives received;

· any initial direct costs; and

· dilapidation provisions.

There has been no change to how the Group accounts for dilapidations on leased items.

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

Short-term leases and low-value assets

Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in the consolidated income statement. Short-term leases are leases with a lease term of 12 months or less. Low-value assets have a capital value, when new, of less than £4,500 and comprise principally IT equipment and small items of office equipment.

Adoption of IFRS 16

The Group has adopted IFRS 16 using the modified retrospective approach, whereby each right-of-use asset recognised at the transition date of 28 April 2019 is initially equal to the corresponding lease liability recognised at the transition date. When measuring lease liabilities under IFRS 16 for leases that were previously classified as operating leases under IAS 17, the Group discounted lease payments using each lessee's incremental borrowing rate. The incremental borrowing rate applied to the lease liabilities as at 28 April 2019 ranged from 2.5% to 3.5% and the Group's weighted average incremental borrowing rate was 3.1%.

For leases previously classified as finance leases, the Group recognised the carrying amount of the leased asset and the lease liability immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of initial application of IFRS 16. The measurement principles of IFRS 16 are only applied after that date.

Practical expedients applied on transition to IFRS 16

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

· applying a single discount rate to a portfolio of leases with reasonably similar characteristics;

· relying on previous assessments of whether leases are onerous as an alternative to performing an impairment review, with any previous onerous lease provision deducted from the carrying value of the related right-of-use asset as at 28 April 2019;

· accounting for leases with a remaining lease term of less than 12 months as at 28 April 2019 as short-term leases;

· excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application;

· using hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and

· selecting not to reassess whether a contract is, or contains, a lease at the date of initial application of 28 April 2019. The Group has applied IFRS 16 only to those contracts previously identified as leases under IAS 17 and IFRIC 4, Determining whether an Arrangement contains a Lease.

Due to the short remaining duration of the Group's rail franchises at 28 April 2019, all of the lease contracts of the rail franchise businesses have been accounted as short-term leases on transition. These include leases for rolling stock but exclude contracts with Network Rail for access to the railway infrastructure (track, stations and depots), which do not meet the definition of a lease under IFRS 16, reflecting the fact that Network Rail, rather than the franchise train operator, directs how and for what purposes the assets are used.

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

Impact of IFRS 16 on Financial Statements

Impact on transition

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

The right-of-use assets recognised on transition on 28 April 2019 are summarised in the following table:

The lease liabilities recognised as at 28 April 2019 can be reconciled as follows:

Impact for the year to 2 May 2020

In respect of leases that would previously have been classified as operating leases, the Group has recognised £78.6m right-of-use assets and £80.3m of lease liabilities as at 2 May 2020.

The cash flow statement includes the following cash outflow in relation to leases and the related interest expense:

The consolidated income statement includes the following depreciation charges and other costs relating to leases:

\* The comparative figures for the year to 27 April 2019 were prepared under IAS 17 and exclude the effect resulting from the recognition of the right-of-use assets on 28 April 2019.

The expense relating to short-term leases for the year to 2 May 2020 includes £13.0m for short-term leases in respect of trains and rolling stock. This will not recur in the year to 1 May 2021 as the Group's rail franchises have now all ended.

IFRS 16 has had a negligible impact on profit before tax but increases the Group's interest costs by £2.7m and increases the Group's operating profit by £1.8m in the year ended 2 May 2020 relative to what they would have been under IAS 17.

(ii) IFRIC 23, Uncertainty over Income Tax Treatments

IFRIC 23 was issued in June 2017 and was implemented by the Group from 28 April 2019. The interpretation clarifies that if it is considered probable that a tax authority will accept an uncertain tax treatment, the tax charge should be calculated on that basis. If it is not considered probable, the effect of the uncertainty should be estimated and reflected in the tax charge applying either the 'most likely outcome' or 'expected value' methodology. In assessing the uncertainty, it is assumed that the tax authority will have full knowledge of all information related to the matter. The Group has assessed the potential impact of the new interpretation. The application of IFRIC 23 on the opening balance of retained earnings as at 28 April 2019 has not resulted in a material change to the amounts held in the consolidated balance sheet for uncertain tax positions.

The principal rates of exchange applied to the consolidated financial statements were:

Management has determined the operating segments based on the reports reviewed by the Board of Directors that are used to make strategic decisions.

The Group is now managed, and reports internally, on a basis consistent with its three continuing operating segments and the segmental information set out in this note is on the basis of those segments as follows:

The Group has interests in two material joint ventures: Virgin Rail Group that operates in UK Rail and Citylink that operates in UK Bus (regional operations). The results of these joint ventures are shown separately in note 3(c).

Due to the nature of the Group's business, the origin and destination of revenue (the United Kingdom) is the same in almost all cases. As the Group predominantly 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.

The vast majority of the UK Bus (London) revenue is from Transport for London.

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