Strategic and operating review

Strategic background and market environment

Our transport services are key to delivering a green economic recovery, tackling climate change, levelling up our regions, and ensuring connected and cohesive communities.

We have made further progress during 2020/21 in the delivery of our business strategy and objectives. Our immediate focus has been on the health and wellbeing of our colleagues and customers; working with central and regional government to deliver critical public transport services; and protecting the business for the future.

While COVID-19 has affected the timeline of some elements of our strategy, we are continuing to explore opportunities to grow and diversify. This includes new commercial products, exploring potential partnerships and maximising the value of our significant estate. We are also progressing new opportunities overseas. While we have yet to succeed in winning new work from any of our recent overseas bids, our bidding continues and we are pleased to be shortlisted for contracts in Scandinavia and Dubai.

We welcome the renewed focus on the importance of bus services by the UK Government and devolved administrations in Scotland and Wales. We are engaging with the Department for Transport around the implementation of its plans as part of the National Bus Strategy for England, as well as working with local government partners to shape flexible and effective Enhanced Partnerships.

Strategic objectives and initiatives

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

Maximise our core business' potential in a changing market

UK Bus (regional operations)

Our UK Bus (regional operations) business continues to deliver critical links in communities across the UK, supporting the economic health of towns and cities. We see a positive long-term outlook for our regional bus business, with supportive government policy, including the new National Bus Strategy for England.

Safety remains our absolute priority as we look to welcome back our customers. All our bus, tram and coach services have been accredited with Visit Britain's "We're Good to Go" official mark, recognising the work carried out to meet government and industry COVID-19 guidelines. Comprehensive hygiene measures are in place to help customers feel safe and confident. These include mandatory facemasks, contactless payment, additional regular cleaning, ventilation, anti-virus air filters, as well as our Busy Bus app feature to help customers travel at quieter times.

We are also continuing to focus on delivering high quality services for customers and are proud that during the year our Stagecoach East Scotland business won Scotland's Public Transport Operator of the Year award for the second year running.

As towns and cities across the UK develop initiatives to re-define their high streets and put in place new destination marketing strategies to attract visitors post the COVID-19 pandemic, we believe there is a clear role for our transport services to connect people with these opportunities. We are working closely with local authorities and other partners seeking to access new recovery funding streams, particularly in England, to boost town and city centres.

During the 2020/21 financial year, we launched a new customer rewards scheme with special offers right across the UK in the leisure sector, including visitor attractions, places to eat out and hotels. Stagecoach Rewards provides exclusive discounts to our bus customers and will help support those local businesses in the communities we serve.

Demand for our regional bus services has continued to follow the changing pattern of COVID-19 restrictions across the UK. We are currently operating regional bus vehicle mileage at around 94% of the level operated around this time in 2019. We saw commercial sales recover to around 60% of 2019 levels in autumn 2020. Sales then dropped from December 2020 as COVID-19 related restrictions were tightened across the UK, with lockdown restrictions applying in most areas. As COVID-19 restrictions have eased, our commercial sales have begun to recover and are now (seven days ended 26 June 2021) at around 68% of the equivalent period in 2019. We are confident of further recovery in commercial sales as restrictions continue to be eased and people regain confidence in travel and in using public transport.

As previously reported, the respective governments in England, Scotland and Wales, and our local authority partners, have put in place measures to protect the continuity of local bus services. The Department for Transport has indicated that COVID-19 Bus Services Support Grant Restart ("CBSSG") for local bus services in England, excluding London, will continue to cover the period until when social distancing is no longer required on buses. Based on the current roadmap for the easing of COVID-19 restrictions in England, we would expect CBSSG or a similar arrangement to now continue until late August 2021. The Department for Transport has confirmed that it remains the case that it will give eight weeks' notice of CBSSG coming to an end.

We, and other bus operators, continue to work closely with the Department for Transport to establish a framework to ensure bus networks successfully bridge from the current CBSSG arrangements to long-term commercial sustainability. We welcome the recent publication of a National Bus Strategy for England, and in particular the Government's commitment to grow bus patronage and maximise the potential of buses. The governments across the UK have demonstrated during the COVID-19 pandemic the importance they place on continuing bus services, and the new National Bus Strategy for England and similar ambitions in Scotland and Wales, underline their longer term ambitions to grow bus usage and make bus services better. Pursuant to the National Bus Strategy, each local authority in England, excluding London, has been invited to confirm by 30 June 2021 whether it intends to pursue bus franchising, an Enhanced Partnership for local bus services, or neither. Two or more local authorities may work together on franchising or an Enhanced Partnership. Greater Manchester has already confirmed its intention to progress with bus franchising, whereas we currently expect most other local authorities to pursue Enhanced Partnerships.

Franchising is an established model for providing bus services and is used in London and in many cities and regions across Europe. In a franchising scheme, local authorities will determine the details of the services to be provided - where they run, when they run and the standards of the services. Typically bus operators provide their services under contract to the local authority who can let whatever sort of contract it feels is appropriate. No other local bus services can operate in the franchised area without the agreement of the franchising authority.

An Enhanced Partnership is a statutory arrangement under the Bus Services Act 2017. The legislation does not prescribe the detailed contents of an Enhanced Partnership agreement, and that requires negotiation between a local authority and bus operators in the area to agree on the scope of the partnership. An Enhanced Partnership might, for example, specify requirements in respect of timetables and multi-operator ticketing. The main difference between an Enhanced Partnership and franchising is that bus operators have a much greater role in developing an Enhanced Partnership, working with the local authority to develop and deliver improvements for passengers and having a real say on how bus services should be improved. Enhanced Partnerships also offer significantly more flexibility than franchising. We are mindful that franchising and/or Enhanced Partnerships could adversely affect the Group's revenue, costs and profitability as our relationship with government evolves but, on balance, we see Enhanced Partnerships as an opportunity for the Group to grow our business with strong commitments and new funding from government.

We also welcome the Scottish Government's target of a 20% reduction in car use by 2030, with £500m investment to improve bus infrastructure and tackle road congestion. The COVID-19 Support Grant Restart ("CSG") payments for continuing bus services in Scotland have now been extended to cover the period to 3 October 2021. We continue to work with other operators and Transport Scotland on the development of a mechanism to see bus services successfully transition from the current framework to that of long-term commercial sustainability.

Our bus business in Wales represents around 3% to 4% of our overall regional bus business. In Wales, a new voluntary partnership arrangement, Bus Emergency Scheme 2 ("BES 2"), is expected to run from April 2021 until July 2022. Under BES 2, there is scope for bus operators to earn a modest profit under a form of "cost plus" arrangement. A bus operator can opt out of the BES 2 scheme if it feels ready to return to the more usual form of commercial operation.

We are pleased that since late March 2021, we have restarted some of our coach services. Our megabus business in England and Wales is now operating around 58% of pre-COVID service levels connecting key towns and cities across the UK. Services continued to run in Scotland throughout the year for essential journeys, and additional cross-border services have also been introduced. A further ramp up of services is planned for the summer period and we are encouraged by current forward-booking levels. We have also re-introduced Oxford Tube services seven days a week. The entire Oxford Tube coach fleet has been replaced following a £13m investment.

During the year, we have continued to work to reduce costs in light of the effects of the pandemic on the business, and to ensure the business is efficient and agile when emerging from this period. We have implemented around £17m of annualised cost savings to date across the Group's entire operations.

London bus operations

We are pleased with the continued strong operational and financial performance of our London business. We are operating at normal levels with full service restored, and continue to work collaboratively with Transport for London in response to the COVID-19 situation. During the 2020/21 year, new contract wins have come on stream and we have introduced 47 new electric buses in London as part of Transport for London's 2030 zero emissions strategy. In September 2021, we will commence two new routes with a fleet of 34 vehicles, of which 25 will be electric.

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

Enhanced safety systems

We announced earlier this year that we will become the first bus operator in the country to invest in the national roll-out of new bridge alert technology across our fleet. The £4m project will strengthen existing measures in place to prevent bridge strikes and build on Stagecoach's industry-leading use of the GreenRoad driver safety and fuel efficiency system. The intelligent GreenRoad system will use GPS vehicle location data and mapping services to alert the driver to nearby low bridges, allowing a safe route that avoids the bridge. The technology will be installed on Stagecoach buses across the country by the end of summer 2021.

People initiatives

At this challenging time, we are focusing our People team resources on our welfare and wellbeing support for our employees, including progressing our employee engagement and recognition programmes. We are also continuing to deliver our industry-leading driver and engineering apprenticeship programmes, with around 800 apprentices currently in place in the business, as well as planning for the future with further steps to ensure we are an even more agile and customer-focused business.

Green fleet development

We have a shared ambition with government and other bus operators to transition to zero emission buses. We are targeting our bus fleet in the UK to be 100% zero emissions by 2035. This means we are well placed as the UK Government consults on setting a deadline for when the sale of new diesel buses will end.  We support a 2030 date for ending the sale of new diesel buses, with some Ultra Low Emission Vehicle ("ULEV") buses being available after that date where zero emission alternatives are not available. This would ensure alignment with the end of sale for new petrol/diesel cars and vans in the UK.

The current capital cost of new zero emission vehicles is significantly greater than the equivalent diesel vehicles. An electric bus is broadly twice the cost of the comparative diesel vehicle, while a hydrogen bus is even more expensive. Furthermore, investment in new infrastructure is often required to enable the introduction of zero emission vehicles. While that presents some challenges and risks, there are a number of offsetting factors. Reflecting the ambition of governments in the UK to grow bus journeys, reduce car journeys and lower emissions, financial support has been available from governments towards the cost of zero emission buses. While there is no certainty of the extent to which such support will continue, the UK governments continue to consider how best to incentivise the transition to zero emission vehicles. In addition, the cost of new electric cars can also exceed their diesel equivalents and so the competitive position of bus versus car might be less affected - indeed, the bus can offer a convenient, cost-effective alternative to electric cars for some individuals and journeys. We are continuing to work with governments, vehicle manufacturers, funders and other industry partners on our goal of a 100% zero emission bus fleet in the UK by 2035.

We are delighted to be part of the plans for Coventry to become the UK's first All Electric Bus City. Under the ground-breaking project, every bus in Coventry will be electric powered by 2025, leading to improved air quality, reduced greenhouse gas emissions and lower running costs. The Department for Transport is providing £50m in funding to West Midlands Combined Authority to help deliver the project.

Our fleet of 32 electric double-decker buses in Greater Manchester, one of the biggest investments of its kind in Europe, has already delivered over 700,000 carbon free miles after a successful first year in service.

In March, we announced plans for a further 46 new fully electric buses, representing an investment of £21.4m across Scotland. The Scottish Government is providing £9m of the funding towards the new buses under the Scottish Ultra-Low Emission Bus Scheme ("SULEBS"), which will also support related infrastructure investment. Our net investment will be around £12m. In September 2020, the Scottish Government awarded £1.2m to the Group to help deliver more than 60 cleaner buses in local communities in East Scotland. The funding from the Bus Emissions Abatement Retrofit programme will help us retrofit 63 buses and bring them up to the latest clean Euro VI standard.  We are also continuing to engage with Transport Scotland and the relevant local authorities around the introduction of Low Emission Zones between February 2022 and May 2022 to improve air quality in Glasgow, Edinburgh, Dundee and Aberdeen.

Simpler ticketing and better value fares

For many years, we have led the bus sector in delivering value travel and independent research has found that we have consistently offered the lowest weekly bus travel of any major bus operator in the UK. However, we believe it is important to make ticketing simpler and more integrated, ensuring it provides customers with easy access to the flexible travel they need and providing them with confidence that they are securing the best value fares regardless of the journeys they make.

We are working independently and with our sector partners to widen the availability of multi-operator ticketing, building on our successful investment and roll-out of Britain's biggest bus contactless payment technology.

We have taken further steps during the year to simplify our own tickets and fares, with improvements introduced in Scotland in March 2021. These included simpler and more consistent fares and our new Flexi 5 ticket, available via our Stagecoach app, which offers five day tickets for the price of four to help meet the changes we are seeing in travel patterns. There are plans for similar enhancements in other parts of the UK later this year as we assess the impact of the new customer offer and more flexible tickets.

Network planning

We are now investing in new bus network planning technology. The Optibus software platform, which is used in more than 450 cities around the world, is being rolled out across our operating companies. It uses a combination of state-of-the-art artificial intelligence, advanced algorithms and cloud computing to deliver smarter timetables and networks and keep up with the continually evolving demand for travel. The system will help deliver the most efficient timetables and rosters that offer customers both attractive frequencies and reliability. It will also reduce carbon emissions, as buses can be planned more effectively, and support the roll-out of electric vehicles by ensuring factors such as charging locations and charging times are included in schedule planning.

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

We are continuing to seek out new opportunities to diversify and grow the business. During the year, we launched our Stagecoach Solutions one-stop-shop to help businesses, the education sector and event organisers. Stagecoach Solutions offers a range of tailored transport solutions. The new product offer, which builds on our core bus services, is designed to respond to the "new normal" and meet the need for flexible mobility services. Stagecoach Solutions offers tailored shuttle buses, education bus services, on demand services and simplified corporate travel. It also includes our long established rail replacement business and offers travel support for major events and festivals.

Aberdeen City Council and the University of Kent are among the first organisations to sign up to our newly developed, digital and direct corporate sales platform through a bespoke corporate app. 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. We are pleased to have agreed a significant ticketing initiative with NHS Scotland, which employs around 140,000 people at several hundred sites.

The UK Government's new National Bus Strategy envisages increasing use of on demand services. We already operate the Tees Flex on-demand bus service on behalf of Tees Valley Combined Authority. The three-year pilot was launched in February 2020, and during its first year, it has helped local people in more isolated communities make around 50,000 journeys. Tees Flex has also helped North Tees and Hartlepool NHS Foundation Trust to get vulnerable patients to and from hospital during the coronavirus pandemic free of charge. More widely, we have also been working closely with the NHS, the UK's biggest employer, to operate on-demand employee shuttles connecting several hospital sites in England.

We are examining domestic contract opportunities, including those linked to major events where we have expertise and a successful track record.  In addition, we are exploring potential partnerships and initiatives to maximise the value of our significant estate, including the potential for our extensive depot footprint across the UK as part of logistics networks.

As part of our diversification strategy, we are progressing targeted, value-adding opportunities in overseas markets where we see relatively low political/regulatory risk, contracts that offer an appropriate risk-reward balance, and geographies with positive demographics and economic outlook. We are continuing to examine potential bus, metro, rail and light rail opportunities in the Scandinavian market. Separately, we are also actively exploring potential bus and long distance coach contracts in the United Arab Emirates and we are expecting to submit a bid for significant bus contracts in Dubai in July 2021.

Financial Review

UK Bus (regional operations)

Financial performance

The financial performance of the UK Bus (regional operations) for the year ended 1 May 2021 is summarised below:

Our UK Bus (regional operations) business has been significantly affected by the substantial fall in passenger demand for public transport in response to the COVID-19 pandemic. Nevertheless, the business reported an operating profit for the year ended 1 May 2021, with government payments for essential local bus services designed to ensure those services operate at a break-even level. The payments from government, which cover the majority of our regional bus operations, include amounts in respect of an allocation of finance costs and overheads. The positive regional bus operating profit should therefore be considered in conjunction with Group overheads and net finance costs, which are separately included in the consolidated income statement.

The scale of like-for-like revenue decline has fluctuated over the course of the year, with passenger demand following the changing pattern of COVID-19 restrictions across the UK. Passenger journey numbers are recovering, with journeys by fare-paying passengers currently recovering faster than concessionary journeys. Commercial sales are currently (seven days ended 26 June 2021) at around 68% of the equivalent period in 2019, compared to a pandemic low of c.12%.  We are currently operating vehicle mileage at around 94% of 2019 levels. We remain confident that as COVID-19 restrictions are eased, in particular social distancing, our sales will grow.

Like-for-like vehicle miles operated in the year were 15.8% lower than the previous year. Like-for-like revenue per vehicle mile reduced 21.7% and like-for-like revenue per journey increased 57.1%. The reduction in revenue per mile reflects that the COVID-related fall in year-on-year revenue exceeds the year-on-year reduction in vehicle mileage, with government grant payments for continuing bus services. Revenue per mile can be thought of as the sum of (a) operating profit per mile and (b) operating costs and other operating income per mile. COVID-related grant income is not included within revenue. It is reported within operating income, which has resulted in lower operating costs and other operating income per mile than in the prior year. Operating profit per mile is also lower as the government payments for bus services are designed to deliver a break-even position on the relevant services. The significant increase in revenue per journey is largely attributable to the continuation of concessionary revenue payments at close to pre-COVID revenue rates despite the suppressed concessionary journey numbers throughout the year.

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 start of the year, commercial sales across our companies were at around 15% of prior year levels. Over the course of the year, passenger demand has moved in line with the COVID-related restrictions in place. As restrictions were relaxed over the course of the last two months of the year, we have seen a gradual increase in demand.

The substantial fall year-on-year in megabus revenue partly reflects our decision to suspend megabus services in England and Wales for much of the past year. The Department for Transport COVID-related payments for bus services do not cover inter-city coach operations. We resumed some services from March 2021 to help reconnect people across the UK.

The decline in revenue receivable from public authorities in respect of concessionary revenue has been more modest, with that revenue generally continuing at closer to pre-COVID levels despite reductions in vehicle mileage and patronage.

The increase in tendered and school revenue includes the effect of a wider trend of smaller operators exiting the market, resulting in further market consolidation, and demand from local authorities to provide additional school services to support social distancing.

The reduction in contract and other revenue is partly attributable to reduced rail replacement work on the East Midlands railway and Sheffield Supertram networks. We have continued to operate some profitable contract services for private sector organisations and those are excluded from the government COVID-19 regimes for local bus services.

Outlook

With the continuing uncertainty of the COVID-19 situation and the UK's recovery, it remains difficult to accurately forecast the precise timing and extent of how our profitability will recover. We anticipate that it will take some time for demand for our regional bus services to return to pre-COVID levels, with the timing of easing of government restrictions impacting on the speed of that recovery. We are therefore planning for a number of scenarios, and are continuing to review our cost base across a range of scenarios. With the various government support arrangements in place, we expect to continue to generate positive EBITDA and operating profit for the time being.

We continue to engage with government on a bridge from the current funding arrangements to commercial sustainability, supporting recovery, while avoiding substantial reductions in overall bus services.

The cost per vehicle mile of our regional bus operations is now a little higher than it was pre-COVID, notwithstanding the management action taken to reduce non-mileage related costs.  The increased cost per vehicle mile reflects the costs of enhanced cleaning, lower driver turnover meaning that average pay costs have increased as the average driver is more experienced, modest inflation in wage rates over the last 16 months, and other cost inflation.  Accordingly, were we to operate the same services we operated pre-COVID, then in order to achieve pre-COVID profitability, we would need to achieve a little more than 100% of pre-COVID revenue in the absence of additional grant income.  In practice, we expect the position to be more nuanced than that.  We will shape our local services to respond to emerging local demand in consultation with government.  Otherwise less profitable or loss-making services may see vehicle mileage reduced, or additional support from government to maintain or grow mileage.  The new National Bus Strategy in England, and similar ambitions in Scotland and Wales, present strong opportunities to match and then exceed pre-COVID revenue.  That, together with the flexibility of our networks and operating costs, means we remain optimistic in returning to a reasonable operating profit but we do recognise that the extent of demand post-COVID and the effects of new government policy remain uncertain.

We continue to see good long-term prospects for the business, with the UK Government's recently announced National Bus Strategy for England demonstrating a commitment to increase bus patronage with significant funding to support that. Strong partnership working between bus operators, national government and local transport authorities is fundamental to transforming the country's bus networks, making services faster and more affordable, and reducing unnecessary car journeys.

UK Bus (London)

Financial performance

The financial performance of UK Bus (London) for the year ended 1 May 2021 is summarised below:

We are pleased with the continued strong operational and financial performance of our London business. As anticipated, operating profit has increased relative to the prior year, reflecting the new contracts that we secured in 2019/20.

The increase in revenue reflects those new contracts, partly offset by the reductions in vehicle mileage we agreed with Transport for London in response to the COVID-19 situation at the start of the year. 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 because of operating less mileage.

The movement in operating margin was built up as follows:

The main changes in the operating margin shown above are:

·      Staff costs have increased reflecting the impact of protecting the wellbeing of more vulnerable employees and related staff absences. Most of these higher costs have been mitigated through grant income recognised under the Coronavirus Job Retention Scheme for employees furloughed.

·      Fuel costs have decreased as a proportion of revenue, due to lower hedged prices and better fuel efficiency, largely arising from reduced traffic levels on our routes and changes in the composition of our vehicle fleet.

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

·      Quality Incentive Contract income has increased £1.3m year-on-year reflecting new contracts and a one-off benefit relating to the timing of settlement recognition.

·      Other costs have increased as expected, principally due to a one-off rates rebate at one of our depots in the prior year.

Outlook

We have worked collaboratively with Transport for London throughout the COVID-19 pandemic, and contract payments are now at normal levels with full service restored. We have agreed changes with Transport for London on how contract price adjustments are determined on an ongoing basis. We note the further funding recently announced by the Department for Transport to support the continuation of essential Transport for London services. We will maintain our discipline in bidding for new contracts as well as our focus on strong operational delivery. We see good prospects for further profit growth in 2021/22.

UK Rail

Financial performance

The financial performance of UK Rail for the year ended 1 May 2021 is summarised below:

The reported UK Rail revenue of £4.7m for the year ended 1 May 2021 includes revenue of £5.9m from our ongoing Sheffield Supertram business, offset by a £1.2m increase in the liability for refunds payable to customers of our expired rail franchises.

The reported revenue for the prior year includes revenue at the East Midlands Trains franchise that ended in August 2019. The substantial fall in reported revenue reflects the end of that franchise.

The like-for-like revenue is in respect of the ongoing Sheffield Supertram business, with the year-on-year reduction principally reflecting the effect of the COVID-19 situation on passenger demand.

The operating profit for the year principally reflects positive progress in concluding matters in relation to our former involvement in the UK train operating market. The reported profit also includes the costs of our commercial and business development team, the majority of whose work is focused on unwinding our former rail franchises, and evaluating and bidding for future contract opportunities.

Outlook

Similar to our local regional bus businesses, our Sheffield Supertram business is receiving government payments in the form of Light Rail Revenue Restart Grant ("LRRRG") income for continuing the essential tram services it provides. The LRRRG payments are committed through until 19 July 2021, and UKTram and the Urban Transport Group continue to engage with the Department for Transport around arrangements beyond that date.

We continue to hold an onerous contract provision, albeit at a reduced amount, for the estimated net costs of fulfilling our contractual obligations at Sheffield Supertram.

Our commercial and business development team continues to explore, and bid for, new opportunities. We will continue to balance the costs of those business development activities with our assessment of the prospective risk-reward of the available opportunities.

Joint Ventures

WCT Group (formerly Virgin Rail Group)

Financial performance

Our Virgin Rail Group joint venture was re-named WCT Group in March 2021. The financial performance of the joint venture for the year ended 1 May 2021 is summarised below:

WCT Group's West Coast rail franchise ran until 8 December 2019. Our joint venture partner, Virgin, and we remain focused on concluding contractual matters associated with that franchise. We have made positive progress during the past year in that regard, including agreeing a full and final settlement with the Department for Transport in respect of the franchise.

Adjusted EBITDA, depreciation and intangible asset amortisation

Earnings before interest, taxation, depreciation, software amortisation and separately disclosed items ("adjusted EBITDA") amounted to £166.7m (2020: £237.3m). Adjusted EBITDA can be reconciled to the condensed financial statements as follows:

The year-on-year decrease in adjusted EBITDA principally reflects the substantial fall in demand for public transport in response to the COVID-19 pandemic.

Depreciation and software amortisation of £110.6m is broadly in line with the £113.7m for the prior year. The impairment losses of £6.8m (2020: £0.3m) include £2.9m in respect of land and buildings, and £3.9m in respect of coaches, that have become surplus to the Group's requirements.  The carrying amounts of the relevant assets have been written down to their estimated recoverable amounts.

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 1 May 2021 amounted to £0.3m (2020: £0.7m).

Re-organisation costs

As part of our response to the COVID-19 situation, the Group took steps to deliver further efficiencies. As part of that programme, we have reshaped our cost base by reducing the size of our back-office activities. The restructuring costs, net of related grant income receivable, associated with those changes amounted to £2.8m in the year ended 1 May 2021.

Reassessment of onerous contract provision

An expense of £16.5m was separately disclosed for the year ended 2 May 2020 in respect of impairment losses and onerous contract provisions. As part of that, an onerous contract provision was recorded as at 2 May 2020 in respect of the Sheffield Supertram concession. Since 2 May 2020, the Department for Transport and South Yorkshire Passenger Transport Executive have made further COVID-related payments to our Sheffield Supertram business to allow us to continue running essential services. We have recalculated the onerous contract provision, reflecting the benefit of these payments in a revised forecast for the business, and recorded a separately disclosed profit for Sheffield Supertram of £2.5m in the year ended 1 May 2021.

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 highly probable and discontinued hedge accounting 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 effect of that, and for subsequent movements in the fair value of fuel derivatives that are not accounted for as hedges, has been presented as a separately disclosed item, resulting in a gain of £4.0m (2020: loss of £12.9m) recognised in the year ended 1 May 2021.

Grant income recognised in the year ended 1 May 2021 includes amounts intended to compensate the Group for cash payable by it pursuant to fuel derivatives. To the extent that grant income relates to the fuel derivatives for which hedge accounting was discontinued, and for which the related expenses on those derivatives is reported within separately disclosed items (either in the year ended 2 May 2020 or in the year ended 1 May 2021), the related grant income of £6.9m (2020: £Nil) in the year ended 1 May 2021 has also been reported within separately disclosed items.

Changes in the fair value of Deferred Payment Instrument

We received a Deferred Payment Instrument as deferred consideration for the sale of the North American business. The instrument, which is accounted for at fair value through profit or loss, has a maturity date of October 2024 and due to the 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 the secured lenders. The carrying value of the instrument was £4.5m as at 2 May 2020. We estimated the carrying value of the instrument to be £1.9m as at 1 May 2021, resulting in a loss of £2.6m (2020: £17.8m) recognised in finance costs in the year ended 1 May 2021.

Tax credit

The net effect of separately disclosed items from continuing and discontinued operations was a pre-tax profit of £7.7m (2020: loss of £51.6m).

The separately disclosed tax credit of £10.8m for the year ended 1 May 2021 (2020: £12.8m) includes the tax effect of the pre-tax separately disclosed items, as well as a tax credit of £5.0m (2020: £3.4m) in respect of tax losses relating to expired rail franchises and a tax credit of £7.3m in respect of financing of overseas operations, whereby the Group has benefitted from the Finance Company Exemption contained in the UK's Controlled Foreign Company ("CFC") legislation.

Net finance costs

Net finance costs, excluding separately disclosed items, for the year ended 1 May 2021 were £31.1m (2020: £28.8m) and can be further analysed as follows:

The increase in adjusted net finance costs is principally due to the higher pensions finance charges arising from the prior year increase in net pension liabilities, in addition to higher interest on increased borrowings.

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 1 May 2021, excluding separately disclosed items, was 18.0% (2020: 21.1%). 

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 18.0% is lower than the 19.0% rate of UK corporation tax for the year, principally due to adjustments in respect of prior year tax estimates.

The cash tax paid in the year of £2.6m (2020: £Nil) compares to the tax credit for Group companies of £8.8m (2020: charge of £3.2m). The difference of £11.4m principally reflects the £12.3m of tax credits for the financing of overseas operations and for expired rail franchises, explained in the earlier section on "separately disclosed items".  There are no cash receipts in the year in respect of those income statement credits.

The separately disclosed tax credit of £10.8m (2020: £12.8m) is explained in the earlier section on "separately disclosed items".

Taking into account the recently enacted increase in the rate of UK corporation tax to 25%, which will be effective from 1 April 2023, assuming there are no changes to tax laws in the UK and assuming that the composition of the Group remains broadly unchanged, we expect the Group's future effective tax rate (excluding separately disclosed items and excluding the one-off effect of the rate change on deferred tax balances) to be 18% to 20% in the next two years, rising to 24% to 26% thereafter.

Had the planned increase in the UK corporation tax rate been substantively enacted as at 1 May 2021, the estimated impact would have been an increase of £0.3m in the deferred tax liability, with an estimated tax charge of £16.1m in the consolidated income statement and an estimated tax credit of £15.8m in the consolidated statement of comprehensive income.

Cash flows and net debt

Consolidated net debt (as analysed in note 17 to the condensed financial statements) has reduced from 2 May 2020, reflecting the actions we have taken during the COVID-19 situation to protect liquidity and cash flow.

We have voluntarily re-stated the consolidated statement of cash flows for the year ended 2 May 2020 to revise the presentation of capital grants received. Previously, we included capital grants received within cash flows from operating activities as part of the movement in payables. As we progress our transition to zero emission vehicles, we are receiving capital grants to support the investment in those vehicles and related infrastructure. Those grants form part of our investment decision making. We now therefore consider it more appropriate to separately highlight capital grants received as a component of cash flows from investing activities. We will also separately highlight the amortisation of capital grants received as part of the reconciliation of operating profit to cash generated by operations.

Net cash from operating activities before tax for the year ended 1 May 2021 was £117.7m (2020 restated: £155.3m) and can be further analysed as follows:

The working capital outflow of £20.4m (2020 restated: £63.4m) for the year ended 1 May 2021 includes:

·      £4.7m in respect of employer pension contributions in excess of the related pension expense included in operating profit;

·      A £7.4m decrease in provisions principally due to the settlement of costs in respect of rail litigation, and the release to profit of the unused provision in relation to the litigation;

·      A £8.6m increase in the net receivables for COVID-19 bus support grants.

Net debt decreased from £352.1m at 2 May 2020 to £312.6m at 1 May 2021. The movement in net debt was:

Even after including the significant COVID-related payments received from government, EBITDA and cash flows from operating activities were adversely affected by COVID-19 in the year ended 1 May 2021, with significantly reduced demand for our regional bus services. However, our decisions to reduce planned capital expenditure and suspend dividend payments, together with active management of working capital, have assisted us in maintaining strong available liquidity and reducing net debt over the year to 1 May 2021.

As at 1 May 2021, all of the major rail franchises previously operated by Group subsidiaries had ended. Therefore, as at 1 May 2021, 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 1 May 2021, the consolidated net assets/liabilities included net liabilities (excluding cash) of £88.4m (2020: £101.0m) in respect of such items. Accordingly, if all items were to be settled at their 1 May 2021 carrying values, consolidated net debt would increase by £88.4m (2020: £101.0m). Consolidated net debt plus those outstanding train operating company net liabilities as at 1 May 2021 was £401.0m (2020: £453.1m).

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

Net capital expenditure reconciles to the condensed financial statements as follows:

In addition to the amounts shown in the table above, the impact of purchases of intangible assets was £6.0m (2020: £5.5m).  £Nil (2020: £0.5m) of cash was received from disposals of intangible assets.

The net capital expenditure and purchases of intangible assets total £72.7m in 2020/21, broadly consistent with the guidance we gave in May 2020 of around £74m. That is below our view of the appropriate long-term average annual net capital expenditure. We will keep our capital expenditure plans for 2021/22 under review as we see how customer demand develops and what opportunities emerge as the UK, and our business, recovers from COVID-19.

Financial position and liquidity

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

The Group remains well positioned to navigate this period of ongoing uncertainty, as evidenced by:

·      We currently have available liquidity of over £875m, and monitor our liquidity and cash flow daily.

·      In June 2020, we secured waivers of the net debt to EBITDA and EBITDA to interest covenant tests in our £325m of core bank facilities. The waivers cover the years ending 31 October 2020 and 1 May 2021. During the year, as a precautionary measure, we have secured further waivers in November 2020 and March 2021, covering the years ending 30 October 2021 and 30 April 2022 respectively. As things stand, the next testing of those covenants will be in late 2022 in respect of the year ending 29 October 2022. In the meantime, the Group has agreed with the banks to maintain a minimum level of available liquidity.

·      Notwithstanding the covenant waivers, we would nevertheless have complied with the covenants for the year ended 1 May 2021.

·      The ratio of net debt at 1 May 2021 to adjusted EBITDA for the year ended 1 May 2021 was 1.9 times (2020: 1.5 times).

·      Adjusted EBITDA for the year ended 1 May 2021 was 5.4 times (2020: 8.4 times) adjusted net finance charges (including our share of joint venture net finance income).

·      Two major credit rating agencies - S&P and Moody's - continue to assign investment grade credit ratings to the Group, with ratings outlooks at negative.

Year-end financial position of the Group

Net assets

Net assets at 1 May 2021 were £61.0m (2020: net liabilities of £130.2m).

The improvement in the net assets/liabilities reflects the actuarial gains on defined benefit pension schemes, gains on cash flow hedges and the profit for the year ended 1 May 2021.

Retirement benefits

The reported net assets of £61.0m (2020: net liabilities of £130.2m) that are shown on the consolidated balance sheet are after taking account of net pre-tax retirement benefit liabilities of £263.8m (2020: £413.1m), and associated deferred tax assets of £50.1m (2020: £78.5m).

The Group recognised pre-tax actuarial gains of £154.9m in the year (2020: losses of £220.1m). The discount rate used to determine pension scheme liabilities as at 1 May 2021 was 2.0%, which was an increase on the discount rate of 1.6% applied as at 2 May 2020.

We are pleased that the trustees have now concluded the 2020 triennial valuation of our main defined benefit pension scheme, having assessed the impact of recent events. The planned increase in employer contributions to the scheme is within the range we had expected. The funding deficit at 30 April 2020 across the two sections of the main scheme was £95.3m, and we expect employer contributions to the scheme to rise by £6.3m per annum, with £4.5m of this increase commencing from the start of May 2021 and the balance by May 2022. The trustees estimate that by 30 April 2021, the main scheme was in surplus on the scheme funding basis.

Dividend policy

The Board has proposed no dividends in respect of the year ended 1 May 2021.

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.

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 11 to 15 of the Group's 2020 Annual Report set out specific risks and uncertainties in more detail.  Further information and updates will be provided in the 2021 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.

·      Major event such as a serious accident - 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 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.  A weaker economy may also increase the risk of the Group's contingent liabilities, particularly those in relation to its former North American business, crystallising.

·      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.  Given the continuing uncertainty resulting from COVID-19, there remains a risk of further significant market movements that could result in significant changes in the amount of our net retirement benefit liabilities reported in the financial statements. 

·      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‑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 1 May 2021.  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 2021 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 1 May 2021 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 remain confident that there is a strong and positive future for public transport as we emerge from the COVID-19 pandemic. Government commitments in the recently published National Bus Strategy for England, and similar ambitions in Scotland and Wales, provide a huge opportunity to fundamentally transform travel, moving away from towns and cities built around cars to more vibrant and prosperous places, well-connected by easy-to-use sustainable public transport and active travel.

Looking ahead, our bus, coach and tram services have a critical role in tackling climate change, delivering economic recovery and ensuring healthier and more connected communities.

Martin Griffiths

Chief Executive

30 June 2021