FirstGroup plc (FGP.L) Earnings Call Transcript & Summary

Hello, and welcome to the FirstGroup 2020 Full Year Results Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Matthew Gregory, Chief Executive. Please go ahead with your meeting.

Thank you. Good morning, everyone, and thank you for joining us for our full year results presentation. As you're aware, we're having to do things slightly differently this year. I'm joined on the call by Ryan Mangold, our CFO, and we also have David Martin, our Chairman, on the line. It's fair to say that we've got a lot to cover off today. We're likely to take about 50 minutes to run through the presentation today. I will start off giving a brief summary of the results as a whole. Ryan will take you through the full year numbers, and then I'll come back to talk more about each division, the year just gone, the impact of coronavirus on the business and the challenges and opportunities that we see for the future. Now we published our presentation on the website. If you go to firstgroupplc/investors, it's on the right-hand side, and we will try to preface our comments with a slide number so that you're clear which section we're referring to. So let me start on Page 3, and let me start by reiterating that our priority throughout this entire period has been to ensure that our passengers and our people remain safe, whilst continuing to provide critical services to key workers and to our communities. Throughout the development of this pandemic, we've responded immediately to government's advice, ensuring that our workplaces and services were safe for our colleagues and for our passengers. We've enhanced cleaning processes, added long-lasting disinfectants to the process as well as leading the industry in implementing social distancing measures and information for customers to ensure that public transportation is safe. Seeing how our people have stepped up to the challenge of this crisis has been a huge source of pride and inspiration. Our teams have delivered food parcels and educational materials to their students and customers. We've delivered medical and safety kit. The teams have raised money and awareness and make charitable donations. And more importantly, they have kept our country's key workers and first responders moving safely at all times. Our collaboration and inclusiveness is a strength, and I'm proud of the immensely diverse workforce, and I want to take a moment to applaud and acknowledge all of our colleagues that live and uphold the values of First Group. So let me move on to Page 4. Overall, we made good progress during the year prior to the impact of COVID-19 on the business. First Student and Transit had strong bidding seasons with good retention and pricing. First Bus made good progress on network optimization in the second half and was also awarded significant funding to progress its leading position in low-emission vehicles. We were pleased to win the West Coast Partnership contract under new Williams-approved terms and also to be rewarded with a further direct award on Great Western. As flagged, there were headwinds for Greyhound in terms of its competitive marketplace, and we also saw further hardening of the U.S. insurance market. However, in early March, we were moving forward with our strategy, we're largely in line with our expectations. I'll talk a lot more about how coronavirus affected our sector, significantly reducing our passenger volumes, but I'm proud of how quickly and effectively our business reacted to the crisis. This response allowed us to protect revenue and employment, securing government and customer support to continue to provide vital services for key workers on both sides of the Atlantic. Cash flow for the '19/'20 year was ahead of our expectations and the action taken since the pandemic took hold has secured significant liquidity headroom and stability. As you'll hear today, there is much uncertainty ahead in terms of the level of future fiscal support and also the impact this pandemic has on people's appetite, ability and need to travel on mass public transport. However, I believe more than ever that public transportation has a vital part play in the regeneration of our economy, and this has been recognized by governments, customers and our communities by their support. We are well placed to emerge from this pandemic in a strong position. At which point, we will resume our portfolio rationalization plans at the earliest appropriate time. And with that, let me hand you over to Ryan to go through the numbers.

Thank you, Matthew, and good morning, everyone. There's a lot of complex issues to get through in the financial review and I'm going to cover 4 key areas. Firstly, our financial performance for the year, including the financial consequences of the pandemic that hit in the last few weeks of the year; the implementation of IFRS 16 that has had a material impact to our reported results; and updates on the major non-GAAP adjustments that we incurred this year and our cash performance and what we have done to strengthen our current liquidity headroom since the crisis struck. On Slide 6, the advent of the pandemic had a material impact on our business with a significant decline in passenger volumes in the last weeks of March. That being said, given that all our businesses run essential services and are vital to the economies and the communities we support, they are all now underpinned by some form of fiscal and contractual arrangements. Several of these contractual arrangements continue to evolve and are being further enhanced and negotiated after the year-end. As noted in our 11th of March Update to Trading, March is a significant trading month for the group given most businesses have an increasing level of demand as we move into the spring, and we were anticipating to deliver a broadly in line adjusted operating profit. As the pandemic struck, we reacted swiftly to reduce fixed costs in the last weeks in March, given the reduction in volumes, with the vast majority of cost savings occurring after the year-end. As a consequence of the pandemic, we believe that this had an impact to the group's anticipated operating profit for the year of roughly GBP 54 million. This impact was materially higher in these last weeks of the year than expected run rate given that most fiscal measures have either been enhanced or further contractually agreed subsequent to the year-end. Matthew will talk more about these measures later in the presentation. Despite the impact of COVID in the last weeks of the year, revenues were up 8.8% as reported, and benefited from the growth in the contracting businesses and in rail, benefiting further from the Avanti startup from the 8th of December. Largely as a consequence of the GBP 54 million impact of COVID effect, operating profits of GBP 256.8 million was down 22.1% in constant currency and before IFRS 16. As we saw at the half year, the implementation of IFRS 16 has had a significant impact on the group's account. This impact is mainly in rail, where we take no long-term risk on these assets based on how the franchise transition works between operators with the rolling stock leases passing to the subsequent franchisee. The IFRS 16 accounting is further complicated by what was previously onerous contracts in rail relating to the poor performance in TPE and SWR that are now subject to impairment rather than onerous contract accounting. The standard has resulted in a substantial increase in EBITDA of GBP 490 million with operating lease payments being stripped out and are replaced with depreciation from the capitalized right-of-use assets and related interest charge with a net effect of GBP 33.8 million reduction in profit before tax, mostly due to the higher interest charges relating mainly to the rail division. As we flagged at the half year, recognizing the right-of-use assets has resulted in a GBP 2.4 billion increase to reported net debt, of which rail is GBP 2.2 billion, including Avanti, that commenced on the 8th of December and circa GBP 200 million of mainly passenger-carrying vehicles that have been capitalized in our Road division. As a reminder, all of our debt covenant testing is on a frozen GAAP basis, and this standard does not have an impact in that regard. That's all I'm going to say on IFRS 16 and further details on the impact by division are included in the appendices of the presentation. Turning to Page 7 on revenue. As noted before, almost all of the fiscal and contractual measures we have been able to achieve have been backdated to effectively the start of the pandemic, where the accounting allows for this. This is particularly relevant to Rail, Bus, Student and Greyhound. Looking at the underlying business performance, where revenues were up GBP 628 million as reported, including the benefit of currency translation on a weaker sterling added -- adding GBP 108 million. Let me take you through the slide from left to right. In Student, we have seen strong growth in revenues up GBP 85 million, benefiting from pricing growth and inflation increases and net growth through share shift and acquisitions. In Transit, revenue is up GBP 70 million, with both net growth and pricing increases. In Greyhound, the lower revenue performance was driven by the Western Canada closure in the prior year of circa GBP 30 million, and the business being further impacted by a difficult competitive market and material reduction in immigration volumes pre COVID. In Bus, the business was able to generate underlying like-for-like revenue growth of GBP 9 million. However, the total revenues are lower due to the sale of the loss-making Manchester depots in the prior year. In Rail, the business delivered GBP 192 million in underlying revenue growth and benefited too from Avanti that started on the 8th of December that has contributed GBP 378 million to revenue in the year. Finally, we estimate that COVID had a net GBP 122 million impact of revenue in the last few weeks of March with lower passenger and service volumes, partially offset by the contractual and fiscal measures. Turning to the adjusted operating profit drivers, and again, I will take you through the slide from left to right. Firstly, after a GBP 6.5 million currency benefit from weaker Sterling, we have also changed our accounting policy with regards to software amortization. This was previously shown within total amortization as an adjusting item and the prior year has been restated for this to be more in line with market practice as this has developed. Matthew will go through -- go into the divisional performance in more detail. But despite the revenue growth in Student and Transit, all the North American businesses have all been impacted by the hardening insurance market and related increase in claims environment. And the resulting higher operating insurance cost charges included in underlying results as well as a tightening labor market resulting in above inflation labor cost pressures. In Bus, the business has benefited from revenue growth and management actions to remove costs. However, these were not enough to mitigate the inflation cost pressures in the period. The business was well advanced with its cost savings program but the implementation was impacted by COVID and the related significant service level reduction in the last weeks in March. Rail benefits from Avanti that starts on the 8th of December that contributed GBP 29 million. And combined with the continued good performance in GWR, Rail was on track for strong delivery before the COVID in impact. Relative to the GBP 122 million net revenue decline from lower passenger volumes, offset by fiscal and contractual measures, our estimation of the profitability impact of the business in the month of March was GBP 54 million. This reflects our swift action to take our cost in response to lower passenger volumes as well as the physical and contractual measures secured in each division. The cost reduction on customer and government support was secured as quickly as possible after the lockdown started, but a great deal of this activity fell after the year-end. For example, the 5311(f) funding in Greyhound and in Bus, the COVID bus service support grant relaunch in late May and Scotland and Wales following in July. Hence, the run rate impact to profitability in March should not be a read across for the impact of the pandemic into the next fiscal year. Further details of the divisional profit and revenue performances are included in the appendices. Turning to the bottom half of the adjusted income statement on Page 9. Finance costs are materially higher as a consequence of capitalizing former operating lease assets and hence, the related impact to interest cost under IFRS 16. Underlying net debt finance costs are GBP 2 million higher year-on-year due to a slightly higher average borrowing levels with net debt staying, however, broadly static year-on-year. The effective tax rate is in line year-on-year and results in a total tax charge of GBP 25 million, down GBP 22 million year-on-year due to lower profitability. As a reminder, given our historical losses, we pay very limited amount of cash tax. The group's primary noncontrolling interests are in Avanti that is profitable, and in SWR under IFRS 16. The net effect is an adjusted attributable profit of GBP 83 million in the year, down GBP 48.2 million -- 48.2% as reported. Turning to the non-GAAP adjustments on Slide 10. I will come back to the Greyhound and North American insurance provision issues on the subsequent slides. The COVID adjusting items relate to students, where there are a minor number of contracts, which run through to the start of the next school year, where we are no longer going to be providing the service and where the school districts have not been contractually supportive and hence, we have provided GBP 14 million for over and onerous contracts. We also hedge a high proportion of our fuel requirements. And as a consequence of COVID, a large number of our vehicles have been parked, which has meant that we are materially overhedged and hence, we have written down these hedge positions by GBP 7.4 million. Furthermore, we have incurred GBP 58 million of restructuring and reorganizing costs, split broadly between the group-wide project to remove costs for which we expect to continue to see future benefits post the crisis and the costs incurred for the execution of our strategy of rationalizing our portfolio for which we are well advanced for. We also have a GBP 9.3 million in property profits that we have recognized as an adjusting item, given the materiality of the amount in Student and in Greyhound, the profit related to sale from our Western Canada closure. This resulting in a total non-GAAP adjusting charge for the year of GBP 410 million, an increase of GBP 194 million from the half year position. Turning to the Greyhound impairment. Subsequent to the half year, where we recognized GBP 124 million in impairment charge, the discount rate driven by the equity risk premium that is used for future cash flows has increased materially. Furthermore, the near-term impact of the pandemic and the resulting material reduction in passenger volumes that is expected to be mostly offset by the 5311(f) funding, and the related pace of recovery expected into 2021, has meant that a further impairment charge is required. From a liability perspective, Greyhound has a large pension scheme that was closed to new members and future accrual many decades ago that is in runoff as well as their share of our North American self-insurance provision. Following the write-down, Greyhound is carried at a negative GBP 156 million on the group balance sheet. As a reminder, the Greyhound assets include a substantial number of properties that have been owned for several years. And we have invested more recently in the fleet to bring the customer offering up to the highest standard we expect from a strong brand. Despite the challenges this business faced, they were able to generate $44 million in EBITDA under IFRS 16 in the past 12 months. On Page 12, the North American insurance market and claims environment continued to harden since the first half of the year, resulting in a higher level of costs incurred for the settlement of historical losses than our actuaries had estimated. There is also a materially lower discount rate at year-end versus the prior year, down 180 basis points, that has meant a further increase in the provision of $26 million. Furthermore, we have also recognized an additional amount over and above the actuarial assessment to be at the higher end of the actuarial range to provide further protection against the settlement of historical losses. To be clear, our underlying business performance that we have reported includes the effect of this increased insurance cost environment in the year in order that our current year provisioning is in line with the hardening claims environment. As a reminder, the majority of the claims and the provisions are expected to settle over the next 5-year period. Over the page, due to the continual increases we have seen in the last few years as the wider auto liability insurance and claims market is hardened, we have made further advances to our processes, namely, higher insurance costs are included in our bid models for both student and transit, given that these increases in insurance costs are an industry-wide phenomenon. This has not been at the expense of the bid margins that continue to advance. We are taking an even more active approach to claims management, and we continue to drive safety in our organization where we believe that we are the market leaders. Furthermore, our recent experience over the past 3 months suggests that the actuarial provisioning is in line with the current settlement values. It is our intention to fully remove the insurance volatility on the sale of our North American businesses and when we have the cash and resources to do this. Looking at the cash flow on Page 14, pre-IFRS 16. In the Road division, GBP 262 million of cash has been invested in the business from the GBP 483 million of EBITDA that was generated. Student and Greyhound disposed of certain properties in the period that generated GBP 47 million, and the net insurance and provisions cash outflows were GBP 65 million over and above what has been included in EBITDA for the insurance charges in the period. The Road working capital outflow includes the impact of working capital under the fiscal measures where the cash has been received after the year-end. For example, the CB SSG and Bus, the employee retention support under the Cares Act and 5311(f) funding in Greyhound. This is resulting in a Road operating cash flow of GBP 196 million. The rail Cash flows includes the take on of Avanti, where there were GBP 64 million in working capital inflow, resulting in a group operating cash inflow up to GBP 287 million. The pension payments were GBP 39 million over and above the EBITDA charges and we paid GBP 86 million in interest, including a small amount of tax cash payments. And we spent GBP 41 million in exceptional items relating mainly to the restructuring and reorganizing costs in the year I mentioned earlier. The GBP 22 million of acquisition costs related to 3 acquisitions in students of 850 buses, and they remain active in growing the business through this route. This resulted in a net cash inflow of GBP 99 million for the year, that was better than our expectations when we started the year. Looking at the liquidity position on Page 15, and what we have done as a consequence of COVID. We have reviewed our CapEx program and stopped all noncommitted or nonsupportive contractual CapEx. We have, however, critically assessed growth CapEx to take advantage of opportunities as they present. We have expanded our access to lease financing by GBP 75 million, and we have increased the level of supply credits, mainly for buses and students. We have also set up a commercial paper program and drew down GBP 300 million under the Bank of England COVID Corporate Finance Fund. We also agreed a GBP 250 million bridging loan at the end of March for the refinance of the GBP 350 million bond that matures in April '21. And for pensions, despite significant volatility in financial markets at the end of March, the pension deficit stayed broadly static at GBP 313 million, benefiting from liability management and investment strategy improvements. Furthermore, we have agreed the Bus pension scheme and U.K. bus local government pension scheme Triennial Valuations as of April 2019. For the Bus Pension scheme, we have worked collegiately with a trustee, to agree the deficit and improve recovery period with an ambition to get to a low dependency over a reasonable time frame. As a consequence, cash payments for the Bus Pension arrangements are expected to be GBP 10 million lower in full year '21 and then revert to be broadly in line with full year '20, and the risk of continued cash requirements in the longer-term expected to reduce. Over the page. As of the end of June, we have GBP 850 million in committed undrawn revolver credit facilities and free cash before rail ring-fenced cash. This level of committed undrawn liquidity, excluding the drawdown on the CCFF in April, has increased by around GBP 80 million, reflecting good cash generation despite the crisis. Since the year-end, the group has generated positive operating cash flow before committed CapEx, despite the higher working capital demands as the physical support measures come into effect. There has been roughly a GBP 65 million increase in total net debt pre-IFRS 16 since the year-end, despite the traditionally higher first quarter CapEx payments relating to committed to capital. Our covenant ratio for the past financial year was 1.4x versus a test ratio of 3.75x, and the total maturity of our debt is currently 3.3 years. Furthermore, S&P and Fitch have also recently reaffirmed our investment-grade rating at BBB minus, albeit [ BSF ] moved us to negative outlook as a consequence of the potential impact of the pandemic. So in summary, on Page 17, despite the material impact to our business from COVID, the group has generated a small operating profit in the first quarter due to the fiscal and contractual measures for the business and the significant cost that we've been able to take out in reaction to the crisis that hit in the last weeks of the financial year. As a reminder, the Student business, in particular, is however seasonal with schools shut over the summer months, and hence, the result for the first half is anticipated to be impacted due to this expected seasonality. Given that the implications for the business continued to evolve as governments and customers respond to the dynamic changes from the pandemic that are happening at a local and national level, there remains material uncertainty regarding the fiscal funding levels and the pace at which our customer base returns to some level of pre-COVID normality. As a result, it is not clear precisely how the business will perform in the near term. And hence, we are not able to provide guidance for the current financial year. Our current committed liquidity is now ever strong at GBP 850 million of free cash before rail ring-fenced cash and committed undrawn revolving credit facility at the end of June, and our lenders remain supportive of our business through new lines of credits since the pandemic broke. These factors and our financial performance in the first quarter under extreme circumstances, provide me with the confidence in the resilience of our group through the crisis. I'll now hand back to Matthew for the review of the business and the strategy.

Great. Thanks, Ryan. So I'm going to refresh your memory as to how coronavirus has affected us as a group and then give more detail on each division. And I'll then close off by coming back to our portfolio rationalization plans. So with that, moving on to Slide 19. Passenger transportation was one of the hardest hit sectors at the start of this outcome. Schools closed in North America almost immediately, removing all transportation requirements as well as closing down all charter opportunities. And schools will remain closed until at least after the summer and summer schools are also canceled. Our First Transit business was affected in a variety of ways. Shuttle was hit by university campus closures across the country as well as a reduction in airport volumes. Paratransit was hit by the inability of nonemergency patients to access doctors and hospitals. Our fixed route operations continue to run, albeit with reduced service levels, and our call centers saw significantly reduced activity. More positively, our transit management operations continued to run as did our first vehicle service operations. But overall, service levels were down on average by 40%, but are now running slightly higher, only down by 35%. Greyhound saw passenger volumes fall dramatically down 85% initially, but as the only provider of a national network, our volumes have grown and are now only down by approximately 70%. In U.K. Bus, we saw passenger volumes fall 90% following lockdown, and these are now closer to around 75% down. The rail volumes were hit very hard, and we're still only operating at volumes between 10% and 15% of what they previously were. For example, we'd ordinarily see 1.8 million passengers flowing through Waterloo during the week, and passenger numbers are currently more like around 200,000 a week. So turning to Slide 20. In the face of the precipitous decline in passenger volumes, it's worth highlighting that as well as negotiating with customers and stakeholders to protect revenue and mileage, which I'll cover at a divisional level, we also took decisive action to prioritize cash flow and reduce nonessential expenditure in this period. A large proportion of our workforce were furloughed in the U.K. and North America, all nonessential capital expenditure has been halted as well as any discretionary operating expenditure. We accelerated cost reduction plans where appropriate and utilized government tax payment holidays where possible. In addition, to reflect the impact on the broader workforce and to preserve cash, the executive directors, executive committee members and the Board volunteered a 20% cut in salary and fees as well as wider senior management agreeing to defer salary. We've acted swiftly to protect the business to best position it as passenger volumes start to build up again. So let's now move on to talk about each of the divisions in turn, and on Slide 21, I'll talk about First Student. The business had a strong bid season, growing the fleet to 43,000 buses and growing market share again. Retention rate was strong, and we're expecting it to finish at 88%. This reflects our great team, our record-breaking customer satisfaction scores and strong safety record. We were successful in winning new business, mainly from our larger competitors, with a small amount of conversion as well. Pricing continued to outpace labor inflation at mid-single-digit levels. I was also pleased to see that during the year, we completed 3 bolt-on acquisitions totaling 850 buses. This included increasing our position in special needs transportation, which is a faster-growing segment of the market. The business continues to look at ways to improve its service offering and expand its capability. Our vans offering continues to pick up traction as we broaden the offering to our customers. And we're pioneering tablet solutions for our drivers with being -- these being rolled out across the fleet to enable us to improve routing efficiency and reduce labor costs. We're also ramping up our capability in running vehicles with alternative fuels. We're currently running trials of electric buses with customers in Chicago, Minnesota and Quebec, with a variety of suppliers as we start to work with customers to tackle air quality and carbon emissions in their areas. Looking at the P&L, you can see that we were not significantly affected by weather this year. As I mentioned before, pricing more than compensated for additional labor costs. However, this and management actions were not sufficient to overcome the additional annual cost of insurance. As a result, the pre COVID margin fell by 70 basis points to 8.7%. The COVID impact of $53 million fall in revenue was mitigated by $37 million of cost savings, leaving a profit impact of $16 million. Turning to the business's response to coronavirus on Slide 22. First Student does not have the contractual right to be paid for services when schools are closed, nor are its customers always obliged to run schools for a set number of days. The team worked with all of its customers and reinforced the importance of maintaining driver and operational capability. As a result, over the past 3 months, we have seen 74% of our customers agreeing to at least partially reimburse our revenue and help us protect our ability to start-up in the new year, and we expect to recover around 52% of home-to-school revenue. Some customers have reduced the invoice they are prepared to pay to reflect saved fuel cost or putting staff on furlough. And so our effective recovery rate is at around 61%. We will also be utilizing all of the assistance permitted in the Cares Act to ensure that we are recovering tax credits for staff that are underutilized during this period of closure. Finally, it's worth reminding you that whilst our recovery of revenue for our home to school contracts has been strong despite not running buses, we are not able to recover the same revenue for our charter business. Historically, our charter business has generated 9% of total revenue for the business. And currently, both school and outside charter is almost 0 and is likely to take some time to recover. Moving on to the future on Slide 23, I'll tackle the challenges first. We're currently working with all of our school customers to establish when and how schools will reopen after the summer. There is no national standard, and each school will determine its own rules to meet its specific circumstances. Our teams are working incredibly hard with each customer to work through each school's operation and how this will affect student transportation as well as the impact of any physical distancing requirements, and we also need to be sure that any new cleaning regime are agreed and financed. Ordinarily, the school start-up is a challenging time as we reset each school routes and bring back drivers to work for the business. Whilst the economic situation in North America may result in a larger pool of available workforce from which to recruit, the average age of student bus drivers will provide challenges for all operators. Approximately 1/3 of our driver base is over the age of 60, and health fears may result in fewer drivers than normal returning to work, which in turn could increase recruitment, training and licensing requirements. As I say, the demographics are such that this is an industry wide issue. But we do believe that our team is well placed to handle these challenges as we progress over the summer. But looking past the start-up, I see opportunities in further new route wins industry consolidation and more bolt-on acquisitions as smaller players either cease trading or retire. And with the economic challenges that will be experienced in North America, we may see an increased appetite for outsourcing school transportation as budgetary pressures rise, which we have not seen for some time. There could be challenges, though, with a potentially slow recovery of the charter business with both schools cutting back and a reduced appetite for social events. So clearly, there is a lot of short-term uncertainty, managing the business through the start-up. But longer term, I still see this as a fundamentally strong business. It is very clear, as evidenced by experts in recent weeks that health and education of students will necessitate schools returning in their physical form. As the industry leader, we have demonstrated the resilience of this business through the unprecedented downturn and the value of our high customer satisfaction scores. Moving on to Transit, Slide 24. This business has continued to demonstrate strong customer relations with a retention rate of 89%. We've seen fixed route customer wins in Merced, California and Arlington, Texas, and a paratransit win in San Bernardino, California, and these wins were from 2 of our major competitors. We won a contract to expand our largest paratransit contract in the Chicago area, and we've also won a major shuttle contract at LA Airport. I'm pleased to see that we continue to lead the industry with our movement into the alternative transport space. Our partnership with Lyft continues to grow, providing them with wheelchair accessible vehicles in 4 large North American cities, and we worked with Uber in a similar fashion in Portland. Our trials of autonomous vehicles continue to lead the industry with recent wins in Houston and Colorado. And I'm pleased that we've been awarded a contract to be the maintenance and operations partner on a military base using stackable technology for the first time. And the stackable technology reflects the fact that the sensor equipment has been retrofitted onto a traditional manned vehicle. From a financial perspective, as noted at the half year, business performance has been challenging. Whilst pricing was more than sufficient to offset higher labor costs, the increase in insurance costs alongside 2 legal settlements, depressed margins, the COVID impact was significant with a loss of $10 million of revenue falling through to an additional net cost of $7.5 million. Looking at Slide 25 and Transit's response to coronavirus. In Transit, contractual terms vary by customer with a variety of fixed and variable fees being charged in each sector. Despite customers only requiring us to run 65% of our previous service levels, we expect to recover around 79% of revenue from them. And we'll also utilize tax breaks offered by the Cares Act. Moving on to Slide 26. Looking forward, we're starting to see customers requesting the restoration of prior service levels. On the fixed route side, we're currently running 72% of services and expect these to start to increase as the lockdown eases. The paratransit activity will start to be restored as patients reengage with non-emergency treatment, and with the physical distancing requirements, we may see upturn in the numbers of trips. The shuttle business is skewed towards the university sector and it appears that universities may start the fall term earlier. They may pass without a break and then finish earlier. Some universities will continue with online teaching, though, which is more suited to a graduate learning regime. And as a final point, I'm also pleased to see that we'll be launching our new mobility-as-a-service platform over the summer. The business called Jaunt will initially leverage our #1 status in the university campus market, giving students a broad range of travel options within their city. More of this later in the year, but this demonstrates that we continue to move our innovation agenda forward despite the current crisis. Moving on to Greyhound on Slide 27. Prior to the pandemic, Greyhound's markets were challenged with low fuel cost encouraging car usage, competition from ultra-low-cost airline carriers and new entrants to the market. We also saw strong immigration demand in Q1 of last year in the southern border states. This stopped abruptly as a result of changing government immigration policy, and volumes have remained at historically low levels. We have continued to upgrade our digital offering, focusing on yield management, and we've also introduced new fleet into the business, which has improved operational performance as well as customer perception and satisfaction. The financial challenges of the business have continued from the first half, with revenue down a total of $32 million, reflecting the points I made earlier. Whilst management action has been taken to reduce miles and remove costs and restructure Canada, this was offset by inflation and insurance costs. COVID had an $8 million impact on revenue, which fell through to the bottom line since savings in staff and mileage costs were offset by a property sale, which was delayed due to the crisis. Moving on to Slide 28. Following the introduction of lockdown measures, the business led lobbying efforts to ensure that the U.S. Cares Act included a grant to enable rural intercity bus services to continue. And the Act included $326 million of available funding. Given its unique network and scale, Greyhound is eligible to be a significant recipient of this funding, and the business has been running approximately 40% of its prime mileage to ensure that it maintains its community critical national network. The funding was passed to each individual state Department of Transport, and Greyhound is working with them to apply for it. Working with the government departments can be a lengthy process in normal times and so efforts have been made to progress agreements, awards, contract and payments as quickly as possible. To date, we have initiated contracts in 24 states, received confirmation of award from 16 states and have contractualized 6 awards. On the total funding package, we run services and states amounting to about 92% of the total. And we've also seen states such as New York and California prioritize smaller, more local providers with their initial awards. We would still expect to receive around 1/3 of the total funding amount and are working hard to secure this as well as lobbying hard for the next potential Cares Act package. Moving on to the future on Slide 29. The funding provided through the Cares Act demonstrates that there is a place for long distance coach travel in the U.S., connecting cities and communities. We're currently operating just over 40% of our previous mileage and are selling around 30% of previous ticket volumes. We've had a significant change in the booking window, with the vast majority of passengers waiting until a day or 2 prior to travel before they book, and this has resulted in higher yields. And consequently, revenue is currently running at around 40% at prior levels. The dramatic change to the competitive environment and reduction of mileage levels has given us an opportunity to fully assess the network in its current state and how this can be reshaped in the context of the new competitive environment. And the CARES Act funding demonstrates the value of the network, but we need to be clear that we can make the right financial return in this new landscape. We know that the curve of the recovery is unclear and will be affected by a number of factors, whether it's people's propensity to travel in the face of the health environment, working from home reducing commuting and business travel, and the competitive reaction from traditional competitors, new entrants and the low-cost airline business. And while the petrol price are low, car competition could still be strong, although the economic environment could be such that car ownership may become cost prohibitive. So a lot of uncertainty, but an opportunity to reshape the business and the cost base in the face of a new landscape. But I will say that we do remain committed to divesting this business in the context of our overall portfolio rationalization strategy. Given that most of its competitors had to close during the lockdown period, the business has demonstrated that it's in a better position to thrive due to its unique network. However, we need to ensure that any potential transaction terms and financial capability of any buyers remain valid. As we finalize the recovery of funding from each state and also our view of the network, we'll be able to recast our financial numbers and resume our divestment conversations. In the meantime, we also continue to progress our plans to monetize the property portfolio if appropriate valuations are available to us. So let's move over to the U.K. on Slide 30. Prior to the crisis, the bus business was seeing revenue growth at low levels and yields were being improved. The cost base was also being addressed with network changes being made to improve profitability of local operating companies. We now have far more sophisticated platforms from which to manage route profitability and generate our timetables and schedules. And a great example of this is the work we've done in leads to identify congestion hotspots at a traffic light level and then work with the city council to fix particular problems in the Headingley Corridor, for example. Our customer-facing digital platforms have also progressed and contactless and mobile apps now account for more than 50% of commercial revenue. This capability has been extremely helpful during the current period as we've discouraged customers from using cash where possible, and cash now represents less than 30% of current revenues. I'm pleased with the way that the management team has reacted quickly to provide a safe bus service that complies with social distancing rules. We're leading the industry in this respect, particularly when it comes to giving customers real time information. Not only does our app show precisely where the bus is on route, we're now showing exactly how many seats are free on each bus and whether the wheelchair space is in use, an industry-first. And we're currently running around 80% of mileage but generating only 25% of prior revenue. From a financial perspective, cost inflation and fuel costs have hit the business during the year and more than offset the like-for-like revenue growth that the business generated. Cost reduction driven by network optimization changes were starting to come through in the fourth quarter of last year, but the impact of these has been halted by the current situation. As I said before, we now have much more sophisticated systems to manage schedules and networks so I expect these to be effective once demand levels return to normal. COVID hit the business by GBP 9 million in March. And as Ryan intimated previously, the impact of support and cost-cutting had a minimal impact to the March numbers, due to the fixed nature of our cost base, notice periods and the timing of the government grant schemes and furlough support. Moving on to Slide 31. We've seen the government recognize the critical nature of our businesses, and we've worked closely with them in First Bus to secure the funding required to provide the service levels needed by the country. The government confirmed the continuation of the BSOG payments and funding for local authorities to maintain concessionary fair payments at prior levels. In addition, the government grant mechanism was agreed to enable us to provide first 40% of prior mileage and with the new restart scheme up to 80% of prior mileage, enabling us to bring back the vast majority of our staff to work. Looking forward, on Slide 32, we're covered by government grant for a rolling 12-week period, which allows us to run to near full capacity. It is difficult to predict how the recovery will develop and what long-term revenue trends look like. We will need to manage the need to socially distance per government guidelines for some time to come. And transitioning from the current restart model will need to be worked through. We are likely to need continued government funding to transition to new demand levels, particularly so that we can continue to provide the existing level of service. And we know that working patterns are likely to change with more flexible working and working from home, but people will still need to travel. And given the improvements in our customer proposition, we could see people giving up costly motoring in favor of public transport. It is clear, however, that whilst there may be challenges in the short term, we have also been able to see what bus travel can look like when congestion is eliminated. We have long advocated for local authorities to focus on bus prioritization schemes to enable public transport to run services as fast as possible and get people out of their cars. And I would hope that they will see this as the right way to move their cities forward. I'd also hope that the dramatic improvement in air quality will also encourage a faster transition to vehicles with better emission control and those meeting 0-carbon standards. Our fleet is already 35% Euro 6 or better, the highest in the industry, and I can confirm that First Bus is committed to operating a zero-emission and zero-carbon fleet by 2035, and we plan not to buy diesel buses in the U.K. after 2022. However, to fully embrace the challenge of zero carbon, we will need to have a sensible debate with governments and local authorities to ensure that appropriate funding is in place to accelerate this transition. Safe, clean and efficient bus travel is vital to the economic health of our local economies, providing critical services to many, and we will need to work with government to ensure that these services are delivered in the right way. Let's move on to Rail on Slide 33. Overall, this has been a good year for First Rail. We were extremely pleased to have been awarded the West Coast Partnership, which commenced in December. Great Western Railway managed the largest timetable change in a generation extremely well, and we were very pleased to have been awarded a further direct award on that railway until at least 2023. The timetable change at TransPennine Express was more challenging, though, due to fleet delays, but our customers are now benefiting from the arrival of the new, faster and longer trains that are fundamental to the success of this railway. Prior to coronavirus, passenger revenue growth was flat on a like-for-like basis, and volumes were down about 1.3% across our networks. And margins moderated to low single-digit levels, reflecting the transition to emergency measured agreements. Moving on to Slide 34. The COVID crisis was swiftly resolved by government, and we were pleased that the emergency measures agreements were put in place for our franchises, enabling us to continue to keep essential workers moving throughout the period of lockdown. These agreements remove revenue costs and continued capital risk until at least the 20th of September 2020. And at present, Hull Trains [ or ] open access railway is suspended, and we're monitoring how we can bring this important service back into operation. Looking to the future on Slide 35. We're currently operating around 85% of services, but passenger revenue has been down around 10% to 15% of previous levels. In the first wave of lockdown easing, we saw a minimal change to passenger volumes, and these low levels have continued following the subsequent easing. As a result, we expect rail travel to take some time to revert to previous travel patterns and that business and community travel will be significantly affected, particularly in the short term. We continue to work with government to manage the current restrictions of social distancing as well as the appropriate messaging and guidance with respect to using public transport, and begin to turn to the question of how the industry moves forward post 20th of September. But given current trends, I believe that the current approach will need to be maintained for some time to come until travel patterns can be reassessed in what will become the new normal. So let me move on to the broader strategy, turning our attention to portfolio rationalization on Slide 36. As you know, we announced back in March, the process to sell our 2 North American contract businesses were underway, alongside the continued sale process for Greyhound. Despite the coronavirus crisis, I want to be clear that my strategic thinking has not changed. There continues to be no significant synergies between the U.S. and the U.K. and so the way to unlock the inherent value in the group is through portfolio rationalization. Obviously, we've needed to take a breath to allow management to deal with the crisis and assess the situation in the short-term financial performance of the business as the pandemic plays out in the context of any second wave as well. Interested parties will also need to assess their positions and understand the impact on the debt capital markets and their ability to raise funds. But we were already on the path towards the disposal of these highly attractive strategic assets and a lot of interest had been expressed. We continue to work behind the scenes to progress our readiness, and we also regularly review our options. But once we are clear on when and how the business will reopen and have finalized all of our contractual negotiations with customers, we can then recast the numbers and resume the process, having demonstrated the value and resilience of these businesses in times of crisis, and we'll do this at the earliest appropriate time. Once the portfolio rationalization is complete, the group will then be focused on its critically important transportation assets in Bus and Rail in the U.K., and these will form the core of the ongoing group. We have the opportunity to reset the network in U.K. Bus, allowing us to drive margins towards those of industry peers. We have a significant role to play in the U.K.'s transition to a higher air quality, lower congestion and zero carbon economy. And the U.K. rail franchising model report written by Keith Williams has not yet been released, but this is believed to emphasize passenger experience and management fee-based contracts, and this was exemplified in the approach to the West Coast Partnership contract. And recent government support for the business has demonstrated how vital our services are to keeping the country moving and supporting transport infrastructure. This new business will need to have a robust balance sheet, it will have a reduced legacy pension burden and will need adequate capability to support the investment required to reach zero carbon over time. So let me close off by reiterating my pride and gratitude to our dedicated workforce for maintaining critical services as well as for supporting their communities at this time of crisis. I'm proud of the swift and decisive action taken by our management teams to deal with the dramatic reduction in passenger volumes and protect our business, and we've also improved our liquidity headroom and taken immediate action to reduce costs and improve cash flow. There continues to be a great deal of uncertainty around how our sector will recover from this crisis, whether there will be further waves of lockdown and the state of the global economy will be in at the end of it. However, our businesses continue to be vital to their countries and communities and the need for efficient customer-focused public transportation will be ever more important as we move towards a zero carbon economy. And this is demonstrated by the level of support that governments and customers have given us. We're committed to our portfolio rationalization program so that we can deliver our strategic objective to unlock the inherent value of the group for our shareholders. And with that, I'll turn it over to questions.

[Operator Instructions] Our first question comes from the line of Sathish Sivakumar of Citigroup.

I have 3 questions. Firstly, on the insurance provision and impairment. So if you could -- could you please explain the impact of self-insurance provision of GBP 141 million across Student, Transit and Greyhound. So what is the split would be for those 3 divisions? And also, if you could just give more color on what has led to the further increase in Greyhound impairment charges? And do you expect things to get [indiscernible] year on -- in regards to Greyhound? Secondly, if you could please update on the expectation of fiscal funding from DfT? When do you see that funding to taper off? And what are the conversations as an industry that you are having with DfT, both for lithium bus as well as the [indiscernible] bus [indiscernible]. Thirdly, on the U.K. regional market, if you could share details around what are the volume expectations are right now versus miles driven trend compared to last year? And when do you expect these things to get back to normal levels?

Sathish, could you just repeat that third question? Sorry, you cut out a little bit there.

Yes. The first question is on the self-insurance provision...

No, sorry, the third -- the last question, the third question.

The third question, yes. You touched upon the volume trends for the regional bus market. So if you could just give us more color, what are your expectations are in terms of volumes and miles driven getting back to the normal levels? And what is the current disparity between the miles driven and volume?

Okay. Well, let me -- I'll go through those also. Let's touch off on the insurance provision. I think Ryan will have to help me with some of the splits. But look, in terms of the impairments, I mean, we've got 2 issues. We have talked consistently on the insurance market that the legal environment in the U.S. has continued to get harder and harder, and judgments and settlements have been more and more punitive. So we've seen that in our business, we are not in any way alone in this in transportation. I think the 5 of the top 10 legal claims in totality in the U.S. were transportation related. And we have seen this, we've seen people like UPS with some of the insurance companies recognizing this hardening. And what -- clearly, what we've done is we've looked the actuarial valuation of these claims and that advice has indicated that we have to increase the provision from our half year position. But I think it's also important to recognize that we -- that we're being hit by lower discount rates, because we have to discount this provision, and it's cost us about $25 million. And also, Ryan is being more prudent. So I think on the insurance side, we flagged this a lot. Ryan was very clear that over the last 3 months though we've not seen any kind of deterioration and things seem to have very much leveled out. On the Greyhound side of things, what I'd say is that clearly this is a business that we have had challenges with and which is why we've made impairments in the past. The impact this half has been entirely affected by the discount rates. And I think what I would say around Greyhound is that we do still have a strong portfolio property which is valuable and we'll continue to move forward in trying to unlock that value at the right time and the right prices. Perhaps, Ryan, do you have that split?

Yes, I do have the splits [indiscernible]. With Greyhound, Greyhound has had a relatively large impact for some claims that went against its -- claim settlements that went to jury and went against the business. So they've got a fairly disproportionate larger share of that insurance movement from an exceptional point of view. And then Students and Transit are probably by 1/3 and then a 1/3 of that 1/3 in scale.

Great. Well, let me come on to the other 2 questions, and these are really sort of fundamental questions, so this is why we're drawing out the uncertainty because relatively, we don't know the answer to these two questions. But let me try and give you a bit more color. So in terms of the funding, the bus agreement is a rolling 12-week agreement, whereby the operators put in a claim for a grant to enable them to run -- enable us to continue to run the services. And we're currently running sort of 80% of services. Now the country needs our services to operate. We need to move people around. People need to get back to work. They need to go to school. They need to travel. And if we do not have this funding, we will have to cut services, and that is not what the economy needs and what the government wanted at this time. So we would expect to continue to have regular conversations with the level of funding in the bus industry. Now the bus funding is a grant. So we -- whatever passenger revenue we earn kind of gets deducted from our claim. We claim, effectively our net costs, the costs we've incurred less the revenue that we've taken at the fare box. So it is important that we get back to a position where we can start reducing the level of social distancing. We can reduce -- we can get more capacity on the buses and get people moving more. We're currently running at this sort of 1 meter plus, which at a maximum gives us around 50% capacity on our buses. And we are in regular dialogue with the government around we can move that forward, how we can move the messaging away from avoiding public transportation. So I think on the -- so that's what I'd say around the bus fiscal funding constant conversation. I think with Rail, we are really just turning to that side of things with Rail. I mean the good thing about the funding package for Rail that it was a 6-month package, and we've got until the 20th of September to work that through. At 10% to 15% levels of -- 10% to 15% levels of passenger volumes we're currently seeing, there is no way that we can go back to the way things were. And we think this is a great opportunity for us to accelerate, us together with the government to accelerate towards what we think would be the logical conclusion from the Williams report, which is the move to more -- towards more management contracts. So we think that, that is a much more logical way forward. We've advocated for a long time that there needs to be a better balance of risk and reward on rail franchising, and the way that these management contracts work would be logical for that. And it was very -- it was alluded to in our West Coast Partnership deal as well. So I suppose a long answer to a lot of conversations going on. We don't know the direct answer, but we know that we need continued funding to enable us to continue to provide the services that the country needs. In terms of -- and that sort of leads into the volume trends. I mean, look, I can't predict, I can't predict how all the schools are going to go back in the U.K., I can't predict how everyone's going to go back to work in the U.K. All we can say is that bus volumes are increasing gradually, but rail volumes do not seem to be increasing very much, which is why we need to work through the government guidance on using public transportation. I can say categorically that public translation is safe. And we need to start moving away from the avoiding public transport to use it safely and to reducing social distancing guidelines. And as people get back to work and get back to their normal ways of life, we'll see volumes increase. But we're not in a position to say when and how long that will take.

Our next question comes from the line of [ Suzanne Evett ] of Royal Bank of Canada.

Sorry, this is Stephanie D'Ath from Royal Bank of Canada. The first one is on your CapEx expectations for current fiscal year. You mentioned you would be cutting down on investments. But could you maybe quantify how much you intended to spend in bus versus -- by different division? My second question is on the divestment. Could you be maybe a bit more specific on Greyhound? You were pretty advanced in the process. Is everything just on hold? Or is there still interest? And is it progressing at all? And then I guess it was more early days for Student and Transit. But if you could give us an idea of if there has been any progress at all there? And then finally, when would you expect to be able to give an outlook for the current fiscal year and return to dividend payments?

Great. Okay. Well, look, I think I will -- I'll try and answer those ones. I think, look, on the CapEx one, we are not giving guidance. So we're not telling people where we are with CapEx. What we have said is that we are cutting CapEx where we're able to and also, we have to balance off the needs of our customers, particularly in Student, who have supported us throughout this crisis, and we have some contractual obligations there. So I would expect our CapEx number to be lower than it was this year, but we're not giving specific guidance on that one, Stephanie. In terms of the divestments, yes, look, we have entered into an unprecedented pandemic here with all of our business effectively being closed. As we said in March, we were very advanced with those discussions. Discussions continue. But as I said earlier in my script, that -- and I appreciate it was a long conversation earlier that we need to see the outcome of this funding. And we also need to see how we're going to recast the business in the light of the networks. I mean, the reality is most of our competitors are largely shut or running significantly reduced services. So we are the kind of leading -- we're a leading player in the market. And we want to make sure that we take advantage of those impacts, as we have these conversations. But we are -- it is -- we're continuing those conversations, but we do need clarity on how the business looks. And in terms of the North American contract businesses, yes, we launched it. Clearly, we have a situation where our student business is still closed. We need the schools to open after the summer. And once we've got some clarity on how and when they open, we can recast our numbers, and we can resume that process as normal. But what I can say is when we launched it, huge amount of interest, huge amount of work have gone into it. So we're ready to go as soon as we get that clarity. And then, look, I mean, the difficulty with your question about outlook, I would love to be in a business where we can give you give you outlook and guidance. But at the moment, as you heard today, there is a lot of uncertainty around. And until we get clarity on most of the things that we've talked about today with our businesses, it wouldn't be appropriate for us to give that outlook. But clearly, I think over the past 3 months, we have probably given 6 updates to the market. So you know from us as things progress and as things change, we will update the market accordingly.

Our next question comes from the line of Joe Thomas of HSBC.

It's Joe here from HSBC. I'm just interested, Matthew, in your questions about -- or your comments about driver recruitment in the U.S. Can you just talk about how you're going to get around those challenges and what it might mean whether we should be worried about some sort of step-up in the cost base there? I'm also wondering about the -- thinking more positively about the opportunities in the U.S. There's been talk about bigger operators taking more market share there. Are you tangibly seeing any of that at the moment? And then finally, and I guess it is related to that. Obviously, there's been a lot of comments about the material uncertainty statement that you're making today. I'm just wondering if that is having any impact on your ability to pick up work and what your customers are saying about it? I mean, obviously, they must have a pretty good idea about the situation that you find yourselves in.