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

Hello, and welcome to the First Group's half yearly results 2020. [Operator Instructions] 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 half year results presentation. I'm joined on the call by our CFO, Ryan Mangold; and our Chairman, David Martin. I'm going to start off by giving a brief overview of performance before Ryan takes you through the half year numbers. And then I will come back to talk about each division in a little more detail, including the developments as well as the challenges and opportunities that we see for the future. The presentation is published on our website, and so we'll try to preface our comments with a slide number to help navigate to the particular section we're referring to. Starting on Page 2. I'd like to begin by reiterating that our priorities through this entire period had been to ensure that our passengers and our people are safe while continuing to provide critical services. In what has been an exceptionally difficult period for public transportation, I'm pleased that we have demonstrated our resilience, performing well ahead of our expectations at the start of this crisis. Our customers have recognized the importance of our services and worked with us to ensure that these were maintained. Governments and local authorities relied on us to continue to provide transport for key workers and essential journeys by procuring our services on both sides of the Atlantic. This, alongside rapid and strong cost control has enabled us to deliver positive EBITDA, adjusted operating profit and strong cash flow for the half. We've reinforced the balance sheet, securing additional facilities, we've robustly managed our capital expenditure program and also secured amendments to our covenants at the right time after we'd comfortably met the September 2020 tests. The strategy is on track. And we're focused on delivering value from each part of our portfolio. With respect to the North American contract businesses, we're in discussions with a number of credible buyers who have a long-term perspective. And together with our advisers, we're exploring and evaluating these. First Bus is well placed to emerge in a strong position, working to lead the industry on its journey to 0 emissions. And as seen by our other announcement made today, we're well on the way to transitioning to new directly awarded national rail contracts, which we expect to have a greater focus on the customer as well as a better balance of risk and reward that we've long been calling for. The pandemics trajectory remains uncertain, but our teams and our business continue to meet this with agility and resilience. We have much greater visibility on the business's future than earlier in the year, and I'm confident in our long-term fundamentals and the vital role we will play in supporting customers, communities and their economic recovery. And with that, I'm going to hand over to Ryan to take you through the numbers. Ryan?

Thank you, Matthew. As an agenda on Slide 4, I'm going to cover 3 principal areas in my presentation: the positive financial performance through what has been the most challenging period ever for the group; what we have done to maintain strong business resilience, liquidity and balance sheet flexibility; and finally, some of the key areas of focus as we look ahead for the balance of the year and beyond. Unsurprisingly, all our markets going into lockdown in March and currently continuing to have a high level of disruption has had a significant impact to the trading and financial performance of the business in the half year. Despite these extraordinary challenges, our management and cost actions resulted in the group delivering an adjusted operating profit of GBP 10.4 million in the period. We have ensured that we maintain strong levels of committed liquidity in excess of GBP 800 million throughout the crisis. And as announced today, we have agreed the termination sums of Avanti at 0 cost and SWR at GBP 33 million that provides further clarity for our rails stable with only TPE still to be completed. Turning to the financial summary on Slide 5. Recognizing that this is normally a seasonally low half year period, the impact of the material decline in passenger volume since March has been offset by cost and management actions that we implemented by the start of the fiscal year. The business has also benefited from the respective wider fiscal support measures, particularly focused on labor retention costs that were enacted by governments in our markets as they reacted to the consequences of the pandemic. Some of these fiscal measures are more specific to FirstGroup and the essential services that we run to ensure safe, socially distanced mobility can still be delivered. If we exclude Avanti and rail and the impact of exchange rates, our revenues declined GBP 838 million versus the prior year. However, the mitigating and contractual actions implemented contained the operating profit decline to GBP 99 million, this results in the group generating an operating profit of GBP 10.4 million in what has been a difficult trading half year. This has been a remarkable achievement by the organization, whilst continuing to support the communities we serve. With a higher level of depreciation in the period through the right-of-use assets under IFRS 16, the group generated GBP 465 million in EBITDA, and this is at GBP 31 million year-on-year, however, down GBP 56 million if we exclude Avanti and on a constant currency basis. Net finance costs were GBP 83.7 million, up GBP 14.7 million year-on-year, mainly as a result of GWR, Direct Award 3 and Avanti right-of-use asset capitalization under IFRS 16 and the related increased finance costs. This results in a GBP 73 million adjusted loss before tax for the half year, down GBP 93 million as reported relative to the GBP 430 million reduction in revenues and results in an attributable loss of GBP 63.6 million. That is down GBP 81 million year-on-year after taking into account the 30% minority interest in SWR and Avanti, respectively. Reported net debt pre-IFRS 16 ended the period at GBP 815 million, an improvement of GBP 247 million on prior year, and we will discuss the key movements later in the presentation. The IFRS 16 right-of-use lease liabilities included in the group reported net debt mostly relates to rail for which we take no risk under the current contractual arrangements, and the recognition of these liabilities is simply a requirement of the accounting standards. Turning to the revenue and operating profit analysis for the period on Slide 6. All the businesses have reacted swiftly to the onset of the pandemic, with the rapid decline in passenger volumes largely matched by cost actions and benefiting from wider economic stimulus packages, which have generally been in the form of support for retained labor costs. I will review the individual business performances in subsequent slides. But for the Road divisions, the GBP 835 million reduction in revenues were largely offset by the GBP 741 million reduction in costs. We have reflected Avanti separately given the materiality of the revenue in this franchise. Looking now at the divisional performance and starting with Student on Slide 7. As can be seen in the chart, with the dark lines being the current year and the dotted lines, the prior year trends, the pandemic has had a material impact to the student business with a steep decline in home-to-school revenues. As a reminder, the Student business financial performance is normally very seasonal with a materially lower first half and matches the school year that runs on average from the last weeks in August to the last weeks in June of each year. Under normal circumstances, the Student business also ran a high level of charter revenue that is particularly strong over the summer holidays for summer school camps. Charter normally makes up around 8% of Student revenue and year-on-year, charter revenue is down $120 million. After taking into account the revenue recovery from the school districts, where we are running more limited services, first quarter revenue was 50% of the prior year. However, the operating profit impact was limited to 38% down due to the swift cost and management actions the business undertook. As well as wider economic support in the U.S.A. and Canada through the CARES and Cures Act relating to retained labor wage support. As the division progressed towards the summer months, that are traditionally a loss-making second quarter with the delayed school start-ups due to school curbed preparations as well as the significant decline in charter, the revenue decline has been more marked with the revenue being down 57% in the second quarter. As the schools continue to open up and the division running up to around 65% of the buses, either on a traditional home-to-school basis or hybrid basis, revenues continued to remain materially down versus the prior year. As you can see, the profitability has a flatter profile in the current year as we continue to work through the crisis with the school district boards. There are clearly a significant number of moving parts in the operating profit result given the high level of variable costs in Student at around 65%. Hence, the impact of lower revenue from lower service levels that have been mitigated to some extent through revenue recoveries are offset by the lower variable costs. Student is expected to continue generating profit in the second half, albeit at a lower level than the prior year. And they delivered $4.5 million in fixed cost savings in the period. In overall terms, the $569 million net reduction in revenues for the half year has been limited to a $92 million reduction in profitability. Turning to Transit performance on the half year on Slide 8. The division has run on average around 80% of service levels through the pandemic in the first half, with the diversity of the contracted business model providing a higher level of resilience through the crisis. The impact to revenues through lower service levels has been mitigated through cost and management actions with $4 million of fixed cost savings delivered in the period as well as the division benefiting from wider economic stimulus in the U.S.A. and Canada of the retained labor cost support mechanisms. As a reminder, the prior year had a one-off legal settlement that impacted the results and, hence, for a like-for-like basis, the divisional operating profit performance is limited to being down $2.6 million despite a $127 million reduction in revenue. For the Greyhound business, following the initial dramatic passenger volume drop-off in late March and early April, the passenger volumes and miles have increased to now being stable at around 45% of pre pandemic levels. Despite the lower passenger volumes and miles, the business has been able to improve yields versus the prior year that has improved the net contribution per mile being run. The business has also reacted swiftly to remove costs and reshape the network based on demand levels with a fixed cost reduction of $31 million in the period. As noted before, given the national network Greyhound operates, they have benefited from a material amount of the $326 million allocated by the federal government for 5311(f) funding under the CARES Act that subsidizes the cost of running the national network to allow for continued mobility of the communities we serve. We have recognized $65 million of funding in the period based on the contracts that have been executed that effectively covers the network costs of operations in the states that we have agreement with. This 5311(f) funding continues into the second half, where contracts with the respective states continue to be secured and provide some level of mitigation to the losses being incurred to broadly cover our cash costs. Our Greyhound Canada operations were suspended from May, and they remain closed. The net effect is the $219 million reduction in Greyhound revenue, including the $65 million recognizing 5311(f) funding, was limited to a $29 million reduction in profitability. Turning to the U.K. businesses on Slide 9. As a result of the pandemic, both Bus and Rail are now effectively under contracts where we currently take no revenue risk and limited cost risk to ensure the continuity of essential services we run and operate. In Bus, the respective developed governments have procured our bus services to continue running at a higher service level to be able to achieve socially distanced mobility. The schemes under CBSSG-R, where we are currently running around 95% in the U.K. overall is a model that is operated on a 0 deficit or breakeven financial position basis including compensation for pension contributions and interest costs for the capital we are being deployed. This means that from an accounting perspective, we make a marginal operating profit each month due to the interest and pension costs being disclosed lower on the P&L and in the cash flow statement, respectively. It is anticipated that these arrangements should remain in place until we transition out from the pandemic and the government policy on social distancing is removed. Furthermore, despite the underwrite of the costs through the CBSSG-R and high service delivery levels and, at the same time, dealing with the operational complexity to the crisis the business has taken out GBP 2.7 million in fixed costs. In Rail, we've operated the half year under emergency measure agreements, or EMA, across our franchise stable. Under this regime, we have earned a fixed management fee and a performance incentive. The Rail result benefits from Avanti in the period as well as GBP 12 million gain on settlement on prior claims mainly in GWR relating to the pre EMA period. The EMA and transition to emergency recovery measures agreements or ERMAs for SWR and TPE has had an impact to the financial reporting under the right-of-use assets under IFRS 16 that we'll discuss in the next slide. As a reminder, the ERMA commercial terms from September are tighter overall than under the EMA in the first half, combined with the higher level of the fee relating to the performance element rather than the higher level being fixed element under the EMA. Turning to Slide 10 on the Rail termination agreements. As updated previously, the maximum cash exposure we had for the franchises we are currently operating that were contracted pre COVID of SWR, TPE and Avanti was GBP 294 million. As announced earlier today, we have agreed the termination sums for SWR and Avanti. The results of these agreements is that the remaining unpaid parent company support in SWR will be paid at the end of March of GBP 33 million for the first group share. And there is no termination fee payable for Avanti. The performance bonds in SWR and Avanti are also not anticipated to be called given how the termination sum agreement mechanisms work, and in particular, this will only be concluded in the periods ahead after the full year '21 accounts for SWR are finalized. Following this agreement, Avanti remains under the ERMA arrangements to March 2022. We are currently in discussions with the DfT on the TPE termination sum. And if agreed, this is expected to be finalized in late January 2021 and for this to be paid at the end of March 2021. Given that the TPE PCS funding may only have been called later in the pre COVID financial trajectory model scenario, any termination sum payable will be discounted at 3.5% to reflect the theoretical timing. We anticipate that the TPE performance bond will also not be called. And as discussed before, on entering the ERMA, the TPE termination sum may potentially be deferred to September 2021. From an accounting perspective, the net impact of the change to ERMA agreements since finalizing the full year 2020 accounts and how the right-of-use asset impairment provisions that were initially recognized in transition to IFRS 16 for SWR and TPE has meant that the unapplied portion of the previous impairments have been reversed as a net credit to the P&L. We have provided for the termination sums on SWR and estimated TPE. And after taking the impairment release into account, this has resulted in a net charge to the P&L of GBP 18.3 million, that has been treated as an adjusting item. In agreeing the termination sums and booking the net adjusting charge of GBP 18.3 million, this crystallizes the effective end of the contingent capital exposure for TPE and SWR that we had prior to the onset of COVID. In moving to management contract-style contracts following the termination of the franchise on payment of the termination sums, it is anticipated that the respective train operating companies will continue to be consolidated in the group accounts, including the rail ring-fenced cash. Turning to the group cash flow on Slide 11. The focus of the group has been on maintaining business performance and cash generation as we navigated through the crisis, despite the material decline in revenue, the Road business generated GBP 131 million of EBITDA, of which GBP 59 million was applied in contractual CapEx commitments and paying for CapEx deferrals from full year 2020. The normal seasonal demands in working capital are around GBP 150 million at the half year as the business starts to fully deliver services following the summer holidays. Given the pandemic, the receivables working capital demands are now expected to increase in the second half as the business is anticipated to continue ramping up service levels. The current lower level of trade receivables has however been partially offset by the delayed timing of receipts under almost all the fiscal support measures that have lagged the service delivery. With the low level of services being run in the U.S.A., and hence the related low level of ongoing self-insurance provisioning included in EBITDA, this has meant that there is a higher level of net payments from the self-insurance reserve than the accrual through the EBITDA. This has resulted in the Road division generating GBP 187 million in free cash in the period. For the Rail division, with all the franchises operating under a no revenue or cost risk model, the operational and CapEx cash requirements have been funded through the mechanisms that are in place with the DfT. Now that we have moved to ERMA arrangements, we have also aligned the rail cutoff for the half year to be in line with the Road divisions. This has resulted in the working capital pre-funding received from the DfT under the emergency measures agreements for rail period 7 of GBP 167 million in the last weeks in September being recognized in the half year accounts. This is pre-funded working capital that forms part of the ring-fenced cash and this unwinds in the month. After servicing the pension scheme with some level of deferral as allowed under COVID-19 and paying debt interest costs and the cash costs relating to adjusting items, the group generated GBP 232 million in free cash in the period. Turning to the detail on CapEx on Slide 12. As we entered the current fiscal year, a substantial amount of the CapEx spend in the period was already committed from the prior year. The swift management actions we took on CapEx in the Road divisions was to stop all CapEx that was not fully committed from the previous financial year. Through the subsequent CapEx reviews, around GBP 176 million in pre COVID budgeted CapEx for the year has been reprofiled from the first half through deferrals to future periods, of which around GBP 50 million is a permanent CapEx savings, and we anticipate a further GBP 60 million to be deferred from the second half. As discussions with our contractual customers progressed and the revenue recoveries were agreed, we remain committed to fulfilling our CapEx obligations under our contracts. Vehicle CapEx has generally been funded through leases and supplier finance arrangements that we had in place. The Bus division CapEx primarily relates to environmental commitments as we progress to lower carbon fleet, several of which are electric and hydrogen buses. In total, the Road CapEx reduced from GBP 251 million in the prior year to GBP 174 million in the current period with GBP 115 million of this funded through the supplier credit and lease financing facilities. The Rail CapEx is fully funded by the DfT and through leases, if this relates to rolling stock, but nonetheless, forms part of our consolidated cash flow. Turning to Slide 13. We have undertaken a number of balance sheet actions to improve resources as well as actions to improve our financial flexibility as we navigate through the crisis. Firstly, in March, we secured a GBP 250 million bridge facility for the refinance of the GBP 350 million bond that matures in April '21. In April, we applied and drew down GBP 300 million under the Bank of England COVID Corporate financing facility. And we have redrawn this facility in December as an improved interest rate and to provide continuity of security of committed funding for the next 12 months. We believe that we have the continued ability to redraw this CCFF facility up to March 2021 for a further year. We have entered into roughly GBP 70 million of new leases for buses delivered in the period, and converted $195 million of supplier trade payable terms to a committed 7-year financing facility. In November, for prudence and to allow for more enhanced business and financial flexibility, we agreed with our bank and PP lenders amendments to our net debt-to-EBITDA and fixed charge covenants in March and September of '21. As anticipated, our bank covenant test for the first half was comfortably met at 1.5x and is broadly as expected. We have also made substantial progress with regards to the U.K. pensions, in the period, we finalized the 2019 bus scheme valuation and related recovery plan and in November, we completed a GBP 240 million annuity buy-in for all the pensioners of the Aberdeen local government pension scheme, where the pensioners represents round about 70% of our Scotland local government pension scheme liabilities and in so doing, removing our exposure to that risk, which represents a material reduction to the group's overall ongoing pension exposure. So in closing, we have made substantial progress since the onset of the pandemic. A number of the risks that we identified as part of our full year 2020 process have been addressed or reduced subsequently. However, some uncertainty and short-term volatility remains. We currently have around GBP 805 million of free cash before rail ring-fenced cash and undrawn committed revolving credit facilities, and this level has stayed broadly stable since April when the management actions and cost reductions we undertook in response to the pandemic took effect. I'll now hand over to Matthew for the business and strategy review.

Great. Thanks, Ryan. So let's move on and talk about each of the divisions in turn. Turning to Slide 15 and our First Student business. Student had a strong performance when considering the closure of the schools in the spring term and the seasonality of the business. As a result of our excellent customer relationships and diligent negotiations and rapid cost control, alongside the government's CARES and Cures funding, we were able to report a profit of $52 million in our first quarter. And even with the seasonality over the summer, the overall profit impact for the half as a whole was contained to $92 million despite a $570 million reduction in revenue. Looking to the new school year. This is always going to be more challenging than the blanket closure of all schools back in the spring. At the start of this autumn term, each school district had to determine how it wanted to provide schooling to its students and then had to determine whether and how transportation were to be provided. This was an immense logistical challenge for each district, and our experienced teams immediately stepped up to help each customer work through the impact this had on transportation. Once this was established, the business then had to work out the impact on each contract and sought to negotiate appropriate compensation from each customer. Many schools delayed the start of full in person teaching, some going fully online and some adopting a wide variety of hybrid approaches. Coming up to Thanksgiving in November, we had seen the number of buses being run up into the high 60%. But due to the increase in cases of COVID in the U.S.A, schools have started to revert back to an online model. As we stand today, we have 59% of our buses operating, either in full or through a hybrid model, leaving 41% attached to customers that are teaching fully online. As we did in spring, we've negotiated payment from customers where services are not in operation to maintain buses and preserve starving levels -- staffing levels. And we are currently securing around 75% of our home-to-school revenue with further discussions ongoing. Another way of looking at this is that we have only 14% of our buses that are not operating and where we're not yet receiving some form of compensation. So the schooling situation remains in flux, but our team is working well at achieving recoveries as well as managing costs in the short term. Commercially, the bid season closed out to 87% retention, which is effectively 95% across the whole contract base. And this was alongside significant wins from competitors and a reasonably sized outsourcing conversion. Looking ahead on Slide 16. For the remainder of the year, our key challenge is the speed at which schools reopen to in-person teaching. Our team is working well to chart the best path through this situation. And as we've noted before, the school bus industry has a unique employee demographic with an older driver population. And this is something we're mindful of as we continue to plan and manage the recommencement of school transportation. On the positive side, our acquisition pipeline is strong, and we continue to review select acquisitions in a disciplined way. We completed a bolt-on acquisition in Ontario in September and signed another bolt-on deal this month. We're also seeing opportunities to win business from challenged competitors. For the rest of the year, we anticipate that a large proportion of schools will be back to full in-person teaching by Easter, and that there will not be any significant return to charter until this time, too. We also believe that there's a strong likelihood that the new U.S. government stimulus bill will be issued early in the new year, providing additional funding and support to schools in this industry. But prudently, we're not taking this into account when we run our models. So while some short-term uncertainty remains, in the longer term, this is a fundamentally strong and resilient business. It's very clear that the well-being and education of students will necessitate schools returning in their physical form and that the business will return to growth. Our market leadership position has been fully validated through the resilience of the business throughout this unprecedented downturn, the strength of our management team and our high customer satisfaction scores. Moving on to Transit on Slide 17. Our Transit business has been very active throughout the pandemic. And whilst there is some variability across the subsegments, overall, the business is currently operating 71% of services. The team has negotiated significant amendments to contracts for those customers where service requirements have fallen, including receiving additional payments to cover fixed costs or to alter the mix of fixed and variable cost coverage. As a result, the transit division is currently recovering around 85% of its pre pandemic revenue. I do want to take a second to commend the Transit team for their diligence in delivering service and working with customers in this highly dynamic environment. This led to the creditable first half results. From a customer perspective, I'm pleased that our retention rate remains high at 91% and that we retained large contracts in Houston and Hartford valued at around $300 million. We've won a large power transit contract in Atlanta, which will generate $90 million of revenue over its 3-year life. The robust performance of our Transit business has allowed us to push forward with market-leading innovation. During the half, we've launched an e-bike contract with Nike and Lyft in Portland, a micro transit service in San Bernardino and the Fort Carson army base autonomous vehicle pilot. We've also launched our mobility-as-a-service platform, which is branded JAUNT and will commence trials this month in a Kansas University, where we're integrating the university schedule into the broader city's public transportation service as well as tying into ride share services. As we look forward on Slide 18, there remain challenges to service reinstatement and the customer response to increased coronavirus cases. But given the robust performance in the first half, the transit team are well positioned to manage the second half. Transit has demonstrated that it is the market leader, providing critical services to a wide variety of customers. The strong performance in the first half is testament to their ability to deliver operational performance retain its customers, win new business and to continue to lead with innovation at what is an exciting time for mobility. Moving on to Greyhound. Slide 19. This was the only sizable bus operator in the U.S.A. to continue running community critical services throughout the crisis. During the spring, passenger revenues reduced to 20% at prior levels and rose to around 55% of pre pandemic levels by September. Since then, the increase in cases and changes to state travel rules has resulted in a reduction of volumes and revenue is now running at around 40% of prior year. Greyhound was instrumental in ensuring that funds were set aside in the CARES act to enable this level of rural intercity busing to continue. And our team has exceeded the expected amount of grant award since we updated the market in July. The business has been agile in reducing its costs to match the reduction in demand, and we've also suspended services in Canada to reflect the closure of the border. On top of this, we continue with our program to rationalize the property portfolio, rightsizing our footprint and moving into intermodal hubs or new facilities better suited to our requirements, and we're progressing with strong interest in a number of key properties. Moving on to Slide 20. Without doubt, there is uncertainty as to how the demand for Greyhound certainties -- services will evolve once the pandemic has passed. And this is now the only one of our businesses with significant reliance on farebox to generate profit. More broadly, the previous tough competitive environment continues to be exacerbated by low gas pump prices. However, the business has held up to the crisis, outperforming the market and is well positioned to benefit from any further stimulus packages that may pass through federal government in the new year. When we talk to the full year results in July, we confirmed our commitment of divesting this business but said that the timing needed to be right. We have the plans in place to grow out of this crisis and are positive about further assistance that will come from government to enable us to continue to provide critical but unprofitable services while the pandemic continues in the short term. When there's clarity on these measures, they will form part of our ongoing sales discussions. In the meantime, as noted above, we continue to progress plans to monetize our property portfolio where appropriate values are available to us. Moving over to the U.K. on Slide 21. Before we turn to the specific divisions, I thought it worth sharing a couple of graphs on U.K. activity. Now what these graphs show us is that as a result of government procurement of our services, we're running close to 100% of services in both Bus and Rail in the U.K., all the while maintaining a socially distanced environment to protect passengers and staff. From a passenger volume perspective, in bus, you can see that in September, the volumes had exceeded 50% of the prior year and what are around 60% in some areas. This fell due to the various national lockdowns in the autumn. But now that these have ended, we're seeing passenger volumes back up to around 50% of prior year. This underlines the critical part that buses have to play in connecting communities and enabling key workers to travel and other essential journeys to be made. In contrast, rail passenger volumes were significantly below those of bus and are currently running at around 20% of prior year volumes. And this reflects the impact on the pandemic on commuting, leisure and business travel. The different volume curves reflect the differing passenger demographics and the travel purpose for each mode of transport. So on Slide 22, having talked about volumes, I'll talk about bus in more detail. The regional bus industry in England continues to benefit from the CBSSG restart program, which procures 100% of our buses so that we can provide a full socially distanced service, and the situation is similar in Scotland and Wales. With the use of cash on our buses now at an all-time low of 28% of commercial revenue, we've continued to innovate with our customer offering. Our now award-winning app that shows real-time bus seats capacity has been complemented by further web and app enhancements to help customers identify which services are busy during the day and when are the quieter times to travel. We've also expanded our trial of fare capping, similar to that used in London from Aberdeen and Doncaster to Bristol in South Hampton. Our teams has done incredible work reshaping networks in response to changing demand levels, and we've also developed significantly improved analytical tools to manage networks and schedules. We continue to lead the industry in terms of zero-emission buses and meeting our air quality obligations. During this period, and an industry first, we've taken delivery of 5 double decker hydrogen buses in Aberdeen, with another 10 arriving in January as well as a further 39 electric buses across York, Leeds and Glasgow. We now have 38% of our diesel fleet at the Euro 6 emission standard. And in the next few months, we will complete our 1,000th air quality retrofit. By the end of the year, our financial year, will have 48%, nearly half of our fleet at either Euro 6 standards or better. Looking ahead on Slide 23. The government has recognized the critical nature of our services and has committed to keeping CBSSG in place while social distancing is mandated. We expect this to continue until around Easter, the end of our financial year. The government is cognizant of the fact that some bus services will remain unprofitable until volumes and revenue levels are back to normality. So further funding is expected to avoid significant reductions in service. As a result, the business will remain stable through to the spring of 2021. After this, we'll be working with local authorities to ensure that this funding is in place to maintain services that no longer have sufficient patronage but that are required to provide a service to the community. And this has been reflected in the amounts allocated to bus funding in the annual spending review in November. It's difficult to be definitive as to how future travel patterns and demand of bus services that will turn out, and our models do not assume that demand will return to prior levels in the short term. However, our customer surveys are telling us that most of our historic customers want to get back on the bus. In addition, we can take a level of comfort from the fact that bus volumes remain resilient compared to other forms of public transport and have already returned to around 50% of prior year. We've completed the groundwork to establish how our networks could look once social distancing is removed and once we can assess future travel patterns. We know that working patterns are likely to change with more flexible working, but people will still need to and want to travel. The bus is still a very cheap mode of transport and given the improvement in our customer proposition, we could see people giving up costly motoring in favor of public transport. Managing our network and improving scheduling efficiencies and working practice will enable the business to continue with its margin improvement strategy. We will also continue with our digital strategy, relentlessly improving our customer offering and commercial insights. I said before that while there will be challenges in the short term, we've also been able to see what bus travel can look like when congestion is eliminated. We've 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. I've also said that I hope that the dramatic improvement in air quality that we've seen would encourage a faster transition to vehicles with better emission control and those meeting 0 carbon standards. So we're very encouraged by the ambitions of the Green Industrial Revolution that was announced by the government in recent weeks with additional funding for ours and other infrastructure industries as well as new targets to transition transport to zero-emission propulsion. This fits with the commitment we made in July to operate a zero-emission and 0 carbon fleets by 2035 and to not buy diesel buses in the U.K. after 2022. We believe that buses have a significant part to play in building local economies back better and greener. Zero-emission targets will need to be met through encouraging people out of their cars and onto public transportation. And our commitment is to provide a pain-free, affordable journey as well as a zero-emission bus. We will need to do this in partnership with national and local governments as we work together to replace fleets in a green way as well as prioritize the bus to reduce congestion and improved journey times. Moving on to First Rail on Slide 24. We provided a number of dates on rail over the past few months, including the announcement we made this morning. So I think it's sensible just to reiterate where we are with each franchise. As we've announced today, we've reached conclusion with the DfT as to the termination sums for West Coast partnership, Avanti, and the South Western Railway. This means that franchises are now effectively ended at the end of the ERMA, so we move forward to negotiate the terms of the new directly awarded national rail contracts. For West Coast partnership, the existing ERMA runs until the end of March 2022, after which a 4-year plus 2-year contract will be negotiated. For South Western Railway, the ERMA runs until the end of March 2021, after which a 2-year plus 2-year contract will be negotiated. This leaves us with the termination sum for TPE to still be agreed. Whilst Ryan has noted that we've accounted for this on a prudent basis, there is still a very active and ongoing discussion taking place to agree a fair and reasonable settlement. This position will be concluded before the end of our financial year. At this point, TPE would remain on an ERMA until the end of March 2021, with the DfT able to extend by 6 months, followed by the 2 plus 2-year contract to be negotiated. Great Western Railway, which was under a direct award, has had its EMA extended to at least the 26th of June 2021, with a possible 20 -- 21-month extension. After which point, we would move back to the original franchise terms, but with the rebasing of revenue as well as the forecast revenue protection mechanism. We do not anticipate any significant change to the existing cash flow mechanisms with these new contracts. So when we spoke to you at the full year results in July, we highlighted a potential GBP 294 million downside cash exposure from the rail portfolio. The announcement today has removed GBP 118 million from this exposure. And we provided for and taken into account in our cash forecasting the remaining maximum cash exposure of GBP 160 million. So turning to Slide 25. What does the future of our Rail business look like? For a number of years, I've been advocating for rail industry where private operators bring expertise and innovation to run the railway, but one where there's a better balance of risk and reward. I've also advocated for an industry that could be far more responsive to customer demands around digital transformation, fare reform and operational service. As we stand today, we've removed a significant amount of uncertainty from our business and no longer take revenue risk on our franchises. The performance regime focuses on the key issues that are important to the passenger, customer service and operational reliability. We now represent around 30% of the U.K. rail industry and so are very well placed to work with all stakeholders to build a railway that is fit for the future. So turning to Slide 26. I want to briefly touch upon the broader portfolio rationalization strategy. As you know, we were already on the path towards disposal of our North American contract businesses by the time that COVID struck in March. In July, we told you that we'd taken a breath. We are now in discussions with a number of credible buyers who recognize the long-term fundamentals of these businesses and who are able to look through the short-term issues and provide a compelling valuation. Whilst it's not right to speculate further on the outcome of these discussions, we are committed to unlocking value for shareholders and to do this in a way that balances pace, execution certainty and the value. When the portfolio rationalization is complete and value is delivered, 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. First Bus is a market leader in regional bus services and remains the best value for money and most flexible and responsive mass transportation solution. Post crisis, we'll have the opportunity to reshape the network in U.K. Bus, allowing us to drive margins up. We have a significant role to play in the U.K.'s transition to a higher air quality, lower congestion and 0 carbon economy, and this will drive growth from new public transport passengers. And it's clear that the U.K. franchising model, as we knew it is over, but we now have some visibility into the new directly awarded national rail contracts. As the operator of 30% of the market and with our deep-rooted skills and experience in this industry, we are well placed to move on to the new model with this better balance of risk and reward, enhancing service and operations for all passengers. Fundamentally, I believe in the long-term value of public transportation in the U.K., and it's clear that all stakeholders believe that our services are vital to keeping the country moving and contributing to delivering the country's 0 emissions commitments. This new business will need to have a robust investment-grade balance sheet, will have a reduced legacy pension burden and will need adequate capability to support the investment required to reach 0 carbon over time. The business would also need to sustain a dividend. So let me close off by reiterating my pride and gratitude to our workforce for maintaining critical services and for supporting their communities during this time of crisis. The uncertainty around our business and the broader public transport market still exists, but it's significantly reduced from the position over the summer. Performance has been stronger than expected. Liquidity has been improved, and we have much more visibility of how our businesses will emerge from this crisis. What is certain is that our businesses continue to be vital to their countries and their communities and the need for efficient customer-focused public transport is ever more important as we move towards 0 carbon economies. Our results have demonstrated that our customers and governments agree and are willing to work with us to continue to deliver these services. Finally, 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. Well, thank you for listening to that, and I'll open the call up to questions.

[Operator Instructions] Our first question comes from Stephanie from RBC.

The first one is on the progression of the divestment of your North American assets. Could you please for each of the Transit Greyhound, maybe give us a little bit more visibility on the time line. Do you think anything could be announced before the end of your fiscal year, in March next year? Or would you rather expect this to close in the next fiscal year? So anything on that would be very helpful. That's my first question. The second question is regarding your expectations for the full year. If you could maybe help us on the free cash flow side and the spend, the moving part, and in particular, the working capital. You had obviously a pretty nice GBP 169 million saving in the first half. How much of that could reverse in the second half? And on the Rail side, operating cash flow as well, what do you expect that to look like for the second half given the prefunding benefit in the first half and then maybe putting all that together with your full year CapEx expectation? How much do you expect free cash flow could be for the full year? And then my final question is on FirstGroup -- First Bus, sorry, margin, once the government supports end -- and I know it might would be a few months ahead of us. But how much time would you need to adjust service levels to end demand? And what is your expectations once this is done off the potential of EBIT margin and we used to generate mid high single-digit EBIT margin. Go ahead, share with us a sensitivity analysis showing how much margin impact there could be from lower end demand? Would you have anything similar to share with us?

Great. Well, thank you for that, Stephanie. I think I'll cover the first question and the third question, and I'll let Ryan talk about the operating cash flow. Yes. So look, I can understand the question around the sale process timing. I think what we're demonstrating here is we launched cell process in March. We took a breath over the summer. In September, we were encouraged by the significant interest. And now we're saying we're in discussion with a number of credible buyers who are able to look through the short-term issues. So we're demonstrating progress and we have to balance the pace and the execution certainty and the value. I'm not going to say much more than that. It's not really in my interest to sort of get ahead of this, get ahead of what's happening here. All I can say to you is we are making progress. We're running very hard at this. And as always, with any of these kind of transactions, we will update the market when there's something more to say on that. On the first bus margin, yes, I mean, it's an interesting question. I think -- and it's one that is very, very relevant, I think, to all regional bus operators. And I think what I would say on that is there's a number of issues. Firstly, we've got this additional funding come out from the government. There's around GBP 300 million announced in the spending review recently. And we have been having very active talks with the DfT around the way this might work. So the commitments are, we will continue to get funding and the grant while social distancing is mandated on our buses. So obviously, at the moment, we're running at around 50% of capacity. When that looks like that will end, there will be an 8-week period of notice that kind of effectively gives what you could call a soft landing. As we go through that process, allowing us all to really reconsider how the networks are looking at that point. And yes, we can adjust our networks in a relatively short period. As I said in the speech, the government is cognizant of the fact that if the volumes aren't back up to where they were, then there are going to -- there are going to be challenges about running services. But what we've seen in this whole situation is that everyone's recognized how vital a lot of these services are. And you already have that in local authorities providing tender funding to provide services that don't make financial sense. So there's a lot of discussion going on at the moment about the recovery partnerships that will emerge from the period after the 8-week notice has been given. So I think we're all very cognizant of it. We are very clear that we want to continue to provide services, but we have to be able to make sure they are sustainable, particularly in the context of investment in new buses. And the DfT are working very hard with us to sort of make sure that, that happens. I mean in terms of the overall margin objectives, we had plans before this crisis hit, and we would expect to continue our work on network restructuring and looking at our working practices to continue to push our margins up as we get back to more normality. With that, I'll let Ryan talk about the -- just give you a general sense of where we are with cash flow.

Stephanie, thanks for those questions. I think on the working capital side, as I called out in the presentation, we need to sort of break this down into 2 categories, and I'm glad that you highlighted sort of rail separately. So if we firstly look at our road businesses, principally in our Student business, we've called out roughly about GBP 150 million of normal seasonal working capital demand that would have happened up to the end of the September reporting period. That's being deferred into the second half. But clearly, it's dependent, too, on an increasing level of children going back-to-school and transportation services increasing. So that's broadly about GBP 150 million worth of working capital swing into the second half. For the rail cash flow, as noted in the presentation, we've had the -- we've had a pre-funding working capital of roughly about GBP 167 million that was paid in by the DfT that unwinds in the month of October. In other words, that's expected to unwind in the second half. We aren't seeing any expected changes to the ring-fenced cash levels, which, as you know, under the ERMAs are managed between sort of a base, a ceiling and a floor. And so we're not expecting a huge amount of volatility on that working capital. But I do note the -- I do note the GBP 167 million that will unwind, which was prefunded in rail reporting period 7. As far as the CapEx expectations in the second half, we expect those to be broadly matched by the increased level of EBITDA in the second half. And so those should be sort of a net to 0. I hope that sort of answered your question and given you sufficient amount of guidance.

Our next question comes from Najet from Bank of America.

Just to come back on Stephanie's question regarding the disposal of the U.S. business. Would you be -- are you discussing to sell the businesses, the 3 businesses separately? And my second question is regarding the level of profitability for students. When do you expect -- what are your expectations for the second half given that you're operating around -- you're expecting to get around 75% of the revenue?

Sure. Okay. Well, yes, let me just come back to this point about disposal. So the disposal process is very clearly in 2 parts, okay? So we announced the Greyhound disposal as a separate transaction before we announced the disposal of the North American contract businesses. So they continue to run very, very separately, very different dynamics, and they both have very different positions. So I think it's -- just to be clear, Greyhound is a separate process. And then we have the North American contract businesses that are separate as well. And we've always said, we're running -- we're talking to people about the sale of both of those North American contract businesses. But we'd always be open to selling those separately, but it really depends on value. So again, it's all about people making compelling value case for us. I mean, in terms of the level of profitability, look, as we said back in July, we are not giving guidance. So we're not giving sort of very clear guidance at this stage. We've reflected there's still a level of uncertainty, and we still got a number of months to go before our financial year, and particularly given the things changing, and the March period is always a very sort of strong one for us. So what we're expecting is that the -- we are looking with the increase in the vaccine. We're looking -- and we're seeing different reactions to different states. We're looking at schools starting to go back again during the first quarter of the calendar year. And we said that we expect a large proportion to get back sort of by the Easter time. And then our expectation is that going back into the next academic year, we'd expect things to be sort of largely back to normal, not entirely back, but largely back to normal. So we see things growing from here. And that's the way we've sort of put our models together.

[Operator Instructions] Our next question comes from Alex Paterson from Peel Hunt.