FirstGroup H1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 14, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the First Group 2025 Half Year Results Presentation. In a moment, I will hand over to Ryan to take you through the financial performance for the half year, after which I will provide an update on the business performance in Bus and Rail before we take your questions at the end. And on to Slide 3. We continue to make progress in strengthening our business and we remain confident that we are well positioned to deliver further long term sustainable growth as our industry enters a period of transition under a new government. Our strong performance in the first half of twenty twenty five demonstrates progress on strategy and reinforces our track record for delivery.

Operator

In 1st Bus, we have improved operational performance, driving revenue growth and margin expansion, and we've made a number of acquisitions as we grow and diversify our bus earnings. In First Rail, good operational delivery continues in our train operating companies and affiliate businesses. In our 2 open access operations, Hull Trains and Lumo, we continue to grow revenues and earnings as we work to materially increase our open access capacity. We have also received further recognition of our strong sustainability position, reflecting significant investment alongside government co funding as we electrify our bus fleet and depot infrastructure at pace. This also supports our credentials when bidding for new contracts.

Operator

We continue to assess a strong pipeline of organic and inorganic opportunities in both bus and rail, which will drive growth and further diversify our earnings. Our interim dividend has increased by 13% to 1.7p per share, and this reflects the confidence and progress made in delivery of our strategy. We also remain committed to returning excess capital to our shareholders and have today announced a new $50,000,000 share buyback program. We also expect to maintain earnings per share in full year 2026 as growth in bus and open access rail is offset by the commencement of the transfer of a train operating companies to the public sector. Turning now to Slide 4.

Operator

This sets out some of the key highlights in the first half against our strategic framework and our 4 key priority areas. We continue to improve operational performance in bus and remain on track to reach a 10% adjusted operating profit margin in the second half. Improved driver recruitment has also enabled us to deliver an increase in bus service miles operated as we look to drive more demand for our services. We're publishing bus net promoter score for the first time as a KPI and are encouraged by the plus 13 result, which will support insight and delivery of a better customer experience. Driving modal shift is a key component of our strategy.

Operator

We have made good progress with 4% underlying volume growth in bus and encouraging revenue growth in both Lumo and Hall trains open access rail and bus adjacent services. We are delighted to receive recognition on the progress made on sustainability. MSCI have upgraded FirstGroup to their highest possible ESG ranking of AAA. And in bus, we have continued electrification of our fleet and depot infrastructure. Growth and diversification of our earnings remains a key strategic priority.

Operator

Highlights include the acquisition of First Bus of Anderson Travel and Lake Side Coaches, which will support growth in the adjacent services market. We've also acquired the track access rights from Grand Union for a new open access rail service between London, Houston and Sterling. I will now hand over to Ryan, who will take us through our financial results for the half year.

Speaker 1

Thank you, Graham, and good morning, everybody. The group has continued to make decent progress during the half year across all of the businesses, including a much better mix of earnings coming from more sustainable commercial revenue streams. In my presentation, I'll be covering the following three areas: the bus business, well on the path to 10% operating margin for the second half of the year and also most positively off a much higher revenue base the financial progress in rail and the expected cash generation that's going to come out over the coming years and finally, the earnings momentum for full year 2025 and maintaining EPS as we look ahead into full year 2020 6 despite the planned government policy changes. Turning to the financial summary on Slide 6. I've added a new financial KPI that focuses on the revenue of the group that drives shareholder value that now excludes the DFT TOK revenue other than the fees that we earn, given that we take limited revenue risk and the income is purely fee based.

Speaker 1

At the bus business, the prior year included an extra week in reporting that has a minor drag on the current year variances, with the reported numbers having CAD 19,000,000 of revenue and CAD 1,400,000 of profit in the comparative period as a result of the extra week. For the half, the group's continuing business adjusted revenues are up year on year as passenger demand, improved net fare increases and yield management were implemented in bus and open access. Rail, combined with adjacent revenue growth, were offset by lower government grant funding as the market continues to normalize. Underlying adjusted revenues are up 8%, adjusting for the extra week and the contribution of the Oldham Depot in Manchester in the first half of twenty twenty four. The revenue improvements in the bus and open access rail have only been partly offset by cost increases.

Speaker 1

However, combined with lower variable fees in the management fee talks and the extra week in full year 2024 resulted in adjusted operating profit for the group at GBP 100,800,000 being in line with the prior year. The positive operating profit performance has, however, been impacted by IFRS 16 adjustments in Rail being slightly lower, resulting in the group delivering £51,800,000 in earnings. But with the share buyback program that ran throughout the full year 2026 and up to August has meant that EPS at 8.5p per share or up 4.9 percentage points year on year. This robust underlying business performance and strength of the balance sheet have resulted in the Board declaring an interim dividend of 1.7p per share, up 13% versus the prior year. The dividend is in line with the current dividend policy of around 3x adjusted earnings, with onethree paid at the interim.

Speaker 1

The adjusted net debt for the group ended the period at €200,000 versus a net cash of €77,100,000 in the prior year, with the strong cash generation from the business being offset by £165,000,000 in capital deployment in the business GBP 125,000,000 being returned to shareholders through the buyback program and dividends paid. Turning to the bus performance on Slide 7. Reported bus revenues are up GBP 8,800,000 with higher commercial and adjacent services revenue growth only partially offset by lower government funding, where these were down £12,400,000 year on year. As noted before, the prior year did include an extra week of circa £19,000,000 in revenue. And excluding this and the contribution of Oldham that went to franchising in Manchester, underlying revenues were up 8%.

Speaker 1

The increase in revenue has been underpinned by solid passenger demand growth as well as continued expansion into the B2B and contract markets from both organic and inorganic growth. Strong revenue growth has ever only been partly offset by underlying inflation cost increases of roughly 3% of the inflationary cost base, particularly in driver wages and engineering staff, with these cost increases mitigated by other efficiencies on the transition to EV fleet as well as the energy hedging program that we've got in place. As a result, Bus delivered an operating profit of £41,100,000 which is up £5,100,000 or 14% and a sequential margin improvement up to 8%, that is 90 basis points up year on year, reflecting a decent trend in what is a seasonally lower first half and good progress towards a 10% margin in the second half. The bus post tax return on capital employed at 11.4% is marginally up year on year as the business continues to generate better operating profit or asset base that has increased mainly as a result of further growth in investment in electrification as well as working capital flows and the changing the way the funding operated in the bus business over the last 12 months, with this funding now being in arrears.

Speaker 1

Turning to Rail on Slide 8. The Rail business continues to deliver strong financial performance in the period, including a better distribution of earnings as we continue to diversify the Rail portfolio, with open access and additional services revenue of GBP 112,300,000 up 12% on the prior year. For the management fee tax, these delivered an attributable net income of GBP 14,000,000 after tax and non controlling interests, which is down GBP 9,200,000 on the prior year, with the prior year benefiting from the catch up in fees from full year 'twenty three performance. The open access business made a combined operating profit of £18,100,000 in the period, up £2,400,000 driven by continued strong demand and yield management, only partially offset by inflation. The additional services in Rail delivered an operating profit of £5,700,000 with steady progress in delivery by all the business units versus the prior year, offset by some of the business development costs that we're incurring in the current year, mainly in bidding for the Elizabeth line in London as well as progressing the open access expansion applications.

Speaker 1

This resulted in a reported adjusted operating profit of GBP 67,900,000, which is an underlying improvement on prior year if you exclude GBP 13,000,000 of performance fee recognition relating to full year 2023. Turning to EPS growth on Slide 9 on a post tax basis for the variances. In the period, earnings from the DFT TOX are 1.3p lower, and with the focus on diversifying our portfolio to a better quality earnings underpin, the DFT TOC earnings are now down to less than a quarter of the group's EPS, with this relative contribution expected to continue to decrease as we look further ahead. Open access and additional services contribute an additional 0.2p in growth, with this now at 2.6p of EPS in the half is a materially higher proportion of earnings now coming from more sustainable part of the rail business. First Bus increase in operating profits contributed 0.5p to the improvement, and central costs are 0.4p lower year on year, partly driven by cost efficiencies as well as from allocating a higher proportion of central costs to the divisions to where the activity relates.

Speaker 1

Interest costs were 0.5p higher due mainly to lower interest received on lower cash deposits. The buyback program that ran throughout full year 2024 and up to August of the current year has resulted in a lower number of average shares and issues, and that has added 1.1p to the EPS. So as can be seen in the chart, the work that we've been doing over the past few years has not only grown the EPS, but more equally importantly, has resulted in a far better distribution in the quality of earnings. Looking at the adjusted cash flow on Slide 10 that excludes ring fenced cash in Rail as well as the impact of IFRS 16. The group generated GBP 78,500,000 in EBITDA before the Rail Management fee TOC cash inflows, where we received GBP 9,200,000 in the period relating to TPE that ended in May 2023.

Speaker 1

As a reminder, these management fees are generally paid by way of dividend in the second half of the following year following the completion of the audited accounts. Working capital was a net GBP 15,600,000 outflow in the period, mainly relating to the timing difference in receivables that are largely expected to reverse in the second half and resulted in a total of GBP 72,100,000 in capital generated from operation in what is a seasonally lower first half. This underlying capital generated was deployed in investing GBP 61,800,000 in CapEx, net of grant funding, primarily in the bus on electrification of the fleet, where we have the largest EV fleet in the regional bus market, combined with a small investment in open access growth from the acquisition of the Sterling to London Rights. First Bus generated £10,500,000 in disposals, mainly relating to the battery sales into the strategic joint venture partnership with Hitachi. Pensions and Employee Benefit Trust payments of £12,700,000 includes the shares acquired by the Employee Benefit Trust.

Speaker 1

So it could GBP 3,000,000 was paid relating to the pension settlement for the exit from the local government pension schemes in the prior year and the GBP 6,000,000 that was paid on the Greyhound USA pension buyout. £7,000,000 was paid in cash interest and tax, mainly relating to the interest on the now repaid 2024 bond and new finance lease arrangements for the electric fleet and bus, offset by interest earned on cash balances. There was a nominal amount of cash tax paid in the period, with a low level of cash tax driven by the historical losses and the accelerated capital allowances that should now apply for several years yet, given our decarbonization investment program. GBP 24,000,000 was paid by way of final dividend for full year 2024 and GBP 41,400,000 was spent in completing the share buyback program. This resulted in the group ending the period in a marginal net debt position.

Speaker 1

Looking ahead for the financial outlook for full year 25 on Slide 11. The group continues to make good progress year to date, and the outlook for the year is marginally ahead of our expectations that we set out in June, with the further benefit of the continued improvement in the mix in earnings. The bus business is anticipating to make sequential operating profit progress year on year to full year 2025, in line with our expectations and is anticipated to reach the 10% margin in the second half of the year. At Rail, we anticipate delivering a result in full year 'twenty five ahead of our expectations, with the management fees from the 3 talks in line with expectations and the Open Access and Additional Services businesses are anticipated to deliver results ahead of full year 'twenty four, given the strong demand in Open Access, partially offset by the inflationary cost pressures. We anticipate incurring GBP 50,000,000 to GBP 55,000,000 in interest, of which £40,000,000 relates to IFRS 16 accounting, due mainly to the no risk DFT rail leases.

Speaker 1

We remain on track to deploy circa £125,000,000 in CapEx, net of grants in bus, mainly on the electrification of fleets and depots, after taking into account cash benefit of circa GBP 15,000,000 from the Hitachi Strategic Battery Partnership. Rail remains capital light, with some investment expected for inorganic growth opportunities in Open Access. We anticipate to end the year in a marginally adjusted net debt position after paying the ordinary dividends and assuming around half of the GBP 50,000,000 share buyback program announced today is completed by year end. This net debt guidance is, however, before the execution of any further inorganic growth opportunities that we continue to evaluate. Finally, on Slide 12.

Speaker 1

Given the announced changes to government policy going forward, in particular relating to the DFT talks, we have set out some guidance for full year 'twenty six, where we expect EPS to be maintained year on year. At the bus business, we anticipate making further progress in both top line growth from the organic and inorganic growth activities that we've undertaken as well as the sequential growth in operating profit. The recent government budget does have an impact on the business. However, we believe that these should be fully mitigated through yield management, operational efficiencies and other management actions. In First Rail, the government's announced policy is to bring the national rail contracts into public ownership at the earliest possible opportunity.

Speaker 1

The SWR contract ends in May 2025, the GWR core contract ends in June 2025 and the Avanti West Coast core contract ends in October 2026. All contracts require the rail business to be able to continue to support the operational activities for at least a year after the contract end date. And hence, we anticipate that the additional services business will be providing support throughout the full year 'twenty six on similar terms. As the management fees for the DFT talks are paid a year in arrears, we anticipate that at least £80,000,000 in cash will be received from the DFT talks from April 2025 onwards if the franchises are nationalized at the end of the core terms. This includes the supporting additional services businesses after any recognition of costs that the group may incur.

Speaker 1

The open access business is expected to continue to grow from the existing strong base, with the inorganic opportunities only contributing beyond full year 'twenty six, however, with anticipated start up costs during full year 'twenty six. In terms of investment in bus, underlying CapEx is anticipated at circa GBP 100,000,000 which is at a lower level than in recent year run rates given our accelerated investment in electrification in the bus business and the fleet now being well capitalized with the average age of less than 9 years. By the end of full year 'twenty six, we anticipate on having over 900 electric vehicles or more than 20% of the fleet in operation. The funding valuation for the pension sections of the pension scheme is currently ongoing and is anticipated to be finalized by July 2025. The finalization of this valuation determines how much of the £79,000,000 escrow monies will be returned to the group, and there's a further £22,000,000 relating to the group pension section that has a longer review period.

Speaker 1

Our strong well capitalized balance sheet and cash generative business model provides the group with great flexibility and options for driving value creation for shareholders, both in the deployment of growth capital as well as returns as with the $50,000,000 buyback program announced today. And I hand over to Graeme for the business review.

Operator

Thank you, Ryan, for the comprehensive financial update. I'll now move on to Slide 14. The First Bus team have continued to make good progress against the backdrop of a challenging economic climate. They've delivered an operating profit margin of 8.0 percent in the first half, up from 7.1% in the prior year and remain on track to deliver the 10% target in the second half of twenty twenty five. This follows a number of years of sequential progress in the business and consistency in delivery of margin.

Operator

Underlying passenger volumes were up 4% as we carried 204,000,000 passengers in the first half. Passenger volumes have continued to benefit from service improvements, free under 22 travel in Scotland and the 2 pound fare cap in England. The 2 pound fare cap will be replaced by a 3 pound fare cap from 1st January and will run to the end of December 2025. The detailed terms and conditions have not yet been confirmed, but we believe the 3 pound fare cap will still protect the majority of our customers from the largest increases back to uncapped fares and in turn protect the volume uplifts we have seen on the longer journey routes. We are currently reviewing our commercial strategy and any relevant changes will be implemented in January 2025.

Operator

As we complete this work, we will also look at options to manage the circa £15,000,000 impact of the budget change to employers' National Insurance contributions. As with any government policy change that negatively impacts our business, we anticipate that it will be managed through a combination of price shield management and operational efficiencies. Our operated mileage has increased by 4% in the first half, and we've grown our underlying revenue per mile by 5% as a result of improved passenger volumes and better service reliability due to continued focus on driver recruitment and training. This maintains the progress made in prior periods as we focus on efficiently growing our bus revenues. And moving on to Slide 15.

Operator

We continue to see opportunities to grow our bus business in the U. K. A number of Duval Merrill Authorities have indicated that franchising is the preferred future option. We continue to build relationships and have developed a strong commercial team to participate in each of the bid processes, with the first likely being Liverpool City region. There's still uncertainty over which franchising models will be deployed and in particular around the fleet and depot ownership.

Operator

Different areas could certainly have different models. Our balance sheet strength leaves us very well positioned to participate as franchising rolls out. We also continue to see both organic and inorganic growth opportunities in adjacent services, primarily in airport services, workplace shuttles and B2B and B2C Coach. Half year revenues have doubled over the last 2 years, and we continue to build on this with the recent acquisitions of Anderson Travel and Lakeside Coaches. Both quality businesses purchase at a fair price and they also increase our depot footprint.

Operator

On electrification, we continue to make good progress, thanks to our significant investment over recent years and our in house expertise. We now have 15% of our fleet 0 emission and 650 charging outlets now in operation. We continue to build 3rd party charging relationships, and we expect this to grow as we build out more depot infrastructure. Another significant milestone for First Bus has been our entry into the repower market for mid aged diesel or hybrid buses, which have been converted to run on electricity. In addition to an earlier partnership with equip mate for 12 electric buses in York, we have placed the U.

Operator

K. Largest single repower order with Wrightbus for 32 electric conversions scheduled for delivery in full year 2025. This adds to our decarbonization strategy and gives us the potential for future development in this area. Moving on to rail on Slide 16. Our teams managing the national rail contracts at GWR, SWR and Avanti West Coast Partnership have continued to focus on operational delivery, innovation and cost control as we work hard to offer better rail services to our customers.

Operator

Attributable net income from the national rail contracts has reduced in the first half, but that's solely due to the £13,000,000 higher than accrued full year 2023 variable fees in the prior year. Passenger volumes continue to grow up in an encouraging 7% in the first half of twenty twenty five to £131,000,000 We also continue to manage several significant investment programs, including the introduction of new fleets for both Avanti and SWR. The recent introduction of the Class 807 electric trains has allowed us to offer more services to Liverpool. Avanti is one of the few rail operators in the U. K, increasing the level of services to customers.

Operator

Our additional services businesses continue to progress and perform well, with revenues up circa 10% in the first half of twenty twenty five. We've also commenced the operation of the London cable car in June and submitted a bid for the Elizabeth line with our partner Kyolas with the result expected soon. In line with government announced policy, the DFT train operating companies will move into public ownership. We are still awaiting further direction on how this will take place, but expect further detail over the next few weeks. As we go through this period of transition for the group, we anticipate that our national rail contracts will generate a cash inflow of circa £80,000,000 over a 3 year period from April 2025.

Operator

And now moving on to open access rail on Slide 18. Hull trains and Lumo continue to exceed expectations and deliver material improvements in financial performance with growth rates significantly above the market. They are demonstrating what private operators can do for the industry. They're stimulating demand and providing competitive, sustainable and reliable services to underserved markets. Both businesses saw double digit revenue growth in the first half and an increase in passenger numbers.

Operator

Seat capacity utilization at both Hull Trains and Lumo remains significantly above the national average, and we've added capacity on Hull Trains to meet demand on certain peak services. Furthermore, both Hull Trains and Lumo continue to be amongst the most reliable operators in the country. We've also highlighted the positive role open access plays with key social and economic contributions, including more affordable travel and investment in apprenticeships. We continue to pursue growth opportunities where we can further leverage our capability and experience. We have recently acquired the Grand Union track access rights to run a new open access rail service on the West Coast Mainline from London, Houston to Sterling.

Operator

Confirmation of our plans and operational start date will be available soon. And on service launch, we'll increase our overall open access seat capacity by circa 50%. As you're also aware, we have several other open access applications in progress with the regulator, and we expect to start being notified of updates and decisions in the 1st 6 months of 2025. Our ambition to drive long term growth in open access rail remains clear, with good progress made over the last few months. Moving on to Slide 19 to conclude.

Operator

Our strong set of results in the first half of our financial year demonstrates that our strategy continues to deliver. We remain confident of our strong position as we continue to diversify our earnings and prepare to enter a period of transition in rail. As we've set out in today's presentation, we expect to deliver on our full year 2025 commitments and maintain earnings per share in full year 2026. In First Bus, we have a clear plan to navigate the evolving market, to grow and diversify our portfolio and to deliver sustainable earnings growth. As the electrification of our fleet and infrastructure continues at pace, we will look to unlock cost efficiencies and leverage our capabilities when bidding for new contracts.

Operator

In First Rail, we will continue to prioritize contractual and operational delivery in our national rail contracts, look to materially expand our open access capacity and revenues and to bid for contracts where we can bring forward our experience and capability. First Group will undoubtedly change over the next few years given developments in government policy, but we're well placed to manage this transition. Our strategic framework will maintain focus on delivering every day, driving modal shift, leading in environmental and social sustainability, and diversifying and growing our portfolio. Furthermore, our balance sheet capacity leaves us well positioned As we continue to evaluate a strong pipeline of growth opportunities in both bus and rail, we remain committed to our disciplined capital allocation policy, and we will return any surplus cash to our shareholders. In closing, we have delivered good financial and operational progress in the first half of twenty twenty five, but we still have much more to do and remain focused on the task at hand.

Operator

Thank you for your time this morning. We will now open to questions. We will start with questions from the room and then go to the webcast.

Speaker 2

Thanks. Good morning. Joel Koo from Panmure Liberum. 2 from me, if I can. Firstly, on the NPS the bus NPS score, I know you said you're publishing it for the first time.

Speaker 2

How has that evolved over time in terms of the data that you have? And what do you think is driving that positive NPS? And secondly, you talked about repowering. I was just wondering whether you could indicate what's the difference in cost, sort of CapEx cost for a sort of repowered bus versus a brand new EV? And what useful life do you get from a repowered bus?

Operator

Okay. Thank you very much. I'll take the first question. Maybe, Ryan, you could do the second. On MPS, I mean, it's quite early days.

Operator

We've introduced this about 6 months ago, but been working on the introduction for a period of time. I mean, we are very focused on really looking at the customer and the customer's experience in bus and what we can do to improve it. And we wanted to take a tried and trusted methodology and apply it to this industry. And we want to be open about it and make it visible to investors in the market because it's a real reflection of the quality of your operation, the quality of your people and what you're trying to do every single day. So having been through this in a number of industries, I think the start point is encouraging.

Operator

I think a positive NPS shows that for the majority of the time, we're getting it right for our customers. But we obviously want to push that forward as much as possible over time, and we're committed as a team to do it. So not massive learnings yet. It's early stages, but the team are very focused on it and we're obviously putting out there today and we will continue to do so going forward.

Speaker 1

And then on the repowering, the average diesel bus has a major engine change midlife. And it's quite symmetrical between the age of the husk and the age of and the age of a battery and that the battery life is probably about half the life of a husk. So when we get to that point on a diesel vehicle where we would go through a normal major engine overhaul, We're taking that engine out and putting an electric drivetrain. The battery cost going into a repowered vehicle versus the battery cost going into an existing EV that's got to be replaced halfway through its life is about the same. So there's perfect there's reasonable amount of symmetry there.

Speaker 1

We've got about there's about probably about 700 vehicles in our fleet that we would be targeting for repower. So it's not all of the diesel vehicles. There's just only a certain particular type of diesel vehicle that we think is the most efficient to do at this stage based on where technology is. It does cost a little bit more than traditional just engine change, but because you're getting that economic value out of the battery life and the efficiencies that come with an electric drivetrain rather than a diesel on a go forward basis from an engineering perspective, it's a really good thing for us to be doing.

Speaker 3

Yes. Good morning. It's Rory Culnane from RBC. Firstly, could you expand on the cost efficiencies planned in bus? Will reductions in mileage be required as the bus fare cap comes to an end?

Speaker 3

Secondly, as increasing parts of the bus business shift to franchising, I suppose that might be an EBIT margin headwind, but in some instances come with lower CapEx requirements. Do you think you can generate similar cash flows or return on capital employed if more of the U. K. Does shift to franchising? And then finally, it would seem from the outside that it's going to be a big job for the DFT, operator of last resort, to nationalize all the talks at the first opportunity.

Speaker 3

From what you're seeing on the ground, is the government working very hard to do so? Thank you.

Operator

Okay. Right, I'll take the first one. Let me might share the next one and then I'll do the last one. On the fare cap and cost efficiencies network, I mean, the way I would look upon this is that we are we operate in a market that changes is normal. We've seen funding reduce over the last few years.

Operator

And we've obviously worked hard on route profitability. And that's by and large how we've improved our business over time. So we kind of look upon this as just the next stage of the evolution of the business. So we will always look at price yield management as you would expect us to do. There's always opportunities there.

Operator

We will always look at the profitability of our network. And if we feel there's changes that should be made, we will make them. And as you know, over the last few years, we have disposed of one part of our business that we felt we would struggle to make profitable in the long term. And we have shut down certain routes over time. And in terms of cost, like any business, we're constantly looking at being as efficient as we can.

Operator

So I don't want this to be seen as a kind of dynamic event. What it is, is your normal evolution of the business, and we've got a mentality of continuous improvement, and that's what we're going to try and do. So the reality of the fair cap is changes that we will look at all aspects of our business and try and improve them. And we're working obviously on that at the moment. We still have to see details of the cap, exactly what it means.

Operator

And we'll start any changes we plan to make, we'll start in January and run through to April. And that's what we'll do there. In terms of franchising, I'll let Ryan cover the cash impacts, etcetera, and CapEx. But I mean, I think this is likely still to play over a period of time. And we don't foresee any material, very limited changes to portfolio in full year 'twenty six and full year 'twenty seven.

Operator

There's a lot of work that has to be done to deliver a franchise model. You've got the consultation phase. You've got the design phase. You've got to be looking at fares, IT, operations. It's a big exercise.

Operator

So invariably, there can be ways that you might be able to quicken it up, but there's a lot of work to be done upfront if it's going to be effective on launch. So I think our view is we'll begin to see the impacts of that in full year 2020 beyond. But when you look at the schedule and it's coming out, there's probably 4 or 5 areas that will come out over that period and be involved in processes where we have no business. And there's 2 areas that we think will come out over that period where we do have business. So we're kind of leaning into this with a positive mindset.

Operator

Currently margins will be lower, and I'll let Ryan talk through that now. But I just want to make the point that we still feel there'll be very limited impact in the next two fiscal years.

Speaker 1

Yes. In terms of margins, I mean, there's a couple of dynamics going on. I think it's going to very much depend on the actual mode that they execute franchising. Either they're going to be going for the ownership model themselves of the fleets and depots or there could be a hybrid like we saw in Manchester where they own the depots but the operator owned the fleets. I think in the medium term as part of the sort of electrification journey that the sector needs to go on, I mean we are market leaders in the space, so we know exactly what it takes to be able to electrify depots and get them up and running and working.

Speaker 1

It is very, very complicated exercise. It's not something that can happen very quickly. But as a result of that, I suspect the medium term model will probably be an alternative ownership model. And in that context, I think you'll end up having a slightly lower margin scenario. But to Graham's point, we've got more opportunity than we have risk, we think, from franchising in terms of market participation.

Speaker 1

And so we'd have a substantially greater top line as a result, albeit at maybe at a slightly lower level of margin. And in getting to that point, because as you know, we've got a ownership model is our preferred model in terms of the assets and depots rather than a leased model. And we try and participate as much as we can in all of the commercial offerings that come with that ownership model. If that shifts to being something where the local authorities or the combined authorities are earning all of the assets, clearly for those places where we've existing, got existing operations, that would be an enormous capital release that would come out of that in getting there. So as you go over transition, top line growth, potentially lower margins, but a substantial amount of cash that will come out of the business.

Speaker 1

But it's very much going to depend on what model they're going to actually go for from an ownership perspective.

Operator

Okay. Thanks, Ryan. And on the DFT, OLR and the nationalization process, I mean, obviously, there's been strong messaging put out in the 1st kind of 5 months from the labor government, but we still haven't got any details of how it's going to be done. Obviously, there's been some comments this week being made from the DFT and Secretary of State that when the current bill gets rather sent, they will give the 1st train operating company 3 months notice. And but with no detail of who that is at this point, we're in a situation where we plan for the worst and assume the contracts will go at that point.

Operator

I think the reality is there is a lot of contracts with the potential to go over the next 6 to 9 months. And I think most people in the industry think it will be hard for them all to be delivered in that kind of timescale. So I guess our expectation is that from what we've heard and seen so far is some form of timetable or view as to how the companies will be brought in house, will probably be published shortly after the bill gets, brought in the sand. And then we will work accordingly from there.

Speaker 4

Morning. It's Joe Thomas from HSBC. Just turning to open access. There's a big increase in mileage, I think you said, from the Houston to Sterling route. Can you just give some view on likely ramp up there, the sort of utilization?

Speaker 4

I know margins have been relatively high and the expectation that that how that would affect the margin profile of the business? Secondly, on Open Access, I just would like any sort of update on how the other applications are progressing and whether the change in government has changed the pace of that at all? And then finally, I think you said that you had the capital available to participate in the event of franchising. And now, Ryan, you're also talking about capital release. I was just wondering if you could sort of square that off.

Speaker 4

I think you might have done to some extent. But what sort of things would you be buying if you're deploying capital? Would it be depots or would it be businesses?

Operator

Okay. On Open Access then and Sterling, I mean, obviously, we as we said that we will announce shortly our launch plan, launch dates and give a view as to how that what we see that business delivering. So I'd love to be able to tell you today, but we need a week or 2 just to finish that process off and then we will obviously announce it. In terms of margins, obviously, we are performing very well on blue on haul trains. And obviously, part of that is the fixed rolling stock prices that we entered into 5 years ago.

Operator

And with inflation over the period of time, you have a natural benefit there. And obviously, we're getting very high utilization as well, which is helping driving top line growth and therefore bottom line growth. I mean, obviously, that level of margin, we're not going to maintain on Sterling or other new business coming through. So the way you've got to look about it is this is a business that we hope will have material revenue growth over the next 3 to 5 years and strong absolute growth in margin. But the margin percentage will weaken as we launch more and more services.

Operator

So I think that's where you've got to look upon it. In terms of other applications, we've got a number and have been in for a while. There's probably 2 types of situation within there. There's some where they're either extension to what we're doing or potentially small change to an existing agreement. And we think they're more likely to be responded to and come through sooner, hopefully early in 2025.

Operator

And we have some that where they're competed, where there are other applications in there that touch or cut across our applications. So they will take a little bit longer. But our hope is that by mid-twenty 25, we will have a view on the majority of those applications.

Speaker 1

And then in terms of capital for franchising, Joe, the point there is that we've got a strong balance sheet, so we can participate irrespective of the mode that they go for. And it's not our gift on franchising. It's going to be their gift as to how they want to designers. If they want us to own the buses, we'll own the buses. If they want us to own the depots and help them with electrification journey like we did in Alder, we'll do that for them because we've got the intellectual property and the IP and the capability to do that.

Speaker 1

So I think that's the point in franchise. We just don't quite know just yet. If it goes a capital light model, I expect to be slightly lower margins, but a huge amount of cash generation. If it's a capital heavy model, then it will be higher margins with the normal level of bus operations that you see today with a different risk profile.

Speaker 5

Anton Prothoro from Citigroup. Two questions, please. First one on the autumn budget. It pledges the grounds for the development of EV network and infrastructure. Do you already at this point understand the mechanics of this process and the possible implications for CapEx?

Speaker 5

And second question on your recent partnership with FlixBus, could you just talk through the rationale for the partnership over expanding to the new routes yourself and your expectations for the potential revenue contributions? And should we expect these kinds of partnerships in the future?

Operator

On budget EV CapEx, don't have the detail around that at the moment. We've obviously participated in anything that's been available previously. We've bid for and be reasonably successful in. In relation to the future, it's uncertain at this point, so until we see a bit more detail. I mean, I'll let maybe Ryan talk about some of the detail on FlixBus.

Operator

But at a top level, we've been clear all along that part of our plan is to use our depot infrastructure and optimize it, try and bring more revenue streams through it. And this is a classic contract where we're able to do that and therefore make a good return, reasonable margins. Obviously, we don't have the brand strength in Coach that FlexBus would have and some of the other operators. So we don't have plans for a national coach operation, but we certainly feel there's opportunities to leverage what we have today to grow our revenues and effectively grow our margins. And that's why we take advantage of the opportunity at macro level.

Operator

Ryan, maybe you want to talk about some of the detail.

Speaker 1

Yes. I mean, on the detail, and as you saw from the announcement, it's a couple of 20, I think, 23 coaches that we're buying. It's a 5 year contract with ability to be able to extend it. I mean the great thing about this is that we're using our existing depot footprint in the large to be able to deliver this. And so it's a utilization factor of something that wasn't being used before.

Speaker 1

And it's a classic B2B contract, as Graham said. They've got a really, really strong brand that's growing really strongly. And if we can come alongside them on a strategic partnership to deliver these routes for them using our scale and capability, then it seems like a good deal for everybody.

Speaker 6

Jack Cummings, Berenberg. Two questions, please. I think you said there was 3% cost inflation in bus with 5% in drivers' wages. As we're thinking about full year 'twenty six, how do you think inflation in the bus business is going to trend, both in terms of wages and also other cost lines? And then secondly, just on capital allocation.

Speaker 6

I think buyback was the biggest contributor to the EPS growth. For the new buyback, why is €50,000,000 the right number? Why is €100,000,000 not the right number? And should we think that that €50,000,000 is kind of a signal that potentially there's more M and A on the agenda coming soon?

Speaker 1

Good

Operator

questions. I mean, on the cost inflation, I mean, I think the encouraging thing is that the team have managed it well, low profile. We've over 80% of what we need to get done in this fiscal year done, And that gives us flow through into next year. I think our general view at the moment is just given how wage settlements have played out over the last 6 months, both in the public sector and the private sector, we still feel there will be some pressure on wages for above inflation wage increases. But we do feel that's on a flattening trend now.

Operator

And actually, the bulk of what we have to deal with will be actually from the middle of next calendar year onwards. We're actually quite well protected in terms of how we flow into next year. So we feel in a reasonable position, not complacent. There is still pressure on wages. In terms of capital allocation, and again, we'll let Ryan comment as well.

Operator

I mean, why is $50,000,000 the right number? We wanted to give a clear message that any excess capital will be returned to shareholders and also to reinforce the cash generative nature of the business and the confidence we have in the strategy and delivery over time. Dollars 50,000,000 will probably take us through to roughly the middle of next year. And then we'll obviously reassess the position there. In terms of M and A, we're always looking at opportunities.

Operator

We've been quite consistent over the last couple of years around that. We've been consistent that we had to diversify our earnings. We were largely dependent on the train operating companies 3 years ago. So the plan has been very clear to do that. So we have a small team that's actively looking at opportunities.

Operator

And what's really interesting now is after the recent acquisition, we actually have people approaching us now with quite a lot of inbound contacts. So I guess through our activity and discipline, we're beginning to create a pipeline of good opportunity. And we're very clear we want to buy quality businesses at a fair price that fit with our existing business and give us the potential for synergies and the potential for growth. So when we've been very clear, so we will constantly look at them. We have a good pipeline.

Operator

And if there's another one, you'll be the first to hear. Just in terms of capital allocation.

Speaker 1

Yes. I mean, there's no change in our financial policy where we'd be comfortable of going up to 2x adjusted EBITDA. From a net debt point of view. We're sitting at the moment at pretty flat to nothing and we're guiding to the full year to being marginal net debt with the buyback program. So in terms of potential and our capacity to be able to do more, if you wanted to do more than that, that clearly exists in terms of the strength of the balance sheet.

Operator

Yes. And largely the way we've approached it is, the smaller acquisitions will de live operating cash flow. If there's larger one comes along, we have no problem, as Ryan said, taking a bit of leverage, yes. So any questions on the webcast?

Speaker 7

Yes. We've got a couple of questions on the webcast. First question is from Savish at Citi. He said, good morning. I have two questions.

Speaker 7

Can you touch on opportunity for bus franchise in the U. K. Regional markets? And has there been any progress outside of Manchester? In which regional market do you see opportunity for M and A in the bus segment?

Operator

Okay. I mean, on bus franchising, as we said, we know Liverpool will bring forward their procurement process early in 2025, and we think that will be the first one. But we are also seeing activity in Cambridge and Peterborough. We're seeing it in West Midlands, West Yorkshire, South Yorkshire, obviously, West and South Yorkshire, we are there. And we're seeing it in the Northeast and West Midlands.

Operator

So there's 5 to 7 regions that have given strong steer that that's the way they intend to go. And obviously, with the Better Buses boat comes out, we need to see the kind of the detail in there and see if that stimulates further growth. But not franchising isn't always the best the right solution for every area. We think this is going to be a mix to stay over time. I guess all we're trying to get the point we're trying to get across is we're well positioned to bid and participate in these processes.

Operator

In terms of M and A and bus, I think what you'll see is more of the same. We are it's a wide market. We obviously have a good market share in the regional bus market. But we have small market share in adjacent services and B2B, and that's where we've been really pushing. Over the last couple of years, we've doubled our revenues in 2 years, which is encouraging.

Operator

And the acquisitions that we've brought in into the business now have margins and close to the mid teens, which is very, very encouraging. But also there are other opportunities and that may come up. London has potential over time. It's obviously quite a settled market at the moment. And I think obviously, we will continue, I think, to see a number of smaller roll up acquisitions take place.

Operator

And we'll participate in those.

Speaker 7

Thank you. Next question comes from Alex at Peel Hunt. He said, please can you quantify bid costs in H2 and how you would expect them to change in H2 FY 2025 and FY 2020 Do you expect to hear conclusions for all open access track applications in H1 2025? Or do you expect it to take longer to get a decision on every application you have made?

Operator

Okay. Ryan, do you want to talk about bit cost?

Speaker 1

On the bit cost, I mean, obviously, the big one that we've applied for today is Elizabeth Lyon, and we're still waiting to hear the outcome on that. And I think they described it in sort of over winter, which somewhere in the 1st part of next year, I expect. And that's where we kind of spent most of the money. I mean, to be fair, a large part of that resource came from our own internal teams, which we've maintained, given our capabilities. And then we spend a reasonable amount of resource on the open access applications that we've submitted.

Speaker 1

And once we get more traction on the outcomes of those, then clearly that's when the real cost will ramp up in terms of mobilization and getting ready for delivery. If we've got the London Overground still coming as well Elizabeth line, which we would look to participate in as well, and we'd expect to spend a pretty similar amount on that as we did on the Elizabeth line because they're fairly similar in scale to order of magnitude sort of £3,000,000 to £5,000,000 Okay.

Operator

And yes, I mean, I think our best view is that we will by the middle of next calendar year, we the majority of our applications, we will have some form of resolution on. I mean, obviously, the regulator has a lot of workload and has to work through it, but we will help with that. We think they're quality cases that we put in. So we have a positive view. I mean, the sector states also reinforced this week in the Transport Select Committee, the role of open access and her view that she sees that growing going forward and she called out Lumo specifically.

Operator

And obviously, we want to use the Lumo brand on the West Coast Mainline as well with the Sterling application. So yes, we have a positive view. But obviously, until it's all washed through the system, we won't know. But our general view is the middle of next calendar year.

Speaker 7

Thank you. There are no further questions. I'll hand back over to you for any closing remarks.

Operator

Well, look, thank you all for giving us your time this morning. We hope it was useful. And I guess just to close, we have a very positive view of the future, and we'll do our very best to keep the story moving forward in a great manner. So, Luke, thanks for your time today, and it's much appreciated.

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Earnings Conference Call
FirstGroup H1 2024
00:00 / 00:00