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Edited Transcript of GOG.L earnings conference call or presentation 21-Feb-19 9:00am GMT

Half Year 2018 Go-Ahead Group PLC Earnings Presentation

London Feb 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Go-Ahead Group PLC earnings conference call or presentation Thursday, February 21, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Allen Brown

The Go-Ahead Group plc - Group Chief Executive & Director

* Elodie Brian

The Go-Ahead Group plc - Interim Group CFO

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Conference Call Participants

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* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* Gerald Nicholas Khoo

Liberum Capital Limited, Research Division - Transport Analyst

* Joseph Philip Thomas

HSBC, Research Division - Analyst

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Presentation

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [1]

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I hope you are all in the mood now. Nothing better than I -- than I have for watching buses and trains. So I am sure you all feel exactly the same way. And actually, the canny eyed amongst you would have noticed there are a few omissions, but eventually we will have other places on those maps, as we have expanded internationally.

So I will do a quick business overview, and then I'll hand over to Elodie Brian, who's our Interim Chief Financial Officer, and then I'll come back and do a bit more color for the numbers. Then we'll have a Q&A at the end. So it's a normal format that we'll go through.

So in terms of business overview, we've got continued good progress in all 3 strategic pillars: protect and grow the core; win new bus and rail contracts; and prepare for the future of transport. First half performance is ahead of expectations. Full year expectations increased principally due to rail.

Bus division results are good. Operating profit pre-exceptional items of GBP 46.9 million. Rail division results ahead of expectations for the half year, reported operating profit of GBP 17.6 million. Agreement has been reached with the DfT over the long-term contractual issues we've had in relation to the GTR franchise, and that includes the GBP 15 million funding for passenger enhancements, creating more certainty for our franchise.

And internationally, Singapore bus is performing well. Ireland commenced trading in the half year and we're off to a good start. And mobilization of German rail contracts progressing ahead of the June 2019 start date. And we won our fifth rail contract in Germany and the first rail contract in Norway. Interim dividend is maintained.

So with that very quick and brief introduction, I'd like to pass over to Elodie.

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Elodie Brian, The Go-Ahead Group plc - Interim Group CFO [2]

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Thank you, David. Good morning.

So overall, the group has performed ahead of our expectations over the first half of the year. Revenue is up 5% and operating profit, though lower than last year, as we anticipated, is ahead of expectations. The GBP 16.8 million exceptional item that you can see on the chart relates to the gender equalization of guaranteed minimum pensions following the high-court ruling last October. And going down the table, as David just mentioned, the board is maintaining the same level of interim dividend per share as last year, which is consistent with our policy of a full-year payout between 50% and 75%.

Capital investment is lower than last year as anticipated. In bus, we have spent less on CapEx this year, in line with the cycle of contract renewals. And in rail, investments reflect the fact that contractual obligations tend to be weighted towards the start of franchise in order to maximize benefits for passengers.

The year-on-year movement on free cash flow is linked to the unwinding of London Midland's, which inflate the value last year. So this year, we are where we expect it to be. And continued cash generation means that our net debt to EBITDA ratio remains comfortably below our target range and very close to our year-end position.

So moving on to the operating profit by division. The bus division overall is slightly ahead of last year with challenging conditions in our regional division, more than offset by strong performance in the London bus division, where profit was ahead of last year. In rail, the movement year-on-year reflects the end of the London Midland franchise and the GTR settlement with the Department for Transport. This is mitigated by strong trading in Southeastern.

Looking at regional bus. Well, in regional bus, the first thing to say is that we have seen passenger growth in each of our regional businesses. The picture is varied across the country, but on average, like-for-like passenger growth has been strong at 2.3%, and it's good to see our initiatives bearing fruit. This growth is reflected in the passenger volume bar on the charts.

Within acquisitions, East Yorkshire is doing well and already making a small contribution. The challenge we have in regional bus is to generate enough yield to offset cost inflation. This means our focus is twofold: one, continue to work at driving passenger yields. Our strategy to promote under-18 flat fares has been successful at reaching out to young people. We need to ensure this also translates into sustained income growth. And secondly, second area of focus is our costs, which is what we're doing by rolling out lean programs to our bus depots across the country and introducing technology wherever relevant to support efficient processes.

So coming back to the chart following the order of the bars, investments in newer, cleaner buses also drives higher depreciation charges, and we have suffered in H1 from one-off events, including a few large insurance claims. We expect H2 this year to show an improvement on last year and claw back some of the profit reduction in H1 so that full year results end up being close to the level achieved last year.

Moving on to the London division. London itself is delivering strong results despite mileage losses. Operational performance has been robust. And this has generated an increase in quality incentive income. Just like in regional, higher depreciation charges reflect the investment in newer, cleaner buses. And finally, we had a fire at our Orpington depot in December, which accounts for the majority of the one-off costs.

Operating profit has also been boosted by our international contracts. Singapore is delivering strong operational and financial performance, and Dublin successfully started operations in September and made a small positive contribution in the period. So overall, for the full year, in the London division, we expect to deliver similar profit levels to last year despite the mileage reductions.

Still in the London division. The bidding market remains competitive in London, but we've had a really encouraging success rate in the contracts awarded so far. And by this time next year, we expect that our volumes will have built back up to where they were this time last year. As anticipated, our capital investment is lower this year and next following a heavy renewal cycle in the last 3 years, and this supports a good level of cash flow generation for the group.

I'll move on to rail. We have had continued good performance in Southeastern. That's been driven by strong passenger growth, steady operational performance and a continued focus on customers. As I have already mentioned, rail performance in H1 is affected by the end of London Midland in December 2017 and the settlement with the Department for Transport for GTR in December '18.

So in terms of outlook, in the second half, we expect Southeastern will continue to deliver strong performance ahead of expectations. But with more uncertainty, profits in Southeastern are limited by a profit share mechanism. And in addition to that, both operational performance and passenger growth could be affected by Brexit, particularly congestion and logistical issues in its geographical area, but it's really difficult to predict the effect this may have. So in rail overall, performance will be stronger than we had expected, and we're still waiting for an outcome on our bid for the next Southeastern franchise with the current one extended to the 22nd of June.

This slide gives you the full picture. I've already explained the operating profit by division as well as the exceptional item. And just to note, the pre-exceptional effective tax rate for the year, which was just over 20% in the first half and expected to be around 21% for the full year.

Cash flow. So this slide is a bit of a job to explain. But this year, we are where we would expect to be. What makes it slightly difficult is the comparator last year is really distorted by the end of the London Midland franchise in December '17. So if you look at cash flow from operations for the whole of last year as opposed to just the half year, that was GBP 233 million. So with GBP 112 million so far in the first half, we are really where we would expect to be. And so working capital, as I just mentioned, is affected by the end of London Midland last year as well as timing of payments in rail.

And then the other line on the charts is also distorted by London Midland. So the key message here really is, to say, this year we are where we should be, and the lower level of CapEx frees up cash flow as I've previously mentioned.

Briefly on our debt position. So our adjusted net debt to EBITDA ratio remains comfortably below our range. As I've already mentioned, it's pretty much in line with our last year rent position, and all our facilities have been recently renegotiated with none coming to maturity until 2023.

So in summary, for the full year, we expect the bus division overall to get close to last year's level of operating profit with the regional and London divisions each broadly consistent with last year. In rail, we expect GTR will breakeven and Southeastern will continue to do well, albeit noting the boundaries of profit share and the uncertainty brought by Brexit in the second half of the year, and our net capital expenditure is in line with our expectations.

Just to note, I won't cover it here that, in the appendices, you'll find a schedule on bus pensions, and this shows that the latest actuarial valuation shows us remaining in surplus. And you will also find the breakdown of our capital expenditure this year, which, as I've mentioned earlier in the presentation, is lower than last year.

So on that note, I will now hand you back to David.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [3]

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Thanks, Elodie. So this is our strategy on the page. I think it's always good to remind people of our strategy, which is protect and grow the core; win new rail and bus contracts; and develop for the future of transport. And we're making good progress in all 3 pillars.

The key to our strategy has been a responsible business. And so we're still only 1 of 3 or 4 FTSE 350 companies to have been awarded the Fair Tax Mark but the first transport company group to be awarded the ISO 50001 for good practice in energy management, and we're the only transport group to be an accredited apprenticeship training provider. And we have over 1,000 apprenticeships planned by July 2019. And through our 28,000 colleagues, some of who you saw earlier on our video, we're proud to support the local communities where we operate helping to create thriving town centers and provide good social mobility.

So in our first pillar, protect and grow the core, move on to regional bus. On regional bus, it's against the backdrop of declining passenger numbers outside of London of about 3.2%. We've actually seen a 2.3% passenger like-for-like growth this period, albeit with some variation by region. We've seen significant growth in the success of our flat GBP 1 fair for people under age of 18, in particular, in Newcastle, but actually it is a variation there as well because we've seen a decline in adult passenger numbers in Newcastle.

However, growth continues in a range of different places, such as Brighton, where bus usage has increased by 8.3%; Southampton, where it's 25.8%; and Fastway and Crawley, where it's 160%.

We aim to always provide high-quality services, and that contributes to us retaining market-leading customer satisfaction of 91% as reported by Transport Focus. We continue to invest in new vehicles with 82 low- or zero-emission vehicles entering the fleet. And we're now adding electric buses into the fleet at Brighton and Newcastle shortly during this year. We're also supporting local authorities, again, in Brighton and also Oxford to achieve their air quality ambitions with ultralow emission zones.

We're driving innovation through constant (inaudible) of our customer apps and our ticket choices. Contactless across all our services is now 25% of sales. And we're trialing tap-in, tap-out mobile ticketing, et cetera, et cetera.

95% of our buses, in fact, take contactless now, and there are 1 million contactless payments every month. And WiFi. WiFi is now available on 61% of our buses. So whatever we can do that improves the customer choice and the customer benefits, we are doing.

We're delivering on the government's health and well-being agenda with our active travel report, Chatty Bus activities. Dementia awareness training, Helping Hands card are exhibit A here. Discounted travel for job seekers, all ways in which we're supporting the government's policies on loneliness, obesity, accessibility and economic growth, and playing our part in the community.

Our East Yorkshire acquisition has been fully integrated into Go-Ahead. We've got new management, new ticket machines, new vehicles on their way. And we're helping to ensure that both passenger numbers and revenue are growing, and it's doing very well at the moment.

And Manchester. We didn't actually put that on the video. That would have been far too prescient to have got that far. But we've agreed terms with FirstGroup this week to purchase the Queen's Road bus depot. And this is our opportunity to enter the U.K.'s second-largest metropolitan area and which has a growing population and a transport authority focused on improvements.

Moving to London bus. Passenger numbers in London are also declining at 0.7%, and in Central London, congestion is still an issue and an obvious cause of some of that passenger decline. In Outer London, declining numbers are related to wider socioeconomic trends. That would be people working from home and home deliveries. We're working with TfL to achieve the Mayor's transport strategy of 80% of journeys by public transport, walking or cycling by 2041. And our QICs performance is ahead of last year.

So our focus remains on operational performance and with punctuality levels increasing by 3% year-on-year. There was a good win rate on new tenders. And over the past 6 months, 6 new contracts have been won from our competitors. And over the next 6 months, we've got another 7 to introduce. Overall, there's been a net increase in contracts for this year and for next year.

The ultralow emission zone is being introduced in April by the Mayor and with an extension in 2021. And I believe this provides an opportunity for modal shift from car to bus. So currently, almost 50% of our bus fleet in London is Euro 6, and we continue to look at ways of introducing more electric vehicles and offering our expertise as the larger -- largest operator of electric vehicles in the U.K.

And Go-Ahead London is the first bus operator to receive accredited provider of apprenticeship training certification. It's putting 40 bus drivers per month through their program. And we're also supporting the Mayor's Vision Zero for safety in London. And we're trialing driver well-being apps, video cameras as wing mirrors as some of -- couple of examples we're looking to improve safety on our buses.

And London's buses still carry 200 million more passenger journeys than all the rest of TfL's public transport services put together. And population growth is still predicted to grow in London. The majority of that will be in the suburbs, and that suburban population growth will drive passenger growth on the buses where the majority of our buses and London's buses actually operate.

On U.K. rail, just a few words about rail review and our strategy. Our strategy remains the same. However, we -- there is a far-reaching and could be fairly significant review of the rail sector, led by Keith Williams, ex of BA, and that does change the backdrop to our strategy. So we're speaking with the team and have been on many occasions, who are leading that review. And there are some of our asks, which I will outline.

So what we want mainly is for it to be a passenger-, customer-driven outcome that we're looking for out of this. What we're saying is there should be different models for different customer markets; contracts to drive accountability with the balance of risk and reward; regional political devolution with services tailored to local customer and community needs; a strategic body that owns and coordinates that vision; and network rail accountability taking place at a regional level, which they have already embarked upon. Our strategy will evolve based on the outcome of the rail review, but we will continue in all likelihood to focus on inter-urban and urban commuter routes, and we're very unlikely to be moving away from bidding with financial discipline.

Moving on to our Southeastern franchise. So Southeastern achieved its most punctual autumn on record in 2018, and that was largely due to very close work in partnership with Network Rail, which has been held up as an industry exemplar. In H1, it improved punctuality by nearly 5% compared to the previous year, and it is currently the best-performing train operating company of a similar size. We're supported by industry-leading communication campaigns on leaf fall and winter preparedness. Trying to explain to people those problems that we experience on the trains when leaf fall takes place in the autumn.

And we've introduced motion onboard entertainment, launched through free WiFi, and that includes video content from Amazon Prime, e-books, audio books, magazines and games. And our key, the smart ticketing system we've enhanced and extended, we started with season tickets. We're now onto singles and returns. And we got further developments in plan with one-click DelayRepay.

With investment to improve passenger information systems also, we're replacing all the station screens and providing information on train location. And we've got -- set up colleague network groups to boost diversity and inclusion. And we have for instance, I'm very proud to say, the only 50% executive female team in the industry.

And even though we are nearing the end of the franchise, we continue to remain totally engaged, constantly seeking improvements and looking ways for improving things for both our customers and our colleagues. As you've heard already, there's a contract extension now to June 2019. And we await the results of the Southeastern franchise award.

GTR. Of great significance is, during H1, we actually reached the contractual settlement with the DfT over a number of very long-term issues. And that -- what that gives us is absolute certainty over the rest of the franchise. So it's -- we're very pleased to have reached that settlement. Performance improvements across all the routes in -- with punctuality in December sitting at 84.8%. And that's the best since 2016. And in southern, for example, in December, it's 85.7% on their PPM, which is 12% improvement year from the previous year. All periods, from October till December, have been the best in the franchise, and the trend continues into H2.

We're running 3,600 services a day across the GTR network, and that's been introduced since December 2018. And we are, without a doubt, the largest franchise in terms of the number of trains we're operating and the number of passengers that we carry. And in May, there'll be additional Cambridge to Brighton services and more weekend services throughout the day.

We're undergoing some consultation with passenger groups on the GBP 15 million customer improvement fund and looking at the best ways to spend that on passenger priorities. And we're providing better customer information by equipping our customer-facing staff with new smartphones. Over 3,000 of them have now been distributed to our staff.

We have more than 2,000 qualified drivers across GTR, and that compares with 1,600 when the franchise first started. And we still have another 270 drivers in training. Got 150 new carriages on the Moorgate line, all doing full service shortly. And the state-of-the-art high-capacity trains will be replacing some of the older stock on the U.K. rail network.

So our second pillar is win new bus and rail contracts. And in a flash, I'll show you our international strategy on a page, which I'm not going to give you a chance to read because I'm going to move on very quickly, but we've had some really exciting successes over the past half year.

And so some of our progress, Singapore bus is performing really well. Overall customer satisfaction in Singapore is 98% on the bus network with 80% of bus users saying the bus system has improved over the last year, and we're playing our part in that story.

Successful mobilization in Dublin with the majority of services now running. We have 3 routes left to introduce, which will take place in March. And then we prepare for the commuter route franchise or commuter route contract that we've won and that starts in the autumn. And we already have a depot acquired for that contract.

We're mobilizing in Germany and progressing for the start of the operations in Baden-Württemberg in June of this year, and the depot in Arlen is nearing completion, and we have a driver recruitment process in absolute full flow.

We've won a fifth rail contract in Germany to operate in Bavaria and Baden-Württemberg, and that's due to commence in 2023. We're particularly pleased with winning this contract because it allows us to have synergies with the other German contracts that we won in exactly the same area. It allows us to join them all up. And we will be overseeing for that contract, 53 Siemens trains in operation.

We've won our first rail contract in Norway. It's the first to be awarded by the Norwegian government, and mobilization has started for operation in December 2019. And it forms a platform for growth across the whole of the Nordic region.

And we've also won a consultancy contract in Australia in partnership with Network Rail, providing digital systems expertise for the transport authority of New South Wales and using our experience actually gained on the GTR to make that happen.

So to-date, we have 10 international contracts in 5 different countries with annualized turnovers of over GBP 400 million. And we are confident of achieving our target of 15% to 20% improved operating profit from international activities by 2022.

And our third pillar is preparing for the future of transport. I'll give you some of those highlights over the H1. So passenger customer needs are changing and so are we, to remain relevant to our customers and to stay in tune with the changes in the transport sector. We are seeking new ways to use our skills, knowledge and assets to create growth and set us apart from our competitors.

Since PickMeUp was launched in Oxford in June last year, it has grown to 20,000 registered users, and we have about 3,000 weekly rides on that service. It recently won the most innovative customer serving operation at the Global Transport Awards, and it's still the U.K.'s largest demand responsive bus service. And we've just been awarded a contract by TfL to run a similar demand responsive pilot in Sutton. And we'll be working with VIA who we work with in Oxford.

We have a Billion Journey Project, which is taking start-ups through an incubator program. And we have plans to pilot Citi Logik, who are offering customer train crowding information on Thameslink and Airportr, which is helping air passengers move their luggage. And we've got further contracts in the pipeline to set up with 5 further start-ups. So we're really making some good progress on that.

In September, we launched a trial of the world's first air-filtering bus in Southampton, which you see a picture of. A successful pilot has been completed, and we're awaiting results of that. And we have an IT consultancy called Hammock, and we've just during the period completed 2 contracts. And we've got further opportunities in the pipeline. And we're currently engaging with potential clients on a worldwide basis.

So in summary, we've got stable bus performance in a challenging market. 2.3% passenger growth we think is really good and a good [turning]. Rail services are improving. Every month, we're improving at the moment on the GTR service. And we've got contractual certainty at GTR. And we received a 12-week extension to the Southeastern franchise. We're continuing to focus on customer improvements and the customer experience, and our operational performance is improving, and it's operational performance which will drive our profits.

And our second pillar of win new bus and rail contracts, we are awaiting the outcome of the new Southeastern franchise, but we have really good positive momentum in winning international contracts. And as you've just heard, we've won 3 contracts in the first half of this year. We're on track, I believe, to achieve our international target of 15% to 20% of profit by 2022.

And our third pillar of preparing for the future of transport, we're piloting and trialing some really innovative solutions for future transport. And that should put us in a really good place in terms of conversations we've had with other authorities. And as you've heard, we've actually moved from a pilot in Oxford and are now doing a pilot in London. And that's based on our expertise in this area, which nobody else actually does have. And we're looking at a number of different areas that we can actually prepare for the future of transport.

We've got strong focus on our shareholder returns. We completely understand what's driving our shareholding. And overall, our operating profit is predicted to be ahead of management expectations principally due to rail for the year ahead. And we are maintaining our interim dividend.

Thank you very much. And with that, we're off to Q&A. Somebody will come around with a mic in the normal manner. Who's first?

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Questions and Answers

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Joseph Philip Thomas, HSBC, Research Division - Analyst [1]

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It's Joe Thomas from HSBC. On the costs in regional bus, you talked about insurance claims. Is there a -- it's not the first time you've talked about insurance claims in -- and not you yourself personally, but we've heard it from the company in the past. Is there a sense that they are gradually ticking further upwards? And do you need to be providing for them at a higher level do you think? First question. Second question is, you talked about the interplay between regional costs and yields. It seemed as though you were suggesting it was a yield problem rather than a cost inflation problem. Perhaps you can just elaborate a little bit on that. And how -- have you perhaps pushed pricing as far as you'd want to now? And then finally, Manchester. Can you give some sort of early thoughts on the profit profile there and the conversations, of course, that you've had with Transport for Greater Manchester?

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [2]

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(inaudible) In terms of insurance, you will always get an ebb and flow in terms of some insurance issues. And there's nothing unusual from that point of view. And all the practices that we're putting in, in terms of insurance are still there in terms of reducing the number of accidents, using technology as we say about meeting the Mayor's safety -- Vision Zero on safety for the Mayor. So all of that is normal. And we're trying to reduce the number of accidents we have on a regular basis using technology, using training of staff. We're putting our staff all through more training. The apprenticeship training that we're now accredited for actually increases the amount of training we give to new staff. So there's a lot of things we're doing which we believe will reduce costs over the long term and, therefore, actually take down insurance cost. But it is a difficult market in terms of insurance market itself but actually I believe is the normal ebb and flow. If you get a big accident, you then have to account for that, and then it will just normalize out over time.

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Elodie Brian, The Go-Ahead Group plc - Interim Group CFO [3]

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So on your second question, cost and yield -- can you hear me, on regional bus. And so as I've said, it's really 2 areas of focus. I think both are important. So in terms of yields, we said we've seen some really good passenger growth. What we've seen in some of the regions, though, is that, that growth has been driven by some of the initiatives we've taken on young people fares. And that's where we want to be because our strategy is for the long-term growth. And we need to attract young people to bus and convert them to regular users as and when they get into jobs and start paying the fuller fares. So we think this is the right strategy, but obviously it takes time to build up. Another thing that we're seeing, for example, is where we've grown, acquired new businesses or acquired new routes or developed new routes. It takes a bit of time to build up that patronage and generate the yield from it as well. Cost is obviously an area of focus. And I've mentioned some of the examples of what we're doing. We are continuing to focus on operational efficiency. So with our engineering costs for example, we have kicked off a lean program. We've been gradually rolling this out to our bus depots across the country. Sometimes that requires initial investments. So it doesn't necessarily bear fruit immediately, but we're confident that, over time, these are things that will help us drive value in the regional bus division.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [4]

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And in terms of Manchester, I mean, our logic is, it is the second-largest metropolitan area in the U.K. Our logic is, is that we run buses in urban areas, therefore, why would we not want to be in there? The -- we think we got a reasonable price for the assets that we've bought. It's very difficult to predict what -- you're asking the question in terms of what that profit level is going to be at the moment because it's not a profit-making operation at this moment in time. But we're backing ourselves to turn it into a good commercial prospect, and that's what we plan to do very shortly.

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Joseph Philip Thomas, HSBC, Research Division - Analyst [5]

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Can I just ask on that, what opportunity do you see there? (inaudible)

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [6]

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We just think we've got a pretty good group to turn around bus businesses. We've done it in Plymouth. We're doing it in Hull. We've done it in Thamesdown. We believe that we can actually improve the issues with colleagues. We think we can work in partnership with the transport authority. And we're just backing ourselves to make a commercial go at running buses in Manchester. Why wouldn't we? Damian?

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [7]

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Damian Brewer from RBC. Firstly, I think your comms team probably do I very good jobs and less questions. But can I focus on 3 nonetheless. First of all, just on the bus business and the importance of building volume, particularly as sort of the teenage demographic begins to go in industry's favor. And if I look back on your business and take a bigger picture in the last 5, 10, 15, 20 years, and look at just the bus only PBT and how that's progressed for what was supposedly a low-growth industry. Can you give us a little bit more feel about how much patience and investments you're prepared to have? If you like to build the volume growth, you're building a bigger business later and doing the right thing by longer-term shareholders. The second question, which probably ties into that. You talk a lot about electric vehicles, but they seem to require a lot of investment, both in the vehicles and the infrastructure that goes behind that. And yet at least in London, there doesn't appear to have been any movement on the duration of the contracts. How long can that last because, effectively, you're having to put in a lot of cost for what still might only be a 5-year contract. What changes there in the future with TfL? And then very finally, as you look at future technology, thinking of one of your European counterparts and [Abena] announced yesterday, the move to full-sized automated guided vehicle buses in Stockholm, is there any move with that in the U.K.? Or is the legislation still preventative of that, again, thinking that a sizable part of your business cost is labor?

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [8]

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Okay. We do have the patience. There's a combination of things taking place in terms of regional bus. You have to do the basics well. That's the first point. You've got to actually provide a vehicle that turns up on time in its arrival and punctual and the driver says good morning and something happens positively and that we're taking people to the right places. And that's the basic hygiene of what you're trying to do. If you don't do that well, you can't do anything else well. On top of that, though, you've got to communicate with stakeholders and even on top of that, you've got to be talking to your local authorities about the town centers and how the bus actually can improve the town center and create the lifeblood for that town center. And then you've got to link that in with congestion. And my personal belief is that things are going in our direction and to use your words back. One, air quality is going to become a major issue for towns and high street vibrancy is going to become a major issue. And those 2 things combined, mean you are going to end up looking to the bus as a solution because the bus will take 75 cars off the road, and the bus will be either zero emission or low emission. The trick is getting enough people to actually recognize that and believe that because it can't be just my voice. It's got to be a number of different people's voices to actually change and start recognizing the benefits that the bus brings to a town center. And what they shouldn't be doing to make a town center vibrant is actually reduce car parking or make more car accessibility because there are so many -- so much research shows that bus passengers will spend as much or more than a car passenger coming into town center. So we need to get that almost a cultural shift to take place in terms of the benefits of the bus in the town center. And then on top of that is the issues I referenced with the government in terms of some social issues whether it will be obesity, whether they'll be issues over dementia, whether they be issues about loneliness, all of those things can be assisted by the bus. We will actually stop loneliness because people will get on a bus to get somewhere and will talk to people, which is the whole point of our Chatty Bus. I left my badge out there. (inaudible) go and get me Chatty Bus badge now. And then the third area, so there's a load of social policy we need to get people to recognize. We've got people in this room. We're going around different departments in government to say to them, we're not just saying with the Department for Transport. We're talking to Health. We're talking to BEIS. We're talking to a load of different people to say the bus can actually help you in these areas. To Health, I mean, there's a huge Health budget. But actually, if you take away that bus service and you don't fund it, you don't recognize what it's doing, you will just increase your Health budget because we're actually helping people get to hospitals. We're helping people to overcome things like loneliness. And then the third area will be as you -- in terms of long-term growth will be today's teenagers. It's a long-term strategy, but if we actually keep them on the bus with low fares, then when they actually start working, we'll keep them -- instead of running away from a bus, we want them to actually run to a bus. That's a quite good line. We actually want them run to a bus for the first time. People -- the decision makers now remember the bus services in the 1970s. And that's all they've got in their mind. I want people to be remembering, that they get on a bus, and they put their phone into a USB pocket and it's WiFi enabled, and it's perfectly clean and good means of travel, taking them where they want to, and they become decision makers and they carry-on using that bus service. And we need to overcome all of that. So I do believe there is a long-term play in terms of how you grow passenger numbers into the future. And it is a fact that actually younger people are not taking so many driving licenses. I've said it before. They're taking them to get into the clubs that don't take them but actually pass the test. They are more likely to travel by public transport, not less likely. And we need to capture them. And we think we're trying to do all the right things to capture people. And we have a long-term play. This is a long-term play. We do believe we can grow the bus business.

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Elodie Brian, The Go-Ahead Group plc - Interim Group CFO [9]

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And I think just to add to that in terms of making it easy to use the bus, everything we've been doing about developing our app, enabling contactless onto our buses, this all contributes to making it easier to take a bus journey.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [10]

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And your second question about electric vehicles. The issue about electric vehicles is that the -- there are -- the cost of running it is cheaper, we know, in terms of fuel consumption, in terms of powering it. The cost of running it in terms of battery life is unknown, and we need to understand the warranties. But I think we're getting smarter at that all the time, and I think the manufacturers are getting smarter at that all time. It hasn't yet got into position where you can take -- get it to all buses -- can't get double-decker with a battery life that are actually supported at the moment, but eventually that will come. The issue is infrastructure. And the issue on the infrastructure is, is where you need either government assistance to provide the infrastructure or the local authority -- public transport authority helping to provide the infrastructure. And what we're trying to do is we have become experts in understanding electrification of buses in London and outside London, understanding how -- what you need to do with [U. K.P. N.], for instance. How you can set up those connections, whether we should look at battery storage, whether it should be off the grid or not. There are a number of different ways in which you can do that. And we're also talking to people about -- I mean, you've said it, how do we change the structure of some of those contracts in London, which we may have to look at in order to create the business case which allows more electrification. Now that's quite difficult for a contracting authority. And we understand all the issues around that, but we're trying to think laterally of different ways in which we can actually provide an electrified bus service in ways that doesn't currently take place because we think that is the future. That's what we would back as being the future of buses in town center. It will be electric buses. The third one is about automation. There's not a lot happening in the U.K. on that, particularly in terms of buses. I've certainly been on a bus which is fully automated in Holland, with the driver sitting in the seat. There are -- what I -- so there are some regulations that need to be got over, just as there is for automated car driving and those issues of that. What I'm actually more excited about is not so much those things but how do we take some of those processes of automation and actually improve the safety for a driver and on a bus. So we are trialing video cameras as wing mirrors. So the wing mirror -- we'll still have the wing mirror because, if you're a business driver, your head will automatically go left and right on a regular basis, and we don't want to change that. So we'll put the video camera with better clarity as the wing mirror, and it's inside the bus, so the driver will still look up, but it will create higher definition certainly in poor lighting conditions, which will improve safety. Those are the sorts of things I want to see us develop on the buses. All of them cost money. But in the end, it goes back to the question of insurance, how do we do these things because we think there's going to be a long-term payback. And that's what we're trying to do.

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Unidentified Analyst, [11]

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Two from me, please. When you were talking about the Williams' review, you mentioned different models for different customers. I wonder if you could elaborate on that and what your thinking is there. And then secondly, your balance sheet is very strong as you identified. Clearly, you don't know whether you will be retaining the Southeastern rail franchise. You've started to deploy capital in Manchester, as an example, if that transaction completes. But when might you think about using your balance sheet more and would you look at returning capital to shareholders or more in the way of investment in the business?

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [12]

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Okay. On the Williams' review, what I mean, by different models for different markets, there is a really good logic to having a model that deals with the East Coast/West Coast type lines, which are all about your management about getting leisure travelers, doing all of those sorts of things, to be on a really customer-driven style franchise. There is less logic for having that on a commuter franchise. On a commuter franchise, you can easily do it as a management contract or as a concessionary contract in a different way. There are already those contracts in existence on the transport for London in terms of where they operate the overground. I see no particular reason why that couldn't be the model for any commuter routes into the major cities because, in the end, it's a different type of market doing different types of things. So that's basically -- I'm not fixated on the existing franchising model. I think it should change accordingly to reflect the different customer demands, personally. And we'll see what happens with that. And in terms of balance sheet, we are fairly conservative. That's the way we do things. It served us well. We start out and then we grow, and then we grow more and then we invest more, and we're carrying on that process. We're certainly investing abroad, and we're investing in the U.K. And we're still investing in regional bus. And we're investing in London bus. So there's a lot of investment taking place in all those areas. We're investing in the vehicles. We're investing in the depots. We're looking at electric depot in London at the moment, how we can do that. All of that is one way of where we're spending our money. We have not run out of opportunities to grow the business at this moment in time. So that's -- the difference is we don't do it in massive great big lumps. We do it in more cautious steps, and that's what our shareholders prefer.

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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [13]

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Gerald Khoo from Liberum. Starting in rail. On the Southeastern, when do we think we're going to have a verdict on the replacement franchise? Secondly, going back to insurance, the impression I get is that the additional costs are driven by a small number of large or, should I say, expensive incidents. Or is there a trend towards a higher claim cost per incident? Or is it more incidents? Just trying to get an understanding of what the driver is and whether that's a trend or whether this is really just one-off? Going back to electric vehicles. How far down the road are you in terms of conversion? I imagine it's not very far. But what percentage of the fleet, both for London and ex London, are electric? And what do you think are the CapEx implications based on what you've done so far in terms of what's the step-up in depot spend? What's the increase -- percentage increase in vehicle cost? And finally, in Manchester, I suspect you've already answered that question about why just the one depot? There are obviously more than one available from FirstGroup alone. Just understanding why the one, why not a bigger move? And you've obviously explained why you felt the need to make the move.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [14]

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Okay. And in terms of insurance, it's -- you've almost answered your own question in terms of it's -- I choose Option A of your list. Option A is it's a small number of expensive incidents. So there's no upward trend in the number of accidents that we're having -- people are litigious this year as they were last year, as they were the year before, that's not changed in terms of nature. We have to run very, very hard to make sure that number doesn't increase. And that's some of the things I've said earlier that we're trying to do, which I won't repeat. There's never huge focus on how do we reduce the number of accidents because if you don't have the accident in the first place, you can't end up with insurance cost. So it is a number of high-profile one-off incidences, which you hope will just even out over the course of the financial year and over the course of time and that is our experience so far. And in terms of conversion of the fleet, we're the largest operator of electric vehicles in U.K. And it's all basically one depot at Waterloo. We're about to have more. The number I think is 38, in terms of Newcastle and Brighton that we'll be introducing, and that's with government funding from their equivalent of the OLEV type funding and from the transforming cities funds. So we're only able to do it with government funding, which comes back to my original point. You'll get some benefits over the lifelong cost of that vehicle, but it's the infrastructure cost upfront is the problem. So unless you change the profile of the business case of that vehicle or the revenue, et cetera, et cetera, you are still going to need some upfront infrastructure cost to make the business case stack up, and that's where you look to central government or local governmental to help you do that because it meets their own aspirations of improving air quality. So to answer all the percentages, I can't do that at the moment. We have developed a level of expertise in understanding what works and what doesn't work. And we're sharing that with -- actually we're sharing it with colleague operators as much as we are with the transport authorities. What we're trying to get the message across is you cannot just say, ha, I want electric. It just doesn't work that way. Just doesn't work. You've got to find the right infrastructure in the right places in the right circumstances, and you've got to even understand the train that you're operating in because if you're trying to operate double-deck vehicles uphill in areas where there's more rain, you won't do it. Your battery life can't do that. It's just not capable yet. So there's a number of things we need to explain to people about what you can and can't do. And in terms of Manchester, I think I've answered both questions already actually because the question about balance sheet, we are conservative in terms of how we do things. That is what our -- our shareholders do like that. Allegedly, there might have been more bus depots available allegedly. We chose to just have a foothold in that market. And we're taking about 10%. So it's a small play in overall, and we're backing ourselves to make a difference, but it's a small play. It's not going to -- if it doesn't work out -- I'm confident it will, but if it doesn't, it's not going to be a dramatic problem for the business. We think we got a good value in terms of the assets. And then we'll work on how do we improve the service for the benefit of the customers in Manchester.

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Elodie Brian, The Go-Ahead Group plc - Interim Group CFO [15]

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And your first question was Southeastern, I think.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [16]

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I forgot about that one.

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Elodie Brian, The Go-Ahead Group plc - Interim Group CFO [17]

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Well, it's an easy one because there isn't an answer, really. We do not know. This is a matter for the Department for Transport. We're awaiting to hear the outcome. We haven't heard anything so far, so we're all in the same boat.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [18]

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Any other questions? You can't come back. Anything else? I'm going to close then. Thank you very much for coming this morning. Thank you for your really good questions. Thank you for your attention. And have a great day. Thank you.