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Edited Transcript of GOG.L earnings conference call or presentation 6-Sep-18 8:00am GMT

Full Year 2017 Go-Ahead Group PLC Earnings Presentation

London Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Go-Ahead Group PLC earnings conference call or presentation Thursday, September 6, 2018 at 8:00:00am 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

* Patrick Butcher

The Go-Ahead Group plc - Group CFO & Director

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Conference Call Participants

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* Alex Paterson

Investec Bank plc, Research Division - Analyst

* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* Gerald Nicholas Khoo

Liberum Capital Limited, Research Division - Transport Analyst

* Peter Larkin

Citigroup Inc, Research Division - VP

* Samuel James Bland

JP Morgan Chase & Co, Research Division - Research 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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We start each day with that video. And right, into the normal business. So this is -- good morning, welcome. This is Go-Ahead's Full Year Results Ending 30th of June 2018.

I'm going to do the normal format, I'll do a quick business overview. Patrick will go through all the numbers. I'll put some color on the numbers, and then we'll get to our Q&A at the end of that.

So good progress made in all 3 of our strategic pillars: protect and grow the core, win new bus and rail contracts, prepare for the future of transport.

Overall, results are ahead of expectations. The GTR impacted -- has been impacted by the industry implementation of the May timetable change. Southeastern rail franchise extended to the 1st of April 2019, and we have been shortlisted for the new franchise. Further progress towards our international target, with contracts coming onstream for the next year and this year. And we successfully launched the U.K.'s largest demand-responsive bus transport service, pictures of which you saw in that film.

So I'll now pass over to Patrick.

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [2]

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Good morning. Overall, the Group has performed ahead of our expectations for the financial year. Both bus divisions have shown resilience in difficult trading conditions. And in rail, the main feature in the change in profits is the expiry of the London Midland franchise in December. The exceptional items, which are explained in the appendix, arrive -- arise from gains that we announced previously from the change in indexation used to calculate bus pensions from RPI to CPI. And this has been partially offset by some goodwill write-offs and accelerated depreciation in some of our smaller bus companies, which have been most affected by reducing volumes and local authority reductions.

So turning to each division. The bus division is showing level profits compared to last year, in line with expectations. There are 2 main effects in the year-on-year comparisons: Adverse weather, which affected regional bus revenue in the last quarter -- sorry, in the second half; and continued good QICs performance in London as congestion eases. The reduction in rail is mainly London Midland, but I will expand on that in a minute.

So regional bus, the results, as you can see, have benefited from acquisitions and the reversal of the prior year one-offs, which we spoke about a year ago. However, this has been more than offset by declines in passenger numbers, including approximately GBP 1 million because of adverse weather in the east -- from the east. And in addition, contract volumes are down as a result of local authority reductions and reduced rail replacement revenues. Through a combination of yield management, route changes and pricing, we have been able to more than offset inflationary cost pressures, and taking together all of those factors results in a full-on profit of GBP 1.3 million.

While in London, margins have held up in what remains a competitive market. Revenue has grown as Singapore has completed its first full financial year, and we've had continued strong performance on QICs in the year. In the last quarter, however, some contract losses have come through, and some work has been retained on lower margins. And I'll talk a little more about that later.

Net inflation has been held at 0, reflecting the benefit of the contract price adjustment formula that we have with Transport for London.

As a result of the contract losses, and there have been a number of reductions across London, so there are a lot of spare buses. Some assets have been written down and others disposed of as a loss. And of course, that is a one-off effect this year and will reverse next year. And then finally, we've had some other cost increases on things like the apprentice levy.

Turning to this chart, which we have been looking at for a couple of years now. What you can see here is the shape of the chart remains the same. We have seen higher churn levels this year, reflecting aggressive bidding by some of our competitors. We remain disciplined in our bidding, and we continue to work -- win work at consistent margins. The coming year actually provides some really good opportunities to bid for work currently operated by other companies. However, because we have been through our contract renewal cycle, we continue to expect a significant reduction in capital expenditure as we go into 2018, '19. So we've now secured the bulk of our work for the coming financial year. We've pretty much secured all the revenue we need, and we're in a good position to respond to the challenges that are facing our single customer in that business, Transport for London.

Right, turning to rail. Operating profit is GBP 15 million lower than last year, and this is mainly because London Midland only operated for half of the year. Southeastern, as you can see from this chart, performed very well in the second half of the year. Revenue has improved following the resumption of through -- services through London Bridge, and the company continues to outperform its cost management plans. And there have been some favorable outcomes on contractual settlements.

On GTR, there are 3 separate effects in this bridge. In the prior year, there were some provision releases on the old Southern contract. And in the current year, some software development costs have been written-off, while the rest of GTR is broadly the same as last year.

Just to remind you, the contract has 3 main drivers of profitability. We must agree with the Department for Transport the costs of running more and longer trains, the program of cost improvements delivered at -- envisaged at the outset of this contract must be delivered and we need to deliver train performance that is in line with the contract.

Real progress is being made on the cost improvements. The dialogue with the DfT on the costs of running more and longer trains is progressing slowly, but we are hopeful of a resolution in the first half of next financial year. The service provider for customers in the last 6 weeks of the year following the timetable change has been well short of our and their expectations, and the results have been impacted accordingly.

As always with GTR, there are a range of reasonably possible outcomes to the discussions we are having with the Department for Transport, and so there remains a range of plus or minus GBP 5 million to these full year results.

So the results all come together on this slide, which shows the full picture for the year. Just a word on the tax charge, which is higher because we've accrued tax on the exceptional profit. And as we look forward on interest, we expect interest next year to be just under GBP 10 million, and the dividend has been maintained in line with last year.

So the business continues to generate strong positive cash flows, underpinned by the bus businesses, with free cash flow up compared to last year. On our new measure, we've changed it a little bit to measure free cash flow after the payment of minority dividends, that's free cash flow for our shareholders. We are proposing that dividend is held constant, given the underpinning provided by the bus cash flows. The board recognizes the importance to shareholders of a stable dividend and as part of its annual review process, therefore, has updated the dividend policy slightly. We're going to target a payout ratio for dividend rather than a cover ratio, and we're going to target a payout ratio of between 50% and 75% of net income. This better reflects both the historic and expected future payout ratio and provides the board with the flexibility to continue to pay an attractive dividend. Included in other is a small acquisition that we made in Oxford and the acquisition of East Yorkshire Motor Services up in the North East later in the year.

Adjusted net debt is broadly flat, but excluding the full impact of the acquisitions, because there's the equity component on the debt we took on would have fallen by around GBP 14 million in the year. And as London bus CapEx reduces, net debt is expected to fall in the coming year.

A brief look at capital investment. We've continued the program of capital investment to support contract renewals in London, protect and grow the regional bus business, targeting investment at routes with growth opportunities as well as delivering committed customer benefits in rail, such as new ticket machines.

Turning to debt. The adjusted net debt to EBITDA ratio remains below target, which in the light of the uncertainties facing us, we think, is the right thing to do. And the business has ample headroom on its facilities. The revolving credit facility was extended during the year on existing terms, which provides us with longer-term certainty. And as rail profits reduce, the ratio is expected to move into the range over the next 18 months.

So a final word about the future. Just to summarize, the bus division continues to perform in line with expectations. We -- yes, as ever, there's mix changes between the 2 divisions, but we expect it continue to remain broadly flat. In rail, there is uncertainty on GTR and potential upside on Southeastern. There's the potential that the contract gets extended for another 3 months. On GTR, looking to the remainder of the contract, we're holding our range of 0.75% to 1.5% over the life of the contract. Net capital expenditure, you can see fall significantly, in line with the fall in London. Some of you might have been expecting it to fall a bit more, but we are now beginning to invest capital in our overseas ventures. We're building a depot in Germany, and we're refurbishing a bus depot in Ireland.

A brief word before I close on the appendices. The first one provides some analysis on the exceptional items. The second one on pensions shows that the bus scheme is in healthy surplus at the end of the financial year, and the usual slide on fuel shows the continuation of our hedging program.

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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Thank you, Patrick. So you'd have seen our strategy before, and we referred to it in the film. And as mentioned already, we are making good progress on our 3 pillars. So our strategy remains relevant of protecting and growing our core business, winning new bus and rail contracts and developing for the future of transport. And we've made progress on all 3.

Over the last year, we have organically evolved our strategy to reflect the principles we adhere to as a business. So incomes, better teams, happier customers, stronger communities, smarter technology and a cleaner environment. And being a responsible business remains key to our strategy. We are still 1 of only 3 FTSE 350 firms to be awarded the Fair Tax Mark, and we have been reaccredited with the FTSE For Good certification. Through our 28,000 colleagues, we support the communities which we operate in.

So moving to our first pillar, protect and grow the core, and starting with regional bus. Against the backdrop of passenger decline of about 2.2% year-on-year outside of London, we saw a decline of 1.6%, driven largely by local authority cuts and wider consumer trends, such as online shopping, working from home and young people not traveling as much. However, falling car ownership and usage by young people does suggest there are some opportunities for growth.

We still have a resilient business model that is experiencing growth in many of the urban areas we operate in. For instance, we have seen a 9.5% growth on our Bluestar brand, which is in Southampton, building on the 3% from the previous year. And in our Fastway service, which is between Gatwick and Crawley, we have seen growth of 8.7% over the last 3 years. We continue to have leading margins in the sector, and our focus remains on customer needs and delivering high-quality services. We are pleased that we are, again, the highest-scoring operator for customer satisfaction in regional bus at 91%.

We're continually developing our customer offering by simplifying the travel experience, providing good value. We've introduced a flat GBP 1 fare for under 18 at most of our bus companies, which will encourage the bus habit, which we hopefully will continue. At Go North East, we have a GBP 10 family ticket; in the Citybus of GBP 5 Weekend Wonder; and on the (inaudible) express coach, kids go free with an adult. All just examples of things that we're doing across the patch. We continue to innovate our retail channels. Virtually, all our buses now take contactless, with 600,000 payments being taken each month. Our iBeacon's project was successful, and we are rolling it out further, offering weekly capping on a Pay As You Go ticket. We have 200,000 customers now using our new bus app, help them to plan and pay for their journeys and to track the exact location of the bus. And 50% of our services all have free WiFi.

We have ongoing network reviews at all of our local bus companies, all initiated by the local management responding to local customer need. We are only able to do this because we have a devolved management structure, and we give our teams the authority and accountability to do so. And we continue to invest in our fleet with 173 new buses.

And on the cost savings side, we have embedded a lean approach to engineering. So for example, in Go North East that has led to a 32% reduction in vehicle breakdowns and GBP 1.6 million capital saving on vehicles.

I passionately believe that buses are the solutions to city issues, and we are getting our message across, especially where air quality is high on the agenda. A Euro 6 bus produces less NOx emissions than a Euro 6 car, where -- whilst carrying up to 75 more people. That is a really powerful message. The government announced funding of GBP 88 million for ultra-low emission vehicles, which we've benefited from both in Newcastle and in Oxford, for example. And they've also announced the Transforming Cities Fund, where we hope to work with local authorities to roll out bus priority measures. We continue to monitor the Bus Services Act, where nothing much has happened. We still believe that working in partnership with local authorities in a mutually beneficial way without the need for contract is the best way forward.

And finally, we're continually looking for growth opportunities through acquisitions. We acquired the East Yorkshire Motor Services in Hull and a sightseeing business in Oxford. Both of them are doing really well and are embedded in our local businesses.

Turning now to London bus. Congestion is still an issue in London. And with other consumer trends already mentioned, they will affect London just the same as everywhere else. Passenger numbers are down, 0.6% across the capital, although that decline is slowing. We continue to support the mayor's plans to improve air quality, where buses are part of the solution and not the problem. And we have a program of retrofitting Euro 6 engines, and we remain the largest operator of electric buses in London and Europe.

We have tried a number of initiatives such as opportunity charging and electric double-deck buses in advance of the ultra-low emission zone for next April. We are working with TfL to achieve the mayor's transport strategy of 80% of journeys by public transport, walking and cycling by 2041. Our focus remains on operational performance. Punch loyalty levels are 12.5% better than last year, leading to a better QICs outcome. And as with outside of London, our lean engineering work has allowed us to reduce our spare allocation, and we've saved costs on engineering resource and reduced our external contract at some garages by over 70%.

And all of this effort is recognized with Go-Ahead London winning bus operator of the year. There is a pipeline of competitors' work coming up for tender, where we hope there will be opportunities to win more work.

And finally, London is still a unique place to run buses. Population growth continues to increase, especially in the suburbs as the city heads to 9 million people. And it will stimulate bus demand, which can't be ignored. And London's buses are still the most popular means of public transport, carrying 200 million more people than all of the other TfL services combined.

Moving on to U.K. Rail. Fundamental problem that exists is that DfT is rightly, through the franchising, increasing services to match the 73% growth in passenger numbers experienced since 2002. And aligned with this, there is a huge infrastructure investment program taking place. However, the infrastructure capacity does not yet support the service increases. And doing them at the same time is the cause of many of the problems we face. And for GTR in Southeastern, which run on some of the most congested and historically under-invested tracks in the whole of Europe, this compounds the problem and highlights the fact that on the railways, there will always be a trade-off between performance, capacity and cost.

The Thameslink program is one of the most significant investments in the railway, which is almost complete, and we have played our part in it. We have a number of concerns around the franchising process, not least the cost of bidding. So we welcome any move to smaller and simpler contracts, with a steady pipeline of opportunities to maintain market interest. And we support reformed franchising that delivers more for customers, communities, taxpayers and the economy.

U.K. still remains attractive, and recent changes introduced by the DfT are helping. So they've just introduced a Forecast Revenue Mechanism, which is in place for the Southeastern franchise, for example.

Our strategy hasn't changed. We continue to focus on the community routes, where our expertise lies and where we can add value dealing with various complex changes. And we bid with financial discipline and are securing -- only securing work on acceptable terms. We bid to earn a margin, not to get market share. And over the long term, this has served us well with rail's contributions to Group's profits.

Turning to the individual top companies. So in Southeastern, passenger numbers in Southeastern have now stabilized following reductions in the first half, which I told you at the half year. Relating to this rate is some of the socioeconomic trends we've already mentioned. This led us to accelerate our efforts on delivering business efficiency savings and a cultural change program leading to improved performance and increased customer satisfaction scores. In the second half of the year, therefore, passenger journeys and revenue growth have shown an improvement, and this is being boosted by the resumption of services through the London Bridge station.

Southeastern is a participant in the One local plan with Network Rail, local company suppliers and local authorities. It sets out 4 key national commitments made by the railway: to strengthen economy, improve journeys, boost communities and provide rewarding careers. And we'll deliver for the people of Southeast London and Kent.

We invested GBP 4.8 million in station enhancements, including USB ports in waiting rooms, new customer information screens and ticket offices for -- in places such as Strood. And there was a 13% increase in customer satisfaction with our colleagues.

Team Victoria is an initiative between Southeastern, GTR and Network Rail. And that led to a similar 13% increase in customer satisfaction. And we introduced 5,000 extra seats with 68 extra carriages in the morning peak in response to customer demand. And we are pleased to have been shortlisted for the Southeastern franchise. We've put in a good bid, we think -- a good sustainable bid on strong performance to date, which is focused on our customers through improving the trains, investing in our colleagues, alliancing with Network Rail and on a strong management team.

Turning to GTR. GTR was set up with one purpose in mind, to transform the railway. It's a network desperate in need of modernization, with growth in passenger numbers, which on the southern routes into London have doubled in the past 12 years. And at King's Cross, they've soared by plus over 70% in 14 years. We are modernizing with new trains. We're growing the capacity, changing working practices and delivering customer benefits, such as new ticket machines, automated delay repay, DelayRepay15, KeyGo, fare capping and Pay As You Go. And Network Rail has invested in infrastructure, and that's illustrated by the changes at London Bridge.

Prior to the introduction of the May timetable changes, operational performance was steadily improving. In May, we introduced the largest timetable change for a generation. Industry failings led to customers suffering a poor service for 8 weeks until an interim timetable was introduced, and I'm sorry for the difficulties this caused our customers. In July, with an interim timetable, we introduced 200 of the proposed new services, and the rest of those will progressively come on track as we go through out to December 9. The service has now stabilized with improving performance. The Southern performance has improved since introduction of the new timetable in May and is currently at its best since before the franchise started.

We have ongoing discussions with the DfT relating to the contract variations, and we support the [Glaister] review into the industry timetabling issues. The ORR in an earlier report has already described the systemic issues with timetabling in the industry. It's not just 1 party involved in this.

Turning to our second pillar, which is win new rail and bus contracts and to international development. Our international expansion is a significant part of the second pillar of our strategy. Our extensive experience in the U.K. positions us well to offer expertise in overseas markets. Our bus contract in Singapore continues to perform well. And in Ireland, mobilization of the first contract to operate bus services in the Outer Dublin area is progressing at pace with our first route due to commence operating later this month.

We've been awarded a second bus contract in Ireland for commuter services linking Dublin to commuter towns such as Newbridge and Kildare. And we're mobilizing in Germany for the start of 3 contracts in 2019, and that's also progressing according to plan. We're awarded a fourth contract to operate the E-Netz Allgäu route this month. And in total, we have secured 7 contracts, which are expected to have an annualized turnover of around GBP 250 million. We continue actively pursuing other opportunities in our existing and other targeted markets within a clear framework. And we're on track to achieve our target of 15% to 20% of Group profit from international operations by 2022. We are an international company.

Turning to our third pillar, prepare for the future of transport. Passenger and customer needs are changing, we've said already, with all the changes in social and economic circumstances and conditions. And we need to remain relevant to our customers and stay in tune with the changes in the transport sector. And we are seeking new ways to use our skills, our knowledge and assets to create growth and set us apart from the competition.

This summer, we launched the U.K.'s largest demand-responsive bus service in Oxford called PickMeUp. It's now in its 11th week of operation, and it's up to nearly 10,000 registered users. We've built relationships with the -- and partnerships with local businesses and hospitals to serve these in (inaudible) Oxford, where we offer the staff discounted travel, and we help to reduce congestion and alleviate parking constraints in the area all at the same time, which benefits everybody, including ourselves.

We launched the Billion Journey Project, offering technical assistance and mentorship to 10 scale-up businesses. It's the largest transport accelerator program around. The first project is with something called airport hour, which will create an integrated app, where you can organize baggage pickup at the same time as you buy a train ticket.

We have an IT consultancy arm called Hammock, which has won 2 contracts with the local authority, where we are commercializing our expertise in smart ticketing and payment solutions. And we're awarded the Smart Cities U.K., Transport Award for 2018 in partnership with iBlocks.

Mobileeee continues to grow across Germany. And as our rail contracts are mobilized, we anticipate further synergies. We continue to partner with logistics providers to use our depots and vehicles to reduce congestion and improve air quality.

And finally, we are working with a number of partners in Brighton to develop an app to plan and purchase journeys across bus, train, bike, car hire, crew Mobility as a Service.

So in summary, because in 2018, '19, our regional bus business, we remain focused on maintaining our leading passenger satisfaction scores, continued adoption of smarter technology and capturing more benefits from rolling out our lean framework. Market conditions will remain challenging, and we expect operating profit to be a slight improvement on this year.

Our London bus business will see a reduction in mileage for '18 and '19, resulting from TfL budget pressures and some contract losses towards the end of '17, '18. There are no further changes in our contracts for this year, and this will reduce -- lead to reduced CapEx spend. There are opportunities to win work, however, the main impact of which will be seen in the following year. In rail, our focus is on working with our industry partners to deliver improved service for passengers. And in terms of winning new bus and rail contracts, we will continue to execute our international strategy with the start of operations in Dublin, mobilization in Germany, and we expect to submit some new bids for additional contracts in our targeted markets.

We remain hopeful of winning the Southeastern franchise. We think we've delivered -- submitted a deliverable and economically sensible bid, building on the work and foundations of good performance of Southeastern.

And in terms of preparing for the future of transport, we constantly strive to make ourselves relevant for the customers of tomorrow more than we are today, so that we can continue to fulfill their evolving preferences and future-proof the business. We are focused on making sure that we have sufficient investment to understand changing trends, position our business to capture opportunities through a process of research and testing and piloting.

And finally, in terms of our shareholder returns, we are maintaining our dividend. Our free cash flow improved in '17, '18. We expect good cash flow generation for '18 and '19. Our adjusted net debt will have reduced. We believe our established bus and rail businesses continue to demonstrate the value private companies bring through delivery of customer-focused public transport, which is a key driver of social and economic activity. We're confident that our clear and focused strategy will continue to deliver value for all of our stakeholders over the long term.

Thank you very much. And we head for question-and-answer.

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Questions and Answers

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

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Who should we go with first?

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [2]

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Damian.

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

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Right. There's a mic coming.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Damian Brewer, RBC. Can I ask 3 questions? First of all, which is more generally around labor as the U.K. labor market opens (inaudible) politics. Can you tell us a little bit more about what you're doing to sort of preempting -- tightening with your stepping up training, recruitment and quite what your both strategy and tactics are towards labor retention and recruitment within the business, not just bus, but across rail as well? Secondly, in this sort of prepared remarks and in the release, you talk about spare depot capacity and highlight something going on in Crawley. Can you talk a little bit more about that? How much spare depot capacity is there? And what kind of difference can that make to incremental revenues and, therefore, returns across the businesses? And then very finally, I know it's a contentious one, but if I look at 2 of your peers here in the U.K. and Sweden, who don't run any rail, they are trading somewhere between 7 to 8x EV EBITDA National Express (inaudible). U.K. bus companies that have ventured into remaining rail trade around about 5x. Now clearly, I understand that rail generates cash and EBITDA, but it also seems to be generating a significant depressing effect on the multiples you trade at. So how can you be confident that you'll generate enough EBITDA or cash flow in future if you like to offset the depressing effect on the Group's multiple of being involved in what seems to be a highly political and difficult business at the moment?

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [5]

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Good questions, as usual. And I'll start with the first 2, and I think we'll share the third one between us.

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [6]

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Okay.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [7]

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We'll do that. For us, the Brexit issue, which is where you're coming from with some of that, is the biggest issue. We are obviously concerned about the economic activity that will drive from the uncertainty at the moment, but the big issue for us will be what happens to the labor market. On the bus side, we've been through that many, many times. I've personally gone through recruitment processes in different times of economic recession and economic growth, and we've always found our way through it. And I anticipate we'll do that this time as well. We have no particular issues across the patch at the moment. We are recruiting in Dublin, and that work has -- absolutely really quiet. Overjoyed by the number of applicants we've had for the jobs we're advertising in Dublin, which is about 350. So it's pretty good. And we're having no issues of recruiting in Dublin. We are big enough to be able to move people around, if we need to, in terms of fulfilling holes that might be in the network. So at the moment, that's not a major problem. There is the issue over on the horizon over Brexit, so we're thinking about some of that. And one of the ways we are looking at it is introducing a lean process. So we've talked about our lean framework. Generally speaking, we've applied the lean framework to engineering. It's been an engineering issue. But now, we've actually realized, almost quite recently, you can apply that to any principle. So we're applying that now to our recruitment process. And what that just does really is it gets you more people more quickly through the process. And we're just applying lean principles. And the example at the moment is in Brighton, where that's working quite well. So I think it's something that we're monitoring. We've been there many, many times. We know what we're doing. We've got huge experience in terms of recruiting, and I think that will be okay. On the railways, the problem with recruiting is not getting people. It's getting the right people for the job. And then the problem is getting them through a very extensive training program, which can be up to 14 months. And that really does need some lean principles applied to it. We are not alone in this, and we don't have full control over that process. It involves a lot more parties. But certainly, we don't have a problem with attracting people in terms of the money that we offer for being a train driver at this moment in time. Spare depot capacity, we -- the capacity is in the times of day we operate. So overnight, our bus depots are full, and all the buses run out in the morning peak. And then, in the middle of the day, some of the buses come back, but we have spare capacity in the middle of the day because the buses are out on the road, frankly. So we had a very good arrangement in our Crawley depot, where we initiated a pop-up consolidation center with a well-known logistics provider. And they -- when we went out, they came in. They set themselves up. When we came back in, they went out. It was a pilot. It was no more than that. But what we are really trying to do with both (inaudible) logistic provider and other logistic providers, of which we have had a lot of discussion and some very high-level discussions is looking at where the synergies exist in this world. And we know they exist. We're just trying to find them. So how do you deal with -- we've got assets going around in rural areas and urban areas, where people can actually put goods on if they needed to. There's a number of different ways that we can explore this. And what we're trying to do is find the right partner who has got enough imagination to find ways of exploring. And we think we've got that now. To be honest, I don't think you can move the dial in the first instance. It's a long-term strategy of trying to pair ourselves up with people who are innovative in this area and have got the same sort of mindset as us, which is there are more things you can do in this area, let's find ways of working together, and that's what we're doing.

Rail has contributed, I said that in the presentation. It's contributed to Group profits pretty well over the last 20-plus years. We've got experience in (inaudible) rail because that's what we do. That's where we've got our experience. (inaudible) lot of cash, if we get it right. When you get it wrong, you don't make profits such as in GTR. It's all linked to performance, which is what Patrick has said. But we only win in Germany, for example, because we are a big player in the U.K. And I know that some people will find this difficult to understand. But when we go to Germany and we say to them we are operating the most congested routes in Southeast England and therefore most probably the world outside of Mumbai and other places perhaps, and we come with a lot of respect. And it's on the basis of that sort of experience that enables us to win work in Germany. I'll illustrate that simply to say, without a domestic market, we may not have an international market until we've built it up to a sufficient level with sufficient experience that works in its own right. So I do think we need to still be in rail in the U.K. It will be a fairly tragic circumstance, I think, if U.K. Rail is completely dominated and left to foreign operators. That doesn't feel right to me. And we should be able to win in our own domestic market to enable us to win in other people's markets. Do you want to add anything else?

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [8]

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You said everything that needs to be said.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [9]

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Right. Next question.

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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [10]

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Gerald Khoo from Liberum. [Delivering] 3 questions, I guess. A couple on London. What's your contract retention rate has been in, shall we say, over the last year or the last sort of 2 tender cycles, both -- I don't know whether you want to call it as an overall number or as a percentage of the at-risk contracts? Secondly, another question about depot utilization, but more thinking about London and literally on the basis of how many more routes can you put into the existing infrastructure or what spare capacity there is? You talked about the opportunities to bid for other operators' work going into next year. What sort of spare capacity do you actually have to accommodate that? And finally, on rail, in Southeastern on the replacement franchise, what's your sense of the timing of the announcement of the award? Do you think that the replacement competition as a whole might be at risk if we do end up in another review?

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [11]

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Okay. I'll start with depot utilization, leading to London, because those 2 things are linked, and then we can share the rail.

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [12]

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The retention rates come straight off the contract renewal slide. If you look, the red bar is -- the blue bar is our contracts that were expiring and the red bar is the ones we won. And if you divide the red bar by the blue bar, you get a percentage.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [13]

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Okay. That's your answer for that.

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [14]

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Yes.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [15]

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And what...

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [16]

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I'll get someone to get a calculator, but...

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [17]

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The point I would make -- that's the mathematical answer. The point I would make is that all of this is over -- you have to look over the medium to long term in terms of retention because you win some, you lose some. You win some, you lose some. The evidence is that we are pretty good at doing it because we maintained our market share. And so the market share hasn't gone down over the years. We've maintained our market share, and (inaudible) over a longer picture, in my view, about how you do that. And we do that because we don't -- we put in sensible bids. We've been here before. We know what we're doing, and we carry on -- we play the longer game mostly. And in terms of depot utilization, the -- you're right. There can come a point where you can't get any more in. We're pretty adept knowing how to maximize usage within depots. Actually, we're pretty adept -- actually finding new depots as well. And last year, I think it was opened a new depot in River Road, Barking, which is absolutely perfect for us in terms of its location. We have at least 3 irons in the fire of locations that we may be going to and we can expand from. And what you always want in a depot in London or any depot is to be expanding right next door. And we've got some opportunities to do that. So we have -- we're always looking to see how you can expand on your existing depot facilities in a number of different ways. Some -- so for example, some -- we have talked to some of the logistics providers, we can have double-deck depots. We can use the space above us just as easily as they do in Hong Kong. There's nothing stopping us from doing that. So we're being quite imaginative and innovative about how we can expand our bus depots in London, and doing quite a good job of it. And in terms of rail, the question was when is the next franchise going to be announced and will it be delayed by a review that may or may not happen. So first off, we don't -- the review is merely rumor. We have no fact. I would suggest that if they did do a review, which I would welcome, that should not hold back the normal processes of making decisions. I'm saying that as a logical consequence. I would expect the franchise for Southeastern to be announced sometime in the New Year, possibly in February, but I'm not in control of that whole process.

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Peter Larkin, Citigroup Inc, Research Division - VP [18]

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It's Peter Larkin from Citi. On London, in terms of QICs, you had great results year-on-year, nearly doubling them. Is that opportunity now maxed out or could you potentially see further improvement to offset some of the mileage last year you'll have there next year? And then on international, would you be willing to detail what's in the pipeline for this coming financial year? And if possible, also what the revenue opportunity is?

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [19]

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Okay. In terms of the QICs, we anticipate a similar level of QICs this year as we had last year. There are circumstances, which improved for us over the last year. One was there was less spend on road building, which has the unintended consequence which is positive for us. That has a positive effect on congestion and not spending money on cycle superhighways has a positive effect on us, plus there are other bus priority measures introduced by TfL. And a lot of them will flow over to the next year. But the most important aspect is that we really have tightened up how we control the services and a lot of self-help. And that's come to fruition now, and that's why we're confident we can actually have the same level of QICs for this year. In terms of international, where there will be no surprises, in the sense that we will continue to bid in our targeted markets. So our targeted markets, we've said, will be in Ireland. They will be in Germany. They will be in Australasia. They will be in the Nordic regions. So there will be contracts submitted in those areas over the next -- the course of this year. Sam?

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [20]

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Sam Bland from JP Morgan. Two for me, please. The first one is on your bus profit bridge. Broadly, year-on-year, bus profit is about flat. I think within that you've had about GBP 6 million help from QICs and about GBP 6 million help from fuel. I think you just said that QICs is now going to be about flat year-on-year going into FY '19. I think fuel is going to be about GBP 2 million help rather than GBP 6 million help. Plus, you've lost some contracts in London. I think some of the work you've retained has been on lower margin, I think you said that earlier. Consensus has got about GBP 90 million, again, for bus profits in FY '19. How -- can you just understand basically where the offsets are, whether it's from acquisitions and new bids or this GBP 2.7 million reversal in London? And what gets it back up to flat bus year-on-year?

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [21]

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Sure. I'll do them separately, if that's helpful. So regional bus, yes, coming in at GBP 46 million this year. Depreciation goes up next year by GBP 1 million to GBP 2 million. Fuel benefits more or less offsets that. And then as we did this year, the combination of [route] restructuring, price increases, yield management will more than offset inflation. We've pretty much done most of our wage settlements, and we're still seeing sensible deals being arranged. In London, obviously, the first benefit we had was the reversal of the one-offs of GBP 2.7 million. Depreciation goes up a bit. Contract volumes are down something just under GBP 5 million, we think, in the full year effect. Fuel benefit of about GBP 1.5 million. QICs flat -- down a bit. And that gets London down a couple of million from this year. So regional up a bit. London down a couple of million. And that gets us to somewhere around GBP 90 million, which -- obviously, it's 2 months in, and we're a couple of months in. And so far, so good.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [22]

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Next question?

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Alex Paterson, Investec Bank plc, Research Division - Analyst [23]

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It's Alex Paterson from Investec. Two questions, please. Firstly, just on London bus. You're talking about pursuing a further GBP 95 million of contracts. I'm assuming that's not a 1-year revenue. What's the kind of contract length? Is that sort of 7 years or 5 years is normal? And then the second question is, just sort of building on what you're answering about Southeastern before. Obviously, the government or rather the press is reporting that the government is going to review the rail franchising network. What would you like to see from that?

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [24]

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The GBP 95 million is an annualized number. So there -- yes, if you were to draw the same chart that I draw for our competitors, you would see quite a lot of spiking going on. So there's annualized revenue. So if we want all of that, our London bus revenue would be GBP 95 million higher than it is now. Clearly, we're not going to win all of it. We wouldn't want to. Those are all 5-year contracts. What we've done is there's even more work than that, that is up for grabs, but we've looked at the contracts that we think we have a credible opportunity to bid for. As you know, what drives your competitive advantage in London is the location of your depots. So if the routes are off in the Northwest of London, those are not ones that we could credibly bid for. But yes, Southeast London is a lot up, and we think we can, in the way we always do, bid sensibly, bid creatively. We think there are some opportunities. As David said, yes, all of those would come through in '19, '20, rather than '18, '19. Yes, there might be the odd one that started in the last bit of the year, but it's more a longer-term thing. We've been through a lot of tendering. We've secured the vast bulk of the work that we have before we started. Now we can take a deep breath and scan what's going on around us.

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [25]

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And in terms of the second question, I don't know whether there will be a review. Allegedly, there is. If there was a review, and we won't -- when we find out, I have no idea, we would welcome it. We would welcome it as long as it's independent, external, it's focused on the whole of the industry i.e. every aspect of it because every aspect works together. This is an interrelated industry, and then it focuses on what's beneficial for customers and for taxpayers. That's -- I would welcome all of that. And I would want it to be an open, transparent, honest debate. And if I could even have cross-party support, I would even be happier. But I'll welcome it. It will be fine. It's the right thing to do in many respects. Yes. And we -- if we would have the opportunity to input into it, we'll be talking about some of the structural changes we've been looking for, which is smaller longer-term contracts, more scope for bidding, make them simpler, concentrating on the outcomes, not the inputs. But who knows?

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Alex Paterson, Investec Bank plc, Research Division - Analyst [26]

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Can I just ask one more? Can I come back to something sort of bigger picture. You mentioned customer satisfaction quite a few times in the presentation. Can you talk a little bit more about where you can or have seen any link between customer satisfaction levels in 1 year and what that does to growth and also profitability for shareholders in future years and whether you've got any examples of that?

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David Allen Brown, The Go-Ahead Group plc - Group Chief Executive & Director [27]

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The truth is, I can show you examples where it works the other way around. So when the customer satisfaction goes down, you will be making less money because people will be traveling less because you're not providing good service. Some of what the customer satisfaction does, to me, is it shows that we're doing the basics well. We are providing a reliable regular service that's clean. It goes where people want it to go. And they're happy and the drivers are giving a good service at the same time. So it's showing you're doing the job right. And then you're trying to build on top of that with all the other things that you can do and how else you satisfy customers. So it's more difficult to prove the upside than the downside. I absolutely can tell you that when that customer satisfaction goes down in individual locations, and sometimes it will ebb and flow, it will affect your bottom right-hand corner in that depot because you're not providing the service.

Great. Thank you very much, indeed. Thank you. We can have the chat now.

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Patrick Butcher, The Go-Ahead Group plc - Group CFO & Director [28]

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Thank you.