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Edited Transcript of NEX.L earnings conference call or presentation 25-Jul-19 8:30am GMT

Half Year 2019 National Express Group PLC Earnings Presentation

London Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of National Express Group PLC earnings conference call or presentation Thursday, July 25, 2019 at 8:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Chris Davies

National Express Group PLC - Group Finance Director & Executive Director

* Dean Finch

National Express Group PLC - Group CEO & Executive Director

* Gary Waits

National Express Group PLC

* James Stamp

National Express Group PLC - Group Commercial Director

* Judith Crawford

Petermann, Ltd. - EVP of Commercial Development and CEO of Transit


Conference Call Participants


* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* Gerald Nicholas Khoo

Liberum Capital Limited, Research Division - Transport Analyst

* Dennis Carlson

WeDriveU, Inc. - Chairman & CEO




Chris Davies, National Express Group PLC - Group Finance Director & Executive Director [1]


Right. Well, this works. Good morning. Delighted to be here again, taking you through another set of record results. We're going to do things a little differently today. So as ever, I will take you through the straightforward numerical piece, but then we've got a bunch of colleagues on the front row: Gary Waits who runs our North American school bus business; Judith Crawford who runs our North American Transit business; Dennis Carlson, CEO of WeDriveU who we're very excited to have here; and James Stamp, our Commercial Director, and they will flesh out some of what -- about the core group. Dean will then close, filling in the gaps on ALSA and the U.K., outlining our outlook for the year before we take questions.

Okay. So we've delivered another strong set of results right across the group, each division growing organic revenue, organic profit and operating margin. We've generated significant growth, 80% revenue growth with all core divisions growing revenue this year -- this half year. And that growth has flowed through to record profits. We've delivered a half year record for statutory PBT, up 10% to GBP 88 million. And all divisions have grown profit year-on-year, driving group normalized profit before tax up 11% on a constant currency basis and normalized earnings per share up nearly 13%. And then we converted those profits to cash with nearly GBP 100 million of free cash flow being delivered in the half.

Gearing remains within our policy at 2.5x EBITDA despite the transition to IFRS 16, adding about 0.2% and despite spending GBP 136 million on acquisitions in the half. And then we are reinvesting and returning that cash. So we continue to invest selectively in value-adding acquisitions, and we completed 4 deals in the first 6 months of the year. The most notable of these, WeDriveU, is Silicon Valley's premier employee shuttle business, and Dennis will talk about that more later.

Our disciplined approach to capital allocation is really shining through. Like-for-like ROCE is up to 13%. Now IFRS '16 then takes 80 basis points of that back from me. So when we report it, it was flat at 12.2%. But as the acquisitions that we've made through the years are returning 15%, you're seeing that underlying ROCE now begin to rise.

And finally, the strong performance is reflected in an increase of 10% in the interim dividend.

So just to lay that out a little more formally. We grew revenue by GBP 127 million to GBP 1.34 billion. We grew operating profit by 17.4% on a reported basis, 14.7% on constant currency, and we grew operating margin by 60 basis points to 10.4%. Now IFRS 16 adoption gave us 20 of those, but underlying margin is up 40%.

Normalized PBT is up 13.8% on a reported basis, up nearly 11% at constant currency to GBP 114.6 million, a record half year delivery for the group.

Now to revenue. Constant currency revenue grew by 7.8% and was boosted by GBP 29 million of translation, predominantly from the dollar to drive reported growth of 10.5%. That growth was fairly balanced across existing new businesses with the continuing business growing by a healthy 4.3%, further boosted by GBP 43 million of revenue from the businesses we added in the first half of the year.

So on to operating profit. The flow-through of that revenue performance in the continuing business contributed GBP 22 million of profit growth across the group. That robust organic growth was boosted by a net GBP 4 million of acquisition profit, so 80% of that first half profit growth is organic.

For the first half of the year, driver wage inflation across the group amounted to some GBP 14 million, and North America remains a particular area of focus for us, as we mentioned in May. But we are securing price raises well in excess of these wage raises, and Gary will expand on this in a few minutes. In addition, hedged fuel prices were GBP 4 million, up year-on-year. But as you can see from the chart, across the remaining cost categories, the group has driven GBP 10 million of efficiencies to offset those wages and fuel.

So stripping this back, if I exclude the acquisition profit, that's organic, constant currency operating profit growth of 11.5%.

So just to finish up on the income statement. Net finance costs are up by GBP 6.7 million year-on-year. Just over half of that increase, and you guess it, is driven by the transition to IFRS 16 with the rest driven by the slightly higher levels of debt and a mix of debt between euros and sterling. So our effective tax rate is up slightly at 22.6%, in line with earlier guidance. And we delivered a 13.8% increase in normalized profit before tax on a reported basis or nearly 11% in constant currency. As I said before, earnings per share is up 12.7%, underpinning the 10% increase in interim dividend.

So turning to cash. We delivered strong cash flow in the half year of nearly GBP 100 million. EBITDA at GBP 243 million is up GBP 54 million year-on-year. And yet again, GBP 29 million of that is driven by the transition to IFRS 16. Strip that out, underlying EBITDA growth is 13.4%. Working capital outflow of GBP 40 million reflects a growing business, in line with our expectations. And reported maintenance CapEx growth is also boosted by the transition to IFRS 16, broadly offsetting that increase in EBITDA. So take the accounting out of it, the overall operational cash flow growth of around 16% is broadly driven by the underlying EBITDA increase.

Now as I said earlier, this has been an unusually big first half for acquisitions, and we have made 4 in the period for a total consideration of GBP 129 million, inclusive of the debt acquired. You'll see GBP 136 million outflow in the fund statement, and that is the net cash consideration of GBP 89 million, less GBP 5.6 million as it was deferred to later years, plus debt acquired of GBP 40 million and then 12.5% deferred consideration paid this year in respect of earlier acquisitions.

You'll see dividend payments are up 10%. Again, you'd expect that. The biggest driver of the increase in debt, however, is the transition to IFRS 16, which has increased reported debt in the period by GBP 211 million, pretty much bang on the guidance we gave you earlier in the year. So I thought I would expand on that a little more in this slide.

As you can see, the free cash flow generation of the group covered growth CapEx, dividend payments and all the other organic movements. So without any acquisitions and without the adoption of IFRS 16, net debt would have been down in the year.

As I said, reported gearing was 2.5x of EBITDA, within the guidance after the impacts of -- after the impact of IFRS 16 and the significant outflow on acquisitions. And both of those impacts, the transition to IFRS 16 and the acquisitions each added about 0.2 to that gearing number. Whilst this gearing number is well within our covenant of 3.5x -- and that covenant, by the way, is on frozen GAAP, so it's effectively 3.7x as we stand. And it does allow us to continue to operate with our internal Board policy of a minimum liquidity headroom of GBP 300 million. We would expect to see that leverage come down over the medium term.

Now given that some of these numbers are -- have been moved somewhat by IFRS 16, I thought -- we're all, frankly, getting grips of that as I know from my calls with some of you this morning. I thought I would update this chart and just give you the numbers again. Now I've rounded the numbers in this for simplicity. So please don't just go back and plug it into your models, but this is a good indication of a kind of normalized year.

So we will deliver EBITDA in excess of GBP 500 million. Reinvesting in maintenance CapEx at the rate of about 1.1x depreciation has us -- would require between GBP 200 million and GBP 250 million. Tax, interest and some working capital works will consume about another GBP 100 million, meaning that we will -- we sustainably generate somewhere between GBP 150 million and GBP 200 million of free cash flow. That sets up the platform to continue to drive the compounding growth through acquisitions, earning 15% on them as we do and/or reduce gearing towards the 2x end of our range and/or return to shareholders, for example, in the form of increased dividends again.

I'll just talk a little bit about the acquisitions we made. I think you'd probably rather hear from Dennis or one of them than me in any case. The WeDriveU -- Dennis will talk about the detail of the business, but let me remind you the mechanics. We acquired a 60% stake in the business, and there are symmetrical put/call options for the remainder of the 40% over the next 3 years. We've recognized a put liability of GBP 105 million in the balance sheet in respect of that.

Staying in North America. We acquired a couple more businesses in the transit shuttle space: a power transit business, providing entry into a fast-growing nonemergency medical transport market and a motor coach business serving university. Both of those, again, I think both Dennis and Judith will talk a bit about later.

In Spain, we expanded our footprint in Galicia, adding a chauffeur services business.

And then I should also advise you of a couple of events that have happened since we locked down these numbers. So they're not in these numbers. They do not feature in the half year, but it happened in the last week or so. Firstly, the acquisition of ATG. That's a demand-responsive, accessible transport business in Birmingham and further builds out our mobile range of transport in that hub. And secondly, the sale of Ecolane, our transport scheduling software business for $42 million in cash and a rollover investment of $10 million into the transit software fund that bought Ecolane. And Judith will expand on that a little later.

On to liquidity. We continue to improve our liquidity profile. The group has around GBP 2 billion worth of debt capital and committed facilities. And at the 30th of June, we held GBP 748 million of cash and undrawn committed facilities. We've extended our bank facilities out to 2024 with one additional 1-year extension remaining. And having entered into a 3-year GBP 500 million bridge to bond facility last year that effectively underwrites the refinancing of our 2020 bonds until '22, as shown on the slide there with the dotted lines, we're now well underway with our plans to refinance our 2020 bonds. I anticipate refinancing a material proportion of those before the year-end, and I'll update you later in the year as to how we're going on.

But bringing all of that back together, we remain fiscally disciplined. We're strongly committed to our investment-grade rating, and we're very pleased with the recent upgrade from Moody's with gearing and interest cover remaining well within our covenants. Fuel is hedged; our pension position, well managed. We operate with a minimum cash and committed facility headroom of GBP 300 million. And as I said, we're well within -- the covenants that we're well within are effectively on frozen GAAP, giving us slightly more headroom as well. And it's worth also remembering the low operational gearing of the business with no single contract worth more than 4% of group profit that underpins the robustness of this business model.

So finally, just to give you a few points on guidance. Net capital expenditure for the year, as previously advised, around 1.1x depreciation. And in a post-IFRS 16 world, that's going to look about GBP 220 million. No change to the effective normalized tax rate, low 20s; cash, low 15s; like-for-like fuel costs over the full year, GBP 6 million higher; and full year free cash flow of at least GBP 160 million. So I think I told you GBP 150 million to GBP 160 million before. We're at least at the GBP 160 million end of that range. Dividend cover of at least 2x normalized earnings as before.

And then I've spoken to many of you this morning already, but just the sort of big numbers on IFRS 16. For the full year, it puts about GBP 60 million onto EBITDA, GBP 211 million has been put on to net debt through transition and underlying gearing impacted by about 0.2x.

So overall, we remain confident we are on track to deliver another year of growth in revenue, profit and cash.

And I will now hand over to Gary Waits to discuss our school bus business in North America. Thank you.


Gary Waits, National Express Group PLC [2]


Thank you, Chris. I'm Gary Waits, and I manage the North American school bus operations. I believe we have a positive future ahead of us. School bus is about focusing on the detail to deliver excellent and safe service, securing competitive rate increases and closely managing costs. For the first half of 2019, we have made good progress on these. Our focus on cost efficiency and service has resulted in a 9% growth in profit and a 10 basis points improvement in margin. This is despite an unprecedentedly cold winter in the central part of the U.S.

We've remained disciplined in our pricing in the current bid season, achieving for the new school year a 3.9% revenue increase across the whole portfolio versus a 3.4% driver wage increase. We've achieved 92% contract retention with a 400 basis point improvement in margin between what we lost and what we won. The net volume loss is more than offset by the difference between revenue and wage increases. This results in a net profit and margin improvement for the full year.

We have made several key hires at the senior school bus operation level in the last year. We now have over 200 years of successful school bus experience in these important roles. I believe we now have the most talented and experienced team in the industry.

We are investing in the tools to allow them to deliver. For example, we're using technology and granular processes to find driver schedule efficiency as well as achieving lower safety cost through improved safety performance.

As a team, we are all focused on growing the number of customers who are highly satisfied. More 5-star ratings create further margin opportunities for us as we improve terms and rates, add extension or renewal, have exemplary references for new work and realize organic growth opportunities. In the last 3 years, our proportion of 5s has gone from 1/3 to 1/2 of our portfolio, and we're determined to maintain momentum on that. As a reminder, our historic margins on 5-star ratings are 400 basis points better than our other contracts.

This competitive pricing and investment in technology, people and customer service gives me confidence we can continue to improve operating margins in the coming years.

And now for review of transit, I'll turn it over to Judith Crawford.


Judith Crawford, Petermann, Ltd. - EVP of Commercial Development and CEO of Transit [3]


Thanks, Gary. Good morning, everyone. I'm Judith Crawford, and I run our transit and shuttle business in the U.S. Transit is the newer of our 2 business units. And while school bus can trace its history back over 100 years, we only started our transit business in 2012 with the purchase of the MBTA contract to -- on para-transit -- to run the para-transit service in Boston. We've seen significant growth in the business since then, and we are now over a 500 million business. For the last 4 years, we achieved a CAGR of over 40% driven mainly by acquisitions.

Our acquisition strategy has been to target the businesses with customers who value service. And as a result, we have very expected contracts. We're the top-performing contractors for service in our 3 largest contracts of Chicago, Boston and D.C. Our strategy has also been once we can compete, we allow business to grow.

So for example, in Chicago, we started with a base para-transit contract that we bought and have soon started a coach business, adding a university shuttle contract business, 1 of the 2 additional contracts including a new para-transit contract for $100 million of annual revenue, which we just started up last week.

Our annual revenue in the city is now over 75 million, and we're targeting to be over 100 million in the next few years, better than what we achieved in the New York City from our base acquisition in 2014.

Investing and growing our transit business is part and partial of the National Express strategy to diversify the portfolio. In the U.S. now, 1/3 of our annualized revenue comes from non-yellow school bus work.

There was also significant diversification within the transit business unit where we want to [make sure services].

Para-transit, our anchor contracts and the largest component of the business. The [accolade] involves transporting those with disabilities under a federally protective mandate. We operate 4 of the top 10 para-transit systems in the U.S. including our largest U.S. contract in Chicago, which we extended for an additional year. We hope to go further this year as we renew and bid a number of contracts in the coming months.

Fixed route. We currently operate over 10 fixed route contracts as well as a $5 billion addressable market, and we recently won our largest organic contract.

Coach. We have been developing a coach network with operations now in 5 major U.S. cities, which focus on the charter market rather than (inaudible) like point-to-point services as we have seen this market expand at 7% annually versus the [last of which to look like].

Shuttle. We continue the diversification earlier this year with the investment of WeDriveU, significantly expanding our footprint in the employee shuttle market. I will leave the details of growth to Dennis Carlson, the Chairman of WeDriveU, to cover this afternoon.

I'm very proud of the business that we have built. The market offers significant opportunity to continue to grow, and we are targeting to double in size in the coming years. We've established ourselves as a market leader with the quality service that we provide, and there's an increasing proportion of our customers who appreciate and value this. Our reputation will allow us to grow -- the growth to be achieved through increased contract wins and less reliance on acquisitions. We are disciplined in our acquisition strategy and demonstrating just this week again with the sale of Ecolane. We purchased the business just over 3 years ago and sold it for 4x return while still retaining an ownership to our $10 million investment in the [PE transportation software fund]. It was strategically the right time to sell. Developing technology is not our core competency, and we were inhibiting their ability to grow. The sale will allow equally to unlock their potential while allowing us to access fund investing in broader transit software.

Thank you, and I will now hand over to Dennis who's going to discuss WeDriveU in more detail.


Dennis Carlson, WeDriveU, Inc. - Chairman & CEO [4]


Good morning. I'm Dennis Carlson. I'd like to introduce WeDriveU and share with you my enthusiasm and excitement for teaming up with National Express. WeDriveU has been transporting employees for the world's top brands for nearly 10 years. We started with Google in 2010 with 5 motor coaches. As of today, we operate over 900 vehicles on behalf of 30 of the world's fastest-growing companies. We launched the corporate shuttle business in Silicon Valley and have been fortunate to expand with several customers in new markets as they've expanded their operations in cities such as Seattle, Austin, Texas and Los Angeles.

Our customers are demanding and expect high performance. I'm very proud of the fact that we've had 100% customer retention over the past decade.

Let me share with you some of the dynamics that are driving the corporate shuttle market. The competition for engineering talent, coupled with the inadequate public transportation infrastructure between San Francisco and Silicon Valley, has led to the rapid adoption of the employee shuttle. Companies quickly realize providing their employees of comfortable commuting experience with amenities such as robust WiFi was both important to attract and to retain talent in a highly competitive labor market. Currently, only 30% of the employees of our Silicon Valley customers regularly utilize these shuttle services. It is reported by various media sources, both Facebook and Google expect to double their number of employees in Silicon Valley over the next 5 years. As companies expand their corporate campuses, many cities impose a reduction in single-passenger vehicle parking at corporate campuses. We believe these factors are tailwinds that will continue to drive further growth in Silicon Valley and in other major markets.

WeDriveU provides 4 types of shuttle services. Residential bus service transports employees from their neighborhood to the office. Intra and inter-campus shuttles provide transportation within and between corporate campuses. Last-mile shuttles transport employees to and from mass transmit or remote parking locations. On-demand services are an Uber-like service for employees to move around the corporate campus.

Typical shuttle contract terms are 3 to 5 years, with up to a 2-year extension. Approximately 40% of our contracts are driver-only. The remainder are full-service, including vehicle, driver, maintenance and related operating costs, which are all reimbursed by the customer. We only lease vehicles upon winning a contract, and we seek to match the vehicle lease terms with the customer contract term.

Our target gross margins are in the 15% to 20% range. Our business model is highly predictable, capital efficient and well positioned for the next phase of growth.

WeDriveU operates in 12 regions in the United States identified by the green icons. We operate on the West Coast from Seattle to Los Angeles, in Texas, in Chicago and in Boston, New York and Washington, D.C. on the East Coast. The light blue represents the states, provinces and European countries with National Express operations. The yellow icons represent WeDriveU's major customer operations. As you can see, there's a high concentration of operations in Europe, and we are beginning to explore these shuttle opportunities with our clients.

Today, we operate in the 2 billion U.S. corporate shuttle market, identified by the dark blue. We are entering 2 new verticals: the university sector with a 1.5 billion market segment, that's the orange area; and the hospital sector with a 1.7 billion market segment, the green-shaded area. This brings the total addressable U.S. market to 5.2 billion.

Our 3-year CAGR is 49% with revenue growing from 56 million in 2016 to a current run rate of 185 million. We are well positioned and extremely excited about our potential for growth over the next several years.

In summary, WeDriveU has successfully partnered with several of the world's fastest-growing companies over the past decade. We've delivered high-growth with an agile, asset-light, high-margin business model, and we are poised to expand in our existing markets and to leverage the National Express global footprint.

Please let me introduce you to James Stamp, Group Commercial Director.


James Stamp, National Express Group PLC - Group Commercial Director [5]


Thanks, Dennis. Good morning, everybody. I'm James Stamp. I'm the Group Commercial Director. I'm going to give you a quick overview of our technology strategy today.

With technology, it is easy to get distracted by the hype and the headlines. Our approach is different. We do recognize the pace of change, and we prepare for it. We have innovation hubs across the globe to capture new ideas. But importantly, we focus on the technology that can really move the dial on returns and improve service, and we invest in those at scale. So while some spend a disproportionate amount of time on things like autonomous vehicles technology, we don't think it's going to be on public roads on a commercial scale for a long time. We focus on those technologies that can capture benefits now and build capabilities for the future.

Let me just give you a few quick examples. Firstly, on safety, what have we done? We've invested in smart cameras, risk profiling and speed monitoring in each of our businesses. We're the industry leader in adopting safety technology and implementing safety processes. And we adopt new technology as it becomes available, new vehicle technology like virtual windows.

But what are we doing to build on that? Well, we're introducing driver apps in each business unit that gives us real-time feedback on driving behavior. The data we're collecting from our vehicles and devices, like DriveCam, allow us to predict risk before it happens. And we will absolutely continue to be at the forefront of rolling out drive rates as they become commercially available?

But why is this really important? What's the dividend for us? Well, we spend on safety GBP 100 million per year. So we're already seeing significant benefits from the investments we've made such as a lower North American insurance charge in this half year.

Moving to operations. We have now telematics on the vast majority of our vehicles. The task we've got is to use this increasingly rich data set to making performance management decisions. We're using this data to implement advanced scheduling solutions, network optimization and demand prediction tools.

Let me just give you one data point here. Every excess minute in our schedules cost us $1 million in the U.S. alone. This is what Gary was talking about earlier when he talked about our investment in scheduling technology.

Two other areas to talk to you about briefly, new or alternative fuels. We now have electric vehicles in each of our business units. In fact, in the West Midlands, so far this year, we have only bought electric vehicles. But more importantly than that, we're engaged with the OEMs to understand their product road maps. We're looking really carefully at the inflection point where the technology becomes commercially viable, whether that's hydrogen or electric.

We're future-proofing our depots that when the switch does come, we have the space, the infrastructure and the expertise. We're looking really carefully at the potential maintenance savings we could make in a full alternative fuel scenario. Now this is important because, again, we spend GBP 350 million a year across the group in fuel and maintenance. The underlying maintenance and fuel cost savings from this new technology could be very significant.

At the moment, if we take electric, for example, battery costs are still too high to make this equation work, but they are falling. And we will be ready to invest at scale when it reaches the tipping point.

And finally, I would just give a couple of examples on growth. You know that we have delivered industry-leading pricing and yield optimization software. We've also invested heavily in technology integrations with third parties, which, amongst other things, allow us to sell through new channels while controlling the price and retaining the control of the customer.

What we're doing in these areas on pricing, we're investing in the latest artificial intelligence and robotic process automation tools to make better, quicker, more granular pricing decisions. Now as you know, our coach revenue management systems have been powering that business organic growth for some years, and we expect this to continue.

With respect to our technology integrations, we use APIs, which is the technology that allows systems to communicate with each other in order to integrate quickly and efficiently with new -- with third parties. Our view is that just focusing on the customer-facing so-called mobility of the service platform in isolation is wrong. It is hype. Cities and customers will continue to make their own choices about how passengers consume information.

Our strategy is to be the transport operator that is the easiest to integrate with, whatever the mobility platform. And we're investing in this technology with some senior hires.

So again, in context, we're seeing very rapid rev growth in API revenues, over 34% up in year-to-date, and we will position ourselves to capture that growth in the future.

Thank you very much. And now I'm going to hand back over to Dean.


Dean Finch, National Express Group PLC - Group CEO & Executive Director [6]


Good morning, everybody. I promise this will be done before the cricket starts. I think England was hangover, don't you?

Well, I wanted you to see a bit more from the team this morning, to give you a flavor of some of the really interesting things that are going on around the business at the moment.

ALSA has had a brilliant start to the year, growing revenues in each of its business segments and growing profits in local currency by nearly 13%. Over the last 5 years, ALSA has grown revenues and profits on average by 6% and 6.4%, respectively, meaning that it is now on course to deliver annual revenues of EUR 1 billion in its own right. It closed one small acquisition in the period, and that delivered about EUR 0.3 million in profits before deal costs. ALSA also achieved some significant renewals and extensions of existing business in the period worth around EUR 1 billion in contract revenues including securing Bilbao, ALSA's largest urban contract until 2034. It's worth remembering that we acquired Bilbao about 5 years ago for EUR 1 when it was a loss-making contract. It is now a profitable contract with annual revenues of around EUR 6 million.

ALSA also won a number of new contracts in the period both in Spain and in Switzerland. The impressive organic growth in the period has been delivered as a result of using revenue management systems and artificial intelligence to drive passenger demand, average revenues per passenger and improving load factors. Simply comparing load factors in Spain, which are now at around 50% on average with the U.K., which are now at closer to 60%, suggests there is substantial scope to continue to improve profitability in Spain over the coming years. Our systems are giving us the confidence and the insights to successfully take decisions that previously we have not taken.

Seven years after I first raised the prospects of the long-haul concessions going to market in Spain, the process has begun. Maybe. They are being appealed against, and that is likely to lead to further delay. So far, only one competition has been launched in connection with ALSA's existing business. This relates to one small concession just started in the group.

We are advised by the Ministry of Transport. They are looking to redraw the existing franchise in that in relation to the larger concessions to reflect changes in travel patterns and behaviors. We believe that this means there will be limited impact on ALSA's existing business in both 2019 and 2020. Indeed, we are not expecting a material impact on the business for some years to come. Clearly, there is at least the possibility that the political environment in the meantime in Spain could change.

We are seeing some very interesting developments in Morocco. Rabat contracting starts later this year, and that will have the effect of doubling our revenues in Morocco to around EUR 100 million. With the tendering of additional urban centers and the developing interurban network in Morocco, there is an opportunity to more than double this business again over the coming years.

Our U.K. businesses also enjoyed a stellar first half with profits up by nearly 16% on the back of a strong organic growth, augmented by good Glastonbury and some partnership renewals. Like ALSA, revenue management systems and artificial intelligence are being deployed to take decisions about fares and service that we could not have taken before. We're also now able to extend our reach to customers through digital channels and control the fares that we offer on a scale that we simply could not have imagined 5 years ago.

One of the most interesting statistics for me is that customers are now using digital tickets for 64% of their journeys with us in the West Midlands. This is giving us vastly more information about our customers than we've ever had before, which over time should enable us to transform service we offer. We're also improving our timetables with additional services and new routes in both bus and coach.

So in summary, we have made a very strong start to the year in all of our business areas with organic growth in all markets. I'm particularly pleased that we have secured an increase in school bus contract rates from September across our portfolio in North America that should be meaningfully ahead of wage inflation. And this is our best performance for at least 7 years.

For example, in 2017, wage inflation was 5.1%, and rates went up 3.2%. Last year, both were at parity at 3.6%. This year, rates for us are up 3.9%, and wages at 3.4%.

The growth in our transit business over recent years has been impressive, and we are all really excited to have Dennis and WeDriveU with us in the business now.

Time has allowed us to improve the diversification of our Spanish business, meaning that we are better protected than we were in the past in the consequences of competitions for long-haul concessions. As I said, over the next 2 years, I don't expect any significant financial impact at all from margin compression if the competitions now begin to run in earnest. If and when we do see any margin compression, I believe that also we'll continue to grow profit, thanks to the many opportunities available to it, not least in Morocco.

Now before expectations get carried too far away with us today, it is worth remembering that German margins will be diluted as a result of the mobilization of RRX in the second half of the year and as we look to refinance the 2020 bonds. I do believe that we're currently enjoying, though, a net positive momentum across the business, thanks to our relentless focus on service.

Now I realize we've gone on a lot and we packed in a lot today, and I'm sorry for that. I know it's a busy day for you guys. If I were in a sense to describe where I think we are, I think Spain and U.K. were on par in the first half, and there's lots of interesting things going on in North America and Morocco.

So thank you very much for listening to us. And now I'll open up to questions.


Questions and Answers


Unidentified Analyst, [1]


A couple of questions about the U.S. In the slide on the U.S. School Bus business, I think you made the comment that if you look to the revenue versus wage increases, the delta between those 2 is more than enough to offset the lost vehicles over the course of the year. Can you just sort of elaborate on that a little bit more and perhaps explain whether that creates some opportunities for capital release from the U.S. school bus business? Because it would seem to indicate return on capital starts to grow quite meaningfully.

And then on transit, target is to double that. I just wondered if you could be a little bit firmer about how you could get there and how long that might take and, indeed, whether any margin might have to be given at some things like WeDriveU?

And then finally, with respect to your presentation, Dean, you were talking about how ALSA has the opportunity to catch up with UK Coach given the load on them. I mean UK Coach itself is doing very well, and I just wondered how much longer that story has to run in the U.K.


Dean Finch, National Express Group PLC - Group CEO & Executive Director [2]


Thanks, [Joe]. Yes. I mean we're working quite hard on the deployment of assets in order to drive up the return on capital. There is definitely an opportunity in there. It's too soon for me to be able to say how big an opportunity it is, but it's meaningful. Over the course of the next couple of years, I am looking for a meaningful dividend in North America from its maintenance CapEx, which, of course, could be redeployed for growth, which is probably what we'll do. So -- but again, of course, that has to be at the right margin. But yes, there is an interesting and exciting opportunity there.

So yes, I mean there's 50 basis point delta on pricing late. You can do the math better than me. You can work out what that means better than me. We have to give up probably 1/3 to 1/2 of that back in terms of the contribution from the volume lost and closing out some of the tail-end contracts. But there will be a boost from that coming through in North America during the course of the next full year.

Of course, it means we've got to go and repeat that again next year, but it is interesting. And I'm not going to say (inaudible). But it is interesting that we have seen incremental and ongoing improvement in rates over the last few years, whilst at the same time, the abatement on wage pressure. Now wage pressure is very much still out there. It's not going to go away. The American economy is burning apart. But we have seen some evidence that, that is going to help us at least over the course of the next 12 months, which is really good news. And the capital dividend is also good news.

The second question is no, do I look that stupid? But there's lots to get excited about now. Yes, I mean I think WeDriveU over -- look, I think it's a really interesting point. And we'll still in the same way our way in. Will WeDriveU have to give up margin? Well, maybe, maybe not. This has got -- this is a different customer base to the traditional customer base we're looking at here. We're talking about some of the fastest-growing companies in the world in one of the richest places in the world. What's California, 15% percent of American GDP? They've got a bigger GDP than England, and it's growing fast. Google and Facebook are both projecting that again to double in the space over the next 5 years. And crucially, Dennis has grown as various customers have grown. And now he's got the bandwidth, not just grown in the Bay Area and the parts of the space that he's operated in, but we've got bandwidth to grow across The States, throughout The States, yes, and across the world to allow infrastructure. And they are reaching out to understand how we can help in cities outside of the United States. So very early days, but that is very interesting.

And the priority is not, is not margin at this point in time, the customer obviously with that. They're really focused on their own growth. They see their employees as a huge, invaluable commodity, and they want to shift them around as well as they possibly can, and service really counts. It really counts. You might win a contract with Facebook and Google, but you only get -- you don't get the volume. You get the right to play, and then you have to go and earn that volume by proving your service. And then you get the additional [laps]. And so you might get in the door, but then you've got to prove yourself. And that's what these guys have done phenomenally well. And they're very focused on their customers. They're very focused on customer service. And I am confident they will continue to grow over the coming years. And if they do have to give up anything in rate, I think it will more than make up with volume.

With ALSA and coach, I'm just really excited about the opportunities that we've seen there at the moment. I think that, yes, you're absolutely right. I also think that, that go up with what -- our coach, so -- and Tom (inaudible) a bit more long (inaudible) and will all be -- beneficial to others. There is still a bandwidth to do that. Services are expanding. There is the real demand for the products out there both in Spain and in the U.K.

I don't know whether you want to say anything about it anymore, Tom or Chris?


Unidentified Company Representative, [3]




Dean Finch, National Express Group PLC - Group CEO & Executive Director [4]


We enjoy healthy competition between each other.


Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [5]


Damian Brewer, RBC. Three, please. One thing which have crept below the radar today but looking at the numbers, it's now about 6% of your revenue base. Can you talk...


Dean Finch, National Express Group PLC - Group CEO & Executive Director [6]




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


One thing that's crept below the radar but now about 6% of your revenue base, it's probably even higher. Can you talk a little bit more about what's going on there and where you think the opportunity is both in size of that business but also in terms margin and return on capital?

Secondly, you mentioned about electric vehicles and battery life. Can you also talk a bit more about the challenges with the infrastructure that has to go behind that in terms of power supply and everything else that has to be put in the depot, kind of how you're thinking about that? It seems like a very big hurdle to the industry at the moment. What needs to change to make that less of a hurdle and, therefore, the whole package attractive to you?

And then very finally, I know -- you talked about healthy competition on load factors because you're running businesses at 50% to 60%. When you look it's either low-cost airlines, and they run in the 90s, which is still effectively wasting 40% of the seats. Do you think it's just the structurally lower level of load factors within the industry? Or do you think there really is a very big angle to push on there as digital gets better, revenue management gets better and the product gets even better load?


Dean Finch, National Express Group PLC - Group CEO & Executive Director [8]


Thanks, Damian. So I'll take those in reverse. Yes, I do because I think our model is different. Airlines go point to point. [We expect to put down at that point]. However much I would love to think I could fill up the coach here, middle of (inaudible). I won't and I never will. Typically, (inaudible). So yes, we're structurally different to the airlines, and you shouldn't think that we can get there.

But am I excited for the opportunity? Hopefully, I showed to you this morning that we are. The systems and the artificial intelligence that we're applying to the business have enabled us to make better decisions than we've ever been able to, take the full -- different depth. If we match supply and demand better, we get the yield better and we can push out service better. All of that is helping. I don't know where it can get to. I'd be lying if I say I did. But I do think there's plenty of scope for further growth.

So EV, well, absolutely believe it's the future. And I think with all the multi-thousand (inaudible). is the most exciting one. And I think there will be real developments over the course of the next 5 years. I think the infrastructure piece of it within of that (inaudible). And James is right. I think the transformation opportunity not only for the environment, which is really important, but within the business is very exciting.

The battery life is not there yet. It's not there. When I go into the batteries, I'm still presented with batteries that's half the size of the bus and consume virtually all of the power that they're generating just to get on the bus. But we're on a rapid development curve, and I'm absolutely positive over the course of the next 5 years we will see that develop at pace. As Tom said -- as Tom keeps reminding me, all the vehicles that we bought and (inaudible) so far this year are EVs. Well, that's more interesting. And there's money available to do that, by the way, from [accumulation].

Where is the national infrastructure customer? Well, you have the chairman of the national infrastructure committee sat in front of you here. You might ask him that question later. I think that has some way to go. As Tom has pointed out, we're particularly impressed. But it really is an exciting (inaudible) development. But it will, I think, transform the business over the course of the next 5 years.

And finally, on private hire, you are dead right, and it is across the businesses. So whether we say in Madrid, whether we say in the States or the U.K., this is a very rapidly developing part of the business. As you say, it is explained on the (inaudible) and there was nothing there a few years ago.

And yes, you're right (inaudible). We're cautious about it. We've got a lot to learn about how to manage that business. But I mean, I mean just take what (inaudible) has done in the previous year. We've gone from nothing to multiple millions of revenue in the period alone on private hire. And there is no doubt that those start to continue further.


Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [9]


Gerald Khoo from Liberum. Starting in the U.K., there was comments about, I think, it was 64% of journeys on digital tickets. I was wondering if you could carve by what channel's of actions (inaudible) it appears, I think it is same (inaudible) because it's contactless.

And on the topic of contactless, there's a throwaway line saying passengers travel more. Can you give an indication of sort of how much more, if you can quantify what the uplift is in terms of journeys by contactless passengers versus traditional?

Thirdly, North American School Bus, obviously, doing really well on the rate increases. How sustainable do you think that is in the medium term either at the current rate or at an accelerating rate? At what point do the customers have to start to push back in terms of their budgets? And also, in North American School Bus, you talked about the retention rate at 92%. Is that across the at-risk -- or was it across the portfolio?

And I think all the EV talk we've had is -- it sounds like more of that in the U.K. What's going on in electric vehicles or alternative fuels in North American School Bus, please?


Dean Finch, National Express Group PLC - Group CEO & Executive Director [10]


Okay. Thanks, Gerald. Yes, it does include contactless. And I think it's about 3%, right, the uptick from -- when they shift across to contactless, we see about a 3% uptick in demand. So that in itself is a pretty interesting thing.

Gary, do you want to pick up the -- maybe pick up the 2 North American?


Gary Waits, National Express Group PLC [11]


The 92% is across the portfolio. We're going to end the year depending on final route counts as the kind of the mid-school year, we'll be about between 600 and 700 buses then in total. I think in the medium term, we will continue to see revenue rate increases, probably around the level that they're at now, certainly for the next 3 to 5 years, I would say.


Dean Finch, National Express Group PLC - Group CEO & Executive Director [12]


And I mean what do I think about EVs in both the base of business. I mean we have some parked outside of our building whenever I go there. And Judith has got a range of initiatives going on around the Transit business. So maybe Gary, if you want to just talk about that?


Gary Waits, National Express Group PLC [13]


We have some initiatives for electric vehicles. Judith has more of them that I do.


Judith Crawford, Petermann, Ltd. - EVP of Commercial Development and CEO of Transit [14]


Yes. I'll pick up on the school bus first. We were the first third-party contractor to run electric vehicles, the Westchester county in New York as part of the pilot there. We have a number of electric vehicles we run particularly in our California transit locations. And there is a push for a number of states, California and Illinois being the top on the West to move all of that public transit to the electric. While we point out a massive -- customer wants, we plan to (inaudible). So we're just the operator of it. The infrastructure investment and the cost of vehicles will come from our customers.

WeDriveU has over 50 electric vehicles at the moment. Combinations -- in fact, their vehicles, a lot of -- some of the intercampus shuttle work and on-demand piece that Dennis picked up earlier is electric. But I think we will continue to see a growth in the number of electric vehicles that we operate.


Dean Finch, National Express Group PLC - Group CEO & Executive Director [15]


I mean (inaudible). And clearly, in the old business and with the old customers. This is going to be (inaudible) of what they're demanding of it at the moment, right?


Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [16]


Damian from RBC again. Can I ask 2 further questions? First of all, because no one has mentioned it, Birmingham next year in the (inaudible), how are you preparing for that? And is there an opportunity to see some genuine real modal shift in the business? And how will you go about capturing that, not just the full demand, but how are we actually going to seek that out?

And then secondly, you're a majority non-U. K. business now, the majority is nonsterling business and that you're still on London listing. Is that inappropriate? Or would you look at all...


Dean Finch, National Express Group PLC - Group CEO & Executive Director [17]


Well, I'd say thank you for that. You will -- I don't know if -- I think it's in the release, right, we even mentioned it. So unsurprisingly, there is a delay in the introduction of (inaudible). If it's not now, the 1st of January, it is the 1st of July next year. We are -- you probably believe that the politicians hopefully are very disappointed about that, and that is a problem driven by really simple government and just the ability of the technology to cope with it. You know I've always -- I've never pretended by being slightly suspect about how they will -- whether they will actually introduce this. I hope they do. And they have the money and they have the power to do it, right? They are facing a lot of retail pressure in Central Birmingham, as you might imagine. But the current Mayor seems very intent to drive it through and perhaps what you're seeing there is the ongoing political ambitions now that the President has been set.

And maybe linking to that, well, who knows what would be designed from the previous, former Mayor and current Prime Minister's management of the country as to -- but no, we never seriously entertain the idea at this stage of moving outside. Whether that proves to be more attractive in the coming years, we should see.

Are we done? Thank you very much indeed. Thank you. Thanks for coming.