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Edited Transcript of SGC.L earnings conference call or presentation 22-Jul-20 8:00am GMT

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Full Year 2020 Stagecoach Group PLC Earnings Call - Q&A Session Perth Aug 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Stagecoach Group PLC earnings conference call or presentation Wednesday, July 22, 2020 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Martin Andrew Griffiths Stagecoach Group plc - CEO & Executive Director * Ross Paterson Stagecoach Group plc - Finance Director & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Alexander Paterson Peel Hunt LLP, Research Division - Analyst * Gerald Nicholas Khoo Liberum Capital Limited, Research Division - Transport Analyst * Jaime Bann Rowbotham Deutsche Bank AG, Research Division - Research Analyst * James Edward Brazier Hollins Exane BNP Paribas, Research Division - Senior Transport Analyst * Sathish Babu Sivakumar Citigroup Inc., Research Division - VP & Analyst * Stephanie Fabienne D'Ath RBC Capital Markets, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, welcome to the Stagecoach Conference Call. My name is Jess, and I'm going to be coordinating today's call. (Operator Instructions) So your host today is Martin Griffiths. So Martin, if you'd like to begin, please go ahead. -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [2] -------------------------------------------------------------------------------- Thank you, Jess. Good morning, everybody. It's Martin here. I have Ross Paterson with me. You'll be glad to know. Well, I hope you're glad to know, and I hope you've been told, we prerecorded the results presentation yesterday, and that went on the website this morning. So I hope you've had a chance to look at that or you will get a chance after this. So really, the purpose -- subject to very few brief remarks for me is to give you the opportunity to ask any questions that you have. I may just bring it by saying, clearly, it's been a challenging time for our sector and the communities that we're involved in. I have been incredibly humbled actually by the response of all of our people through what has been clearly a challenging time. But I think against that backdrop, we've achieved a credible set of results, given the known changes in our business with the sale of North America and our exit from U.K. rail and then with the impact of COVID-19. So I think a credible set of results, as I've said. I think that reflects that Stagecoach is a strong business, was well invested going into this COVID-19 pandemic. Things will undoubtedly, some things will change and accelerate here, but I think -- I passionately still believe in the long-term prospects for public transport and we will get modal shift from the car. Our company is in a good place. Our finance team have done an excellent job in creating the liquidity and the headroom that we need to get through this. I'm very appreciative of the support I've had from my board and our management team in terms of the actions that they supported us in taking to allow us to take the decisions we've taken and importantly, plan for the future. And I said that is laid out in the presentation. And indeed, the strategy that we laid out in December, I think that the plans there are never more important now than ever, and we feel ready to capitalize on opportunities as we come through this. So without further ado, I'm going to hand back to Jess, the operator, and allow you to ask any questions that you might have. And Ross and I'll do our very best to answer those for you. So I'm going to open it up to questions now. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you, Martin. So we do already have some questions coming through. (Operator Instructions) So for our first question, we have a question from Sathish Kumar from Citi. -------------------------------------------------------------------------------- Sathish Babu Sivakumar, Citigroup Inc., Research Division - VP & Analyst [2] -------------------------------------------------------------------------------- Impressive format, I said, we viewed your presentation followed by audio Q&A. I have 2 questions. So firstly, on the government subsidy, obviously, you've given some detail on the job retention team and where we are today versus at the peak of the crisis, so if you could just further elaborate on the government subsidy for regional bus. So what is the current run rate? And as the mileage picks up, how the subsidy has changed in the last 2 months, and then what is your ongoing conversation with the government in terms of tapering of the subsidy? So that's my first one. And the second one on the cost savings. Obviously, the GBP 9 million you've mentioned in the video presentation, you said that will be more of a structural cost savings. So if you could just elaborate on where those cost savings are coming from? And then actually, I could add a third one. On your CapEx plan, give the pandemic impact on the volume recovery, what do you see -- where do you see the CapEx falls in the next 2 years versus, say, at the start of the year? -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [3] -------------------------------------------------------------------------------- Okay. Ross is going to start with the first one, I think. -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [4] -------------------------------------------------------------------------------- Yes. So on -- I think I'll just press it by saying that just a reminder that responsibility for transport has devolved in the U.K. So London clearly is its own market and is underpinned by the current contracts we have for transport for London there. And the rest of the U.K., however, east of England, Scotland and Wales have their own arrangements. And they -- whilst there are similarities, they're not identical. The COVID bus services support grant scheme, which is the scheme that's in place in England, which accounts for about 80% of our regional bus business. As a scheme that we're working at a guess and that we run services that the government want to continue. Because they allow key workers to get to their work. They allow people to access shopping and others to travel around. So -- but what the government hadn't been doing is funding us to make a significant profit. So the scheme is designed to get us around breakeven. Clearly, as mileage has been increased at the government's request, our cost increase equally as volumes of returns to buses, our revenue -- our commercial revenue increases. So the 2 of those things move in opposite directions in terms of the amount of funding we need. At the moment and it varies everyday as people have been returning to buses. But at the moment, the run rate is about GBP 12 million a month of CBSSG income that we're receiving for our English operations. Scotland has a similar arrangement, although at the current level of mileage revenue in Scotland, the additional funding we're receiving is relatively modest. And Wales does not -- Wales at present does not have an equivalent arrangement. In terms of what conversations are we having, the conversations are constructive and relatively pragmatic. Government is unwilling to commit funding arrangements for months in advance. Not because they don't want to continue to support the operation of bus services. But like us, they can't be certain as to what demand or indeed the COVID situation is going to look like looking months ahead. But generally and England certainly just generally is looking 12 weeks out. They've said they would give us 12-weeks' notice before ending this scheme unless they were replacing it with something else. But we're already in discussions with them about what the shape of this might look quite thereafter, but it's going to be a function on the emerging position. -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [5] -------------------------------------------------------------------------------- I'll take the second one on the cost savings, and then Ross can pick up on the capital expenditure. So yes, I referenced a GBP 9 million of annualized cost savings in the presentation that we did. These are predominantly people costs. Like every organization at the moment, we are looking at our structure in light of where we find ourselves. So right across our support functions, back office, over -- group overheads. And these are plans we're well advanced with and are progressing. We will, as clearly as the situation permits, continue to look at all of our costs in the supply chain, procurement, digital IC, as you can imagine, looking through that. And we will be keeping that under constant review over the next 12 months. Those cost savings are, of course, on the top of what you will have seen in the results today, we did on the back of the group changing its composition on the exit from North America and U.K. rail restructure last year. So these cost savings so far been identified are on top of that. -------------------------------------------------------------------------------- Sathish Babu Sivakumar, Citigroup Inc., Research Division - VP & Analyst [6] -------------------------------------------------------------------------------- So can you quantify on the new cost savings, so what will be the likely amount that you're targeting? -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [7] -------------------------------------------------------------------------------- As I said, we've referenced the GBP 9 million at this stage. I'm not going to be drawn at this stage on further cost reductions other than to say, we're clearly looking at all costs across the business at this point in time. -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [8] -------------------------------------------------------------------------------- And I think as we think about different scenarios that could unfold here, there's really 2 elements to cost, that is -- remember, about 70% of our cost is delevered mileage. So the one element is that our cost will go up and down as a function of what mileage we're operating, which in turn will be a function of what's passing general bands and what's the current arrangements with government at any point in time. And then the second piece, and that's what the GBP 9 million in the other work we're looking at is what additional cost savings could we make without reducing mileage. So for any given level of mileage, what additional cost could we take out. So that are -- there's a kind of mileage-related component to costs and then a non-mileage-related component. Just on your question on capital expenditure, Sathish. We -- our original plan for this financial year was for around GBP 143 million of capital expenditure covering both cash expenditure and new leases, given that they're both treated as capital expenditure now under IFRS 16. We previously announced that we'd reduce that by roughly half to around GBP 74 million. We came into the COVID situation being well invested across our fleet and estate. So we didn't have a huge amount of kind of emergency CapEx requirements, if you like. We did have some existing contractual commitments, either contractual commitments to buy vehicles or contractual commitments to supply vehicles for contract that we've run for Transport for London, for example. So that remains the plan for the current financial year, around GBP 74 million. As we look forward, again, it's a function of mileage, depending where mileages will depend how many buses we need and we'll inform our capital expenditure plans. Of course, we can just -- we can let our bus fleet age, there are other implications of that in terms of maintenance costs and operational reliability. And we would need to think carefully before doing that. So if demand bounced back relatively quickly, and we were getting close to 100% a pre COVID mileage, then you should expect CapEx to return to previous levels relatively quickly. If we operate less mileage for a year or 2, then we'd expect CapEx to be a bit less. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Next question is from James Hollins from Exane. -------------------------------------------------------------------------------- James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [10] -------------------------------------------------------------------------------- I get you have 4, so apologies. But first of all, on the international side, I was wondering if you'd potentially reconsidered that sort of strategy. Clearly, you've got your foot down on that one with Sweden and Dubai, et cetera. I was wondering if you could give some thoughts on that. Second one is on liquidity. I was wondering if you're sort of fully done on that. Happy where you are at current levels or whether you're pushing for a bit more? I assume it's flexible. But maybe your thoughts on that, please, Ross. Then on cash inflow, clearly, a GBP 26 million, 2-month cash inflow. I was wondering if maybe you could give some sort of indication as you see it for what we might think for the next 2 months, obviously might vary a bit, but if you may see that going up or down? And then finally, on U.K. rail, probably a subject you're not too keen to talk about. But if we consider what the Williams review looks like, it's probably going to be 1.5% to 2% management margin contracts in my guess. Is that something that is interesting to you? Or should we forget about U.K. rail and Stagecoach for a very long time? -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [11] -------------------------------------------------------------------------------- Thanks, James. Why don't I take the first one and the last one, and Ross can take the 2 on the liquidity and the cash flow. So on the international strategy, yes, clearly, we've challenged ourselves on everything at the moment around, where we're at. But we laid that out as part of the business plan in December. And we feel that, that's something the Board and I feel we should be moving ahead with. We're looking to grow our business and for further diversification, we believe that the markets we're looking at and you referenced here to Sweden and the UAE, there are opportunities. I'm pleased we've been shortlisted on quite significant bus and rail contracts there and we will work through the -- from the prequalification now through to the bidding, and we see that as an important part of how we go forward. On U.K. rail, you all have seen our previous announcements on the litigation. While the litigation was disappointing, I think I, Ross, the Board have no regrets about the commercial position we took and the risks that we weren't prepared to accept. In fact, the last 3 months make me more certain about those decisions. At the end of the day, the court decided, and I respect that, that the DFT had a wide discretion around whether -- what they did was legal or not, and we have to accept that and move on. I think we've made it very clear today that -- for now and I think for the foreseeable future, regardless of what happens with Williams, there's unlikely to be a lot of significant opportunity in U.K. rail and so we would have to see that and what the risk profile looks like. So I think for now, you can safely assume Stagecoach has other priorities, what it could be doing. And we're not looking back over our shoulder, thinking about U.K. rail at this point in time. -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [12] -------------------------------------------------------------------------------- Ross here. I'm very happy with the liquidity position at the moment. I mean ordinarily traded policy, internal policy is that we have at least GBP 150 million of available liquidity at any point in time. We currently have GBP 840 million. So we have very significant liquidity. We will continue to review our funding options as the outlook for the business emerges, but we don't have pressing need for more liquidity. And we have no firm plans to do anything beyond what we've already done. We do continue to be cash positive. I mean cash does bounce around a bit just in terms of the timing of when things are due to be paid. But if I cannot think about it like this, that the -- as I said earlier, the government support arrangements on regional bus has broadly breakeven position. London is still profitable, but we then have some overheads and interest to think about. Our annual depreciation at the moment is around GBP 113 million. So as we're kind of breakeven or slightly better at EBIT level than our EBITDA is in excess of GBP 113 million. And as I've said, we'll produce the CapEx to about GBP 74 million this year. So we should continue to be cash positive. That -- I'm reluctant to give a forecast for a very short period because it does vary from week-to-week, month-to-month, but we should continue to be cash positive for the time being. What we can't be certain about, of course, is exactly how government payments for services evolve and how demand evolves. So that could have some effect on it. But for the moment, EBITDA positive, cash positive and round about breakeven at the EBIT level. -------------------------------------------------------------------------------- James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [13] -------------------------------------------------------------------------------- Okay. Ross, can I just come back on the liquidity. Just see from your slides, the GBP 840 million is actually the GBP 101 million net train operating company liability, just -- maybe I'm being ignorant, run me through what that is? And does that mean we should be actually thinking about GBP 739 million? -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [14] -------------------------------------------------------------------------------- Yes. So that is -- so we -- obviously, all our rail franchisees have now ended, including East Midlands trains that ended in August and West Coast trains, which are part of the mixed joint venture operator to December. Although our operation of the businesses has ended, we retain some significant assets and liabilities and the effect of those expired franchises, which are managed and settled over time. So there's a net circa GBP 100 million of train operating company liabilities on the balance sheet at the end of the year. The reason we single those out is, at some point, either they need to be paid or as partner, the settlement process. We agree that the amount that needs to be paid is less. And thinking about liquidity, I think it is right that we single those out and that we notionally put some liquidity aside to cover those. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- So we have our next question from Jamie Rowbotham from Deutsche Bank. -------------------------------------------------------------------------------- Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [16] -------------------------------------------------------------------------------- Jamie Rowbotham from Deutsche Bank. If I look at the slides, and I want to just ask about regional bus. On Slide 10, which is very helpful. We can see a situation where you've gotten back to running 80% of mileage, but on the commercial side you're only generating 40% of sales. And if I think about this sort of notional breakeven in regional bus. To my mind, that we've got the sort of noncommercial revenues that are stable, the concessionary stuff, the tendered stuff and then on the commercial side, insofar as this scenario is clearly quite a painful one to run the schemes like this CBSSG and the equivalent in Scotland are helping you to sort of breakeven in spite of this situation. If we then skip to Slide 18, which is also helpful. Obviously, here, you've assumed slightly better demand, 50%, not 40% and slightly lower mileage, 70% not 80%. I just wanted to know, is there something in this slide for continuation of CBSSG in similar schemes? Or are you saying that on these types of dynamics, you could potentially make a sort of profit without any of that type of government support? I wasn't quite clear. -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [17] -------------------------------------------------------------------------------- Jamie, it's Ross. So yes, Slide 10, as you see, is history, albeit very decent history up until the end of last week. So we're currently seeing 40% of the equivalent commercial sales that we were seeing last year, but we're running mileage of around 80%. And indeed, the government has encouraged us to ramp back up the mileage and particularly in England, would like to us to try and get closer to 100%, and it's prepared to pay for that. On Slide 18, on the scenario data, I should stress, and I do stress in the presentation. None of this is intended to be a forecast or to imply that we somehow think that 50% demand is the most likely outcome here. This doesn't include CBSSG grant. This is intended to really just -- some of you may already more or less had that information. But it just intended to give some data that if people want to look a bit further ahead beyond the period of CBSSG and model what different combinations of demand and mileage would do to the bottom line. I think this slide helps facilitate that. So in the scenario that's outlined here. Your conclusion is right, if we're at 50% demand. So by 50% demand, we mean 50% of normal commercial revenue. And 70% of normal miles, and we can take out 2% of revenues, cost savings without it being related to mileage, you could still make a small profit. That does assume that concessionary ended another net revenue, continues at peak COVID levels. There's no guaranty of that. It's just an assumption. And it also continues -- also terms the first services operators grant, continues at pre COVID levels. Again, no guarantee of that, but that's the continuing position in both of those cases. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- So our next question is from Gerald Khoo from Liberum. -------------------------------------------------------------------------------- Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [19] -------------------------------------------------------------------------------- In the statement, you talked about expecting a lasting impact from COVID on travel patterns. I was just trying to understand how much of that is related to concerns about the impact of the government messaging, about people having an ongoing fear of infection and is effectively the detection of demand over, let's say, the next 12 months? And how much of this is -- how much of that statement refers to a permanent change in behavior that would persist even if the COVID risk were to disappear overnight? -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [20] -------------------------------------------------------------------------------- Let me start. And I think Ross will probably chip in as well here, because I just want to be clear what we're seeing here. I think it would be -- I mean, frankly, naive and you all follow the sector, but what's happening in the wider economy. Some of the things that we were experiencing before COVID around High Street, around Internet shopping and around some of the structural changes in the employment market have been highlighted and indeed will accelerate on the back of COVID-19. So things like homeworking. People will go back to work, but employers will be looking hard at this. So I don't think we can sit here and say there won't be a kind of change in some of the way society thinks about travel. However, I remain very positive about public transport and bus. Bus is a relatively small percentage of those overall travel journeys. So actually, if you go back to where we were before this and where government policy was headed on investment, on the green agenda, health well-being, what we were seeing about the environment, clean air zones. Once we are through this, I have absolutely no doubt, particularly when we start to get more positive messaging from government and the social-distancing rules could hopefully be relaxed. We've got everything to play for in terms of converting, and I outlined it in the presentation, if we can get that model shift back out of car, which has got to be there, we've got lots to play for. So we've got to be careful what we mean by that. There is going to be change. That's a given. But that doesn't necessarily mean that, that's all reflective in what's going to happen in the bus market. And Ross, may want to add to that as well. -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [21] -------------------------------------------------------------------------------- Yes. Obviously, agree with all of that, Gerald. I mean, I think for me, I really split it into 3 buckets, short term, medium term and long term. And in the short term, as I say, because of the arrangements with government and the actions that we've taken to help ourselves, we're EBITDA positive, cash positive. And the current arrangement you see is around breakeven. I think the medium term is actually the -- this may be the most difficult to predict with certainty because it involves making assessments of what's the extent and duration of COVID-related restrictions, what's going to be the messaging around public transport, might there be local spike, second spikes, what's the timing in this event of recovery in demand. How will the government payments evolve and how will our mileage, how we'll adjust our mileage for all of those factors. That said, I do take some reassurance from government's desire to see continuing public transport services operating and also take the assurance that we -- that outside of London, do have the ability to flex up and down mileage. So I think that gives us some ability and some reassurance that we can avoid significant losses. I think, though, that's when you then come back to our strong liquidity, and we are well positioned to navigate through that more uncertain period. And Martin's outlined in the longer term. We're still -- although we see changes in travel patterns, that's not necessarily negative for bus. We see significant positive opportunities for us in the longer term. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Next question is from Stephanie D'Ath from RBC. -------------------------------------------------------------------------------- Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [23] -------------------------------------------------------------------------------- The first one relates to Slide 18 and the scenario analysis. What I was curious about is, obviously, you highlighted that you believe you can breakeven in the assumption that you have 50% of demand and 70% of mileage. But could you maybe elaborate on how much time you would need to breakeven? Because obviously, overnight, the government support ends. In that scenario, you cut, for instance, drivers cost by 30%. This is not something that you could, I guess, implement that quickly. So my question really relate to the time it would take to go from nongovernment support to 2% operating margin in that scenario and bring those costs down? And then related to that… -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [24] -------------------------------------------------------------------------------- Okay. Before Ross answers that, Stephanie, just again, to reiterate what Ross said and it was in the presentation, while these are the devolved masters, I would reemphasize again, this has been a very positive relationship with government. I mean while they're not agreeing to fund bus operators making significant profits, they absolutely recognize the importance of bus to what we do, the economy, the committees we serve and they are -- we are being paid to provide a service in the current environment where through some of their messaging and through the lockdown, patronage is significantly reduced, and they want to pay for that because of social distancing and they want the extra capacity. And they have made it clear that they will continue to talk to us on a 12-week rolling basis about how that will evolve or change. That is important because, yes, you're right. If that support was to fundamentally change or even stop, then we would have some decisions to make depending on where demand was at that time, about the scale and size of our business, and we'd have to go into looking hard at that, and there would be a time line for that. But that's -- we understand that, and we know how we would do that and the process that would need to be gone through with that. And as we've always said with the bus business, I think that's what Ross will say here. This is just laying out a scenario about those costs that vary with mileage. Yes, we would have to reduce them. We understand that. But you could do that in a relatively systematic and over a relatively short period of time if we have to do that. I'll let Ross talk about the specifics of the slide. -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [25] -------------------------------------------------------------------------------- Yes. I mean -- yes. I guess just yesterday that there's not -- this isn't intended to be a forecast. And it certainly isn't intended to be a current year forecast. This is intended to be, if you wanted to model different scenarios for the medium term. It provides data to enable you to do that. As Martin says, look, it does take time to adjust cost. It doesn't take months and months. We can change mileage relatively quickly. There are consultation periods, et cetera, that involves changes in headcount. Although it needn't necessarily involve that. There are other ways of varying costs, including people-related costs. I think the other relevant pieces, as you would expect, we don't know exactly how the situation is going to unfold. But that's not a reason for us to do nothing. And indeed, we -- what we have been doing and continue to do as planned for a range of different scenarios. So exactly to your point, as a particular scenario emerges, we can move relatively quickly to adjust our cost base because we've already planned for it. We're not doing anything dramatic on cost at the moment other than the things that we've outlined to plan ahead because actually, firstly, government are paying for the services in a way. So as we said, cut costs, it doesn't necessarily have a material impact on the income statement. And also, government wants us to run if we can close to 100% of mileage. And to do that, we need to have sufficient people taking account of the fact that some of the more vulnerable people still need to isolate and we need the other cost that's associated with it, but we do have contingency plans in place for different scenarios. So we can move quickly if the need arises. -------------------------------------------------------------------------------- Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [26] -------------------------------------------------------------------------------- And just following up on that, another related question I had is, what -- do you believe that your ability to recover midterm, the regional bus operating profit? Because obviously and you are mentioning that some headwinds that will impact future demand. But do you believe that could be offset by the cost savings we are putting in place and that you could eventually get back to the pre COVID operating profit levels for regional bus? -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [27] -------------------------------------------------------------------------------- Yes. I mean I feel confident we can get back there eventually, when eventually is, I think, without knowing exactly how COVID's going to -- the COVID situation is going to develop, I think it would be very difficult for any of us to be precise about when we think we're going to get back there, and I'm not going to predict that. But I think for all the reasons we've said, in terms of the long-term opportunities for bus, I think we can get back there and indeed surpass it at some point. -------------------------------------------------------------------------------- Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [28] -------------------------------------------------------------------------------- And then my second question relates to capital allocation. Speaking about -- I know you don't intend to acquire business, but are more thinking about tendering abroad, but that would still involve, I guess, some CapEx. But how confident are you with Sweden and Dubai, to be able to tender, given the lack of visibility, I guess, you also have in those regions? And then related to capital allocation, when would you expect to be able to pay a dividend again in a best case scenario? -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [29] -------------------------------------------------------------------------------- Yes. So I guess I commented earlier, I think how confident are we in our own ability to put together forecast for those businesses, it's a reflection of the nature of the contract, to the extent there is passenger revenue risk involved. And of course, there's a level of uncertainty there that would need to be take in account of. But most of these opportunities that we're looking at are the more into London contract where the client, i.e. the local transit authority pays us a fee to run the service. So to the extent, passenger revenues are higher or lower than forecast, that's picked up by declines rather than us as the operator. So the main forecasting risk around all passenger volumes wouldn't necessarily be a risk. In terms of -- if your question is how confident we are of winning then it's a competitive process, I mean, no more or less confident than we are on any contract. But I certainly wouldn't sit here and say, we're highly confident of winning. But of course, we wouldn't be spending resources and time on it unless we felt there was a reasonable prospect of winning. I think on wider capital allocation, the COVID situation may well throw out some interesting M&A opportunities, time will tell, smaller opportunities, and there may well be some smaller companies find COVID a challenge, we're happy to look at opportunities that arise. If it were a bigger opportunity, we will need to evaluate that, and we need to evaluate it in the context of a liquidity and capital structure because we wouldn't want to stress the company's balance sheet to pursue a particular opportunity. So all of those things will be taken account of and assessing any opportunities that emerge. -------------------------------------------------------------------------------- Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [30] -------------------------------------------------------------------------------- Okay. And maybe, sorry, one, on following up on the dividend? -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [31] -------------------------------------------------------------------------------- Yes. So on the dividend, look, I think that no new information today and that we've previously said that we did not plan to propose final dividend for the year just ended. It is our ambition to return to dividend payments, we recognize the importance of this. As you know, the shareholders are represented in the boardroom through Brian Souter, who's one of our Directors and represents the family who are our biggest shareholders. So there's a strong shareholder voice in the boardroom. I think, look, I mean, I think our view on the dividend is fairly straightforward as one's earnings and cash flow returned to a level that enable us to sustain dividend payments, then that would be the appropriate time to resume dividend payments. It's a bit like the earlier question of when I think that's going to be. I can't put a precise date on it yet. But I'm confident we can get back to the resumed dividend payments in due course. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- (Operator Instructions) So that is from Alex Paterson from Peel Hunt. -------------------------------------------------------------------------------- Alexander Paterson, Peel Hunt LLP, Research Division - Analyst [33] -------------------------------------------------------------------------------- I've got 5 very quick things for you. Firstly, just on London bus. Operating profit improved by about GBP 5.4 million. Quicks are up by about GBP 3.9 million. What was the difference? Was that new contracts or what else helped there? Secondly, on London, how do you see that developing as road traffic and inevitably road works increased, do quicks fall back again or do you think they can stay where they are and what does that mean for operating profit? Is it hard to sort of grow that further if quicks are going backwards? Thirdly, just on Slide 18, just -- may I just make sure I understand this correctly, if I look at, say, engineering costs, the 12% of net revenue, pre COVID, 80% vary with miles. And so is the 9%, is that you can save 9% of the 12%? Or are you saying that, that would fall now to 9% of net revenue? Fourthly, just on regional bus, can you say sort of how scalable do you think that is? I mean you've got overhead costs fixed at 6% on Slide 18, but I'm guessing you can flex those a bit as well. You could rationalize the base the in depots or do something with that? And do you have -- if you look at your routes, are there routes that are very low-margin or maybe even not profitable that you can cut? And then lastly, you did say in the prepared remarks, what percentage -- sorry, what value of the contracts you were bidding on internationally, but I couldn't write fast enough. so please, can you remind me of that? -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [34] -------------------------------------------------------------------------------- I think most of those same line number questions, Alex, are to yourself. I'll do my best to answer them. I think -- I mean, I think on London, we did have a good year on quicks, which is obviously the quality incentive income that we get based on our operational performance. There is a bit of good portion in there, I mean, the road works were a bit less this year, and that helps the reliability of our services. Although, in addition, we have put a concerted effort into making sure that we best optimize our operational performance in the context of the quicks regime. And that's reflected not just in the financials, but also in the transport for London week tables, where they monitor operational performance. The balance would really -- I mean, I think as you know, we've seen a bit of margin pressure on London over recent years, and it wasn't quite at the level we wanted it to be. And in addition to quicks, we had -- and this is pre COVID, actually a real focus on just what further efficiencies can we drive out of that business. So that helped. I mean I think it did -- I have to say we did surpass our own expectations for London bus profit, with both on quicks and on cost reduction. We were able to achieve a bit more than we'd anticipated at the start of the year. I think clearly, as traffic returns to London and to the extent with what return that has a drag on quicks, it will vary from year-to-year, and we're not necessarily saying that we'll maintain that level of profitability in the year ahead. But we do remain positive on London. We are mindful of the pressures on TfL, on finances. In fact, they announced today that they're looking at or the mayor announced he's looking at just how public transport is funded in the capital. But we remain positive on London. And I think although we prefer the deregulated market side of London clearly, during this time, having a business that's underpinned by contracts has been helpful. One, I'm glad this regional bus scenario data is attracting some interest. So just to pick up your comment, just your example of the engineering cost. So if we take that line as an example, what that's saying, on a sort of -- on our pre COVID analysis, just a P&L engineering costs would account for around 12% of net revenue. And 80% of those costs, we estimate would vary with mileage. The reason they don't all vary with mileage is if you run 90% of the miles, it doesn't necessarily mean you can take the company's engineering director away or engineer supervisor at tech level away. So some of the costs are a bit stickier on mileage. The 9% is just a just -- -- if that was pounds, if that was GBP 12, the GBP 9 is to say, well, I'll give you the GBP 9 if you only run 70% of the miles. So that takes that -- the [3s] effectively 80% time, 70% time to GBP 12, so around the nearest percentage. Does that make sense? Have I answered? -------------------------------------------------------------------------------- Alexander Paterson, Peel Hunt LLP, Research Division - Analyst [35] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [36] -------------------------------------------------------------------------------- On the overhead costs, rather than confusing. So other than the penultimate line, that says cost savings are not related to mileage, everything else was just modeled for the mileage change. Clearly, there are things you can do to reduce costs without reducing mileage, which might be an overhead but could also be in some of the lines and rather than trying to do that line by line, that's why we've just shown as an illustration that if you took another 2% out of net revenue for non-mileage-related costs, then clearly, that would have a benefit. I'm not saying that 2% is the right number. You can form your own view on what's realistic, but that's what the arithmetics intended to do. We -- on your question about the route level work, we have route level income statements. Every one of our companies, every 4 weeks produces what we call our route costing report, which is effectively a profit and loss account for every route and they monitor it. And at the margin, they will make adjustments to routes on the basis of it. It's not quite as simple as saying that route isn't meeting our hurdle rate so we should change it because, of course, routes don't exist in a vacuum, they're part of our network and they integrate with other services. And it may be what appears to be an underperforming route is actually an important feeder to create route. So it does -- it points in the right direction, but it does need some more deeper analysis. With pre COVID, we did not have a lot of loss-making risks and where we did, they were either relatively -- that we are developing and hope to achieve profit. We talked about as part of our strategy in December, how we're looking at opportunities for new services or were exactly, as I said, they were part of a wider network. And although on the base of it, they earn a loss, we still felt in the context of the overall net worth that it was appropriate to continue with them. Of course, we need to revisit that in the context of COVID and not every place will be the same. I think that we -- as we emerge from this, we need to see how it looks. It's too early to say. I mean, one -- actually, one of the interesting things about COVID bus service support grant is at the level, I mean, it brings everything more or less to breakeven, averages everything out. So in some ways, our company, not at Stagecoach that started with much lower margins than they have otherwise ended up with higher losses that can be a bigger beneficiary relatively of it. But I think I can give you the reassurance that we have that data. We have that information, and we'll be looking at it and analyzing it closely as we emerge from COVID. I'll come back to on the contract value. -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [37] -------------------------------------------------------------------------------- So the Swedish, our reference to the Swedish stuff in the presentation, I mean, it's still moving, but the 4 bus contracts and the rail contract have something like combined revenue of GBP 1 billion over the life of the contracts. Now that's not likely we'll win them all. And -- and that may move around, but that's the kind of scale of it what I referenced in the presentation. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Our next question from Gerald Khoo from Liberum. -------------------------------------------------------------------------------- Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [39] -------------------------------------------------------------------------------- A couple of follow-up on me. I was just wondering on CBSSG. You talked about sort of 12-month rolling -- a 12-week rolling program. And that funding being potentially available through to October. I just wondering if you can clarify what's actually sort of signs you than deliver. Obviously, definitely through to middle of August, as I understand how certain is that extension through to October? And secondly, on Wales, where you don't seem to be receiving similar support from the regional government. I was just wondering, in reference to what you've put up on slide -- I think it's on Slide 11, in terms of mileage versus commercial sales. Is that an indication of what you would do in terms of mileage versus commercial revenue without support, if that were the case in Scotland and England with effectively -- where you've got 43% of mileage versus 32% of commercial sales. Where the ratio in the other 2 regions is closer to 2:1 rather than -- not 43%. -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [40] -------------------------------------------------------------------------------- So Gerald, this is Ross again. On the CBSSG, I think I should say, it's not a contract. It's structured as a grant. So -- and in that sense, it's not something that we could enforce upon the GST, if it decides to change it going forward. What they have said and what the terms and conditions of the grant, say it will run to the end of October. And if it's going to finish before that, they will give us 12-weeks' notice. Unless they're replacing it with something else that's designed to support the continuity of bus services or there's a step change in terms of all of the restrictions are removed and therefore, demand coming back. I think the discussions -- I think the department have a good appreciation of what we do and probably understand the dynamics of our P&L better than they ever have actually because we've had the --and we've had to spend some time on this, including on their side, presenting to treasury why it makes sense for governments to provide us funding. So I would be surprised if they kind of worked to do it much before October without any replacement. And indeed, there are already discussions ongoing as to what the nature of the arrangement might look beyond that. So legally, I can't sit here and say this is absolutely guaranteed for a particular period of time, 12 weeks from now takes us to the 14th of October. So I expect arrangement to be in place at least for that period. And as I say, the discussions are positive as to what happens thereafter. I think that the now famous Slide 18 where we give the scenario data. I think that gives you the data that you need to work out what combinations of commercial sales and mileage get you to breakeven position. There's clearly a range of different combinations. But I think using that, people can work out what a given level of commercial sales, what would the mileage need to be to get back to breakeven. The one thing I would just add to that, of course, the 2 are unrelated. The number of buses you're running and itself influences demand. If you're running more frequency, you're more likely to get people traveling. So the 2 aren't sort of independently moving variables. But I think the information is there to run your assessment. Wales itself doesn't have a CBSSG equivalent. And part of the reason, the mileage is lower there than elsewhere in the U.K., although those discussions with the Wales government are continuing to the extent that, we feel we should increase mileage, whether that's in the context of back-to-school or a wider emergence from COVID, we've been discussing what arrangements would be in place to support that. -------------------------------------------------------------------------------- Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [41] -------------------------------------------------------------------------------- I just have a quick follow-up. Are you generating cash in Wales in the regional bus unit? -------------------------------------------------------------------------------- Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [42] -------------------------------------------------------------------------------- Not substantial amounts, but yes, we're not burning cash in Wales. Well, I should -- I mean, just the other thing on Wales. I know your question is broader than Wales, but Wales is about 4% of our regional bus business. So in isolation is a relatively small part of the group, although I recognize your question is more about understanding where the cutoff point is on the wider business. -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [43] -------------------------------------------------------------------------------- Do we have any more questions? -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- (Operator Instructions) Currently, we have no further questions. -------------------------------------------------------------------------------- Martin Andrew Griffiths, Stagecoach Group plc - CEO & Executive Director [45] -------------------------------------------------------------------------------- Okay. Well, that's a good hour spend. I'm sure if anyone's got an individual question, they'll follow-up with either myself or Ross or Bruce. But I thank you all for your attendance. As I said, the presentation is on the website. I hope you find that helpful. And hopefully, we've tried to give you as good a speed as we can on where things are right now. So we wish you all well. Stay safe. And then hopefully, we'll be back in December with an update on where we are. But thank you now all for your attendance, and we'll catch up soon. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude today's call. Thank you for joining, and you may now all connect -- disconnect your line. Thank you.