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Edited Transcript of SGC.L earnings conference call or presentation 11-Dec-19 9:00am GMT

Half Year 2020 Stagecoach Group PLC Earnings Call

Perth Dec 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Stagecoach Group PLC earnings conference call or presentation Wednesday, December 11, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Martin Andrew Griffiths

Stagecoach Group plc - Chief Executive & Executive Director

* Ross Paterson

Stagecoach Group plc - Finance Director & Executive Director

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Conference Call Participants

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* 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

* Joseph Philip Thomas

HSBC, Research Division - Analyst

* Sathish Babu Sivakumar

Citigroup Inc, Research Division - Analyst

* Stephanie Fabienne D'Ath

RBC Capital Markets, Research Division - Analyst

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Presentation

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [1]

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So good morning, everybody. Just before I start, just a short -- the company committed to health and safety, I'll make a short announcement. No fire drill planned, but if you do hear an alarm, a member of the staff will direct us to the appropriate exit and the point of safety. Could I also maybe ask you either to switch your mobile phones off or at least put them on silent, if you can, that would be helpful.

So really -- good morning. Thank you for coming. Probably not the most exciting or controversial event of the week, but we're certainly still glad to see you in this week of the general election. I think most of you know me, I'm Martin Griffiths, I'm the Chief Executive; and I've also got Ross Paterson, again, I think known to all of you, our Finance Director. Just a very few opening remarks from me, then Ross is going to take you through the numbers. And then I'll try and give a little bit of flavor to some of the things that are going on and how we see the landscape right now.

So I think in overview, solid financial performance for the first half of the year. Adjusted earnings per share coming in at 10p. I think we've achieved a number of our business objectives successfully in that period. Of course, the numbers also reflect significant change in the scale, the size of the company over the last 18 months, including, of course, the sale of North America. I am pleased that London bus profitability was ahead of our own expectations at the start of the year, and we continue to be disciplined and focused on bidding for contracts that we think are sustainable.

On the regional bus companies, I think revenue growth is recovering. We have now lapped some strong prior year comparatives, and we remain positive for the opportunities for the business ahead. Our financial position remains good with investment-grade rating. At the week end, we completed our exit from the U.K. rail market. We go out with our heads up high and proud of everything that we achieved and left as the best-performing and highest-rated franchise operator in the sector. Of course, we will continue, and I think this will go on for a bit of time, to progress the unwind of contractual positions on the franchises that we have left, but we have successfully transitioned these professionally to the new operators.

I'm very encouraged by the growing political consensus on the need for action on climate change, and more importantly, probably, the recent government's and opposition pro-bus policy announcements and significant funding commitments. Let's see if they'll materialize. But I think for me, step change in recognition of importance of the bus, and this underpins, I think, why we can be positive on the outlook for the business.

In recent months, the Board, working with Ross and I, has agreed an updated strategy, which we've redefined our strategic objectives to deliver growth over the longer term. We've continued to invest over GBP 50 million in net capital expenditure in the first 6 months of the year. And of course, that's largely into our vehicle fleet. By the end of 2020, we'll have around 100 electric vehicles in operation around the U.K.

Shareholders remain extremely important to us, and with interim dividend held at 3.8p per share. And no change in our expected 2019/'20 earnings, which I am sure Ross touch on. So that's just a few overview comments from me. I'll pass over to Ross now to get into the numbers a little bit more, and I'll come back shortly.

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Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [2]

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Good morning, everyone. I'll just take you through the performance of each of the parts of the business, and then we'll move on to just have a look at the overall financial position of the group. So as usual, I'll begin with the regional bus operations in the U.K. Regional bus revenue grew 1.4% in our half year and on a like-for-like basis was up 1.6%. That represents 1% growth in the revenue per mile and 3% growth in the revenue per journey. We did expect to see slower revenue growth in the half year, given the strong prior year comparative, which included the benefit of the exceptionally good 2018 summer weather. And also, last year, we had some one-off work, some bus services that we provided for a major rail resignaling project in the Derby area. So the operating profit for the half year was GBP 57 million and the change year-on-year is largely as expected.

As we said in our October trading statement, revenue in the first few months of the year was a little below our expectation, also partly due to weather, but encouragingly, however, that revenue growth has recovered since. So the 1% like-for-like revenue growth that we reported to you in October for the first 20 weeks of the year compares to 3% growth for the final 6 weeks of the half year. And we're forecasting revenue growth for the second half of the year around that rate of 3% as we compare that against more comparable prior year numbers.

We continue to modernize our retailing. So the mix of how we collect that revenue is changing as we give the customers a choice of where to buy their travel and how to pay for it. Sales to fare-paying customers through our digital channels, in which we include contactless payment on the bus, were up over 60% year-on-year and now make up about 40% of our regional bus commercial revenue. As usual, the revenue trends and profitability do vary across the country, reflecting differing market conditions. Looking across the business, however, we continue to see a major opportunity for modal shift. And as Martin will explain later, irrespective of the outcome of tomorrow's general election, we see a significant opportunity from the rising pressure for action on climate change. And that's underpinned by our customer satisfaction of 90% plus, our high operating performance and our strong employee engagement, which means that we're well positioned to participate in a shift to public transport.

Meanwhile, our London bus business has seen more encouraging results this year. While revenue did reduce 6% and operating profit reduced to GBP 5 million, that reflects the contracts we lost during the previous year. That profit is ahead of our start-of-year expectations. The better-than-expected profit includes higher-than-anticipated quality incentive income. That's the income that we get from Transport for London based on our operating performance. That reflects 2 things, really. One is a bit of luck in the sense that we have been affected by less road works this year in our part of London than we were the previous year. But more significantly, there's been a renewed management focus on how to optimize our quality incentive income, and that's reflected in the numbers.

We've also taken action to continue to control our costs and improve efficiency where we can. That -- there's no big bang that's part of that. It's a whole number of marginal actions that we've taken to improve our efficiency. And again, that's reflected in the better-than-expected profits.

Last year, we were a net loser of contract work. It's, therefore, pleasing that this year, we've seen that reverse. Since May, we've secured a net 5% increase in our contracted peak vehicles through tenders in the period that we've won, and the benefits of that will flow through into the numbers next year. It's worth stressing, however, we remained disciplined in our bidding approach, so those contract wins haven't come at the expense of slashing our prices. Our contract bids are still designed to deliver sensible returns on capital and sensible profit margins. And that continues to be our philosophy on bidding. We only want to win contracts where the returns are sensible and sustainable.

Moving on to rail, not that there's much left of it. Our East Midlands Trains franchise ended in August, and we've worked with the new operator to ensure a smooth transition of the train services. It will take some time to completely unwind the assets and the contractual positions of the various rail franchises we were involved with, but we are making good progress with that. Our only continuing operating business in the rail division is Sheffield Supertram, which is small. A good business. It's train, tram services of carrying more than 1 million passengers this year in its first year of operation. But in terms of the overall group, its contribution is small. So the almost GBP 12 million profit in the first half of the year is principally from East Midlands Trains, net of the cost of our commercial and business development team and also net of the legal costs that we are incurring in pursuing our claims against the Secretary of State for Transport for the disqualifications from franchise bids. On that, we're looking forward to putting our case to the court when the claims come to trial in January. There will be a bit more legal costs to come through in the second half of the year, which we feel are already reflected in the consensus forecast for the full year.

So Martin will update you later on some of the new opportunities that we're considering, but as far as U.K. rail is concerned, I'll just repeat what I said in June, that we have no intention to bid for new rail franchises on the current risk profile that the Department for Transport offers. Never say never if the proposition changes, but as things currently stand, we have no intention to bid for rail franchises on those risk profiles.

The other piece of our rail portfolio is Virgin Rail Group. So as Martin said, that franchise ended on Sunday. The strong financial performance continued through the final months of the franchise. And in the half year, our share of operating profit was GBP 13 million and the dividends we received were GBP 10 million. Our share of Virgin Rail Group's net assets at the 26th of October were around GBP 22 million, and we would expect to receive cash in respect of that GBP 22 million plus the profit from 26th of October in due course.

Turning to the group's financial position. This is a busy slide, but we're conscious there's a few moving parts in the group. The group is a smaller, but well-funded business and continues to be investment-grade rated by 2 major credit rating agencies. Although our net pension liabilities have increased in the half year, reflecting lower bond yields, we continue to manage our exposure to pension risk and remain satisfied with our overall financial position.

On a rolling 12-month basis to the 26th of October, net finance charges were more than 10x covered by EBITDA, and our net debt was 1.4x EBITDA. If you take out the impact of IFRS 16, which I will come on to, net debt was 1.1x EBITDA. Those numbers still include some amounts from North America and U.K. rail. So what was done in the slide for illustration is to remove North America and U.K. rail as well as include our notional interest on the cash proceeds from North America. And we'll also annualize the effect of IFRS 16 because there's only a 6-month effect in the base numbers.

And finally, we've adjusted the net debt to show the effect of unwinding the rail positions. So Virgin Rail Group, there is a share of net assets to come out. On our other rail businesses, there are net liabilities that will be settled over time. After adjusting for all of those items, we get a pro forma net debt to EBITDA of 2.2x, or excluding IFRS 16, 2x, and that remains below the average of our non-rail net debt to EBITDA for the last 10 years. So even when you sort of pro forma the business and take out the parts of the business that have ended, we remain comfortable with the funding position of the group.

So on to your favorite topic of IFRS 16. These results are the first on which we've applied IFRS 16, which is the new accounting standard on leases. We have not restated the comparative information. So while the results for the half year to October 2019 are on an IFRS 16 basis, the previous year's results are not. Having said that, the effect on profit after tax of applying the new standard was only GBP 0.4 million for the half year. So on a net basis, it's not been material to our profits.

In terms of the balance sheet, we've recognized additional lease debt of GBP 89 million and additional fixed assets of GBP 88 million. That reflects leases that previously have been accounted for as straight-line expenses through the income statement coming onto the balance sheet. The standard does give an exemption for leases that have less than 1 year to run. And for us, that means that none of our rail leases have come on balance sheet because our rail franchisees were ending anyway. Those leases have continued to be expensed. So these leases that have come on to the balance sheet are principally vehicles and properties that are leased by our U.K. bus operations. None of this has affected our cash flow. None of this has any immediate impact on our debt covenants. And in addition, the rating agencies already made adjustments for off-balance-sheet leases, so we don't expect the adoption of IFRS 16 to directly affect our investment-grade credit ratings.

The next slide just shows you the effect it's had on the numbers. So for the half year, IFRS 16 has boosted our EBITDA by GBP 13 million, but reduced our -- has also increased our depreciation, amortization and impairment by GBP 12 million. So the impact on operating profit is less than GBP 1 million. And as I said, the impact on profit after tax is GBP 0.4 million. The half year-end net debt is GBP 85 million higher than it would have been on a pre-IFRS 16 basis.

So while I'm sure you'd love me to tell you much more about IFRS 16, I'll instead hand you back to Martin, who is going to explain a bit more about our updated strategy.

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [3]

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Thank you, Ross. So if we can sort of move forward, I think, hopefully, you see we clearly have a simpler, more focused business [value] that's built around our extensive bus, coach and tram operations in the U.K. I think we're very clear on our strategy, which is focused on 3 objectives designed to build a sustainable business for the long term.

Firstly, to maximize the core business potential in what is clearly a changing market. And yes, there are some well-documented challenges, but trains and population, urbanization, consumer lifestyle changes and the rapidly changing use of technology brings significant opportunities for us.

Secondly, we look to manage that change through our people and harnessing that technology. Our focus is helping make travel and our customers' lives simpler and better.

And thirdly, we want to grow by diversifying, balancing our portfolio and opening up new markets for us.

Stagecoach will be 40 next year. It was the original transport disruptor. And as we look to that anniversary, we still have the appetite and the energy to innovate and seek out new opportunities. And that does include suitable potential bus and rail opportunities in overseas markets. Our revised strategy, though, ensures we build a sustainable business, diversify our exposure to risk and to create value for all our stakeholders, investors, customers and the communities that we serve.

And just if we look at the slide here, I think gives an overview of the 10 core activities that we are progressing in line with our strategic objectives. Pick up on some of them in a little bit more detail. But you can see it incorporates commercial initiatives in our existing business, how we modernize retailing, simplify fares to build our customer base and retain loyalty.

We are pursuing opportunities to grow the current U.K. portfolio. We recently did a small tuck-in acquisition which gives us access to Bristol, a major city in the U.K. which we haven't really served before. We believe there is significant untapped potential to leverage our brand, to grow the revenues as well as introduce new products and services. We are clearly cognizant of the current environment, where there is contractual and political uncertainty. But we are actively managing these areas, engaging with all politicians and other stakeholders. And whatever the outcome, whatever tomorrow brings in the general election, we really encourage all political leaders to work in partnership with the private sector to really capitalize on what is a significant opportunity for public transport as we tackle climate change, deliver cleaner air and cut road congestion.

In terms of technology, key priorities are fleet, and we start in a good place. We've invested over GBP 1 billion over the last decade. And we're in a very strong place. And we are focusing on developing sustainable vehicle technology, and that includes significant investment in electric buses to meet the long-term needs. However, it will be -- a mix of technologies will be needed to transition to a cleaner and greener future.

Internally, we're using technology to stream our back-office processes, improve our business and importantly, reduce our costs. We're upskilling our people to improve service delivery. I'm delighted to see further improvements in employee engagement through our survey. In addition, as I said, from a diversification point of view, we're actively looking now to enter new international markets, and I'll say a little bit more about that.

So if we look at the core business potential, the commercial priorities. I think we need to put some sort of size on the opportunity. On the national transport survey, just 4% of distance traveled in 2018 by residents in England was by bus versus 77% in the car. So while overall travel is falling, the biggest opportunity lies and still lies in driving modal shift from the car to mass transit. We have good reasons to believe that this will happen as government is growing expectations from the electric to address the issues that I've touched on: climate, air quality, congestion. It's just becoming more and more.

So how do we do that? How are we seeking to accelerate the modal shift from the car? We continue to have a relentless focus on safety and customer service. And we focus on 4 key areas as we go forward. Firstly, direct corporate sales, focusing on business parks, major employers and rapidly growing cities with constrained parking, particularly companies with a growing emphasis on demonstrating that they are responsible employers in areas -- or in areas planning work, charging levies. And we are developing a simpler corporate product structure and booking tool to allow us to make their lives easier and build those direct relationships.

Multi-journey fares capping. We're progressing quickly now, work on single-operator day and weekly fares capping, similar to what we see in London today, and we're doing that using contactless payment technology. And we're working with other operators to progress multi-operator bus and tram fares capping. And Stagecoach, of course, as Ross alluded to, has already delivered the biggest roll-out of contactless technology by any bus operator in the U.K.

And looking ahead, it gives us a platform to introduce multi-operator price-capped tickets in urban areas right across the country to improve value, trust and increase patronage.

The third commercial initiative for us is brand and marketing. I touched on, we see a big opportunity here. We will see a significant increase in our spend in this area next year as we look to target passenger revenue growth. We're ready to roll out a whole new Stagecoach brand proposition, a new vision, values, commercial initiatives and a marketing campaign to support it. And the aim is simple, to improve the end-to-end customer experience and increase passenger revenues through that modal shift that I talked about. And we see significant potential from complementing the local promotions that we already do and have done well, but with centrally coordinated brand and marketing activity.

And then finally, new bus and coach services. With that, where can we grow? Well, we still see significant opportunities to grow and diversify our risk profile with new service propositions in our core markets. As travel patterns and lifestyles change, we are seeing growing areas of demand to support new bus and coach services, and we're investigating the potential for more of these linked to the growing airport markets, demand for inter-town and intercity travel. A couple of examples. Last month, at Scottish Citylink joint venture, we launched a new GBP 2 million fleet of double-decker coaches on the popular air route between Edinburgh airport, Glasgow City Centre and Glasgow airport, and that investment has delivered a 36% increase in capacity. That's providing more than 8,500 seats a week. At megabus.com, we've seen positive customer response and extra revenue from the introduction of reserved seating, allowing customers to book specific seats on journeys across the country.

And I've also been encouraged by interurban services that we've launched in places like Barnsley, servicing Leeds and places like that where we are seeing growth. 12% growth in some of the new services that we've put in and around Edinburgh from the park and ride. So there are clearly opportunities for us to deploy our capital sensibly.

Talked about the climate crisis and cleaner air. There's an increasing public awareness, and therefore, that creates opportunity for us in the whole environmental area. Indeed, if you listen to the constant theme and the pitch to voters from all the main political parties in the U.K., it keeps getting repeated.

Surface transport is the single-largest producer of carbon emissions in the U.K. and the only sector where greenhouse gases are growing. So the government set a net 0 target by 2050. At the same time, cities are facing legal and political pressure for action on air quality with growing concern over health. The bus is central to the solution. It will be impossible for government and local authorities to deliver on the targets or their legal responsibilities without the power of the bus to deliver that modal shift. New ultra-low and zero-emission bus technology is driving huge environmental improvements. Euro VI buses are up to 95% cleaner than earlier models and cleaner than the equivalent cars. Buses offer up to 20x the carrying capacity of a standard motor vehicle. There's new funding streams to support the transition to cleaner technologies, and that's benefiting buses. And Stagecoach is leading the way in the transition to this cleaner public transport future. I mentioned earlier, GBP 1 billion investment in new greener vehicles over a decade. And we will have one of the biggest electric bus fleets in Europe by the end of 2020. GBP 25 million of new electric buses are being introduced in Manchester, South Wales and Guildford alone during the next -- or during this financial year, and we will see a 2% reduction in our emissions during 2018, 2019.

I think it's interesting that an analysis by the Center for Economic and Business Research shows that without Stagecoach's bus services, there would be 0.19 million more tonnes of extra CO2 from passengers using cars and other transport. That is not insignificant.

As we look at change, we need to look at our people, we need to look at technology. Our people continue to be our most important asset. As well as getting the basics right, we're progressing changes to our organizational structure as we've had to rightsize the business, making it fit for the future, making sure we have the right skills and the right people. We have a new structure for senior leadership for our operating companies to keep us focused on our strong operator performance and help us become more forward-thinking and agile.

We are reviewing our people systems and our processes within recruitment, onboarding and performance management to ensure we access and retain the best skills and motivated people as well as giving our managers and our frontline staff the tools that they need to deliver the high-quality standard of services that customers require.

We are seeing really encouraging signs from our new driver apprentice training program, the first in the U.K., and our new driver recruitment processes, where we've taken a completely different approach to driver recruitment, one of the critical issues, risks that we faced over the long term.

As I said earlier, I'm really encouraged that we saw an over 80% engagement in our employee survey, and that's with improved results in recognition, communication, customer service and safety. Still work to do, but we're moving ahead positively.

And we touched on technology. We are harnessing technology to support our customers and our business. New enhanced version of our Stagecoach bus app, offering customers real-time tracking of their bus service on an interactive map. It's the only travel app now combining live map of all buses, interactive journey planner and ability to pay and use mobile tickets all in one place. We're working with other partners. We've launched the Mobility-as-a-Service pilot in Manchester, and that allows people to plan, book and pay for travel across bus, tram and train journeys as well as car hire, car clubs, all on their smartphone.

We are streamlining and modernizing our business, the back-office bit. We [haven't lost], say that we need to continue to be efficient and drive our cost down. And we will be -- there are projects ongoing for new asset management systems, new finance systems, new operational systems, all we are targeting to be in place by the end of 2020 and 2021. And we are progressing industry-leading trials and innovation in autonomous bus technology, which we've touched on before, but in partnership with bus manufacturers and technology providers. And our plans are well advanced for the 2020 trial of 5 autonomous single-decker vehicles that will travel between Fife and Edinburgh. So there's a lot going on.

I touched earlier about diversifying. Yes, we are now largely focused on our highly profitable and successful business in the U.K. following the disposal of North America and the exit from U.K. rail franchises. But consistent with the history over 4 decades, we continue to look to innovate and to seek out opportunities and grow our business in different markets. And we've undertaken detailed assessments of overseas markets to establish, is there potential for us to add to the public transport offering in some of these places, and would it be consistent with our strategy and our current portfolio. The markets that we're identifying, that we're focusing are ones that we see relatively low political risk; low regulatory risk; contract opportunities with an appropriate risk-reward balance, something we've perhaps haven't seen recently in some of the U.K. rail markets; stability; positive economic outlook; and the right demographics.

We see potential in these geographies to earn higher returns on capital than we were achieving in North America. The initial emphasis will be very much on bidding rather than buying. And in that regard, we've recently submitted a bid for the 12.5-year contract to operate Sweden's Roslagsbanan commuter railway which runs in and out of Stockholm, which, of course, is one of the most densely populated cities in the European Union. That contract would see passenger risk remain with the local authority, but it includes responsibility for putting in a whole new fleet of trains into service in the early part of the franchise, which, of course, is something we've done successfully several times in the U.K., and we will see the decision on the preferred operator early next year.

We're looking forward, and in line with the considered approach over many years, we will continue to evaluate options for growth closely and pursue those opportunities that have the right balance of risk and potential reward for all of our stakeholders.

So kind of summing up, I think we've had a solid start to 2019, '20. The business is undoubtedly simpler and a clear business strategy. Ross has outlined, we're in a good financial position. We've got a positive outlook for the core operation, and there are growth opportunities beyond that. There are growing pressures to address the issues that I've talked about, and that pressure is going to build, and that is our opportunity. And I'm very, very encouraged, as I said at the beginning, by recent government and opposition announcements about policy and funding commitments.

For ourselves, we have a package of commercial initiatives, which are progressing, and they're starting to deliver good results. We've done the work on the other markets that there might be opportunities for, and we look forward to moving ahead with that. And there is no change in our expected earnings per share for the full year as a whole.

So just before we take your questions, there was another announcement this morning, which I think it would be remiss of me not to talk -- to mention. Dame Ann Gloag and Sir Ewan Brown will retire from our Board at the end of the year. Sir Brian Souter will also be stepping down as Chairman and -- but will continue on the Board as a Non-Executive Director with Ray O'Toole becoming independent Chairman. I'd personally like to thank Ann and Ewan for the significant contribution they've made to the company and the support they've given me personally over 22 years. At the same time, we continue to look forward to working with Brian and the Board as we deliver on our business strategy, and it's an exciting time to have Ray become the new Chairman. Some of you will know Ray, he's been 30 years in the industry. He's been on our Board now for several years, and I think he will take us forward and bring an insight that we will -- that will be very valuable for us. So as I said, some changes that you will have read about this morning.

So that was really all I wanted to say. Ross and I are happy now to take any questions that you might have. Thank you for listening. If you can just tell us who you are when you raise your question, that'd be great. Thank you.

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Questions and Answers

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

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It's Joe Thomas from HSBC. Can you just flesh out a little bit about the cost and revenue lines on the provincial bus business? If you look at the margin bridge that you gave, the biggest squeeze was from wages. I'd just like to get a sense of whether that pressure is creeping up, or if that's simply a function of the revenue line, and you expect that to bounce back in the second half. We've obviously heard Go-Ahead talking about higher driver turnover. And so wondering if that's impacting you.

Secondly, with respect to the pickup in revenues in the provincial bus business. Can you give an idea of where that's coming from and the extent to which it is pricing driven? Of course, it looks like it's all pricing driven but a sense of how hard you're willing to push prices given the current political backdrop.

And then finally, just on the international expansion, it doesn't seem that long ago since you were saying that the contracts were too small to justify the management bandwidth that they would take up, and what's changed there in the meantime?

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Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [2]

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So I'll just do them in the order you asked them. In terms of wages in the regional bus business, we're still seeing wage awards ranging in that sort of 2% to 2.5% range. So we're not really seeing any upward pressure yet. I think that the first half margin bridge is largely a function of the change in revenue, and we would expect that to bounce back a bit in the second half, as I've said. We haven't seen a particular spike in driver turnover, but there is 1 or 2 places in the country where it has become more difficult to recruit drivers, London being a good example. So we're still able to run all our service in London. We don't have an immediate problem, but it's just a bit more difficult in terms of number of applicants for positions, et cetera. Actually, one of the -- that Martin touched on, people systems. Actually, one of the areas our people team has been looking at is just our whole recruitment process. And 1 or 2 of the other parts of the country where we were seeing some challenges in recruiting drivers, like Cambridge, for example, we put in place that new recruitment program and the results have been remarkable actually, and we've had a significant uptick, both in applicants and recruitment. So it's not a sort of challenge that you can't do something about. So I think we're -- there's nowhere in the country where we're developing significant service at the moment, but we're very focused on that as we always are.

The revenue growth that I alluded to for the second half is largely pricing. I think not just for political reasons, but just good old-fashioned commercial reasons, we're mindful of not overdoing that because in terms of the long-term health of the business, I mean, we've seen this before in the sector. You could push pricing a bit more in the short term, but you need to be cognizant of what that does to your long-term demand. So there's no exact science to it, Joe. It's a balance, and it varies from location to location, where we'll use pricing where we feel we can sensibly do that, but not to the destruction of the individual businesses. I think on the international stuff...

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [3]

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Well, I'll take -- let me take that one. Yes, I stand by what we said. No, I don't think we said they were too small. What we said was we fail on -- with the benefit of hindsight, I was wrong because clearly, I am disappointed with what's happened on U.K. rail. But like any organization, we only have a limited amount of resource. And we're determined to work within that. And we felt that given where we were in U.K. rail, if you go back just 2.5 years and the market share that we had, and as we thought the model was moving to something that was more sustainable and the risk profile right, our -- that resource would be better spent bidding for contracts we were either defending or we wanted to win. With hindsight, that didn't work. And while I am disappointed about where we're at, I have no regrets because we -- the risk transfer was unacceptable. So we -- these -- when we don't have that opportunity, but we have a skill set, we're going to look elsewhere. And we have a smaller, leaner group now, and there are still some pretty significant opportunities outside the U.K. that I think we should bid for. So it's really about where we thought our resource was best going to be spent at that time, and we've moved on from that.

Gerald?

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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [4]

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Gerald Khoo from Liberum. Three for me, if I can, please. Starting with Sweden and other non-U. K. bids. How are you running those bids? So is that being run by a bid team out of the U.K.? And if so, how are you picking up sort of local intelligence and expertise? You talked about diversifying. I mean, do you have a view as to how quickly that will go? What percentage of revenue or profit might come from non-U. K. operations in, say, 3 or 5 years? And finally, you talked about the environmental benefits of Euro VI buses. What's the current percentage of the regional fleet that is Euro VI compliant? And when do you think you'd get to 100%?

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Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [5]

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So I think -- I mean, I'll start with Sweden. We had a commercial and business development team who were largely focused on bidding U.K. rail franchises, not exclusively, but most of what we did was bid for U.K rail franchises. That was a team of about 40 people. It's now a team of about 20 people. Having found ourselves in a position where we're not bidding for U.K. rail franchises, we had to reduce the size of that team. That team is now doing 2 things. One, as I alluded to earlier, there's a reasonably long tail of unwinding rail franchises and the contractual position. So there's expertise in that team that's managing the unwind of our rail franchises. But that is also -- it's a U.K.-based team. That's also the team that's leading our efforts on overseas opportunities. We supplement that with -- as we did when we were bidding U.K. rail, when we're looking at specific opportunities, we supplement that with external expertise. Clearly, when that's overseas, we want some of the expertise to have an understanding of the local market.

We do have some internal Swedish expertise, although it's a distant memory for most people. We used to own a business called Swebus. It was a bus business rather than a rail business, but they operated bus and coach services across Scandinavia. And we have -- including the Managing Director of our London bus region and 1 or 2 others, we still have some people in the team that worked for us in Sweden and some experience of that market. But where necessary, we bring in external expertise. So the decisions around what we bid, how we bid, the risk-reward trade-off are all made from the U.K. and involve the Board. Where we need local expertise to make sure we properly understand the rest and the operating environment and the local laws and regulations, we have expertise.

We have intentionally not set a target to say, in X years' time, we're going to have X percent of our business, I would say, the U.K. The reality is we don't know where we're going to be. We will bid opportunities on terms that would be acceptable to us. If we win, that's great. If we don't win, so be it. And at one extreme, that might mean that we're here in 3 years' time and we're still a U.K. bus business, or it may mean we've expanded. We've deliberately not set a target to chase. For us, this is about, look, if we can win them on sensible terms for our shareholders, then that would be good, but we don't feel we need to diversify just for the sake of saying we're diversified.

I think on the environmental piece, at the moment, 37% of our fleet is Euro VI or is not conventional diesel, so it's either Euro VI or hybrid or non-diesel, that includes London. If you just look at the regional bus fleet, about 30% is Euro VI or hybrid. So we have -- we're well into that sort of migration to Euro VI. We're not doing -- and any new diesel buses that we're buying would be Euro VI. We're not doing anything to particularly accelerate that. That percentage will just continue to naturally move up through our normal investment cycle. I haven't actually worked out when that means we get to being 100% Euro VI, but we'll get there over time as we refresh the fleet.

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [6]

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And there are schemes in place as well to retrofit some of older buses as well, which we are talking to some local authorities about that and the funding for that. So it doesn't necessarily -- they could have Euro VI standard, but they might have been buses that were bought earlier in the cycle. And I think that's my point here, that they're still -- and I spend a lot of my time, it's a privilege to do it, but going around the country and talking to local authorities. And there are still a number of people out there who think that buses are big and bad and pollute. Actually, they don't. Actually, there's been significant investment in bus technology over the years. So this is about misunderstanding. Yes, we will have an aspiration to move to even cleaner technology, whether that's electric or in some places, hydrogen, and that's why I said it will be different technologies, as we've always done. We've always been at the forefront of that. But actually, we don't -- there will be time and investment to get there, and who's going to pay for all that? And actually, what we need to not lose sight of is we can get a lot of cars off the road much earlier if people have a full understanding of the capability of the bus. And I am more encouraged than I've been in a long time that people are now starting to see that, people who have got personal and local authority responsibility for some of these challenges, and that's an opportunity for us.

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Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [7]

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We're now 75%, at least, Euro V-plus. So you go down to Euro V, the majority of the fleet meets at least that standard.

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [8]

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Jaime?

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [9]

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Jaime Rowbotham from Deutsche Bank. Forgive me for also wanting to focus on international expansion. You say the markets we're focusing on are those where we see low political, regulatory risk, contract opportunities that offer the right risk-reward, positive economic outlook, positive demographics. And you've told us about 1 contract in Sweden. I mean are there many? Do you think there are many? Would you care to expand on where those opportunities are, if the answer is yes?

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [10]

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We think there are more than enough, and I would rather not expand on that at the moment because for us, that's part of what were -- our commercial strategy, and I'd rather not, at the moment, broadcast to the outside world where we're thinking about deploying our management time and our capital, for obvious reasons. But our team are busy. We've done a lot of the [great] work, and we're now looking to pursue different opportunities. And I'm with Ross, I'm not going to overpromise and under-deliver here. And I'm not going to make any -- we're not going to chase stuff. And we're not going to -- I have an aspiration that we can deliver here, but we're not going to put hard-wire revenue or profit targets over the next 2 to 3 years until we see how this progresses.

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Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [11]

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I mean part of this is about our own focus and prioritization as well. I mean Gerard touched on this. You need to have an understanding of each local market that you're bidding, and so trying to become an expert in 25 different countries is more of challenge than trying to become an expert in 4 or 5, say. So at the moment, we are at that -- there are 4 or 5, maybe not countries, but geographic areas that we are focusing on. That's not to say that the ones we're not focusing on are a waste of time. It's about -- those are the ones that we think balancing the attributes of the opportunities and also doing a sort of high-level assessment of what's our chances of winning here. I mean there are -- and again, I wouldn't name names, but there are 1 or 2 countries where there's lots of opportunities and lots of bidders, and lots of bidders that's been at it for much longer than we have in those particular areas that we're not currently pursuing. And that's not necessarily a comment that the opportunities are terrible. It's just us trying to be realistic on where we best focus our efforts. So -- but really looking at 4 or 5 target areas at the moment, which we think is manageable and we think are good opportunities, but that will evolve depending on our success rate and our experience as we progress.

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [12]

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If I could just follow-up? I haven't done the due diligence yet on the Stockholm situation. Who's the incumbent? Or is it coming to market for the first time?

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [13]

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Arriva is the incumbent.

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [14]

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Right. And from what you said, you would potentially consider putting more resource into this bid team if there's lots of opportunities out there. And do you think you need critical mass in some of these areas for the business to be a success?

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [15]

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Yes. You could always run individual contracts, but somewhere -- I'm so not surprised that Scandinavia is one of -- we've said that today. There are a number of opportunities in that Scandinavian market now, bus and rail, which, ideally, yes, what -- one wouldn't be really what I would want to do. You want to try to build a portfolio of a business in that market that would be sustainable for the longer term.

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Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [16]

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Yes. I don't -- and the teams, I think we're content with the size of the team at the moment. In fact, we reduced the size of the team, having come out of U.K. rail. Again, you continue to keep these things under review depending on the progress.

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [17]

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Anything else?

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Alexander Paterson, Peel Hunt LLP, Research Division - Analyst [18]

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It's Alex Paterson from Peel Hunt. If I can just continue the international theme. The -- I mean, you were talking about local expertise. And clearly, Sweden, you've got some residual expertise. Where do you get that if you're looking at other areas? Is that you could engage with consultants or that you could hire a few local people? And secondly, if I look at some of your peers, they've set up local bases to bid from, specifically to understand the market, and they use consulting contracts as a way of getting in. Or in the case of National Express, it took a very small contract to learn about the market, and 20 years on, it's spawned very significant dividends or it looks like it will. Are they the sort of things, and are you willing to make that kind of investment as well?

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [19]

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Yes. Getting people either locally on the ground or the right consultants, I'm not bothered by that. You can do it. It's whether that's the right investment or the right opportunity. But a bit like the rail industry in the U.K., there's tons of people who'll sell you their services for a price. And we have been good over the years at managing the balance between what we do and our own internal resources and our own capability and market intelligence, but also recognizing where we need outside help. So I think both Ross and I and Neil Micklethwaite, who leads for us now on this, that bit's not an issue. We can get the right people. We've been well supported in Scandinavia. I mean if you do these things and do them properly, you need help on the ground, and you need people that would ultimately help you both execute and manage.

One of the things I like about Sweden, for example, is there is a whole year to mobilize. You don't have to do it in 12 weeks. First group tried to mobilize the West Coast in 12 weeks. Interesting. So -- yes, so that's -- there is clearly a bidding -- a market intelligence base, a bidding base. And then where you're successful, negotiation and the whole mobilization, that seems to me to be more management. But we try to do it all ourselves, but that bit, getting people, is not the difficult bit, you just have to work out if it's the right investment or not.

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Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [20]

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That's one of the -- Sweden is one other geography where we've currently got people actually based in the market, looking at stuff. The rest, we're looking at from the U.K. with the expertise as required.

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Sathish Babu Sivakumar, Citigroup Inc, Research Division - Analyst [21]

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Sathish from Citigroup. So as you focus on your international diversification, does it mean that you're no longer actively pursuing any opportunities within the U.K. bus market?

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [22]

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No. So I just -- well, I've just outlined all the things that we're planning. You mean our acquisition [light]. Or what do you mean?

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Sathish Babu Sivakumar, Citigroup Inc, Research Division - Analyst [23]

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Inorganic growth within the U.S.

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [24]

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Inorganic?

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Sathish Babu Sivakumar, Citigroup Inc, Research Division - Analyst [25]

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Inorganic, within the U.S. market.

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [26]

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No. But equally, we have to focus on our own business. And we have a number of priorities that I think are fundamental to our future. And I don't want to be distracted from that. If -- we have always reacted to opportunity if it's there. Right now, that's not a core focus for us. If something comes along that we could do and that could add value for our shareholders, we would still look at that. But I tried to lay out very clearly today what we see as the priorities.

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Stephanie Fabienne D'Ath, RBC Capital Markets, Research Division - Analyst [27]

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Stephanie D'Ath from RBC. Regarding the 4 to 5 geographies you have mentioned, could you just maybe confirm they are in this continent or if we would consider the U.S. again? Regarding the better risk-reward compared to U.K. rail, what would be the kind of return on investment you would be looking at, or if you could share any targets? And if I could maybe come back, sorry if I missed that, on where you see profit outside of the U.K. as a percentage of group in the next 5, 10 years?

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Ross Paterson, Stagecoach Group plc - Finance Director & Executive Director [28]

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I think on the markets, I can't confirm that they're all in this continent, but I can confirm that they are not in the U.S. We actually have a noncompete arrangement in the U.S. with the purchaser of our former North American business. So certainly for the foreseeable future, you're unlikely to see us in the U.S. In terms of the risk-rewards and the returns, look, I think it's no secret that whilst we covered our cost of capital in North America in recent years, we didn't make a significant return beyond that. And I think we see opportunities elsewhere where we can deliver a better return. And I think in terms of what our aspirations are, it's simply that we want to make a sensible return in excess of our cost of capital.

And risk-reward, it's kind of, I guess -- a lot of these contracts are similar to U.K. rail. There's a finite amount of capital that the parent company is asked to put at risk, and you will have an expectation of what the potential return is, and making sure that balance is appropriate is a key area of focus. So there's actually 1 or 2 contracts that we've looked at overseas recently that we decided not to pursue because the amount of capital that the parent company was being asked to put at risk was quite significant relative to what was a relatively small return.

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Martin Andrew Griffiths, Stagecoach Group plc - Chief Executive & Executive Director [29]

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And I think on your final point, I think we just said, I'm not -- we're not going to be drawn on targets on revenue or profit outside the U.K. over any time period. We're very happy with the approach that we're taking, and we'll see what that gives. But I'm not going to sit here and hard-wire in numbers that people can throw back at me if we don't achieve them or, hopefully, if we over-achieve them. So I'm not going to do that.

I'm conscious of time. Okay. Well, thank you all very much for your attendance. And if we can take this opportunity to -- I hope you all have a good Christmas and a happy New Year, when it comes. And we'll see you again in June, where hopefully we'll give you an update on some of the progress that we've made. So thank you for attending.