Mobico Group Plc

Good morning and welcome to our 2023 full year results and Q1 update. Thank you again for your understanding in waiting for this. We are pleased to have completed the supplementary inquiries around German rail that were deemed necessary and James will walk you through the conclusions of that and the weather group performance in a few moments. Before that, I would like to share the key messages that we have taken from what has been a more challenging 23 than we have hoped or expected. In short, our story is one of continuing positive demand drivers, but with profit recovery and therefore reduction in net debt somewhat slower than we had hoped. Yet, 2023 has been a year in which important underlying progress has been made in the context of an evolving and challenging market where Movico has adapted and acted decisively. The fact that demand and revenue growth remains healthy is certainly encouraging, and we see that continuing. As well as delivering a strong new business conversion and healthy margins on Rocky, we're also retaining and successfully mobilizing important contracts that both drive revenues and validate our customer offering. Nonetheless, financial results have been disappointing. The lag between the time when wage rates are agreed and implemented and their subsequent recovery through higher prices does have an impact on our results today, albeit those higher costs will be covered. The profile of inflationary pressure followed by pricing recovery is likely to be similar but somewhat tempered going into 2024. We will now also absorb higher costs in relation to our German rail business than we had previously budgeted. In that mixed environment, the actions that we have taken are crucial to progress and to successfully leveraging our strengths. New leadership in North America school bus and in UK Germany have already made a notable impact. In both businesses, there is a new ambition and commercial rigor being brought to bear through a much clearer direction and leadership and a stronger and more effective execution. Behind these specific pressures, it is also important to understand that our three businesses are at different stages of recovery. ALSA has produced another record result in its centenary year and is expanding its interest successfully. The team has delivered spectacularly over a number of years. North America is making real progress, having launched its most successful school year startup for many years, and is already moving towards another. Transit and shuttle have been successfully combined into one operation, whilst also managing to navigate a sharp decline in revenue from a key technology customer, partly by establishing a presence in new segments and geographies. UK Coach has also been encouraging, having also benefited significantly from rail strikes. As we will discuss later, NXDS, which is part of UK Coach, has suffered from continuing weakness in its key markets, and the ambition is to at least to stop losses during 24. We're addressing all options to achieve that. And UK BAS is refining its model to ensure our business delivers for all our stakeholders, including our shareholders, to ensure that the risk-reward balance of the model is sustainable. And I'll come back to that later in the presentation. And German Rail remains under pressure from what are industry-wide challenges, particularly regarding driver availability and energy cost. Our very successful accelerate efficiency and organizational design programs have delivered to plan in 23 and are on track to deliver their targeted savings in 24 and beyond. We believe there is continued scope to address the structural cost base of some operations further and thus the launch of Accelerate 2.0. Markets constantly evolve and we need to be leading ahead of those changes and that's another reason why management changes were so important and why they have already made such a big difference. Preparations for the sale of the North American School Bus Division are progressing well. Key outcomes which underpin the continued recovery in that division, such as the result of the current bid season, the level of agreed rate increases across the contract portfolio, and further progress on driver recruitment will be known by the end of the bidding season. And we have taken the conscious decision that this will be the optimal time to run a process and crystallize value with a view to conclude the process by the end of the year. And finally, for now, we will describe how full year 2024 adjusted operating profit is now expected to be between $185 million and $205 million and why the Q1 trading performance supports that outlook. With that, I'll hand over to James to walk you through more of the details.

Okay, thanks, Ignacio. Good morning. The story of this year is a group with passenger growth and pricing really driving the top line. But we can't escape from the fact that we have a portfolio of businesses at different stages of recovery and that inflation has not yet been fully recovered. So our revenues grew by over $340 million, or 12%. We saw adjusted operating profit reduce by $29 million on prior year. This is the net result of significant benefits from pricing and volume and the in-year benefits from our Accelerate restructuring programme not being enough to fully offset both a reduction in COVID funding of over 100 million and inflationary cost increases of around 130 million. Note that adjusted operating profit of £169 million is after a one-time, non-cash, IFRS 15 contract asset adjustment of £10 million in German rail, which I will address later. What's clear from these results is that costs have risen more quickly than revenues. We're beginning to address that with both pricing actions and Accelerate, and I'm confident that the actions we're taking will recover profitability in future. However, the impact of lower adjusted operating profit, higher interest costs of approximately 25 million, and an increased effective tax rate has resulted in a reduction in earnings per share of 10.5 pence to 4.5 pence. Free cash flow remained healthy and broadly stable on prior year, and net debt was also stable, although covenant gearing increased as a result of reduced EBITDA to 3.0 times, but still well within our covenant test limit of 3.5 times. Rocky was down slightly on prior year at 7%, although significant progress has been made with new wins, as Ignacio discussed later, we need to see profits on our existing portfolio increase. On a statutory basis, the group's operating loss was better than that prior year because, as expected, there was no impairment charge for ALSA this year. However, statutory profits continue to be impacted by restructuring charges and the impact of onerous contract provisions. So this slide sets out in more detail the big building blocks of the movement in adjusted EBIT from £197 million in 2022 to £169 million in 2023. Working from left to right, the first orange block shows the reduction in COVID funding of £105 million. Now, this has been more than offset by underlying growth in the business. The next two gray bars show the operating profit impact of volume increases, essentially more passengers and increased service levels from contracted work, and the impact of pricing recoveries, which includes three main things. First, the benefits from repricing our U.S. school bus contracts affected from the new school year startup in September 2023 and the annualization or run rate benefits from the equivalent increases in September 2022. Second, the ticket price increases in UK bus effective from July 2023. And third, continuing effective yield management across the rest of the business, but predominantly in our UK and Spanish coach operations. So pricing and volume together benefited adjusted EBITs by $202 million. However, cost increases added $130 million to our cost base, of which approximately 55% is driver wage inflation. We've made good progress in recovering this cost through pricing and the in-year impact of our cost reduction programmes, with Phase 1 of Accelerate delivering $15 million of in-year benefit, in line with our expectations. Finally, the impact of the adjustment to the German Rail IFRS 15 contract asset in the year means that full-year EBIT of 169 million was after absorbing approximately a 10 million charge. Note that this charge principally relates to the impact of changes to assumptions about future profitability of our RME contract, and 10 million is effectively the in-year catch-up, which we do not expect to reoccur. However, overall, there is clearly more work to do, as we have not made sufficient progress to allow our strong top-line growth to flow to the bottom line. So this slide shows the divisional breakout of revenue and profit performance, and I think it illustrates that we have businesses in varying states of recovery. ALSA delivered another excellent performance in its centenary year, with the business going from strength to strength. Revenues were up 19%, and operating profit up 29% to £137 million, with growth across all lines of business, and with exceptional performance in long haul, as the business quickly adapted to capture the benefits of multi-travel voucher and young summer discounts. North America saw top-line growth of 7% as a result of pricing recovery and route reinstatement in school bus. Pricing benefited from 13% uplift on the 40% of contracts up for renewal in the year and the annualisation of the price increases pushed through in FY22. However, profits lagged prior year as a result of 2022 benefiting from £44 million of CERT funding. Margins for the year in North America, and particularly school bus, are clearly far below where we expect them to be. But importantly, the final quarter of FY2023, which is the first quarter that benefits both from school year 23-24 route reinstatement and the benefits of pricing on 40% of the portfolio at the beginning of that school year, showed a significant improvement and is much more representative of our expectations for the school year 23-24. In fact, the improvement in Q4 was approximately $8 million net of wage increases and additional driver training costs, better compared to Q4 of 2022. That Q4 exit rate and a further expected pricing benefit of approximately £4 million for school year 2024-25 translates into a £20 million annualised upside for financial year 2024 compared to financial year 2023. Noting, of course, that the school bus business is highly seasonal. In the UK, we saw revenues increased by 15% as a result of passenger growth in both scheduled coach and bus, with the bus division reaching 90% of pre-COVID commercial passenger levels. However, profits in the UK division were down by 2.1 million, impacted by a driver strike and the subsequent 16.2% driver wages settlement in UK bus, effective from January 2023. And the delay agreed with TFWM in pushing through ticket price increases, which were actually implemented in July of 2023. Finally, the continuing losses in the NXTS division. £15 million of additional benefit during rail strikes in UK coach did mitigate that downside to some extent, however. Our German rail division saw revenues drop by 5%, with profits down 17.4 million year on year. And let me turn to that now. So in Germany... The audit is now complete, and while the delay was not welcome, it was important that we had time to complete our work. As we said previously, the main reason for the delay to the audit, in the context of the significant movements I will talk about in a minute, was additional work required to validate that the assumptions made in prior years remained valid, given what was known at the time. This work has resulted in a restatement and an increase to the prior year onerous contract provision of £25 million. In addition, there was a further delay to allow time to assimilate the impact of the German Federal Statistical Office publishing in March 2024 restated values for the years 2021 to 2023 of energy indices that are used to calculate our energy cost recoveries. So before we come on to the financial impact, I think it's helpful to understand the commercial context. There are three main issues fundamentally impacting our German business. First, energy market volatility. Since the Russian invasion of Ukraine, electricity prices in Germany have been extremely volatile, peaking at over five times 2021 levels. Although our contracts are intended to provide energy price protection, the effectiveness of that protection depends on how certain published energy indices behave. In FY22, we had a good understanding of the relationship between the contract indices and the energy price. However, in late 2023, these indices started to decouple from previous expectations, resulting in lower expectations for energy cost recovery. Secondly, there's been industry-wide labour disruption to the train driver market. The rail industry in Germany is experiencing significant driver shortages that are compounded by reducing driver productivity due to adverse changes to productive hours. This impact accelerated during the second half of 2023, with a significant increase in the activity of driver agencies who can pay drivers more whilst charging a premium to the operators for their supply. And third, we are seeing persistent levels of inflation in Germany. In response, we're in active discussions with our customers, the passenger transport authorities, or PTAs, to reduce the impact of these structural issues. And we are well progressed with our plans to recruit more drivers, with a significant increase in driver training courses. I think it's important to note that the PTAs are also motivated and in fact contractually required to reach an equitable and sustainable solution regarding arrangements with operators and our discussions with them have been pragmatic and constructive. So what this all means in financial terms is as follows. First, the onerous contract provision in respect of RRX lots two and three. So when a contract is classified as onerous, all of the future losses have to be brought onto the balance sheet, discounted and revalued at every reporting period. The onerous contract provision has increased to £118 million from £47 million restated at the end of December 2022. with a £99 million charge to the profit and loss account through adjusting items. This means we expect FY24 will see a cash outflow of approximately £30 million, but that this will drop thereafter to approximately £11 million per annum over the remaining nine years of the contracts. In FY23, profits on our RME and RRX Lot 1 contracts were down £17 million on prior year to just above breakeven. This reduction comprised two key things. First, a non-cash adjustment to the IFRS 15 contract asset of about £10 million. Now, this principally reflects impacts of changes to assumptions about future profitability on that contract, and all other things being equal, we would not expect this to recur. And second, the balance of approximately £7 million is the in-year impact caused by driver issues and lower energy cost recoveries. We expect the driver issues to be resolved in the main by the end of FY25, with the RME and RRX1 contracts generating a loss of approximately 5 million in FY24, but returning to profitability thereafter, and generating approximately 20 million of profit over their remaining contract lives. Work has also been done to strengthen the financial controls in the German business. So let me turn to adjusting items. Total adjusting items had an adverse impact of £190 million to our statutory operating loss in FY23. Although this is down on prior year, this is because FY2022 was impacted by a non-cash impairment charge of £260 million relating to ALSA. Now, disappointingly, the cash outflows relating to adjusting items increased to £71 million in FY23, up from £49 million in prior year. And if I just take the three main buckets of adjustment in turn, first, the non-cash charges are significantly down as we return to amortisation of intangibles being the main adjusting item and no repeat of the ALSA repairment. Secondly, outside of Germany, charges relating to the re-measurement of existing onerous contracts, including North America driver shortages of 12 million, and losses as a result of the COVID-19 pandemic of 2.1 million, have together reduced from 39 million in FY22 to 14 million in this year, and we expect this to further reduce in FY2024. However, the 2023 impact of the German rail onerous contract provision is significant, representing a £99 million charge with £28 million of cash outflows in the year. The third bucket of costs includes the repayment of the UK furlough money of £8.9 million and ongoing costs associated with our Accelerate programmes, as well as costs in association with the sale of school bus, which together are around £30 million. The future cash outflows associated with adjusting items are expected to be primarily in respect of the restructuring and German onerous contract costs. This, unfortunately, is a key reason why we are going to be slower than previously expected in returning to our gearing target range. So turning now to free cash flow. We are changing our medium-term cash flow targets to be a measure after M&A and growth capital expenditure. The core components of this measure are shown above, with our previous measure of free cash flow shown for consistency. In FY23, we generated £163.7 million of free cash flow, which was consistent with the £160.5 million delivered in prior year and represents a conversion from EBIT of 97%. EBITDA was down on prior year as a result of the EBIT reduction I've just talked about. Maintenance CapEx of $136 million principally relates to purchases in North America and ALSA and is approximately $50 million down on prior year as the group accelerated CapEx to secure production slots in FY22. So while no capex has been intentionally delayed in FY23, we do expect that capex will return to an average level of approximately 0.9 times depreciation in the future, noting that depreciation is in the order of 200 million. Working capital remains well controlled, and tax and interest costs have increased as a result of higher interest charges in line with previous guidance. Growth capex and M&A of 77.5 million includes 46 million for the final 20% tranche of We Drive You and is down on prior year because of significant payments made for Moroccan fleet in 2022 and the benefit of a fleet subsidy received in 2023. On this basis, i.e. after growth capex and M&A, free cash generated was 86.2 million as compared to 37.9 million in FY 2022. So this next slide shows how the cash flow generation I've just spoken about has been used in the business. It demonstrates that closing net debt has remained stable at approximately £1.2 billion on a reported basis, with covenant net debt also stable at approximately £990 million. As a result, because EBITDA is slightly down, covenant gearing, which is covenant net debt divided by covenant EBITDA, has increased 0.2 times to 3.0 times, albeit well within our covenant test limit of 3.5 times. Just running through the other items in this funds flow. Adjusting items cash flows represents the cash costs associated with adjusting items in the income statement. The key components of the 71 million of adjusting items cash flows in the year are 28 million in respect of the German rail onerous contracts, $10 million due to the North American driver shortages. We do not expect significant cash costs beyond 2024. And $7 million due to other COVID-related onerous contracts, which will reduce to $5 million in 2024 and with limited amounts thereafter. We've then got $26 million in respect of restructuring and other costs, including the costs associated with our Accelerate programmes. Dividend and hybrid coupon service costs were 62 million. As we've said previously, we took the decision to suspend the final dividend when it became clear that we were not going to make progress with the leverage in the year. So overall, I'm clearly not satisfied with the progress on deleverage, which has been compounded by the cash flows associated with the onerous contracts. Our focus is to make sure that those contracts are managed and, where possible, renegotiated, and with active cost control across the group to ensure that the benefits we are seeing to the top line flow to profit and cash. And on that note, growing earnings and allowing revenue growth to flow to the bottom line means we have to be relentlessly focused on cost of delivery. Our unit cost of delivery, that is cost per mile, have increased faster than our revenues have when compared with 2019. The clear focus of our Accelerate programmes has been on how we deliver our services, ensuring that the business model is appropriate and competitive, starting with the back office and support functions. Accelerate One, which was launched in Q1 of 2023, delivered 15 million of in-year savings, which is expected to result in at least 30 million of run rate savings in FY24 and beyond. This is in line with our previously announced target. Accelerate 2 was announced in late FY23, with the stated aim of generating 20 million of annualised savings, beginning in the second half of FY24, when we expect to deliver 10 million of those savings in-year. This programme is focused on more fundamental changes to the business model. Addressing the unit cost challenge remains an important and continuing priority. So let me turn now to our 2024 guidance. Our FY24 adjusted EBIT is expected, as Ignacio said, to be in the range of £185 million to £205 million, reflecting significant actions to offset a number of headwinds. This is supported by the Q1 trading experience to date, whereby revenue has been 6.7% ahead of the same period in FY2023 on a constant currency basis, and which I'll cover next. So the bridge you see there takes us from an adjusted EBIT for FY23 of 169 million to a range of between 185 and 205 million for FY24. Walking through these in turn, and please bear in mind that these are all approximations, so don't get your rulers out, we do not expect a recurrence of the 10 million IFRS 15 contract asset adjustment in FY24. So that effectively takes us from 169 million to 179 million. From there, we do see some headwinds, as highlighted by the orange bars on the page. Revenue headwinds include those items that benefited FY23, but which we do not expect to recur in FY24. And this mainly comprises the Young Summer Ticket Initiative in Alsa, the impact of fewer rail strikes in the UK, and a reduction in funding received by UKBUS. Inflation and cost headwinds are expected to be in the region of £100 million. Offsetting that are the benefits of significant management actions. The Accelerate programmes will deliver at least £25 million of incremental cost savings in FY24 relative to FY23, with at least £15 million more coming from the annualisation of the Accelerate 1 savings delivered in prior year and a further £10 million from the Accelerate 2 programme. Pricing actions are expected to add at least £85 million, with around £40 million of this already secured through annualisation of price rises implemented in FY23, a further portion guaranteed through contractual escalators, and the remainder to be negotiated in FY24. Volume growth and recovery is expected to add at least £35 million, a portion of which is already secured through the new contract wins seen in FY23. So you'll have seen this morning that we also announced our Q1 update with Q1 revenues 3.5% ahead of prior year or 6.7% on a constant currency basis. ALSA delivered a strong Q1 performance, with revenues up 8.7% on Q1 2023, 12.1% on a constant currency basis. Long Haul is continuing to trade exceptionally well, driven by the continuation of the multi-voucher scheme, coupled with another strong Easter trading period, with Q1 passenger numbers 25% higher than in Q1 2023. Our regional business is continuing to trade well with passengers numbers up by 17% compared to prior year in that part of the business that is exposed to passenger volumes. And our urban operations also continue to trade strongly with passenger numbers up 11% versus Q1 of 23. In addition, the acquisition of Canary Bus, the leading operator in the Canary Islands, completed on the 1st of March 24, has had a positive start to the year and further diversifies the ALSA portfolio. In North America, revenues are down by 0.8% versus Q123 on a reported basis, 3.5% up on a constant currency basis. Skilled bus revenues were broadly consistent with Q123 on a constant currency basis, with the impact of price rises and route recovery being offset by the consequences of unusually poor weather, whereby lost operating days are expected to be recovered at the end of the skilled year, i.e. in Q3-24. Reinstatement has been marginally ahead of expectations to date, and there is a strong focus on contract pricing increase as we progress through the bid season, with above-inflation price rises expected on the remaining portion of the portfolio whose contracts fall for renewal. In transit and shuttle, revenues were up 13% compared with Q123 on a constant currency basis, reflecting new growth wins from FY23 and additional service volume with some of our existing customers. The business continues to pursue strategically compelling bids in line with the evolved strategy, and Ignacio will pick up on some of those important wins later. And finally, in the UK and Germany, UK revenues were up 9.5% compared to Q1-23, predominantly driven by UK bus. Ticket price rises and passenger growth, including the non-recurrence of FY23 strikes, led to an increase of 18.3% in revenue compared to Q1 of prior year. UK coach revenues are up by 3.4%, reflecting passenger growth of 4% within the scheduled coach business, and representing underlying growth of 10% when removing the impact of rail strikes from both years. And progress continues to be made with the turnaround of the NXTS business. German rail revenues were 8.6% lower than in Q123, 5.7% down on a constant currency basis, reflecting higher revenues in Q123 from the emergency contract award, higher penalties in Q124 for the reasons outlined previously, and the impact of the adjustment to the IFRS 15 phasing asset. I'll hand back to Ignacio.

Thank you, James. As you can see, it has been a very busy year with much of our time concentrated on addressing some significant challenges. However, the business has also been very careful to continue with our focus on delivering against the evolved strategy. and more importantly, against the specific ambitions embodied by that strategy. Achieving the highest standards in safety, reliability, environmental standards, customer satisfaction, and being the employer of choice will ultimately deliver repeatable commercial success. Across these categories, the business continues to improve, and we are confident that financial returns will follow. Moving into how we have delivered on pipeline and how excited we are that this will be a key building block to sustaining the top line growth. Let's start by retention. Well, before you can win your business, you first have to retain the business you already operate. Our overall contract retention rate across the group is approaching 100%, with only non-regretted losses in the school bus business, taking that figure down very slightly. This, I believe, is a great achievement. ALSA alone delivered 165 million euros in key retentions, with the UK business also winning a strategically important agreement serving both Luton and Dublin airports. Winning has to then be followed by successful mobilization and execution. So it is important that we have maintained our track record in that too. When we look at the pipeline conversion, I am very pleased that we are also winning new business as we gradually convert the opportunity pipeline into contracts and revenues. These slides give a snapshot of the projects we have won, and most importantly, describes continued momentum both in the number of projects secured and the margins achieved. Conversion rate continues to be high at 20% with 43 new contracts, one with annual contract value of $126 million and $1 billion of total contract value at 12% EBIT margin and 23% ROKI expected. Although it might appear as though 2023 was a weaker year, 2022 results did include the award of RRX Lot 1 with an hour contract value of £90 million. I would also draw your attention to the important acquisitions we have made for ALSA. These are relatively small but strategically important additions to their business where ALSA leadership has identified clear strategic and synergistic opportunities. Since the year end in March of 24, as mentioned, we have completed the acquisition of Canary Bas, significantly increasing our presence in the Canary Islands. It represents another important step into adjacent tourism market, which accounts for about two-thirds of its 70 million euros of revenue. They have 800 vehicles and they transport 13 million passengers per year. And finally, when we look at the existing new business pipeline, all of this means that we have constantly replenished the pipeline of opportunities, and it remains significant at $2.5 billion, comprising a mix of contract bid opportunities and selected M&A targets. Again, as we have mentioned before, the largest balance of organic pipeline involves asset-light prospects, a direction the group has been moving in over recent years. Which brings me neatly onto ALSA's performance in 2023. While celebrating its 100th year, ALSA delivered another record performance with growth across the business. It serves as a benchmark for the rest of the group. Passenger numbers have reached a new high at 589 million, up 13% on 22. We retained and won significant business, while strengthening our key hubs and expanding in new sectors, including the healthcare, transport, and new cities as well. And more than 65% of our long-haul revenues are now digital sales, with a new center of innovation established through the year. The key differentiator at ALSA over a number of years has been the quality of the team, from senior leadership right through the organization. The good news for the wider group is that we now believe we have strong management teams across all the three divisions, the first of those being North America. Despite the announcement of our intention to sell school bus, we remain just as ambitious for this business as we are for any other business that we have. And it has been actively managed to deliver against those ambitions. The new team continues to drive for excellence and has already brought more rigor around operational effectiveness. School Bus, therefore, has made a big step forward operationally, delivering the best-ever school year startup for school year 2023-2024, and it's heading for another successful bidding season this year. The additional early wins of new business for next year, circa 450 new routes, offsetting expected churn, is testament to the progress. and the successfully implemented 13% price increase in the year is a measure of their strong relationship with customers and the quality of our service. I am truly delighted at how Tim and his team have been able to make such early and important improvements in what is a large and complex business. And that work is continuing at pace to improve the platform and its inherent value. In our North American operations, the combination of the transit and shuttle businesses into one operation was also an important milestone successfully completed during the year as it establishes a strong platform for growth and improved profitability. Of setting significant weakening in brings from a large technology customer, the Transit and Shuttle team have also grown successfully into other segments and delivered some encouraging momentum on the underlying basis. Transit and Shuttle has delivered 32% of the group contract wins and 46% of the total contract value at expected 10% EBIT and 31% ROKI. Also, the restructuring of the sales teams and the introduction of the involved reinvigorated sales processes have led to building a stronger pipeline of new opportunities and delivering solid conversion rates. It is very encouraging to see that from a historical growth in transit based on acquisitions, we are now delivering growth in transit with new contracts won like the ones in Charleston, North Cook, River Valley. And this is a testament of what Evolve is delivering and of Mobico's strong credentials in bidding, planning, mobilizing, and delivering safe and reliable mobility solutions. Additionally, all operational KPIs have shown improvement year on year. And if I move to the UK, where we made our other key change in leadership when Alex Jensen joined us to lead UK and Germany in September. Alex has already made an impact both in our business and the weather industry. The UK bus and coach market is a dynamic and competitive sector which often requires a different approach to deliver the sustainable profitable growth that we target. I'm pleased to report that the fresh view and considerable experience in managing complex businesses that Alex brings is already having an impact. In July, the UK bus and coach businesses were combined into one UK structure, allowing important practical efficiencies to be realized. As is the case elsewhere in the group, the UK has succeeded in attracting new users to its services, with coach delivering a 25% increase in passenger numbers, along with an improvement in yields. Coach also retained two crucial contracts that I mentioned for Luton and Dublin Airport in a very competitive segment. In UK bus, the successful implementation of the 12.5% rate increase has helped to mitigate inflation, albeit after a lag. Aside from dealing with Germany through the year end, much of Alex's time has been spent on revisiting the strategy and its assumptions in the business model in the UK. National Express is a leading player in the sector and is in a great position to grow as the market evolves. However, as James has outlined, unit cost has been allowed to grow faster than revenues, and it is imperative that we keep a clear focus on efficiency without damaging or differentiating offering if we are to prevail in any market. Now, I'll talk a little about the challenges facing our UK business. The greatest challenge facing the UK bus business is rebalancing the risk-reward structure in a way that delivers more equitable and more sustainable commercial arrangements. For example, the bus operators group is working to establish a pricing mechanism that will automatically look to cover industry-related inflation factors. But more fundamentally, our business is preparing for a possible move to greater franchising across the UK, making sure that we are best placed to prosper in that market structure too. Whatever the market structure, we continue to focus on the commercial viability of our networks. After extending some losses at NXDS, UK Coach is resetting its structural cost base with a clear focus again on cost and revenue per mile and is executing on a plan to take NXDS to break even at worst. And a review of the NXDS resulted in a decision to close two depots. At the same time, the business is leveraging its strength in the market to accelerate the model shift from trains and cars to coaches. And finally, Germany. We have already talked a great deal about Germany. The impact that higher than expected cost had on profits, particularly driver shortage, related penalties, has been clear to see. The good news is that our customers, the passenger transport authorities, PTAs, are also keen to find an equitable solution to what has been an industry-wide problem, and we remain committed to supporting them. The conversion of the RRX1 contract from being on an emergency award basis onto normal terms has gone well, although margins are impacted temporarily by driver shortages that result in penalties. In Germany, the clear priorities are already being actively pursued. Plans to recover the driver shortage are well advanced, but it will take some time for the issue to be finally resolved, with the training typically lasting 12 to 18 months, and discussions with the PTAs are well underway. As James mentioned, actions have been taken to reinforce controls over all aspects of a very complex long-term contract accounting business. And that brings me to the conclusions. 2023 has been a challenging year by the year in which important underlying progress have been made in the context of an evolving market where Mobico has adapted to the reality of post-pandemic world and addressed notable external headwinds, acted decisively to adjust the business model and cost structure to be fit for purpose, Accounting issues in Germany are close and behind us, and Evolve is delivering significant organic growth, and we are well positioned to capture future growth opportunities. Most importantly, we also continue to believe that ALSA is a truly world-leading business, consistently delivering a strong organic growth in revenues and profits, as well as gradually and successfully diversifying into adjacent markets. North America is already in an encouraging recovery trend. And operational improvements being delivered across the group, but particularly in those businesses with new leadership, are already making a difference. Communities around the world will increasingly depend upon good quality transport infrastructure being provided by companies like Mobico. As we lead the model shift from private cars into public transport, we are determined to remain a permanent solution provider in this market, but also make sure those highly rated services generate appropriate return for all the stakeholders. And to conclude, I'm very confident on the long prospect of the business. And finally, before we go to Q&A, You will have noticed that James Stam or CFO is leaving us. James has been with Mobico for seven years and has been a great colleague whose commitment and contribution I have always valued enormously. And I'd like to thank him for that. The last 18 months or so since James took on the CFO role has been an eventful and challenging period for Mobico. And a lot of good work has been done to put Mobico on a more solid foundation than it was before. James, as announced, will stay with us to complete a smooth hands-over to our new intern CFO, Helen Cohen, who you will have the opportunity to meet in the course. With that, I thank you for the attention, and we will go now to Q&A. Here, Gerald.

And starting in the UK, starting in the UK, profit margins pre-pandemic were comfortably in the double digit percentage range, obviously well below that at the moment. Is there a path back to double digit levels? And if so, what do you see as the key building blocks and what's the sort of rough timeline? Secondly, in North America, in relation to Shuttle, I think you made reference to, I think you said a loss of revenue from a large tech customer. I wasn't sure whether I heard that correctly. Could you elaborate on what that was? Was that a loss of the entire contract or a loss of one of a number of contracts? Or what was the reason behind that loss of reduction in revenue? And finally, on CapEx, you made reference to 0.9 times depreciation going forwards. Why is below one times sustainable?

So first, three questions. So the first one on the UK. Clearly, the building blocks is for one. The first one is the first increase. And the second building block is the network, the size of the network. The first one, you know that within the enhanced partnership, we took the decision, combined, you know, we have the... mutual objective with the transfer from West Midland was we had the funding to freeze the fares to allow that passenger growth. And actually, it was quite successful for the time because we were well ahead of the rest of the industry. Now, with that pressure that we saw last year in terms of the wage inflation, obviously that was not sustainable, and this is why we had to renegotiate and we had that first increase in July the 3rd. So right now, as I mentioned, the bus operating group is working with an external party to make sure that there is a process to increase the fares, and that is part, by the way, of the enhanced partnership agreement. That needs to be resolved. The second one is the network. We do have in 24 a constraint because of the funding not to reduce more than 90% of the existing network pre-pandemic. That constraint will disappear December or January 25, and therefore we're working to have plans in alignment with the transfer for West Midland on what that network should look like to make sure it's well balanced, the risk and reward. That's the UK. The second question, North America, oh yes, North American shuttle. That is a very well known and announced layoffs of a very big technology customer. Basically, it was a decline in 50% of the revenue that we had in the past. We have not lost that customer. Actually, we have renewed with that big customer for the next years. And it was around, in terms of revenue, $25 million. But again, transit and shuttle, despite that impact, managed to grow above 10%.

Yeah, so I'll just add to that. I think we haven't lost any contracts, Gerald. There was a reduction of volume effectively within a call-off contract. So I think as people do return to the workplace and the campuses, we'd expect that to come back, and there's already some signs of that happening. Your final question, do you want me to pick one on the CapEx point? Why below one times depreciation? I think there's three reasons for that, Gerald. Firstly, there is a significant amount of government funding for assets, which significantly reduces the cash impact. Secondly, we have more use of variable leasing and availability-style contracts, with availability-style contracts particularly in the UK. They're effectively off-balance sheet solutions, risk transfer. Thirdly, we're seeing an increase in customer funding and asset-light type contracts as well, which does change the mix a little bit. So those three things are the reason why it's not one-time depreciation going forward.

Joe?

Good morning. Joe Thomas from HSBC. In the statement, Given some long-term targets, although you didn't talk about them in the presentation, can you just, back on the building blocks you were talking about, can you just talk about how you expect to progress towards those 2027 targets? I'm mindful that there are some puts and takes in there. I'm just wondering, especially around things like voucher removal in Spain and concession renewal in Spain, what sort of things you've built into there and how that plays through over time. Second thing, US student. Can you just give an idea when you'd expect, normally, if it's held in-house, that business to return to pre-pandemic profit margins or pre-pandemic levels of profit? I'm not entirely clear on that. And then, finally, just on what you were just talking about with respect to the negotiations with the local authority in the West Midlands, I just – well, I mean – How does that work in terms of presumably you've got a profit margin target in mind? Is that the sort of starting point? And then the subsidy negotiations continue around that so that ultimately if you don't get your desired objective, which is presumably a double digit, you cut capacity from that network.

Okay, if I go to the long-term ambitions, let me run very quickly through it. So the revenue, nothing has changed, is $1 billion. We have been clear on what sort of revenue we need to achieve, which is $3.8 billion. And, you know, as you see, there's a strong growth, you know, so we're well positioned for that. On the operating profit is 300 million, which is very aligned to our original ambition. But, you know, in that respect, it's a sequential improvement, what you should expect, not linear, but a sequential improvement. In that context, you mentioned, you know, how these, you know, sort of things, the concession renewals in Spain, et cetera, could impact. The way we see it at this moment in time, given the process where it is in the Palantir... parliamentary discussions in Spain is that this will not happen until probably 2026, although they are progressing. So it needs to be approved, the new law, sustainability law. Then you have the approval of the model. Then you have the remapping. Then you have the agreement that needs to be done with the regional communities, autonomous communities. And then, you know, so it will take until 2006. We do see a lot of increased demand in Spain. It is true that that law, the sustainable law, incentivizes a lot the move from private cars into public transport. We see that somehow probably the could be changed, but there will be another incentives coming for sure because the government has set very, very aggressive targets for decarbonization. So we see that underlying passenger demand present. So that was to your questions regarding the sequential improvement on EBIT and how could that be impacted. Obviously, in that sequential improvement, you will see the improvements in North America and the improvements in the UK. Then if I move to free cash flow, here is where we have changed the definition to make sure that it also includes for clarity growth capex and M&A. We have a slightly change. The original one was 1.25%. And now that will be like for like 1 billion. And what we expect is to produce cumulative 300 million pounds between 23 and 27. And then nothing has changed on the covenant debt, net debt and covenant EBITDA with 1.5 to 2 times by 27.

Shall I just add to that? I think, Joe, what set out in the bridge on page 14 of the presentation was the development of the FY23 to FY24. You asked specifically about the headwinds. There are headwinds there, predominantly from UK coach, rail strikes, from the ALSA young summer discount. and a reduction in U.K. bus funding. Together, that's around about $40 million of headwind. But we more than recover that with pricing and continued volume growth. It's really clear to me and to Ignacio that, as a group, we don't have a revenue or a top-line problem. We've got to make sure that that top line flows through to the bottom line. With the actions we're taking on pricing and restructuring the cost base, you will see sequential growth in profit in line with those targets.

We'd like to comment on the negotiation with TSWM.

Yeah, so the TFWM negotiations, I think it is... You asked again whether we've got a target profit percentage in mind. We don't, actually. We have a target return in mind. And we don't really mind how that comes. It's got to be a return that's in line with risk and reward. Where we are at the moment in FY24 is we're in the final year of the existing funding agreement, where we've had limited ability to cut or make changes to the network and a bit of friction, frankly, in our ability to increase prices. From FY24 onwards, from FY25 onwards, those restrictions drop away. We're confident that we'll have changed the mechanism, that pricing will almost be automatic recovery of inflationary costs, and we do have the ability to reduce the networks. And look, it's not necessarily in anybody's interest to start hacking at a network sustainably We've got to find the right balance between the network size and the amount of subsidy that TFWM is going to pay. And I think those discussions will continue as they have been historically to be constructive. But 25 is a bit of a reset year for that point. North America. Yeah, look, shall I talk about the profit margin? Yep. I'll take it. I mean, I think it is possible, Joe, but it's not possible by doing things in the way that we've always done them before. I think that clear objective of Tim and his team. is to fundamentally – is to change the way that we deliver our services in the U.S. And that does mean a real rethink, which is part of Accelerate, too, about how the CSC, which is the depot structure in the U.S., is structured to support the delivery. I think that it's a slightly longer burn, but it will be supported by when the rollout of the bike curve is finally completed to give us the absolute grip on wage control. So is it going to get there in 2024? No. 2025? No. But I think that it is certainly possible, and it's absolutely what we're striving for.

Good morning. It's Rory Cullinane, RBC. Firstly, could you indicate how sizable a provision reversal could be if your negotiations with German PTAs were successful? Secondly, I'm interested in learnings from German Rail for future bids and if there's anything... You'll particularly aim to avoid signing up for in future contracts. And then finally, could you remind us why school bus remains the best business to sell as opposed to another business or your entire North American business? Thank you.

Okay. Maybe I can take the lessons learned from Germany and then the school bus and then the provisions that are available. Lessons learned, I think there are many. First, in terms of the bidding error that happened in 2015, we did learn a lot. And since then, significantly improvement has been made. In fact, the RX1 had a much better protection, which indices that are transparent and reflective of a true cost. And, you know, we also need to make sure that we think ahead and try to protect against any radical market structure changes. And again, you know, that discipline came through because there were other lots that we did bid for them, but we remained very, very disciplined and we didn't cross any line. I guess is to expand the levels of controls and understanding of the sensitivities of critical inputs of the models. to more people than the local people. So the local, the division, UK and Germany, but also the central, the group. And I guess more frequent review of assumptions, and above all, I think it is having a more robust evidence and documentation of the critical accounting judgment of main inputs. James?

Yeah. The key learnings here, I think, we hadn't expected that the indices gave us decent coverage of energy based on what we were seeing. I think we'd be more skeptical in future about whether indices really do provide you the protection you're asking for, and what you'd be looking for is contractual ways of rebalancing contracts should things that are not outside of your control and which you're not being paid to manage move against you. I would point out that in the new contract that we entered into with RRX1, in line with that has moved to a much more sustainable index already. But also all of the contracts do contain provisions to rebalance the economics if things move against you. So far, we haven't needed to enforce that legally. We've done that through constructive negotiation with the PTA. But that clarity on what rebalancing really means and what the triggers for it are should be really clear in any contracts we sign in future.

Regarding the school bus, why school bus? First of all, the school bus is a high-quality asset that we have. It is a market leader, but it is capital-intensive. So we believe that as a group we have other opportunities where we can have a better return on capital employed. and that the school bus business can thrive and grow faster with another owner. So that's basically what I would say. And then we move to the provisions.

Yeah, so I don't want to discuss the potential for the outcome of the negotiations with the PTA because they are live. And I'm not going to salami-slice those into all the different bits of the contract we'd like to renegotiate. But to just give you a bit of a sense for what we're looking at here, of the increase in the provision, probably 10 million of it was due to a change in the discount rate or risk-free rate. So that's a non-cash impact. probably about 20 to 30 million of it was due to residual bid error, and I wouldn't expect any PTA to compensate us for that, so that's what it is. The balance is really due to the change in inflation, into driver shortages, and due to various changes in the index. I think all of that needs to be on the table for negotiation, and there's various mechanisms for doing that which are subject to live negotiation at the moment. Thank you.

Hello, hi. from Bank of America. So I have a question on cost inflation in 2024. How much feasibility do you have? How much headroom do you have? And is there a risk that inflation may overshoot your current expectations?

So we missed a little bit of that question. Sorry. So it was cost inflation 2024. Yes. Sorry.

How much visibility do you have? I know you gave guidance in that bridge slide 14, if my memory is correct. Yeah. So just how much visibility do you have in the various businesses that you have? And is there a risk that cost inflation may overshoot that number that you have in mind?

I think that actually what you see in the range is that when we look at the range of 185 to 285, inflation is probably an upside from the bottom end of that range. So we've actually taken a pretty prudent view of what we know of inflation already. To a significant extent, a lot of the inflation is already locked in. So I'd say 185 contains a pessimistic view of where inflation will land. 205 is a more optimistic view. The range we've given contains, you know, effectively reflects the visibility we have over the inflation assumptions in the budget, yeah.

If there are not further questions in the room, we maybe could go to questions from the line.

Thank you. If you would like to ask a question and you've joined us over the phone, please dial star 1 on your telephone keypad now. That's star 1 for any questions if you're joining us over the phone. Final call for any questions. If you're joining us over the phone, please dial star 1 now. Okay, it appears we have no questions on the conference line, so I'd like to hand back to Ignacio Graz for any further remarks.

Well, thank you again for taking the time to listen to us today. We're all well aware that we have covered a lot of ground, but we're confident in the main characteristics of Nomeco Group. We have important strategic assets in all of our businesses. The group's revenue performance continues to be very encouraging, and there remain significant opportunities to generate better returns as well. So we are very confident on the future, and with that, I would say goodbye for now. Thank you.