Hello everyone and welcome to today's Mobico Group call. My name's Seb and I'll be the operator for your call today. If you wish to submit a question, you can do so by pressing Star One on your telephone keypad or press Star Two to withdraw your question. I will now hand the floor over to Ignacio Garat to begin the call. Please go ahead when you're ready.
Good morning and thank you for taking the time to speak to us today. I'm sorry to be coming to you with further unwelcome news, but hopefully we can reassure you about its context and likely impacts. Again, this is all about German Rail only and no other part of the group is affected. The good news is that we have made good progress in completing our review of accounting judgments in the German Rail business and the associated audit of those judgments. Although it may have been tight, and there were a small number of items relating to Germany outstanding, we believe we could make our deadline to report our 2023 results by the end of March. All of the substantive work required in relation to the audit of the remainder of the group's businesses have been completed.
However, as we have set out in today's RNS, there has been a recent announcement relating to the indices used in modeling the German Rail business, which now makes this impossible. Let me talk about the context. As you'll be aware, the German Rail contract that we operate offers some protection from volatile energy prices and the calculation of the cost recovery based upon indices produced by Destatis , the German statistical office. Towards the end of last week, we became aware that Destatis has published restated and rebased versions of those indices, changing the basis of those cost recovery calculations in the process. These indices are revised in this way infrequently. The last revision we are aware of was in 2015. So a revision at this point was a surprise to us and also to the rest of the industry. This is clearly an industry-wide issue.
It will affect all operators whose contracts rely upon the same, 625 and 626 indices. So following the revision, we're undertaking two streams of work. The first one, confirming the potential specific impact on the different contracts that we operate, and the second, discussing with the PTAs around the extent to which these changes will or, or will not be used by them to determine payment of energy cost compensation. And now James will, take you through what we believe that impact may be and where we stand in relation to guidance.
Yeah. Thanks, Ignacio. So as we said in our statement, we're discussing this issue with the PTAs, and it's important to note that our relationships with the PTAs are strong. Also, they are motivated as anyone to find an equitable solution to the problems these changes may cause the industry. They want a healthy, competitive market. So while we expect that the models and the accounting judgments used to calculate the profitability of our German Rail business remain valid, further work is now required to determine the full effect of the revised indices. At this stage, we currently estimate that the maximum effect of the revised indices is a reduction in total rough cost recovery over the terms of the contracts to 2032 of around about GBP 15 million.
Moving on to the wider audit, the wider audit process had been going well, time-consuming as these things always are, but we were pushing hard to announce our results at the end of March. All of the substantive work required in relation to the audit of the remainder of the group's businesses had been completed, and as is usual at this point in the process, a number of items relating to the German Rail business remain to be finalized between the group and our auditors. Those items are quite judgmental and the impact both on the Onerous Contract Provision as well potentially as, as in, in-year Adjusted EBIT. So where does that leave us? At this late stage of the audit process, a number of judgmental items remain to be agreed with the auditors, which could affect the final outcomes for FY 2023.
In particular, we now need to fully assess and understand the impact of the revised indices on the financial results. As a result, we're updating our previous guidance to reflect the situation and currently expect the FY 2023 results to include Adjusted EBIT to be in the range of GBP 160-175 million, although the group's expectations are that we will be at the upper end of that range, and a prior year adjustment in relation to the onerous contract provision in FY 2022 of somewhere in the region of GBP 25 million. In addition, an increase to the Onerous Contract Provision as of 31st December of a further GBP 70 million above that. I'll just hand back to Ignacio.
Thank you, James. With that, I open for a few questions.
Thank you. If you would like to ask a question, please press Star One on your telephone keypad or press Star Two if you would like to withdraw your question. Here we have a question from Gerald Khoo from Liberum. Gerald, please go ahead.
Morning all. Please hear me if I can. I'm trying to get my head around why there's an impact on the 2023 results, in terms of what doesn't fall into the OCP or why the accounting works that way. Secondly, you talked about that GBP 15 million reduction in energy cost recovery. Why has the onerous contract provision moved by more than that GBP 15 million? And finally, am I right to say that with the change in indexation, the way that this works is that Mobico's loss is the PTA's gain, and that therefore what you're suggesting is that's the scope to negotiate because that's not that wasn't the intent. I'll leave it there. Thanks.
Thank you. Thank you, Gerald. There are two questions, and the, the first one on the full year 2023. James.
Oh, sorry.
Yeah, yeah.
Yeah. So,
Morning, Gerald. So there, there's two really impacts. One is that, because these indices have changed in respect of prior years, so from 2021 to 2023, it's possible that the PTAs may require an adjustment to previously agreed cost recovery. And now I'll come back to the part three of your question was around the contracts and expectations. So there is a possibility that if that has to be repaid, then that would impact on the 2023 results. But the main impact, Gerald, is it could be because of the judgmental nature of the German Rail contract, particularly the RME contract, where we are making judgments about long-term revenue and cost assumptions, out to 2030.
If the future expectations for revenue and cost change, that effectively can be a catch-up. It would be a non-cash catch-up, purely accounting phasing that could impact on 2023. Because of the changes in the indices, we need to run back through those models, and make sure that us and obviously our auditors are comfortable with those judgments.
And you have last one? No one on the Mobico issues and the PTA. Let me be very clear. I think the PTAs are motivated to make the industry work and make it sustainable, no? And again, you know, these news took us all by surprise. We have had an initial contact with the PTA, have spoken to other operators as well, and they have all been as surprised about the news about the changes. I have to say that we do have a strong relationship with our lead PTA, and we expect to be able to have a constructive discussion with them about the impact of these changes. But they will also need some time to assess the implications of the revision of the indices. And again, we have taken a prudent view on this, and our estimations don't include any benefit from any mitigation.
I can just so I understand, excuse me. Just so I understand, the GBP 15 million you're saying would reduce cost recovery and the OCP moving by more, is that the difference the other assumptions, so revenue and other costs, coming down?
Yeah. There, there's a bit of that, Gerald. We've also, looking at the discount rate, and changing the risk discount rate to a risk-free rate has had a bit of an impact. So saying that that doesn't impact the cash flow, but it does impact on the, on the size of the provision if we move the discount rate to a risk-free rate.
Okay. Thanks.
Just a reminder, for any further questions, please press Star One on your telephone keypad. Okay. We just have another follow-up from Gerald Khoo at Liberum. Just open the line now. Please go ahead.
Yes. No one. If I just wanted to ask, I'll go again. Is there any mechanism that caps the losses on any of the contracts, or in terms of the, is there any way to exit the contracts if, for example, if the PTAs don't renegotiate or they can't renegotiate, or if there was to be some other shock or unexpected event, you know, whether it's indexation or something else, is there any way where the losses could grow again? Is there any way for you to either cap the losses or to exit, please?
Yeah. Again, you know, let me say that, you know, the PTAs are motivated to make the industry work and sustainable, no? And the contract has some languages, no? That if there's impacts, you know, in the environment that impact the cost modeling, the parties immediately need to agree new suitable bases that most closely correspond to the original, in this case, energy index series, you know, at the time of the offered calculation. And that's not resolved in any disadvantage for any of the parties under the term of the contract. So that is there. But again, you know, the responses are at a very, very early stage. So that is included.
But let me be very clear that does not include, you know, the bidding error that, you all know that the RRX 2 and 3 has, no? So there is that level of protection, yeah? Now, in terms of, you know, what can you do to the other question is, you know, there could be significant financial and reputational consequences if Mobico did decide to walk away, yeah? So, but also, let me let me tell you that even assuming no mitigation, as I said before, RRX 1 and RME will remain profitable, no? And even the RRX 2, 3, which will be loss-making, as you know, because of the bidding errors in the past.
Okay. Thanks very much.
Okay. At this stage, it looks like there are no further questions on the call.
Are you still there, sir?
I'm here. Yeah.
Yeah. So we do have somebody else trying to ask a question. So we're just so I can make sure he's using the right call. If you could just give us a minute, please.
Okay. Of course. If everyone could just stand by. Thank you. Hello, everyone. Thank you for your patience. We have just now registered a few additional questions on the call. First one here comes from Faezeh Molaei from Jefferies. Please go ahead.
Hi. Can you hear me? Hello? Can you can you hear me?
Hi, Farhad. Can you confirm you can hear us?
I can hear you. Can you hear me?
Unfortunately, we're not hearing anything from your line, so we'll have to move to the next question.
Okay.
Just bear with me. We'll just we'll just double-check on that. Sorry, Farhad. Can you can you just try speaking once more?
Hi. Can you hear me now?
Yes, we can.
Yeah. It'll cut. Okay. Perfect. Yeah. No, so I just wanted to confirm, right? So these, so the reason for the delay is the changes in indices 625 and 626, right? So before this, like, there wasn't like, this wasn't an issue before when the results were delayed, one. And two, was this just kind of the main driver for the delay?
Yes. The republishing of the indices is the main driver for the delay.
Okay. And just, sorry. I think you mentioned it earlier, but I couldn't hear properly. But why is there a revision in the EBIT guidance? Could you just clarify that as well?
Yeah. Yeah. So, as I said, there were two aspects to the potential revision to EBIT. One is the fact that because these indices have been republished in respect of historic years, 2021 to 2023, settlements that we previously agreed with the PTA could be reopened, and there is a possibility that we have the power to repay some of that amount. The second aspect of it is the impact on the judgmental areas around RME. So the RME contract is the one that we account for on a long-term contract accounting basis. There are some significant judgments around, particularly around the revenue growth rates that we go through every year. We need to go through those with our auditors. Those judgmental areas are typically closed out towards the end of the audit.
We just need to now continue through that process. As I said, if there are adjustments to the judgmental areas, it means that we're changing the view on future revenue and future costs. There is no cash impact in, in FY23, but there could be a catch-up adjustment into the 2023 results as a result of that change.
Let me reemphasize, you know, to your first question, no? Again, you know, all the substantive work required in relation to the audit of the remainder of the group of businesses have been completed, yeah? And it was only a small number of items relating to the German Rail business that remain to be finalized with the auditors, no? So we were very close and would have announced either on Thursday of this week or early next week. And clearly, you know, the discovery of the news on the indices impacted the progress to the final state of the audit at the end of last week, no? So now we need extra time to complete the work with our auditors and the discussions with the PTA to have the clarity.
Okay. No, that seems very helpful. Thank you. And, and I guess so I think the last time you mentioned as well that, you didn't have like, this wouldn't really impact your fiscal 2023 results, in terms of your guidance, and that's why guidance was kind of unchanged from previously. Like, is there like, like, do you have any comments on that at this stage? Like, obviously, now that you've revised guidance lower.
Yeah. Well, I'd say it's the same, as I've just described. We have to go through the judgmental areas related to the future revenue and cost assumptions. Those are always the kind of things we go through with the auditors, and they're typically closed out towards the end of the process. Had it not been for the republication of the indices, we would have finalized that discussion with the auditors in time for the 28th of March or close to that time. Now that, once the indices were changed, it means there was a bit of a delay in getting that work done because, obviously, we needed to go back around the houses on what this index change means. So at this stage, there are judgmental areas there that still remain to be closed out in respect of Germany.
and therefore, we thought it was right to give, at this stage, because they're not closed out, where potentially the range of where that could potentially be, although I'd emphasize, again, that we would agree with you that we will be towards the top end of that range. But that's the range you've got reflects the remainder of the range of judgment that is still being finalized.
Okay. And I guess for the onerous contract provisions moving forward as well, I think my understanding was previously it was kind of at about a GBP 5 million-GBP 8 million effect per year into future earnings. Do you still estimate something similar or,
I expect them to be the cash outflow unmitigated, and assuming we can't recover anything back from the PTA, which we would expect to do. But from an unmitigated perspective, the average cash flow of the remainder of the contract lives is about GBP 14 million per annum on average. It is about double that in 2024, but then reverts to more like the average of the remainder of the contract lives.
Okay. So that's a big change from previously. And then I, I guess.
I think previously, we'd said it was in the region of 8-10. It's now about 14.
Okay. Cool. Around 20 to 24, I'm guessing, for 2024, right? Is that right?
Yeah. So I'd say GBP 14 million on average.
So it's 8, too, yeah. Yeah. And then you said double for 2024, right? So it'd be 28.
Yeah. Yeah. Yeah. Roughly double that in 2024. That's right. Yes.
So, okay. Cool. Okay. No, that's helpful. Thank you.
We have a couple of further questions on the line. The next one is from Ruairi Cullinane at RBC Capital Markets. Please go ahead.
Yes. Good morning. First, could you help us a bit with perhaps Adjusted EBIT prospects going forward in German Rail? I suppose one part of that question, are the provisions set at such a level that Adjusted EBIT from two of the contracts are expected to be around zero? Second, has this dampened investor enthusiasm at all in asset-light contracts? And then, there may be some repetition there, but just what drove the sort of GBP 25 million adjustment in for year 2022? Thank you.
James, would you like to take that one?
Yeah. I'll take kind of one and one and three there. So the Adjusted EBIT prospects, so the contracts that are onerous, so the RRX 2 and 3, they're the only contracts that remain onerous. So as you say, there's no impact on them on adjusted earnings, but there is clearly a cash flow impact associated with those and the onerous contract provision. The two other contracts, RRX 1 and RME, remain profitable. We expect them to generate approximately GBP 20 million of profit over the remainder of the contract lives. So it is a reduction from what we previously expected. Again, unmitigated and assuming we can't get recover some of this from the PTA, but at the moment, that's what I would expect around about GBP 20 million over remaining contract lives.
You asked about the GBP 25 million adjustment to prior year. We'll give more detail on that around year-end. But essentially, it relates to. It doesn't change the 2023 position. It just relates to judgments that were made around that year-end time, that in context of things that we've seen develop during the course of the year, we felt that it was right to make the revision to. But it doesn't change the cash flow future cash flow profile, and it doesn't change the FY23 year-end position. I think there was also a question there about asset-light contracts. Ignacio, did you want to take that one?
Okay. Well, yeah. I mean, we're making good progress in that respect, you know, with asset-lights. You saw the, I mean, we have been reporting on that and providing more visibility on the pipeline, on how much is asset-light and also on what is the conversion rate, no? So we do see, and we will provide more details in our full-year results that I think will be very helpful for you to understand.
Our next question on the line comes from Joe Thomas from HSBC. Please go ahead.
Morning, Ignacio. Morning, James. I just wanted to come back to something you said earlier, Ignacio, about when asked about potential for exiting these contracts, you talked about reputational, potential reputational damage, which I think we can all understand. But you also talked about financial damage as well. And I was just wondering if you could elaborate on that a little bit. Are there any sort of trigger clauses in other contracts beyond Germany if you were to exit Germany, or is it some sort of large performance bond lodged there?
Correct. That is related. Yeah.
No, there's no. It's performance bond related, Joe. That's exactly right. It's, but it is contained to Germany. What we were saying about future, you know, if we were to walk away with the contract, then it could impact our ability to bid for future work elsewhere in the group. There is no impact on existing contracts in the group elsewhere in the group.
Okay. Thanks. And then, just thinking about the downgrade for the contracts that remain profitable, I'm just trying to sort of square that against the guidance that you've given today, you know, for the well, for the latest range that you've given. Is there some outperformance elsewhere in the group, or is this cut just relating to that change in the outlook? I mean, if you could just go through the other moving parts or if there's anything changed in expectations around other parts of the business, that'd be quite helpful.
The rest of the group is in line with our expectations. Again, this is a forward-looking forecast concentrated on the level of reimbursement in these German contracts. And as we have said, we have taken a prudent view of the issue. So, there is no mitigation, no benefit from mitigations. And this is what we have expressed, and this is the reason for having that impact reflected in our new guidance.
Okay. Thanks. And then the...
Yeah. Go ahead.
Oh, yeah. Just the final thing that I wanted to ask you about, you obviously, there is some hope here that there might be compensation or renegotiation coming from elsewhere, from the PTAs. Is there any precedent for that, or is there anywhere else we can look in Germany where we've seen PTAs increase?
Yeah. You can talk about the so, so as Ignacio said, there is a contractual clause that requires both parties to seek to rebalance the contract if there are changes to circumstances outside of the party's control. We've never had to exercise that clause, but it is there. But in terms of precedent, absolutely, there is precedent, and it's with us. We previously had moved an index that related to labor costs, from a more generalistic labor inflation index to a rail-specific inflation index that was more favorable to us as an operator. That was agreed with the PTA, and has been implemented. We didn't require us to enforce the you know, to try and enforce the contract. It was a good faith negotiation. So there is absolute precedent of doing this.
I would point out that PTAs actually approached us in respect of the energy.
That's, that's what I was going to mention. Let's not forget that ongoing discussion with them, which was proactive coming from the PTA as well, because they believe that it reflects much better the actual cost of the energy.
Okay. That's good to hear. George, just final thing on the performance bond, how large are they? Have they? I can't remember if they've ever been quantified. Perhaps you could, if you're able to disclose it, it'd be quite helpful.
We've, I think they, they are disclosed, Joe. But I'd have to get back to you on the exact details of that.
Okay. Thank you.
Just have another follow-up question from Faezeh Molaei Jefferies. Please go ahead.
Hey, guys. Just one follow-up question I had or two, actually. One was, the first one was on so the PTAs, you the kind of renegotiation. How much are you expecting to get back on that? That is the first question. And the second question is on the North America school bus business sale. At this time, do you have anything more that you could comment on that and how, like, how the progress on that sale is going, or talks around that?
Thank you. So on the first one, the discussions are very early stage with the PTA, so nothing that we can say at this moment in time, apart from what we have said that we have a very strong relationship with them, and we are having very constructive discussions. On the second one, as we said, you know, we are progressing well in terms of the process, and we will get to provide more visibility on the full-year results on the North American school bus disposal.
Okay. Thank you. And so I guess on the timelines of the kind of, like, the PTA kind of renegotiations, when would we expect to hear something back? Would that be as like, would that be still be, like, a few months away, or like, we wouldn't expect to hear anything for the next few weeks from in the full-year results of the?
Again, it's too early a stage, and this just came out last week. So we have spoken to them, and as I said before, they need to work. What are the implications for them? So I cannot comment on any specific timing for it.
Because the whole industry is considering its position at the moment, and it came when we noticed the issue, and we were, I think, the first in the industry to notice it. So it's very early stage, but we will, of course, update you when there is any substantive progress.
Okay. That's helpful. Thank you very much.
Currently, we have no further questions registered on the call.
Well, thank you, everyone. With that, we'll see you soon at the full-year results.
Thank you. This concludes the Mobico Group call. You may now disconnect.