Morning, everyone, thank you all for taking the time to join the, our 2023 half year results presentation. Mobico fulfills a crucial role, delivering increased social mobility through safe, accessible, reliable, low-carbon, mass transit. We're very proud that the transport solutions we offer directly address some of the world's biggest challenges.
I'm joined today by the wider senior leadership team, including the CEOs from each of our businesses. You know Paco, here, Eric, from, obviously from ALSA and Transdev and Shuttle in the U.S., and I would like to offer a particular welcome to Tim Wertner and Alex Jensen, here present today. Tim is our newly appointed CEO of North America School Bus. Tim has significant transportation and logistics expertise across large organizations and joins us from FedEx.
We're delighted that he has joined us to drive the school bus business to achieve its true potential. After 30 years with the group, Thomas Stables has decided to leave the business. He will be succeeded by Alex Jensen. Alex Jensen, who was most recently with BP, has an impressive track record of delivering commercial and operational transformation.
He will be joining September 3rd or 4th. In the interim, the business will be managed by Chris Hardy, who until recently was the MD of Coach. I will first talk about the important key messages that we would like to share before James Stamp, our Group CFO, walks through the financial and operational review.
Later, I will return with the concluding remarks before we move to the Q&A. As I reflect on the first half of the year, it is clear that the team has been working incredibly hard and taking decisive actions in the context of a tough economic environment. I'm pleased with the progress we have made, which puts us firmly on the firm foot for the future, including the reduction of 60 million COVID funding.
Group adjusted operating profit has increased by 27 million GBP. However, although revenues are showing good growth, driven by underlying momentum, we have faced into cost pressures that have put a drag on first half profits. As James will discuss, we are confident that the decisive actions that we have taken give us a clear path to growing profits in H2 and beyond.
My key message today is that I can see evidence that the Evolve strategy is delivering momentum in the underlying business, including through passenger growth, pricing power, and pipeline conversion. I'll say more about each of these shortly. James will talk you through the numbers for H1 and why we expect H2 to be much stronger following the actions we have taken.
Most importantly, a number of significant but confirmed contributions in the second half, including price rises. Identified cost savings will deliver a much higher weighting to the second half than we usually have. The cost-saving program, announced earlier in the year, targeting GBP 25 million of annualized savings, is well progressed, and we will now deliver GBP 30 million.
There will be a contribution of GBP 50 million in the second half of 2023. Since the period end, we have also taken proactive steps to improve our debt maturity. We have refinanced our RCF to GBP 600 million, extending its debt maturity to 2028. Good progress is also being made with the refinancing of the GBP 400 million bonds expiring in November 2023, scheduled to take place in Q3 of this year.
Our covenant gearing remains within the expected range at 2.8. Given the encouraging revenue momentum together with the decisive actions we have taken on cost, we are pleased to provide full year 2023 EBIT guidance to be between GBP 200 million and GBP 250 million.
James will shortly give you a lot of detail to help you map first half and second half results, and to explain why we are so confident in delivering the full year 2023 outcome that we now expect. Before he does that, we should remind ourselves of the Evolve strategy and its key characteristics, because it is through driving significant change in culture and purpose that we will ultimately deliver for our stakeholders. A little later, I will revisit our pipeline and why we are so confident of its value.
I will also talk about the whole portfolio of existing businesses, and in particular, about the very healthy retention rates, the contracts with a total value of GBP 1.4 billion being mobilized as we speak, and an annual value of GBP 170 million, and our continuous continuing conversion from the strong pipeline at the high levels of return on capital employed.
First, I would like to mention a new contract recently won that exemplifies the importance of Evolve and why and how we're winning in the priority markets and sectors that we selected in our strategy. This is slide 5, gives you the main characteristics of the contract I want to discuss.
This is a good example of reinvigorating public transport, where we have demonstrated our Group credentials, to win, plan, organize, and operate safe, reliable public transport networks in partnership with local authorities.
This important win in Charleston, for shuttle and transit, involved a rapid mobilization over 4 months and began operating in July 2023. The opportunity played to our strengths, and our ability to bring together a multi-discipline, close-knit project management team to address the customers' needs quickly and effectively. In this approach, all the Evolve outcomes were met. The result, a successful mobilization and a happy customer. Let me walk you through them. Being the safest, you know, to ensure our top-class safety performance, which, you know that for us is a priority.
We focus on training for drivers and maintenance technicians, including extensive training, so they were brought up to speed on our global safety management policies and operating practices. Being the most reliable, our maintenance leads spend time with maintenance technicians to rapidly map out their training requirements to bring their knowledge up to speed, you know, with our global standard.
Digitally enabled, an important one. In addition, one of the major challenges of in mobilization was the limited opportunity to install the new IT systems and the equipment, which was only possible once the outgoing operator obviously had left the property on the eve of the commencement of the date. Again, it's our capabilities as a company to solve that problem.
We use our expertise to deploy rapid installation and testing, followed by the training for new employees in the systems. We have a satisfied customer. We have great feedback from the client, and look forward to transporting 4 million passengers annually in a growing region that's home to companies like Boeing, Mercedes, and Volvo.
An environmental leader. In a fleet of 133 buses, the customer already operates 33 electric vehicles, so its ambition in low-carbon transport aligns closely with our own. As a leader in the conversion of fleets to EVs, where that is required, the customer knows it has a partner with both the expertise and desire to deliver such a solutions effectively.
As the employer of choice, one of our major successes was our focus on retaining the incumbent employees from the outgoing operator, ultimately, our engagement with the incumbent employees and our explanation on what Mobico stands as a group was successful with all but six of the 130 drivers choosing to transfer to Mobico.
Finally, we'll generate strong financial results on this asset-light contract. I'm also excited about how Evolve is delivering passenger growth. We've set out on this slide an update on the chart that we showed with the 2022 full-year results. It clearly shows the underlying momentum in passenger growth across the businesses, with a year-on-year growth of 36% in our long-distance coach business, 11% in urban bus, and 57% in shuttle.
The continuation of that positive passenger growth is a reflection on what I talked about earlier. We're fulfilling a crucial role, delivering essential increased mobility through safe, accessible, reliable, low-carbon mass transit. Whilst passenger growth is an important driver of our business, it has to be in combination with progress in pricing. Because of the quality of our service we provide and the strength of our customer proposition, we have good pricing power.
That allows us to respond positively to industry-wide pressures, including inflation. It's also a measure of the quality of our business. This chart confirms some of the price rises we have been able to implement across the group. We'll see the greatest impact of those in the second half of this year and beyond. It's one of the factors that support the full-year outlook.
As promised, we have delivered two years of double-digit price increases in the school bus. I'm also pleased with the results of our yield management discipline in coach, balancing yield, capacity, and occupancy to drive the top line. 42% growth in U.K. coach passengers, while increasing average ticket prices by 11% and occupancy by 3 percentage points.
28% in Spanish long-haul passengers, while increasing yields 4% and occupancy 7 percentage points. In addition, we're dealing with headwinds and helping us to weather the worst of inflation, being able to raise prices with the agreement of our partners is, if required, help us to maintain services for a customer that might otherwise not be viable. In the U.K., we have raised prices from July third.
This is the first material price increase since 2018. We have worked with our partner, Transport for West Midlands, to secure a funding agreement that allows us to maintain the network. When we look at the future opportunities we have in front of us, I'm pleased that we are building a strong momentum from the pipeline.
In the first half of the year, we have won 27 new contracts, compared to 16 in half one of 2022. This is equivalent to over GBP 70 million of annualized revenue, more than double the prior period. It represents a win rate of 28% on bids that we submitted and were obviously awarded in the period, in the half. This is up from 22% in prior year.
We have maintained our capital discipline with a ROCE of 28% on won contracts, up from 15% in the prior year. Maintaining this cadence of wins is important, so it's encouraging to see. We have continued to make select acquisitions with 3 new, smaller, but strategic completions in the first half in ALSA.
Alongside, with new contract, it is important to note that the hard work of the team has been rewarded with high retention. In the school bus, we had a 98% retention rate on contracts that we wanted to keep. Our up or out strategy means that underperforming contracts will require a significant step up in profitability or pricing, or otherwise, we're unlikely to renew them.
There have been no material losses outside of the school bus, so almost 100% retention rate. Some of those retentions have been particularly significant. For example, in ALSA, we have had successful contract renewals in both regional services, Valencia, Alicante, the discretionary services like Madrid Metro, Caixa, BBVA, Arcelor, which together represent EUR 150 million of our contract value.
While doing all this, I'm really proud that we are successfully mobilizing EUR 1.4 billion worth of contracts as measured by total contract value in this year. That's equivalent to EUR 170 million of annualized contract value. Again, we plan, mobilize, and operate networks. This is what we do. Doing this successfully is key to winning and retaining business.
I will now hand over to James, and he will take you through the financial and operational review.
Morning. Morning, everyone. Thanks, Ignacio. This has been a challenging half, but one in which we've built momentum and taken actions to put us in a good place for the second half of the year and beyond. Top-line growth has been significant, up GBP 245 million or 18.5% on a reported basis, that's 14.4% on a like-for-like basis.
This really reflects two things: First, strong underlying growth in those businesses where we have exposure to passenger demand. Second, a continuing rebuild of the school bus business through pricing and route recovery. As we'll show on the next slide, we've rebuilt the business to offset the impact of GBP 60 million less of COVID funding in the year.
Adjusted operating profit is down GBP 33 million because of the impact of COVID funding and wage inflation impacting before price recovery. Excluding the impact of COVID funding, adjusted operating profit grew by GBP 27 million. Free cash flow conversion remains strong and ahead of prior year at GBP 78 million.
O ur covenant gearing is reduced to 2.8 x from 3.1x at 30th June 2022. Let me go into a bit more detail on this now. As I said, total organic revenues grew by 14.4% in half one compared to the same six months in prior year. Pleasingly, this growth is across all divisions and all driven by growing demand. ALSA revenues are up 21% as a result of increasing demand across all lines of business, but especially strong in long haul.
U.K. revenues are up 20%, driven by 42% growth in coach passengers and commercial bus passengers exceeding 97% of pre-COVID levels. North America growth of 8% reflects continuing recovery in U.S. school bus as we work tirelessly to overcome driver shortages. Last, but certainly not least, growth in Germany is due to the award of the RRX Lot 1 contract, currently on an emergency basis.
Profits have lagged revenue growth, especially in the U.K. and North America, but with ALSA delivering profits 10% ahead of prior year. I'll now talk in more detail about our profit bridge between the first six months of this year and the comparable period in 2022.
What I'm presenting on this slide is how we bridge from GBP 91 million of profit in H1 of 2022, to the result of GBP 58 million for the first 6 months of this year. There are four core components of the bridge: the removal of COVID funding, the impact of pricing actions we've already taken, growth that has been delivered, and the impact of inflation before pricing recovery.
I'll take you through them. Starting with the light green block on the left-hand side, within the GBP 91 million of adjusted EBIT for H1 of 2022, was a significant element of COVID-related funding, of which GBP 60 million was not repeated in 2023.
COVID funding in the first half of 2023 has actually reduced to GBP 15 million. In the first half of this year, this funding has been more than offset by the underlying recovery in the business, including the impact of pricing benefits from the price increases pushed through in 2022 and business growth. These are highlighted in the middle 2 dark green blocks.
However, in the first 6 months of 2023, we've seen the significant impact of 2 key issues. Firstly, we settled driver wages in U.K. bus at 16%, with that pay award backdated to first of January this year. As expected, this will be recovered through fares increases from third of July, 2023, and an improved funding package negotiated with our partners, which gives us much more certainty over FY 2023 and FY 2024, for us, for the network, and for our passengers.
In 2022, you remember we increased school bus wages by 10%, we repriced the first tranche, approximately 40% of our school bus contract in that year, with repricing on the 60% of the contracts still to come. These two factors, along with other inflation, are highlighted by the light green block on the right-hand side of the chart.
As I'll come to in a moment, the benefit of the next tranche of contracts to be repriced will impact positively on half two of this year. What this chart shows is how we build from a half one profit of GBP 58 million to the result for the second half of the year. Moving from left to right on this chart, we've identified the main building blocks.
First block, in a normal year, being an average of the 5 years up to and including 2019, we would have earned somewhat less than half of our profits in the first 6 months. This swing is worth GBP 20 million-GBP 25 million in profit, which is the second block in the chart, and is simply due to underlying seasonality, including the important impact of summer trading.
Moving to the third block on this page, U.K. pricing. We've reached an agreement with WMCA, which will allow us to raise fares from 12.5% from 3rd of July, but without impacting funding arrangements. Moving on to school bus pricing. This shows the benefit we expect to achieve from the price increases I told you about previously, which is 13% on the expiring portfolio this year, with 7.4% on the whole portfolio.
This block shows the benefit net of further increases we expect in driver wages of between 4% and 5%. We've been very successful in achieving price increases on 80% of the school bus portfolio. 40% in 2022 at 10%. 40% in this year at 13%. Continuing on, the next block shows the expected impact of in-year savings from our previously announced cost reduction program.
We are confident of achieving $15 million of in-year savings here. The next block shows the continued impact of business growth. Put simply, more passengers, more services, more contracts. In the penultimate block, we show a narrowing range of possible outcomes with respect to potential school bus route recovery, which will only be fully known when we are well into school startup.
The risk associated with this has reduced significantly, and the range of the remaining uncertainty now translates to roughly GBP 10 million-GBP 15 million. Moving to cost savings. At the Q1 trading update, we announced a cost-saving program to unlock at least GBP 25 million of annualized benefit. Now, the work here is ongoing, but we've made really good progress.
I fully expect to exceed GBP 25 million, reaching GBP 30 million on an annualized basis. Work has progressed well across all four areas of focus. However, as expected, our early work has been weighted towards identifying organizational design efficiencies among the non-frontline workforce. To date, we've identified more than 200 positions, equating to more than 10% of the non-frontline workforce that will regrettably have become redundant in the near term, but without impacting frontline services. Moving on to cash and gearing, and I'll start with free cash flow.
As a reminder, we've consistently defined free cash flow as cash that is either available to reinvest in growth, or pay down debt, or pay dividends. The key bridging items between EBITDA and free cash flow are shown in the table. EBITDA is down, as we explained on the previous slide, but is expected to recover in line with EBIT in H2.
Note again that last year we had significant COVID funding in that number. Maintenance CapEx is down GBP 33 million year-on-year, and this is primarily because we accelerated CapEx at the end of last year, particularly to secure production slots. Working capital is well controlled, noting that last year's outflow was due to the receipt in cash of cert funding in FY 2021.
Despite H1 suffering some significant headwinds, covenant gearing is reduced compared to H1 of 2022 and is stable compared to the full year. We expect further underlying improvement in gearing as we approach the end of the year. Our long-term targets are unchanged. Moving on to our debt maturity profile and liquidity, where since the period end, we've made important progress.
We ended the half with GBP 0.8 billion of cash and undrawn facilities, including within that GBP 311 million of cash. Our average debt maturity is 4.5 years, including the hybrid, and the chart shows the debt maturity profile. The key development on here is that we took the opportunity to extend our revolving credit facility. Our RCF had previously been up for renewal in 2025, and now extends to 2028.
Some key points to note here: the total facility size has increased to GBP 600 million, up from GBP 527 million. We've retained a core set of strong relationship banks. The margin is 55 basis points over SONIA, with only a modest 5 basis point increase in the margin from the previous facility. Crucially, the covenant tests and the way that the covenants are assessed remain unchanged, i.e., we have maintained a pre-IFRS 16 frozen GAAP basis.
As a reminder on the bond, we entered into a 36-month bridge to bond facility in December 2022, in respect of the GBP 400 million sterling bond due in November this year. We're well progressed with the bond process. Our expectation is that this will be refinanced later this year.
Given that 80% of our debt is at fixed rates, and with the 20% that is swapped due to revert to fixed in 2025, we have very good visibility on our interest costs. As rates stand today, we expect interest to increase to about GBP 75 million in 2023, and then by a further GBP 7 million in 2024, in line with previous guidance. Turning to adjusted items, I really think of these in 3 key buckets.
The first bucket is the normal adjustment we make every year for intangible amortization of acquired businesses. As expected, this non-cash charge remained broadly stable in H2 of 2023 on prior year. The second bucket includes the COVID-related provisions we've taken, including the remeasured onerous contract provisions, but driver shortages in North America and the RRX Lots 2 and 3 contracts.
Together, the charge for these half year for these items was $6.2 million, down from $27.9 million in half one of 2022. Cash utilization of these provisions was $10.9 million in the half. Now, the provision at June the thirtieth is approximately $30 million, of which approximately two-thirds relates to RRX, and that will unwind equally over the next 10 years, with the remaining third over the period 2023-2025. The third bucket includes some other one-off costs.
Firstly, the WeDriveU put liability adjustment reflects the finalization of the final payment for that business of $57 million. This dollars. This payment has been made as expected in July. There is no further overhang from the put liability, and this will free up cash for growth next year.
Second, there is a GBP 9 million repayment of furlough money that we received in 2021. We committed to repay this when we restarted the dividend. Third, we have restructuring other costs of GBP 14 million, which includes costs associated with our cost reduction program. Turning briefly then to operations and starting with ALSA.
ALSA has delivered record revenues and strong profit growth. The top line has been driven by strong growth in all lines of business. Long-haul revenues for half one are up 34% on prior year, driven by passenger volume recovery up 28% and yields up 4%, and with occupancy up 7 percentage points. We've seen continuing growth in regional and urban business, with revenues up by 12% and 10% respectively on prior year, boosted by increased mobility, network increases, and price-protected contracts.
Mobico is ahead of expectations, with revenue for half 1 growing strongly versus last year across all of our contracts. As Ignacio said, we've made 3 small strategic acquisitions in Spain, providing entry, for example, into the Seville bus market and complementing our regional bus and tourism market in northern Spain.
Profit growth of 10% is a result of increased volumes and has been delivered alongside record levels of customer satisfaction. As Ignacio said, North America, we've made an important change to the leadership, and it's really great to have Tim with us today. Revenue growth was 8% in North America as services continue to recover.
In school bus, in half one, we had clear evidence that driver hiring and retention is working well, with 277 net driver hires in the half, which compares to 4 in half one of 2022, and a net loss of nearly 600 in the year before that. This is driven by our reinvigorated hiring and training processes. Since the end of the last school year, 2022, 2023, we continue that strong progress.
Assuming retention rates are similar to last year, we've closed the gap to full driver availability by close to two-thirds. In terms of training, we've converted more trainees into qualified drivers, and we've had more qualified drivers join us than in any of the last three years. What this done is allowed us to narrow down the range of outcomes associated with route reinstatement significantly.
In transit and shuttle, we've had 9 new contract wins, including the one described by Ignacio earlier. Finally, as I said, we now own 100% of WeDriveU. This brings the total purchase price for that business to $194 million and is generating average return on investment of 15%.
Some new news on that front, having just spoken to Eric, who runs transit shuttle, we've just won an important new contract in North Chicago, which further strengthens our ever-growing Chicago hub, and that's real-time news. In the U.K., we've restructured our operations under 1 combined management team. This will allow us to drive further efficiencies and growth.
In coach, there was strong growth at our core business, with revenues for half one up 57% on prior year, driven by passenger volume recovery up 42% and yields up 11%, as Ignacio said. The intercity coach network is now back at 100% of pre-COVID levels, with significant room for growth across the rest of the network and with high levels of occupancy and further expansion planned.
We've expanded our network since the start of the year, more than 8 times more in terms of services offered than the rest of the market. Impressively, some of our core intercity flows are now well in excess of 2019 levels of passengers. For example, the services between London, Manchester, Bristol, Liverpool, and Swansea are all up between 35% and 60% on 2019.
Meanwhile, Net Promoter Score of 40% demonstrates the benefit of the network redesign for the customer. In bus, U.K. Bus was significantly impacted by the driver strike in Q1 and the associated wage settlement effective from 1st of January. We entered into this along with our partners, TfWM. We agreed that the short-term imperative was to protect services.
As such, a funding package has been agreed with them and national government, which will recover costs along with a 12.5% fare increase, effective 3rd July. The funding package, which runs to the end of 2024, includes both nationally and locally agreed schemes. This funding shows the commitment of national and local government to buy service, to drive modal shift onto bigger, sustainable networks as passenger volumes continue to grow. In Germany, revenues grew by 6%.
Passenger volumes were boosted by the EUR 49 monthly travel initiative, which is a national initiative with price protection for the RME contract. Preparation for mobilization of RRX Lot 1 continues, with operations continuing on an emergency basis at the moment. Germany continues to have an attractive pipeline of asset-light opportunities.
Despite the headwinds impacting the first half of the year, we have very good line of sight into the second half, with a significant portion of the bridging items locked. We expect full year 2023 EBIT to be between EUR 200 million and EUR 215 million. I'll hand back to Ignacio to wrap up before we move to Q&A.
Thank you, James. Thank you, James. I'll close with the with a reminder of those key messages that we ran through at the start. In summary, it has undoubtedly been a tough half, but I'm confident that we have taken decisive actions that put us in a good place for the future. I'm pleased to see evidence again that the Evolve strategy is delivering momentum by acting decisively on the key things that drive performance.
The business is delivering on passenger growth, pricing, and pipeline conversion. The actions taken will deliver significant tailwinds in the second half that support a confident full-year outlook, and we therefore provide guidance for 2023, as we have repeated along the presentation, for full-year EBIT to be between GBP 200 million and GBP 250 million.
With that, we'll now open for questions from the room in the first instance, and then before handing over to the moderator for online questions. Thank you. Okay.
Good morning.
Good morning.
It's Joe Thomas here from HSBC. Could I just look at the profit bridge again, please, James, and how you get from H1 to H2?
Yeah, sure.
Consider a few different bits and pieces. Firstly, I'd just like a little bit more color on subsidies and where they might move it in and out, 'cause it sounds like there are still some subsidies there that could... I don't know exactly when they phase out, but perhaps you could give some visibility on that, how you've thought about it.
Then, if you think about the growth element, I hear what you say about pricing, et cetera, and cost savings. On the growth element, how is that coming out from contracts that you've already won compared to volume growth? Given that U.K. Bus is now largely recovered, where else is that growth coming from?
If you could give some detail around that would be helpful. The final question that I had really with respect to numbers, was about the BSIP funding. You've obviously had a good result there with Transport for West Midlands.
Yeah
... getting the subsidies agreed, with the pricing going up. I just wonder that they front-loaded that subsidy, so it's going into, this year, next year. What happens and how are you thinking about life beyond that?
Do you want to cover the first question?
Yeah, fine. In terms of subsidies, Joe, I mean, we had about GBP 15 million of COVID subsidy drop into half one of this year. It was GBP 75 million in the prior year, the delta is GBP 60 million. There is much more we're expecting in terms of the COVID-related subsidy for the remainder of the year. Subsidies and government income do form a continuing part of the business.
They always have. We have a great deal of visibility of what they are, and that's effectively just government buying service, just like any other customer would. We've moved from the position where we were taking emergency funding to protect service during COVID, to the level that we were seeing before.
In terms of growth on the block that I showed, that's, you know, in the region of GBP 15 million-GBP 20 million. I'd say that roughly splits half and half between new business and continuing growth in each of the businesses. I would just point to the fact, though, Joe, I think you kind of alluded to we're back to where we were before in UK bus. I'm not seeing a plateau in passenger numbers.
The slide that Ignacio showed, we're seeing continued momentum across all the businesses where we have retail exposure, whether it's ALSA Long-Haul, ALSA or U.K. Urban Bus, or, and so forth. We're seeing continued sequential improvement in those, with further improvements to come.
If I look at the U.K. network, for example, we're continuing to expand and grow that network. Your question on BSIP funding, really pleased that we secured an arrangement with our partners, that allowed us to raise the prices and protect the total amount of the BSIP funding, which allowed them to reinvest in protection of the network.
As I've said before, the whole ethos of BSIP was to grow the network to sustainable levels. By the end of the funding package, we'd expect commercial passenger growth to have increased to the point where we don't need that level of income anymore.
For the last one, you know, what is the future beyond that? Listen, yeah. I think the West Midlands and our partnership has been the reference of the enhanced partnership agreements that we have, and actually is working well now. We're demonstrating that we're recovering faster than the rest of the country, and that is important, no?
I have to say that I'm really proud and grateful to the West Midlands because we share the same vision and purpose, you know, and the role, the critical role of public transport as an essential service, as almost like a public service obligation, no? In that respect, this is also why it has been tough this year, no?
Obviously we started with the pay settlement, which was has delayed a little bit, you know, the closing of the arrangement, you know, the agreement, because obviously we need to see where we landed on the pay settlement. Again, no, it's... Right now, it's working well.
Clearly, you know, you see the evidence because we have closed a good agreement which, you know, closes the gaps on. Because if not, the alternative is basically a reduction of the network or a massive increase in the fares. Again, this is working well. You will ask, you know, how about franchises? Franchises, you know, Manchester is going on that, you know, and we will see.
At this moment in time with the local government, they firmly believe in enhanced partnering, and that is the most cost-effective way, you know, to run public transport for the taxpayer, you know? That's what I would say.
Thanks. Sorry, can I just follow up on that point? On the GBP 15 million of continuing COVID subsidy, it doesn't sound like it's continuing COVID-related. It sounds like.
No, the 15 is the residual amount of the amount we've recognized in half 1 of this year. I'm not expecting that to continue.
Okay, fine. Okay. Yeah, okay. Thanks very much.
Thanks, Joe.
Thank you, Joe.
Okay. Satish from Citigroup. I got two questions here. Firstly, on the North America School Bus, there are actually two parts in it. In terms of ZEVs funding, you had about $50 million in H1, and it completely unwind. How should we think about going into the second half of this year? Is there any further unwind in that?
In terms of charter activities within the s chool bus, what is the recovery there, where we are versus 2019 in terms of charter services? Again, sorry, the third part within the school bus is route recovery, where we are today and how should we think about as the new school year starts, again, versus 2019 levels.
Yeah.
The second aspect is actually related to the U.K. business. Yield performance on the U.K. coach has been strong versus, say, if you compare with ALSA. How much of that is actually related to the rail strikes that we had in the U.K.? Can you quantify that as below our impact? Then the 16% wage deal, is it a multi-year deal, or should we think about when is the next negotiation is actually up? Finally, you pushed prices up start of this July, and what has been the impact on like, volume as such? Have you seen any price elasticity play out there so far? Thank you. Sorry, that's like six questions, but ...
Yeah, yeah.
I counted 6. Yeah.
The way we should limit the questions to 2, please, you know, to allow the, some more time for other people.
Yeah, Do you want me to take the ones I noted down?
Yeah, the first one was on a school bus. That's very clear. Not search, you know, it's when this we don't have anymore, so that's gone. The charter activity, now we're picking up charter activity and more field trips, which is something that was almost dead, you know, in the past. I know it is a clear focus of team. He's driving that. Although we are still well below 2019, we're growing at a rate of 20%-25%, so that's very encouraging and should give us more room for growth.
The route recovery that was covered by James during the presentation, we have already covered two-thirds of the maximum drivers that we will need to cover the routes that we have available. It's progressing extremely well. At this moment in time, where we still have one month, we are in a good place.
Clearly the work done last year is working out well, and that's what I would say. Well, we're well set for. Also, remember, we talked about recruiting, retaining, and recovering, and all those three aspect building blocks are working well. Also, the retention, which is significantly important.
Yeah. Yeah, I think I'll add to that. You asked a question on yield performance. Look, we're getting some benefit from the rail strikes, but the real benefit for us is that people who've never used us before, who used us first time in a rail strike, 12% of those have come back, and that's not on a rail strike day.
That's real modal shift. The yield performance in the coach business is really impressive. We said it was 11% up on prior year. It's 20% up on 2019. Continuing strong performance. You asked about the wage deal. It's not a multi-year deal, it's a single-year deal.
In terms of the price elasticity, look, we haven't raised fares in the bus business, but since 2018. I think that's the impressive thing to note. It's too early to say for sure, but the initial indications we've seen from the price rises on the 3rd of June are they're well within our range of expectations.
Even better, no? Yes, a slight decrease, but building up again to where we were.
Thank you. A follow-up.
Hello, Sir James Hollins from BNP Paribas. Two from me. What strategic ones? I'd love to hear from Tim on the U.S. school. Really, classic question, what's top of the in-tray? What's your real focus for the rest of this year? What you'd like to change, what you'd love to get your hands on, and maybe how you see the long-term evolution? Then I guess for Ignacio, the Evolve strategy. It seems like a while since we've had any updates on that. If you'll forgive me, put it another way, how is the Evolve strategy evolving?
Well, I will start with the last one before I pass it to. I mean, I must have done a very bad job if you didn't get, you know? I think we have the delivered, you know, enough evidence that it is working, no? We have a much more focus on where we need to, where we can grow, what markets and segments we want to compete and how to win.
Actually, we are converting that pipeline of opportunities, no? In that respect, you know, let me reemphasize, the company was growing extremely well through acquisitions. What we have reinforced, again, this is a long cycle, you know, work, the organic growth.
We are massively reinforcing that capability, again, through a standardized sales processes, contract management, common systems, you know, to follow up on the pipeline. We're growing, and we're converting business. That is very important because, you know, we will come to a point where we will, you know, complement that again, with acquisitions in the future, no?
I think it is evolving extremely well. In terms of effectiveness, we have plenty of evidence, you know, in all the different outcomes that we are massively improving. We are, for the first time, we have broken the silos between the divisions, and that is... I mean, it is very important. We have a common culture now, uh? Before, we had divisional cultures.
Now, we have a common purpose, a common vision, a common strategy that we follow up. What, what is the benefit of that, you know? Last week, I was with the Spanish team who came here to work together with the U.K. team. They were looking on how to, you know, the best practice from the U.K. on terms of electric vehicles. We have used the best practice from North America on how to control the wages, you know? And now, and also, even, you know, they are doing extremely well, have mapped the processes, and identified all that continuous improvement, all that quality driven management framework that we have introduced. You see that, and you see it all over. Sometimes is a continuous improvement, is small opportunities, but they all add up.
Again, you know, the reinforcing capabilities within the team. Karim is here. We now have a HR process. We're working on the organizational design, removing, you know, layers, to make it more effective, to be closer to the customers, to be closer to the employees.
We measure customer sat, customer satisfaction with it, but employment engagement. There's a lot of evidence that it is working. Again, we have another period of sequential improvement. I'm really thrilled and excited with this. I'm. The last. Then I pass to Tim.
Appreciate that. Who asked that question, just so I remember who you are?
All right, James.
He's the guy? All right. Well, first of all, I'm happy to be here. It's been a privilege for the 6 weeks I've been here. The fastest way you can learn organization is to spend time with the frontline. My first 6, 7 weeks here, I've been spending a lot of time with the frontline employees and the organization. They'll tell you a lot if you spend the time on opportunities to improve.
Really, what I'm focused on, and I spent 30 years with FedEx running the U.S., I have a large organization background in operations. Number one, laser focus on being best in class. We have a strong brand in North America, we can improve in certain areas, completely focused on best in class.
We know there is market share to be gained by focusing on best in class and delivering exceptional service, so I have the team really focusing on that. The other thing is just efficiencies. You know, Ignacio talked about some of the efficiencies that could be driven to the organization. We're really focused on that, making sure that the three R's are there, right?
Recruitment, retention, and then route recovery, and then leveraging that to the bottom line. Making sure that we're driving lean principles, we're operating as efficient as we can to really, really take out some of the costs and redundancies. Really, top-line growth, best in class, and then driving efficiencies.
Thank you, Tim.
... Yes, it's Ruairi Cullinane from RBC. Two questions from me. Firstly, in U.S. school bus, are you structuring the contracts differently in terms of inflation pass-through? One follow-up on the Evolve strategy: is your guidance to deliver over GBP 1 billion of free cash flow by 2027 still valid?
I will. Yeah, I will answer this one. Yep, we're absolutely confident of our guidance for Evolve, both in revenue, EBIT, absolute EBIT, and cash flow. Absolutely.
U.S. school bus contracts.
Contracts.
I think what we've done on U.S. school bus contracts is where it's possible to try and change it, you can, but actually the pricing success just shows that if you're ruthless and disciplined in going to the customer and explaining to them what you need and why, and you've got a common purpose, which is to get the kids to school on time and safe and reliably, we're getting through price rises of 13% and 10%. That's really where. That's really how we manage our contracts.
Thanks. Good morning, it's Jarrod Castle from UBS. Seems like you're very confident about the second half, medium term around Evolve, but, you know, clearly that's not being reflected in your share price. How do you think about unlocking value through disposals, either divisional or, assets which you think can unlock value?
Then secondly, your pipeline conversion, that's gone up quite nicely. It seems like you have also improved on the ROIC there, but what's happening on the competition front? Are you just bidding more aggressively or just better bids or less competition? I'd be interested to get your thoughts amongst the different businesses.
Okay. On the first one, I think it's the market to decide the price and the valuation, you know. I mean, regardless on however much we disagree, and I guess, you know, our job is to execute Evolve, you know, and our strategy will maximize the returns, and the returns will, you know, enable to reduce the debt. We have a good path, you know, and a good plan, and we're very confident on that. Now, I have to say that, you know, as you can imagine in the board, we constantly discuss options to unlock value.
I have said many times, you know, we don't have any sacred cows or, you know, we're not dogmatic about it, but that's what I kind of say. You know, we have a good plan.
Yeah. You asked on the competition.
Yep.
I think you may be alluding to the fact, are we bidding price aggressively to win? Well, we wouldn't be getting 28% ROCE on one contract if that. What the Evolve was about was where contracts are won on both price and quality is to maximize quality, and all the Evolve outcomes are what drive the customer's buying decisions. That is, for me, the evidence of success. 28% win rate, 28% ROCE on those contracts that we've won, demonstrates the Evolve is working.
I would complement, you know, maybe, during this year, the school bus has not been so aggressive maybe in the past because of the lack of drivers, which is a, you know, a global issue and the lack of ability of manufacturing capabilities of buses. The rest, we see the same number of competitors, and that has not decreased, and all willing to get new business.
Again, it's about the ability as a company, through the processes and the strategy that we have defined, to win, plan, mobilize, and operate. The example that I gave you on Charleston, you know, it's very short mobilization process. If you remember, the same thing with the, with the rail contract that we won.
That requires real trust from customers. This is what we are doing for the first time globally, to present the group's credentials in that ability to win, plan, mobilize, and be successful.
Hi, good morning. [Paul Scianna] from Bank of America. Two questions, please. What do you see as key risks to this year's guidance outside of macro? On the leverage, cash conversion has been strong, quite strong recently. Does that give you more comfort with your leverage target? Is that target still Q1 of 2025?
Well, starting by the last one, cash conversion, it is. Yeah, it gives us much more confidence, obviously, you know. There are two elements, you know, is the cash conversion and is the EBITDA, and we're growing, and we're confident on that. The risk, I think you went through it, you know, in the, in the bridge, you know, you can see that element, but I think we have massively narrowed that risk.
That I'd echo that the key risks to execution as we sat here at the start of the year around reinstatement, that was a lot wider. I'm really pleased that we've narrowed that down through ruthlessly going through our driver recruitment and retention policies, and that range is reflected in the range that I gave you. In terms of your free cash flow conversion, it is strong.
Yes, absolutely, we're standing by the guidance to be close to our target range by Q1 of 25. We are making progress on gearing. It was an improvement year-over-year. It was flat on year end at 2.8. That was expected.
The gearing is a LTM calculation, trailing LTM calculation. The back half of last year and the first half of this year had a few headwinds. As we move through into the second half of the year, with the confidence we've given you about how strong the second half of the year will be, fully expect to see underlying improvement in the continuing improvement in the gearing.
Thank you.
Gerald? Oh.
... Thanks. Gerald Khoo from Liberum. Three if I can. Firstly, in the U.K., are you able to put a figure on the cost of the strike in the bus business? Also in the U.K., I suspect I know the answer to this, but could you clarify whether both parts of the business were loss-making or whether the losses were concentrated in bus?
Finally, you still have an investment-grade credit rating. You've got a bond refi coming later this year, as you've indicated. Firstly, can you confirm whether that we should assume it's a sort of like for like plain vanilla bond that you're looking at? Secondly, are you, have you, or are you going to give a hard commitment to defending investment grade when you refinance?
The last one is, yes, absolutely full commitment. Then you want to take the two questions, in the U.K.
Yeah, cost of strike. The immediate cost of strike in terms of disrupted service, somewhere between GBP 2 million and GBP 3 million, impacts the cost of strike. Were the losses in the U.K.? Mainly concentrated in U.K. bus. U.K. coach always has a second half, first half waiting because the strength of the summer period, the majority of those losses were UK bus. I'll just echo what Ignacio says, absolutely committed to maintaining our investment-grade credit rating, and it will be plain vanilla bond of some form.
There's no further questions from the floor, so we hand over to the moderator.
Thank you. As a reminder, it's dial one to ask any questions today. We now have a question on the phone line from Alex Paterson of Peel Hunt. Your line is open.
Morning, everybody. I've got two questions, please. The first thing is, on the school bus side, you talked about the driver recruitment there, but is it possible to say what gives the risk on the potential range of outcomes or route reinstatement?
Is this down to a change in demand because some of these routes haven't operated for some while, or is it because there is still a risk to getting drivers? Secondly, just on the 2H profit recovery, you've given the sort of the uplifts that come through, but you've not mentioned anything that might work against it. For instance, where would the GBP 15 million non-recurrence of the subsidy in the first half here in that?
Are there any other things that would work against it, like, some cost increases or anything like that? Thank you.
Okay. Thank you.
Thank you. I'll take that.
Yeah. The driver recruitment, when we came into the year, you are absolutely right. There was a risk that we needed to get the drivers, and then we needed to talk to the customers and convince them to reinstate the routes. The work that the team have done in the U.S. to go through every single contract with every single customer, and to confirm that if we get the drivers, you will put the routes on, means that we're working to a much harder target.
Really what I'm saying is the risk on execution is much more balanced to us getting the drivers in the door than convincing now that the customers to put the route back on. That is fully reflected in the guidance that I've given you. We've discounted where custom...
Already discounted where customers have said they might be trimming the routes a little bit. In terms of the second half profit recovery, the GBP 15 million non-recurrence of the COVID subsidies already been replaced by underlying trading growth.
There is nothing further to see there. In terms of the other risks, I mean, we've put them in the bridge. Pricing inflation on driver wages in the U.S., the block I showed was net of we're assuming 5% inflation in that bridge. The only other one that I would point to is the elasticity relating to the U.K. bus price rises. As I've said, early evidence is that well within what we were expecting.
You know, that's why I'm able to give the confidence on the range that I gave.
Got it. Thank you very much indeed.
Thanks, Alex.
Thank you. I can confirm we currently have no further questions on the line.
Okay. Well, thank you everybody for taking the time to listen to us this morning, whether you are in the room or here or online. Of course, we're pleased to see the Evolve strategy delivering, but we're looking forward to telling you about further progress over the forthcoming months, and that's where our focus as a team is concentrating now. In the meantime, have a lovely summer, and let us know how it was to travel with a Mobico vehicle. Have a good summer. Bye-bye.
Thanks, everyone.