FirstGroup plc (FGP.L) Earnings Call Transcript & Summary

Hello, and welcome to the FirstGroup Annual Results 2021. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Matthew Gregory, Chief Executive Officer. Please begin your meeting.

Thank you. Good morning, everyone, and thanks for joining us today for our full year results presentation. I'm joined on the call by our Chairman, David Martin; and the CFO, Ryan Mangold. David is going to start with a recap on our achievements this year, I'll update you on our sale of the North American contract businesses and the use of proceeds, then Ryan will take you through our financial performance before I come back to review each of our continuing businesses in more detail, including the opportunities that we see for the future. The presentation has been published on our website, and we will try to help you navigate to the particular section we're referring to by prefacing our comments with the page numbers. So let me hand over to David.

Thanks, Matthew. Good morning. I'm very pleased to be addressing you today because we've achieved significant results by delivering the strategy implemented following my arrival. And I want to commend all our people and the FirstGroup team led by Matthew on what has already been achieved. I must emphasize that this has been a landmark year for the group. We've reset the company and indeed the future investment proposition. We have sold the North American contract businesses at a full price. We have cleared the balance sheet of all significant liabilities. We will return GBP 500 million to shareholders with the real prospect of more to come. And after a 10-year hiatus, we will start paying dividends again next year. We have continued to keep it services moving working with all our stakeholders. And we have fared the business through the pandemic. Generated cash and profits are only down around 20%, but ahead of our initial expectations. We've continued to provide the critical services that our communities rely on, all the while ensuring that our passengers and our people are safe. Moving on to Slide 4. And we now have a transformed business with significant upsides in bus. And when volumes return towards pre-pandemic levels, we will have an operating structure that will deliver 10% operating margins. And in rail, we have the leading business that will deliver consistent profits under a newly derisked regime. The landscape for bus and rail is greatly improving. Matthew will talk in more detail about the national bus strategy and new structure of rail in a moment. Let me just say this. From my perspective, this is the most positive environment for public transport that I have personally seen in decades. The importance of public transport is finally being recognized with real funding and real commitment behind it from government at all levels. And finally, just think for a moment, we are critical if the government is to achieve its climate targets. We are critical for increasing demand for mobility, and we will deliver services in an increasingly environmentally friendly way. This is an inflection point for public transport, and it's also a new chapter for FirstGroup. No longer encumbered by its past, the business now stands ready to make the most of the opportunity ahead and deliver for all its stakeholders. The board and management is evolving and will change further to deliver this. There is yet more we will be doing, and I'm very confident in, and in fact, I'm excited about our future prospects. And that's why it's been a landmark year. With that, I'll hand over to Matthew.

Thanks, David. Turning to Slide 6. Let me give you a brief update on the sale process for the North American contract businesses now that the deal has completed and the funds have been received. We're now turning our attention to settling legacy liabilities. We've already provided notice to redeem the government's CCFF commercial paper, for example, with funds expected to flow out to this week. We also want to move forward the shareholder return. Having resolved a number of the uncertainties that were present when we signed the deal in April, we're going to increase the returns of GBP 500 million, which is equivalent to 41p. This is down to 3 factors: firstly, greater clarity for our rail operations with the termination sum for TransPennine Express concluded at GBP 50 million better than our expectations at the time of the announcement and the signature of 2 national rail contracts; secondly, the disposal completion accounts have been finalized, which results in a positive $58 million benefit; and thirdly, our cash flow expectation for the remaining group have also improved since the announcement. We expect to execute the return of value in the autumn following feedback from shareholders, the distribution mechanism will be announced in due course. In addition to this GBP 500 million return to shareholders, we still have 4 areas of potential value: the transit earnouts within the deal, which is worth up to $240 million; the exit from Greyhound; future pension valuations, which may release up to GBP 117 million from the escrow amounts; and also the group's overall leverage level, which will be linked to trading conditions as we emerge from COVID. All of this is clear potential for further upside. I'd comment that both First Student and Transit performed extremely well last year, serving their customers, delivering resilient financial performance and demonstrating categorically that -- their market-leading positions in the industry. And I also want to take this opportunity to pay tribute to all the employees of First Student and Transit. Their performance this year is truly a testament to the quality of their management and their people and their dedication to serving their customers. I'm confident that they will continue to thrive under their new ownership. Let me now hand you over to Ryan to talk you through the numbers.

Thank you, Matthew, and good morning, all. This has been an extraordinary year. And all the commentary I'll be making has the pandemic as a backdrop and the significant impact this has had on the group's operations for the year. Turning to Slide 8. I'm going to cover 5 key areas in the review of the group's financial performance. Firstly, the divisional financial performance with the continuing group delivering GBP 101.9 million in adjusted operating profit. The group's cash flows as we navigated through the crisis, ending the year with adjusted net debt GBP 77 million improvement on the prior year. How the financial model has shifted during the year, most notably in rail and the move away from franchising to the new very limited risk contractual arrangements. Sale of First Student and Transit and what this means for the remaining group's balance sheet and capital structure. And finally, the guidance for full year 2022 as we emerge from the crisis, and the expected shape of the group in full year '23, which we anticipate to be the first full year without COVID disruption. On Slide 9, we have set out the key financial indicators for the group. With the sale of First Student and First Transit, this has resulted in these businesses being reflected as discontinued operations in the financial statements with the comparators restated, and the continuing business consists of First Bus, First Rail, noncore Greyhound and central costs. Despite the extraordinary impacts on the passenger volumes, the continuing group generated an adjusting operating profit of GBP 101.9 million that was up GBP 32.2 million year-on-year. This result was off revenues that stayed broadly static with the government procured services in bus, a full year of Avanti that started trading in December 2019, offset by lower revenues in Greyhound driven by passenger demand, partially offset by physical measures that were put in place for the national carrier. The discontinued operations of First Student and Transit contributed GBP 79.6 million lower profitability in the year, which was a strong performance given that most of the student buses were parked for the first 6 months of the year. Net adjusted profit before tax for the whole group of GBP 39.4 million was down GBP 70.5 million on the prior year with the results also impacted by higher finance costs, mainly as a result of IFRS 16 lease finance costs that were up GBP 30.5 million that includes the full year of Avanti and Rail. The adjusting items for the year were a net gain of GBP 76.4 million versus the loss of GBP 409.5 million in the prior year. The current year gain is made up of profit on sale of the Greyhound properties, a reversal of previous impairments in rail relating to TPE and SWR following the resolution of the termination sums offset by costs incurred in the year relating to the execution of the strategy, a further net charge recognized in insurance reserves in North America, mainly in Transit and a small amount in Greyhound and the impairment of certain properties in the U.K. Under the way that we are considering rail contribution to group profitability going forward, given the 0 revenue and low-cost risk model in the train operating companies, the pro forma attributable net post-tax earnings for the continuing group in the year was GBP 18.2 million, and the calculation is included in the appendix. This results in the group generating a statutory operating profit of GBP 285.8 million versus the GBP 152.7 million loss in the previous year. For the group, the operational performance and management actions has meant that the group ended the year with net debt before rail ring-fenced cash and IFRS 16 of GBP 1.4 billion, GBP 77 million better than the end of full year '20. Turning to Slide 10 on the U.K. operations. As you know, the U.K. government acted swiftly in response to the pandemic, enacting various emergency measures for the continuity of services that impacted the respective businesses in different ways. In the Bus division, a high level of services were procured in order to ensure social distancing could be achieved on the buses. These higher level of services have effectively been procured on a 0 financial gain basis after taking into account the pension cash costs and debt servicing costs that have been incurred to provide the capital resources being deployed to run the services. As a result, the Bus division has made a broadly fixed margin for the year and generated GBP 36.6 million in operating profit. This operating profit is offset by the debt servicing costs and cash costs for funding the pension scheme to result in a broadly neutral overall financial position under the fiscal measures. In Rail, the train operating companies operated throughout the year under emergency arrangements under which the group took no revenue or cost risk and were subject to a fixed fee and a performance fee. It is pleasing that all 4 of the group's train operating companies achieved a maximum score for the initial EMA period up to September, earning the full performance fee. And the second half performance is currently being reviewed by the DFT and has been accrued for as being on target performance. These contractual fees earned in the TOCs, including a full year of Avanti, however, been offset by the group's open access hold trains where a GBP 10 million loss was incurred due to the services being suspended for most of the year. Services have, however, resumed in April following the lockdown easing and the passenger volume recovery continues. Given the low-risk contractual arrangements now in rail that make up the majority of the current earnings, at a net result level, the attributable earnings to group from rail were GBP 42.3 million in the year. The earnings include the after-tax fees from the train operating companies that will be received by way of cash as a dividend after completion of the respective statutory accounts later in the year. Turning to Slide 11. Greyhound forms part of the continuing group. However, given our intention to exit the business in due course, we have classified Greyhound as noncore. At an operational level, Greyhound passenger volumes were materially impacted by the shelter-in-place orders implemented across the U.S.A. And in Canada, the services were suspended in the early part of the onset of the pandemic and the Canadian business was officially closed in May 2021. Focusing on the continuing operations. The U.S.A. business has benefited from the 5311(f) funding for the national carrier and Greyhound has recognized an incremental $122 million in revenue. This grant funding partially offsets the $421 million decline in commercial revenues as a result of the material reduction in passenger volumes. The business has been able to permanently address a large part of the fixed cost base with fixed costs down $60 million year-on-year, and the business has driven further efficiencies through the network transformation program. This program has also provided the opportunity to release capital from certain older operating sites, notably in Los Angeles and Denver that were disposed of in December 2020 for $110 million and a profit of $90 million that has been reflected as an adjusting item. Despite the materially lower level of passenger demand, Greyhound was able to improve yields by 10% on the pre-pandemic levels. And as a result of these actions, the U.S.A. operations generated a GBP 1.8 million profit in the year versus the $14.9 million loss in the prior year. Looking ahead, the business expects to receive further awards in the second round of funding announced in December 2020. This funding will allow the business to continue to operate at a marginal profit as the passenger volumes recover with these now at around 50% of pre-pandemic levels. Furthermore, we intend to significantly derisk Greyhound's legacy insurance and pension obligations by applying some of the proceeds on the First Student and Transit sale as well as from further property disposals. A pro forma net asset schedule is included in the appendix, with pro forma net assets at circa $70 million after taking into account the market value of the real estate and removing the receivable relating to the funding awards that have been accrued for past losses. These derisking actions will improve the overall position for Greyhound. And combined with the costs and management actions undertaken during the crisis, positions the business better for ultimate exit in due course. Turning to Slide 12 and the movement in adjusted net debt. The pre-IFRS 16 net debt attributable to the group ended the year at GBP 1.4 billion, a GBP 77 million improvement on the prior year, driven by the cash and liquidity management actions. All the divisions other than bus have generated cash in the year with bus cash flows being impacted by circa GBP 70 million relating to the timing of receipts from the DfT for the CBSSG funding where the reconciliations and final settlements are around 45 months in arrears. First Rail cash flows of GBP 39 million represents dividends received from the TOCs, cash generated through the affiliate contracts offset by the cash cost of whole trains that were suspended for most of the year. The Greyhound cash flows benefited from the property sale receipts, partially offset by the receivable from the 5311(f) grant funding. The GBP 109 million of cash generated in Student and Transit benefited by a circa GBP 90 million release in working capital, driven by lower service levels through to March as well as the circa GBP 50 million to GBP 60 million lower CapEx to normal due to the CapEx deferral approach that we have taken in response to the pandemic. Both of these are reflected in the group's improved net debt at year-end. These positive cash flow effects, however, were partially offset in the quantum of net cash proceeds on the sale through the normalized working capital and CapEx adjustments that were applied. The GBP 117 million of cash generated by the divisions is after spending circa GBP 225 million on road CapEx and acquisitions in the year. The group incurred GBP 93 million in cash interest payments relating to exceptional adjusting items and taxation and benefited by GBP 53 million on foreign exchange translation helped by the swaps we put in place to hedge the dollar proceeds of the sale of Student and Transit by switching almost all of the debt into U.S. dollars during the year. That covers the movements in adjusted net debt. For the net debt flows relating to IFRS 16 leases, the movement is a reduction of GBP 507 million and benefits further by GBP 25 million on translation of the North American business on the weaker pound. The majority of the IFRS 16 funds flow movement is in the Rail division, where this has the greatest impact in recognizing leases that relate to rolling stock in the TOCs where we take no risk under the contractual arrangements with the DfT. Total net debt ends the year at GBP 2.6 billion, down GBP 635 million year-on-year. Turning to Slide 13 and the impact of the group's adjusted net debt, starting from the GBP 1.4 billion as of the 27th of March 2021 to the anticipated pro forma net debt of GBP 100 million following the completion of the sale of Student and Transit. The key cash flows are repaying the majority of the gross pre-IFRS 16 debt with only the GBP 200 million 2024 bond and finance leases of GBP 44 million in bus and GBP 18 million in Greyhound outstanding. The funding of GBP 337 million into the U.K. pensions splits GBP 220 million directly into the bus scheme and GBP 117 million paid into escrow with potential future return. Returning GBP 500 million to shareholders, and allowing for the short-term underlying capital demands and derisking the Greyhound legacy pensions and insurance obligations for which the majority of the cash is anticipated to be incurred in full year 2022 and a small portion in full year '23. The transaction has provided the opportunity to significantly derisk and strengthen the balance sheet with a pro forma adjusted net debt anticipated to be GBP 100 million with limited remaining pensions and insurance cash flow strain going forward. The potential earnout relating specifically to the Transit business of a maximum of $240 million has been included in the pro forma balance sheet in the appendix. The GBP 102 million or $140 million, fair value of the earnout has been calculated by applying a stochastic discounted cash flow model and assumes that EQT have not disposed of transit by the third anniversary. This additional future return relating to the sale has not been included in the funds flow and arriving at the closing pro forma net debt of GBP 100 million and represents future potential upside. Turning to Slide 14 and the outlook for the year. Full year 2022 is clearly a transitionary year given the markets we operate in will be in some form of restriction during the current year. That being said, we have a better picture of passenger demand in bus that Matthew will cover later. The rail train operating companies are largely fully contracted for the fiscal year and beyond, and whole train's passenger demand levels are increasing combined with several affiliate contracts now agreed. Greyhound demand levels, yield and cost actions, combined with some further clarity on Phase 2 of the funding provides more certainty. And following the Student and Transit sale completing, the activities to support a simplified group are progressing with the targeted corporate savings of GBP 10 million per annum run rate, of which GBP 5 million of savings should be achieved in full year 2022. From a cash flow perspective, in full year '22, outside of the sale transaction flows, we anticipate the positive EBITDA for the year, a net inflow of working capital on receipt of the monies owed under CBSSG and bus and the 5311(f) funding in Greyhound. We anticipate investing a net circa GBP 90 million in bus after the grant funding, mostly on the electrification of the fleet and the final diesel bus purchases to meet clean air requirements, investing circa GBP 25 million pounds in Greyhound on coaches ordered pre-pandemic and infrastructure spend relating to the network transformation. This means that we have a higher degree of certainty of the financial performance in the near term and full year 2022 provides a solid platform for the group to build from. As we look beyond the full year 2022 into full year '23, under the environment that is expected to be returned to a new normal, we expect bus passenger volumes to recover to around 80% to 90% of pre-pandemic levels with the bus business having clear plans to get to at least 90% operating profit margin in the first full year post pandemic. Rail performance is mostly contractual with incremental earnings expected from the adjacent rail opportunities that we're making progress on. We anticipate investing the net GBP 90 million per annum in bus CapEx after grants in purchasing around 250 to 270 electrical hydrogen buses per year, part of the group's environmental commitment and a very limited amount of CapEx requirements in rail for the affiliate contracts. Cash interest costs after the gross debt redemptions will primarily be servicing the GBP 200 million September 2024 bond at an interest rate of roughly 7% and the interest costs on the finance leases. Outside of the train operating companies, we do not anticipate it to be cash tax paying in the U.K. in the short to medium term, pensions funding timing and how the tax deductions operate combined with the accelerated capital allowances from investments. From a leverage perspective, the group is targeting a maximum of 2x net debt to the new KPI of rail adjusted EBITDA, meaning we have retained financial capacity to be flexible going forward. And finally, given the expected strength and quality of the business, the Board has set a dividend policy of 3x cover against the new post-tax profit measure that includes the attributable earnings from the train operating companies. The Board anticipates paying the first ordinary dividend towards the end of the calendar year 2022. I'll now hand back to Matthew for the business review.

Great. Thanks, Ryan. So let me move on to Page 16 and give you an update on our continuing businesses and how we see them moving forward. Before we get into the detail of each business, it's worth stepping back and reminding ourselves just how important and relevant our continuing operations are. There's no debate that public transportation is a critical enabler of society's goals, and we see significant opportunities for our ongoing business. Clearly, the U.K. looks to build back better. On the right-hand side of the page, you can see that transport is now the largest source of U.K. greenhouse gas emissions with cars and taxis being by far the largest contributor. The pandemic has highlighted the environmental imperative to get people out of their cars and onto public transport. Not only does this improve air quality and reduce congestion, but the country won't meet its carbon emission targets without this modal shift. Public transport is also integral to generating economic growth and will also be a source of green jobs as we seek to build back better and greener. Buses are the most cost-effective means of expanding the interconnectivity and scale of communities and helping to address the city center decline. Our business has a very clear purpose, and we make a positive impact on 6 UN sustainable development goals. We're also at the heart of driving the innovation that's required in order to make public transport journeys more simple and frictionless. These are exciting times for U.K. public transport. The need for our services has never been clearer and the policy backdrop never been so supportive. So with that, let's turn to Page 17. Let's look at how this applies to First Bus and review the positive policy backdrop. You already know that First Bus is the market leader. Once buses can be operated in an unconstrained manner, there's a huge opportunity to increase bus volumes with only a small change in car use. You can see from the chart that 80% of journeys made between 2 and 10 miles are taken by car with only 9% taken by bus. Switching just 1% of car trips to the bus will increase patronage by 6%. Whilst this opportunity has been available for many years, the new national bus strategy provides the strongest impetus in decades to finally see this modal shift coming through. This strategy promises GBP 3 billion of funding to include 4,000 zero-emission vehicles as well as support for bus lanes and information systems and measures to prioritize the bus and reduce congestion. In order to access this funding, the local authorities must work together with operators to ensure that services improve in each area. In a number of our locations, we already have the strong cooperation between operators and local authorities that the new bus strategy is seeking to foster everywhere. So we already know its potential to improve services and increase passenger numbers. And this backdrop is also mirrored in Scotland and Wales. Moving on to Slide 18. We know that there are going to be new arrangements and partnerships with local authorities, so let's take a look at how we see this playing out. We currently have an agreement with the DfT to procure our buses through the CBSSG grant. This remained in place while social distancing was enforced and is followed by a soft landing period to the end of August when CBSSG will still be available. In July, the DfT announced a further GBP 227 million of transitional funding to ensure bus services are in place as passenger numbers rebuild to commercially viable levels. This is intended to last until March 2022. Now the terms and conditions still needs to be agreed, but this is a positive step. If we look forward then to October of this year, by this time, the bus service improvement plans need to be generated by the local transport authorities, and we're working to help design those in our local areas. And finally, by April '22, enhanced partnerships come into effect with binding agreements between local transport authorities and operators to deliver improved services, allowing both parties to access the national bus strategy funds. Scotland, the strategy is focused on providing funding for ultra-low emission services, and we've accessed the vast majority of the funding. And this has enabled First Glasgow to invest in 148 electric buses. In Wales, the government is currently working on its detailed strategy to deliver on its objective of a reliable, affordable and low-carbon network. On Page 19, the chart shows how our bus business has worked hand-in-hand with national and local government to maintain service levels at near 100% whilst also managing the requirement for social distancing. Despite the fact that social distancing required capacity to be restricted to around 50% on each bus for all of last year, we saw demand rebuild robustly after the first lockdown ended. And as recent restrictions have been lifted, we're seeing demand recovering to around 60%, and 67% in certain places. It is encouraging that patronage is building and this gives us confidence in our estimate that volumes will return to around 80% to 90% of prior levels within a year of social distancing restrictions being lifted. Our surveys also tell us that the vast majority of passengers intend to return to bus travel post pandemic. We also think that working from home is unlikely to affect the majority of bus users. As we look at the purpose of journeys, only a small proportion, around 5% relates to white collar commuting, which is the group most likely to be impacted by increases to flexible working. And you'll also note that a high proportion of our customer base is less likely to drive or have access to a car, with 63% of our customers below the age of 20 and over the age of 60. So how does this flow into our margin targets for bus? As we show on Page 20, our margins has been progressing towards double digits prior to the pandemic, and we now have clear plans to enable us to reach 10% by the end of the first year after social distancing has been removed. We set out 5 bridging items on the chart. And I've already talked about our view of passenger volumes on the previous slide. So the second point is that during this coming period, we'll be reconfiguring our networks to ensure that unprofitable mileage is removed. A significant number of network changes had been registered at the start of 2020, and we're ready to make changes to networks once true customer demand is understood. I'd also comment that we now lead the industry in the digital space, particularly in being able to determine precise and real-time passenger numbers on each bus, which will allow us to be more agile and more effective in identifying poor performing routes as well as spotting the more popular routes to which services could be added. Moving across the chart, we've continued to work on cost reduction plans that were started pre-COVID as well as locking in savings that were delivered in the last year. We've delivered GBP 3 million in fixed overhead savings and locked in around GBP 10 million of savings by increasing flexibility around the workforce. In addition, we're implementing new engineering systems and new scheduling tools that will further improve our efficiency. And all of these savings will total around GBP 30 million a year. As well as reviewing operating profitability on a route-by-route basis, we'll be assessing a small number of our operating areas that are not performing at levels we need. In these cases, we'll be working with the local authorities to find ways to ensure we can continue to provide the level of service justified by demand in these areas. And as a final point, we've launched the program to review pricing policy to take account of the more detailed data that's now available to us. This will enable more personalized pricing and will allow us to continue our drive to digital ticketing and payments. We'll continue our Tap & Cap fixing trials and participating in lots of initiatives such as the Cornwall super bus project, which will analyze whether reduced pricing does result in sustained higher volumes. Clearly, the next 6 months are going to be crucial for the bus business to manage the transition away from government procurement to a stand-alone commercial model. So looking forward on Page 21, it's clear that First Bus is changing. And this is being driven by the 0 emissions agenda as well as through the opportunities that we see in the future bus market. We talked about the critical inflection point for the bus with the pandemic only serving to reinforce the need to build back better and greener. And we feel confident that FirstGroup is well positioned for this change. We're leading the way on transforming our fleet to 0 emissions. We now have 50% of all our buses meeting Euro VI air quality levels. 23% of these are either low or 0 emission buses. We've introduced the world's first hydrogen double-decker buses to Aberdeen. We've added double-deck vehicles to the U.K.'s largest fleet of park and ride vehicles in York and are currently operating around 100 biomethane buses in Bristol. Partnership that we've announced with the Arrival bus company is a great step forward in accessing electric vehicles that are being designed from scratch to serve the electric bus market at a price that is far more comparable to the existing technology. And the national bus strategy sets out funding at levels we've not seen for decades. Significant funding is available to local authorities to help them prioritize the bus, enabling them to tackle congestion and take cars off the road. Funding is also available for the ability of the service trials. And as a result of our considerable experience with First Transit and our detailed knowledge of the local networks, we're well positioned to develop bespoke solutions for our local authorities. In Scotland, the ultralow emission funding schemes have provided grants for 148 electric vehicles to operate in Glasgow, making our Glasgow facility the largest electric bus depot in the U.K. And we're also working to support the national governments in readiness for COP26 in November. All of this demonstrates the political, social and economic environment that's highly supportive of the bus and acknowledges the integral part of the bus will play in meeting society's 0 carbon and 0 emission goals. So let me finally touch upon other market opportunities that we see for bus. We're well placed to grow into the nascent mobility as a service market as well as work on demand responsive transport and autonomous vehicle pilots. We're also working on growth opportunities within the GBP 1.4 billion B2B contracted bus services market, and our new bus MD has structured her business with MDs to focus on developing and growing these opportunities. Turning to Rail on Page 22. We're the U.K.'s largest operator with 4 DfT contracted operations and a market share of around 27%. We have a long-standing expertise and a strong experienced management team. The Rail business has fundamentally changed. We welcome the Williams-Shapps white paper and are pleased to have signed 2 of the new national rail contracts that were directly awarded. The direction of the national rail contracts and the white paper is what we've long been advocating for, a better balance of risk and reward and a model that places greater emphasis on the passenger. The new national rail contracts will provide a totally different reward structure and a much lower risk than the old franchising contracts. And as a reminder, the DfT will retain all revenue risk. There'll be a fixed fee for service delivery and performance incentive based mainly on passenger service metrics. And contingent capital requirements are significantly below the old franchising levels. And all of this means we'll have a clearer and more predictable earnings stream from rail than in the past. On top of this, the government's longer-term plans may play well to our strengths. Contracts are likely to be longer, and incentives are focused on service delivery. There'll be a requirement for strong stakeholder management, which has long been a First Rail strength. And finally, there will continue to be significant infrastructure upgrades across the railways. And First Rail has demonstrated its capabilities as a partner in this regard over many years. So as the market leader, we're in a strong position for this new operating framework. On Page 23, I want to briefly set out precisely where we stand with our portfolio in rail currently. We told you that all of our operating companies would be directly awarded a National Rail contract or NRC, following the emergency agreements. Southwestern Railway and TransPennine Express NRCs have been agreed with contracts that operate until the end of 2023 plus a 2-year extension. TPE has the potential to be extended further as a result of the TransPennine route upgrade. Avanti West Coast NRC will be directly awarded in March 2022 and has the potential to extend to 2032, linking back to our successful award of the shadow operator role on HS2. Great Western Railway is expected to move to an NRC at the end of the calendar year since the DfT have recently extended their emergency agreement until December. We don't yet know how long this NRC will be for but it's unlikely to be shorter than the 2 plus 2 years of the Southwestern and TransPennine contracts. The recent development in rail now give us far more confidence of a longer-term participation in this marketplace. On average, since 2007, we've operated around 20% of the market. And now with over 20% of the market today, we're in a strong incumbent position. We aim to use our long-standing experience and commercial expertise to deliver service and innovation for customers and the change management expertise that our future industry partners need. We published in our recent announcement, the detailed terms of the NRCs and we're quite happy to go over this in Q&A., so I'm not going to repeat what's in the slide here. However, there's a substantial fee pool available with the fixed fees plus the performance incentives to work towards as well as potential other projects to work on, such as the TransPennine route upgrade. Moving on to Page 24 and having discussed a more traditional area of rail, I do want to expand on the other opportunities that are out there in the marketplace. So let's start off with the evo-rail business. This is a solution where we and our technology partner have developed industry-leading technology to provide superfast WiFi onto trains, solving the problem of patchy WiFi that we've all suffered from. The technology is based on installing a series of trackside mass that effectively sling the signal onto the train using millimeter wave technology. The solution was trialed on the Isle of White, and we now have a contract to provide this solution on a longer stretch of southwestern railway. Our contracts require us to procure the mass and technology, and we own a double-digit margin on this. Importantly, capital is prefunded by the customers. When assessing this opportunity, we've looked at the marketplace and economics involved in investing in this solution by rail owners. We've assessed the cost of this solution versus the competition and believe that ours is much more cost effective. Costs, however, does not scale substantially with track length, so we believe it's likely to be cost-effective along routes with high passenger volumes. And looking at likely markets, we've identified a dozen or so countries where this solution would be attractive and 5 major markets, in particular, including the U.K. So boiling all of this down, we think there are around 24,000 kilometers of track where our solution will be the most cost effective and impactful. And to put this into context, our existing contracts, which will deliver around GBP 5 million of revenue and around GBP 1 million of EBIT relates to 100 kilometers. So this is a very attractive marketplace to pursue, and we're augmenting our commercial team so that we can push hard of the opportunities that this presents. Looking into the other opportunities, we're pleased that hold trains is back in operation and passenger volumes are building. We're also very excited to be launching another open access operation on the East Coast line, which will offer a new direct service to Edinburgh and London at low cost, but also redesigned to focus on the customer experience. In addition, our creative rail team will provide integrated contact center operations for its existing business with the opportunity to sell this to third parties. We also have a rail industry analytical system, Mistral Data, which we're starting to commercialize as well as the consultancy operation, which builds on our vast knowledge of the industry. So moving on to Slide 25. FirstGroup stands ready as a critical enabler of society's ESG goals. We've always been a responsible business with clear social purpose, and this has been intrinsic to our operating model. Through our sustainability framework known as Mobility Beyond Today, we're setting out to be the partner of choice, building on our strong credentials to accelerate the transition to a 0 carbon world. And this isn't something in the dim and distant future, it's happening now with real tangible activity underway. During the year, we focused on the following: early adoption of the TCFD reporting requirements, demonstrating how our business helps combat climate change and air quality. And we were also the first U.K. bus and rail operator to formally commit to setting a science-based target to reach net 0 emissions by 2050 or earlier. But it's not all about the E in ESG. I believe it's critical that we move our sector from being traditional to one that's far more diverse and inclusive. In our business, we have a multitude of initiatives and programs underway, but I put out a couple of examples. Our development programs, which have been in place for 2 years, have increased the proportion of women in senior roles from 23% in 2019 to 28% in 2021. And this, of course, is just the tip of the iceberg. In addition to this, I'm extremely pleased to have signed up to the Change The Race Ratio initiative, which commits us to increasing racial and ethnic diversity and create a more inclusive culture. We'll publish our first ethnicity pay gap report next year. And there's still a huge amount to do, but we are committed, and I'm encouraged by our progress. So to summarize on Page 26, as David said at the outset, this has been a landmark year for the group. We've robustly managed through the pandemic and delivered a resilient financial performance. We've continued to provide the critical services that our communities rely on, all the while ensuring that our passengers and our people are kept safe. Working with government and industry partners, we've helped shape the future of U.K. bus and rail, fundamentally changing the course of both our businesses. We've delivered on our portfolio rationalization strategy, having completed the transformational sale of First Student and Transit and are increasing the shareholder returns of GBP 500 million with clear prospects for further distributions over time. Greyhound has been derisked. And as it remains noncore, we're committed to resolving this as soon as practical. We put the business on a really solid footing for the future with a well-capitalized balance sheet and the lowest risk and leverage of our peers. As you can see, the ongoing group is now well set on a path to create sustainable long-term value for shareholders. And this is underpinned by U.K. government policy that placed a major emphasis on public transport in delivering economic, social and environmental goals in the years ahead. In First Bus, we're experiencing the most supportive policy and funding backdrop that we've seen for decades, and the nature of rail contracting has fundamentally changed to a lower-risk model. This is a turning point for the business. As we emerge from the pandemic, we're set to deliver strong financial performance, generate cash and reinstate a dividend for the first time in a decade. So let me now hand you back to David for closing remarks before we move to Q&A.

Thank you, Matthew. You will have seen we also announced today that Matthew has decided that having delivered the transformation of U.S. sales and put the business on track for the future, the time is right for him to move on to new opportunities. Matthew will be stepping down from the Board and as CEO at the conclusion of our AGM in September, at which point, I will become Interim Executive Chairman until a new CEO is appointed. A comprehensive search is underway, and we will keep the market informed as appropriate. I'm sure we will find the appropriate person to lead this group going forward. I want to take this opportunity to extend my sincere thanks to Matthew for his significant contribution to the company over the past 6 years. He and I will continue to work very closely over the coming months to ensure a smooth handover. And I'm grateful to be able to call on Matthew's support and knowledge as required during this transitionary period. As the group enters this new phase, the composition and background of the Board will continue to evolve. As you will have seen, Jane Lodge and Peter Lynas has joined the Board as nonexecutive directors in June, and I'm confident of the strong contribution that both will make. I will continue to oversee an orderly and appropriate evolution of the Board in order to ensure it has the right balance of skills, experience and diversity for the group's future needs. Finally, just a reminder that this is the start of a new area for FirstGroup. We are determined to establish an investment case, which is secure, sustainable, cash generative and consistent. An investment case, which offers investors' exposure to sectors, which are vital to society and undergoing positive change. With that, let me now hand the call back to the operator for questions, please.

[Operator Instructions] Our first question comes from the line of Sathish Sivakumar from Citigroup.

I've got a couple of questions here. So more actually longer term. Firstly, on the U.K. bus, what are the opportunities actually in terms of further consolidation in the U.K. regional market considering now post the sale, it would be mainly U.K. bus operator? So what are your thoughts on mainly on inorganic opportunities available within the U.K.? And the second is actually on the Greyhound operations, actually. Could you please update where are we actually in terms of the disposal process? Do you have any specific time line in the mind given matter is actually likely leaving now? So what is that future was for Greyhound actually?

Great. Okay. Thanks, Sathish. I'll cover both of those off. Look, I think the -- well, the first thing I'd say about the U.K. bus market is there are huge opportunities that we can see for this market to grow, and we think we're positioning ourselves extremely well to get back to growth over time and also to deliver a 10% margin. In terms of inorganic opportunities. I mean, I think there have always been some sort of small inorganic opportunities around the piece, I think, for a sort of a more broader conversation around consolidation. That's really not something we're focusing on right now. We're focusing on the next 6 months, which is going to be critical for U.K. bus to get itself back to a commercially viable model and to deliver all of these opportunities that we see going forward. And I think in terms of Greyhound, I think we said back in April that Greyhound's very different sort of situation from the Student and Transit business. The business was affected significantly by the COVID pandemic. And we were actually very pleased with how the business has stabilized itself despite the fact that the revenues are down at sort of 50%. The guys did very well in reducing the fixed cost base, and they've done very well in obtaining the 5311(f) funding from the U.S. government to continue to provide this vital intercity bus network. We're also -- what we've also done with Greyhound is we've delivered on the property sales as well as significant cash coming through for that. And we're also quite pleased that there's a second round of funding coming from the U.S. government to continue to provide this network. So the business is very stable. We're saying that it's noncore. We will continue to progress the discussions that we're having on the potential sale of that business. And clearly, we're looking to exit that business as soon as practicable. But we're turning very much our attention to that process, but are comforted that the group -- that, that business is in a relatively stable position at the moment.

I'll follow up actually on the Greyhound. In terms of the real estate, what is the residual value of the real estate in terms of depots and others left in the business?

Ryan, do you want to cover that one off?

Yes. Sathish, the sort of market value of the remaining portfolio is just in excess of $200 million. And we provided some details of sort of net asset stack in the appendix to the presentation.

And the next question comes from the line of Alex Paterson from Peel Hunt.

I just got 2 questions, please. Firstly, can you say a bit more about the data-driven pricing strategy? What sort of thing is this going to involve? You mentioned in Cornwall that you're going to see if lower prices deliver sustainable volume gains. Is that something that you would trial elsewhere? Or if it's worked in Cornwall, would you apply that across your network? So I was just sort of wondering what you might do there. And also, obviously, you've got the Mistral Data for rail. Are there any crossovers between rail and bus where you can use the sort of data or anything for both? And then the second thing I was going to ask about was on the evo-rail. What is the sort of the model for selling this? Are you selling to the train operator, I'm assuming TOC? And are they then charging their customers for it? Or how is that going to work? And so how would you go from 100 kilometers of network to more? What's the kind of time frame for delivery on that?

Sure. Yes, let me cover both of those. So I think if we step back on bus, and I think that the way that people have traditionally sort of worked out how busy or otherwise bus services are is through surveys and sort of people standing there, sort of also clipboards and just looking at the buses, what we've -- we were the first bus company in the U.K. to put this ticketer machine on every single bus, which allows us to track every transaction with the -- every person getting on and off the bus. And we particularly did that in COVID, where we're actually tracking on and off because we have to track the social distancing capacity. So what that really allows us to do is to gather all the information of who's using the bus, when, what time, which stops and really helps us plan the route network. So that's going to be very valuable information to us. More broadly, the sort of data-driven pricing is really all about looking at the simplicity of pricing, how it interacts with sort of daily, weekly pricing, making sure that it's really looking at what the options are for sort of giving the customer what they need in specific locations. And that's something that we'll deliver as we sort of get back to this more commercial model. I think on the Cornwall project, Alex, this is a very specific project where they're actually going to take a relatively blunt -- sort of blunt approach, which is almost sort of slashing the prices to see whether it -- significantly to see whether that drives higher volume. Now that's actually part of sort of the DfT funding. So we're not sort of paying for that effectively. We're working with the local authority to enact that. So we'll see whether that's successful. And obviously, if it is successful and it's financially viable, then we'll be looking to promote that across the network through the DfT. On the Mistral point, yes, absolutely. There's no reason why a set of data analysts couldn't work -- move from rail to work on bus. I think what's important to understand on Mistral is that the rail industry data systems are incredibly complex and the interactions on multiple systems within multiple organizations. And the reason why that particular group is sort of is one that can sort of sell some good services is because they really understand how the mechanics and the plumbing works throughout the whole rail system. But I think they'll be focusing more on the rail side. But yes, there's no reason why we can't use that sort of data analytical skills across bus. Turning to evo-rail. Just to make sure that I've got -- make sure I understand the question. It's less about selling it to the TOCs in the U.K. because the commercial model has now changed. So we are -- everybody is now operating on these national rail contracts where we deliver a plan that we've agreed with the government. So in fact, the customer in this respect are the people that operate the railways in each country. So that's largely going to be government or sort of bodies of governments. And what we'll be looking to do is to sell the capability of this millimeter wave capability to each of those governments, whether it's DfT or sort of across Europe or even globally. And for them to weigh up the benefit of a better WiFi connectivity and to fund that project. Now the interesting part of this is that it's not just about you streaming Netflix on a train, but obviously, that's good for the commercial -- for the customer side of things. But as you start thinking about all of the data that's within the train and all the sort of operational data that's collected within the train, this system will enable people to get that information off the train in a real-time basis. So looking at going beyond the customer piece, and then going into the basic operations of the train, which is really quite interesting. Even things like CCTV and all of the telematics that go into a train. So again, that's where you can see this market expanding and expanding and us being able to provide -- it's a step change in the data capability for the operators of the railways.

And so -- yes, no, that's very helpful. And so to go from 100 kilometers to more, you're in talks with these -- the government or government bodies across these 5 countries. And then it's just when or if contracts are awarded to save you from corona.

Yes. So look, these are long -- these will be long-term agreements that will be relatively big investments. They will need to be done in a slightly -- in a much more sort of commercial way, not in a kind of necessarily in a rail industry way, but they'll need to be sort of commercialized in a more traditional B2B way. So we're increasing our commercial team and bringing in people with those kind of skills who can then ally with our rail industry knowledge and the technology knowledge to deliver these contracts. But these are things that will take months -- a number of months for people to sort of prospect and then sell into, contractualize and all those kind of things. So it's -- we're right at the start of that process, but it's a very interesting marketplace and a demonstration of how we're sort of expanding away from just the more traditional rail business.

Absolutely. I'm sorry, last follow-up, I promise. The -- if you're getting a GBP 5 million of revenue for a 100 kilometers of track, what's actually the sort of total cost to the purchase for that investment, please?

Yes. Well, we're not talking about that, Alex, because we -- that's sort of commercially sensitive really.