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

Good morning, and welcome to the presentation of FirstGroup plc's results for the 26 weeks to the 25th of September 2021. Presenting today are David Martin, Executive Chairman of FirstGroup; and Ryan Mangold, Chief Financial Officer. [Operator Instructions] And just to remind you, this event is being recorded and will appear in due course on the firstgroupplc.com website, alongside today's presentation slides and other materials. I'll now hand over to David.

Good morning, and thank you all for joining. I'm joined on the call today by our CFO, Ryan Mangold, to review our progress since the start of the financial year. We will be speaking to the presentation, which most of you will be able to see on screen or indeed on our website, and we will navigate you through by reference to the page numbers. It is a rather complicated set of numbers, given all the corporate activity in the period and indeed subsequently. Therefore, we only intend to highlight the key areas, and we will really concentrate on our bus and rail business and future prospects. Of course, as usual, we'll be happy to answer any more detailed questions at the end. Starting on Page 3. I really would like to emphasize that the group has been truly transformed by the actions we have taken during the year, particularly of the successful disposal of First Student, First Transit and Greyhound. And of course, we have recently completed the GBP 500 million return of cash to shareholders and reduced shares in issue by 39%. Consequently, we are refocused on First Bus and First Rail, both market leaders in U.K. public transport, and we've been making good progress, which I shall come back to you later. Both businesses have performed resiliently despite the recent headwinds. Operationally, we have continued to keep vital services moving safely by working closely with all our stakeholders as we have done throughout the pandemic, and we owe great thanks to all our employees for this. The overall trajectory of passenger volume recovery demonstrates the latent need for people to travel. Uncertainties remain to be sure, not least as a result of the latest variant and indeed recent government guidance, although we are seeing no impact to date. We are now beginning to see the real tangible effects of government's renewed recognition of the importance of public transport on the ground, although there is, of course, much more to do. We are continuing to deliver all the right actions to meet the financial and other targets we have set for ourselves once the pandemic effects on travel have receded, including our 10% margin target in bus and the transformation of the fleet to zero carbon. We are now a cash-generative business, which we intend to recognize by commencing regular dividends during the next year. And that is so even before the substantial further inflows, which will be realized over the coming months and years from the Greyhound property disposals, for example, as well as the transit earnout and other items. I really do feel that the business has been put into a very strong position by the actions we have delivered over the past months. I will talk more about how FirstGroup is increasingly well positioned in a moment. But first, I'll hand over to Ryan to talk you through the numbers. Ryan?

Thank you, David, and good morning, everyone. As David noted, this has been a massively transformative half year period for the group in delivering on the strategy of rationalizing the portfolio to being the leading U.K. public transport operator. I'm going to cover 4 key areas in my presentation, starting on Slide 5: firstly, the continuing group financial performance in the period; then the impact of the substantial corporate activity culminating in GBP 500 million being returned to shareholders; the significantly strengthened and derisked balance sheet with significant future potential and capacity with clear boundaries on leverage; and finally, the confidence in delivery for our expectation for full year 2022 and looking ahead into full year '23. Turning to Page 6 and the adjusted financial performance for the continuing group. Revenue was up GBP 86 million on prior year, reflecting mainly improved passenger volume recovery versus the prior year, where this year was materially impacted by the onset of the pandemic. Operating profit was GBP 51.8 million and is down GBP 3.9 million, with improvements in bus offset by rail. Net finance costs at GBP 58.1 million or an improvement of GBP 13.2 million in the prior year due to the material debt pay down in the summer. The interest expense includes the impact of IFRS 16 relating to leases, mainly of rolling stock and rail of GBP 19 million versus GBP 29 million in the prior year, and the reduction primarily reflects the application of this accounting standard on the various leases and the term of the management fee TOC contracts. The IFRS 16 interest cost will remain variable in the future and will very much depend on the length of future rail contracts. This resulted in adjusted loss before tax of GBP 6.3 million, an improvement of GBP 9.3 million on the prior year. The adjusting items in the period mainly relates to the GBP 478 million profit realized on the sale of Student and Transit, including the recycling of the foreign exchange reserve, the partial reversal of the previous impairments in Greyhound of GBP 55 million recognizing the value that was achieved on the sale that completed in October, offset by the make-whole costs on the bonds and PPs that were redeemed early as well as the execution costs for the sale and exit of these businesses. Our key alternative financial performance measure introduced earlier this year is the attributable group rail adjusted profit after tax, given the change to rail and the move to low-risk management fees in the TOCs, and this was GBP 1.2 million loss in the period that I'll cover how we see this improving from the second half onwards. This resulted in a statutory profit of GBP 644 million for the half year. The group ended the period in a net cash position before IFRS 16 and rail ring-fenced cash of GBP 614 million, an improvement of GBP 2.2 billion on the prior year. Turning to Slide 7 for the bus business review. Bus revenues are up GBP 81.5 million, reflecting the passenger revenues being up 46% year-on-year, with the total mileage levels remaining fairly stable at 85% of pre-pandemic levels. This improvement in passenger revenues was partially offset by the lower level of government grant arrangements. In terms of the grant funding arrangements that applied in the period, CBSSG operated on a cash breakeven basis after allowing for pension and interest costs. And this scheme came to an end in August and has been replaced by a more commercial risk model in England under the Bus Recovery Grant funding. In Wales, the previous funding arrangements continue to apply into the next fiscal year, and the Scotland arrangements are in place until March 2022. In the period, the combination of the passenger recovery, the continued delivery of underlying cost savings and efficiency gains has resulted in the bus delivering GBP 26.8 million in adjusted operating profit in the period, an improvement of GBP 9.4 million. Following the end of CBSSG that prevented fare increases while the scheme operated, the business has commenced fare increases in England in line with CPI. These increases help mitigate the short-term inflation cost pressures, particularly in driver wages, given the driver shortages that we are currently experiencing. Turning to Slide 8. Rail is now made up of 2 distinct profit centers, consisting of the 4 low-risk management fee Train Operating Companies and the affiliate contracts and Open Access part of the business. As such, we think it is helpful to show the respective contributions from these 2 areas more clearly. Under the management fee TOC contracts, there is no revenue risk and limited cost risk, with a more predictable and steady profit anticipated. We have implemented a more appropriate financial performance measure that includes the net after tax and minority interest attributable earnings from the TOCs, which is effectively the group's reward for managing the operations of these train companies. And the business delivered GBP 17.5 million in the period. The performance fees have been accrued at the level of the respective TOCs hitting an on-target score under the respective performance measures, and we anticipate the fees earned to remain broadly stable for full year '22 and '23, including the anticipated extensions of the GWR and Avanti contracts. These net attributable management fee profits were partially offset by GBP 7.6 million operating loss incurred in the balance of the rail business, primarily at the Open Access operations of Hull Trains and the launch of our new Lumo train services on the East Coast. As guided before, we anticipate these Open Access businesses will incur a combined loss of circa GBP 20 million in full year 2022, driven mostly by the start-up of Lumo. And both Open Access businesses are anticipated to generate marginal profits in full year '23, driven by the anticipated passenger volume growth, particularly the leisure market that makes up most of these businesses' passenger demands. There's also further upside potential in profitability growth that can be driven through other affiliate contracts in the rail activities. The reported adjusted operating profit of GBP 39.2 million is down GBP 20.2 million on the prior year, reflecting mainly the lower management fee TOC contractual terms versus under the initial EMAs and the impact of the accounting under IFRS 16 in the TOCs and the launch of Lumo. Turning to Slide 9 for what this means for shareholders and attributable profits for the group activities. Given that the management fee TOCs are required to be fully consolidated, including the application of IFRS 16, the financial performance measures for the group focuses on the attributable profit to shareholders from the management feed TOCs for both the dividend purposes under our policy as well as EBITDA for balance sheet leverage considerations. The net attributable profits from the management fee TOCs are received by way of dividend after the fiscal year-end, following the completion of the respective TOCs statutory accounts. However, we consider the alternative profit measure as an earned basis rather than on a cash basis. This results in a marginal loss in the period, mainly driven by the losses at Hull and Lumo trains and the higher cash interest cost. Looking ahead, we anticipate Hull and Lumo to make a marginal profit in full year '23, as noted earlier, and the run rate for corporate overheads are expected to be GBP 10 million per annum saving. And we will incur a materially lower cash interest cost as a result of the significant debt redemptions. Turning to Slide 10. The group's cash flow in the period reflects the material impact of completing the sale of Student and Transit in July and the subsequent debt redemptions and pension derisking in applying part of the sales proceeds. The rail business is fully consolidated in the group's cash flow statement, which means we recognize substantially fully funded, ring-fenced cash balances in the management fee-based TOCs. As such, we have separately identified the cash flows under these agreements to show what truly relates to the group. Focusing therefore on the adjusted net debt column. The bus business generated GBP 52.2 million in the period, reflecting the EBITDA generated, collection of part of the receivables from the government procurement under CBSSG, offset by only GBP 8.7 million invested in CapEx in the period, given the delays in bus deliveries that are anticipated to be received in the second half of the year. The rail cash outflow of GBP 3.4 million primarily represents the cash generated in the affiliate contracts, offset by the net cash costs of Lumo and Hull trains. The after-tax management fees earned from the TOCs in full year 2021 are to be paid as dividends and are anticipated to be received in the coming months, following completion of the statutory accounts and the procedures being finalized with the DfT. The group payments of GBP 24.3 million relate to the underlying central cash costs as well as related working capital movements, resulting in an underlying cash generation of GBP 24.5 million in the period. Interest paid is expected to be materially lower going forward, in line with the reduction in debt, and the tax payments will largely reflect the corporate tax rates in the U.K. The corporate activity inflow of GBP 2.3 billion reflects the net proceeds of the sale of Student and Transit after direct costs relating to the sale and GBP 220 million in debt items that were transferred to the buyer. These proceeds were then applied in deleveraging the group and derisking the U.K. bus pension exposure. The discontinued and noncore operations was a cash outflow of GBP 35 million, and GBP 74 million has been paid into the Greyhound pension plans as part of the liability derisking. The exceptional cash outflow of GBP 54.9 million mainly reflects the payment of the termination sum agreed in SWR on exiting the former franchise agreement as well as the indirect transaction and separation costs following the sale of Student and Transit. Overall, this results in an adjusted net cash balance before rail ring-fenced cash and IFRS 16 of GBP 614 million at period end, with only the GBP 200 million 2024 bonds and finance leases outstanding. On Slide 11, there are several key cash flows relating to the strategy execution that will be completed after the reported period end. Moving from the GBP 614 million net cash position as at the 25th of September to the current net cash position as at the 6th of December, we received GBP 101 million on the Greyhound sale and have collected a further GBP 10 million post closing the transaction in asset realization. We have paid GBP 500 million to shareholders through the tender offer and incurred GBP 88 million net cash outflow from the continuing group over the period, driven mostly by the normal working capital flows after month end and bus CapEx and acquisitions. Looking ahead to beyond the 6th of December at the key cash flows to the full year 2022 year-end and the anticipated net debt position that we've guided of GBP 10 million to GBP 20 million, the following flows are anticipated to be incurred: payment of the agreed GBP 117 million escrow into the pension scheme; the Greyhound legacy insurance and pension derisking of about GBP 150 million; collection of the Greyhound post-sale amounts of circa GBP 50 million; as well as the other continuing group net cash inflows anticipated to be GBP 60 million to GBP 70 million that is after the expected spend on the CapEx in bus as well as the receipt of the rail dividends. In terms of anticipated future value buckets beyond full year 2022, the transit earnout has been fair valued at GBP 102 million at period end against a potential maximum of GBP 180 million. And this valuation assumes EQT do not sell transit by the backstop date of July 2024, at which point transit is fair valued and there is a purchase price adjustment. From the Greyhound sale, a net total of GBP 120 million is expected to be received made up of: the balance of the unconditional deferred consideration; rental on the retained properties and the ultimate sale of these properties; collection of the remaining CARES and ARP funding, offset by the remaining legacy liability payments, primarily relating to the final pension derisking. Pensions escrow release for the potential excess of the respective schemes reach self-sufficiency for bus in 2024 valuation on a gilts plus 50 basis points basis, covering GBP 95 million of escrow; and the 2030 valuation for the group scheme on a gilts plus 25 basis points, covering GBP 22 million of escrow. For both schemes, we are working closely with the trustee on both liability management and investment strategies to ensure the right balance is achieved to protect the value for shareholders. So in summary on Slide 12. Following the sale of Student and Transit, we set out clear financial framework, and we continue to make good progress against all of these items. Bus continues to progress efficiencies and the preparedness for when the full commercial model resumes that's expected during the full year 2023. Rail has relative certainty on full year 2022 and is in a strong position to make progress into full year '23, particularly with Hull and Lumo expected to move into profitability, as well as making further progress on the affiliate contracts. In the Corporate Center, we are on track for the GBP 10 million per annum saving, with GBP 5 million savings anticipated to be delivered in full year '22. The capital structure is now firm, with cash interest costs of roughly GBP 22 million per annum going forward. Furthermore, the group has substantial balance sheet flexibility to take advantage of opportunities in the sector as well as material future value to be generated through the transit earnout and Greyhound residual net asset realization. And finally, the Board anticipates declaring an ordinary dividend in line with the group's 3x cover ratio on rail management fee-adjusted attributable net earnings within the next 12 months. I'll now hand back to David for the business review.

Thanks, Ryan. There's obviously a lot of complexity in the financials for the 6-month period, which is unsurprising given the amount of corporate activity undertaken. However, in that context, I wanted just to step back for a moment for more the detail and review the big picture. Turning to Page 14. We first laid out this summary of the investment case back in April when we announced the Student and Transit disposals, but it bears repeating. You will know that First Bus is the second largest regional bus operator with 20% of the market, and Rail is the clear leader now with nearly 30% of passenger rail services. It is a critical inflection point for this industry, with a renewed emphasis on its potential to help with getting people out of their cars, improving air quality, reducing congestion and meeting its carbon emission targets. Public transport is also integral to generating economic growth and a source of green jobs as we seek to build back better and greener. And buses are the most cost-effective way to increase connectivity in and between communities and help to address city center decline. I will talk more about the innovation we continue to drive in each of the divisions, but particularly the availability of much more accurate passenger and other travel data really is a game changer for both running operations and for our service to our passengers. Under new leadership and a revamped senior team, First Bus is on track to deliver our stated objective. And the rail industry is undergoing a fundamental shift to a lower risk, more consistent business model that we believe should be more attractive to shareholders than the old franchising system. With their scale and experience, both businesses have real opportunities to act as a platform for future growth, both in adjacent markets to their core U.K. businesses and potentially in new geographies over time. And last but very much not least, FirstGroup stands ready as a critical enabler of society's ESG goals. We have always been a responsible business with a clear social purpose, and we have clear plans to help accelerate the transition to a zero carbon world. In any case, this investment case and the sources of further value all play into the financial framework Ryan referred to, supporting our clear plans to return to the dividend, less shortly. Turning to Page 15. As a passenger revenue-based business in normal times, FirstGroup is closely following the rebuild of passenger revenues as pandemic-related travel restrictions and guidance ease. We are seeing passenger numbers increasing to 71% of pre-pandemic levels. However, this is taking place at different rates in different parts of the country, with the North of England fastest, Wales much slower, and the Southeast, Southwestern Scotland somewhere in between. And we have also seen commercial volumes returning much faster than concessions. There has been some evidence of a slowdown in the rate of change in recent weeks, which we believe reflects guidance to limit travel still in place in Scotland and Wales, which represents over 1/4 of total revenues, as well as activity levels in many schools and universities acting as a bit of a ceiling for now. Of course, we have as yet seen very limited data on the effects of Omicron on volumes, but it appears negligible to date. And we do, of course, recognize the recent government guidance will have an impact. However, we do not see anything deterring us from our planning assumption at circa 80% to 90% over a relatively short period after travel guidance and restrictions end, but we are ready to implement networks reflecting whatever the level of demand. Turning to Page 16. As Ryan indicated, we are experiencing some headwinds, particularly driver availability, which we are actively managing. But we are confident we have the tools to deliver our 10% margin target in due course. The key levers remain the same. So let's run through them in turn. Passenger volumes are the key input. We have greater visibility than ever before on passenger travel patterns through our new digital tools. Based on these, plans are ready to go to realign networks to demand. These are constantly being reviewed to flex with actual passenger behavior. We're able to be more agile than ever before as a result. A series of cost efficiency actions already underway prior to the pandemic as well as locking in savings delivered last year. We have delivered GBP 4 million in annualized fixed savings and locked in another GBP 16 million in operational and other efficiencies. And we're in the process of implementing new engineering systems and new scheduling tools to further improve efficiency. As previously said, we are reviewing a small number of operating areas which are not performing at the levels required, and we're working hard with local authorities to find ways to ensure continued provision of service indicated by local demand. Finally, the program to review pricing policy to take account of the more detailed data available is progressing. We're aiming to enable more personalized pricing and continue the drive to digital ticketing and payments, which instantly is now 77% of all transactions and in some place even higher than that. For the first time since 2019, we are now implementing changes to our baskets affairs in some areas, which we expect to result in meaningful increases in yield in line with inflation being experienced, with similar changes rolling out across the division over the next 3 months. We've also implemented Tap on Tap off ticketing, including in Leicester and the Potteries in recent months, in response to strong passenger take-up in earlier trials as well as continuous improvements to our leading customer technology. Although the volume picture and possibility of further changes to travel guidance because of Omicron make prediction of the timing uncertain, we're still confident we have the tools to deliver our 10% margin in due course. Turning to Page 17. We talked at length about renewed recognition of the power of the vibrant bus networks by government. There is 2 aspects to this. First is the significant support maintained by all developed governments to maintain bus services as volumes rebuild. And having come this far, we are confident this will continue if the circumstances require, and that may be the case. In fact, the Scottish government have recently confirmed extension of funding until the end of March. Second, the longer-term investment plans are also moving forward, with real progress on the ground on both the service and decarbonization agendas. Bus service improvement plans in England are with the DfT for review, and they are planned to move forward mostly by our enhanced partnerships from April next year. As a reminder, these are the investments core to strengthening attractions of bus services for passengers in some local areas where perhaps it has not been a clear focus in the past. In the long run, we believe this will turn historic declining volumes around and will create passenger growth again. It doesn't take much. For example, a 1% switch from car trips in the 2- to 10-mile range to bus would actually increase total bus trips by 6%. Zero carbon funding is also coming through, evidenced by supported investments in York, Leicester and Glasgow to date, with more bids actively under consideration by relevant authorities. In summary, the government commitments here are really beginning to turn from ambition into reality. Turning to Page 18. Bus has been taking its own steps to develop its business. B2B business is growing. In the period, we acquired 50% of a company called SPS not already owned. This is a JV operating 156 buses on contract. And we successfully operated the official shuttle service contract for delegates with our electric fleet at COP26. Further opportunities are ahead in this growing space, with proposals recently made actively under consideration. Zero carbon is not just for the future. We've made real progress in Caledonia depot in Glasgow, which is well on the way to being the biggest EV charging hub in the U.K. with 24 buses operational, and this increases to 150 over the coming weeks and months. We've also announced an important partnership with Hitachi Europe as our prime strategic partner for the site, which includes battery as a service. And alongside other technologies and suppliers, we've been busy working for some time with Arrival, which is a PE-backed U.S. firm currently developing and building vehicles on behalf of UPS. And we're helping them develop their prototype, which is about to enter track testing and homologation before FirstGroup receives 4 vehicles which we will test in operational conditions. Assuming all works well, we will be taking the first 68 vehicles exclusively as they build out their U.K. production facility. This to me is a game changer. It's a fully flat floor, single deck, very modern concept feel built around software capability; so in building vehicle diagnostics, safety systems, dynamic real-time capability and comes without a significant price tag. These are all part of our efforts to achieve the optimal route to our zero carbon fleet by our 2035 commitment. Turning to Page 19. As you know, we are the U.K.'s largest operator with 4 contracted operations, providing passenger services on a management fee basis to the DfT. That's a market share of around 27%. And so far, we're delivering in line with our expectations on the passenger service-based metrics, which drive the performance fees in addition to the fixed fees. We welcome the Williams-Shapps white paper, which is taking the industry in a direction we've long been advocating for, a better balance of risk and reward and a model that places greater emphasis on the passenger. The Department of Transport and other industry participants, including ourselves, are working on making those changes a reality, which will, of course, take time. South Western Railway and TransPennine Express have moved already to the National Rail Contracts, which are themselves transitional to the new long-term passenger service contracts which are being developed in consultation with the industry. Great Western Railway and Avanti will move over to National Rail Contracts next year as their current arrangements come to an end, and the National Rail Contracts are expected to be up to 6 and 10 years long, respectively. All of this means that we remain confident that rail is becoming a clearer and more predictable earnings stream than in the past. Slide 20 is all about increasing revenues and profits we can and will earn beyond the passenger rail services provided by contracted DfT. Today, the majority of this revenue stream comes from our Open Access operations, Hull Trains and Lumo. As the only part of our rail operations were passenger revenue risk, Hull Trains has had a tough period as a result. The more recent trading has been hugely encouraging, with leisure travel the fastest recovering part of the rail industry. The recent Lumo start-up has gone exceptionally well, with driver training, branding and marketing culminating a really strong launch of passenger operations in October with 56,000 passengers carried to date, representing a load factors in excess of 85%. These businesses are innovative and a real opportunity to showcase expertise, and we expect both to turn profitable in FY '23. Remember, this is a GBP 20 million turnaround on this year. We talked in the summer about evo rail, where we and our technology partner have developed industry-leading technology to provide superfast WiFi onto trains. This is the only system in operation offering this potential. Installation will be progressing on the South Western Railway mainline in the coming months. And we're also progressing a number of trial opportunities in the U.K. and indeed other markets. As a result, we are growing in confidence that there is significant market opportunity for this technology, and we are investing heavily in the team to take advantage of it. Capability and expertise also picks up opportunities more directly affiliated with the DfT contracts. For example, in the period, we were awarded development partner work for the TransPennine Route upgrade. This actually generates additional fees of GBP 5 million. And we expect there to be other similar opportunities as Network Rail and the government continue to upgrade infrastructure across the north and elsewhere. So to summarize, let's turn to Page 21. We are delivering what we set out to do. We've unlocked the group's potential by refocusing on First Bus and First Rail. We have substantial additional value still to be realized from this process on top of the portion of proceeds returned to shareholders this month. The businesses have proven themselves to be resilient, and both our expectations for this year and the division's longer-term potential are maintained. Our prospects are exciting, underpinned by a renewed recognition of the value to society of vibrant public transport networks. We have laid out our expectation that the businesses are cash-generative and will soon support regular dividends even as we invest in a low-carbon future. And we have a strong balance sheet, which provides us with flexibility to capture the opportunities ahead. In addition to the intrinsic attractions of our core business, there are further sources of value to come over time from the deals already done. And I make no apology for reemphasizing that significant inflows will come from Greyhound property disposals and other items and, in particular, from the transit earnout as it manifests itself in the coming months or years. So with that, I'm completely confident of delivering again what we said we would do. We're on track, and we're ready to go forward. And with that, it's time to go to questions.

[Operator Instructions] First question comes from Joe Thomas of HSBC.

David and Ryan, it's Joe Thomas here from HSBC. I hope that you can hear me. Good. Right. Just a couple on bus and a couple on rail, please. Firstly, on the U.K. bus targets, can you -- you've helpfully given us a bit of a route map to that 10% margin target. I was just wondering, how much capacity you felt that you might need to take out in order to hit those sorts of targets, given what you've said about the volume recovery? And then secondly, you've also talked about getting underperforming businesses, either exiting them from the portfolio or getting them up. I just wonder how big those underperforming businesses are? And what the sort of dispersion is in terms of margin between them and the rest of the portfolio? So they're the questions on bus. And then on rail, can you just give -- just remind me, what sort of margin you think that you'll be able to achieve in the context of those contracts -- on those new contracts? And how much of the sort of performance you'll be able to hit? And then secondly, Lumo and Hull Trains, there's obviously a big uplift in profits or reduction in loss, I should say, from this year to next. How far do you think they can go? I mean, what is the sort of margin potential that you could make from them?

Is that the end of your questions, Joe? Because there's quite a few there.

Yes. Sorry. Actually, I categorized it as 2 and 2, but it might have been a bit more.

Yes, just a little bit. Thanks for your questions, Joe, and good to talk to you again. In terms of bus, I think as Ryan said, we've been operating consistently around 85% of mileage in the period during the pandemic. Clearly, it depends on passenger volumes. We're quite clear on the fact that we do expect passenger volumes to come back to somewhere between 80% and 90% as we come out of the restrictions contained within the pandemic. And you can expect mileage to reflect that sort of volume. I am absolutely confident that given the data that we actually have on passenger demand and passenger movements, we will design the network at the right level to provide the right level of service in accordance with the demand that is there. Which is why I'm then confident that from that platform, we have the ability to actually look at passenger growth as we go forward and start to build back better in a different way. I think the second one was relative to our low-performing areas. I have a trajectory and a confidence in mind that across the division, we will achieve our 10% margin. Some areas will be better than others. The return on capital will be attractive to shareholders. I think we have an action plan in place, most of which has already been delivered and locked in. I quoted the GBP 16 million operational cost delivery locked in for the case of this year. That reflects our lower-margin businesses as well. Fundamentally, it now comes down to the delivery of bus service improvement plans, how the government reacts to the bids that have been put in from all the local authorities and how we then consult with local authorities to design the network going forward. But clearly, as a commercial entity, we would not be wish -- looking to operate routes where we cannot make a sensible return. If I can move on to the NRCs or maybe hand over to Ryan to pick that up.

Yes. Joe, we have intentionally called out the sort of net attributable earnings under the management fee contracts on the basis that we don't -- they're not really sort of margin-driven. -- The fee structure is fixed as a base fee plus a performance fee that then gets measured against certain targets. We're accruing effectively an on-target performance, which means about 2/3 of that fee should be payable. I think under some of those measures, there's going to be wins. We will get to the 3 which is the top score, and on some of those, we probably aren't going to be performing at the level that we ideally would want to. So an average of about 2 seems about right for us. So it's not really a margin play on those. And then on the Hull Trains and Lumo trains. Hull Trains is doing roughly about sort of GBP 35 million pre-pandemic, and we don't see any reason why we can't get back to that kind of level. Based on the length of travel up to Edinburgh from London King's Cross on Lumo and running 5 train sets doing 10 services a day, we should be running at about that same sort of level once we fully emerge from the pandemic on Lumo. So you've got quite a nice, tidy GBP 70 million to GBP 80 million worth of revenue coming out of those 2. Both of those businesses have got leased trains, so they're under operating lease which comes to an end at the end of the Open Access contracts. And so the margins, as a consequence, are slightly lower on those services, as a result, of roughly around about sort of 5% -- the sort of mid-single-digit margins once we get to stability.

I think it's useful to add, Joe. I'll put Ryan on the spot here because I don't know the answer. Hull Trains pre-pandemic was actually making GBP 3 million or GBP 4 million a year, just to give you a flavor of that. But we're very confident that we've got the right product. The early take-up on Lumo is above our expectations, frankly. And it will be interesting to see how that develops. And it is all leisure-related. So we're not even attacking the flight market, if I can put it that way, which is where we expect a lot of growth to come from. So that business, commuting, transportation has still not manifested itself. So I'm actually quite excited about where that could actually go.

Okay. So sort of GBP 8 million to GBP 10 million profit ultimately is the sort of number we might expect from them?

Yes, that sort of that high single-digit profit margins once we kind of return back to whatever the new normal is going to look like in terms of passenger demand from those 2. And then above that, we've clearly got the affiliate contracts of FCC in a sort of a customer servicing area. We've got Mistral Data, which is a sort of more of a technology play on managing a massive amount of information for the rail sector. And we're not going to see the benefits of evo rail for some time to come through just yet, given the fact that we've got to sign up the contracts and then do the installation of the hardware for delivery of that high-speed broadband on trains. And so the profile going forward is out of the sort of non-management fee top side of the business is substantial.

The next question comes from the line of Alex Paterson.

Just a couple of questions from me on rail, please. Just on the Open Access operators, I wonder if you could just talk a little bit about the sort of assumptions in order to deliver that kind of revenue. You mentioned 85% load factor. Is that what you'd sort of expect going forward? And then on the capacity side, is it -- for Lumo, it sounds like it's 10 services a day. Could you say what that is for Hull Trains, please? And then secondly, this is -- I appreciate it's going to be a little bit of a technical question. But you've given a rail attributable net income from management fee-based TOCs. How does that relate to a sort of an adjusted operating profit for rail? I think your net income was on IAS 17. Obviously, you'll be reporting under IFRS 16. How can we kind of compare the 2, please?

Do you want to answer that one first, Ryan?

Yes. I think that IFRS 16 wreaks havoc on our reported numbers on the basis that we've got a sort of a fixed fee that we earn for our efforts. That's the thing we've got to constantly bear in mind when it comes to these management fee TOCs. We've got a fixed fee that we earn. So as a result of having to capitalize these, it's really -- it's a technical question, Joe (sic) [ Alex ], so I'm going to give you a very technical answer. On the basis we've got to capitalize the rolling stock under the lease terms or under at least the term of the NRC, it results in a disproportionate amount of money going either on the interest line or the depreciation line, which has a massive influence on the adjusted operating profit. Hence, we've come up with the alternative measure. Because as you can see for the rail earnings in the period, the rail earnings in the period are down GBP 20 million broadly year-on-year. But if you do the math on the stuff outside of the Train Operating Companies, we made a loss of GBP 7.6 million, that's only down GBP 10 million. The net attributable earnings out of the 2 -- out of the 4 franchises are only down marginally. And so we've got a bit of a disconnect there that happens under the actual adjusted operating profit. So -- and unfortunately, it's just one of the sort of technical areas which is going to be subject to volatility, which is going to be dependent on the length of the contract and the scale of capitalization of the rolling stock. There's not going to be sort of a definitive answer that I can say to you, take the net attributable earnings and multiply it by a factor to give you the adjusted operating profit. Unfortunately, it just won't work like that.