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

Good morning, and thank you for joining us. Welcome to the presentation of FirstGroup plc's results for the 52 weeks to the 26th of March 2022. Presenting today are David Martin, Chairman; Graham Sutherland, Chief Executive Officer; and Ryan Mangold, Chief Financial Officer. In accordance with Takeover Code rules, this event is also being attended by one of our financial advisers. [Operator Instructions] And just to remind you, this event is being recorded and will appear in due course on the firstgroupplc.com website, where you can also find today's presentation slides and other materials. I'll now hand over to David.

Good morning, and thank you for joining us to review our full year results. I'm joined today by Graham Sutherland, who as you well know, started as CEO only a matter of a few weeks ago; and Ryan Mangold, our CFO. Let me start off by saying welcome to the new FirstGroup. In a moment, Ryan is going to take you through the financials focusing on the simpler continuing operation. After which Graham will pick up on the business update, and then I'll come back to close before we take questions. It's been an exceptional year of consistent execution and delivery by the whole team. And of course, all of this during an unprecedented pandemic. We have done everything we set out to do and consistently delivered a better than envisaged outcome. Just to recap, we have sold our 3 North American businesses for a full strategic value, delevered and derisked the balance sheet and strengthened our pensions positions. We've also returned GBP 500 million to shareholders, and we've completed the evolution of the Board culminating in the appointment of our new CEO recently. As we set out previously, there's further value still to come, and we made good progress in the period in realizing these 2. We're ahead of plan with respect to Greyhound and now advance with a property portfolio sale, which Ryan will touch upon later. This gives us confidence that we'll deliver at least $155 million as suggested. The transit earnout has a carrying value of $140 million and the maximum potential has now increased by $50 million following post-close contractual amendments. And as you'll recall, there's a further GBP 117 million in pensions escrow, some or all of which may be released over time. Turning to the results. We've delivered a strong financial performance in financial year '22, ahead of expectations. We now have a more resilient earnings base with First Bus now more agile. We have increasing longer-term visibility for First Rail supported by today's announcement of a national rail contract for GWR for a 3-year period with an option for a further 3 years, and we have additional earnings opportunities added in both divisions. This has enabled the Board to propose a resumption of dividends for the first time in 10 years, an important milestone for the company and indeed its investors. I make absolutely no apologies for repeating. This is a completely transformed business. I am confident that the new team at the helm will build on this progress, and the company is focused on consistent delivery, supported by the right culture that befits our vital role in connecting communities and meeting society's wider goals. As we look ahead, we now have solid foundations in place with lots of opportunities for long-term sustainable value creation in addition to the value already achieved. Before I hand over to Ryan, I feel sure there will be a question about the recent potential offer from I Squared Capital. I know you'll fully understand that under the takeover panel rules, there is nothing more than we can add beyond the public disclosures and our recent rejection of their offer. But I will just comment that the value we see in the business and in the sector more broadly is increasingly being recognized. Thank you, and over to Ryan.

Thank you, David, and good morning, everyone. Turning to Slide 5. This has been a significant year of delivery through the effective execution of the group's strategy and setting the business up for future success. In my presentation, I'll be covering the following 4 areas. Firstly, the solid underlying business performance as the group navigated through the crisis of the past year with operating profits ahead of expectations. Secondly, after returning GBP 500 million to shareholders, the group has a wealth capital strong balance sheet that has been significantly derisked. Thirdly, the future upside potential relating to certain matters following the sale of the North American businesses. And finally, the guidance for full year '23 and a reminder of our financial framework that has been applied in determining the final dividend that has been proposed. Turning to the financial summary, Slide 6. The group's continuing business revenues are up GBP 272.3 million year-on-year as passenger demand increased, that was partially offset by lower government grant funding. Our key financial performance measure of attributable adjusted profit that adjusts profits to include only the net attributable earnings from the 4 management fee-based rail contracts increased by GBP 16.3 million to GBP 36.2 million. And with the solid underlying business performance resulting in the Board proposing a final dividend for the year of GBP 0.011 per share. Adjusted EPS was GBP 0.016, up GBP 0.044 on the prior year, with the current year benefiting from the weighted average impact of the shares acquired in December 2021 with the tender offer. Following the proceeds from the execution of the sale of North American businesses, the significant derisking of pensions and legacy insurance liabilities and returning GBP 500 million to shareholders through the tender offer. This, combined with bus and rail cash generation in the year, the adjusted net debt ended the year at GBP 3.9 million, a GBP 1.4 billion improvement on the prior year. Turning to bus on Slide 7. The past year remained materially impacted by the effect of the pandemic on passenger volume demand despite running a high level of mileage. That being said, there was a steady recovery in passenger volumes as the pandemic restrictions eased and the passenger revenues were up 49% year-on-year. The lower-than-normal passenger demand levels were, however, offset by the government grant funding arrangements to ensure the business ran a high level of mileage, resulting in total revenues up GBP 91 million in the year to GBP 790 million. Revenue growth has also benefited from the acquisition of the remaining 50% stake in SPS, which is now fully consolidated that reported a GBP 15 million in revenue for the period since acquisition. Despite the lower passenger demand levels and navigating through the crisis, the business delivered an operating profit per year broadly in line with the pre-pandemic levels despite running circa 14% lower mileage in total across the business, with an operating profit margin of 5.7%, being 50 basis points ahead of full year '21. The situation for driver availability, particularly in the autumn of 2021, has now stabilized, albeit at a higher level of turnover and the recovery of recruitment, training and retention has improved more recently, but there is clearly a lot more to be done here. Our fuel hedging policy has provided protection against the recent increase in fuel costs. And looking ahead, 87% of our full year '23 and 53% of full year '24 has been hedged with these cost increases included in our business plans and forecasts. These inflationary pressures are currently being mitigated through net fare yield increases, including applying more sophisticated pricing models. In the short-term, the respective funding regimes in England, Scotland and Wales effectively operates to after the summer, albeit the grant mechanisms for each are slightly different. These funding approaches provide the commercial underpin for currently running a higher service levels than passenger demand levels, and it is anticipated that the commercial passenger demand levels continue to trend upwards from the circa 80% currently as the funding for higher service levels reduces. And however, we anticipate that this will not be symmetrical through the recovery. First Bus is currently preparing for the realignment of the network for October implementation to match passenger demand levels, and the business continues to implement data-driven pricing strategies, both of which provide confidence in our short to medium-term expectations. Turning to Rail on Slide 8. The Rail business consists of 3 components: Contracted rail for the 4 main train operating companies where the group takes no revenue risk and limited cost risk for which we earn a fixed management fee and performance fees. The Open Access businesses of Hull and Lumo that launched in October '21 and from April is now running the full 10 services between London and Edinburgh with both open access services focused more on the leisure market and the additional services contracts where the rail business provides services into the wider rail market. For the management fee tax, these delivered an attributable net after-tax and minority earnings of GBP 45.5 million to the group. This result benefited from a stronger performance than normal in GWR due to GWR still being on the original emergency measures agreement contract as well as settlements in the year of certain pre-pandemic claims with the DfT at both GWR and TPE. As announced this morning, GWR is moving on to a national rail contract from later this month at slightly lower financial benefits than under the current [ EMA ] terms, albeit with the group continuing to take no revenue risk and limited cost risk. The Open Access businesses made a combined loss of GBP 16.6 million in the year. This was lower than guidance for the year, with whole trains having been mothballed until May 2021 as a result of the impact of demand due to the pandemic. And at Lumo, this was loss making due to the start-up cost for this new business. It is pleasing to note that passenger demand in recent months means that both businesses are now operating profitably despite demand levels not being back fully to the anticipated levels, and this recent experience provides confidence in the expected turnaround to profitability for these businesses in full year '23. GBP 92.6 million in revenue has been generated in the additional services side of the rail business, generating a profit of GBP 6.9 million in the period. This result has been impacted by the startup costs for the evo-rail business that launched in full year '22 that provides high-speed broadband on trains and with Mistral Data, London Tram and the rail consulting businesses performing in line with expectations. Turning to Slide 9 on our key financial performance metrics that includes the net attributable earnings from the 4 management fee-based rail contracts. All businesses have delivered improved financial performance over the year. This combined with the cost savings at the center of GBP 6 million in the year being delivered ahead of the planned annual run rate savings of GBP 10 million per annum. Cash interest for this measure is pro forma in both years given the significant deleveraging following the business disposals and consists primarily of the interest on the GBP 200 million 2024 bonds and finance leases, where this cost is expected to reduce in future following the redemption of the bond. This results in a GBP 16.3 million increase in attributable profits to GBP 36.2 million for full year '22. This increase in earnings momentum, combined with the confidence and continued business delivery has meant that the Board has recommended a final dividend of circa GBP 8 million or GBP 0.011 per share, in line with the 3x cover policy with the final dividend being circa 2/3 of a full year dividend. The dividend proposed will be put to shareholders at the AGM for approval. The adjusted EBITDA, allowing for rail management fee attributable earnings is also applied in calculating leverage ratios against a policy of 2x and GBP 98.6 million in adjusted EBITDA was delivered in the period. This net debt potential compares with only GBP 3.9 million in adjusted net debt at the end of the year, meaning that we retain substantial balance sheet capacity going forwards for future and further value creation for investors. Turning to the cash flow for the year on Slide 10. Given the rail management fee franchises take no revenue risk and limited cost risk and IFRS 16 has a material impact in the financial statements for these franchises in recognizing the rolling stock leases, we have separately identified the underlying adjusted net debt movements, isolating ring-fenced cash and cash flows relating to the recognition of IFRS 16 leases. Focusing on the continuing group cash flows. On a pro forma basis, before exceptional cash flows, First Bus generated GBP 33.1 million with a solid EBITDA performance and working capital flows, partially offset by GBP 71 million invested in bus CapEx in the year. The rail business cash flows to group related to the dividends received from the management fee tax and the cash generated in additional services businesses that were partially offset by the cash outflow into the open access contracts of Hull and Lumo in the year and rail generated GBP 63.4 million in total for the group. The group items cash outflow of GBP 56.2 million includes the central costs, provisions movements and pro forma cash interest and tax cost of GBP 18.5 million, resulting in GBP 40.3 million underlying cash generation for the continuing group in the year. Exceptional cash flows where the full details are included in the appendix, include all the flows relating to the disposal of the North American businesses, including the balance sheet derisking and the GBP 500 million returned to shareholders. And the net of all of these flows resulted in the group ending the year with an adjusted net debt of GBP 3.9 million. Turning to Slide 11. The continuing group pensions obligations have been materially derisked during the year, including the GBP 220 million contribution into the bus scheme and the positive impact of asset performance and benefits from the changes in actuarial assumptions. GBP 117 million has been contributed into escrow through a limited partnership, of which GBP 95 million relates to the bus scheme and GBP 22 million relates to the group scheme. These escrow monies have the potential to be released back to the group if the low dependency funding targets are achieved by future triennial valuations. The GBP 117 million held in escrow is not included in the planned assets of the combined bus and group scheme under IAS 19, which shows a surplus of GBP 161 million, and there's no certainty how the financial and actuarial markets may perform in the coming years. However, we work closely with the trustees in liability management and investment strategies on the flat path to low dependency for each scheme as the medium-term target. It is worth noting that the local government pension schemes in bus are in a surplus of GBP 39 million, and having completed a buy-in for the membership of the Aberdeen local government pension scheme during full year 2022, GBP 12 million has been returned to the group since year-end. For the business disposals completed last year, the transit earnout has been prudently valued at $140 million in the accounts with the maximum potential now of $290 million following finalization of certain contractual matters. The earnout is triggered at an enterprise value above $380 million for the transit business, subject to the normal working capital and debt-like items adjustments to the base value versus the final value received on disposal of EQT or the arm's length valuation as of July 2024, if not yet disposed by this point. The carrying value of $140 million has been determined based on a stochastic discounted model and assumes that the business is not sold by July 2024. At Greyhound, the significant majority of the legacy self-insurance obligations have been derisked with only circa $12 million remaining that mainly relates to the Canadian business that ceased operating in March 2020. And there is circa $15 million in pension deficit remaining after the derisking that has been completed in the past year. The balance of Greyhound consists of the net value of the retained real estate portfolio, the receivables for CARES and ARP awards for the balance of the deferred consideration that's been paid monthly by the buyer. For the real estate portfolio, we are at an advanced stage of disposing the USA portfolio, with the net expected results for the full exit from the Greyhound from full year '23 onwards expected to be marginally ahead of the $155 million we guided with the half year results announcement. Turning to the financial outlook for the full year 2023, on Slide 12. For the bus business, we anticipate making further operating profit progress despite the wider economic uncertainty given the essential nature of the services we operate and the more agile business model that is better able to adapt passenger demand levels. At the rail business, we are on track for the turnaround in profitability at the Open Access businesses that made a loss of GBP 16.6 million in full year '22, and the additional services businesses are expected to continue to make progress in the year. With GWR transitioning to an NRC later this month on a 3 plus 3 basis to 2028, and there are ongoing discussions with the DfT for Avanti moving to an NRC later this year. The fee-based franchises remain well set for the year, albeit we anticipate a slightly lower result than full year '22, given the settlements of pre-pandemic claims at TPE and GWR. We anticipate further savings of circa GBP 5 million year-on-year at the Corporate Center, and we anticipate incurring GBP 70 million in interest, of which GBP 50 million relates to IFRS 16 charges that are expected to increase year-on-year due to the NRC at GWR and the related material capitalization of lease assets under IFRS 16. We anticipate to end the year in a marginally net cash position after incurring circa GBP 90 million net investment in bus CapEx and paying ordinary dividends. This net cash guidance is before any return of value from Greyhound property disposals or the transit earnout. Finally, the financial policy framework for the group has not changed from what we have set out previously. The business is well capitalized and cash generative despite the deployment of CapEx in bus, principally for the evolution towards electrification of the circa 5,000 bus fleet. Today's announcement includes the group returning to paying dividends after a decade, commencing a 3x cover, and it is anticipated that this will be a progressive dividend as we look forwards. We continue to explore adjacent organic and inorganic opportunities to drive growth where we believe that this will create value for shareholders, and we remain committed to considering further additional distributions to shareholders over time. I'll now hand over to Graham for the business review.

Thank you, Ryan, and good morning, everyone. As David said, I joined last month as Chief Executive and has certainly been an action-packed first few weeks. I was attracted to FirstGroup as it has many characteristics that are similar to businesses I have previously led, a provider of critical national infrastructure, a market leader with a large distributed business across the U.K. and Ireland, strong purpose in connection with local communities and significant contracts with government. These are all areas where I have experience and can add value. Before I go through the slides in turn, let me just provide some clarity on my short-term priorities. I will be focusing on the delivery of consistent and improving financial and operational performance. This is very important to me on the basis of creating sustainable shareholder value. I will also be focusing on a rigorous stress test of our strategy to ensure we are capturing all opportunities and effectively delivering on our capital allocation policy. I look forward to setting out more details on this later in the year. I will be also out visiting more of our operations, listening to our people to fully understand how we can continue to improve the business. So on to Slide 15. Passenger volumes in First Bus continue to recover and have recently reached 76% of pre-pandemic levels. The recovery has been varied. College and university demand is fully returned. The pensioner concession volumes remain around 60% of the pre-pandemic levels of 2019. As you'll have seen, unlike in rail, only 15% of our bus passengers were commuters even before the pandemic. The work-from-home effect is visible. So we're seeing some impact, albeit fairly limited. So demand generation and the ability to be flexible and responsive to our customers was vitally important. We continue to evolve with digital, now 70% of all tickets sold. We've also invested to ensure better data analytics, which has transformed our ability to manage demand, align our networks and improve our yields. On to Slide 16. The drive towards a 10% margin in First Bus continues. We've made progress in fiscal year '22, but margin growth was limited by the cost plus nature of some of our government support funding. The current year is critical as recovery funding tapers with an end anticipated in the autumn. We have clear plans to commercially align our networks and are already engaging with local authorities to deliver route plans that work for both of us. Funding from local authorities may be required to support routes in certain locations. The impact of inflation is also visible within the business. So far, we have been able to manage the impact through both pricing and cost mitigation. Our progress on digital and its impact on pricing strategy to both increase demand and improve yield has also been effective. We're securing yields commensurate with CPI. With employee and fuel costs combined making up around 75% of our cost base, good execution from the team on multiyear wage agreements and effective fuel hedging have also helped to mitigate the impact of inflation. Fiscal year '23 is a transitional year for First Bus, as we, by the rest of the industry exit government support. We have robust plans, a renewed and committed team and remain confident that we will continue to improve margins and profitability. On to Slide 17. I'm encouraged by the overall policy backdrop for First Bus. It is a well-supported sector with policy initiatives for demand generation, service improvement and acceleration to zero emission vehicles. I will not go through all the details on the slide. They are there to see, but there are 2 key takeaways. Firstly, First Bus continues to work closely with national and local stakeholders in England, Scotland and Wales as we recover from the pandemic. Secondly, we're also being successful in gaining funding support from both business service improvement plans and zero-emission bus regional areas. This enables FirstGroup to improve our customer experience and accelerate the shift to a zero emission fleet. Now on to Slide 18, on the outlook for First Bus. We're very sensitive to the current economic conditions and its impact on our customers' discretionary spending. It will impact our business, but we still expect our volumes and revenues to grow as the post-pandemic recovery continues. We have become more agile with significantly improved customer data. This ally to our operating leverage gives us the capability to continue to improve the financial and operational performance of First Bus. We'll be a trusted partner to all our stakeholders. We want to lead on the transition to a zero-emission fleet and can sustain investment given our levels of cash generation and government co-funding. And to close on bus, we have a broad base of opportunities to develop and scale this business. As I said earlier, we will review our strategy to ensure we are capturing all opportunities to develop regional bus and the additional services close to our core capabilities. Now on to First Rail on Slide 19. We continue to be a substantial operator as the government implements its new model for rail. We aim to deliver and then extend our national rail contracts with the Department for Transport to ensure contract visibility and tenure. The management fee-based operations have continued to successfully deliver consistent passenger performance metrics during the fiscal year. This has helped deliver an improving profit profile. South Western Railway has contracted to May 2025 as is TransPennine Express, where a prior information notice was also issued in March, indicating the potential of a 4 plus 4 year direct award. We end our emergency measures agreement on Great Western Railway this month and are delighted that we've just signed a national rail contract on a 3 plus 3 year agreement. West Coast Partnership remains under its emergency recovery measures agreement until October, but we aim to conclude the up to 10 year national rail contract in line with the prior information notice issued in August 2021. Clearly, the rail industry is embarking on a period of reform and you'll be aware that strike action is planned across the train operating companies and at Network Rail. We're disappointed that the unions are taking this action. Notwithstanding the fact that under management fee contracts, the operator bears no revenue risk and limited cost risk, prolonged industrial action presents enormous challenges for everyone and most importantly for our passengers to rely on these services for their daily lives. We will do all we can, working with our industry partners to minimize the effects of disruption on our passengers. On to Slide 20. First Rail has continued to make considerable progress on our Open Access operations, Lumo and Hull trains. These services primarily target leisure travel, which has been robust with volumes above pre-pandemic levels. Current demand for Open Access services is encouraging as we target at least GBP 35 million of annualized revenue from each. This will help us move these Open Access operations to profitability this year. We're also looking to further develop additional rail services. Good progress has been made in all areas: Consulting, London Trams, Mistral Data and First Customer Contact, are all profitable and delivering performance in line with our expectations. Evo-rail, our track-to-train WiFi connectivity solution is still in the start-up phase and moving to implementation on its first major contract with South Western Railway. So in summary, substantial progress was made last year in both First Bus and First Rail. Earnings have improved and provide a solid foundation for further progress in 2022-'23. I'm absolutely delighted to be here. It's a really exciting time for the sector and for FirstGroup, and I look forward to meeting many of you over the coming weeks and months. I will now hand back to David.

Thank you, Graham. I'd just like to summarize, you're all more than familiar with all the details on this slide, so I don't intend to go through them specifically. But I will just summarize by saying the company is well set with leading positions in bus and rail. We do have a strengthened balance sheet, which means we are now well placed to capitalize on the opportunities we see to create even more sustainable value, and this is evidenced by the proposal to reinstate dividends after a 10-year wait. And of course, the further sources of value that we have been pointing to since the sale of our North American businesses are now coming closer into view. Let me close by expressing my thanks to all our hard working and tenacious employees who deliver for our customers every single day. I also want to acknowledge the ongoing support of our shareholders. I'm confident that their faith in the business will continue to be justified. And that is the refreshed, repositioned, revitalized and ready to move on FirstGroup. All that's left for me to say is I commend this set of results to the house. Thank you. Now let's take any questions. But firstly, if I may, a quick reminder that we cannot comment at all on certain issues whilst we're in an offer period. So I would hope that you would respect that. Thank you. Any questions, please?

[Operator Instructions] The first question comes from the line of Ruairi Cullinane.

My first question is on labor costs in U.K. Bus. So where have you settled in wage agreements and what trends are you seeing in employee churn? My second question is on bus funding. So you noted in your release that First Bus regions received nearly 1/4 of the GBP 1 billion made available in April this year. So what kind of measures are you expecting to see introduced? And when do you expect this money to be spent? And finally, on capital allocation, perhaps you may not be able to comment given the circumstances, but some of your peers are focused on bolt-on acquisitions in U.K. Bus. Is this of interest to FirstGroup given your balance sheet strength?

If I may, just an immediate response and Graham can support it with any further detail. As far as pay is concerned, we do operate on multiyear agreements. So around 2/3 of our pay at the moment is subject to those agreements. So there are some negotiations ongoing. But we have it under as much control as we can do. In terms of driver attrition, it is slowing down, but it is still a real issue. We're focusing very much on recruitment and training and how we actually develop the right employee proposition to get people to join FirstGroup, and we're looking at different ways of attracting people in that sense. In terms of the BSIP plans, I'm absolutely delighted that I think FirstGroup has actually punched above its way in the context of the monies that have been offered. And we have a significant share of those and committed now to investing in electrification in a number of different cities, to quote some of them, Leicester, Norfolk, Portsmouth, Stoke, Aberdeen, Glasgow, so all over the country. Our Caledonian operation is now complete with all the infrastructure in place for the largest U.K.-based electrification on bus in the country, and we're looking at ways of monetizing that infrastructure as we go forward. In terms of capital allocation, I don't know if Ryan wants to say anything there, but clearly, any opportunities, and I'm sure Graham will come back to the market in short order, I think, to express his views on the overall strategic direction. We are aligned to all opportunities. I've been in the industry for 30 years, and I pretty much still know everything that is going on, and we need to be aware of those opportunities. And if there's something there that creates the right situation for us to develop significant shareholder value, we will certainly fully evaluate it.

Yes. Thanks, David. And I think just one thing to add as well there on wages. We have a number of different collective bargaining arrangements in First Bus. So we're always going to be dealing with that at any point in time. So the team are managing this over a multiyear horizon, and it's fairly well controlled. Obviously the current situation is challenging, but we're on top of it, and we're comfortable with our position at this point. And just to reinforce the point David's made around capital allocation and opportunities, we are constantly looking at both organic and inorganic opportunities of various sizes. And if we feel they will create long-term shareholder value, then we'll definitely look at them. That's for sure.

The next question comes from Gerald Khoo at Liberum.

Three from me, if I can. Firstly, you talked about the quite rapid increase in the take-up of digital tickets. I was wondering whether you could elaborate on where the benefits come from that both in terms of financial and nonfinancial. Secondly, I think you hinted that in advance of the ending of government funding in the autumn, you're looking at plans to cut back services. I was wondering whether you could give a rough ballpark figure of what sort of cut we should be thinking of? And finally a point of clarification, I think on TransPennine, you said that -- you talked about the prior information notice. Is that -- did you say that it was for a direct award from May 2025? Or are they going to go out to tender?

Okay. On -- in relation to data first, I mean, with the increase from sort of 20% digital tickets 3 years ago to 70% now, it affords us a lot more data and information about the route journeys, individual journeys and our ability to sort of understand how we can price and effectively provide better services and support demand increase as well. So as that continues, we get a completely different lens on our business, and it enables us to operate in a much more effective way. We're still in discussions with local authorities around routes. And at the end of the day, it's quite hard to call exactly what that will mean because, one, we haven't finished the exercise. And secondly, we do expect volumes to still increase from the current level. So we will have a judgment call to make as we go over the next few months in terms of how we realign our networks. But obviously, we're a commercial operation, and we expect to make the right decisions that are in the interest of First Bus. And obviously, if there's pinch points at a local level, we're more than happy to discuss the provision of those services assuming there would be some score for that. So that's fundamentally how we will look at data and how we will look at our network alignment over the next couple of months.

On TransPennine, Gerald, I think your question there, the prior information notice is out. As you know, we've been running TransPennine for several years. We have -- the fact that we're being incumbent and also advising and consulting Department of Transport on the TransPennine route upgrade, we think puts us in a hugely strong position. At the moment, I'm certainly not aware that there's any intention to go to a competitive bid in that sense. So our expectation is we will negotiate a direct award for that additional period with the Department of Transport.

[Operator Instructions] The next question comes from the line of Alex Paterson.

Can I ask 2 questions, please? Firstly, could you give a little bit of color on your expectations for, first, passenger volume recovery perhaps by type of passenger and also by geographic area, i.e., commercial passengers and so on? And then secondly, just in terms of evo-rail, 5G, I think you said that the first contract that you were working on was with SWR. Can you give any indications of other conversations going on, the discussions and what the future might hold for that? I mean, I had thought with the recovery in rail volumes, never has a need for better Wi-Fi and rail being stronger.

Very true your last comment, Alex, and I totally agree with you. But I'll pass it over to Graham to answer your questions.

On passenger volumes, we didn't see a complete linear recovery. It was different between, say, England, Scotland and Wales. I mean, where we are right now is England, Scotland fairly similar, Wales a little bit behind us. Some of the restrictions were held for a longer period. We still expect volumes to recover to the kind of 80%, between 80% and 90% levels. One concern we have at the moment is obviously on pensioner concessions. They've stayed fairly static around 60%, and they're roughly 30% of our volume. So that is a clear concern for us. It explains roughly 40% or 50% of the reduction from pre-pandemic levels across all of our base. So that's an area we will obviously want to discuss with the relevant stakeholders to see if we can encourage more social mobility and more use of our services. So at this stage, we still feel volumes will recover to the range that we've previously said. At the moment, we're at 76%, and that has improved a little bit over the last 3 or 4 months, and we're hopeful that will continue to happen. In terms then of evo-rail, I mean, it's a very interesting proposition and an exciting proposition. It's been tested, looks very effective. We're obviously have one contract signed, and we're moving into implementation. I think it's going to be a very important test. It's on the line from our Earlsfield to Basingstoke, I think. And I think that is a heavy volume route and it will really test out the service. We're obviously in discussion with a number of other organizations, both in the U.K. and outside the U.K. It's largely going to be a fairly large contract type scenario with upfront capital investment to be made and then obviously a kind of service fee that runs on the back of it. So I think it's an important development. It's still early stages, but it's one that we're hopeful that once we get the first couple of contracts at one implementation, it will then be seen as a really top quality solution for -- well, it's been an intractable problem for a long period of time, having come from that sector into transport. I'm well aware of discussions that have taken place over many years to try and solve this issue without much success to date. So we're encouraged by our solution. We've clearly got more to do. But I think we're going to have a pretty good view in the near future on the contracts that we have and how successful they're going to be.

Okay. Thank you, Alex. I hope that answers your questions.

The next question comes from the line of Jerry Thomas of HSBC.