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

Welcome to the presentation of FirstGroup plc's results for the 52 weeks to the 25th of March 2023. Presenting today are Graham Sutherland, Chief Executive Officer; 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 FirstGroup website, where you can also find today's presentation slides and other materials. I will now hand over to Graham.

Okay. Thank you, and good morning, everyone, and welcome to the FirstGroup 2023 full year results presentation. We move on to the first slide. In a moment, I will hand over to Ryan to take you through the financial performance for the year, after which I will provide an update on the business performance and our plans before we take your questions at the end. Let me start by saying that we have delivered a strong set of results in 2023 and ahead of our expectations despite our challenging economic and industrial relations environment. Group adjusted attributable profit has more than doubled to GBP 82 million, driven by good progress in bus and excellent performance in our rail open access operations. Our strategy continues to deliver as we focus on improvement in operational performance, continued investment in growth opportunities, leading on decarbonization and public transport and delivering value to our shareholders. We have deployed GBP 37 million of growth capital in bus, mainly acquisitions and invested capital expenditure of GBP 94 million. Our final dividend recommendation of 2.9p per share, 3.8p full year reflects our progressive dividend policy and earnings growth in full year 2023. Following realization of some of the proceeds of our North America exit we launched a GBP 75 million on-market share buyback program in December 2022. Today, we have proposed an additional buyback program of GBP 115 million subject to the usual approvals at the Annual General Meeting in July. This is aligned to the realization of receipts from the sale of Greyhound properties in December 2022 and the anticipated receipt of the First Transit earnout over the next few months. Our focus is on delivering for our customers, and we remain positive about the future opportunities for FirstGroup. We have an organization with deep expertise and experience, and this will stand us in good stead as we further develop and deliver growth opportunities for our business, which is a vital role to play in the sustainability and economic growth agendas. I will now hand over to Ryan who will take us through our financial results.

Thank you, Graham, and good morning, everyone. This has been another period of strong financial delivery despite the macro and economic headwinds that we faced during the year. In my presentation, I'll be covering the following 3 areas: firstly, the strong progress in the financial performance across the Group. Secondly, the delivery of the vast majority of the contingent value from the exit of North America. And finally, the guidance for full year 2024 and the capital allocation, including the additional share buyback of GBP 115 million announced today, bringing the total surplus capital to be returned to GBP 190 million following the exit from the legacy North America. Turning to the financial summary on Slide 5. The group's continuing business revenues are up GBP 163.9 million year-on-year as passenger demand improved and net fare increases were implemented, that were partly offset by lower government grant funding as passenger volumes continue to recover. The revenue improvements have, however, been partly offset by cost increases. And our key financial performance measure of adjusted attributable profit that adjusts profits to include only the net attributable earnings from the management fee-based rail contracts more than doubled to GBP 82.1 million. Adjusted operating profit at GBP 161 million was up GBP 54.3 million or 51% and combined with lower interest costs due to the deleveraging in the prior year, and the partial buyback of the GBP 200 million 2024 bond in the current year meant that adjusted profit before tax at GBP 104.2 million is up GBP 79.4 million year-on-year. Adjusted EPS were 10.6p, up 9p on the prior year with the current year benefiting from the impact of the reduced number of shares in issue following the share buyback that commenced in December 2022. And by year-end, 4% of the shares in issue were acquired. This robust underlying business performance and strength of the balance sheet have resulted in the Board recommending a final dividend of 2.9p per share, in line with the current policy meaning that for the full year, a total dividend of 3.8p per share is being paid, having recommended paying a dividend in the prior year. The adjusted net cash for the Group ended the year at GBP 109.9 million versus a net debt of GBP 3.9 million at full year 2022, and this benefiting from strong underlying cash generation as well as the proceeds from Greyhound being partially offset by the capital deployment. Turning to bus performance on Slide 6. Bus revenues are up GBP 112.6 million or 14%, with higher commercial and complementary business revenues, only partially offset by lower government revenue grants, where these were down GBP 42.8 million year-on-year. The increase in revenue has been underpinned by solid passenger demand growth as well as continued expansion into the B2B and contract markets in both organic and inorganic activities. Passenger volumes were up 20% to 390 million, with 168 million miles being run, which is down 9% year-on-year. The mileage and passenger volumes include Scotland East to the point of sale and of Southampton to the point of closure during the year. The passenger volume growth, combined with the inflationary fare increases has resulted in revenue per mile increasing 26% as the business progressed, the realignment of the network to more fully commercial demand model. Revenue growth has also benefited from the full year impact of the acquisition of the remaining 50% stake in SPS in the prior year and further progress in the B2B market with revenues of GBP 175 million, up GBP 54 million year-on-year. The strong revenue growth, however, has been partially offset by inflationary cost increases of circa GBP 48 million, particularly in driver wages. Our fuel hedging policy has provided protection against the year-on-year increases in fuel costs. And looking ahead, 85% of full year 2024 and 55% of full year '25 has been hedged. We have also commenced electricity hedging this calendar year, given the greater exposure with the increased electrification of the fleet. Details of both the fuel and electricity hedging is in the appendix of the presentation. As a result, bus delivered an operating profit of GBP 58.4 million at a margin of 6.5% versus GBP 45.2 million at 5.7% in the prior year, with the prior year margin benefiting from how the grant funding was applied. The sequential margin improvement reflects a decent trend in the second half at 7.9% and a good progress towards the 10% target. Turning to rail on Slide 7. The Rail business consists of 3 components, each with different value and returns profiles. Firstly, the contracted rail for the management fee TOCs where the group takes no revenue risk and limited cost risk. Secondly, the open access business of Hull Trains and Lumo with both open access service focused [indiscernible] on the stronger leisure markets. And finally, the additional services contract business where First Rail provides services into the wider rail market. For the management fee TOCs, these delivered an attributable earnings after tax and minority interest of GBP 38.7 million to degree. This is marginally down on the prior year. This result benefited from stronger actual performance scores from full year 2022 than was initially accrued and TPE benefiting from the Transpennine Route Upgrade project that was entered into in the second half of full year '22, where the Group earned additional fees. These strong performances were offset by GWR moving to an NRC in the current year at lower margin versus the previous EMA, but now also includes Heathrow Express management as an additional service. And the impact on certain performance scores as a result of industrial action. The open access business has made a combined profit of GBP 19.6 million in the year due to the strong demand versus a loss of GBP 16.6 million in the prior year. With the prior year impacted by the start-up costs at Lumo that launched in October 2021 and the pandemic impact of Hull Trains, this materially improved performance of GBP 36.2 million year-on-year is a significant driver for the Group's profit growth in the year, and both businesses are performing ahead of our expectations with stronger-than-anticipated passenger demand providing the ability to drive further yield improvements. The additional services in Rail delivered an operating profit of GBP 11.9 million, up GBP 5 million on the prior year with the tram business benefiting from settlements relating to prior periods and strong performance in the first contact center as passenger volumes growing. Turning to Slide 8 on our key financial performance metric of underlying earnings generated that are attributable to shareholders. It's pleasing that all divisions have contributed to the more than doubling of attributable profit during the year. At First Bus, the increase in operational leverage during the year contributed GBP 13.2 million to the improvement. And at rail, the more diversified portfolio with a greater proportion of earnings coming from outside of the management fee TOCs has meant that First Rail contributed strongly to the Group's financial growth overall. At the Corporate Center, group costs have decreased GBP 4.1 million, and cash interest was GBP 6.6 million lower against the pro forma of the prior year, given the significant delevering following the business disposals that concluded in full year 2022 and the GBP 16 million bond buyback in the current year. Interest for this measure consists of the interest on the 2024 bond and interest incurred on bus finance leases, which are partly offset by interest earned on the Group's cash deposits. The effective tax rate for the year was 19.6%, slightly ahead of the statutory rates due to the impact of prior year adjustments in the current year and as a result of the significantly higher profitability, this has meant that there is an additional GBP 12.4 million tax in the current year. This results in a GBP 45.9 million increase in attributable profits to GBP 82.1 million being delivered in the year. And this increase in earnings momentum, combined with the confidence in continued business delivery, has meant that the Board has recommended a final dividend of GBP 20 million. Turning to the cash flow for the year on Slide 9. Given the rail management fee franchises take no revenue risk and limited cost risk, and hence the related IFRS 16 leases and rail ring-fenced cash movements that has a material impact on the reported financial statements is not really relevant to the overall Group underlying performance. We have separately identified the underlying adjusted cash movements ignoring the ring-fenced cash and IFRS 16. The Group generated GBP 116.3 million EBITDA before management fee TOCs and received GBP 48.7 million in distributions in arrears from the management fee TOCs. Working capital was a net GBP 3.3 million inflow, with this being a fairly stable position and has resulted in a total of GBP 168 million in capital generated from operations. This underlying capital generated was deployed and investing GBP 96.6 million in CapEx primarily in bus on the electrification of fleet, with the average age now in bus down to 9.1 years from 10.1 years in the prior year as well as investing GBP 36.8 million in growth including the Ensignbus acquisition in Essex, Metro line in Bristol, the third payment for the SPS acquisition following the contract extension and Airporter acquisition in Ireland. First Bus generated GBP 24.4 million of disposals in the year, which includes Scotland East as well as certain bus batteries relating to the first EV deliveries in Caledonia. The bus battery ownership in financing structures remains an interesting space that we continue to evaluate as the business ramps up, electrification scale, and Graham will cover this later in his presentation. GBP 40 million is paid in cash interest and a nominal amount of cash tax was paid with the low level of cash tax driven by historical losses and accelerated capital allowances that should be able to apply for several years yet. GBP 14.7 million was spent by way of ordinary dividend in the year and GBP 116.4 million was realized from legacy Greyhound assets receipts in the year, partially offset by pension and insurance payments and legacy environmental remediation costs and GBP 31.6 million of the GBP 75 million share buyback program is executed by year-end. The other movements outflow of GBP 1.6 million includes shares acquired of circa GBP 9 million over and above the [indiscernible] scheme costs in EBITDA, partially offset by GBP 12 million return from the Aberdeen Local Government Pension Scheme that's in surplus. This resulted in the Group ending the year with GBP 109.9 million net cash versus a net debt of GBP 3.9 million in the prior year. Turning to Slide 10. As a reminder, for the U.K. pensions exposure, the Bus and Group scheme IAS 19 surplus was GBP 15 million before the GBP 117 million that has been contributed into escrow through a limited partnership, of which GBP 95 million related to the bus scheme and GBP 22 million relates to the group scheme. The funding levels of the group and bus scheme combined versus the low dependency targets has improved roughly GBP 60 million year-on-year to a funding deficit of around GBP 146 million. And whilst there's no certainty as to how the financial actuarial markets may perform in the coming years, this trend in funding levels on an agreed basis provides a certain level of confidence in receiving some of the escrow monies back. The local government pension schemes in bus have also reported restricted surplus of GBP 22 million, with some further opportunity in this area as has been demonstrated by the GBP 12 million surplus return to date. At Greyhound, we are in the process of effectively buying out the pension liabilities at the anticipated costs broadly in line with the IAS 19 valuations of circa $11 million, and the legacy self-insurance obligations have been derisked with circa $7 million remaining, that is in runoff. The remaining assets of Greyhound, including a few residual properties means that on a net basis, we do not expect any material cash flows from Greyhound in total with the remaining assets broadly sufficient to discharge the remaining liabilities. EQT have also completed the disposal of the transit business to Transdev. And based on the draft information provided, it is estimated that the Group will receive circa $89 million from the earnout to be paid to us in the coming months. Turning to Slide 11 and the disciplined capital allocation and balance sheet strength. The Group's capital allocation decisions are based on delivering value for shareholders, with all investment decisions required to exceed the Group's pretax WACC of 10%. With the IRRs required appropriately adjusted for any risk of deploying the capital on a project-by-project basis. At bus, we deployed GBP 94.3 million net CapEx, including the electrification of the fleets and depots where this remains a priority after successfully applying for funding in both England and Scotland. This is an area that the Group will continue to accelerate to the extent that government funding is available, given the substantially greater upfront CapEx costs for electrification these equivalents. As demonstrated in full year 2023, inorganic growth is also a priority given the relatively fragmented nature of the sector and the opportunities that exist. At rail, the model remains capital light in terms of group investment. And given the scale and diversity of both the 3 management fee TOCs and open access operations, combined with additional services business, the rail division should continue to be materially cash generative for investors. In terms of capital available for deployment, the financial policy is net debt to adjusted EBITDA of less than 2x, meaning that the business retains substantial flexibility to be opportunistic for capital deployment. It's pleasing to note that Fitch has recognized the strength of the balance sheet and the quality of the business and this, combined with the financial framework that the Group applies has resulted in upgrading the Group to BBB-Flat with a stable outlook as well as an improved short-term credit quality to being good. The dividend policy is set at 3x cover against the Group's attributable adjusted profits. And for this to be a progressive policy in both policy terms as well as value per share over time with the absolute values per share anticipated to benefit from both the growth in profitability as well as the reducing number of shares following the share buyback program. Finally, the financial outlook for full year '24 on Slide 12. The Group has made significant progress year-on-year, and the outlook for the year is in line with our expectations with the benefit of the continued improvement in the mix of earnings, and this progress is despite the continued macro and economic headwinds. The bus business is anticipating to make sequential progress in operating profits in full year 2024 despite the wider inflation and economic challenges that lie ahead and anticipating to deploying CapEx of GBP 130 million net of grants, mainly on the electrification of fleet and depots. At rail, we anticipate delivering a result in full '24 in line with our expectations despite TPE not being extended. We expect to continue earning management fees from the 3 TOCs in line with expectations, recognizing the challenges as a result of industrial action that are being addressed. And at the open access and additional rail services businesses, we anticipate to deliver results at least in line with full year 2023 given the strong demand in open access, partially offset by inflationary cost pressures and track access charges that come into effect this year in Lumo. We anticipate incurring GBP 70 million in interest, of which GBP 60 million related to IFRS 16 charges due mainly to new rail leases and taxation for the current year is anticipated to be at 25%, in line with government announcements. We anticipate to end the year in a net cash position of roughly GBP 10 million to GBP 20 million after paying ordinary dividends in line with the 3x policy and assuming the completion of circa GBP 158 million of the outstanding share buyback program, with the GBP 115 million extension subject to shareholder approval at the AGM. The strong well-capitalized balance sheet provides the Group with great flexibility and options for driving future value creation for our shareholders. And I'll hand back to Graham for the business review.

Thank you, Ryan, for the comprehensive financial update and a clear articulation of the financial progress made during full year 2023. I will now move on to cover the business review. Moving to Slide 14. We called out at the half year results that both divisions were in a period of transition. But our strong foundations and capability put us in a strong position to grow and create value. Our belief still holds despite short-term challenges that medium- to long-term government policy, demographics and environmental and social trends will support public transport growth. Full year 2023 has turned out to be a year of delivery against our strategy and operational plans. We have made significant progress, but still have much more to do over the coming years. Our sustainability credentials continue to develop with a fourth consecutive appearance in the Clean200 Report and the only U.K. public transport operator to be included in the 2022 S&P Sustainability yearbook. I will be covering all the key takeaways on this slide on bus and rail in detail in the upcoming slides. Now turning now to bus on Slide 15. It's been a challenging year for the bus team as we transition to a more commercial model as funding support reduces across the sector and industry-wide inflationary pressures remained. Considerable progress has been made in aligning our operated mileage with passenger demand, and this has resulted in running 9% less miles than full year 2022. As you can see on the bridge, bus adjusted operating profit reflects significant movements in several key items. It is worth noting that we have improved adjusted operating profit from GBP 21 million in half one to GBP 38 million in the second half of the year. Passenger volumes have grown more strongly in the second half and are up 20% compared to full year 2022. This growth has been aided by free under-22 travel in Scotland and the GBP 2 fare cap in England. Volumes in Scotland are up 19.8%; in England, up 19.5% and Wales 33%. We welcomed the recent announcement of further funding clarity in England. And we believe it will continue to support passenger demand in full year 2024. We have yet to receive final confirmation on the detailed funding proposal, but believe it would be broadly positive for the remainder of full year 2024. The bus team has effectively managed the significant pressure on inflation on our cost base with an average driver pay settlements of 7% during the year. We expect inflationary pressures to continue in full year 2024 as just over half of our wage agreements are in the process of renewal this year. Operational performance has continued to improve in the second half of the year with stable operative mileage and increased driver availability. We were able to add net 324 drivers over the last 7 months as our recruitment and retention activities have started to deliver really positive outcomes. We also continue to work on the rebalancing of the bus portfolio to improve our operating margin with the sale of First Scotland East and the closure of our Southampton based operations completed during the year. This work will continue in full year 2024 as we drive to improve margins across the whole portfolio. The last 12 months have also shown progression against our decarbonization goals. Working closely with government, we've been able to attain funding to support the order of around 400 electric buses and to support significant investment in electric infrastructure at 4 depots. Moving on to Slide 16. In First Bus, we're also focused on opportunities for growth in areas that leverage our capability, assets and overall footprint. We have created a solid base in workplace shuttles in corporate transports, Airport City Express services and rail replacement services. We're able to differentiate our service capability by making use of our national footprint, our core bus assets and first travel solutions of contracted network and our capability to effectively manage large customers. During the year, we've been able to achieve growth in our adjacent services businesses through successful contract bids as well as through acquisition, namely Ensignbus and Airporter. We've grown revenue during the year to GBP 175 million which is promising progress and we are encouraged by the opportunity for further growth in this area of the market. Turning now to Slide 17. The Group's decarbonization goals are a key part of our strategy and we've made significant progress in bus during the year. Working closely with government, we've been able to accelerate our investment in our electric bus fleet and the related infrastructure required our depots, we issued delivery of 83 electric buses, installed 58 charges and also installed solar panels on 20 depots during the year. The solar panels will ensure that our depots will be largely self-sufficient on all non-bus power requirements. We've also placed orders for circa 400 buses to be delivered by March 2024 and with the vast majority being manufactured in the U.K. A number of these new bus orders also have different battery packs, extending route length capability. This will enable us to have circa 14% of our fleet electric by the end of this financial year. We have also been developing opportunities for future value creation on the back of the transition to an electric fleet and fully electric depot infrastructure. It is early days, but we want to maintain optionality to participate in this value chain and to optimize our own depot assets. We expect to make progress over the next year in the areas of B2B and B2C charging and also in participation and residual battery value. We will also gain significant knowledge and insight on our operational costs as we transition 4 depots in England to a wholly electric infrastructure. Moving on to rail on Slide 18. The Lumo open access operation has made significant progress in full year 2023 and exceeded our expectations. It has also demonstrated that First Rail has the experience, capability and entrepreneurial spirits to resolve challenges and innovate in the rail sector, deliver green transport and grow passenger demand. Revenue reached GBP 38.6 million in its first full year of operation and continues to perform well in the first few months of the financial year 2024. Seat capacity utilization of 71% has reached encouraging levels and passenger yields have continued to improve during the year. The service has helped to facilitate a modal shift from air to rail on the Edinburgh to London route, which has also benefited other rail operators on this route. The fully electric service ensures 95% lower carbon emissions compared to flying for an Edinburgh to London journey. The establishment of the Lumo brand has also been a success. Our people have embraced the new travel experience and ways of working, and we were delighted when they recently received best overall operator based on customer sentiment at the World Passenger Awards. Our truck access agreement will run to 2033. And given the progress over the last year, we continue to review options to expand the customer offering. Moving on to Slide 19. Hull Trains also had a positive year, exceeding our expectations with revenues reaching GBP 32.1 million, driven by growth in passenger journeys following the fall in volumes during the pandemic. We have seen a strong recovery in leisure volumes and also in business volumes, specifically in the last few months. As recently as March, Hull Trains led the industry recovery in passenger volumes when compared to '19, '20 pre-pandemic levels. Seat utilization has materially improved to 59% from 45% in the previous year. We are seeing the benefit from investing in a new fleet of bi-mode trains which has reduced carbon emissions by 57%. Improved reliability enabled us to run more services and more seats as we support increased customer demand. We're also benefiting from both Lumo and Hull Trains being run as one management team where we can leverage both marketing and service experience to enhance the overall open access business. Our track access agreement for Hull Trains runs to December 2032. And now moving on to Slide 20. It has been a challenging year for our management fee-based train operating companies, given the continuing industrial action. Attributable net income from management fee operations was circa GBP 39 million for the full year 2023, down from circa GBP 45 million in the previous year. As Ryan has already covered, this was largely due to GWR moving from an EMA to an NRC in June 2022. We were extremely disappointed that the TransPennine Express contract was not extended last month. As we've said before, the withdrawal of [indiscernible] working had a severe impact on our customers and our ability to run a full schedule. Our service recovery plan agreed by the Department for Transport was working, and we'd reduced cancellations by 40% by the time the contract expires. We continue to work with TPE supplying support services through First Rail under additional services businesses, FCC and Mistral. GWR had a strong year after we signed the NRC to 2028, which includes a 3-year extension period. The recent timetable changes increased services by 5%, providing better choice and flexibility for GWR customers. We're also encouraged with SWR extending its NRC by 2 years to 2025 as they commence a major introduction of new trains in the second half of full year 2024. Avanti has made a strong recovery in operational performance in the second half of full year 2023 and are running approximately 98% of all services. There's been a 40% increase in services compared to last summer and we remain in discussion with the Department for Transport on a longer-term contract from October 2023. Moving on to Slide 21. We're a leading rail operator in the U.K. with a strong platform to grow and diversify our earnings base. Our additional services businesses delivered an operating profit of almost GBP 12 million in full year 2023 versus $7 million in the previous year. These are scalable businesses that we will be able to market to other rail operators. We welcomed the recent position articulated by the Secretary of State highlighting that going forward, there will be an enhanced role for the private sector to reinvigorate the rail industry, drive innovation and attract more customers to the railway. As a leading operator, we will remain a key partner and the development of government contracts and to identify opportunities for increased revenue focus and the current management fee-based contracts. We are also actively reviewing opportunities to expand our portfolio with other contracting authorities. Moving on to Slide 23. It's been a challenging year for FirstGroup as we dealt with high levels of inflation and industry-wide industrial action in rail. That said, the business is in good shape with significant progress made in our financial performance. The Group adjusted attributable profit has more than doubled to reach GBP 82 million, together with delivery of material improvements and dividend per share and earnings per share. This is a testament to the resilience and capability of our people across the whole business. Bus remains on track to deliver a 10% margin after making good progress in the second half of full year 2023. Investment in decarbonization has accelerated, our drive towards greener transport, supporting our own and the government's goals and also opens up the potential to create adjacent value opportunities. Rail's excellent financial performance in full year 2023 was a step forward as we began to deliver on the full potential of our open access operations, and we remain firmly focused on operational delivery and securing longer-term national rail contracts for our management fee-based operations. Our leading role in the decarbonization of public transport remains on track. We're investing and remain committed to delivering our Net Zero goals by 2035. Our credentials continue to be recognized with recent endorsements in the Clean200 Report and the S&P Sustainability year. So in closing, we've delivered a significant improvement in our financial performance during full year 2023. We remain committed to financial discipline, our capital allocation policy, and we will continue to scan the market for growth opportunities that will deliver value to our shareholders. Thank you for your time today, and we will now open up for questions.

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

Congratulations on the strong results. So my first question is on open access, where there was quite impressive sequential improvement in H2, which was notable given you might think this would be a summer-weighted business. Was that sort of primarily driven by yield? And is there upside from annualizing that into the full year this year? Perhaps in addition, you could touch on which options to expand the customer offering under consideration. And secondly, on shareholder returns, the dividend remains well covered, but the buyback looks higher than what you may receive from North American proceeds. Could we read into this that the buyback maybe one of your options in addition to a regular dividend in years beyond the current financial year? And then perhaps finally, on bus, where bus CapEx is relatively high relative to current levels of EBITDA. Does this reflects confidence in the potential returns or payback periods that you may expect from investments in electrification? I'd just be interested in any comments on the economics -- the investments in electrification.

Okay. Well, thanks for a significant number of questions. We appreciate that. I mean on open access, I think I guess our first impression is if you go back a year, we would have thought there would be more seasonality in open access, but that's not really how it's played out. I mean leisure volumes during the majority of 2023 were maintained through the whole year. And obviously, on that route, there is a lot of travel between Edinburgh and London. So it stayed very consistent. Yield has improved and continue to improve during the year because we've had high demand for our services. And we effectively -- we manage every individual train service from 8, 10 weeks out, and we obviously managed through the whole process as seats are booked, quite similar to an airline. So we've seen strong yield improvement in the second half. Hull Trains, obviously, is good improvement in seat capacity. We see strong leisure volumes on those routes, too. And obviously, so if you sum up, I mean, I think Lumo's been driven by continual improvement and seat capacity and yield and Hull Trains has been driven by volumes fundamentally. And as we've entered this year, we've seen that continue to move forward. So I think that's been a fairly robust performance, right, all the way through the year. we think it will remain pretty consistent as we look forward. In terms of ability to expand customer offering, we're in case of Hull Trains, we build the option to more cars on and we have done that in high-demand routes already. And as we continue to improve and push forward with our marketing, we've got the flexibility to do that. And we still have seats available to sell on the existing capacity. On Lumo, we're looking at a number of options. But fundamentally, we still have -- we still feel we can improve our utilization as we go forward. So I think the outlook is encouraging. We're not complacent. It takes hard work to run these services at the level we've managed to do over the last few months. And we think that will continue. In terms of the -- Ryan, do you want to take the dividend [indiscernible] question.

Ruairi, on the shareholder returns, just a reminder, we exited the ground properties for about GBP 122 million, and we've got the transit earnout due to us in the next few months of roughly about GBP 70 million and broadly speaking. So the way that you should kind of look at that more is that, that capital return relates to the North American excess. In terms of the optionality on a go-forward basis, would we look at share buybacks rather than an order dividend as an alternative. I mean I think we'll just keep things under review as a board and decide the right approach at the time. But for the time being, we've got a progressive ordinary dividend policy, 3x cover -- progressive on cover over time as well as scale at the time, is the intention.

Yes. And we're comfortable with the current position that we have until the dividend, and we will continue to be progressive. And I think just to reinforce the point, the buyback reflects the return of North American proceeds. Its as simple as that. Yes.

And then on bus CapEx and the EBITDA ratio?

Yes. I mean I think on bus CapEx, I think we've been very successful in the last year of attracting government funding. And we feel it's commercially a strong proposition. So we've effectively upped our CapEx in 2024 on the back of our success in gaining government funding. So that acceleration is above the level, the kind of normalized level of GBP 80 million, GBP 90 million that we called out before. But we feel with a strong balance sheet, we're able to take advantage of the funding available, and we think is a big step forward for the business. And will bring us lots of learnings and lots of benefits in future years. So it's an attractive value proposition for us to do that at this point.

Next question comes from Gerald Khoo.

A few from me if I can. Starting in bus, I was wondering whether you could give an indication of what you think the size of the adjacent services market is? How the margins in that activity compare with say, normal commercial bus operations. And then more broadly in bus, what do you think needs to be done to get to your long-standing 10% margin target? And finally, one in rail in open access, you made reference to seat capacity utilization. What's the practical upper limit for seat capacity utilization in open access? I'm assuming you don't actually sell you only sell -- like an airline, you sell enough tickets to fill the seats and therefore, you don't -- an outstanding. But what's the -- the practical in it because presumably it's below 100%.

Yes. Okay. Thanks, Gerald. I appreciate the questions. I mean the adjacent services market, I mean, we've done our kind of bold internal assessment of that buildup from knowledge of contracts and regional insight, et cetera. And we think that market is well north of GBP 1 billion. And we obviously -- as we started looking into this over the last 12, 18 months, we felt we had the opportunity to grow. And we've done that through organic and inorganic means. So I think we made really good progress, but we still feel there's a way to go. I mean, we're one of the major bus operators in the U.K. we should have a decent share of that market. And we've got a footprint that we can leverage, which is attractive, and we've got very strong management capabilities. So we've called out what we've achieved, which we think is promising progress and we're going to work hard to improve it, and that's what we intend to do. So in terms of margins in that area, I think we can attain margins in line with our regional bus business. I think we've got the ability to do that given the assets that we have to deploy. In terms of the 10% margin target, we're certainly encouraged by progress in the second half. We have a plan, a detailed operating plan and we're working at it. I think realistically, we're kind of halfway through the opportunities we have internally to work on and resolve. I think the team have done a good job. So to me, it's more of the same. I mean it's -- the message is good progress, but much more to do fundamentally. So I think a lot of this is within our own gift, and we're going to work hard on our execution going forward. So our confidence is we called it out. This is a target a few years ago. I think the progress in the last 6 months reiterates that this is something we can achieve and potentially improve on as we go forward. In terms of open access capacity, I think it's -- clearly, it's unlikely to be 100%. I mean our kind of general management view would be somewhere around 80% will be reasonable and something that would still work from a passenger perspective. Some trends might be higher some trends might be lower, but we feel that's not an unreasonable number to push for and try and achieve over time.

And the next question comes from Alex Paterson.