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

Good morning, and thank you for joining us. Welcome to the presentation of FirstGroup plc's FY 2024 Half Year Results. 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 firstgroupplc.com website, where you can also find today's presentation slides and other materials. I will now hand over to Graham.

Thank you. Good morning, and welcome to the FirstGroup 2024 Half Year Results presentation. In a moment, I will hand over to Ryan to take you through the financial performance for the half year, after which I will provide an update on the business performance in Bus and Rail and also on our key priorities before we take your questions at the end. Let me start by saying that we have delivered another strong set of financial results in half year 2024. All key financial metrics show significant growth over the prior year despite the challenging economic and industrial relations environment. Group adjusted earnings per share at 8.1p has increased by 76% from 4.6p per share in the prior year. This has been driven by strong financial performance across all areas of the Bus and Rail businesses. We also finished the half year with adjusted net cash of GBP 77 million, which was up from GBP 7 million at the half year in 2023. First Bus continues to make very good progress with operating profit margin at 7.1%, up from 4.8% in half year 2023. This leaves us well positioned to deliver on our commitment of a 10% operating margin, and we expect to see continued improvement in the second half of the year. We have also recently entered a strategic partnership with Hitachi, which will help optimize our position in the decarbonization value chain that support Bus operating margin improvement over time. In First Rail, we've had an excellent start to the year with good execution on our national rail contracts and continued better-than-expected performance at our Lumo and Hull Trains open access operations. Our strong balance sheet and disciplined capital allocation policy has been maintained. This has facilitated the declaration of an interim dividend per share of 1.5p, up from 0.9p per share in the prior year. We have also continued our share buyback programs returning GBP 67 million in the period. Our strategy continues to deliver as we focus on continuous improvement in operational performance, driving modal shift in demand for our services, diversifying our portfolio to increase resilience and to focus on growth opportunities and leading on decarbonization public transport. We believe that continued focus on these priorities will deliver value to our shareholders. 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 space during the period. In my presentation, I'll be covering the following 3 areas: the strong progress in the financial performance across the group, the significant derisking of pension liabilities and finally, the guidance for the remainder of full year 2024. Turning to the financial summary on Slide 5. With the half year period being 30th of September versus the prior year of 24th of September, at Bus, there is an extra week in the period that has a minor benefit in the current year on the reported numbers. For the half, the Group's continuing business revenues are flat year-on-year as passenger demand improved, net fare increases and yield management were implemented in Bus and open access Rail combined with adjacent revenue growth were offset by lower government grant funding as passenger volumes continue to recover as well as the lower revenues in the management fee tax where the TPE contract ended in May. Given we take limited revenue risk on the management fee TOCs , the revenue improvements in Bus and open access Rail have only been partially offset by cost increases. And this, combined with higher variable fees that the management fee TOCs resulted in the adjusted operating profit for the group at GBP 100.6 million, up 52% year-on-year. We have simplified the adjusted earnings measure that excludes adjusting items and now also removes the net impact of IFRS 16 at the management fee TOCs given that we take no cost risk on the lease contracts. The positive business performance has also benefited from lower net finance costs, but has been impacted by the higher corporation tax rate, resulting in the group delivering GBP 36.5 million in earnings, up 66%. Adjusted EPS were 8.1p, up 76% on the prior year, with the current year benefiting from the impact of the reduced number of shares in issue from the share buyback program that commenced in December 2022, were circa 10.5% of the shares in issue have been acquired by the period end. This robust underlying business performance and strength of the balance sheet have resulted in the Board declaring an interim dividend of 1.5p per share versus 0.9p in the prior year. This is in line with the current dividend policy of 3x adjusted earnings. And going forward, given the progress that we have made with the share buyback, the progressive dividend cover ratio will be applied against our adjusted EPS measure in determining the dividend per share. The adjusted net cash for the group ended the period at GBP 77.1 million versus a net cash of GBP 7.3 million in the prior year. With a strong underlying cash generation from the business, the proceeds from the Greyhound property sales in the second half of the prior year and the part receipt of the transit earnout in the current year being partially offset by capital deployment in the business and returns to shareholders. Turning to the Bus performance on Slide 6, where the Bus is demonstrating progress towards the 10% margin target. Bus revenues were up GBP 77.2 million or 18% with higher commercial and adjacent services revenue growth only partially offset by lower government revenue grants, where these were down GBP 19.2 million. The increase in revenue has been underpinned by solid passenger demand growth as well as continued expansion into the B2B market and contract market in both organic and inorganic growth, where revenues from these segments have grown 80% year-on-year to GBP 116.2 million in the half year. This growth has however benefited from strong demand in Rail replacement, particularly at TPE where we don't expect this to continue at this elevated level. If you look at this at a trailing 12-month basis, the Bus business is now effectively a GBP 1 billion business that has demonstrated substantial growth over the past few years. Passenger volumes were up 12%, GBP 210 million, with 84 million miles being run, which is down 3% year-on-year. The mileage and passenger volume statistics include Scotland East to the point of sale and Southampton to the point of closure during the prior year. The network realignment to better match demand, combined with passenger volume growth has meant that passengers per mile have increased by 16%, and this operational leverage is a key driver of profitability improvement. The strong revenue growth has ever been partly offset by underlying inflationary cost increases of roughly circa 7% on the inflationary cost base, particularly in driver wages. Our fuel hedging policy has provided protection against the year-on-year increases in fuel costs. And looking ahead, 62% of full year of '25 and 17% of full year '26 has been hedged with our electricity hedging program reflecting similar coverage. Details of both fuel and electricity hedging are included in the appendix to the presentation. As a result, Bus delivered an operating profit of GBP 36 million at a margin of 7.1% versus GBP 20.7 million at 4.8% in the prior year. The sequential margin improvement of 7.1%, that is up 2.3 percentage points year-on-year reflects a decent trend in what is a seasonally lower first half and good progress towards our 10% margin target. Turning to Rail on Slide 7. The Rail business continues to deliver strong financial performance in the period, with reported adjusted operating profit at GBP 21.6 million. For the management fee TOCs, these delivered an attributable net income of GBP 23.2 million after tax and noncontrolling interests, up GBP 4.1 million in the prior year, with progress across all franchises. These results benefited from stronger actual performance scores in full year 2023 than it was initially accrued that have been recognized in the period. As a reminder, the performance fee element is generally predicted on delivering an on-target performance that reflects a 65% of the fee potential. And going forward, we expect the accounting for performance fees to be more stable, given how the scoring has changed that Graham will cover later in the presentation. The Open Access businesses made a combined operating profit of GBP 15.7 million in the period, up GBP 9 million, driven by continued strong demand and yield management, only partially offset by cost inflation. We expect the growth in demand and yield for these services to continue, which was partially tempered by cost increases, particularly access charges at Lumo that are now in effect following the launch in 2021. The additional services in Rail delivered an operating profit of GBP 6.4 million in the period, with steady progress in delivering by all businesses versus the prior year and where the prior year also included of some one-off benefits. Turning to Slide 8 on our key financial performance metric of underlying adjusted earnings. All divisions have continued to contribute to strong progress and growth year-on-year. As noted before, there is a change in the way that we calculate and present our adjusted earnings measure and that this now simply excludes the impact of IFRS 16 in the management fee TOCs given that this creates a high degree of earnings volatility that is not for our accounts. On this revised basis, the tax and noncontrolling interest relating to the management fee TOCs is not included in the relevant bar on the chart. At First Bus, the increase in operational leverage during the year contributed GBP 15.3 million to the improvement in operating profit. And at Rail, with the more diversified portfolio, a greater portion of earnings coming from outside the management fee TOCs has meant that growth in the First Rail profits is equally spread across the business. And that portfolio diversification is something that we're very pleased about. Interest costs were GBP 5.1 million lower due to the partial bond buyback as well as higher interest received on cash deposits. The effective tax rate for the period was 25%, in line with the higher U.K. corporate tax rate year-on-year. With the increased profitability, combined with the higher tax rate, has meant an additional GBP 13.8 million charge in tax year-on-year. This results in a GBP 22.5 million or 65% increase in attributable profits to GBP 56.5 million being delivered in the period. And this increase in earnings momentum combined with the confidence in continued business delivery has meant that the Board has declared an interim dividend of circa GBP 10 million in line with the policy of 1/3 interim and 2/3 final. Turning to the adjusted cash flow movements for the period on Slide 9 that excludes ring-fenced cash as well as the impact of IFRS 16. The Group generated GBP 71.6 million in EBITDA before Rail management fee TOC cash inflows, where we received GBP 5.8 million in distributions in the period. As a reminder, these management fees are generally paid following the completion of the statutory audit accounts of the entities in the second half of the year. Working capital was a net GBP 31.7 million outflow in the period, mainly relating to timing differences in receivables that are largely expected to reverse in the second half of the year and resulted in a total of GBP 46 million of capital generated from operation in what is a seasonally lower first half. This underlying capital generator was deployed and investing GBP 50.2 million in the CapEx, net of ground funding, primarily in Bus and electrification of the fleet and the average age of the bus continues to reduce and is down to 9 years. First Bus generates GBP 15 million in disposals, including the cash received from the Southampton depot from the prior year and the sale of certain fleet in the period as part of the reshaping of the fleet to better align to the network scale. GBP 4.9 million was paid in tax and interests mainly on the 2024 bond, offset by interest earned on cash balances, combined with nominal amount in cash tax with a lower level of cash tax driven by historical losses and the accelerated capital allowances that should now apply for several years yet given our decarbonization investment program. GBP 19.7 million has been paid by way of final dividend for the full year '23 year. GBP 48.9 million has been received in the period as the initial payment for the Transit earnout with the remaining amount anticipated to be received before the year-end at a level in line with the remaining fair value on the balance sheet of circa GBP 21 million and GBP 66.6 million of the share buyback program was executed in the period. The other movements outflow of GBP 1 million includes shares acquired by the Employee Benefit Trust of GBP 6 million and other movements, partially offset by foreign exchange cash inflows relating to the cash flow hedge settlements. This resulted in the group ending the period with GBP 77.1 million in net cash. Turning to Slide 10. This has been a busy period for discharging pensions liabilities as indicated in our recent trading update. And the Group has removed or insured GBP 1 billion of pension risk from the balance sheet. For the local government pension schemes in the U.K., we have terminated our participation in the Manchester and Aberdeen schemes at the end of October. And in so doing, we will be removing GBP 713 million of liabilities from the balance sheet. On exit from these schemes, we anticipate receiving a net cash return after costs of GBP 15 million from surplus. However, the accounting requires a recognition of GBP 142 million P&L adjusting charge offset by an actuarial gain of GBP 160 million in the consolidated statement of comprehensive income. The termination of participating in the local government pension schemes should result in a circa GBP 2 million to GBP 3 million overhead and cost savings in full year '25 onwards at the Bus business. At Greyhound, the pension derisking has removed circa GBP 250 million worth of pension liability risk from the balance sheet, where we have bought in the pension exposure in Canada, and we have partially bought out the pension exposure in the USA at a minimal cash costs. The remaining exposure in the USA is well hedged in terms of investment strategy until these liabilities are eventually annuitized in due course. In the U.K., we are also making good progress on the merger of the Bus and the Group scheme to drive operational efficiencies that should result in further cost savings in future years. As a reminder, the Bus and the Group pension escrow monies are held on the balance sheet as a financial asset and are not reported in net cash. In the period, GBP 24 million was paid to the Bus scheme from the escrow relating to the settlement for the GBP 500 million that was returned to shareholders in December 2021 following the exit of North America. The remaining balance in escrow is now GBP 97 million, of which GBP 72 million relates to the Bus scheme that is subject to finalizing the valuation in April 2024 and GBP 22 million related to the Group scheme that is subject to valuation in 2030, plus interest earned on the money of circa GBP 3 million. The funding levels of the Group and Bus scheme combined versus the low dependency targets has an improved circa GBP 46 million since the full year '23 year-end to circa GBP 100 million, and whilst there is no certainty as to how the financial and actuarial markets may perform in the coming years, this continued trend of improving funding levels on an agreed basis provides a certain level of confidence of receiving some of the escrow monies back. Finally, the financial outlook for full year '24 on Slide 11. The group has made significant progress year-to-date and the outlook for the year is in line with our expectations with the benefits of the continued improvement on the mix of earnings. The Bus business is anticipating to make sequential operating profit progress year-on-year in full year '24, in line with our expectations despite the wider inflation and economic challenges that lie ahead. At Rail, we anticipate delivering results in full year '24 in line with our expectations of continuing to earn management fees from the 3 TOCs in line with the expectations, recognizing the challenges as a result of the continuing industrial action that are being addressed and an open access and additional Rail services businesses are anticipated to deliver results ahead of full year '23, given the strong demand in Open Access, partially offset by inflation, cost pressures and track access charges. And at the Rail center, we are now incurring some bid costs for growth opportunities that the Rail team are evaluating. We anticipate incurring GBP 65 million in interest, of which GBP 60 million relates to IFRS 16 charges due mainly to the low-risk Rail leases as well as incurring a net cash interest cost of GBP 5 million. We remain on track to deploy GBP 115 million of CapEx net of grants in bus business mainly on the electrification of fleets and depots after taking into account the cash benefit of circa GBP 20 million from the Hitachi battery transaction that Graham will cover later in the presentation. We anticipate to end the year in a net cash position of GBP 40 million to GBP 50 million after paying ordinary dividends as well as assuming the completion of the remaining GBP 93 million outstanding from the share buyback program. The strong, well-capitalized balance sheet provides the Group with great flexibility and options for driving future value creation for shareholders. I'll now hand back to Graham for business review.

Thank you, Ryan, for the comprehensive financial update and insight on the progress made during the first half of 2024. I will now move on to cover the business review. Moving to Slide 13. The First Bus team continued to make good progress despite the challenging economic climate and results of industry-wide inflationary pressures. Adjusted operating profit in the period has increased to GBP 36 million, up 74% on the prior year. Considerable progress has been made in restructuring the business as we transition to a lower funding environment. The transformation of the business is delivering stronger foundations with a simplified operating model, and our increased capability puts us in a strong position to drive growth and create value. Our belief still holds despite short-term challenges on the economy, the medium- to long-term government policy, favorable demographics and environmental and societal trends will support public transport growth in the Bus sector. As you can see from the adjusted operating profit bridge, Bus continues to reflect significant profit movements in key items. Passenger volume growth is up 12% year-on-year with 22 million additional journeys in the first half. The volume growth has been aided by free under-22 travel in Scotland, the GBP 2 fare cap in England and the extra week in Half1, 2024. Volumes in Scotland are up 5%, 17% if you exclude the disposal for First Scotland East, England is up 14% and Wales 23%, partially due to lower volumes of prior year due to the slower exit in Wales and COVID restrictions. This growth allowed to improvements made in our network and service reliability have ensured that our revenue per mile has increased significantly by 22% over the prior year. We've also continued to experience a significant pressure of inflation on our cost base with our average driver pay settlements of circa 8% in the first half. We have now completed approximately 75% of all wage settlements due in the full year 2024. Inflation is still a major challenge for the business, but the team continued to manage in a balanced and effective manner. Operational performance has continued to improve with a more efficient network and better service delivery. An increase in driver recruitment has helped to improve prior year driver shortages. And we're also seeing the benefits of data-led efficiencies across our network. One example we're using prospective AI platform to accurately predict journey times and to facilitate the planning of more reliable timetables. This is delivering improved punctuality, reliability and ensuring our operating mileage is improving when we compare it to our scheduled mileage. We are now running at 98% operated mileage versus scheduled mileage, up from 96% in the prior year, and this is driving and improving customer experience. Moving to Slide 14. At First Bus, we continue to focus on growth opportunities in areas that leverage our capability, assets and overall footprint. We have created a solid base in workplace shuttles in corporate transport, Airport City Express services and Rail replacement services. We can differentiate our service capability by making use of our national footprint, our core bus assets, the First travel Solutions subcontracted network and our capability to effectively manage large customers. Our Adjacent Services revenues grew to GBP 116 million in Half1, up 78% on the prior year. This has been driven by the increased revenue in First Travel Solutions, new contract wins and the inclusion of acquisitions completed in full year 2023. This [indiscernible] strong progress made in the previous financial year as we continue to grow and diversify our bus revenue profile. We're also continuing to focus on franchising and partnership opportunities. We've been selected in July by transport for Greater Manchester to operate the Rochdale Franchise contract, which has also facilitated an additional franchise contract win to operate 6 schools bus services out of the Rochdale depot. We've also been focusing on enhanced partnerships with Leicester being an excellent example of the progress capable of being achieved starting in May 2022 and supported by GBP 100 million of private and public funding, we, as a key operator working closely with Leicester City Council, have been able to improve punctuality and frequency, resulting in bus passengers being 20% up on the prior year. It has also facilitated Leicester to become a leader in decarbonization with high levels of electric vehicle penetration in the council area. This is a notable example of a public-private partnership, delivering effectively and driving real value for customers on an accelerated path to a fully decarbonized fleet. We have an experienced growth team in place to continue to monitor and evaluate further franchising partnership opportunities as they arise. The Group's decarbonization goals are a key part of our strategy, and we continue to make considerable progress in Bus during the half year. Working closely with government, we've been able to accelerate our investment in our electric bus fleet and the related infrastructure required at our depos. Strong first half with 166 electric buses delivered, the installation of more than 100 charges and the installation of solar panels at 25 depots. We remain firmly on track to a circa 15% of our fleet fully electric by March 2024 this, along with the completion of 4 fully electric depots in England will enhance our knowledge and provide greater insight into the long-term operational benefits of electrification. Turning now to Slide 15. Last week, we announced that we've signed a strategic decarbonization partnership with Hitachi. A global leader in the transport sector. Both companies will invest GBP 10 million in a joint venture. NextGen, together with GBP 80 million of debt funding to purchase up to 1,000 electric bus batteries for the expanding First Bus electric fleet. The batteries will be leased to First Bus over an initial 8-year period with the potential to extend the lease by a further 2 years at 0 cost depending on battery capacity. The partnership also includes the provision of battery and charging management services by Hitachi Zero Carbon, a specialist division of Hitachi. This will allow us to manage energy use efficiently, optimize the health of the batteries, enhanced residual battery value and also with the potential to extend the useful life of a battery. As part of the joint venture agreement and unlike other possible financing options, we will retain 75% of the residual value of the batteries as they've taken off our buses. We've previously said that we wanted to participate in the decarbonization value chain, and this agreement facilitates the aim of optimizing material second-life battery opportunities. We also have a noncontrolling option to participate in future value creation through a small minority interest in Hitachi ZeroCarbon as they deploy decarbonization solutions to commercial fleet operators worldwide. The partnership with Hitachi will deliver an anticipated GBP 3 million of adjusted earnings by full year 2026 before any potential operational cost benefits. We're also anticipating a saving of GBP 20 million of full year 2024 capital expenditure, with future savings of GBP 40 million into full year 2027. This is a landmark partnership for FirstGroup, creating the opportunity to work with a global transport leader as we move forward with our decarbonization journey. Moving on to Rail on Slide 16. It has been a period of delivery for our teams managing the National Rail Contracts at GWR, SWR and the West Coast partnership, including Avanti. A new 9-year National Rail Contract was signed for the West Coast partnership to run until October 2032. The contract has a minimum core term of 3 years with the final 6 years subject to Department for Transport approval in October 2026. The contract includes acting as a shadow operator for HS2 Phase I. The increased attributable net income from National Rail Contracts reflects better-than-anticipated final variable fee awards for full year '23, which is a testament to the hard work and effectiveness of the teams across our Rail businesses. Most of the upside is due to strong operational performance and contract delivery at GWR and SWR. Rail additional services also had operating profit of GBP 6 million, up 21% on the prior year, and this has been driven mainly by growth through higher volumes at FCC and Mistral. We continue to demonstrate our capabilities and deep sector knowledge to bring value to the government as we strive to improve customer experience and to reduce the level of rail subsidies. I'm moving now to Slide 17. Our open access operations at Lumo and Hull Trains continue to exceed expectations, and deliver significant improvements in financial performance. Lumo revenue at GBP 26 million is up 43% year-on-year, driven primarily by effective yield and demand management. Seat utilization continues to improve, reaching an impressive 78%, up from 74% in the prior year. Lumo continues to offer competitive fares and value to our customers and we have now carried over 2 million passengers since our launch in October 2021. We continue to look at opportunities to increase capacity on our Lumo Service. Hull Trains has also had a strong first half, with revenues reaching GBP 20 million up 40% on the prior year. This has been driven by increasing passenger journeys of 33% on the prior year due to effective marketing, increased leisure demand and significantly improving business-customer volumes. In response to increasing demand, Hull trains are introducing extra capacity from December on certain high-demand services, this will facilitate circa 10% additional seat capacity on the Hull train services moving forward, creating the opportunity to continue to improve passenger volumes. We are also actively reviewing additional open access opportunities where it may be possible to further leverage the enhanced Rail capability and experience we have in the Group. And on to Slide 19. Looking forward, our strategy remains consistent as we develop our platform to drive further sustainable growth in revenues and earnings, supported by our balance sheet and disciplined capital allocation policy. Good progress has been made, but we have much more to do. We have four clear strategic priorities that will drive the group forward, firstly, deliver day in, and day out. We aim to improve customer experience and reliability, implement pricing strategies to enhance value, drive demand and improve yield and to win and extend contracts at Bus and Rail. Secondly, driving modal shift. We're entering the next phase of our development as we aim to drive a step change from car and air travel to bus and train. This will be supported by increasing capacity in our open access rail operations and focusing our bus proposition on driving demand and increasing usage. Thirdly, diversifying our portfolio. We aim to invest to grow, diversify our earnings and ensure our business remains resilient in the long term. Our pipeline of opportunities is growing as we look at bus franchising and partnerships, rail open access opportunities, other rail contracts and expanding our adjacent services, both in bus and rail. We will look at selective and organic opportunities, but we'll remain financially disciplined in this regard. And finally, leading in environmental and social sustainability. As we deliver our net zero commitments, we aim to optimize funding and bust decarbonization, build out adjacent electrification opportunities and work to support growth on green jobs in the communities we serve. As I said earlier, good progress so far, but much more to do. And now finally, moving on to Slide 20. It has been a challenging economic and industrial relations environment as we've had to deal with elevated levels of inflation and sector-wide industrial action in Rail. That said, the business is robust and continues to improve with significant progress made on our financial performance, which is a testament to the resilience and capability of our people across the whole business. Bus remains on track to deliver a 10% operating profit margin. And Rail continues to execute well on National Rail Contracts and to drive significant growth in Open Access operations. This progress is helping to diversify our earnings and increase the resilience of the group. Decarbonization continues at pace and bus and has accelerated our drive towards greener transport supporting our own and the government's goals with the potential to create adjacent value opportunities. So in closing, we have backed up our full year 2023 results with a significant improvement and our financial performance during the first half of 2024. We remain committed to financial discipline, our capital allocation policy, and we'll continue to scan the market for growth opportunities that will deliver sustainable value to our shareholders. Thank you for your time today, and we will now open for questions.

[Operator Instructions] First question comes from Ruairi. Next question, it's Sathish at Citi.

This is Sathish from Citigroup. I've got two questions here. Actually, both are related to the Rail segment. On the Open Access, what is the flexibility you have in -- just in case if the demand starts to soften because this is quite capital intensive, right? And also, in terms of drivers, that you're recruiting on the train side, what type of contracts they are coming in? And again, this also points to that question is how flexible that this is, as softening demand. And then just -- sorry, on the Open Access as well. Customers that are traveling. Do you have any color on what type of customers that are traveling there in terms of demographic wise, that will be helpful as well. So that's firstly on the Open Access thing. And then the second one is around the contract. Usually, the contract on the Rail from DfTs around, like, say, 5 to 7 years, but this is like slightly longer. What has driven the shift? Going forward, do you expect something on these lines like longer durations?

Okay. Right. Let me try and deal with that. I mean, obviously, we haven't seen any suffering demand at all. In fact, quite the opposite. And if you look across the whole Rail industry, passenger volumes have been increasing this year as there is some market recovery. Obviously, on our services, we have relatively high seat utilizations as we've driven our business forward, and that's why we're looking at potential increased capacity. We also offer value fares, which is supporting that demand. At the moment, we're not anticipating a softening in demand. We're very comfortable with the progress. And obviously, with revenues in the first half, growing at over 40%. And we're very comfortable with the performance of the team, and they are also working very hard on service, which I think is creating loyalty and helping improve the -- I guess, the stickiness of our product and services. So we're not anticipating a drop in demand in Open Access. In terms of drivers, we -- drivers in all trades. It's even recognized. There are a lot drivers. We negotiate and settle with them as and when required. At Lumo, we don't recognize the Union at this point, as many of our drivers are [indiscernible] drivers. But again, we have [indiscernible] that we think are attractive. And we've been able to get through this year with no [ strike ] action in either of our Open Access operations. In terms of the kind of travel type, I guess what we're seeing is strong leisure demand, fundamentally has been driving the growth that we see. Also in Hull trains we see the business customer beginning to come back, again, reflecting the good service we're providing, on the grants. But it's a mix of Lumo's leisure, Hull's, a mixture leisure business. In terms of the durations of National Rail contracts, I mean we're still -- these are contracts that were set coming out of -- back of pandemic and by default of shorter durations. Avanti is a 9-year contract that was obviously a 3-year break -- potential break. But obviously, we feel if we're delivering value on our National Rail Contracts, which we think we are and showing the value of the private sector, we expect them to get extended. Obviously, we have two contracts that will come up in '25 for potential extension, and we will work hard to make sure that, that's the case. But I mean there's a couple of points to know on National Rail Contracts. I think there's clear demonstrable value for the private sector. If you look at Page 31, [indiscernible] RNS, you will see the subsidy in the first half of this financial year is GBP 155 million lower than the same period a year ago. And that's a reflection of the hard work of our teams and beginning to push this business forward both financially and in terms of driving more demand for services. So I think obviously, we'd like longer-term contracts. And that's Rail. I mean, it's part of our strategy is to obviously elongate and extend and elongate them and we will continue to work hard to achieve those goals.

If I could I just actually ask another one on the Bus segment. Obviously, we have seen recently Arriva being bid for, would you like look at something on those side? Or would you like still comfortable, let's say, first focus on the transition to EV and then look at opportunities within the U.K. market later on. What's your like capital allocation would be there?

Yes. I mean, we obviously -- we have plenty of balance sheet capacity up to GBP 400 million plus of balance sheet capacity. Obviously, the market is quite fluid at the moment. There's quite a bit that either comes to the market or could potentially come to the market. And we have a team that's geared up to review opportunities. We're clear that we'll be financially disciplined, and if we do any M&A, it will be on the basis of that. And we don't feel we have to do it. But clearly, we got the capacity to do it and if we think it creates long-term shareholder value, then we will look at it. And we said that 6 months ago, 12 months ago, and that remains our position.