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

Good morning, everyone, and welcome to our First Rail Teach-in today. I'm delighted to be joined by Ryan Mangold, our Group CFO; Steve Montgomery, MD of First Rail; Mike Nelson, our Finance and Strategic Development Director at First Rail; and David Statham, our Commercial Director. We have a very full morning ahead of us. In the first session, as you can see from the agenda, we're going to cover a number of areas of rail. We're going to go through how we account for it, which is relatively complex. And I'm glad Ryan is going to talk about that, not me. We're then going to go on to talk about the industry in general, run through our train operating contracts and then also add in terms of the additional services we provide into the rail industry. At that point, we'll have a Q&A, then a break, and Session 2 will come back and cover our Open Access rail business and opportunities for growth for the First Rail division, in general. So moving on, just to set the scene and talk a little bit about the priorities for the Group. We've been operating a fairly rigid framework in terms of how we run and manage First Group. We have 4 main strategic pillars that we focus on. And I'll just run through them here to give you a little bit of flavor of what our priorities are and what we're trying to deliver within the business. So first of all, delivering, day in and day out. For us, that's about operational excellence. It's about improving the experience of our customers and improving the efficiency and the underlying performance of our business. And we've made a lot of progress, I think, in the last few years towards this. Our margins in our bus division have improved significantly, and we're getting very close to delivering on our 10% margin target that we set a number of years ago. We've been able to win and extend all our key contracts. And we've worked very hard on how we manage pricing, yield and delivery of real underlying performance improvement and margin improvement across all of our businesses. And on the next slide, you'll begin to see how that progress has translated into our financials. We're also focusing on modal shift. This is about really fundamentally moving passengers from air and car on to bus and rail. We've done that through a number of initiatives within the business. Obviously, within Open Access, we've been adding more capacity, and that's enabled us, particularly on Lumo to shift a significant amount of air passengers from Edinburgh on to rail. And that brings significant sustainability benefits but also has driven demand up on that route, which is good for the industry in general. We're also repositioning our bus division. Janette and the team are in the middle of a fairly major transformation. The last few years have been fundamentally about matching supply and demand and enhancing margins. We're now moving to a phase where we're much more focused on using the technology we have and the data within the business to drive more car usage onto bus, and we expect to make significant gains on that over the next few years. And also, we're adding Adjacent Service business within bus as well. We're fundamentally looking at opportunities where the car is no longer practical and working with major businesses to provide transport solutions in that area. We have been diversifying our portfolio materially over the last couple of years. We were heavily dependent on our train operating company earnings 2, 3 years ago, and we've consciously been looking about how we grow our business to actually reduce that dependency, but also create more value across our whole portfolio. And again, significant progress has been made. Obviously, bus revenues are up close to GBP 200 million over the last 2 years with margins improving, and that's had a big impact on the shape of our overall Group. We've also really moved our Open Access business from its early launch phase in Lumo to both Lumo and Hull Trains being profitable and driving significant growth. And obviously, we've been expanding the services that sit in and around their core bus and rail business to effectively grow profits in that area and help diversify the overall earnings of the Group. And then finally, we've done 3 acquisitions in bus over the last 18 months. Again, organizations that fit well with our portfolio and where we have a chance to grow and support their future development. So that's been a positive as well. And then in terms of environmental and social sustainability, this is a big part of the Group's strategy. Very significant progress, I think, in a leading position in bus and the electrification of its fleet. We'll have close to 15% of our fleet electrified by the end of this month. We are also electrifying a significant number of our depots, and that is moving us to really a different business and a different model, lower operating cost but also the opportunity for additional revenues and earnings from the infrastructure that we're putting into these businesses. And then obviously, in terms of Lumo and Hull Trains, again, significant sustainability benefits there, a new fleet and Hull Trains has brought a significant improvement in terms of lower carbon emissions at around 65%. And then every air passenger, we move to rail on Lumo is 95% less CO2. So very positive step forward in terms of the overall strategy of the business. Moving on then just to First Rail itself. Again, I think the couple of points I really want to get across here really just as a scene setter. One is the capability within the business. This is an organization where it's been at the forefront of rail in the U.K. for over 25 years. We have a deep capability and deep technical knowledge within our business, which we think puts us in a strong position to grow and develop as we move forward. We've also been able to add significant value to the Department of Transport into the government in general. And our management offered train operating company contracts where we've really provided a number of initiatives that significantly reduce costs and reduce subsidy to the tax payers in that area. And also, obviously, the success of Open Access. This is a business now that is a third pillar in terms of value creation within the Group. Major progress in the last couple of years in terms of both revenues and margins. And then that active diversification of the portfolio, as you can see from full year 2022 through to the kind of last 12 months is a major reshaping of the business, notwithstanding the fact that we've nearly doubled our profitability over that period. So First Rail is a developing business. It's one that's changing. And hopefully, today, you'll get a really good feel for that and the opportunity that exists in the future. So without holding up, Ryan will move forward now and will talk about accounting in rail. Thank you.

Thank you, Graham, and I'm sure everybody is going to be pretty excited about this session. And everybody pretty happy to be seeing that we are the 2-pagers. But for this session, what I'm planning on doing is to try and demystify the accounting for rail because of its complexity, particularly with the significant management fee TOCs that we've got with the DfT, which we have to consolidate into our reported accounts. By way of context, the management fee TOCs revenues are circa GBP 3.5 billion of the total revenues, and the balance sheet impact is roughly GBP 1 billion to GBP 2 billion given that IFRS 16 and capitalization of the rolling stock leases, which covers the vast number of the fleets that we've got in the 3 management fee TOCs. Despite the scale that's reported into our financial statements, the management fee TOCs, however, have very limited revenue and cost risk for the business. And our commercial benefit is effectively the fees that we earn out of the management fee TOCs. That's the fixed fee and the performance fees. And Mike will cover that later in the presentation. And these fees are effectively consolidated into the revenue line of the Group at roughly about [ GBP 50 million ] to GBP 60 million per year. Furthermore, the management fee TOCs working capital and CapEx requirements are all funded through the DfT through ring-fenced cash. So this funding is not for our account despite this being consolidated into the Group financial statements. And as at the half year, for last report in September last year, GBP 307 million worth of cash, which was on the balance sheet that relates to this ring-fenced cash that we exclude. So the true cash flows to First Group from the management fee TOCs are the net after-tax fees and minority interests that are paid to the business by way of dividends. And those are paid to the Group about 6 to 9 months after the period end. Once we've completed the audit process and we've got the approval from DfT to release that funding to the Group. So as a result of these, material impacts are not for our account, we present an adjusted measure for the Group for both earnings as well as for cash in our business. For earnings, we simply strip out the effects of IFRS 16 leases from the DfT management fee TOCs given that these leases create a higher degree of volatility in our earnings that you'll see in the subsequent slide, and have no real underlying impact for the Group in terms of responsibility because we take no cost risk. And for reported net cash for the Group, we exclude both the impact of IFRS 16 leases on the rolling stock as well as the ring-fenced cash. The actual capital deployed in the DfT management fee TOCs is hence fairly negligible. And the way you should think about it is broadly, it's the dividends that are tied up in the management fee TOCs that we'd earn subsequent to the year-end once we finalize the accounts. These adjustments to the KPIs, we believe, results in a much cleaner attributable measure for both financial performance as well as balance sheet for the investors. By way of comparison, and we've added to the slide, the wider rail business of Open Access and other rail operations remains quite capital-light relative to the scale of profitability we generate. With the capital in these businesses of only GBP 41 million at the half year 2024, made up mostly of the capitalized leases that we have for the train sets for the Open Access operations. Turning to the calculation of Group adjusted earnings and hence, how we calculate EPS and ultimately, how that translates into dividends per share, where we currently have a 3x cover policy that we have set out quite clearly to be progressive both in value and cover ratio. For 2024, as Graham noted earlier, we've reflected the trailing 12 months to September 2023 to provide a more recent annualized performance for the business given the proximity of the year-end reporting. The method of the earnings calculation starts with the reported operating profit numbers, and this reported operating profit includes the impact of IFRS 16 in the management fee train operating companies. And you will see some sort of various references throughout this presentation in the rail section and elsewhere, that we will describe that as either pre or post-IFRS 16 to be clear. We then adjust for the impact of IFRS 16 on the DfT TOCs to try and leave a clean management fee number in earnings. And as you can see from the table below, there is no symmetry between the EBIT impact and the interest impact of IFRS 16. And hence, we make this adjustment to ensure that we have a more accurate reported earnings flow coming out of the rail business for shareholders. The total taxation for the Group and the minority interests, which is broadly the minority interest that are in the train operating companies at SWR and Avanti are deducted to provide the adjusted earnings measure for the Group. As a result of this, the DfT management fee TOCs relative total contribution to the Group's EBITDA or a cash measure before IFRS 16 is only 23% of the full year '23 result, and this being a small component of the more material scale of the reported numbers in the accounts. I hope that this quick canter through rail accounting has provided you with much greater clarity of our KPIs and demystified rail reporting for you. And I'll hand over to Steve for rail industry overview.

Thanks, Ryan. Good day, everybody. I'm Steve Montgomery, the Managing Director of First Rail. It's good to see everybody here today. As Graham said earlier on, this session, hopefully, will help explain a little bit about what rail is in the U.K. and also what rail and rail division means to First Group. U.K. Rail has got many strands as we've seen over the years, and it has slightly changed, obviously, after the pandemic. Obviously, Network Rail make up the largest part of the U.K. rail in terms of delivering the infrastructure but the passenger services is a bit that obviously, hits the headlines and many people see day in, day out. The size of the sector and the passenger service sector is about GBP 13 billion, made up of GBP 9 billion of revenue and then GBP 4 million of other revenue -- GBP 9 million fees, I should say, and GBP 4 billion of other, revenue and subsidy. There's currently 25 train operating companies out there. And again, that is a mix of where we -- that is a mix of where we see train operating companies operated by the DfT. So there is 14 of them. Four of them get into what they call operate the last resort, so direct management with the DfT and the rest are managed by private sector like Groups -- First Group. We also see Open Access businesses. Again, there's 4 of those in the U.K. and then you have the devolved nations, which is Wales and Scotland, and then you have [indiscernible] that would play a part in it as well. It's quite a wide sector of number of people involved in it. I think it goes to say since the pandemic, rail has changed and particularly for the DfT contracts. We've moved away from the traditional model of the train operating companies have been filled revenue in contracts. That now lies with the DfT and is no longer set with the train operating companies. As I said, DfT are managed differently now. And we -- it's how we plan the businesses now, and we work with the DfT set up annual business plans rather than us setting those plans ourselves, we agree them with the DfT. And Open Access, again, obviously outside of the control of the DfT, that is very much about full commercial risk to the operators of that. But again, that model, and we'll talk more about it as we get through something that we are very keen on and believe we have a lot of expertise in. I think we can show that with things like seat utilization as an example at the moment. The industry circa 35% of capacity getting used and Open Access businesses that is up over 70%. So again, when you get that commercial freedom, we believe that that helps drive the overall business. I think it's also important we mention what's happened over the last 18 to 24 months, with industrial action in the U.K. rail and particularly affecting the DfT contracts. What we've clearly seen there as customers really having a difficult time and losing a lot of confidence in the rail sector. There is some light at the end of the tunnel where we'll start to see RMT resolve their dispute with the industry. But as live the driver's Trade Union continue to be quite a difficult challenge, but we continue to work with that and try and make sure we can move that forward because, again, whilst we have got this customer disharmony, it impacts whole of the industry. The good news is the Open Access operations in particular, have been able to get settlements with the trade unions at reasonable rates and not getting pinned down like we've seen with the National Rail. I think it's also clear, we will start to see some government announcements recently, particularly on the plan for rail, which again is about putting a gate in [indiscernible] into the industry, and then expand on how we take that forward. Now we are very supportive of that concept where it heavily involves a private sector. But the legislation required that is meant to try and get before the end of this parliament. But I think with all of the opinion and less labor support that, it's highly unlikely we will see that legislation going through. So we obviously await and watch the industry, with government to try and keep pushing things forward. So if I move us on to an overview of First Rail in itself. As Graham had alluded to earlier on, First Rail has been bidding for contracts since the start of privatization has been very successful. And we are one of the largest operators by revenues in the industry with over GBP 283 million or GBP 260 million [indiscernible] in our talk. We operate 3 DfT contracts, Great Western Railways, we have South Western Railways and West Coast Partnership development. And just to remind you, West Coast partnership -- sorry, West Coast Partnership is made up of 2 strands, that's Avanti West Coast to operate the day services and then out of Euston. And we have West Coast Partnership development, which is a shadow operator for HS2 and it continues to work with HS2 to develop the customer concept. As we've alluded to, we've also very -- 2 very successful Open Access operators in Hull and Lumo, and we'll say a lot more about them as we come through, but they have been very pivotal and given customers a value for money option, and open up other markets for us out there. We also operate Croydon tram on behalf of TfL as a contract we've had since 2000, and it runs through 2030. As well as the core rail businesses, we obviously have another business in Heathrow Express, which has worked out at Great Western, but it provides a service. We provide the drivers and the trains for Heathrow Airport to run the Express, the rail services, HEX NRC, and we receive a different payment for that. So again, it's another strand that we have within this. And we talk about our additional services of our affiliate businesses, which will continue to grow, and we'll say more about them. But we have First Rail consultancy, Mistral Data, first contact center and evo-rail. And those businesses we are both growing and our business over the last number of years. The rail team obviously, has a wealth of knowledge. As we say, we've been in play since the early 19 -- mid-1990s, and we have built up a huge amount of experience with over 17,500 staff and play with different skill sets and define ability innovate in the industry, and we've used that very successfully over the years. And finally, we believe that we play a major part and the sustainability for the industry and working with government. And we're already making a lot of inroads into that area with over 73% of our passenger service mileage run on zero-carbon renewable energies that we get from the grid. So really important that we continue to roll out that message and work with government. So I'm now going to pass over to Mike to give you a bit of a more run through on some finances and other parts of the business.

Thanks, Steve. Good morning. I'm Mike Nelson, Finance and Strategic Development Director for First Rail division. The chart on this slide shows the growth and diversification of our earnings over the last few financial years. As Ryan mentioned, the 2024 last 12 months shows effectively the latest trend up until September 2023 to show the trend continuing in a positive manner. First Rail's earnings come from 3 core areas: the DfT contracts as we flag on the slide, they provide a solid, consistent earnings base over a number of contract changes in recent years. So the DfT introduced the Emergency Measures Agreement at short notice at the beginning of the pandemic, very simple contracts and all TOCs transferred onto Emergency Measures Agreements, at least until September 2020. We then transferred to Emergency Recovery Measure Agreements, or ERMEs, as we call them. And then South Western and TransPennine Express transferred to National Rail Contracts from May 2021. Great Western to National Rail Contract from June 2022 and West Coast Partnership from October 2023, and I will share more details on the key elements of the National Rail Contracts on the next slide. The TPE contract was not extended beyond its initial 2-year core terms and transferred in May 2023 to the Operator of Last Resort, as Steve mentioned. Although we still continue to provide a variety of services to TransPennine trains. Open Access, Hull Trains was severely impacted during the pandemic, as we've mentioned, they were on full revenue and cost risk. So it severely impacted in '21 and, to a lesser extent, in financial year 2022 but has recovered very strongly and is ahead of our pre-pandemic numbers. The Open Access costs of the start-up Lumo were taken to the P&L in financial year 2022. The chart shows the pre-IFRS 16 attributable earnings for our DfT TOCs. I won't repeat what Ryan said in his section, but the IFRS 16 impact on Hull and Lumo is immaterial in EBIT terms. So this effectively provides the cash control contribution to the Group less the impact of tax. Please note, as Ryan said, that the minority interest for both West Coast and South West are included in our consolidated position. We've also flagged on the slide that all of our DfT TOCs and Open Access operations are contingent capital light. The additional services that are in the other first rail box are an increasing share of our earnings, and we will provide more detail in later slides. National Rail Contracts. So these were developed in conjunction with the government. We worked with the government and South Western Railway and TransPennine Express were the first National Rail Contracts signed in May 2021. Under the contract, the operators provide their expertise to the government. And the fundamental aim is to manage the cost base and service delivery effectively on behalf of the government and ensure responsible procurement based on the level of funding available to deliver the services. Operators have paid a fixed fee, which doesn't change throughout the contract. And also paid performance-based variable fees. Performance-based variable fees are scored against a mix of quantitative metrics, including operational performance, service quality and ticketless travel. And qualitative measures, including cost management and customer satisfaction assessments. For the qualitative assessments, there are 3 levels of scoring: below acceptable, acceptable and good. And an acceptable rating results in approximately 2/3 of the performance base fee element being payable. Historically, quantitative measures were known at year-end, whereas qualitative measures, results were received later after assessment by the DfT. However, a new biannual scoring process has been agreed with the DfT, which started in the current financial year '23, '24, meaning all of the scores for the first half of the year will be known in time for the full year results and the second half qualitative scores will be estimated as per the previous year's process. So we will have more certainty at year-end. Quantitative measures cover operational performance, our own cancellation and delays within our remit and where we do not provide enough vehicles in the train and all industry measures. So all cancellations, which are the external caused cancellations in addition to our own caused cancellations. And what proportion of trains arrive on schedule at each monitoring point, which are primarily stations. And these are measured at both time to 3 minutes and time to 15 minutes. We agreed target measures with the DfT each year as part of the annual business planning process for these measures. Service quality. In each DfT TOC, we are independently measured across 9 categories covering our stations, our trains and our customer service. And these results are published on our website. And then again, compared with target scores agreed with the DfT as part of the business planning process based on the funding that we have available in the budget. So these scores are all -- the targets are all set based on the amount of funding available. It is not achievable to -- it is not possible to achieve 100% scores. There isn't that level of funding available. So the targets are realistic. Ticketless travel, again, is independently measured. Currently, twice a year, but increasing to 3 or even 4x a year going forward, and again, compared with pre-agreed targets. Post-COVID, the incentive for the operators to grow revenue was initially a scorecard measure, i.e., a DfT assessment of how well we did, given the variability in forecast outturns. With a more consistent level of revenue projection, we have contracted with the DfT for a new revenue outturn mechanism where we take a limited degree of risk and the potential share of the upside compared with mutually agreed forecasts. In the base case, we earned fees in line with the expected 2 acceptable score under the old scorecard mechanism and the potential upside is in single-digit millions. As Ryan said, the fees are distributed up to Group annually in arrears subject to DfT approval. The values on this slide show the post-IFRS 16 values disaggregated by operator. So you can see the portfolio that we are operating. As noted in the previous slide, scorecard results are received in arrears. Hence, there was a lag and a positive upside in financial year '22 relating to FY 2021 scores, and particularly in the first half of the current financial year where we received an additional GBP 11.5 million from the DfT in performance-based fees in recognition of higher performance on the scorecard measures relating to financial year '23 than we had accrued at year-end. As outlined on the previous slide, we'll now know our first half scores in time for the full year results, and we'll only have to estimate our second half results. And as we have more experience of operating these contracts, they've been in play for longer. We have a better understanding of the requirements and we're better able to estimate those results. There are also opportunities to add to the core fees through industry change projects, such as the TransPennine Route Upgrade, which was reported in the TPE results for financial year '22 and '23. As we've mentioned a number of times, Open Access has had very positive growth and remains ahead of our initial expectations. Additional services have been growing in value and showing consistent delivery and Steve will cover these businesses shortly. I'll now take you through our DfT TOCs in more detail. Great Western Railway. First Group have been involved in Great Western since 1996 and 100% owners since 1998. It now operates under a National Rail Contract until June 2028 with a minimum core term until at least June 2025. GWR is one of the most diverse train operating companies covering metro, intercity, regional and sleeper services. With the intercity services operated by bi-mode Hitachi trains that can use the overhead wires where these exist to operate on electric power, and provide a more sustainable service. As Steve mentioned, GWR also operate Heathrow Express Services, providing maintained rolling stock and drivers where costs are funded by Heathrow Airport, who retain the revenue risks, but this provides a profitable contract contribution on top of the fees to Great Western Railway. We've recently supported the launch of the Bristol MetroWest services with the West of England combined authority that has seen targets for an additional 1 million journeys in that area, including opening of a new station at Portway Park & Ride with a further new station at Ashley Down due to open during 2024. We've also been focusing on rolling out new ticketing technology, especially in Bristol area, where we have the new smart card. And overall, almost 70% of passenger journeys have now been made using smart media. We're also proud to be introducing a fast-charge battery trains trial on the West Ealing to Greenford Branch in West London using innovative new technology. And the test train recently completed a record for battery power 70-mile journey using only 45% of the battery charge. The charging equipment is designed to be easy and quick to install on the infrastructure to avoid prolonged disruption to passengers as has been the case with electrification works. South Western Railway is a 70-30 joint venture with MTR Corporation, a Hong Kong-based metro operator. And as I noted earlier, has been on an NRC since May 2021. The current contract is scheduled to expire in May 2025. In SWR, on behalf of the DfT, we've led the construction of a new GBP 50 million depot in Feltham, West London to support the servicing of the new fleet of 75 Arterio trains that we are currently introducing on services to the south and west of London. We've also managed the significant refurbishment and reopening of the Island Line on the Isle of Wight with the introduction of new trains and upgraded track. We're currently installing a new superfast Wi-Fi network between Earlsfield and Basingstoke, which is inspected to go live to customers this summer. This will deliver more than 0.5 gigabyte of data to each train on a consistent basis, giving people the opportunity to stay connected more easily and hold more meaningful communications whilst on the move. SWR have also encouraged customers to use smart card technology, and this has now grown on SWR to about 75% of all journeys being carried out through digital fulfillment. West Coast Partnership. As we mentioned, West Coast Partnership is a 70-30 joint venture with Trenitalia, the experienced high-speed national Italian operator. And has a National Rail Contract until October 2032 with a core period until October 2026. As Steve has said, and just to reiterate, the West Coast Partnership has 2 key components. The first and more high profile is Avanti West Coast, which delivers the daily train service on the West Coast Mainline out of London Euston. And that's aligned with SWR and GWR in the way that the network rail -- the National Rail Contract is applied and the fees that we earn, the fixed fee and the performance-based fees. West Coast Partnership, as Steve mentioned, works in partnership with HS2 and helping to bring alive the future customer proposition and will be used as the vehicle to introduce and operate high-speed services as and when the infrastructure and trains become available. And there is a separate fee earning opportunity aligned to the West Coast Partnership element of the contract. AWC has been busy delivering a fully funded GBP 117 million refurbishment of the Pendolino fleet, and will be introducing a brand-new fleet of bi-mode and fully electric trains during the course of this year that will have a significant impact on reducing miles operated by the current pure diesel fleet under the electrified network overhead wires. Avanti has also been the first rail company to introduce a permanent product to standard premium, which allows customers to upgrade to an enhanced service for an affordable price. We should also highlight that for our people, we are setting ourselves very challenging targets with 50% of future recruits being targeted to be female by 2030. And this will go some way to balancing our current demographics, especially in our driving grade. I'll now hand you back to Steve to take you through our additional services.

Okay. Thanks, Mike. I mentioned earlier about the additional services. So what's happened since the pandemic, First Group had quite a large bid team. And what we decided to do, we recognize it as a potential market there of how we could grow out of what we call a traditional DfT-type contract basis and more look at how we became dealt with affiliate-type businesses that can best serve our train operating companies and our Open Access businesses but also with the opportunity to expand beyond First Group. We were one of the few operators, [ debt retainer ] of bid team, and that allowed us to set up First Rail consultancy. So First Rail consultancy used a lot of the knowledge from the bid teams, a lot of the ideas that come out of it, the innovation. And we were able to use that knowledge to start then get out and putting that into some of the other businesses. Mike spoke about West Coast Partnership development. We've put a large number of the consultancy team out into that business to help develop the product for the DfT for HS2. We are also able to use the consultancy team for looking at other projects, which is a High Frequency Rail in Canada, where we have got a large number of experts in that area, and we're working in partnership with a consortium and building up a proposal for the Canadian government. Turbo [indiscernible] rail will be between Toronto and Quebec City. So we're able to use those resources and better utilize them, and retain that knowledge within the Group for when we do start bidding again, which we're obviously starting to see with the Elizabeth Line. So really important that we keep that knowledge within the Group. The other thing that we've been able to do with rail consultancy is that we'll manage to get on to the governments, the DfT's STARThree contracts framework. And again, that allows us to bid for other work. Within rail, other parts of rail, but also road and air should -- we feel we have the appropriate skill set. That then allowed us also in '20 as part of us moving forward and diversifying, and 2019, we quickly identified that we had another opportunity, and particularly in the delivery of pay as you go -- sorry, apologize, delayed to pay. If we are -- obviously, it was growing, we asked third parties to provide that service as well as deal with all our customer respondents whether that be inquiries, complaints. We got this from a third party. It was not a good quality service and was very expensive, and we took the opportunity to set up first contact center in Sheffield. And that business started roughly with about 100 people, and we gradually took in the contracts from the train operating companies as they came to an end, and we were able to build that business up to about 250 people, and that provides a high-quality value for money service that obviously helps us make money but also reduces the overall cost to the industry and to the DfT in particular. And that's something, again, we feel we can scale out to other operators outside of First Group, and we continue to look at those opportunities as we move forward. We then have Mistral Data. Mistral Data, again, was set up as part of SWR bids and the West Coast Partnership but where we came up with innovation to try and look at new products of how we could help the businesses drive forward, things like revenue management. So we created a revenue management tool called [ One Tool ] that helps drive yields within the businesses, and we'll put that out to each of the train operating companies as well as with Open Access to passenger. But again, something we can sell. We've also got products in terms of customer communications, whether it's apps to customers or whether it's apps to staff as well, where we allow staff to communicate with us and report faults on trains. And we've recently just signed a contract we had made a large train manufacturer which allows us to take some of their data and replay it back to them so they can better do fault finding on the trains and make them more reliable. So we take these type of products, and we then go and try and scale that up. As I say, there's 14 products at the moment that [ adds good owing ] over the next year as we identify what people want from us and then we go and build that and deliver it for them. So again, it's proving very, very popular. And then finally, we have evo-rail. Mike spoke to evo-rail earlier, again, come out the South Western franchise when it was a franchise and now on to the NRC, the delivery was super-fast Wi-Fi, which the team come up with this concept of where we believe we can deliver up to 0.5 gig to a train to allow people on these trains to be able to obviously continue to work, do meetings while on the train. So again, very innovative, and we'll start to see that come live over the summer. So that's a quick run through the additional services that we have. We spoke earlier on, again, about sustainability as well has been a really important part for First Group, and particularly how do we work with our key stakeholders and DfT and meet government's goals going forward. In First Group, I think we went some that way already. We've heard this already mentioned bi-mode trains. Now we have bought an awful lot of these trains from Hitachi and they've been very effective in taking out a lot of what we call diesel miles when we're running underneath the overhead wires. That's allowed us to make sure that we've got the most efficient rails using the renewable energy that we buy from Network Rail who put through the overheads. So that's really important to us. And we continue to look at those opportunities. We introduced an all-electric fleet on the Lumo -- all electric fleet on the East Coast Mainline through our Lumo operation, again, as Graham alluded to, 95% more environmental-friendly than it is for traveling by air. When you look at community and social impact, again, an area where we have set up a significant funding over the last 3 years, circa about GBP 9 million. And that allows people in the community bid and the train operating companies to ask for money to set up things like station buildings that are maybe dilapidated, not getting used. People can bid for money and then turn them into community hubs, and it might be things like children's clubs, it could be art clubs, railway model clubs as we've got in a number of locations. And this -- what this purposely does is makes the community be part of the station and the station become more part of the community, and then that help stop cheating under people hanging about stations, making it unfriendly. We bring more people to the station and that means it's a better atmosphere and customers feel it's a better way to travel. So it's really important to continue -- keep developing. Again, our people are really important, but obviously, we are a customer-facing business. We have 17,500 people work within rail. And again, that's from the guards in the trains to the headquarters, that everybody plays a part in delivering. We have been very proactive in bringing apprenticeship front to real. We've had 850 apprenticeships in 2023. That's made up from station staff to engineers to drivers. We're starting to bring different dynamics. And I think one of the key things for us as that we put our people at the forefront, and particularly during the pandemic, where we saw a lot of ambassadors, particularly with mental health and how these ambassadors could talk to their colleagues. And again, that got us a lot of good interaction with all the staff and been able to show that we put staff at the front of our business. So that's a very quick run through. And you can see on the right-hand side, the number of organizations that we worked with to try and ensure that we're meeting the right environmental credentials, sustainability credentials within the industry and work in the wider industry. So I'm now going to hand back to Graham about a Q&A.

Thank you, Steve, and I appreciate everyone's contribution so far. We're going to open up to questions now. We'll do the room first, and then we'll maybe -- we'll go online and do those questions as well. And at the end of the Q&A, we're going to have a short break then before we recommence at 11:00 a.m. And in that break, we're going to run some of the deals around First Rail, and you can maybe see some of the products that we're using as well in this trial, which will hopefully be insightful for you. So let's start with the Q&A and see where it goes. Okay, Gerald, if you want to go first.

Gerald Khoo from Liberum. On the additional services, can you clarify how much of revenue and ideally profit comes from non-First Group clients? I mean, predominantly, obviously, [ train offers ], but how much of it actually generated outside of the Group. You talked about the train manufacturer, what's the sense of where that number is? And also, is there any reason why the services that you provide to TOCs, whether your own or others can't be provided to for example, OLR, [indiscernible] train operating companies?

Yes. Thanks, Gerald. I mean at the moment, 90% plus of the profits are made within our Group new companies that we have today, but it's obviously something we're working hard to change. And it's a fairly fledgling market for some of these areas. And Mistral, for instance, it's Software as a Service at the end of the day. And we're working to demonstrate real value through those products and services. And then our confidence to sell outside of the Group is quite high. So we're probably moving to the next phase of our development now, which is looking at these businesses fairly independently and then saying, look, is this something we can scale? Are we the right owner to scale this business? Do we need a partner or not? So we're going through the kind of normal strategic process that you would do. But we are confident that we're going to be able to sell a number of these services outside the Group, and it's a very big market. I think that's one thing to note that the rail industry is very substantial. If you look at the supply base to that GBP 13 billion market, it's very, very significant. And we think we've got a lot of capability within the Group, and that's why we've pushed this hard over the last couple of years. And I think we're getting to the point now where, individually, there's enough scale within the business to look -- to monetize this and grow share outside. And that's the process we've started over the last few months, and we've got some early traction with Mistral, with a global train manufacturers. So it's not an insignificant step. But we'll -- we expect over the next 6 to 12 months to provide a little bit more detail on this as to what we think the right strategy for each part of the business is. But ultimately, the aim is to grow these businesses. Profits have been growing at 20% plus in this baskets of companies. So we're doing okay, but we think there's quite a long way to go, and that's what we intend to do over the next year or 2.

Yes, Ruairi Cullinane, RBC. Yes, perhaps one follow-up on the additional services. Would you be able to provide any detail on the contribution towards the GBP 6.4 million of profits? And then one on overseas rail, perhaps based on your consulting contracts in Canada, how sort of U.K. specific, do you think your cost transferable do you think the expertise you have is in rail.

Ryan, I mean, we don't currently provide a breakout of that number, Ryan. But do you want to...

Yes, we don't provide a breakdown of that number. But as Graham mentioned, that we clear this is an area that we continue to grow. And as it gets to being a bit more scale, we'll be a lot more transparent.

And on consulting, Steve, do you want to...

The Canadian opportunity was something that we worked on for a while. As we said earlier, we can come back into the -- we are in the U.K., we are looking at opportunities within the U.K. to do that. But as I said, as we expand the consultancy team, we will look at where we best believe our skill sets are. Canada was one of them, as I say, because we knew the partners. We worked with the partners and they came to us and thought we were a good fit for them, but we will look at all opportunities where we think we can deliver a benefit.

Alex?

It's Alex Paterson from Peel Hunt. Can I ask a couple of questions, please? One is just on nationalization. Obviously -- well, not obviously, perhaps, but privatization has been hugely successful in growing passenger numbers in making the industry more customer-facing, new fares and so on. But the opposition party currently is talking about nationalization. Could you say where you think -- well, do you know what -- have you had conversations with them? Do you know what the sort of scope this is and what impact it might have on your operations? I'm guessing mainly on the management fee side. And then you're bidding on the Elizabeth first-line contract, but that I think the existing one with MTR would expire during the next term of government. So what do you think that might mean for that? And then can I just ask on evo-rail. Is it possible to discuss a little bit about how the sort of rollout of that might look. You're working on a stretching on SWR between from Earlsfield down. Do you envisage sort of completing the whole line? Do you think you would look at doing other SWR lines? And how does that sort of pricing model work, please?

Okay, should have brought my pen and paper with me, Alex, I'll have to say. On nationalization, I mean, we're obviously engaged with both the main political parties on a very regular basis. The situation at the moment, obviously, there is some uncertainty. But there's a number of steps still to happen. I mean we still have an election to run at some point. I think the Conservatives has been clear on the guiding mind, the role of the private sector. And we support that. In terms of Labor, we've obviously heard a number of statements from the Shallow Transport team, but nothing from the leaders office as such yet or from Shadow Treasury. We've had a number of meetings with them. And I actually think they are still forming policy. I don't think they've got to the stage where they've made firm decisions if they get into government. So I think there's still a lot to play for. And I think the role of the private sector in the rail industry in general is to take a positive view of this and to demonstrate what we can do and what we can achieve. And I think there is lots of examples, whether it's the money we've been able to save government through the business planning process, within the train operating companies where we've been able to provide more demand, better services, better value for customers on an Open Access, which has been a roaring success. I think the team have done a really fantastic job over the last couple of years. So I think there's a lot that we can still demonstrate to both parties, the role we can play. And obviously, we've been -- we're for 20 years that Labor might do this and they said they might do it if they were in government and haven't done so far. And that's why we've been actively really pushing the diversification agenda to strengthen our other opportunities. And the reality is we are looking to do more Open Access, not less. So we'll come on to that in a second session. So I think we're doing everything we can to get to the right answer. I think it's still uncertain as to whether Labor would go down that route. And we will continue to actively gauge and sell the benefits of First Group in the private sector. And I think it's quite easy to demonstrate the value that we bring. And also, the actual fees involved in running the train operating companies when you look at them in the context of the industry, and opportunity with the industry are actually relatively small and I think good value for government. So I still think there's a lot to play for. And we will continue to put a positive case forward and engage actively, and that's what we're doing. And we were doing it last week, and we're going to be doing it next week, and we're carrying on, on that basis. In terms then of the second question.

Elizabeth Line. So Elizabeth Line is TfL contract under mayor's ownership. We don't see Labour if they did come to power and make any change to that. That process kicks off. We expect the ITT in the next week -- next month or I should say, so we don't see any impact on that. Evo-rail, we are funded to roll out evo-rail on SWR. Government have not provided any additional funding at this moment in time. So we would be very much driven, if the government wanted to fund further rollout of it. But at the moment, there's no indication that they will -- they're willing to do that.

Yes. And I think you have to look upon it as the -- it's a trial for the industry in many ways. And I think the proof will be what the customers think about it when it's fully switched on, and we're covering a fairly substantial length of where the main passenger volume is on SWR. So I think when the customer feedback comes, I think that will probably be the driver of whether the government is willing to invest more in that area.

And does the customer pay extra for that? Or is it in the ticket price? Or how does that work?

Yes, they wouldn't pay extra for it. Yes. No, it will be just on the WiFi on the train.

Yes. It's effectively the service that will come with it. If I could just go back to Ruairi's question just on the additional services split of profitability. There's obviously a number of different components to that. We've obviously got the bidding. We've got the Elizabeth Line that we're bidding for and there's other sort of contracts that we'll be looking for, which sit in our sort of First Rail holding business, which incur a bit of a cost. And we see that very much as an investment for the future. And then you've got the tram, which earns a very decent fixed amount of fee, which is available in sort of public records to be able to see how much generate out of that. And then the balance is pretty split equally between FCC and wider consulting. And then evo-rail is very bespoke to SWR at the moment for implementation as well as a bit of selling and potential sales into other parts of the rail sector. Yes.

Yes. And I think just probably to reiterate as well, we don't expect any change to how TfL are going to bid. I don't think that will change under either government. So -- and also both governments have been very positive on Open Access. So I think they will absolutely support growth in those areas. So there's pluses and minuses in terms of the political and landscape within the U.K. Okay. Any more questions in the room?

Just one from me. You mentioned that the Open Access have been better able to sign deals with the unions than the management, the DfT contracts. Do I understand that the unions have to negotiate with the DfT rather than the operators? And is there anything else, which is a major source of disruption delays and problems to you as well as customers, which are not in your hands?

Well, in terms of negotiations, I mean, there all direct between the train operating companies and the unions. The government's not negotiating. There are contracts, and it's up to us to get them resolved. Obviously, within the business planning process for the DfT train operating companies, there is an effective mandate around the level of pay increases. And we obviously have to work and try and work within that. And that's how it plays out. So you can -- when you look at Open Access, obviously, you've got 100% flexibility about what you do. And obviously, with the high seat utilization we have in Open Access, effectively our labor costs are a smaller proportion of our revenues that would be the same case in the train operating companies. So you have a little bit more flexibility around the terms and conditions that you could operate as it is at a different environment. In terms of other [ that's outside ] of our control, Steve, I don't think there's...

I think biggest challenge for this is working closely with Network Rail. Obviously, the infrastructure have been available is vitally important to run the train service. So we work very closely with Network Rail to ensure that we can keep the network as reliable as possible.

Another question?

Yes, David Herman with [indiscernible] Capital. I mean it kind of builds on her question as well. I just was wondering what is kind of the like when I look at the National Rail Contracts, it seems like you almost have no risk. Is it really the labor cost inflation, that's the major risk? Or how could you actually incur a loss on the operation?

Well, it is limited risk. You have some cost risk. If we didn't deliver within the agreed business plan, there could be a scenario where there's some disallowable costs that would be for our kind. But obviously, we have a long track record of delivering these business plans well, and we haven't had that situation. But outside of that, the risk is really around delivery of service and performance in general, which would mean that you wouldn't get the level of performance or variable fee. That's within the contract. But when you look at our track record over time, we talked about the 1, 2, 3 measure. I mean we've been averaging a little bit above 2, 2.3 so on average across all these contracts over the last 2 or 3 years. So the track record has been quite strong in terms of delivering to the contract and what the government are actually asking us to do in those contracts. So the level of risk is small. But obviously, the level of -- you could underperform. And obviously, you'd just be left with the fixed fee element, which is quite a relatively small part of the contract.

And maybe just a second question on the bidding process. Like, what is really the key to win the contract?

Okay. Steve, I'll let you have that one.

What contract? Elizabeth Line.

Let's maybe stick to the National Rail Contracts. I'm just wondering like...

We don't bet fully National Rail Contracts at this moment in time. They are just a continuation of what contracts were there previously. Only when government decided to put them back out to the market, while we'll start that bidding process again. Again, very early stages of understanding what government actually want from that. While we put revenue risk and cost risk back, and again, how much will people want to take that type of risk. So again, we are still trying to understand that element of it. But they started up, Peter work about 3 years ago, and that very quickly fall away again because GBR was meant to try and take that work beyond to get it to a contract. But obviously, legislation didn't get through a number of years ago, and it's still not to do yet. So we probably have to wait to see if we had government eventually get to and what that National Rail Contract will look like and how you would bid for it. I wouldn't -- it's highly unlikely you would -- particularly as the market that at the moment, take massive fair risk at this moment in time because, again, the market changed so dramatically. But the wrong mechanism, the revenue outcome mechanism that Mike spoke about as an opportunity of where we could turn around and back ourselves to grow revenue. We've done it with Open Access. We would be happy to do that in a National Rail Contract. So there's different options you can play into it.

I think it's fair to say that quality and capability of delivery probably would rank quite highly while we -- whilst we hold out of this -- coming out of the pandemic.

Okay. So it's the ratings probably that's most...