Mobico Group Plc (MCG) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our 2021 half year results presentation. First and foremost, my heartfelt thank you to our 50,000 employees for their outstanding ongoing effort in what continues to be challenging circumstances. I would also like to thank our customers for their ongoing support. I'm going to walk you through the highlights for the first half before handing over to Chris, who will talk you through the financials. I will then come back to talk to you about rebounding from the pandemic and the exciting growth ahead of us. So to the highlights. It goes without saying that our main priority has been to reopen in a safe way for our employees and for our customers. In a few slides time, I will show you what I mean. I'm really pleased to say that our first half results are slightly ahead of our expectations and even more pleased to see that we have returned to profit. We have made significant improvements in revenue, EBITDA and cash generation. And we are seeing good progress on the big deltas I outlined in March. What is also very pleasing is the continuing trend of improving month-to-month performance despite ongoing COVID related restrictions in each of our markets, and we have delivered EBITDA GBP 30 million higher than in the second half of 2020. We also continue to see significant opportunity in all markets and, pleasingly, we have continued to win new contracts and have expanded existing contracts during the first half. Each of our divisions has a strong and active pipeline in terms of bidding or acquisitions. I'll now hand over to Chris, who will talk you through the financials.

Thank you, Ignacio. Let me start with a brief summary. In a period that continued to be shaped by mobility restrictions, we delivered revenue of GBP 992 million, down 3.8% year-on-year. On a constant currency basis, however, revenue increased by 1%, with a decline of 27% in the first quarter as we cycled the pre-pandemic period in 2020, followed by a strong increase of 57% in the second quarter. Pleasingly, and despite ongoing restrictions, the group has returned to profitability, recording an underlying operating profit for the period of GBP 23 million. The GBP 54 million year-on-year improvement in profit despite lower revenue reflects, amongst other things, the benefits of the GBP 100 million cost reduction program announced last year. The 45% increase in EBITDA to GBP 128 million drove free cash flow of GBP 41 million, a year-on-year improvement of GBP 234 million. Net debt of GBP 1 billion is GBP 318 million less than a year ago, driven by the refinancing actions taken in the second half of 2020. The increase since the 31st of December is driven by growth capital expenditure relating to the contracts won last year in Morocco and North American school bus. And so to round off at a statutory level, the group posted a loss after tax for the 6 months of GBP 24 million, GBP 67 million ahead of last year. Now this chart shows how we have steadily rebuilt service and revenue since the start of the pandemic. To recap, pre-pandemic, we were performing very strongly with revenue up 17% in January and February of 2020. During the extensive first lockdown, passenger numbers declined by nearly 80% with revenue around 50% of pre-pandemic levels. Through the initial recovery period of July to September 2020, revenue is running at around 65% of pre-pandemic levels. And then despite restrictions being reimposed from October 2020 through May 2021, throughout that period, we generated revenue of around 70% of pre-pandemic levels with a rising trend throughout. And that trend has continued as restrictions were lifted with June revenue about 85% of pre-pandemic levels. The service evolution chart shows how we've responded to the mobility restrictions in different areas of our businesses. You will see the bus businesses in both the U.K. and ALSA rebuilt quickly. In the U.K., passenger numbers are back to around 70% of pre-pandemic levels, ahead of the industry average. And we are seeing similar levels in both Spain and Morocco. Our North American school bus services rebuilt to around 80% of normal levels by the end of 2020. Before growing steadily through 2021, finishing the school year was around 96% of schools back to either full-time or hybrid teaching. Transit services have gradually increased such that we are currently operating around 80% of pre-COVID levels and rising. You can see clearly the impact on our coach businesses in particular, in the U.K., where the imposition of mobility restrictions, coupled with social distancing forced us to shut the network completely for 11 weeks during the period. In both the U.K. and Spain, we are now seeing intercity demand come back strongly as restrictions have been lifted. In Spain, we've increased the level of service to around 55%, carrying around 45% of passengers. And in the U.K., service is at around 37% with passengers at 33% of prepandemic levels. Now this chart shows a similar picture for EBITDA. And as you can see, the group has accelerated the rate of EBITDA growth, recording GBP 128 million in the period or put another way, around 70% of the entire EBITDA delivered across 2020 despite continuing restrictions throughout the period. EBITDA growth is clearly concentrated on the second quarter given the strength of the first quarter of 2020 before restrictions were enacted. Year-on-year, second quarter EBITDA is up by GBP 66 million to GBP 85 million. And I'll now talk to performance by division. The performance of both North America and ALSA improved strongly through the period, whilst the U.K. performed broadly in line with the prior period, reflecting the continued restrictions impacting our coach business. ALSA revenue grew by 8.4% to EUR 331 million, driven by growth in our urban and regional businesses in Spain and strong growth in Morocco with the ongoing mobilization of Casablanca and record passenger numbers in Tangier. Underlying operating profit of EUR 20 million represents a EUR 28 million improvement versus the same period last year and is also well ahead of the profit delivered in the second half of 2020. North American revenue declined by 3.7% to $628 million, principally as a result of the exit of loss-making contracts. Operating profit of $58 million represents a year-on-year improvement of $47 million as well as being comfortably ahead of the profit delivered in the second half of 2020. And we delivered a profit margin of 9.2%. That is well on the way back to pre-COVID levels. In the U.K., the bus business made a small profit as the CBSSG grant payments offset the cost of running a full service under social distancing restrictions. The Coach business received no such support, resulting in an operating loss driven by restricted mobility and restricted occupancy levels. U.K. revenue declined by 9% in the period to GBP 173 million, reflecting the temporary mothballing of our coach operations for the first quarter of this year and significantly reduced services in the second quarter. Now revenue is now starting to rebuild in our coach business as we ramp up service ahead of the summer, where we are expecting a pent-up desire to travel and a busy staycation season to drive that demand. Meanwhile, our bus business has seen strong revenue growth through the period, reflecting the high service levels where we have been operating at around 102% of pre-COVID levels. So while the U.K. business delivered an operating loss in the period, this was at a much reduced level compared to the second half of 2020. This chart shows the drivers of year-on-year increases in underlying profit. Now this is as much art as science as it's not straightforward to break these effects apart, but this is directionally correct. The first impact is increased levels of government support received in the period. And I calculate this, net of the cost of additional service we would otherwise not have run to have been GBP 24 million. The second impact is the reduction in revenue of GBP 48 million, net of an estimated GBP 34 million of variable costs saved as a consequence. Finally, and importantly, the balance is driven by GBP 44 million of permanent cost reduction from the GBP 100 million program we launched last year. I'll now turn to cash flow. As I said earlier, we generated EBITDA of GBP 128 million, a year-on-year improvement of GBP 40 million. Working capital was broadly flat in the period, cash collection remained strong, but the mix of revenue away from cash upfront passenger revenue to subsidies and compensation paid in arrears continued during the period. Maintenance capital investment of GBP 57 million was around half the level of the prior period, reflecting the actions taken in 2020 to reduce capital additions. Net interest paid decreased by GBP 10 million to around GBP 18 million, reflecting some double carry in 2020, along with the interest savings from lower borrowings this year. And the net impact of all those factors was a return to positive free cash flow with GBP 41 million delivered in the period. Growth capital expenditure of GBP 75 million is predominantly the cash flows for the 2020 additions of buses in Casablanca and the new school bus contracts in North America. The GBP 47 million of acquisitions shown here includes GBP 23 million for Rober in Spain and GBP 18 million for the next 10% of WeDriveU. A cash outflow of GBP 34 million was recorded in respect of items excluded from underlying results, which I'll cover on the next slide. And as I previously guided, in light of the exceptional circumstances and the conditions attaching to our amended covenants, the group will not be paying an interim dividend. Other cash flows of GBP 58 million predominantly reflect the movement in exchange rates and the settlement of foreign exchange derivatives. So together, these factors drove net funds outflow for the period of GBP 63 million, resulting in net debt of around GBP 1 billion. So let me give you a little more detail on those separately disclosed items. Firstly, and consistent with all prior years, is GBP 19 million of amortization of acquired intangibles. The remainder then are either directly or indirectly driven by dealing with the pandemic. GBP 19 million of this relates directly and includes GBP 13 million of noncash impairments, GBP 5 million of incremental health and safety costs and compensation payments to third-party operators and a further GBP 1 million in reversing overhedged fuel trades. In addition, GBP 10 million of restructuring costs were incurred in respect of the final stages of that GBP 100 million cost reduction program, which, as I said earlier, we are already reaping the benefits from -- and there is more to come. We remain committed to an investment-grade credit rating and both Moody's and Fitch have recently reaffirmed our ratings. Despite our expectations for ongoing improvement in the second half, given the ongoing uncertainties around the pandemic, we took the prudent step of further renegotiating our covenants. The gearing covenant has been amended to 5x for June 2022, giving plenty of headroom. As of the 30th of June 2021, gearing had fallen to 4.4x and interest cover increased to 4.1x, i.e., inside the pre-amendment threshold. We remain committed to returning gearing to between 1.5 and 2x EBITDA once activity levels normalize. During the first half of 2021, as planned, we allowed the short-term facilities that were put in place at the start of the pandemic, including the CCFF to lapse and did not refinance them given the ample liquidity headroom. So as at the 30th of June 2021, the group had GBP 1.9 billion of capital and committed facilities with an average maturity of 5 years. The group had a total of GBP 1 billion in cash and undrawn committed facilities available, and we have no material refinancing requirements before 2023. Now the positive impact of high vaccination rates in the countries in which we operate is visible in improved mobility. And as I've outlined today, we are starting to see this feed through to our financial results. That said, I'm afraid that I'm not yet able to reinstate guidance as there is still too much uncertainty, making it impossible to accurately forecast financial performance. However, we have again laid out detailed scenario modeling in our "going concern" analysis that might help manage expectations. Our base case scenario assumes that there will be a steady recovery in the second half so that by December 2021, constant currency revenue recovers to levels similar to December 2019. Now under that scenario, we expect strong positive free cash flow in 2021, driven by continued sequential growth in EBITDA. In summary, we are pleased with our first half performance and our prospects remain strong. And I'm going to hand you back to Ignacio to hear more about that.

Thanks, Chris. In a few moments, I'll talk a bit about the long-term vision for the group. But 1 thing I'm not going to change is safety being our #1 priority. This chart shows risk scores, an independently validated basket of safety outcomes and compares our performance to a number of other transport companies, including our biggest U.S. competitors. As we have increased our services in recent months, we have maintained our unrelenting focus on safety. As you can see, each of our businesses have reduced the risk score further. And across the group as a whole, this is 76% lower than the industry average. As well as saving lives, it helps to drive and strengthen our relationship with our customers who see us as a trusted partner. And it impacts the bottom line in lower claims costs and insurance premiums. Before I move on to the longer-term vision, let's take a closer look at what we have achieved in the first half. I'm really pleased with the collective sense of urgency we are developing as a group. In ALSA, we have mobilized Rabat and Casablanca. And the major restructuring program to reduce central cost is about 80% complete, and that has contributed to a return to revenue growth and to profit. Looking ahead, we see plenty of reasons for optimism. We will continue to consolidate our growing position in both the urban and regional bus market. We are also looking at a number of attractive upcoming tenders in cities outside of Spain. In countries such as Portugal, where we have already been awarded a contract in Lisbon and Porto and also in Italy, France, Chile and Dubai. Turning to North America. It's really encouraging to see by the end of the school year, 96% of schools were back, and we believe this bodes well for the start of the new school year. In transit, we achieved significant price increases on a number of contracts that we previously earmarked as potential assets. And whilst revenue is lower, as a result of the exiting unprofitable contracts, this has already delivered a significant improvement in profitability. And we are making progress on our driving excellence program. Looking forward, again, I see many reasons for optimism. We expect to see much larger-than-normal school bus bid season in the coming year, and we're getting ready for it right now. We see good bidding opportunities in shuttle and transit where there are some attractive power transit contracts coming up for bid later this year. And finally, in the U.K., we have seen an increase in service and occupancy in both our bus and coach businesses. We have completed the network redesign in our coach operations. Our bus business has recorded passenger numbers to around 70% of pre-COVID levels well ahead of the industry average, and we have integrated net and net. Looking ahead, we see significant growth opportunities through the consolidation of the fragmented market in which both mid and net operate in. And there are also many opportunities to grow our bus operation in other regions with the [ likes ] of Manchester likely to be franchised its past operations. Finally, we are also making solid progress in transitioning our bus fleet to zero emissions. We are a purpose-driven organization. Our vision and purpose guides us in all we do. Our vision is to be the world's premier mass transit operator with services offering leading safety, reliability and environmental standards that customers trust and value. And this has never resonated more. It's an exciting time to be in public transport. The desire for long-term improvements for the environment is now a must have. The last 18 months have been significant in that respect with cities, governments and corporations, all looking for tangible gains. No longer is this being reflected only in words, but in actions, too. It's clear that the biggest impact we can have is to drive modal shift to public transport. But as a leader, we can amplify this by decarbonizing our already clean fleet at pace. On this slide, you can see the list of funds available in each of our markets, not least of which is the funding available through the national bus strategy in the U.K. where the government is providing funding for at least 4,000 zero emissions buses. Working in partnership with the Transport for West Midlands, we have already secured funding for 170 electric buses for Coventry, the first electric bus city, and we are working again with Transport for West Midlands to bid for funding for around 200 hydrogen buses. And it's clear from the quote from Andy Street, the West Midlands Mayor, that we're seeing as a quality operator and trusted partner with the ambition and ability to deliver on the challenges presented by climate change and congested cities through delivering green, safe and reliable transport. There's a clear opportunity to expand our services in our existing markets. The chart on this slide shows where we are currently and where we aim to be by 2030. In addition, we already operate in 50 cities, and we have identified a further 150 cities that match or returns criteria that are close to our existing locations and where we can be the partner of choice for improving mass transport systems. What I want to make clear is that there are plenty of opportunities in or close to our existing markets to go after. Our business review is nearing completion, and I will provide further details when we speak to you at the Capital Markets Day in the autumn. As a trusted partner to our customers, we provide 5 key solutions that drive demand for our services. First, reinvigorating public transport as we have done in places like the West Midlands, Bilbao in Spain, Rabat and Casablanca in Morocco. Second, building multi-modal solutions, building a wider portfolio of services from an initial foothold. Madrid is a good example. Third, delivering operational transformation. For example, in the first half, we have rolled out the new digital integrated optimization platform, or DIOP, in North America, which is automating and optimizing many processes such as the daily scheduling and dispatch, the driver attendance records, driving efficiencies and improving services for our customers. Fourth, filling the transit gap, providing solutions where public transport cannot reach. Our fast-growing employee shuttle business is the best example. Compounding and consolidating, we professionalize and bring scale through the consolidation of fragmented markets, as you have seen in a school bus. Our transport solutions and accessible transport are targets here. So far, I have talked to you about where we participate and what we offer. However, the "how we operate" is just as important. We are developing a high-performance culture where there is a sense of urgency to drive tangible improvements across the business. During the period, we have rapidly rolled out a new quality management framework where we are looking to drive continuous improvements across the business. Training programs are being rolled out across all employees, and we are really encouraged by the enthusiastic response. We are increasingly leveraging digital solutions to unlock operational efficiencies and growth. As I mentioned in the last slide, we're rolling out DIOP in our school bus operations in North America. And we are clear about what outcomes we are looking to achieve to be the safest, most reliable, greenest operator with the most satisfied customers and to be the employer of choice. All of these outcomes help to drive sustainable growth. I wanted to show you a slide which shows just how much progress we are making with our driving excellence program. Key to driving on-time performance is yard departure performance. We have increased focus here as part of our driving excellence and the chart shows performance increasing from 50% to 90% over the period. In turn, this drives on-time performance, which is now at record levels and has been consistently over 95% during the latest fiscal year. And what that means is that by having a [ retina-based ] focus on operations, we have reduced liquidated damages or performance penalties by 78%. To give you a sense of what this is worth, in 2019, we incurred $8 million of penalties. So 78% is a big saving. And through delivering a better operational performance for our customers, we are strengthening our customer relationships and seeing a higher level of highly satisfied customers, up 11 percentage points to 66%, the highest all-time performance. Highly satisfied customers are more likely to renew their contracts and with higher-than-average margins. So all of this makes good financial sense as well. We'll go through this in more detail at our Capital Markets Day, but our priorities are clear. First, we have to ensure we stabilize the business to restore service, occupancy, revenue, profit and cash to prepandemic levels. This is progressing well. To support this, we will continue to embed our quality management framework and processes across the business. I have made changes at the top of our HR function to enable a sharper focus on building the capabilities we need. I call it, organizing to win. And our balance sheet is improving, and we recognize the need to reinstate the dividend at the appropriate time whilst we're also focused on reducing gearing to 1.5x to 2x. As the business stabilization progresses, we will place increasing focus on growth agenda. We are starting this in parallel as we promised last year. We will look to broaden and deepen penetration within our existing markets and we'll invest to expand either through bidding or through acquisition into more of the key cities we have identified. We will establish new availability models to help us accelerate our transition to zero emissions vehicles without stressing the balance sheet. I see no reason why this business should not return to the profitable growth trajectory it enjoyed in the 5 years to 2019. To be clear, this is a growth company. In summary, our first half has exceeded my expectations and I expect improving positive trajectory to continue into the second half. I remain committed to the sustainable and profitable growth of the group, and I am optimistic about the significant growth opportunities in all our 4 divisions. Demographics are in our favor, legislation is in our favor, and we can provide the solutions to the problems of the 21st century. And we are uniquely positioned as the only truly diversified international public transport company. It's been a busy few months, but we are emerging with a clear vision and purpose, a direction that unite us, and we have increased optimism for the long term. As we move our sites from the short-term recovery to the long-term growth, that optimism is growing. That concludes our presentation. Chris and I would now be happy to take your questions.

[Operator Instructions] We'll now take our first question from Jarrod Castle from UBS.

You talked about U.K. occupancy at 70% outperforming the market. Any reason why you think you're outperforming? Is it your geographic mix or just the way you're operating? Secondly, good cost cutting coming through. How do you think about margins over the medium term once you've built back volumes given this level of cost cutting? And then partly related, there's, obviously, some form of labor scarcity and further potential for wage pressure. So just any color on how you're dealing with it in certain markets, especially in North America.

Thank you very much for your question. Tom, can you take please the U.K. questions on the 70% and why the reasons? And Chris, you will take the other ones on the cost cutting and the long term and the wage in North America?

Sure.

Yes, of course. So across the West Midlands, we've seen our [ coach wins ] grow to this level of around 70% on commercial. We think this really does illustrate the fact that the region is a very strong bus region -- has great potential for growth in the future. The population dynamics are strong towards bussing with a high percentage of people who are dependent on this mode of travel. We absolutely think it's also coupled to the fact that the very strong service we've continued to put out throughout the pandemic and the measures we're taking to promote that service too.

And Jarrod, it's Chris. On costs, I think it depends on your definition of medium term. I mean I think over 2 to 3, 4 years, I see no reason why we're not back at the margin levels we were at 2019. I think margin recovery lags revenue recovery a little in part, as we invest to bring customers back. So in the U.K., we're keeping fares down to bring the patronage back. There's a habit of lack of travel that we are looking to break in the coach businesses of the U.K. and Spain. But look, we were really thrilled with North America already back to 9.3% margin, which was only about a percentage point off half year of 2019. The drag, though, links to your third point, I do think we will see a level of cost inflation in the U.S. We're not seeing it come through in wages in the U.K. We're not seeing it come through in wages in Spain. We're not seeing it come through in wages in Morocco. But in the U.S., we are tipping up a little bit as we fill what is about a 5% vacancy gap at the moment. So I am bullish about our margin trajectory into next year. I don't think we'll get all the way back to 2019 that quickly, but roll it forward, and I don't see any structural impediment to return.

Yes. And if I can add a little bit more of flavor on the margins. You need to realize that we're investing in growth. And I think that is very important. So there is a little bit of an impact on the mix. It is true that our coach businesses in Spain and the U.K. are taking longer to recover because of the restrictions. So as you know, that has -- it's a very profitable part of our business. And then we have been very successful in the new business acquisitions and you always have [ business ] step cost, mobilization cost. So it's only for a short period. And so it's an impact on mix. And then investing in growth also is adding up supply. As the airlines are doing, we're investing to put more supply to trigger that the incentive to return to travel. And also, we are incentivizing as well with fares, with -- through price to make sure that we relaunch and people see that incentive to come back and traveling. Maybe I think also one point to consider is the -- probably the transition from hibernating the whole network and all the costs that we have done, the variable part and not the structural, which are -- those are proving to be the stickiness of it is we need to transition from hibernating to having full network and that also -- and seeing the revenue coming back. So that's also an impact which is compounded into what Chris mentioned.

Joe Thomas, HSBC.

Ignacio, Chris. I'd just like to, first of all, I understand -- interesting, the data point you've given that June revenue was 85% of pre-pandemic levels. I'm guessing that's [ flapped ] a little bit by some acquisitions that you've made and contracts you've won. Do you know if somehow -- which I guess, in itself sort of feeds into your margin point you've just made, any sense of what it would be if you strip that out? And I'm guessing kind of 5-ish-percent lower, but any sort of thoughts on what M&A and contract wins have given to you? Secondly, you've talked about some, obviously, competition issues in the U.K. Coach business. I'm just wondering what the strategy is there and how long you see that lasting for? And then finally, is there any update on the perennial question, please, of Spanish concession renewal and what the time line is there?

Sorry, what was your second question? Sorry, Joe, it's Chris. I was writing down too fast. What was your second question?

The second question was about competition in U.K. Coach. How sort of durable a problem do you think that's going to be and what the end game is there?

Okay, got it. Well, shall I have a go at the like-for-like revenue? It is tricky, Joe. It is tricky. There's a couple of effects. You've got -- you're quite right. We've added Casablanca, we've added Rabat, we've added Germany. And even in the U.K., we've got an element of CBSSG funding going through. I think, broadly speaking, that is about 8% of to get to like-for-like. So that 85 is probably something like 77, but it's -- that's directionally correct.

Regarding the competition in the U.K., I mean, and then Tom can speak a little bit more. But we welcome our competition and expect competitors' presence to further widen the appeals of Coach, and we believe their entrance highlights the massive potential for growth in this market. Clearly, in the short term, competition will no doubt be price based, and this is impacting margins. But we know that it is not sustainable to have a strategy just based on significantly pricing below the operating cost. So -- but we think it will also stimulate demand. And we know that when coach ticket prices are reduced, passengers are tempted away from rail. And we are sticking to our value proposition. And we monitor very closely our internal customer satisfaction and [ Trustpilot ]. You only need to look at it. And see how we perform against our competitors. And we're pleased to see that our customers value safety, reliability, comfort and coverage. And as I said, how will we compare against competitors? And at the end, it will be customers having the say. And as I say, it is not sustainable, the strategy to sell below the operating cost. In that respect, we have a very clear plan. We have a dynamic pricing defensive strategy that we monitor on a daily basis. And I don't know if you want to add anything, Tom, on that?

Yes. I mean I can just provide a bit more color. I mean, clearly, we're going through a phase at the moment to relaunching our network. At this point, our network size is now getting to a point where we are 10x the scale of our nearest competitor, and that is growing fast as we put the mileage back on. So we see our approach as Ignacio said, one about competing very vigorously on price, but also highly on quality. We know our customers value that high-quality offer. We also welcome this. I mean we've seen on some of our corridors, which are the most competed at the moment, that patronage is now above 2019, which is evidence of the market growing. We've seen this in the past, but on some of our key routes now we have more people than 2019. And so it is supporting both. And the prices and yields are increasing. The strategy which you will have seen of our new competitor is to come in at below operating cost per journey, but they don't sustain it. And as the prices come back up, the market is bigger. So we see this actually as an advantage, which more money going in to advertise and bring the customer back to the coach sector.

Thank you, Tom. And to your last question regarding the Spanish concessions, the long-haul concessions renewal process remains on hold as the authorities continue to absorb the impact of the pandemic on transport with no stated intentions from the ministry to restart the process in the near term. So we, therefore, see no impact on the concession renewal process on our long-haul business coach business in Spain until late '23 or '24 at the earliest.

Muneeba Kayani, Bank of America.

Just one follow-up on North America. So you mentioned the benefit from loss making -- from exiting loss-making contracts on margins for the first half and then the driver inflation pressures going forward. So net-net, how are you thinking about margins in North America in -- with these 2 impacts. And then secondly, just more specifically on '22, where do you see recovery across the businesses by '22 in terms of top line? And then margins, which I just said, you mentioned that margins would lag revenue of the company. And thirdly, can you talk about Spain and kind of competition from the new rail operator? And how do you see that playing out?

Chris, would you like to comment on the transit margins...

Yes. I mean you're absolutely right, Muneeba, there's a twin effect there. So I do -- look, I do think we'll have a short term -- and it might be as short as Q4, it might be as medium as the school year, I don't think it goes any longer, of wage inflation playing against us. We -- again, as I said to Jarrod, I think structurally, we come through this when we are rebuilt structurally with stronger margins. I think 2022 is -- there's still a level of transition to that. But I don't -- I see no reason why we should not be within a percentage point of pre-COVID margins across North America when you take those 2 factors into account. I mean their share of the GBP 100 million permanent cost reductions was pretty meaningful. The structural margin now on the transit business is higher. Shuttle is continuing to grow, and the school bus business will have a little bit of a short-term headwind from driver wages. But as Ignacio said in the presentation, I mean, we had $8.3 million of liquidated damages or penalties in 2019, we had about $9 million in 2017. And per route, so not in absolute, but per route. We've just reduced that by 78% so far this year. So there are some meaningful sort of pluses and minuses. My sense is that adds up to within a percentage point as we transition back and potentially structurally higher over the medium term.

Yes. With regards to the high speed in Spain for the group, you all know that this is coming as a result of the liberalization of Spanish rail, which has allowed other operators to enter the market. So far, it's Ouigo, so it's the French SNCF, they have entered with a low-cost offer - very aggressive. And Renfe has also introduced a lot cost division and offer matching that. We are currently only seen this competition on the corridor Madrid-Zaragoza-Barcelona. However, we expect long-haul to remain attractive -- an attractive way to travel. And we will flex our operations. This might also present opportunities to increase shorter trips routes as we look at ways to redesign our networks and potentially adding new stops where the high-speed trains are not stopping. And in that respect, I have to say that the bus and coach has more capillarity that the rail could ever have, and that is important if you look at the population in Spain, how spread it is throughout the country and the need for a reliable service offer. And things that we have done, we have new coach stations, departures from Plaza de Castilla, which is in the northern part of Madrid, to allow the use of double deckers that we have introduced to maximize the operations that we have. We, through the revenue management, have identified times where the high speed doesn't operate, and we still see a lot of attraction for, for example, the night services. So that's what I can say.

Muneeba, I think we may have skipped your second question, which I think if I wrote it down right, was where do we see recovery across the business? I mean, look, the glib answer is everywhere. I think in terms of timing right across the businesses, the bus businesses are coming back faster as one would expect. They are essential services. In Morocco, we are ahead of 2019 already. And of course, you'd expect that because of Rabat and Casablanca, but Tangier, we've got record passengers, for instance. In Spain, look, it's demand protected anyway, but we're already back at 2/3 and rising rapidly in the U.K., as Tom said, 70% and then with the fares package pushing that on. The coach businesses will lag a little. Airports clearly aren't going to be open this summer to the extent that we might have hoped, but next summer. And if you listen to Wizz Air, Ryanair and easyJet and the capacity they're putting on for next summer, that is going to bode very well for us. Transit in the States is back at 80% plus, still held back somewhat by occupancy in the smaller vehicles, where they're limited to 1 person. That's dropping soon. So that should come back. And as we said, school buses was at 96% at the end of last school year, and we expect to open at 100. So we see recovery everywhere, a slight lag on the Coach business.

Sathish Sivakumar, Citigroup.

I got actually one follow-up on and a few more questions. So just on a follow-up. You mentioned about the low-cost operator in the U.K. coach. So is it potential on the other [ end, ] players entering the market apart from FlixBus. And if you could just touch upon that? And which part of the market actually they are targeting right now, what will be your exposure in terms of your network would be, say, the new entrant? And the second one is actually in your presentation, you mentioned about the -- you are planning to do what is your thoughts for North America in your CMD. So what is your thoughts on the U.K. bus and the U.K. coach market? And then the third one, regarding the alpha, what percentages of your fare traffic is actually exposed to tourists and airport-related travel in Spain?

We've got a bit of a problem on the line here. I think the first point was around I think you're asking about whether we see another competitor versus Flix. The third question, I think you were asking about how much ALSA was exposed to tourism. And sorry, what was the second question?

Second question, in your presentation, you said that you had plans for ALSA and North America in the CMD. So I'm just wondering what are your thoughts on the U.K. bus and the coach market. Simply for the U.K. operations?

Okay. That's -- I mean, Okay. So what are our plans for the U.K. So Flix in the U.K. was #1. Second, overall plans for the U.K. And third, ALSA's exposure to tourism.

Sorry if I added any confusion. We do not see another competitor in the U.K. The coach market currently consists of ourselves, FlixBus and Megabus. As I said, we are -- our network is responding and growing very fast in line with passenger demand and we are now running in the order of 6,500 journeys a day, compared to about 600 of our 2 competitors. We are not seeing them put on more volume. And so we expect to be returning rapidly to a position where our business is profitable and sustainable and growing as we build out and return our network, as Ignacio says, in a way which is more efficient, quicker and cheaper to run than it was previously. So we see this as, as I say, a great opportunity actually to have somebody else also -- they're spending advertising money to encourage people to use coach rather than rail.

Sathish, when we talk about the low-cost entrant, it is Flix. Flix are the guy we're talking about, operating, making huge losses, operating below cost.

Yes. But they've been in the market since last year, right? That's what I was just wondering why [indiscernible]...

They had a couple of vehicles and 1 operator.

Yes. They were very -- sorry, they were very small last year. And clearly, were affected by the closedowns and everything else. So this year, you've seen them come on to a number of corridors and they seem to have stabilized this volume they're at today. I'm sure they will do bits and pieces more, but we are seeing them -- our view is -- struggle to make traction in headway despite any statements they make.

And maybe regarding on views on the U.K. I think the U.K. is an important economy in the world. So we are looking, obviously, to continue our position in the U.K. Basically, the high levels where we will anticipate before the Market Capital Day, it's continued developing our enhanced partnership -- that it's proven to be a reference in the market. There are new opportunities coming out like the Manchester opportunity and we'll be actively seeing how we can expand our bus operation. But we are extremely excited with the -- how the NETS and NEAT -- for all of those, if someone doesn't know the acronym, is the whole new transfer solutions division and accessible transport. We have good growth plans and we want to consolidate and compound in that segment. And this is what I can say at a high level, and we'll provide more details at the due time.

I'm sure Sathish, you weren't expecting us to give you any views on whether or not we would be participating in any rumored consolidation of the U.K. Clearly, in regards to the...

Yes, I was actually expecting something on those lines, actually.

Sorry to let you down, Sathish.

Your last question was on the impact on ALSA for tourism. ALSA, it is more internal consumption that we have, obviously, in the bus and also in Coach. But yes, we do have around 5% impact exposed to tourism. And obviously, yes, we do serve also as private hire for -- or shuttle for some of the airlines, and we have seen a reduction there, but it's around 5%.

Okay. So is your exposure to tourism, it's mainly in the U.K. rather than ALSA.

Yes. The coaches in Spain don't have that kind of airport routes that they do in the U.K. So that kind of Luton to London, Stansted to London, Gatwick to London, that Tom's business run. Paco doesn't have a similar business.

We will now take our next question from Owen Shirley from Berenberg.

The first one was, I was curious on Slide 27, the yard departure kind of performance improvement. What did you change? Why where they -- why weren't they departing on time before? The second question was you flagged the $150 million bid pipeline in North America. And I was just wondering if you could give more color on the type of things included here and the time frame over which those bid processes will conclude. And the third one, a bit more general around. You, obviously, talked about getting funding for the electric buses in Coventry. Bidding for funding for the hydrogen buses. But could you touch a bit more on the economics there, but presumably they're subsidizing rather than buying these buses for you. What are the operating costs of the hydrogen bus like? And I guess the crux of the question really is as this becomes more prevalent, should we expect any impact on returns on capital or margins?

I'll take the first 2 ones regarding departures on the pipeline in North America, and then Tom, you can take the other one on the electric and zero emission vehicles. On the departure, as I said during the presentation is -- we are extremely excited with the impact of driving excellence. Basically, what we did is to -- what are the main indicators and how does that relate to the bottom line? And as I explained, on-time performance is linked to the customer satisfaction and then is linked to the retention and higher margins. And when looking deep into the on-time performance, we started looking and created that new indicator. We were not looking in the past before. So if you don't do right first time, things very difficult you can deliver the end result. So we just put focus on it. And it was that collective sense of urgency and the drumbeat and visibility to manage that. And again, if you think that with the number of drivers that we have and the cost of the wages, et cetera, it's -- every minute, you reduce from operations, it costs a lot of money. And we calculate, it's around 1 million. So -- and this is what it's having a clear reflection in the bottom line of this massive improvement in on-time performance rooted. And again, we are just introducing this, the methodology that we are applying in driving excellence is what we have launched worldwide, which is the new quality management framework and continuous improvement. And it's really understanding what are the root causes of issues? Where are the bottlenecks in our processes? And through that, and I think I mentioned that before, in -- we knew there were opportunities because we were very successful in building and acquiring businesses, but we knew that we had that opportunity to integrate those processes and have the standard processes. And as we speak, we have already reviewed and removed the waste of those processes of [ 2019 ] and key operating procedures. And that really has an impact in the service that we can provide and the cost efficiency of that service. Regarding the pipeline, it is -- yes. I mean you know that we have said in the past, probably that we had a huge millions and billions of what -- we are extremely disciplined is in the review and we have new processes to look at the pipeline and really be laser focused on those who are profitable, and we have -- in all areas, we think -- if you go to a school bus first, we see that -- and as I mentioned, we are working right now because we see that the next year's bidding season will be very strong. But going through transit and shuttle this GBP 150 million is in power transit. They are coming up in September, October, November, some of important bids. We have good CapEx light, asset-light opportunities, which is also -- and very important for us and matches our return criteria. And we see also in the education sector. As you know, we have -- we are focusing in shuttle also in education and hospitals, and we have been successful in getting new business in a couple of universities, and we have other in our radar. And also opportunities within those GBP 150 million come from existing customer who wants to extend the services. And if you remember, we told in the past, how shuttle is very much based in California, and some of those big customers want to move to other areas of the country. And that's the beauty of the platform that we have built also in North America as the one that we have in Spain and the one that we have in the U.K. because we have a big footprint in -- with the school bus and transit and there are synergies opportunities over there. So we can be more competitive, more cost efficient. And those basically are the opportunities that we are seeing in transit and shuttle.

Okay. So regarding 0 emissions in the U.K., the current regime is roughly 75% of the premium between a standard diesel vehicle and a 0-emission bus is covered by the grant. So that's both the vehicle and the infrastructure costs. We -- our current view of this is that battery electric and fuel cells are moving at slightly different paces at slightly different points of the development curve. But battery electrics are now -- the operating costs going forward are the same or lower than diesel. This is supported by the recent change to the bus -- the BSO grant regime increasing up to 22p for 0 emissions, which puts it in line with diesel. It's no better than, but it is in line. So this means the operating cost is lower. So the P&L going forward benefits from this as these vehicles become more prevalent. The fuel cell vehicles we expect to catch up. They are slightly more at the moment, but will come in line. In terms of the impact of the capital, so the -- clearly, the grant reduces that capital requirement. Doesn't nullify it, but we have an existing fleet, which requires replacement. That said, we are -- as the release says, we are putting in place an availability model to manage this so that we will be looking to fund these vehicles in a different way through a [ fleet co ] and an availability regime.

Brilliant. And can I just ask a quick follow-up on the yard departure again? Sorry if it's sort of same at this point. Your anecdotes can be quite helpful for us. So it would be useful to understand why were 50% of the buses not leaving on time before? Was it because the drivers didn't understand and have it...

To be very blunt, we...

[indiscernible]

You know that you cannot improve what you don't measure, and we were not measuring that. And now we are. That comes also back to something very important that was done last year, which was the introduction of a master schedule, which route by route, you have a clear time to depart and all the operations is synchronized. And so we introduced that -- and when we look how to further improve the on-time performance, then again, you go back to root causes of issues and then you -- as I said, we were not measuring that. And since we have put our focus on it, we have massively improved it.

And the sort of things they've done to improve it, it's a long, long list of very small things. I mean, it can be the way the vehicles are parked. It can be the order in which the scheduler gives drivers keys. I mean it's really, really micromanaging that sort of stuff, and it takes minutes and minutes and minutes out. And where it hits the bottom line is, as Ignacio showed on the slide, not paying these blooming penalty charges for turning up late, because if you leave late, you tend to turn up late. We were also finding days of weeks -- Fridays were worse than Mondays, Tuesdays, Thursdays who would have guessed. But it's been a kind of reengineering of micro processes at the yards once they understand it, once it's league tabled up and once they want to get to the top, all sorts of little bits and bobs get changed to pull the minutes out.

Yes. And this is what -- again, what we're bringing with the new quality management framework and the continuous improvement process with the [ forward dips, ] for the steps. It's equipping the front lines with the tools -- the right tools -- to have those statistical tools to identify where the issues are and what this issue is specifically. And when -- aggregated numbers are very difficult. But when you start to disaggregate, you start seeing those opportunities and then you start correcting. And again, that's all about the continuous improvement.

Gerald Khoo, Liberum.

Just picking up on the last question. Sorry to push on this again. But within driving excellence, you talked about the need and the importance of standard operating procedures and all of the micro measures that you've talked about, how do you drive compliance with those standard operating procedures across what is a very large business with a very large number of individual operating units and drivers? And secondly, on the GBP 100 million of annualized structural cost savings that you talked about, can you give us some examples of where those savings will come from? And also where in the group they're falling? I think you talked about North America having a meaningful share, but can you just give an indication as to how they fall across the divisions, please?

Okay. Well, on driving excellence, it is a very comprehensive and a big program. So the first change was to have a program management director, officer who is bringing all together and defining very well the work -- the different work streams who have a project owner. And so you have action leads, you have -- for every action, you need time lines and responsibility, and it is the drumbeat. So we follow -- they follow every week, they follow every week, every month with us -- with me and the central team. And it's about execution, focus on execution. But -- so driving excellence basically was to identify what are the KPIs that we're going to follow. Do all those changes and review the processes and making sure we all work together because that's the way you get efficiencies. But then it's about the -- also the cultural transformation into a high performance. And that is about the daily routines. So with those standard operating procedures, we have defined what is the daily routine. What time do you get to the office? What sort of reports do you look first time in the morning? What do you do next? How do you do the standup meetings with the rest of the team so everyone knows what's happening? It's the closure of the day to understand where do you have deviations and what are you going to do next day to make sure that it doesn't happen again. And that is about the drumbeat. And so just for you to know, we are having -- they have weekly goals every -- they have within the regions, the daily call. Within the country, the weekly calls with the COO. They have the monthly -- they also -- a monthly call with me, they have -- we have a monthly review, so it's about that drumbeat. And again, there was one important component which was the organizational blueprint, and we have advanced and progress a lot in 6 months. So we have already implemented a change in regions. And at the end, it's all about the scope of control that you can have, how many senior vice presidents do we need, or how many regional managers or how many general managers and how many general managers for every different types of depots and sizes and volume, how many people do we need to have and standardizing what they all need to do. And this is how you start getting efficiencies, so I don't know if that adds a little bit more flavor on what we're doing.

And Gerald, on the 100 million costs, we've kind of previously put broad numbers out as EUR 25 million also GBP 25 million U.K. and at least $40 million, it was $40 million to $70 million, actually, in North America, and there's a chunk at the center as well. There is a very long list of drivers. The biggest single one is taking out back-office and support costs. So in the U.K., Tom has outsourced quite a bit of finance, HR, et cetera, into India. That's had a meaningful saving in ALSA, they've got somewhere between 30% and 50% of central costs out. You might ask, well, why wasn't that possible before? I mean it's really been reengineering the way they look after the multiple different operating contracts within that ALSA business. In North America, we've taken out an entire layer plus we crushed together -- we effectively had 3 centers. We had a transit center; a shuttle center; and a school bus center. We no longer do. And the other big component of that North American number is some of the delivering excellence savings, which, I mean, frankly, when they come out, are as just as structural as taking out a layer of management. But we were looking at the ALSA list because as you might imagine, we look at this quite carefully here at the center. The ALSA list alone had, I think, 2 pages of A4 of kind of font size 10 of 100,000 here, 200,000 here, 100,000 there. So it's not 1 or 2 big silver bullets. It's a consistent squeeze right across the piece. But very, very pleasingly, we've seen it come through the numbers demonstrably in the first half. And look, my job now, Gerald, is to stop it creeping back. Never let a good crisis go to waste, right? And one of the silver linings of this pandemic has been, people have been better able to and more accepting of cost reduction. I've just got to make sure it stays out now.

We'll now take our last question in the queue from Alex Paterson, Peel Hunt.

I've got 4 questions actually. And just sort of linking the last question, I wonder if you could just sort of join the dots between the GBP 44 million of permanent cost savings in that GBP 100 million. What is the sort of the profile to get there? How long has it taken -- that sort of thing? Secondly, on the transition from government support, can you just say if there are any businesses that you think that you won't be able to either realign networks or recover revenues as quickly as the government support may drop off. Thirdly, on school bus pricing, clearly, wage inflation may be a more prevalent feature, the market leader is now owned by private equity, so that may change the pricing dynamics. Do you expect price increases to rise as we go through the coming bid seasons. Or would you use the opportunity to take more market share perhaps? And then finally, just on the exceptionals, you have GBP 18.6 million directly attributable to COVID-19. But of that, some of these things are sort of compensation payments, onerous contracts, that sort of thing. These tend to happen from time to time anyway. Are all of those going to drop out or would some elements of those be continuing?

Thank you very much, Alex. Do you want to take that, Chris?

Should I take the first and fourth? So the 2 numbery ones. I don't know the exact profile of the 44 to the 100, Alex. I have a hard -- I have a good belief -- I can see the 100 annualized. Some of the work is still ongoing. So for instance, you would have seen part of the exceptional charge was a GBP 10 million restructuring charge. Most of that was in ALSA. Some of that was in the U.K. Some of that was in the Corporate Center, a little piece of that was in North America. So there are still some changes to come through. Will we have it all in this year? I don't think so. Will it all be in '22? Absolutely. In terms of the exceptionals, look, no finance director you ever talked to wants to put out a set of numbers with exceptionals in. And I really don't. I don't like it. I don't want to have to do it. The exceptionals, the onerous contracts and the payments are absolutely 100% COVID-related. The payments are in Tom's business, where he is paying the third-party operators, frankly, to keep them alive while they were mothballed. It was a de minimis payment per operator, but it added up. And the alternative is quality operators going out of business or falling into the clutches of FlixBus, and we took, we took the view that we were not going to let either of those happen. As Tom gets closer to 100% network, those will fall away to 0. So I'm expecting negligible exceptionals of any kind in the second half, let alone afterwards. The one exception being we have always and will always carve out amortization of acquired intangibles. The rest of it, you can expect this to be the last year and materially the last half for those sorts of numbers.

And regarding -- there was a question on the school bus pricing. This year, we have achieved a 3.7% rate increase on expiring contracts, which is above inflation. And that leads to a 2.9% rate increase on the overall portfolio, which we are very pleased with it, with the new process that we put together. Where we analyze exactly contract by contract, what is the profitability, how can we improve the efficiency of the operations, what is the wage increase expectations in every single of those operations? And then we have put our proposal. It is true, as we have mentioned, is a potential risk or headwind, the wage increase in North America, is still to see -- we clearly see the impact for Q4. We are not able to estimate how this will look next year. Because obviously, as we have mentioned, when the temporary -- I mean, when the enhanced government support ends in September, that will in itself make a pick up on more drivers available in our case and people, because it's all sectors of activity. And again, if that is the case, we will certainly need to recover through pricing. And to your questions, are we interested to be very aggressive on price to get market share? We think the new equity will be more rational in terms of pricing. And we don't want to be just for the sake of being just bigger, we want to be better to be able to have the right levels of return to reinvest in the business into profit by area. So that's our view.

Just to build on that very quickly. I mean, EQT have got a 5- to 7-year holding period likely on the student business. They will need an exit multiple better than their input multiple. And the only way they're going to get that is to drive up prices. So you've effectively got EQT holding the #1. You've got CDPQ. So EQT, they're not private equity -- actually, it's an infrastructure fund. An infrastructure fund holding, #1, you've got a pension fund holding #3 and you've got us holding #2. I foresee this without saying anything disparaging about previous competition, I foresee this being a more rational pricing market.

There was another question on the transition from government support in -- overall in the business. That's more -- the impact is more in Spain and U.K. I mean we want to live without the government support but both in Spain and the U.K. they are extending the support because, obviously, they know the consequences on the network. I think we have proven to be very good to adapt the networks and supply to the demand. So we will -- we have confidence that we will correct adequately in that respect. And as I said -- we said before, what we're doing now is to make sure that we drive the ridership and patronage, and we're incentivizing to get as many passengers as possible as soon as possible.

Alex, there's no cliff edge. If that was behind your question, there's no cliff edge. So in the U.K., we've got to taper from CBSSG through to recovery partnerships, and that looks to be smooth. And actually, the [ FA ] funding in Spain predates COVID. So there is no cliff edge on any of our businesses.

And following -- and of course, following the end of the recovery funding we move in the U.K. into the national bus strategy which is the GBP 3 billion program the government has to support industry growth going forward. So in some ways, the U.K. bus market has the most supportive government -- ongoing government regime that it's had for decades, which will keep us really at the forefront of public transport. And the move is to actually encourage commercial operations through making road space better, et cetera. So the next few years seem actually very encouraging for the bus market.

Absolutely. We certainly look forward to that growth.

Thank you. As there are no further questions in the queue, I would like to hand the call back over to Ignacio for closing remarks. Over to you, sir.

Well, thank you very much for the call and look forward to talk to you in -- shortly. Thank you very much. Goodbye.