Mobico Group Plc (MCG) Earnings Call Transcript & Summary

I'm first going to take you through the highlights of what has been a strong first half performance. Chris will then go through the financial review, and I will come back to talk about the progress we are making with our evolving strategy and the exciting opportunities ahead. I will focus on 4 key areas today. The first one is that we've delivered revenue growth, a strong revenue growth. Actually, our record revenue result for the first half of the year. Group revenue is up 34% to GBP 1.3 billion. We are seeing strong growth across all divisions, but particularly in our coach business in the U.K. and Spain. Momentum is building with Q2 stronger than Q1. Secondly, this positive momentum is converting both to profit, into profit and cash. We're seeing significant operational leverage as we return to scale and have generated more profit in the first half of this year than in the whole of 2021. We've delivered a step-up in margin to 7%, and cash conversion has risen to 70%. Thirdly, the Evolve strategy is delivering and there is more to come. Our pipeline of bid and M&A opportunities continue to grow, now worth GBP 2.1 billion. We continue to win new contracts, adding 16 in the first half worth GBP 150 million over the contract lives. We've successfully mobilized our first contract in Portugal, and we're down to the last 2 bidders for a sizable urban bus contract in Dubai, which would be another new market for us. We are also progressing well in transitioning to our fleet to 0 emissions vehicles. Our U.K. Bus business is on track to be 50%, 0 emissions by 2025. Fourthly, the strong progress we've made in the first half and the positive momentum we are seeing provides confidence for the full year. With the management actions we have taken across the group, we are well positioned to manage inflationary pressures and the potential impact of an economic downturn. Our U.K. Coach business will see further recovery in the second half with the U.K. division expected to return to profit for the full year. And finally, we continue to anticipate reinstating a full year dividend with our full year 2022 results. We have made good progress across each division. In ALSA, strong performance in both Long Haul and Morocco were key drivers of the 60% growth in revenue. And the 172% growth we have seen in Long Haul has driven a record result for revenue per kilometer, up to 19% year-on-year. With the acquisition of Paratransit business in Madrid, we have entered a new market that is worth GBP 1.4 billion. And we successfully mobilized in Lisbon, the first of 2 contracts in Portugal or 11 countries. And we hope to be entering at 12 with the Dubai contract. Being the employer of choice is also a target outcome for Evolve. So it's great to see that we have been awarded the best place to work in Morocco as well as being recognized by the Ministry of Labor for our work in diversity and inclusion. In North America, our Shuttle business had a great first half with revenue up 28% and profit ahead of 2019 levels. We also won 9 new contracts in the half. Our transit business is growing organically and will be further boosted by an asset-light paratransit contract in Richmond, Virginia, worth $80 million over the life of the contract. In the school bus, we are achieving rate increases ahead of the expected wage inflation, and it's encouraging to see that our relentless focus on safety has driven 25% reduction in speeding events. In the U.K., [indiscernible] our buses is continuing to outperform the industry average. And like ALSA, the U.K. Coach is seeing a big recovery with a strong tailwind into the second half. We've also seen an improving trend in the Net Promoter Score, customer satisfaction. We are transforming public transport in Coventry. The first tranche of electric buses have arrived, creating the first all-electric city and we'll have 130 operating by the year-end. And what's really encouraging is that our first batch of 0 emission vehicles are delivering efficiencies ahead of our expectations. Independent analysis from DfT shows that fuel consumption is 37% better than the U.K. average for emissions efficiency. Our 0 emission vehicles are also 39% more reliable than a comparable diesel bus, saving us almost 60% in expenditure on parts. And finally, in Germany, we have successfully mobilized 2 emergency rail contract at very short notice. This underlines our growing reputation with -- for reliability with a local PTA and should strengthen our credentials for future bidding opportunities. I will now hand over to Chris, who will talk through the financials.

Thanks, Ignacio. It feels great to be backing up here again. Let me start with a summary. We delivered strong top line growth across the business. As Ignacio said, grew revenue by 1/3 to over GBP 1.3 billion, and that is the highest level of first half revenue we've delivered in well over a decade. As we built back scale, we've then benefited strongly from operational leverage. So that 34% revenue increase flow to a near 300% increase in underlying operating profit of GBP 91 million, a 54% increase in EBITDA to nearly GBP 200 million drove free cash flow of GBP 64 million. So a very strong 70% cash conversion. Covenant net debt of GBP 947 million was up GBP 74 million versus last year, but as I've come to most of that is FX. And then to round off the group returned to statutory profit, recording GBP 16 million for the year, which is an improvement of GBP 40 million year-on-year. So I'll now talk you through by division. As Ignacio said, ALSA delivered a very strong growth, both in revenue and underlying profit, revenue up 60% to GBP 444 million on a constant currency basis, driven by a very strong recovery in passenger demand across all businesses, particularly in Long Haul, where passenger journeys were up 162%. Urban bus revenue grew by 38%. Now that largely reflects the acquisition of Rober in 2021. Regional was also up strongly, with revenue up 22%. Morocco delivered 25% revenue growth, where we had organic growth in every single one of the cities boosted by the finalization of the mobilization of Casablanca. So underlying operating profit and margin have recovered very strongly, in part driven by our revenue management systems, which drove an increase in both occupancy and yield and drove revenue per kilometer 19% up higher year-on-year as effectively price. Underlying operating profit of GBP 50 million represents a GBP 33 million improvement versus the same period last year, with margin up 530 basis points to 11.3%. In North America, we again delivered strong growth in both revenue and underlying profit in the first half, and that reflected the continuing improvement of trading throughout the business. Revenue was up 7.5% to GBP 519 million on a constant currency basis, which was driven by strong growth in both our school bus and shuttle operations. And while we delivered revenue growth of 8% in school bus in the first half, that rate of growth has been impacted by the ongoing industry-wide driver shortages, which resulted in about 10% of our contracted routes not being run. And I'll come back to that point a little later. Transit grew revenue by 5%, with service levels now running at about 83% of 2019 levels. And we have a very strong pipeline in both transit and shuttle. We've got bidding opportunities coming up over the next 18 months' worth of $600 million. We won't win all of them, but we won 10 of them in the first half worth $80 million. Underlying operating profit rose by 30% to GBP 57 million on a constant currency basis, and margin was up by 190 basis points to just over 11%. In the U.K., the U.K. also delivered strong growth in revenue together with a vastly improved underlying operating result. Revenue grew by 37% to GBP 237 million, and that was driven predominantly by Coach, which saw a rapid rise from April onwards. The first quarter was impacted by the Omicron variant. I'll come back to that a little later. But coach revenue grew by 359% and is now running at over 80% of 2019's level. Occupancy levels are now approaching 70%. Yields are up 9% versus 2019 as the dynamic revenue management system improves returns. U.K. bus operations have also seen improving trajectory with passenger demand with passenger -- commercial passenger revenue now running at about 87% of pre-pandemic levels, and that's still ahead of the industry average. And that's driven by the combination of our low fare strategy and our ongoing partnership with transport for West Midlands, which has delivered upgraded bus priority infrastructure to reduce journey times. Now we did make a loss in the half that underlying operating loss in the U.K. of GBP 13 million represents a GBP 7 million improvement versus the same period last year. But within that, really a tale of 2 quarters and strongly improving momentum, which I will come back to in a couple of slides' time. German rail business delivered a very strong performance in revenue and profit. Revenue is up 59% to GBP 124 million, and that's largely reflective of the emergency contract awards at the beginning of the year. Underlying operating profit of GBP 3 million marks a return to profitability in that business and reflects the phasing of some subsidies, which hampered us in 2021, together with those 2 new contracts. And as Ignacio said, the award of those contracts really does reflect our strong and growing reputation with the local passenger transport authorities. And together, those contracts will give us about EUR 200 million of revenue across '22 and '23. But what's really key is their successful mobilization at a really short notice further strengthens our credibility and credentials for further bidding opportunities. Now I know I've spoken to a number of you so far this morning, and you've all asked me about separately disclosed items, so we'll hit those straight on. GBP 48 million in total, of which GBP 23 million represent cash outflows. And look, as we've [ signaled ] previously, the directly attributable gains and losses due to COVID only includes changes in estimates to items previously recorded. So there's nothing new in that, there is a GBP 3 million reassessment of items previously recorded. The new item is during the period, we identified a number of onerous contracts in North America, which have been driven by the national driver shortages. So what we have done in the half is provided to the end of the life of those contracts or until the renewal point of those contracts and that is an exceptional expense of GBP 19.7 million, which we've recorded exceptional because of its size and nature. In the first half, only GBP 2 million of that has been utilized in the second half, maybe another GBP 6 million, the balance in '23 and then going on '24 and beyond. So it's not distorting these numbers. It's a charge we've taken for future contract usage. So at the end of 2021, you may remember we recorded an onerous contract provision for the RRX contract within German rail. This has been reassessed with a further charge of nearly GBP 5 million recognized in the period, and that is all reflective of the increase in long-term energy costs, where the accounting makes you sort of look at what you're paying now and factor that over the life of those contracts. But look, this is a single aspect of a single contract, and we remain increasingly confident in the current and future profitability of our entire German rail franchise. And finally, other [ up ] there is the transaction fees of the aborted Stagecoach deal. As you can see on this chart, we have continued to build back operating margin, driven by that operational leverage as we build back scale. Underlying operating margin is up 450 basis points to around 7%. And as expected, in the near term, that continues to be below the level we generated in 2019 for a couple of reasons. Almost a full percentage point of that margin difference comes from business mix. And the chief factor there is the relative growth of German rail within our overall business. But as you know, that is an asset-light business with a consequently really high return on capital employed. Also in the first half, the main driver -- the main driver, actually the difference now versus 2019, it was clearly the U.K. As I said, it reported an operating loss in the period. This was driven by Omicron in Q1. Q2 has rebounded very strongly, and I'll show you that in the next slide. Now countering that in the full year, we do expect North American margins to come off the first half level a little as we are not forecasting full resolution of the driver shortages issue. And in the first half, those driver shortages were somewhat offset by CERTS funding, and that funding is no longer available to the industry. If you wrap all of that together, overall, we are expecting group margin for the full year to be slightly ahead of the first half and resulting in around 7% as previously guided. Now this is based on a central forecast of what our proposed wage investments will do to the vacancies. And we are assuming they will be sufficient to recover around 1/3 of the school bus routes lost from the driver shortages in the first half. So clearly, there is both upside, hopefully, and potentially downside to that central forecast if we do better or worse than nailing 1/3 of the vacancies. So look, as I said earlier, our U.K. business recorded an operating loss for the period, but this disguises a sharply different quarterly profile, as you can see in the chart. There was a significant uplift in trading in Q2 versus Q1, delivering a swing in underlying operating profit of GBP 29 million between the quarters and building really significant momentum for the balance of this year and beyond. Again, I don't want to labor the point, but it was driven by the Omicron variant in the first quarter and was most pronounced in the discretionary coach business, which you can see on the right. And you can clearly see how demand has rebounded in both airport and into city travel. And as it does, we benefit from that operational leverage as our fixed costs are covered. That is then compounded by the active yield and occupancy management that we talked about earlier. So U.K. Coach was profitable in June, and we expect to see further improvements in the second half as services ramp up over the summer period and fully expect the U.K. to return to strong profitability for the full year. Now I want to say a few words about school bus driver shortages. The consequent wage inflation and the pricing power we have to offset this with rate increases through the contract renewal cycle. So a bit of maths. Driver wages amount to around 40% of school bus revenue, and we anticipate average driver wage increases of 10% to 12% across our portfolio of school bus operations. Where the contracts have been renewed this year, which is around 40% of our total portfolio, we've secured average increases of 10%. Across the non-expiring contracts, we either have fixed rate or CPI-linked increases in the contractual terms. And across all of those contracts, that will yield an average price increase of around 4%. Therefore, together, that nets to a rate increase of around 7% across that entire portfolio. Now assuming all other cash costs, which are about another 30% of revenue, inflate at around 5%, and that's probably conservative. That 7% increase on price would cover most of that cost inflation. So most of the contracts not expiring this year are up for renewal over the next 18 months, and we are confident, very confident that we will recover wage inflation through price in those negotiations as we have done this year. So in summary, and this is a key point. School bus is a relatively inflation resistant business due to the nondiscretionary nature, which gives us a high degree of pricing power. Now we do expect some temporary margin impact over the next year, which is factored in already to the guidance we've given. But that is more about driver shortages than it is about inflationary worries. And as I said earlier, our central forecast is that the proposed -- those wage increases that I've talked about are sufficient to close about 1/3 of that driver shortage that we suffered in H1. And over the first few months of the schools reopening and then the balance of those -- of that shortage closed over the next 18 months. I'd like to make a brief but important comment, too, on weakening economic conditions here. The industry-wide shortage of school bus drivers is perhaps the #1 business risk that we face in the near term and a softening of the U.S. economy could prove very helpful to recruiting and retaining those drivers. Let me now give you a sense of how the rest of the portfolio is positioned against inflationary pressures because I know that's on everybody's mind at the moment. What we've tried to show simplistically in this chart is a breakdown of our group by revenue into major business lines. And we've color coded it green, where we have high levels of contractual inflation protection and amber where we are more reliant on passing cost to consumers. Now on the cost side, as you know, already, our fuel is hedged in a rolling 3-year cycle. We've got 2022 fully covered; 2023, 75% covered; 2024, 35% covered all at an average price lower than we paid in 2021. You know that staff costs are typically covered in a multiyear collective bargaining agreements and other input costs are subject to long-term supply agreements. So that's the cost side. Now our contracted businesses typically benefit from a good level of protection against that inflation, containing either annual fixed price or inflation-linked price increases and, in some cases, a direct pass-through of cost. In total, 2/3 of our group revenue is contracted, and all of that contracted revenue has some form of annual escalator allowing the passing through of cost increases. And around half of that contracted revenue is effectively fully inflation protected. Outside our contracted businesses, the rising yields in our coach operations demonstrate our ability to flex pricing, to rapidly adapt to changing travel patterns. Our U.K. Coach business delivered a 20% increase in yield year-on-year. Also delivered a 19% increase in revenue per kilometers. And it's worth noting that whilst demand elasticity is important in these businesses, in an environment where the cost of fuel and hence, private motoring is escalating, this is supportive. Finally, if I created the same kind of chart for resilience to a weakening economy, it would look very similar. We have got relatively high defensive characteristics in the face of a possible economic downturn. In North America, much of what we do is essential service, children have to go to school, mobility for less able people is government protected. In ALSA, around half of our revenue is protected with no demand risk, no demand risk in urban bus and about 70% in regional bus. In Morocco, our biggest contract has no demand risk. And across the rest of the cities, there are few options other than public transport for people going to work and school, et cetera. And then the U.K., both coach and bus are the cheapest forms of transport. And in Germany, the majority of our rail contracts have no demand risk. So we have uncertain times in front of us. I think our business is about as well positioned against those uncertain terms as you might hope to be. Now let me turn to cash flow. As I said earlier, we generated EBITDA of close to GBP 200 million in the first half. GBP 88 million of maintenance capital expenditure, as you know, is primarily fleet replacement, higher year-on-year as we have returned to normalized operations. That maintenance CapEx is about 0.8x depreciation as we guided at the start of the year. GBP 25 million outflow on working capital, a strong cash collection was more than offset by the utilization of the CERTS deferred income disclosed last year. So we booked it last year. We utilized it this year. Net interest paid decreased by GBP 4 million over the period. Some of the bankers really won't like that, of course. And that was driven by the saving on the private placement facility that matured in August '21 and some timing of interest rate swap payments. And the net impact of all of that was free cash flow of GBP 64 million, representing a strong free cash flow conversion of 70%. So to round off on cash. Growth capital expenditure here of GBP 29 million is predominantly related to the Casablanca fleet. Acquisitions of GBP 18 million are predominantly the further 10% stake in WeDriveU and the GBP 6 million acquisition of Vitalia in Spain. We've got the GBP 23 million of cash outflow on exceptionals that I talked about before, primarily utilized through onerous contract provisions. And that other cash flow number there of GBP 62 million is primarily the movement in exchange rates. And therefore, overall, it accounts for about 2/3 of our net funds outflow for the period. And that all results in covenant net debt of GBP 947 million, with gearing falling back well within pre-amendment covenant levels back at 3.1x EBITDA. And by the way, in terms of liquidity, we still have GBP 1.9 billion of debt and capital committed facilities with an average maturity of nearly 5 years. And at the period end, we had a total of about GBP 0.8 billion in cash and undrawn facilities as a slide in the back, if you need. I did want to take a minute just to reiterate quickly on our capital allocation model. This is unchanged, but I think it's worth reiterating. We seek to broadly balance this business in 3 areas: first, to invest for growth, targeting investments that deliver 15% returns. And in the near term, as Ignacio said, we are focused on asset-light bid opportunities, but we have a total of GBP 0.8 billion of those type of opportunities within our GBP 2.1 billion current opportunity pipeline. Second, we want to pay a dividend, a targeted cover of at least 2x, and we fully intend to restate that dividend for the full year based on our expected outturn at the moment. And third, to get that net debt-to-EBITDA level back down to within our range of 1.5 to 2x. I expect to be somewhere between 2.5 to 3x by the end of 2022, with FX being the driving factor of exactly where we sit in that range. So let me finish just by reiterating the guidance or at least the bits I haven't already covered as we've gone through those slides. These strong first half results really increase our conviction in the guidance we've previously provided. Look, there are challenges to overcome in filling school bus driver vacancies, but we still expect 2022 revenue to be at least at 2019 levels in constant currency. We expect operating margin to be around 7%. And in summary, we are really pleased with our first half performance and our prospects remain strong. So I'm going to hand you back to Ignacio to hear more about those prospects and how we're progressing with Evolve.

Well, thank you, Chris. Let me return to our progress against our Evolve strategy. Let me start with a remainder of Evolve, which we set out in our Capital Market Day presentation last October. It has our vision at its center, to be the world's premier shared mobility operator and our purpose to lead modal shift from cars to mass transit. We have 5 clear customer propositions underpinned by technology, and we are ruthlessly focused on the outcomes. I'm pleased with the progress we have made in the first half of on each of our customer propositions. I will talk through a couple of case studies to show how we are reinvigorating public transport in Lisbon and delivering operational transformation through our emergency rail contracts in Germany. Elsewhere, in terms of multimodal expansion, we have been awarded an urban bus contract in Geneva, expanded our multimodal hub. It's our first all-electric bus contracts, so an exciting milestone for us. And in the U.K., our Transport Solutions business has launched operations in the West Midland, leveraging existing infrastructure to deliver cost efficiencies as well as growing revenue. We are also making progress in filling the gap -- the transit gap, winning 10 new contracts in North America in the first half, 9 in shuttle and 1 paratransit and most of these are asset light. I promise you a couple of slides to show off in action. So firstly, I want to talk about our highly successful mobilization of Lisbon, our first contract in Portugal. And as I mentioned before, we were the only new operator when the contracts were awarded last year. It's really pleasing, therefore, that we not only met all the contractual milestones on time, but we did this ahead of incumbent operators. Although this was a completely new market for us, really underlying our reputation for reliability. And while it is early days, we are exceeding initial expectations. Equally important, it demonstrates our strong and growing credentials which position us for bidding for the contracts in Portugal and other new markets. And I'm really hopeful that we will be entering another new market shortly, which will be our 12 as we are on [ 1 of only 2 leaders ] in the final stage of bidding for Urban bus contract in Dubai, which is of assessable one. The second example I want to highlight is the successful mobilization of the 2-year emergency contract. They were awarded in December. This contract were awarded after the failing incumbent operator had to hand them back, meaning that we had to mobilize them both in a matter of weeks rather than the usual 2, 3 years planning. Not only did we do this at very short notice, but we did it seamlessly delivering a safe, reliable service from day 1, a true example of reinvigorating public transport. We're also achieving operating efficiencies with our existing contract in North-Rhine Westphalia, with the operating leverage, improving financial returns digitization is playing its part here, too. When we took over these contracts, we used scheduling tools to analyze historic scheduling data. We have already identified waste and inefficiencies that will deliver operating savings of over EUR 1 million. And as with Portugal, this successful mobilization only serves to build our reputation for reliability with the PTA, again, strengthening our position for further contract bids and contract renewals in 2024. A key enabler of or above the strategy, and I'm very passionate about this is the digitization to achieve ongoing improvement in our outcomes. And here, again, we are making good progress. Let me focus on just a few. We have implemented virtual reality simulation training for our drivers in ALSA, Morocco and now we are rolling it out in the U.K. This is increasing safety awareness and performance before to go out on the road. This reduces risks for new drivers and enables dynamic testing. We continue to roll out transformation programs across all operations to make us more efficient and drive improvements for our customers. In North America, we're implementing Bytecurve, a program which automates and optimizes many processes, such as the daily scheduling and dispatching. This is now rollout to around 50% of our locations, and we are already seeing results with 15% better scheduling compliance, that's enabling us to better manage driver cost and once completed, achieved around $6 million in cost and efficiency savings from this one platform. We are rolling out the apps to enhance our customer experience. For example, in ALSA, we launched Mobi4U, Mobility-as-a-Service app and to be used for travel on all types of mobility service in a local area. This makes it more convenient for customers to plan their journeys with real-time information on services, journey times, connections. We have rolled out the app in more cities and towns this year across Spain and Morocco, and we have also introduced QR codes, making payments easier and more convenient for our customers. Ultimately, making travel more convenient will help to drive the modal shift. We are focused on building a scalable digital assets that can be applied on a group-wide basis to make us safer and more efficient and improve the customer experience. It will also drive revenue growth and improved financial returns. As you can see from this slide, there are a huge number of areas where we can apply digitization. From the development and improvement of operational tools, platform management, distribution channels and customer information through to data management, developing new ways of doing business and improving central processing. A good example is Salesforce, which we're using across the group. This is not only automate sales processes and customer invoicing, but will also improve revenue collection and customer satisfaction. Moreover, it provides a single customer view for B2C that is being used in U.K. Coach and rolling out in bus to replace an old bespoke system. We are also using artificial intelligence and analytics to inform operational and commercial decisions. For example, in fleet management, we are using IBM's maximum to transform our engineering processes across the group. First, this was first introduced in ALSA. And now we're rolling out in the U.K. and North America. This is using artificial intelligence, predictive maintenance tools to optimize performance of our fleet, which will reduce fleet downtime, extend vehicle life and enable a reduction in parts inventory. We are continuing to make good progress on our above outcomes. In terms of satisfying customers, our U.K. Coach business has seen a 7% improvement in the Net Promoter Score in Spain Long Haul, has seen a 5% increase in customer satisfaction. On safety or fatalities and weighted injuries per million miles score has improved 50%. It's particularly pleasing to see the results in Morocco, where the significant improvement we have made in safety in Casablanca since we started have resulted in 28% reduction in at-fault accident. And we continue to lead the way on the environmental front with plans approved for 1,500 0-emissions vehicles by 2025. In the U.K., we will be half of our buses fleet transition by 2025. What is also encouraging is that we are delivering great efficiencies from our original 0-emissions vehicles than we had expected with the total cost of ownership, now 15% lower compared to a diesel bus. So it is not just nice to do, but also a solid economic choice. Turning to our ambitions. We have got the strong and growing pipeline of bid and M&A opportunities now at GBP 2.1 billion. This is up, if you remember, from GBP 1.5 billion when I spoke to you at the Capital Markets Day last year. And as you can see from the chart, these opportunities are broadly spread in each division with more than half being organic bids opportunities. Of the GBP 1.2 billion organic pipeline, it is important to emphasize that 2/3 or GBP 800 million are asset-light opportunities. We have got some sizable and strategic opportunities on the horizon, particularly in transit in North America with paratransit contract coming up for bid in Las Vegas, Houston and Orlando. Asset-light contracts offer, as you know, a range of operating margin, depending particularly on the level of demand risk. More importantly, they have the benefit of offering both higher returns on capital and minimal cash outlay, allowing us to grow our business and deleverage at the same time. And we have shown our ability to win this contract, securing 7, as I mentioned before, in the first half. So this slide summarizes our unique and attractive investment case as set out in our Capital Markets Day. I won't go through the -- all of 6 of those points, but I wanted to highlight how the progress we're making aligns to the -- to this investment case. In particular, we have talked today about the long-term structural growth opportunities. We are making strong progress in or above outputs to be the best-in-class operator, and we're moving quickly [ to the decarbonization ] fleet. And let me reinforce that we have a uniquely diversified and balanced portfolio. So to wrap up, coming back to the 4 key areas I talked about at the start of the presentation. We have seen a strong revenue growth in the first half and momentum is building across the group. And this is translating into strong profit and cash conversion. We are continuing to make progress with our Evolve strategy across each of our businesses and the path forward will not be without challenges, notating North America, where we have significant resources. I've explained, focused on ensuring we can hire sufficient drivers and, of course, the current inflationary environment. However, as we have shown, we are well positioned to manage inflationary pressures and barring any unforeseen global shots. I'm confident we can deliver on growth ambition for the full year and beyond. So we will now be happy to take your questions.

It's Joe Thomas from HSBC. 3, please. So on the pipeline issue, if you could just give us a bit more granularity on that, please. First of all, Ignacio said, it's grown at [ GBP 2.1 billion, I think, from GBP 1.5 billion ] at the Capital Markets Day. What's behind that? Is it a broader scope or is more stuff coming out to market now and why? And is there any sort of detail you can give about what that GBP 2.1 billion might mean on an annual basis because I guess it's lifetime value. So that would be the first question. The second thing is in ALSA, there's been some news about rent free offering free fares around Spain at the moment. I just wonder what the thoughts are on that and how we should expect that to play through. And then finally, on the subject of driver availability. If I recall correctly, the American school start going back before too long now. When do you start getting visibility on when those drivers start turning up.

So on pipeline. So it is annualized revenue at the pipeline, and it also only considers the 18 next months. So the growth from [ GBP 1.5 billion to GBP 2.1 billion ] is thanks to the sales process that we have introduced since the beginning of last year. And scaling up some of the teams, sales teams and business development teams. So we now have a much more strong process and consistent and visibility on that. So [ GBP 2.1 billion, you have GBP 800 million ] we have said out of the [ GBP 1.1 billion ] of organic, which are asset light. The rest is through M&A. So we always, as you know, look at the market, and we have there some options for the future. And again, as a good well balanced, a lot of options, very disciplined and rigorous process. And as I said, it only 18 months. We now have something that we didn't have in the past, visibility and what is coming in [ '23, '24, '25, '27 ]. And so we're starting, as I said, introducing also sales force and all these tools help us to start working on the account management plan to make sure that when they come out, we are ready for it. And again, as you have seen, we're translating them into actual new wins.

Joe, you divide it by 5, average contract. On ALSA, rent free fares, I mean, Paco could expand, but it's quite limited. So it's only for certain ticket types on certain types of line. It's also not being implemented. We think worst case if it is mid-single-digit millions worst case. And then drivers, you're absolutely right, schools start in August. By mid-August, we'll have a very good sense of where we'll be.

And the last question was on when we will see -- how many drivers are coming back? Is that -- that was -- that basically we want go until mid-August when the school restarts.

Owen Shirley from Berenberg. First question was just on U.S. school bus. How rationally appears behaving both in terms of recruiting drivers and also the prices they're putting through on new contracts? Secondly, on fuel, when do you start covering '23 and '24 at these levels? Because I think you'd sort of paused temporarily. And then maybe if I can sort of put 2 into 1 on bus. You mentioned Manchester and Dubai kind of confidence levels on those time lines, any context on potential size?

Good. I mean I have Gary with us today. So maybe on the recruitment, can you give a little bit of light on the question.

Sure. As far as what we're seeing from competitors, we're seeing driver wage increases in line with what we're doing. So we're pretty comparable in the markets that we operate in. From a pricing perspective, they're also pushing through price increases to recover the costs that we're seeing, both in fuel and driver wages. And there's no -- they're not out of line with what we're seeing in our portfolio.

Before passing to fuel hedge, there's 2 things that is recruiting and retention, and we are focusing on both directions. So it's more a retention issue than recruitment. We streamlined the process. We reinforce the recruitment, and we are having a good pipeline of new drivers. And actually, we have a reasonable size now behind the world training. It's on the recruitment on the retention time. Now what have we done? Before the left on holidays, we have announced the wage increases. So we expect a better retention this year than the previous. And it's not only that. It's about leadership, about being follow on them, be attentive with them, recognize them, and we have introduced a lot of actions in that respect as well. On the fuel hedge, would you like to take that one?

Sure. We did pause for a little bit, and we're back on dangerous one to answer in this audience of experts, but the future curves have come down quite a bit. So there's still slightly elevated spot but with fears of sort of Chinese recession or what have you, the future curves have come back down. And actually, the price we're looking at paying now in '23, '24, even '25 is 10% or 12%, 15% max higher than we were paying in '21. So we'll restart. What it has done is Tom and I in the U.K., Paco and I in Spain and Gary and I in the U.S. I've just put a little bit of make sure the senior guys are having a chat rather than letting the machine do it, but we're rolling on in all 3 markets now.

And the third question was on Dubai and Manchester, I will answer Dubai and maybe Tom being here, can take the Manchester. Dubai, we are -- I mean, we are very hopeful because we're well positioned in the buffer. So we have the finalists with another competitor. They are basically 2 lots. The combined 2 lots are [ GBP 156 million ] for a 10-year contract annualized per year. And there's an option of getting 1 lot, 2 lots on the combined operations or -- and that's where we are. So we will know very soon the outcome of the decision of the PTA.

[ GBP 160 million ] per annum.

Per annum?

Yes.

10-year contract.

Mid-single-digit margin.

And in terms of the U.K., the Manchester piece, I think we're in a good position. I mean we have a great reputation in the U.K. bus market for our engagement with the local authorities, but it will be hard fought. But we're well engaged with designing the competition. We're deeply in it. There are 2 lots. I think the total round, we expect around about GBP 100 million turnover. So again, we should know before the year is out. Although there has been a bit of slippage in the process already as this is the first time this has happened in the market.

It's worth pointing out, Tom. Tom is personally engaged in helping Manchester design the process. And that is really important that you understand that. So that has done things like allowed Manchester to change the process so that we will be allowed to run EVs under availability contracts. Had Tom not been engaged in designing as well as bidding, we would not have got that in.

It's Ruairi Cullinane from RBC. Firstly, how should we expect growth CapEx to evolve in the medium term given the greater weighting towards asset-light contracts in your pipeline? Secondly, quite impressive margin in ALSA, 11% in H1. Should we expect that to continue to grow as passengers and revenues recover? And then finally, I think Chris mentioned on the RRX onerous contract provision, that was a function of the energy costs, which you're paying currently. So does that mean the accounting rules compel you to increase the onerous contract provision if energy prices spike and then release it? Is that how it works?

Yes, broadly. That's the answer to 3. Growth CapEx this year, we'll do about GBP 100 million. So it will spike up a little bit in the second half. Most of our growth CapEx this year is vehicle CapEx for new contracts. Most of our vehicle CapEx has got about a 1-year payment term on it. So frankly, the cash flow in the second half is for vehicles we're already driving. As you look at our Evolve strategy towards the sort of end of '26, '27, it peaks at about GBP 300 million a year. We think that's about the -- if you think about 3 -- if you think about a [ GBP 2 billion ] pipeline of opportunities, and you think about somewhere between 10% and 20% conversion rate on that. We think it -- [ GBP 300 million ] is about the max, we could ever really reach in a year. And you're absolutely right to say that as we move to asset light, it will be less about buying new vehicles. But as we sort of get back into the M&A swing, that growth CapEx in M&A together is the [ GBP 300 million ], and you'll see us, I hope, consolidating and compounding more. ALSA margin is -- there's nothing untoward in that 11% margin. There's no funnies. There are no one-offs. There's a little bit of phasing of some -- there's a little bit of phasing of some concessionary income, I think it will be a tad back on the full year, a tad, nothing major. And then as we run into the multiple years, it's all about -- as we've been saying for a decade, it's all about concession renewal. So I think the margin that Paco and the team have delivered this half is good for your models, at least until the end of 2024, after which I think you'll see a little dip and then it will build back to about that level.

[Operator Instructions] We have our first question on the phone line from Jarrod Castle of UBS.

Just 2 from me. Firstly, just on school bus shortages. Obviously, it's difficult to complete the existing contracts but -- or some of the existing contracts. But what does this mean in terms of bidding for new contracts? All schools approaching you and you're turning away the business? And kind of related, what is happening with competitors in terms of their ability to service contracts or indeed possible failure. I guess that was 2 questions already. And then the third then, just looking ahead into next year, what are you thinking in terms of how U.K. bus prices might evolve?

Maybe you can take Gary, the first 2 ones on the shortages on the competitors' ability to recruit.

Yes. So the shortages are affecting our ability to hit new contracts. We have taken a very conservative approach on looking for new work, basically because of the uncertainty around labor shortages and the ability to start that up. We're seeing that from our competitors as well. It's been a very quiet 2 bid seasons. The bid season before was quiet due to COVID. And this year, it was quiet due to uncertainty around driver shortages. What we are seeing recently is a bit of an easing. Ignacio mentioned that we're seeing a growth in our pipeline of drivers, driver trainees. And so as that pressure eases, my expectation is that the new bid season will be a bit more back to normal. As far as competitors, competitors are struggling with drivers, the same as we are. I think last year was difficult for a lot of contractors. But again, as the pressure eases, I think the risk of seeing contractors fail is probably lessening this year. But it will be a difficult few months anyway.

Tom, would you like to take the U.K. bus.

Yes. In terms of U.K. bus pricing, the government's national bus strategy and in particular, the service improvement plans actually funds price stability. So at a headline level, sort of day tickets are pretty flat. But underlying that is a simplification and a change of mix. So we are achieving yield increases without, if you like, headline grabbing top line fares changes. So quite a nice place to be that we can begin in that patronage through the top line, the advertise fair, but then underneath it, the yields are creeping up constantly.

The next question on line comes from Sathish Sivakumar of Citi.

I've got 2 questions here. Firstly, on the U.K. market. Given the recent news flows around some of your peers, what's your thoughts around the consolidation in the U.K.? Do you still see further opportunity here? And second only, ALSA, again, any changes to the concession renewal time line that you've said that you previously guided, which is more like end of -- you don't expect anything until end of next year? And also within ALSA, if you could share the trends around the utilization levels in the Long Haul network, especially in the last few months? And how does the pricing dynamic [ compared ] versus say 2019?

So let me take the first one on the U.K. consolidation. I can only comment on what we have is not part of our Evolve strategy, and we had an attempt with the company that we thought strategically fit and had synergies. And since then, well, also what's happening in the market. So it would be no sense to think about that. So that's what I'd say. We have good plans in the U.K. and Evolve is a very strong framework to deliver progress as we have committed. Paco, would you like to take the question on the concessions renewal, prospect the planning and the utilization levels.

Yes. Yes, of course. On the renewal of concession, there is no, any change in terms of the timing of the process. The current government is working as you could know about a new map for the franchisees is visiting all the routes, but it will take some time to be finished. So we don't expect any change, any movement in the next 2 years. So we don't expect any change. In terms of the utilization of the fleet is clear that we are now in a very mature state of our revenue management system. So we are now reaching in the peak season in the end of the Q2 of the year, we are reaching about 60%, 70% of -- in most of the long-haul routes. So I expect that this is part of the success of the margins that all of your partners have asked previously. I don't know if you, Ignacio want to add something on this.

No, no, no, I think you mentioned all this is 60% is the overall one, then you have a specific corridors where we have a much better authorization. And as I said, both in the U.K. and the ALSA team, I think we are extremely ahead in the sector in revenue management. And if there's something that I really love is sitting in the weekly planning meetings in the U.K. and [ ALSA ] where you have revenue management, you have marketing, you have operations, you have engineering. And those decisions are implemented, you have visibility, you have using very powerful tools for forecasting, and that's the key. And the utilization and the yield is the success that we're seeing in Coach and these strong results.

[Operator Instructions] We now have another question on the line from Alex Paterson of Peel Hunt.

Can I just ask -- I think 3 or 4 questions actually. Firstly, Chris, could you just reiterate, you were talking about what were the cash element of the exceptionals? Could you just say what that was it again, please? And secondly, on the North American costs, you were saying driver wages were 40% of revenues going up [ 10% to 12% ]. And the cash was 30% going up [ 5% ]. What are the other elements take you [ to 100% ] on what sort of inflation should we expect there? And then on the -- what benefit do you expect from the Commonwealth Games in U.K.? And then lastly, can I just ask on noncontrolling interest. Clearly, you've been buying out WeDriveU and probably 1 or 2 other things as well. But we've also got recovery in competing and profitability. So what -- what should we be looking at for the full year charge.

Can you take the -- all on the finance, and then we'll live for the end, did you fit on the Commonwealth and Tom can comment?

Thanks, Alex, for being the first analyst in 5 years to ever ask me about NCI. The cash elements of exceptionals are broadly the utilization of the onerous contracts put up last year and some of the onerous contracts put out this year. So that's the big cash issue. So when you put an onerous contract provision up, obviously, you take a charge to profitability at the time you take it up and then the cash goes out as you spend it. I simplified the -- I simplified the North American P&L. So it's not to give you an easy run in your model, but basically a very, very rough -- very rough rule of a normalized year. Think of the school bus business as a $1 billion business, 40% of that, so GBP 400 million is in driver and wages and associated costs. Somewhere like 30% of that is all other cash costs. And the delta between that and the margin is obviously their noncash costs, i.e., depreciation. So don't expect a depreciation, obviously, doesn't inflate, which is why I break it down that way. NCI, I mean, is broadly we drive you, and we are clearly going to buy out, because we have a symmetrical put call, so that does go. But there's quite a lot of noncontrolling interest in ALSA. ALSA make use of partnerships in many of their contracts. There are -- I mean, a very large number of ALSA contracts where they're working in partnership with other small local operators to have really good local understanding and a chunk of that NCI is also. So it never disappears to 0. Just before I [ hand it over to Tom, Adam ] do I get any of that wrong?

No, I think that's all right.

So I think the half charge was GBP 3.5 million of the profit was attributable to noncontrol. And you can see that probably being broadly around the same in half 2. But then if we buy out the remaining 20% of WeDriveU at the end of the year, you'll see that drop off. But as Chris says, there's bits in also, which will carry on over the next few years.

Yes, the Commonwealth Games start today. So we're benefiting in a couple of ways. We have a number of bespoke contracts supporting the games, both for paratransit type services and coach services and a few support services, but also coupled with all our domestic networks are running fully and supporting the games in that way. So do expect some revenue tick up. But also probably more importantly, is rebuilding confidence in public transport across the U.K. that we will be seeing people using coaches and buses who don't normally, and that is something which we expect a long-term benefit from.

Thank you. We have no further questions on the line.

Well, thank you very much to all of you for coming.