© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
[Audio Gap] Our strategy continues to focus on 3 priorities: improving financial and operational delivery, targeted investment and adjacent growth opportunities and our leading role in the decarbonization of public transport. Good progress has been made in the first half on all of these, as we will cover in more detail later in the presentation. This strategy and the strength of our balance sheet supports our balanced capital allocation policy between growth and progressive shareholder returns. We have declared an interim dividend of 0.9p per share, in line with our policy. And there is potential for additional distributions as the values from exiting North America are realized. We remain positive about the future of FirstGroup. In the near term, the transport sector is in a period of transition as we move to a more commercial model post the pandemic, but we have an organization with deep expertise and experience. And this will stand us in good stead as we further develop and deliver growth opportunities, which is a vital role to play in the sustainability and economic growth agendas. I will now hand over to Ryan, who will take us through our financial results.
Thank you, Graham. And good morning, everyone. Turning to Slide 5. This has been another period of resilient financial delivery despite the macro and economic headwinds as well as progress in the period in exiting North America legacy assets and liabilities. In my presentation, I'll be covering the following 3 areas: the continued solid underlying financial performance as the group emerges from the pandemic, with substantial progress made year-on-year with the group's key financial performance measure; secondly, at Greyhound, the progress to date and the agreed disposal of the vast majority of the property portfolio, with the net results before hedging costs expected to be circa GBP 154 million that is better than the GBP 130 million previously guided in June as well as now having more certainty on the First Transit earnout; and finally, guidance for full year '23 and a reminder of our financial framework that has been applied in determining the 0.9p per share interim dividend. Turning to the financial summary on Slide 6. The group's continuing business revenues are up GBP 73.3 million year-on-year, as passenger demand improved and net fare increases were implemented that was partially offset by lower government funding as the group emerges from the impact of the pandemic. The revenue improvements have, however, been partly offset by cost increases. And our key financial performance measure of attributable adjusted profit that adjusts profits to include only the net attributable earning from the 4 management fee-based rail contracts more than doubled to GBP 30.8 million delivered in the period. Adjusted EPS were 4.4p, up 4.8p on the prior year, with the current year benefiting further from the impact of the 476 million shares that were acquired in December 2021 with a GBP 500 million tender offer. The solid underlying business performance and strength of the balance sheet resulted in the Board declaring an interim dividend of 0.9p per share, in line with our current policy. The adjusted net cash for the group ended the period at GBP 7.3 million versus a net debt of GBP 3.9 million at full year '22. And this is after investing GBP 37 million in our bus CapEx and growth CapEx and paying a final dividend of GBP 8.2 million as well as buying GBP 10.7 million worth of shares for our share schemes in the period. Turning to bus on Slide 7. Bus revenues are up GBP 35.2 million or 9% year-on-year, with higher commercial revenues partially offset by lower government grants as the business transitions to a more fully commercial model. During the period, 87 million miles were run versus 95 million miles in the prior year, down 8%, as the business progressed out of the pandemic impact and the network realignment commenced to a more fully commercial model. Revenue growth has also benefited from the acquisition of the remaining 50% stake in SPS in the prior year; as well as further progress in the B2B market, with revenues of GBP 55 million in the half year up GBP 24 million on a year ago. With the transition to a more fully commercial operating model, reflected by recovering passenger volumes and improving yields during the period, bus delivered an operating profit of GBP 20.7 million at a margin of 4.8% versus GBP 26.8 million at 6.8% in the prior year, with the prior year margin benefiting from how the grant funding was applied. The profitability in the period has ever been impacted by material cost inflation, particularly in driver wages, as well as driver availability. These cost pressures were partially offset by the impact of net fare yields that started to be implemented from September 2021 after CBSSG-R funding came to an end. The fare increases that are generally in line with inflation have been implemented during the period on a phased basis and hence lagged cost inflation from a net impact perspective. Our fuel hedging policy has provided protection against the year-on-year increase in fuel costs. And looking ahead, 97% for the balance of full year '23 and 63% for full year '24 has been hedged, with these hedged cost increases included in our business plans and forecasts. Turning to rail on Slide 8. The rail business consists of 3 components: the contracted rail for the 4 management fee TOCs, where the group takes no revenue risk and limited cost risk; the open access business of Hull Trains and Lumo, with both open access services focused more on the leisure market; and the additional services contracts business where First Rail provides services into the wider rail market. For the management fee TOCs, these delivered an attributable net after-tax and minority earnings of GBP 19.1 million to the group, marginally up on the prior year. This result benefited from stronger actual performance scores from full year 2022 than initially accrued and TPE benefiting from the Transpennine route upgrade project that was entered into in the second half of full year '22, where the group earns additional fee revenues. Several of the TOCs are, however, marginally impacted in the current year from the financial perspective, driven by the operational performance measures due to the current low operational performance, notably at Avanti West Coast and SWR. The open access business made a combined profit of GBP 6.7 million in the period versus a loss of GBP 10.4 million in the prior year, with the prior year impacted by the start-up costs in Lumo that launched in October 2021 and the pandemic-impacted Hull Trains. This materially improved performance of GBP 17.1 million year-on-year in our open access operations is a significant driver of the group's profitable growth in the period. And both businesses are performing ahead of our expectations, with stronger-than-anticipated passenger demand providing the ability to drive further yield improvements. The additional services in rail delivered an operating profit of GBP 5.3 million in the period, up GBP 2.5 million on the prior year, with most of the improvement coming from tram business due to settlements relating to prior periods. Turning to Slide 9, on our key financial performance metric that includes the net attributable earnings from the 4 management fee-based rail contracts. The bus result being lower year-on-year is more than offset by the material improvements in rail, particularly open access, and further cost savings delivered at the center. Cash interest for this measure is pro forma for the prior year given the significant deleveraging following the business disposals that concluded during the year. And this interest consists primarily of the interest on the GBP 200 million 2024 bonds and interest incurred on bus finance leases. This results in a GBP 17.5 million increase in attributable profits to GBP 30.8 million delivered in the first half. And this increased earnings momentum from the prior year, combined with the confidence in continued business delivery, has meant that the Board has declared an interim dividend of 0.9p per share, in line with the 3x cover policy, with the interim dividend being circa 1/3 of the anticipated full year dividend. Turning to the cash flow for the period on Slide 10. Given the rail management fee franchises take no revenue risk and limited cost risk and the related IFRS 16 and rail ring-fenced cash that has a material impact on the financial statements for these franchises, we have separately identified the underlying adjusted net cash movements, ignoring ring-fenced cash and the impact of IFRS 16. First Bus generated GBP 27.2 million, with the solid EBITDA performance and working capital flows partially offset by the GBP 30.9 million invested in bus CapEx in the period, mostly on the electrification of the fleet. The rail business cash flows to group mainly relate to the cash generated by the open access operations and additional services businesses in the period. The management fee TOCs dividends are anticipated in the second half of the year following confirmation of the performance fees for full year 2022 and completion of the full year '22 statutory accounts. And this process is consistent with how it applied in the prior year. The group items cash outflow of GBP 34.9 million includes the central costs, provisions and other movements, cash interest and tax flows totaling GBP 11.1 million and resulting in a GBP 1.7 million underlying cash generation for the continuing group in the period. We have invested GBP 6.1 million in growth CapEx in the period, relating to acquisitions in bus for the metro bus contract acquired in Bristol and the GBP 1.6 million incurred at SPS for the extension of the Hinkley Point contract in the B2B part of the business. Bus realized GBP 21.4 million in disposal proceeds in the period, including the sale of Scotland East as well as the disposal of bus batteries as part of a battery as a service for the initial buses delivered in Caledonia. The battery ownership and financing remains an interesting space that we continue to evaluate. GBP 8.2 million has been paid by way of final dividend for full year '22. GBP 15.8 million has been realized from legacy Greyhound, consisting of deferred consideration, rental income, subsidy receipts and property sales in the period, that has been partially offset by remaining pensions and insurance payments and legacy environmental remediation costs. And finally, a net GBP 9 million has been spent over and above the IFRS 2 charge in EBITDA on acquiring shares for settlement of share scheme awards. And GBP 16 million was incurred in hedging costs, mainly for the U.S. dollar asset realizations from Greyhound and transit earnout, with these now effectively hedged at $1.15 to the pound. These corporate outflows have been partially offset, though, by GBP 12 million returned from the Aberdeen local government pension scheme that is in surplus. Turning to Slide 11. As a reminder: For the U.K. pensions exposure, GBP 117 million has been contributed into escrow through a limited partnership, of which GBP 95 million relates to the bus scheme and GBP 22 million relates to the group scheme. The majority of the escrow monies have the potential to be released back to the group if the low-dependence funding targets are achieved in future triennial valuations. The escrow monies are not included in the plan assets of the combined bus and group scheme under IAS 19 basis, which is at surplus of GBP 43.3 million. And there is no certainty as to how the financial and actuarial markets may perform in the coming years. However, we continue to work closely with the trustees on liability management and investment strategies on the flight path to low dependency for each scheme as a medium-term target. And currently, after the financial market turmoil as a result of the government's [ money ] budget, the estimated funding position of the bus scheme and the group scheme as at the end of October have improved by GBP 70 million and GBP 10 million, respectively, since March 2022. The local government pension schemes in bus are also in a reported restricted surplus of GBP 20.8 million, with some further opportunity in this area as demonstrated by the GBP 12 million that have been returned to date. At Greyhound, the legacy self-insurance and pension obligations have been largely derisked, with only GBP 12 million remaining after the nominal derisking that has been incurred during the period. The balance of Greyhound consists of the net value of the real estate portfolio for which we announced the sale of the bus majority for a net GBP 122 million, where the proceeds are expected in December; the receivable for subsidy awards; and the balance of the deferred consideration that has been paid monthly from the buy-in. From October 2022 onwards, the group expects to receive circa GBP 140 million from Greyhound having already realized a net [ GBP 16 million ] year-to-date. EQT have now also signed a sale and purchase agreement to dispose the transit business to Transdev. And based on this transaction, it is estimated that the group will receive circa GBP 74 million from the earnout to be paid to FirstGroup several months after the sale completes. As a result, a circa GBP 28 million loss has been recorded in the period in writing-down the previous carrying value. Finally, turning to the financial outlook for the full year of 2023 on Slide 12. The group has made significant progress year-to-date. And the forecast for the year is broadly in line with our expectations as set out previously for the full year despite the macroeconomic headwinds, albeit with a change in mix of earnings between businesses. For the bus business, we anticipate making sequential further operating profit progress in the second half despite the wider inflation and economic challenges that lie ahead. This is supported by the recent network realignment, disposal of the loss-making businesses, operational restructuring and fare increases, partially offset by the impact of cost inflation. The network realignment better matches the passenger demand levels. However, this will continue to remain dynamic due to the various Ts and Cs that apply with the funding regime at a local level, meaning that the margin progress is slightly slower than we initially anticipated and pushed out several months as the business adjusts to the market recovery. At the rail business, we expect to continue earning management fees from the 4 train operating companies in line with expectations, recognizing the challenges as a result of the industrial action and the impact this has on the wider industry. The good progress made at Lumo and Hull Trains is expected to continue, with some of this progress being tempered by slightly higher energy costs, partially mitigated by continued yield management. We remain on track for the year-on-year cost savings of GBP 5 million at the corporate center. And we anticipate incurring GBP 65 million in interest, of which circa GBP 45 million relates to IFRS 16 charges, with guidance for the current year reducing due to the timing and nature of the rolling stock leases entered into a GWR when this moved to an NRC in July. Taxation for the current year is anticipated at 19%, with this increasing subsequently in line with government announcements. We anticipate to end the year in a net cash position of GBP 100 million to GBP 110 million after investing circa GBP 90 million in bus maintenance CapEx, mostly related to the electrification of the fleet and depots, and after the already announced bus acquisitions and paying GBP 50 million by way of ordinary dividends. The strong, well-capitalized balance sheet provides the group with great flexibility and options for the future shareholder value creation.
I'll now hand over to Graham for the business review and capital allocation.
Yes. Thank you, Ryan, for the comprehensive financial update. I will now move on to cover the business review, on to Slide 14. The business has leading positions in bus and rail in a supportive medium-term policy environment in the U.K. FirstGroup's local authority areas have been successful in obtaining nearly 1/4 of the GBP 1 billion allocated from central government for bus service improvement plans and secured GBP 80 million in ZEBRA co-funding for electric vehicles and depot infrastructure investment. Demographics and forecast population growth also provide a supportive backdrop to our growth aspirations. Full year 2023 is a transitional year for FirstGroup, as we navigate high levels of cost inflation, which has had a GBP 23 million impact on First Bus in half 1; and industrial relations challenges in rail. Bus is moving towards a more commercial model as funding tapers, with the business focusing on aligning its operations to passenger needs, with volumes around 20% lower than pre-pandemic levels. Rail is focusing on improving service levels at our train operating companies and delivering longer-duration National Rail Contracts, together with continuing to enhance the significant impact made by our success in open access operations at Lumo and Hull Trains. We are committed to our capital allocation policy, with debt less than 2x rail management fee adjusted EBITDA in the medium term. This facilitates 3 main uses of capital: firstly, bus CapEx of approximately 90 million a year as we transition to 100% zero-emission fleet by 2035, with rail being relatively capital light; secondly, targeted growth investment in the U.K. and elsewhere; and thirdly, returns to shareholders with a progressive dividend in line with our policy as well as the additional distributions to shareholders we are considering as the values from exiting North America are realized. The foundations are in place and we have a strong platform for growth and value creation into the medium term. Now on to Slide 15. First Rail has delivered a strong financial performance in the first half with significant growth in attributable net income. This is largely down to the development of our open access operations, the successful launch of Lumo and the post-pandemic recovery of Hull Trains. This has led to improvements in profitability of GBP 17 million. Together with progress on our additional services businesses, open access operations and additional services now account for more than 1/3 of rail net income. The financial performance of First Rail's management fee operations is in line with the prior year. It has been an extremely challenging period for our train operating companies. A strike action and the lack of appetite for rest-day working has resulted in timetable reductions and higher cancellation levels at both Avanti and TransPennine Express. With the Avanti extension awarded in October, our complete focus in the second half will be on operational improvement and delivering acceptable passenger service levels. Robust plans are in place, including progress on our driver training backlog which resulted from delays during the pandemic. We expect material progress as we launch the new timetables in December. We continue to work with the Department of -- for Transport on signing a longer-term National Rail Contract for Avanti of up to 10 years. And on to Slide 16. It has been a highly successful 6 months for our open access operations Lumo and Hull Trains. Lumo has just recently carried its 1 millionth passenger, as leisure demand has consistently been above the overall rail industry performance. An average ticket price of GBP 37 is great value for our customers as Lumo drives a modal shift from air to rail on the Edinburgh-to-London route. Rail passengers now account for approximately 60% of all passenger journeys on this route, up from 35% pre pandemic. We are currently examining options to increase capacity given the high levels of customer demand. Lumo is a good example of [ rail ] private sector innovation driving real value for customers together with a strong decarbonization story for the rail industry. Hull Trains has also performed ahead of our expectations, with performance strengthening during the half year. Volumes have returned to pre-pandemic levels and above the rail industry average, driven by leisure demand and the returning business market. Open access operations net income accounted for 22% of the overall rail attributable net income in the first half. As Ryan mentioned, profits in our additional services businesses have nearly doubled in the period. This was driven partly by one-off items in tram, but First Customer Contact, Mistral Data and other areas have also benefited from increasing passenger volumes and some new product additions to their services. evo-rail recently began installing the first series of rail-5G poles on the 70 kilometers of the South West main line between Basingstoke and Earlsfield. And their multi-gigabit Internet solution is expected to launch for customer use in early 2023. And on to Slide 17. First Rail is committed to delivering a strong second half to the fiscal year 2023. As you can imagine, our prime operational focus will be on improvements and our delivery of services for passengers as we launch new rail timetables in December. The rail management team will also be looking to progress towards signing the National Rail Contract for West Coast Partnership with DfT when the current extension ends in March 2023. On open access operations, we're looking for more of the same in the second half, together with an accelerated decision on how we could increase Lumo available capacity over the next few years. We also have a broad base of opportunities to further develop our rail additional services businesses. We will be making decisions in the second half on the potential to grow and scale some of these operations. Turning now to bus on Slide 18. As you can see on the bridge, bus adjusted operating profit in the first half reflects significant movements in several key items, reflecting the transition to a more commercial model and the impact of cost inflation. Passenger volumes have improved by 29% year-on-year but still remain at around 80% of pre-pandemic levels. Commercial volumes have increased by 32%, but concessionary volumes are only marginally up on the prior year. Funding mechanisms continue to evolve, but as you can see from the first 2 red bars on the bridge, they have had a significant impact on our adjusted operating profit, which together slightly outweigh the growth in passenger volumes. In England, funding has been extended to the end of March, with similar terms and conditions being worked through. And Wales' existing funding is in place to March 2023, with an option to extend to March 2024. And in Scotland, funding ended in early October, with most of the industry still lobbying for a reintroduction. We continue to make considerable progress with our electric vehicle fleet and have placed the largest vehicle order outside of London, with vehicles to be in service by 2024. Our bus key performance indicators show material improvement over the half year 2022. Revenue per mile has increased by 12% and passenger volumes by 29%. We are particularly encouraged by our progress in the B2B sector, with revenues growing 75% due to -- due in large part to the acquisition of SPS. We continue to prioritize growth in this area. And on to Slide 19. In the second half, First Bus will continue to transition to a more commercial model, and we expect to deliver sequential progress in revenues and adjusted operating profit. We're obviously conscious of the current economic impact on consumer spending and the high levels of inflation. We will continue with agile pricing, networks aligned to passenger demand; and are also commencing further work on our cost base to improve margins. We remain committed to our 10% margin target for bus, but given the current economic climate and slower passenger growth than anticipated, we now expect it to be delivered in full year 2025. Decarbonization is at the forefront of our strategy. And we continue to invest in our electric fleet and related depot infrastructure. We currently have over 400 vehicles on order and, together with related infrastructure investments, take the next phase of investment to a net level of GBP 107 million. This will take electric vehicles to around 15% of our total fleet by 2024, on track to deliver our net zero target by 2035. And on to Slide 20. It has been a challenging 6 months for FirstGroup, as for many companies, but significant progress has been made in our financial performance with group adjusted attributable profit of GBP 31 million, up from GBP 13 million in the first half of the previous year. Our expectations for the full year are broadly unchanged, which is a testament to the resilience of the group. In both rail and bus, we are focused on areas where we can make operational improvements that will drive both service benefit for our customers and improve financial performance. We are cognizant of the uncertain economic environment, but our cash position and capital allocation policy give us the flexibility to take advantage of growth opportunities when they arise. We are monitoring several opportunities, but we will be financially disciplined in assessing whether there is value for FirstGroup. We continue with our policy of progressive dividends. And we will review the potential for additional shareholder distributions on receipt of our North America Greyhound and transit exit proceeds. Our leading role in the decarbonization of public transport remains on track. We're investing and remain committed to delivering our net zero goals by 2035. Our credentials continue to be recognized, with recent endorsements from the World Benchmarking Alliance which ranked FirstGroup third out of 90 of the world's largest transportation companies for progress against the decarbonization goals of the Paris Agreement and contributing to a just energy transition. FirstGroup was the top-performing U.K. transport company in this independent assessment. So just to reiterate, in closing. We have delivered a resilient performance in the first half of 2023 and remain confident of further progress over the remainder of this fiscal year. Thank you. And we will now take any questions you may have.
[Operator Instructions] The first question comes from the line of Ruairi Cullinane from RBC.
Ruairi, we can't hear you.
Maybe we'll come back to Ruairi then. The next question comes from the line of Gerald Khoo from Liberum.
I hope that you can hear me, yes. 3, if I can. Firstly, in bus, I think in the statement you talked about changes to fare structures. I was wondering whether you can give some more detail on that. Secondly, in rail, has there been any indication from the DfT as to when they might return to competitive tendering for rail contracts? And finally, also on rail. Unless I misread this, it looked like in open access you achieved a 20% operating margin. I mean, is that performance representative? Is there scope for that to go higher as Lumo continues to get traction? So basically is that -- where should we think about that going as a margin?
Okay. On fare structures, I mean, I think the work we've been doing is effectively -- with the way passenger volumes have moved, what we've seen is virtually all the passengers that were pre pandemic have been returning, but they're doing less journeys, so a lot of the changes that we've made have increasing flexibility away from the kind of weekly, monthly, annual fares to something a little bit more dynamic and flexible in the short term. What that enables us to do is to effectively improve yield on a journey basis, but we create options for passengers to get more value in line with their -- how they're traveling today, yes, so there's been a fair bit of work around that. In terms of rail competitive tendering, I mean, obviously the expectation was that -- as kind of reform with the industry progressed, and the launch of passenger service contracts further down the line, that they would be subject to competitive tendering. I mean obviously, so far, National Rail Contracts have been allocated to the incumbents, so until we see signals of high-passenger service contracts develop, we probably don't anticipate competitive tendering until that point. And in relation to open access margin. Ryan, dive in if you wish, but we obviously feel the performance has been very good. And we've been able to get margins around the levels you said, Gerald, while still providing real value for passengers and something very competitive against air fares on the Edinburgh-to-London route. [ So we acted ]. We have dynamic pricing in place. We look at the demand that's there, but the one thing we want to do is remain competitive. So we think it's a good margin. What we're really looking at is whether we can put extra capacity on to service the demand. And obviously that incremental capacity will come at a good margin while still making us very competitive on pricing, and that's the way we want to approach it.
Can I just ask a bit of a clarification? So when I see you talk about government issuing a prior information notice for an NRC, should I view that as a prelude to a further direct award rather than [ missed tender ]?
Yes. Well, that's effectively what's happened in the market to date.
So the next question comes from the line of Alex Paterson.
Hopefully, you can hear me.
Yes.
I've got 4 questions, please. Should I just go through them and then you can answer them in turn? I was just wondering on the -- 2 on the bus side. Firstly, what is your expectations for government support for concessionary revenues given the sluggish sort of passenger recovery? Do you think there's a risk that they might not continue to support those with the local authorities? Or do you think [ that the current rates ] will continue sort of regardless of passenger recovery? Secondly, just on the bus margin side, you've got a very useful slide showing the impact to profitability in the first half. I'm imagining, in the second half, you would expect further passenger volume growth and also the network management to be major features, but I just wonder if you could say if there's any other things that you think are going to help the margin in the second half. Thirdly, just on electric vehicles. I think you had an agreement with a rival who, I believe, have stopped production and actually may not -- I think they made an announcement yesterday about financial -- their financial situation. Have you changed to a different supplier? Or what do you think the implications of that situation would be? And then finally, just on Avanti West Coast and Transpennine: You're clearly recruiting drivers and working very hard to improve the services. Can you just let us know where you are on that driver recruitment and what the sort of critical things are in order for you to deliver the service improvement?
Yes. Well, I'll start, Alex. [ It's ] quite a comprehensive list of questions. On concessionary revenues, the DfT are kind of looking at what the forward situation on that might be. We have no indication as to what that might look like or what it might mean, but it's something that's under discussion and will play out over the next few months as we move into full year '24, so a little bit uncertain at this point in time. In relation to margins in the second half, Ryan, do you want to take that one? And I can chip in if necessary.
You're quite right, Alex. We're expecting to see a bit more progress on volume recovery between now and the end of the year as well as a bit more network realignment. We did a reset in the end of the sort of first week in October to take out additional mileage, but some discussions are ongoing at a local level with the bus service levels. The other thing that you kind of missed in your summation there is that obviously impact of cost inflation will clearly continue into the second half, but we did also increase fares at the start of October and so those should be a cover and a match there. So overall, sort of sequential progress in bus margins into the second half as a result.
That's what we expect. In relation to a rival, it's obviously been clear that their investment in the U.K. has dropped off and stared an investment in relation to bus. I mean the orders that we placed recently that take us up into 2024 have been placed with other suppliers. And we're obviously actively looking at the supplier base on a regular basis, but we're certainly covered on the orders that we've made to date. And then in relation to Avanti and TPE, obviously it's been a challenging period. We obviously had to reduce service levels over the last few months when rest-day working was withdrawn. Just to understand: Rest-day working has been common in the industry for a long time. And we would have run 400 services a week on rest-day working with Avanti. So we reduced the timetable to really provide predictability and a lot less cancellations. And what we've been doing over the last few months is working very hard on our trading backlog which really was there coming out of the back of the pandemic. It takes 18 months to train a driver. And we have quite a lot of drivers who have been coming on stream over the last couple of months and will do between now and the new timetables in December. We have more trained drivers now than we had pre pandemic. And so the team have worked hard. And we think there will be a material improvement in service levels when the new timetables launched on the 11th of December.
And should we try Ruairi Cullinane at RBC?
Yes. Can you hear me this time?
We can.
Okay, great, yes. So you've -- just perhaps one follow-up on Alex's question on bus margins. Would you be able to quantify any of the restructuring actions you've taken in September and October in order to help us with the [ structuring of ] margin improvement? And secondly on that, I was wondering how the pricing measures you've announced will interact with the U.K. government's funding for GBP 2 fares in the first quarter of next year. And then one question on electrification-linked earnings streams, which you've talked about as an opportunity in the past. So I saw a press release highlighting that DPD had signed up to use your EV charging infrastructure. Are agreements like that a significant opportunity for you? And are there any other electrification-linked earnings streams that we should be thinking about in the near future?
Did you want to go on bus margins, or...
Yes. On the bus margins, the other kind of sort of structural points that we've done is -- you will have seen that we've exited Scotland East in the period. And if you kind of go to the pre-pandemic period, Scotland East was a loss-making business, but clearly with the sort of structural change to the whole sector as a consequence of COVID, we felt it was the right time to do the exit there. We've done some restructuring and reorganization of the management team in bus as well in response to a slightly lower-scale business in terms of total mileage. And those are sort of some of the self-helps, as well as sort of targeting a bit more overhead and engineering cost savings. And that gives us the sort of confidence as we take those plans forward into the next fiscal year.
Yes. In relation to -- it's worth also noting as well on margins our pricing. Effective pricing is lagging cost inflation under the terms of some of the funding arrangements we have in place. And on the GBP 2 fares, I mean, yes, the detail of that [ from January through March ] is still being worked through, but from what we can see, we're positive that we can work it well into our existing structures. And if there are increases in volume because of it, then that should be helpful, but we are -- we don't feel there's any downside risk from the GBP 2 fares, but at the moment, until we work through the detail, it's hard to say if there will be any upside at this point. In relation to electrification opportunities, Ryan, do you want to maybe say a few words on that?
Yes. I think it's a -- I'm glad that you raised that, Ruairi, because I think it's a significant opportunity for us as we electrify our depots. And you did -- you're rightly calling out the announcement that we did make on a sort of trial basis with one of the logistics operators. When you've got such a significant change to infrastructure and offering -- for the very first time, we've actually got the ability to monetize our forecourts in a way that we haven't done in the past. The real trick here is to try and find the accessibility at the time that, that sort of demand needs to exist and -- when that demand exists [ so that we cancel to ] kind of get our buses in overnight for charging, but the significant investment we're making in this regard should in theory drive down, well, the total costs of ownership in terms of running the fleet and the bus fleet, as well as providing incremental opportunity to do the B2B and B2C potentially even in certain circumstances if we can fix that access point. Once these depots are powered up, they've got a unique opportunity relative to the rest of the sort of energy network at a local level. And now it's about sort of how do we kind of maximize and monetize that opportunity.
Thank you. The next call comes from the line of Erik Salz.
[ So far, there's ] quite a few questions that have been answered but a few that I will ask now. So first of all, on the potential for additional distribution to shareholders, you know that these proceeds from the legacy businesses will come in during the year, so what are you still doubting about? And why is there not like a clearer message on that additional distribution? And the second question is, I mean, you've spoken about Avanti, but still, like, what makes you confident in getting that 10-year extension? And what do you anticipate are the risks of losing that contract eventually? And the third question is around the performance fees and the management fee-based operations. Like -- and the revenue that you've received these management fee-based operations is circa 2/3 of that coming from performance fees. And do you still think, as I think you mentioned last time, that for the full year it's about 2/3 of that management fee operation revenue that will be based on performance fees?
Okay. In terms of the additional potential distribution, I mean, we feel it's right to be prudent. We haven't received the cash yet. I mean obviously we've signed an agreement for that to happen in December, but until it's here, we don't think it's right to say what we will do with it. So that will come on receipt of the cash. In terms of the Avanti extension, we have deep expertise and a long history in rail of private sector innovation and driving real value for the government. I mean it obviously has been a challenging situation when you go through a period of industrial relations and effectively changing the model away from running services relying on goodwill and rest-day working. And we've obviously worked hard to achieve that. We're confident that service levels will get back to the right level for our passengers. And if we feel -- if we achieve that, we're also confident that we will be able to sign a National Rail Contract for Avanti, and that's what we're 100% focused on. In term of performance fees, we -- our view is that we're performing well in general as an industry and obviously as an organization. We've been successful in performance fees on a regular basis in all our contracts and we don't see why that won't continue. I mean obviously we've got a specific issue we're dealing with at the moment, but by and large, our track record has been very good in delivering performance fees above the average. And we feel -- as long as National Rail Contracts continue, then we will carry on doing that.
Yes. And it's just worth, Erik, just reinforcing there that obviously the operational performance is only one of the components of the overall measure. It's not all of the measure on being able to achieve those performance fees. And so as a consequence of that, the level of accrual that we've currently got in the -- for the current year is slightly lower on the basis that we have got some operational challenges given the wide industrial relations actions that's happening across the network, but for the rest of the underlying performance measures, we still believe that we are on target.
Okay, that's clear, but still, on the additional distribution, I appreciate you're prudent. I think that's also the right thing to do, but is there any sort of other things that you are doubting about it -- that you can potentially do with that cash other than distributing it to shareholders?
I mean we're obviously constantly reviewing growth -- targeted investment in growth opportunities. And we're actively reviewing a number of things at the moment, so we've got a balanced policy, and we think that will continue. So we think it will clearly be balanced between growth investment and dividend and potentially distributions, and that's how we'll carry on. So we are actively looking at a number of opportunities and we're pretty hopeful, some of those, we'll land in the near future.
Yes. And you're obviously doing that with a strong balance sheet position, [ if we look at it at the ] net cash position, which is [indiscernible] end of the year.
Yes. And we're working on the basis that, when we achieve something, we will tell you.
The next question comes from the line of Joe Thomas.
3 questions from me, if that's all right, please. Firstly, you've talked about a 20% reduction to bus capacity. Can you just perhaps give a little bit more color about how that has been achieved? I'm just wondering what's happened to frequencies within that and how much of it is just using smaller buses. I think the mix does matter. And secondly, Ryan, you did in your part of the presentation refer, again in relation to U.K. bus network, changes to local Ts and Cs. And I just wonder how much flexibility you've got against whatever those local Ts and Cs might be. And perhaps you could explain what they are. And then finally, at one point, you were talking about -- this was prior to today and several months ago, talking about expanding potentially into continental Europe. And I just wondered if there was an update on any activity there.
Okay. In terms of the mileage, frequencies, et cetera, I mean, we're obviously -- part of the funding arrangements are that we're reviewing routes and services on a constant basis with the local authorities. And any changes that we do make, and we have made some in October, are largely down to the interaction at a local level. And they are effectively agreed at a local level as we do them. By and large, what we're looking at and what we're looking to resolve is the tail of our business where -- which is loss making and in some cases materially loss making. And that's the discussions we have at a local level, so that's the process we've been going through to make sure our network is -- matches passenger demand and obviously works for us on a commercial basis. Obviously in some routes we will increase frequencies if the demand is there, so it really is -- it's a mix, but fundamentally we -- a lot of our business is digital now. And we have a lot of insight into what's happening at a local level and a route level. And fundamentally, as we move to more a commercial model, that's the approach we will be taking. And local Ts and Cs, Ryan...
Yes. The local Ts and Cs is almost covering the exact point, where we'll be able to use a lot more sophisticated analysis and information to be able to sort of demonstrate the implications of running certain routes, and as a consequence of that, we're having certain dialogues. So in some locations, we haven't gone for government funding on the basis that it just simply would be commercially unviable. And we flipped that around to being sort of, if they're interested in -- if there's routes running, then we would go for a tender against those routes, which then puts those routes to sort of a bit more of a commercial model. And so it's those types of things that we are working through, Joe.
And in relation to expansion outside the U.K. I mean, as we've said in our policy and our discussion today, that we are looking at growth opportunities in the U.K. and elsewhere. I won't talk about any individual details around that, but it's fundamentally the lens we're looking at is, is it -- at any kind of activity, is it -- does it fit well with our core business? Is the environment something that's conducive to the skills and experience we have? Are the returns going to be there? All the things you would expect to see. So again, I won't go into any detail, but we are looking at a wide range of opportunities at the moment. And as I said, if anything come -- any come to fruition, then we'll be the first to say.
Since there are no further questions, I think that concludes this event this morning. Thank you all for attending. You may now disconnect. Thank you.
Thank you.
Thank you very much.