National Express Group PLC

LSE:NEX

Earnings Call Transcript 2018-Q3

[Operator]

Hello, and welcome to the National Express Trading Update Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Dean Finch. Please go ahead with your meeting.

[Dean Finch, Group CEO & Executive Director]

Thank you. Good morning, everybody. I hope you can hear me. I'm out in the airport, so I'm sorry if there's any background noise. So as you can see from our announcement this morning, we had a very good summer, but do remember that we are guiding from a 2017 base that had GBP 5 million to GBP 10 million of one-off benefits in it, and mostly, they landed in Q4 of last year. But nevertheless, we expect the year to end well, and we got a positive outlook for 2019.I guess the real issue and the real question that we are pondering at the moment is the timing of Spanish concession renewals. Since we last spoke over the summer, the new Spanish government paused and indeed canceled some of the competitions and they have yet to restart them. So this is a -- this means, there will be no impact on our financial results in 2019. The question is, what impact will they have on 2020?If the competitions were to be delayed during 2019, for example, if there were another general election, then the issue is the combined impacts of this delay as we look ahead on our 2020 numbers coupled with the startup in earnest of our Rabat concession. I mean both of those would have a materially positive impact on our numbers. And I think that's probably not widely appreciated.Other thing that I just wanted to pick out before turning it over to any questions is that obviously the coach business had a extremely strong summer, which was very pleasing. We think part of this is explained by the recovery from the 2017 terrorist attacks and also partly from various railway closures and disruptions and assorted mishaps. But nevertheless, the underlying coach business is very strong and has done very well.The other thing I would pick out is the work we're doing in North America where we are really focusing in on the difference that customer service is making to our margins. So about half of our customers in North American would grade us at the highest rate of satisfaction. And I guess, the interesting point is that the difference between in terms of margin between graded at the highest rate and the average rate is about 11 points of margin. So that's really quite interesting and quite significant, and you'll see more work on this in the coming years as we work through that -- that end of our business. So overall, I think, the business is doing very well. We're increasingly growing access in a growing number of cities around the world and also increasing our range of mobility services in those cities. And this will ultimately be in our sweet spot in the years to come.And the other point I would make is that the business is continuing to diversify itself. So if we take just -- well one example, the ALSA Group. Next year, with the startup of Rabat, 1/3 of ALSA's vehicles will be operating outside of Spain, which again is probably something that is not widely appreciated.Cash flow continues to be good and strong. The fleet remains well invested. There's no change there. And I'll just pick up on Germany, it's small but we've had -- been surprised on the upside over the summer with some good revenue numbers as they continue to trickle through.So overall, very pleased with the performance of the business, and we expect a strong end to the year. We look forward to 2019 and beyond.So thank you for joining us, and I'll now turn it over to questions for Chris and I.

[Operator]

[Operator Instructions] And our first question comes from the line of Damian Brewer from RBC.

[Damian Brewer, Analyst]

Two questions please. First of all, just generally across the business. In the past, you've talked about what price elasticity can do and how you've experimented with it? Could you talk a little bit more about what that's done over the summer period, and particularly, in businesses like long distance coach in the U.K. and Spain where clearly that's a key period where that experiments can been seen to work or not? And then secondly, more generally across the business again, could you talk a little bit further about how the M&A or bolt-on businesses that you bought in the last 12 months have performed versus your expectations, again in that critical summer period for the non-School Bus businesses please?

[Dean Finch, Group CEO & Executive Director]

Okay. Damian, well, look, our customers, I think, rolled over -- our retail customers rolled over are extremely price sensitive. And so pitching the price at a competitive level is extremely important. It's -- however, having said that -- I mean, so that's a general position. Having said that, there are also places where we can and we find that we can and we do yield where it's the right thing to do. So it's a nuanced approach. But overall, the -- although it's focused on the price elasticity impact, and generally speaking, when we cut fares, we grow volumes and revenues, and it's almost always the right thing to do. And we have definitely seen that over the summer. Having a competitive but also a flexible offering is at the heart of what we do and what our customers want from us. And you've seen that in the 10% growth numbers. We've seen, for example, in UK Coach this summer, but you are also seeing it in the bus customers, and you are also seeing it in Spain over the summer. And if you remember the first half of the year in Spain, following the score for a variety of reasons somewhat related to the start of the year, some impact of Catalonia looked pretty flat then really came to life over the summer, a strong July, August and indeed September. So we are very pleased with that. I think turning to your second question. I think you mentioned -- you asked about non-School Bus. They performed well over the summer, are the best, for instance, in Madrid, Maitours as well. The business is outperforming. Those businesses that we bought in the last 12 months are outperforming ahead of our expectations, and we're very pleased with what we bought.

[Operator]

[Operator Instructions] And our next question comes from the line of Joe Thomas from HSBC.

[Joseph Philip Thomas, Analyst]

I was interested in what you're saying being about the impact of customer satisfaction scores on your margins in School Bus. Is this some sort of cause and effect there in Q2, I'm just -- I'm trying to understand exactly what you were driving towards? And when you said there's an 11 percentage point -- 11% in margin difference, did you mean 11 percentage points or it can be 11% difference between 2 percentage numbers if that makes any sense? And then just a couple of other things. On School Bus and you now mobilized for the -- obviously for the current academic year. Just wondered if there's anything that's come out that has surprised you positively or negatively? And then finally, on acquisitions. To what extent are you still expecting to deploy capital on acquisitions? Are you still seeing the same level of opportunities at the same rates of returns that you were in the past?

[Dean Finch, Group CEO & Executive Director]

Okay. Joe, so, yes, I do mean 11 absolute points, so that means 11% difference. So where we score highly on customer sats with our customer, we retain those customers for years and the margin is good. And actually, they believe, they are paying enough for our services, which is a happy problem for us to have. And so what we're driving towards is can we, and I don't know, but can we with some focus on investment lift our business up by the bootstraps to get the other half of the business, if not all of it, from the average margin to -- the upper quartile margin that we seem to be earning from our very satisfied customers. So this is an interesting opportunity. I don't know the answer to it at this point in time. But what I do know is that the business is really focusing on this. And we would hope over the coming years to show some margin progression in the business if we're able to achieve our goals here. It won't come overnight to build the long-term relationships we have with some of our customers have gone by years and years and years. But over the long term, if we work and focus -- I mean, it'll probably cost a bit in the short term, but if we work and focus on this, I think, it will definitely with our business strategy for us to pursue and also create returns for us. Answering your second question, it's been a very good return to school for us. Again, we've invested in that to make sure that we weren't short of drivers and it's tough as you know because the U.S. economy is growing okay, but we were well deployed over on school starts up overall. And we picked up maybe 200 organic groups, and most of those came from competitors, who couldn't source the groups themselves. So that school boards giving us other people's work because we were in a position to run those services where our competitors weren't and that's great business for us as well. We -- the ebb and flow on acquisitions. I don't think there's going to be anything material for the remainder of this year. We continue to look at them. The returns are what they were. The prices are not going up, and we're very disciplined about it. Where they do go up, we won't pay the price unless there's a really compelling reason for doing it. So we're still seeing a good stream of activity ahead of us, which if we achieve the right prices, we can deploy our cash flow and grow the business. Hopefully that's answered your questions.

[Operator]

Our next question comes from the line of Dominic Edridge from UBS.

[Dominic Edridge, Executive Director and Analyst]

Just couple of questions. Firstly, I know, Dean, you had already mentioned both on the staff side in the U.S. Could you just talk maybe a bit generally about some of the other markets, the U.K. and also perhaps even potentially on Spain if what the staff situation is there in terms of both turnover and of course, sentiment levels? And then, secondly, just on the Spanish issues and obviously the delays there in the re-tendering process. Where would you say you are now in terms of visibility looking at 2019 and 2020 in terms of the business? And yes, can you give an idea, if you just look at this for contractual businesses, what kind of, sort of, backlog you now have there?

[Dean Finch, Group CEO & Executive Director]

Yes. The turnover in Spain is particularly low, low single digits and that's the same in the U.K. as well in staff members. And settlements, they're between 2% and 3% overall. And so inflation is not spiking up that much. It's a bit higher in Spain, in some regions of Spain, not overall, but in some regions of Spain, it's over -- it's a bit higher, but it's not giving us margin pressure in either the U.K. and Spain. On contract visibility, I mean, we have absolutely got complete visibility now in 2019. So -- whereas previously we thought we would have some loss of margin in Spain in 2019, we won't see that now. And what I was trying to say to you earlier is the incomparable is 2020, and if -- I think the biggest factor in that, it could be a general election in Spain in 2019. Now elections in Spain are not due until 2020, but it is a minority government in Spain, and there is plenty of speculation if you take out any of the Spanish newspapers or look at any Spanish media about whether there will be an election or not in 2019. As far as I'm concerned, that's anybody's guess, I'm not qualified to talk about it. But were there an election in 2019 then the issue for me will be, well actually do we then move in a situation where we can tell you there will be no impact on -- in 2020 either. And I guess, as every week goes by, we further delay the impact on 2020. So as each year comes along, we're pushing out the impact. And it's then -- well, most of the issue is the combined impact of that coupled with the startup of Rabat, which will be a large contract. Albeit, we've only got 51% of it, but a large contract to average Spanish margins. I think there could be a material impact on the numbers there.

[Operator]

[Operator Instructions] And we have a follow-up question from the line of Damian Brewer from RBC.

[Damian Brewer, Analyst]

Dean, a little bit, maybe, if you could speak on the issue, but could you talk a little bit more about what's happening in Birmingham, particularly the bus rapid transit proposals and where you're fitting in there? And whether there's any CapEx or OpEx sort of in advance of that in the trading you've disclosed for the summer? And if not, does any come in and is that already in your outlook and guidance?

[Dean Finch, Group CEO & Executive Director]

If somebody could tell me what's going on with bus rapid transit in Birmingham, and then I'd be grateful. So I have no visibility of that at the moment, Damian. But -- I wouldn't get along one way or other on it just at this point in time.

[Damian Brewer, Analyst]

Cool. So at the moment, it's just something that's out there but no clear impact.

[Dean Finch, Group CEO & Executive Director]

I think that, it's hard for me to say. But I think that -- I think it's quite likely that -- well, again, just pick up any newspaper in Birmingham, there are an increased number of councilors and some politicians now, who are questioning some of the visionary aspects that, that had previously been trialed. And I suspect, if I were a betting man then my money would be on a partnership between us and the West Midlands in terms of upgrading and some of their core central routes gearing the early 2020s, and we're already doing that anyway. We've been doing that a number of years and there might be some good come out of it as we work on first priority scalings, which in fairness, the highway don't do that, Damian. And it's helping to give us a bit more of a bounce on our tax numbers anyway in Birmingham. The tax numbers look pretty good over the summer in Birmingham. Unless we do more work on highways then they should continue to improve. So pretty unclear picture, but there's not some big CapEx bubble out there or some big regulatory set out there as I see it at the moment.

[Damian Brewer, Analyst]

Okay, that's very helpful. And if possible, is it possible to just get a quick update on where the group is on its fuel exposure position? If there's been any change since the interim's announcement?

[Dean Finch, Group CEO & Executive Director]

I think next year, we're probably looking at sort of GBP 3 million, GBP 5 million maybe as a group overall in terms of the cost uptick. So no big deal, which we'll adjust as well.

[Operator]

Our next question comes from the line of Alex Paterson from Investec.

[Alex Paterson, Analyst]

I just wonder if you can say a bit more about ALSA's long distance returning to growth again. Was that or is it an end rate as a result of something that you did specifically? Or was that something else that happened in the market?

[Dean Finch, Group CEO & Executive Director]

The first part of the year was -- it was a bit strange. And our numbers were skewed anyway by the loss of a loss-making contract compared to the prior year. So actually when you factor that out, the underlying business was growing, albeit it wasn't particularly strong. We do think that was explained by a number of external events. The confidence -- the loss of confidence in Catalonia is not to be underestimated, and I suspect all businesses that have interest in Spain, across Spain, will have seen that impact, and that's probably continuing. Weather had an impact and the timing of each of these initiatives compared to the prior year also had an impact. But the summer was extremely strong as Spain remains a very healthy tourist market, and we really grow our initiatives on both digital and on fares and all that combined to give us a clean win summer in Spain and it's continuing now into the autumn. We're in a very good position.

[Operator]

Our next question comes from the line of Gerald Khoo from Liberum.

[Gerald Nicholas Khoo, Transport Analyst]

Couple of questions for me. I was just wondering on the group's revenue and PBT growth rates. Whether you might be able to give us an organic number to complement the all-in reported numbers? I'm also just thinking about UK Coach, obviously very strong growth there. What's your sense as to what might be the long-term growth rate for that business? Because obviously you're getting on for sort of double-digit growth there, which has probably faster than you might think the underlying growth of the market might be. And what is your sense as to what you might be able to sustain in a long term?

[Dean Finch, Group CEO & Executive Director]

Well, if I answer the second question first. I don't know the answer to the first question. I don't know if Chris does either. But I'll give him a moment to think about it. I mean, I typically think about the UK Coach business growing about organic -- grow organically about 3% or 4% a year. But what we've seen this year is, we think the underlying organic piece of coach is north of that so 5%, 6%. Railways, railway disruptions did have a material impact. There's no doubt about that this year. With the closures of -- with the Eastern closed over all this bank holiday and then for the following 3 weeks and just the parkway is closed now for the best part of the month and then that also did have an impact on our demand unquestionably over the summer. And as, of course, there's terrorism impact as well. And I think I'm not alone in saying that, also Mervyn mentioned it the other day as well. But the UK Coach probably this year is all about making sure you run the right service -- the cliché, I would say, the right services at right price. And the demand out there is strong. And I expect that strength will continue in the years to come because it's a very good and flexible product. Hopefully, I've diverted enough so that Chris can think of an answer to the first question?

[Chris Davies, Group Finance Director & Executive Director]

Sorry, Gerald, what -- could you repeat the first question.

[Gerald Nicholas Khoo, Transport Analyst]

I was just -- I just asked an organic growth rate for revenue and ideally profit, obviously, I'm assuming that the, for example, the group revenue number of 9.5% reported, is all-in including acquisitions? I was just wondering what you might think the organic growth rate was or may be a rough statement in terms of how much?

[Dean Finch, Group CEO & Executive Director]

Well, I'd think as far as -- I'll try. The overall organic piece will be about half of it because you can see from what we're talking about in coach and particularly in Spain, the 4% overall long haul, all of that overall for long haul is organic. None of that is acquisition. And that would have driven profitability in Spain quite considerably. So I would say about half-and-half.

[Operator]

And as there are no questions registered, and I'll hand back to our speakers for any closing comments.

[Dean Finch, Group CEO & Executive Director]

Okay. Well, thanks very much for your interest this morning. I hope you could hear me all right. And as I said, the position of the business is in a good place or in good shape. And we got lots of opportunities across the group where we can continue to grow. So thank you very much, and have a good day all.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.