Mobico Group Plc (MCG) Earnings Call Transcript

Good morning, and welcome to the Mobico Group Plc Investor Presentation. [Operator Instructions] I'd now like to hand you over to Phil White, Executive Chair. Good morning, sir.

Good morning, everyone. I'm Phil, I'm the Chairman of Mobico. Welcome to you all for our audited results presentation. It covers the 15-month period ending 31st of March 2026. Joining me today are Brian Egan, our CFO; and Paco Iglesias, who stepped up to be our Group CEO in April. So I think we warned you last time that the -- our reporting period this year would be a bit unusual. Our audited results actually, as I said, cover a 15-month period, which always seems to make things complicated. So apologies for that. We're also a little later than expected in reporting. But as I said before, we are in a World Cup year so we have to pay a bit more extra time and extra time and extra time. And of course, VAR getting involved. But I'm very happy to report that we have not received any yellow cards. Over to the results. I mean, as you know, we delivered good results in 2025 and we've made a strong start to 2026. This has enabled us to build a stable platform to derisk legacy issues and take the business forward. Our focus has been on [indiscernible] and restructuring the Group to make it stronger. We have had quite a few legacy issues to manage, but we've made a lot of progress. So we're now on track as well to deliver the GBP 75 million cost savings we promised [ for 2026 ], and this is equivalent to GBP 100 million in a full year. We've dialed back our CapEx to a more disciplined GBP 120 million target from 2027. And we're also looking at other ways to significantly reduce our costs even further. In Germany, we've done what was absolutely necessary to derisk our rail contracts. In RME, we've improved profitability and removed revenue risk entirely by shifting the contract from a net to a gross. RRX is still loss-making, but we successfully reduced its lifespan by 3 years. On a combined basis, these changes mean that our rail ops will now be at least cash-neutral over their remaining contract lives. This brings more certainty to the Group and frees up more management time and focus on the future rather than the past. It's important to note here that we have some payment advances we are currently discussing with [ the PTAs ]. This is one of the legacy liabilities that Brian will explain in more detail later on. German Rail, as you appreciate, is not the only area of focus we have as we've been rationalizing other parts of the business. During the period, we exited 2 loss-making subsidiaries in U.K. Coach. And we also addressed the 2 significant loss-making contracts in WeDriveU. As always, our jewel in the crown, Alsa, delivered another set of record figures. This was driven by a continued strong performance in Spain and growth in Alsa's diversified and international businesses. It's no surprise that Alsa is increasingly playing a more important role across the wider Group. Based on the strong start to 2026, we are raising our operating profit guidance for the year to between GBP 215 million and GBP 230 million. Looking ahead, our priorities are plain and simple. We are continuing to destabilize and derisk the Group. We are maintaining the strong trading performance of Alsa by continuing to invest in the business. We are completing the monetization and derisking of our U.K. Bus business. And we are continuing to streamline our central framework by removing the corporate glue that holds us back. We're [ additionally ] focusing on cash generation to help us derisk and deleverage. And finally, and importantly, we're looking at all options to manage our balance sheet better as the current level of debt is too high for the size of the Group. But let me now hand over to Brian, who will take you through the numbers.

Okay. Thank you very much, Phil and Jack. Good morning, everyone. Today we're reporting on an extended 15-month period ending the 31st of March 2026. Since we previously discussed our 12 months results, the focus today is our trading progress in quarter 1 and other key areas of focus. When measured against the previous 15-month period, revenue increased 6% to GBP 3.4 billion, driven largely by Alsa's strong Group growth momentum. Group adjusted profit -- operating profit grew by 18% to GBP 231 million. Statutory operating profit was lower at GBP 12 million. This gap between adjusted and statutory operating profit continues to reflect a number of significant adjusting items. We discussed these in detail at the 12-month results, and an updated breakdown is provided in the appendix to this presentation. Free cash flow of GBP 132 million came in lower than the 12 months '24, largely due to cash outflow related to the school bus business prior to its sale back in July '25. Covenant gearing remains well within tolerance at 2.9x. Turning to the first quarter of 2026. We saw continued operational momentum with Group revenue increasing by GBP 28 million or 9%, with Group adjusted operating profit nearly doubling from the equivalent period a year ago. Alsa's revenue improved by GBP 29 million and adjusted operating profit by GBP 6 million. It is important to highlight that Alsa's strong performance is well balanced across all businesses. Long-haul continues to grow and is being boosted by government's single-ticket initiative. Region and urban are both growing strongly. Health transport and other diversified activities are seeing particularly strong momentum. We also recognized our first technical service fee from the [ Khadiya ] contract in Saudi Arabia. And in Morocco, operations have stabilized after December's changes, and they remain profitable. WeDriveU shows a GBP 4 million improvement in operating profit. However, this is mainly due to losses in [ the matter ] during quarter 1 '25, which are now -- which were not covered by the onerous contract provision at that time. UK Coach has had a difficult quarter of trading with levels of competition remaining high. Adjusted operating profit is down by GBP 4 million versus the previous year. This mainly reflects a provision taken in March related to a legal claim by a supplier. We are confident that there will be a positive outcome, which will be reflected in the next reporting period. Our U.K. business continues to be affected by lower passenger volumes and higher costs. This, along with changes to the treatment of supplier rebates, resulted in quarter 1 operating profit worsening by GBP 4 million. This was supported by a subsidy for transport for West Midlands, the local authority by -- of GBP 18 million. German Rail recorded a GBP 12 million improvement in operating profit, reflecting the financial benefits of stabilized operations, which we've seen since quarter 4 of last year. This also includes a GBP 6 million benefit related to [ ORX1 ] emergency award contract, which has operated between '22 and '23. Central function costs have almost halved, GBP 2.9 million, showing the rightsizing of our central functions is progressing well. On the back of good quarter 1 results and the revised contracts in Germany, we are upgrading our full year 2026 adjusted operating profit guidance to between GBP 215 million and GBP 230 million. In Alsa, the Young Summer initiative in Spain restarted last month, and we're already seeing volumes above last year's. In Alsa -- sorry, taken together, the remaining divisions are broadly expected to offset central costs. We continue to focus on reducing costs and are implementing a number of new initiatives to improve performance. Adjusted operating profit for WeDriveU is expected to be broadly in line with 2025 as focus returns to core operations and streamlining the business with a transformation plan underway. In U.K. Coach, the focus remains on improving its competitiveness, and we expect benefits of integration into Alsa and significant cost reduction to make an impact in the second half. U.K. Bus is expected to be broadly breakeven, with local authority fund support offsetting the decrease in patronage that the bus industry has seen right across the country. Central costs have reduced significantly. However, increased audit fees have offset most of these savings. We expect the audit fee to normalize once we return to our usual reporting cycle. Underpinning our increased guidance is our strong cost visibility, noting we are 100% hedged fuel -- sorry, 100% hedged on fuel for full year '26, and mostly covered for the full '27 also. I want to spend some time just talking about our legacy liabilities and the impact they're having on our balance sheet. The core business is generating strong cash flow, which is enabling us to reduce these legacy liabilities. However, these liabilities are impacting on our ability to reduce debt. For retained school bus claims -- North American school bus claims, we have a provision of GBP 62.5 million to cover expected settlements. The cash outflow will occur as the claims are settled, which should happen over the next 5 years. The school bus purchase dispute is capped -- purchase price dispute is capped at GBP 35 million. We have provisioned an appropriate amount, and the outcome is expected before -- the outcome of that dispute is expected to be settled before the end of '26. We also have German PTA advances of circa GBP 130 million. These consist of historic penalties and the overpayment of subsidies. We are in discussions with the PTAs in regard to the value and the timing of the repayments. We expect that these will be repaid over the lifetime of each contract. Finally, we have a pension deficit in the U.K. of GBP 53 million. Here we have a 3-year funding arrangement, which we see the annual cash flows of just under GBP 20 million. Now moving on to cash flow. We have excluded the negative contribution from North American school bus to show a clearer picture of our cash flow. Focusing on the first quarter of the year, we spent GBP 32 million on maintenance CapEx and had working capital inflow of GBP 22 million. We made a GBP 4 million pension deficit contribution and paid GBP 14 million in interest. Overall, free cash flow was GBP 55 million, and free cash flow after growth CapEx was GBP 50 million. The improvement reflects our much more disciplined approach to CapEx and working capital, which Phil also mentioned. Looking forward, we expect total CapEx this year to be around GBP 135 million due to prior vehicle orders, but we remain fully committed to our disciplined target of GBP 120 million per annum from '27 onwards. Despite the disciplined CapEx target, we are still able to pursue new growth opportunities through focusing on CapEx-light contracts. For example, JV contracts in the Middle East and elsewhere in Alsa, as well as asset-light opportunities in the U.S. Now moving back to the 15-month figures. We delivered free cash flow after growth and M&A of GBP 40 million. We received GBP 286 million from the disposal of the school bus business, but had GBP 150 million of cash outflows relating to adjusting items, mainly working capital. Again, a full breakdown of adjusting items can be seen in the appendix. We spent GBP 43 million in hybrid coupon payments, noting that this replaced 2 coupon payments falling within this extended 15-month period. So in other words, February fell twice. Other movements saw a GBP 10 million outflow, leaving the Group with net funds inflow of GBP 115 million. Adjusted net debt at March 26 was GBP 1.1 billion, down from an opening balance of GBP 1.25 billion at December '24. Covenant gearing of 2.9x is a 0.2 increase from improvement from the 12-month audited results and a 0.1 improvement from '24. We expect net funds inflow of GBP 50 million before GBP 80 million of legacy payments for 2026. As a result, we expect overall cash flow -- cash outflow as the business derisks its legacy liabilities. However, we do expect a small reduction in covenant gearing at the end of December '26 as the business continues to grow its EBITDA. Finally, our liquidity position remains robust. We have GBP 0.8 billion in total liquidity, including GBP 240 million in cash. We have more than sufficient runway to manage our private placement maturities in mid-'27. 86% of our Group debt is maintained at fixed rates and the weighted average interest rate is 3.5%. For the hybrid, the coupon rate is 8.1%, which was reset last February, and the first payment at this higher rate is scheduled for February 27. We will decide on that payment closer to the time. To sum up, debt reduction remains the Board's absolute priority. To achieve this, we are driving operational excellence to generate strong and predictable cash flow and derisking our U.K. Bus operational assets ahead of the regional transition to franchising. Turning to deleveraging. The Board and management are working closely with our advisers to evaluate all available strategic and financial options to deleverage. We will provide an update on this later in the year. So now please, I would like to hand over to Paco, who will discuss the performance of each of the divisions.

Thank you, Brian; Thank you, Phil. Well, I'm Paco Iglesias. You know that I've been appointed CEO in April. So that means that I have spent my first 100 days in the company. What I guess that you expect me to have a clear view on where we are and especially what are we going to do to fix and to improve the situation. After this period, I have good and bad news, as always. Bad news is that we have inherited our company in a very difficult situation because of the legacies. But good news is that we have put in place a very solid plan that I'll try to explain right now with [indiscernible] and clear facts, over narrative, that will explain why we are going to -- we are very optimistic of that. Don't expect that we're able to show you our new strategy or [indiscernible] consultancy firm supporting the process. Now we have done this work with the main ideas from top to the down and after that [indiscernible] initiative bottom-up [indiscernible] later. My main goal, as Brian explained, is to generate cash in the next month, and back to be fully transferring with you with the plans, with the numbers. Because it is fundamental for us to recover all the confidence in the performance of the company and the capabilities to keep growing in the future. This is the [indiscernible] to summarize the plan. The plan is very simple. As I said, it's based on the 4 -- sorry, the 4 main issues and what you have in the screen and in the [indiscernible]. First, I have a big focus on stabilizing the operations because, before starting to fix this, we need to make sure that we are performing in terms of operation in a right way. Secondly, as we said, we need to avoid the risk, some contracts that we are running and they are jeopardizing us a lot. So as you have already listened, we have some good news on the German contract, in [indiscernible] in some other places. Then [indiscernible] that once we have the right operation and the right contracts, we need to get more savings and [indiscernible] I will show you later. And finally, it's also important that we cannot live for the whole life only cutting costs. So we need to create new opportunities for the future, and I will try to explain what's in our pipeline. This is the plan that I showed you with numbers, in terms of sales, we'd have more than 100 initiatives that have proved us a run rate for a year of EUR 100 million, that is initiative by initiative of EUR 100 million of cash. We have a lot of initiatives, as we said, and we are putting in place, and you can see that the first months we are performing better. It's very important to reduce CapEx as well, also a figure. We've been able to manage to pass from more than EUR 150 million last year to EUR 112 million [indiscernible] a way of [indiscernible] to avoid the loss-making contract, as I said, that is very important, and to keep the opportunities of growing through the -- for example, new contracts in Spain in [indiscernible] or the new contract in Saudi. And we have just announced [indiscernible] big contract to go through. Of course, we need to grow through the asset-light project. Let me go division by division, and starting from Alsa. One question that you probably are thinking is Alsa able to keep growing in the future? Well, this is the figures for the last 15 months. In terms of revenue -- in terms of revenue, we have a growth more than 10%. As if you see the numbers on the chart, is not long-haul. Long-haul, we have growth, but it is a very small part of the growth. The main part comes from the internationalization of new businesses and diversification. That is the most important part. And it's remarkable, the case of Morocco, revenue, we have lost after the [indiscernible] at the end of last year, is roughly 1% of the revenue of Alsa. But now we are still the leader on [indiscernible] transferring Morocco. We are profitable there. We have managed to restructure the company there, and we are working in a normal way. Another question for -- probably from you is what's happening with the franchise system in Spain, in Alsa. To put it in context, we manage roughly 200 contracts in Alsa, more than 50 PTA. And it's an ongoing process that we have every single year in the last 3 years or more 5%, 10% of our revenue under renewal. So it's something that probably is -- it's difficult or is smaller [indiscernible] part of the long-haul has not had a significant delay. But it's also now in the process of bid tendering. The key point here for Alsa is that we'll have a ratio of success when we are the incumbent, very high, a good 95%. But if you ask me for last year, '25, it was 100%. And we have also a good ratio of success when we are not the incumbent, that would be [ 30%, 35% ]. That's the reason behind we are able to keep growing. And as we said, you saw, with very similar margins that we published the last 5 years after pandemic, we have been performing with margins between 12% and 14%. And I don't see a vision why not to keep going that way. After our [indiscernible] process, it's true that we have to reduce our shares. That means that [indiscernible] we have a reduction on the margins. But as you saw it in the slide, we [indiscernible] in Alsa, almost 10%. That means that in 2 or 3 years, we usually recover the margin. This is what had happened in the past. If we move to the States, I think it's the same [indiscernible] I have explained earlier, is first to reduce CapEx. We are now working in opportunities with asset-light. We are avoiding contracts with heavy CapEx, and we're working on that. On the sales area, we have changed completely the company there. Now we are working a more similar way that we do in Alsa, with regional -- by regional areas, and [indiscernible] and controlling the headquarter. Headquarter manage procurement, safety, finance, legal, and we have been able to reduce the overheads in all the regions. That gives us a significant reduction in [indiscernible]. The loss-making contracts, I think is a good example, the States, we have managed in the last months to avoid pretty significant loss-making contracts that we were running there. So now it's getting a better position. It's been a difficult process with our [indiscernible] process. Now we are out of them. Finally, growth, as I said, we have a huge operating pipeline of opportunity, more than 600. And we have -- we need to be very disciplined and selective in order to pursue only the opportunities with asset-light and with real positive EBIT in the future. For U.K. Coach, I have to acknowledge that we are growing slower than expected, because of lot of reasons. The [indiscernible] of Alsa started but we have -- struggling with some of the products, mainly that they will have a strong competition there that in the last months we have [indiscernible] number of slides managed by 70%. And with [indiscernible] we have lost only less than 5% of [indiscernible]. We have also reduced the average [indiscernible] in order to be more competitive on -- actually, we still have the largest market share in U.K., so and the strategy we are following is the same, that I explained. CapEx, less CapEx. We are reducing our own fleet in order to not to have commitment for CapEx in the future. On the sales side, we have reduced our overhead [indiscernible] basis by more than EUR 25 million in the year. And in terms of loss-making contracts, we have the [indiscernible] in the noncore business, but we are also reducing and cutting part of our network that were not profitable. So we are focusing on the more profitable routes in the country, are finally good growth. I can give you some examples. We are now using revenue management system tool from Alsa and we have been able to grow passengers in some regions where we are introducing this to. Next is U.K. Bus. If U.K. Bus -- well, here we have in a different [indiscernible]. You know that with the new Prime Minister, have decided that he wants give local PTAs [indiscernible] of having control of the transport. The background that we have in the U.K. is London has [ grown positives ] passages a lot in the last year, but the rest of the cities of the region has lost a lot of passages [indiscernible] with a change. So our strategy there is to [indiscernible] the contract with money [indiscernible] some of the asset, and prepare the company for the franchise system that you've been seeing with international experience. So I think we will be neutral at the end of the year. Because even with the patronage that we are suffering, we have been able to manage the subsidies and the sales in order not to lose EBIT. And finally, German Rail, sorry that I cannot give you many details because we are under an NDA, but it's public that we signed off an agreement a couple of months ago with the 5 PTAs in Germany, and that will give us cash, at least, cash-neutral in the -- for coming years from [indiscernible] as you know, with loss-making contracts won. On the operational side, savings, for example, for the first time, we have 100% of the [indiscernible] that make for operation. Even more, we are high -- part of our drivers come from the training center to [indiscernible] making money on that. But also number of penalties that we are suffering [indiscernible] in a lower range in the last years. And finally, just to give you a -- in terms of same safety, we have the best ratio of safety in Germany. So that's a very good news. And in terms of growth, we are working to create a platform [indiscernible] platform with potential new opportunities [indiscernible] in the area of Westphalia, where we are the largest private operator there. We can add significant value to the company for the future. And yes, finally, to summarize, how are doing that? It's not a secret that we are working in a model that Alsa is the central. We are proving the practices and supporting all the teams. And I think this is allowing us to get better margins, to get better operation. It's absolute a priority to [indiscernible] cash, as I said, and we are doing that with significant savings everywhere, but also to reduce CapEx or to manage the working capital. And finally, with a new structure with very central -- strong central functions, for example, that we are now with [ Rafael Sterling ] as COO who is in charge of procurement, safety, maintenance and a lot of things that he will manage for the whole company of Mobico, not only for Alsa. And as a result of all of that, we have presented a record number for the year for the 15 months and an outcome from that, that we have increased our guidance for the full year by 10%. That is completely shown according to the data that we have. So that's all, and happy to answer to any questions.

Okay, guys. Back to me again. I'm just about to wrap up the presentation as quickly as I can. I think it's important to emphasize that we've made a strong start to 2026. I'm confident that can continue through the rest of the year. And that enables us to be in the position for an upward revision to our guidance for operating profit this year. Alsa continues to outperform and is absolutely key to the Group. We will continue to invest in that business so it can continue achieve its growth potential. The stabilization of our German Rail contracts ensures our rail services have a future, we continue to operate a quality service. In the U.K., we are progressing the monetization of our U.K. assets in the West Midlands to derisk the business, well ahead of the move to the re-regulation of bus services and the introduction of bus franchising. Any move we make right now is focused on private cash generation and managing the legacy issues we inherited. This includes driving further cost savings over the [indiscernible] we announced in 2025 12-month results. Our priority is leverage reduction. We are working closely with our advisers to look at all our available strategic and financial options to deleverage the business. We will give you an update later in the year. So that concludes our presentation guys. So happy to take any questions.

[Operator Instructions] And [indiscernible] would like to turn back to you just to [indiscernible] the Q&A where appropriate, and I'll pick up from you at the end.

Thank you, moderator. First presubmitted question. As debts reach maturity, are you intending to pay them off or refinance?

Okay. So we're working with our advisers at the moment -- I mean, first of all, just to say we have a very high level of liquidity with GBP 0.8 billion at the end of March. And we are now working with our advisers on a plan to tackle our debt on our balance sheet. So we'll have an update later in the year, probably in the September results.

Any updates on asset sales in the U.K.? Can you give any opinion as to whether this will be cash in or liabilities out?

If you're talking about the West Midlands monetization, I think it's a bit of both really. We have assets that we can capitalize on, we have cash. But we've also got some longer-term availability contracts that we have built, have to deal with its liabilities.

A question on Alsa. How will Alsa maintain a durable competitive advantage in the long-term future?

Well, as I said in the presentation, I think there are several factors. One is to keep diversifying and not to have all the risks in the same -- just in one business and [indiscernible] to approach more especially international. Another important point is to have a very strong team in bidding, with the ratio of success as high as we have had in the past. Also to keep our [indiscernible] structure to the simple and [indiscernible] low central costs in order to not to have -- to be able to maintain high [indiscernible].

[indiscernible] also serving as the new Group COO and, investors should expect the rail business play a bigger part in the future, going forward?

Well, the arrival of [ Rafael ] [indiscernible] has nothing to do with the rail. He's not in charge of rail. He's in charge of operation, in maintenance, procurement. But it's true that he has a lot of experience in rail, so we'll take advantage of his experience and knowledge in order to improve operation or to analyze new opportunities. But it's not the main program he has been hired for.

How has Saudi JV commenced? And are there more contracts currently being bid on?

Well, the quarter we have just started was 6 months ago with Khadiya in Saudi, and we are over expectation in terms packages, but also in terms of profitability. So we are working quite well. And the other news is that we have been announced as preferred bidder for [ Badida ] that is a huge, huge contract there, another with a joint venture one. There will be a lot of new opportunities there [indiscernible] or some other places. So it's [indiscernible] so we will grow faster in the next years.

Question, Brian, how many years of cash outflows in legacy liabilities [indiscernible]?