REG-FirstGroup PLC: Annual Financial Report <Origin Href="QuoteRef">FGP.L</Origin> - Part 1
15/06/2017 17:00
FIRSTGROUP PLC
(the ‘Company’)
ANNUAL FINANCIAL REPORT
In compliance with Listing Rule 9.6.1R, the Company has today submitted a copy
of the documents listed below to the UK Listing Authority and they will
shortly be available for inspection via the National Storage Mechanism at
www.morningstar.co.uk/uk/NSM. These documents have also been despatched or
otherwise made available to shareholders.
* 2017 Annual Report and Financial Statements (the ‘2017 Annual Report’);
* Notice of the 2017 Annual General Meeting of the Company which will be held
at Aberdeen Exhibition & Conference Centre at 1.30pm on Tuesday 18 July 2017
(the ‘2017 AGM Notice’); and
* Form of Proxy and Notice of Availability for the 2017 AGM.
The 2017 Annual Report and the 2017 AGM Notice are also available on the
Company’s website at www.firstgroupplc.com
A condensed set of the FirstGroup plc financial statements, including
information on important events that have occurred during the year and their
impact on the financial statements, were included in the Company's
announcement of its full year results made on 1 June 2017. That information,
together with the information set out below, which is extracted from the 2017
Annual Report, constitute the material required under the Disclosure Guidance
and Transparency Rule (‘DTR’) 6.3.5R to be communicated to the media in
unedited full text through a Regulatory Information Service.
This announcement is not a substitute for reading the 2017 Annual Report.
Cross-references and page numbers in the extracted information below refer to
sections in the 2017 Annual Report. To view the final results announcement,
visit the Company website at www.firstgroupplc.com
PRINCIPAL RISKS AND UNCERTAINTIES
Our risk management methodology is aimed at identifying the principal risks
that could:
*
adversely impact the safety or security of the Group’s employees, customers
and/or assets
*
have a material impact on the financial or operational performance of the
Group
*
impede achievement of the Group’s strategic objectives and financial
targets; and/or
*
adversely impact the Group’s reputation or stakeholder expectations.
The Group’s principal risks are set out below. These risks have been
assessed taking into account their potential impact (both financial and
reputational), the likelihood of occurrence and any change to this compared to
the prior year and the residual risk after the implementation of controls.
Further information on our risk management processes is contained in the
corporate governance report on pages 54 to 55.
Strategic objectives
To deliver our strategy, it is important that we understand and manage the
risks that face the Group. The table below outlines our principal risks and
identifies which of our strategic objectives may be affected by those
principal risks.
Focused and disciplined bidding Driving growth through attractive commercial propositions Continuous improvement in operating and financial performance Prudent investment in our key assets Responsible partnerships with our customers and communities
Economic conditions - - - -
Political and regulatory - - - - -
Contracted businesses including rain franchising - - - - -
Competition and emerging technologies - - - -
Information technology - - - - -
Treasury and credit rating - - -
Pension scheme funding - - -
Compliance, litigation and claims, health and safety - - - -
Labour costs/employee relations/recruitment and retention - - - - -
Disruption to infrastructure/operations - - - -
Risk and potential impact Mitigation Comment and movement during the year
Economic conditions including Brexit implications Changing economic conditions affect our different businesses in different ways. A less positive economic outlook could To an extent, our First Bus and Greyhound operating companies are able to modify services to react to market changes. All of our businesses focus on controlling costs to ensure they remain competitive. Continued low oil prices have adversely affected our Greyhound business. The UK departure from the European Union (‘Brexit’) may adversely impact the UK’s economic position which in turn may have an adverse impact on the Group’s UK operations. These factors have increased the risk during the year.
have a negative impact on our businesses in terms of reduced demand and reduced opportunities for growth or to retain or secure new business. Our First Rail businesses
are particularly sensitive to movements in key economic indicators. The same factors could also affect our key suppliers. An improving economic climate, particularly
when combined with lower fuel prices, may result in reduced demand for public transportation in our Greyhound and First Bus businesses as alternative modes of transport
become relatively more affordable. Improving economic conditions may also result in a tightening of labour markets resulting in employee shortages, pressure to increase
pay, or affect the availability of public funding for transport services.
Political and regulatory The political landscape within which the Group operates is constantly changing. Changes to government policy, funding regimes, or the legal and The Group has dedicated legal teams in the UK and North America who advise on emerging issues. The Group actively engages with the relevant government and transport bodies and policy makers to help ensure that we are properly positioned to respond to any proposed changes. Our continued focus on service quality and delivery helps to mitigate calls for structural market change. The Bus Services Bill came into force in April which includes devolved powers to regulate bus services in local areas, subject to certain criteria being met. The risks has increased in the year as Brexit, the new administration in the USA, and the shift in the political landscape in the UK could bring about changes in both how we operate and in the markets we serve.
regulatory framework may result in structural market changes or impact the Group’s operations in terms of reduced profitability, increased costs and/or a reduction in
operational flexibility or efficiency.
Contract businesses including rail franchising Approximately fifty percent of the Group’s business is contracted, which is dependent on the ability to renew and secure The relevant Divisions have experienced and dedicated bid teams who undertake careful economic modelling of contract bids and, where possible, seek to negotiate risk sharing arrangements with the relevant customer or contracting authority. The Group also has a comprehensive review process for rail bids as they are developed and finalised involving a number of divisional and Group functions as well as final Board sign off. Compliance with our rail franchise agreements is closely managed and monitored on a monthly basis by senior management and procedures are in place to minimise the risk of non-compliance. No material change during the year, although the award of the South Western franchise will increase the size of our contracted operations.
new contract wins on profitable terms. Failure to do so would result in reduced revenue and profitability and incorrect modelling or bid assumptions could lead to greater
than anticipated costs or losses. Failure to comply with contract terms could result in termination, litigation and financial penalties and failure to win new contracts
or non-renewal of existing contracts. Competition for new rail franchises is intense. We bid against rail operators from both the UK and other countries. Failure to win
franchises in the future will result in a lower First Rail division contribution and profitability. The GWR, TPE and South Western franchises cover a period during which
there will be significant change including major infrastructure work, electrification and resignalling as well as the introduction of new trains, which require careful
planning and management. Failure to manage these risks adequately in accordance with our plans could result in financial and reputational impacts to the Group.
Competition and emerging technologies All of the Group’s businesses (both contract and non-contract) compete in the areas of pricing and service and face competition from The Group continues to focus on service quality and delivery as priorities in making our services attractive to passengers and other customers, across our portfolio of businesses. In the UK, we have established a dedicated cross-divisional Retail Services Committee and a Group wide Consumer Experience Area of Expertise focused on improving our service to customers and improving access to our services. In our contract businesses, a competitive bidding strategy and a strong bidding team are key. In addition, wherever possible, the Group works with local and national bodies to promote measures aimed at increasing demand for public transport and the other services that we offer. No material change during the year.
a number of sources. Our main competitors include the private car and existing and new public and private transport operators across all our markets. Emerging
technologies such as Uber, ride sharing apps and price comparison websites make access to alternative transport solutions easier. Increased competition could result in
lost business, reduced revenue and reduced profitability.
Information technology (IT) and cyber security The Group relies on IT in all aspects of our businesses. Any significant disruption or failure, caused by external factors, As a result of the continuing threat of cyber attacks, we have implemented new threat detection systems but continue to remain vigilant to security improvements when identified. The Group has also increased its focus on asset management and further enhanced its IT security processes and procedures during the year. The Group has further strengthened its IT project management capability during the year, particularly within Greyhound. No material change in the year, however, web and mobile sales channels remain of increasing importance across many of our businesses. Cyber security remains high risk.
denial of service, computer viruses, or human error could result in a service interruption, accident or misappropriation of confidential information (including credit
card and personal data). Process failure, security breach or other operational difficulties may also lead to revenue loss or increased costs, fines, penalties or
additional insurance requirements. Prolonged failure of our sales websites could also adversely affect revenues. Continued successful delivery and implementation of the
Greyhound IT transformation plan is required to improve yield management and drive future growth. Failure to properly manage the implementation of new IT systems may
result in increased costs and/or lost revenue.
Treasury and credit rating As set out in further detail in note 24 to the financial statements on pages 116 to 117, treasury risks include liquidity risks, risks arising The Group’s Treasury Committee manages treasury policy, and delegated authorities are reviewed periodically to ensure compliance with best practice and to control and monitor these risks appropriately. The Group is continuously focused on improving operating and financial performance as part of our strategic objectives as outlined on page 8. The reduction in the Group’s leverage from 2.3 times net debt:EBITDA to 1.9 times at the end of the financial year, and improved cash generation has reduced the level of risk.
from changes to foreign exchange and interest rates and fuel price risk. Foreign currency and interest rate movements may impact the profits, balance sheet and cash
flows of the Group. Ineffective hedging arrangements may not fully mitigate losses or may increase them. The Group is credit rated by Standard & Poor’s and Fitch. A
downgrade in the Group’s credit ratings to below investment grade may lead to increased financing costs and other consequences and affect the Group’s ability to invest in
its operations.
Pension scheme funding The Group sponsors or participates in a number of significant defined benefit pension schemes, primarily in the UK. Future cash contribution Diversification of investments, hedging of liabilities, amendment of the defined benefit promises and the introduction of defined contribution benefits for new starters in First Bus, Group, and our Canadian businesses, has reduced these risks. The Group also seeks to remove liabilities from the balance sheet where it can be achieved cost effectively. Under the First Rail franchise arrangements, the Group’s train operating companies are not responsible for any residual deficit at the end of a franchise so there is only short term cash flow risk within any particular franchise. No material change in the year, however, the Company has given notice to the UK First Bus Pension Scheme to close to future accrual from April 2018. This will further reduce the size and volatility of the pension funding risk over the longer term.
requirements may increase or decrease based upon financial markets, notably investment returns and valuations, the rates used to value the liabilities and through changes
to life expectancy and could result in material changes in the accounting cost and cash contributions required.
Compliance, litigation and claims, health and safety The Group’s operations are subject to a wide range of legislation and regulation. Failure to comply can lead to Compliance with Group and divisional policies and procedures. The Group has a very strong focus on safety and it is one of our five values. The Group self-insures third party and employee injury claims up to a certain level commensurate with the historical risk profile. We purchase insurance above these limits from reputable global insurance firms. Claims are managed by experienced claims handlers. Non-insured claims are managed by the Group’s dedicated in-house legal teams with external assistance as appropriate. There has been no material change to the risk environment in the year, however, due to the scale and scope of our operation, risk mitigation in this area continues to be an area of focus for managers.
litigation, claims, damages, fines and penalties. The Group has three main insurable risks: third party injury and other claims arising from vehicle and general
operations, employee injuries and property damage. The Group is also subject to other litigation, which is not insured, particularly in North America, including
contractual claims and those relating to employee wage and hour and meal and break matters. A higher volume of litigation and claims can lead to increased costs, reduced
availability of insurance cover, and/or reputational impact. A large single claim or a large number of smaller claims may negatively affect profitability and cash flow.
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