REG-FirstGroup PLC: Final Results <Origin Href="QuoteRef">FGP.L</Origin> - Part 1

FirstgroupAnnouncement

14/06/2016 07:05

FIRSTGROUP PLC 
 
 PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2016 
 
 Overview: 
 * 
 Operating profit maintained despite smaller rail portfolio and challenging
trading environment in some businesses, in line with prior update on fourth
quarter trading 
 
* 
 Solid progress made in the year to position the Group for future growth and
higher returns 
 
* 
 Contract portfolio enhanced with TransPennine Express rail award and other
wins across the Group 
 
* 
 Wolfhart Hauser appointed as Chairman and Matthew Gregory joined as CFO in
the year 
 
* 
 Continued disciplined bidding and cost efficiencies, as well as lower fuel
costs and additional First Student operating days expected to result in strong
progress for the Group in the year ahead 
 
* 
 Significantly increased cash generation expected in 2016/17 
 
 
 Financial summary 2015/16: 
 * 
 Underlying 1 revenue broadly flat. Reported revenue decreased by 13.8% due to
changes in rail portfolio 
 
* 
 Adjusted 2 operating profit in line with prior year, and adjusted 2 EPS
increased by 5.1% 
 
* 
 Statutory operating profit and EPS increased by 0.2% and 21.0% respectively 
 
* 
 Net cash inflow for the year (before end of rail franchise outflows) was
ahead of expectations at £36.0m 
 
* 
 Net debt:EBITDA flat at 2.3 times 
 
 
                                      2016          2015     Change  
  Underlying 1 revenue           £5,218.1m     £5,232.3m     (0.3)%  
                                                                     
  Adjusted 2                                                         
  - Revenue                      £5,218.1m     £6,050.7m    (13.8)%  
  - EBITDA 3                       £615.9m       £624.4m     (1.4)%  
  - Operating profit               £300.7m       £303.6m     (1.0)%  
  - Operating profit margin           5.8%          5.0%     +80bps  
  - Profit before tax              £168.3m       £163.9m      +2.7%  
  - Attributable profit            £123.5m       £117.5m      +5.1%  
  - EPS                              10.3p          9.8p      +5.1%  
                                                                     
  Statutory                                                          
  - Revenue                      £5,218.1m     £6,050.7m    (13.8)%  
  - Operating profit               £246.3m       £245.8m      +0.2%  
  - Profit before tax              £113.5m       £105.8m      +7.3%  
  - Attributable profit             £90.3m        £75.2m     +20.1%  
  - EPS                               7.5p          6.2p     +21.0%  
                                                                     
  Net debt 4                     £1,410.2m     £1,407.3m             
 
 1 ‘ Underlying’ revenue throughout this document is in constant currency
and adjusts for changes in First Rail franchise portfolio. 
 
 2 ‘Adjusted’ figures throughout this document are before other intangible
asset amortisation charges and certain other items as set out in note 4 to the
financial statements. 
 
 3 EBITDA is adjusted operating profit less capital grant amortisation plus
depreciation. 
 
 4 Net debt is stated excluding accrued bond interest. 
 
 Commenting, Chief Executive Tim O'Toole said: 
 
 "Overall we have made encouraging progress this year toward a profile of more
consistent financial returns for the Group. As we indicated at the start of
the year, a smaller rail franchise portfolio and fewer operating days in our
school bus business were factors that would make delivering headline growth
this year challenging. However, by being flexible with our plans we have
delivered a comparable adjusted operating profit to last year and a net cash
inflow ahead of our expectations. 
 
 "The Group expects to make strong progress in the year ahead despite a
challenging trading environment in several of our markets. This will come from
our continued focus on disciplined contract bidding and rigorous cost
efficiency programmes, as well as lower fuel costs and more First Student
operating days compared with the year just ended. Following several years of
reinvestment we expect to deliver a significant increase in net cash
generation. Overall, we expect the considerable efforts of our people in
recent years to be reflected in a significant improvement in our profile of
sustainable returns and cash generation going forward." 
 
 A presentation for investors and analysts will be held at 9:00am today –
attendance is by invitation 
 
 A live telephone 'listen in' facility is available – for joining details
please call +44 (0) 20 7725 3354 
 
 A playback facility will be available together with presentation slides and 
 
 a pdf copy of this report at www.firstgroupplc.com/investors 
 
 Contacts at FirstGroup: 
 
 Faisal Tabbah, Head of Investor Relations 
 
 Stuart Butchers, Group Head of Media 
 
 Tel: +44 (0) 20 7725 3354 
 
 Contacts at Brunswick PR: 
 
 Michael Harrison / Andrew Porter, Tel: +44 (0) 20 7404 5959 
 
 Notes 
 
 FirstGroup plc (LSE: FGP.L) is the leading transport operator in the UK and
North America. With £5.2 billion in revenues and 110,000 employees, we
transported around 2.2 billion passengers last year. Each of our five
divisions is a leader in its field: In North America, First Student is the
largest provider of student transportation with a fleet of around 47,000
yellow school buses, First Transit is one of the largest providers of
outsourced transit management and contracting services, while Greyhound is the
only nationwide operator of scheduled intercity coach services. In the UK,
FirstGroup is one of Britain's largest bus operators running a fleet of some
6,200 buses, and we are one of the country's most experienced passenger rail
operators, carrying around 140 million passengers last year. 
 
 Our vision is to provide solutions for an increasingly congested world...
keeping people moving and communities prospering. 
 
 Visit our website at www.firstgroupplc.com and follow us @firstgroupplc on
Twitter. 
 
 Chairman's statement 
 
 I am pleased to make my first report to you as Chairman of FirstGroup. Every
day, FirstGroup’s 110,000 people are responsible for providing vital
transportation services for millions of customers across our core markets in
the UK and North America. The Group’s five divisions have considerable
opportunities to support economic activity and improve social wellbeing by
linking together the customers and communities they serve. 
 
 The transportation services provided by FirstGroup have always been a
critical enabler of economic and social activity, and the economic and
environmental challenges of increasing urbanisation, congestion, and
demographic change mean that this is likely to remain so for the foreseeable
future. At the same time, expectations for service quality and convenience –
at reasonable cost – are increasing on the part of passengers and the
governments we work with. Meanwhile the digital economy continues to offer
opportunities and risks throughout the Group, changing how customers expect to
interact with the Group, how tickets are offered and revenue is collected, and
how costs, employees and networks are managed. 
 
 In this environment, FirstGroup has significant advantages and opportunities
thanks to its scale and experience, both within each of the markets served,
and as a Group. As a significant service provider in each business line with
increasingly strong relationships with customers and passengers, a robust
safety culture and improving financial and operational performance, the Group
has sound foundations for the future. Without doubt there are significant
challenges to face and commitments still to deliver, but I am confident that
FirstGroup has opportunities to deliver sustainable growth and good financial
returns through ever more rigorous focus on customers’ needs going forwards.

 
 In recent years, the Group has been investing in its capital assets and
customer offerings while working to deliver improved margins through pricing
and cost efficiency programmes. Throughout this time, the focus has been on
enhancing the Group’s long term ability to generate sustainable value, not
on short term fixes. Advances have been made in several areas – notably
First Student’s bidding strategy, the reset of First Bus’ networks and
fares, and the retooling of Greyhound’s entire business model. First Transit
has extended the range of its expertise by service line and by geography, and
the Group’s medium term future in the UK rail industry has been secured
through the Great Western Railway (GWR) and TransPennine Express (TPE)
contract awards, as well as through open access operations. Meanwhile, cost
efficiencies continue to be delivered, and a step-change in the level of
collaboration across the organisation is underway, particularly in terms of
smart ticketing and other customer-facing technologies. 
 
 Although challenges have emerged along the way, and plans have evolved in
response, I am confident the continuation of this disciplined strategy will
see the Group return to a position of significant free cash flow generation in
the 2016/17 financial year and beyond. Over time this will allow the Group’s
leverage and interest costs to reduce towards an optimum long term level,
while increasing shareholder returns. The Board recognises that dividends are
an important component of total shareholder return for many investors and
remains committed to reinstating a sustainable dividend at the appropriate
time, having regard to the Group’s financial performance, balance sheet and
outlook. 
 
 Results for the year 
 
 Underlying revenue was broadly flat, while reported revenue decreased by
13.8% mainly due to changes in the rail franchise portfolio. Group adjusted
operating profit was, however, comparable to the prior year, benefiting from
cost efficiencies in First Student and First Bus and a good performance from
First Rail, though we were disappointed that costs associated with driver
shortages in First Student did not allow the Group to report more progress
this year. Adjusted EPS increased by 5.1% and net cash inflow for the year
(before end of rail franchise outflows) was £36.0m, which is expected to
increase going forwards. 
 
 The Board 
 
 On 1 December 2015 Matthew Gregory was appointed to the Board as Chief
Financial Officer, succeeding Chris Surch on his retirement. We thank Chris
for his contribution over his three years with the Group. Matthew has already
begun to bring his considerable financial, strategic and international
experience to bear and I am sure he will make a significant contribution to
the Group and its future development. 
 
 I would also like to thank my predecessor as Chairman, John McFarlane, who
stepped down from the Board at the conclusion of the AGM in July 2015. It is
clear to me that in the short time he was at FirstGroup he made an important
contribution to the Group’s strategy and its focus on delivery. 
 
 Our people 
 
 Since joining the Group in May 2015, I have had the opportunity to meet with
many front line employees in all of the Group’s divisions. I have been
extraordinarily impressed by the commitment and dedication shown by them and
all our 110,000 people, who have continued to focus on the task of delivering
high-quality services to our customers through some challenging years for the
Group. On behalf of the Board I would like to extend my sincere gratitude to
all of our employees for their hard work during the year, which has allowed
the Group to lay foundations for further success into the future. 
 
 With a clear strategy for delivering improved financial performance and a
growing focus on attracting new customers to our services, the Group is well
placed to deliver more sustainable cash generation and returns going forward.
Notwithstanding a number of headwinds in some markets, the Board is confident
that the Group’s increasing ability to deliver the innovative, efficient and
reliable transport solutions that customers and communities need to flourish
will allow FirstGroup to drive increasing shareholder value in the future. 
 
 Wolfhart Hauser 
 
 Chairman 
 
 14 June 2016 
 
 Chief Executive's review 
 
 Overall we have made encouraging progress this year in repositioning
FirstGroup for improved financial performance and more consistent returns –
more befitting our strong service capabilities and our market positions in our
five business divisions. 
 
 As we indicated at the start of the year, a smaller rail franchise portfolio
and fewer operating days in our school bus business were factors that would
make delivering headline earnings growth this year challenging. However, by
being flexible with our plans we have delivered a comparable adjusted
operating profit to last year as well as a net cash inflow ahead of our
expectations, despite several headwinds – some anticipated at the start of
the year and some emerging in our markets over the course of the last twelve
months. We have done so by adapting our plans in response to evolving market
conditions, while maintaining our focus on our five strategic objectives:
focused and disciplined bidding in our contract businesses; driving growth
through attractive commercial propositions in our passenger revenue
businesses; continuous improvement in operating and financial performance;
prudent investment in our key assets (fleets, systems and people); and
maintaining responsible partnerships with our customers and communities. 
 
 Our performance in the year 
 
 In this regard, our First Bus division reacted well to disappointing
passenger volume trends across the industry in the year, rapidly adjusting
commercial and cost efficiency plans including our depot footprint while
maintaining a focus on long term investments in smarter ticketing, improved
connectivity for our passengers and better partnerships with our local
authorities. In Greyhound we also flexed our operations in response to reduced
passenger demand from lower fuel prices – which continued to fall over the
course of the year – while improving our medium term prospects through
investment in yield management and other systems. In First Student we
delivered another year of contract awards at prices more reflective of the
capital we employ whilst delivering significant cost efficiencies, though
disappointingly this was offset by higher than planned costs incurred in
response to worsening driver shortages in some of our locations as US
employment markets continue to tighten. In response to this challenge we have
taken a number of additional cost reduction actions including a realignment of
our regional and central services structures at the start of the 2016/17 year.
We are also reflecting these cost challenges in our bid proposals going
forward and continue to upgrade our employee recruitment and retention
practices. First Transit has continued to win contracts in our core markets
but also in adjacent areas such as Bus Rapid Transit (BRT) and new
geographies, though the oil price resulted in lower activity in the Canadian
oil sands region, as expected. The recent wildfire which devastated the city
of Fort McMurray presents further challenges for this part of First
Transit’s business in the coming months. In First Rail we have continued to
develop our franchise portfolio, winning the new seven year TransPennine
Express contract in the year and securing opportunities to grow our open
access operations, while maintaining good passenger volume and revenue growth
and strong financial performances across all our networks. We continue to be
active in a number of upcoming rail franchise competitions. 
 
 We are encouraged by the overall progress we have made to strengthen our
businesses in recent years. Although our plans have had to adapt to changing
circumstances, the Group is now in a position to deliver sustainable cash
generation. Going forward, we will continue to drive progress with our
pricing, margin and operational improvement plans in order to complete the
programme we set out in 2013, but will also place increasing emphasis on
growth. Across the Group we are already enhancing our ability to understand
and interact with our passengers throughout their experience of our services,
while providing more and better journey information and related services
tailored to their needs. In this area our scale and the range of experience
and expertise available throughout the Group is a significant asset. For
example, First Bus is already working very closely with the Greyhound team on
using IT to deepen customer relationships. 
 
 Our sustained reinvestment in our non-rail fleets and systems is now largely
complete, and going forward our capital allocation decisions will increasingly
focus on the maintenance of our existing asset portfolio and selected growth
opportunities with good returns. As we continue to focus on increasing our
operating earnings, our free cash flow is expected to improve over time. We
also expect our financing costs to continue to reduce as cash flow increases
and our relatively high coupon bonds mature over time. 
 
 People 
 
 In the year we welcomed two new members to the Board. Wolfhart Hauser joined
the Board in May 2015 and became Chairman at the conclusion of the AGM in
July. With his considerable track record of sustained value creation, Wolfhart
has already begun to make important contributions to the development of the
Group. In December 2015 Matthew Gregory joined the Group as Chief Financial
Officer, succeeding Chris Surch on his retirement. Matthew’s financial,
strategic and international experience will be invaluable as FirstGroup’s
strategy continues to evolve. I echo the sentiments of the Chairman in
thanking Chris Surch for his contribution to the Group since he joined in
2012. 
 
 We continue to invest in our people throughout the Group, giving them
leadership, professional development and other support which is increasing the
level of collaboration throughout our organisation and leveraging the
extraordinary breadth of expertise across our business. 
 
 Outlook 
 
 In the coming year we expect the Group to make strong progress despite a
challenging trading environment in several of our markets. This will come from
our ongoing focus on disciplined contract bidding and our cost efficiency
programmes, as well as lower fuel costs and a higher number of First Student
operating days compared with the prior year. We also expect to deliver a
significant increase in net cash generation for the first time since we
launched our transformation of the Group in 2013. 
 
 In the year ahead we expect First Student’s ‘up or out’ contract
pricing programme to offset cost inflation and our performance to benefit from
further cost efficiencies, a higher number of operating days and a reduction
in our fuel costs due to our hedging profile. Although these will be partially
offset by the driver shortage headwinds we are experiencing, we expect
significant margin progression for 2016/17 to at least 9%. In First Transit we
will continue to bid for contracts offering good margins with modest capital
investment, and expect to return to overall growth, despite further reductions
in demand for our shuttle services in the Canadian oil sands region due to the
oil price and recent wildfire. Although Greyhound’s passenger revenue
decline trend has shown signs of moderating, we expect a year of muted
passenger demand and modest margin benefits as our systems upgrades begin to
build and we continue to flex operations in response to the demand
environment. In First Bus we expect market conditions to remain challenging in
the year ahead. We therefore expect moderate margin progression from the full
year benefits of past cost saving actions, additional cost and operational
efficiency initiatives and some benefits from our fuel hedging programme. We
are expecting the rate of passenger revenue growth in First Rail to moderate
in line with recent industry-wide trends and our divisional margin will rebase
toward industry norms following the start of the new TPE franchise. 
 
 Overall, we expect the considerable efforts of our people in recent years to
be reflected in a significant improvement in our profile of sustainable
returns and cash generation going forwards. 
 
 Tim O'Toole 
 
 Chief Executive 
 
 14 June 2016 
 
 Operating and financial review 
 
 Changes in the First Rail franchise portfolio resulted in reported Group
revenue decreasing by 13.8% in the year to £5,218.1m (2015: £6,050.7m).
Excluding the rail portfolio changes, underlying revenue decreased by 0.3%. 
 
 Group adjusted operating profit decreased by 1.0% to £300.7m (2015:
£303.6m), reflecting an improved financial performance in First Bus and the
continuing First Rail operations as well as the change in basis of estimate
for accounting for First Rail pensions, partially offset by a reduced
contribution from Greyhound and from First Student due to fewer operating days
and higher driver shortage-related costs. 
 
 Adjusted profit attributable to ordinary shareholders was £123.5m (2015:
£117.5m), with lower net finance costs and a lower non-controlling interest
charge being partly offset by lower adjusted operating profit and a higher
effective tax rate. 
 
 Adjusted EPS was 10.3p (2015: 9.8p), an increase of 5.1%. EBITDA was £615.9m
(2015: £624.4m). 
 
 Statutory operating profit was £246.3m (2015: £245.8m). Statutory profit
before tax of £113.5m (2015: £105.8m) reflects the slightly higher statutory
operating profit and lower net finance costs. 
 
 The net cash inflow for the year before First Rail end of franchise cash
flows was £36.0m (2015: £39.4m), ahead of expectations but slightly lower
than the prior year. This cash inflow, combined with the end of First Rail
franchise outflows of £20.8m (2015: £107.9m) and movements in debt due to
foreign exchange, resulted in a net debt increase of £2.9m (2015: £103.5m). 
 
 As at 31 March 2016, the net debt:EBITDA ratio was 2.3 times (2015: 2.3
times). Liquidity within the Group has remained strong. At 31 March 2016 there
was £940.2m (2015: £1,023.8m) of committed headroom and free cash, being
£800.0m (2015: £800.0m) of committed headroom and £140.2m (2015: £223.8m)
of free cash. Our average debt maturity was 4.4 years (2015: 5.2 years).  
 
 During the year gross capital investment of £413.3m (2015: £425.1m) was
invested in our business. Our sustained reinvestment in our non-rail fleets
and systems is now largely complete, and going forward our capital allocation
decisions will increasingly focus on the maintenance of our existing asset
portfolio and selected growth opportunities with good returns. In the year
ahead we expect capital investment for the Group (excluding in First Rail,
where such expenditures are typically matched by franchise receipts or other
funding) to decrease modestly. ROCE was 7.2% (2015: 7.4% at constant exchange
rates). However, after adjusting for the changes in First Rail franchise
portfolio, lower number of First Student operating days and the change in the
basis of estimate for accounting for First Rail pensions, ROCE would have
increased by 60 basis points. 
 
                                                                Year to 31 March 2016                                              Year to 31 March 2015  
                                  Revenue    Operating profit 1    Operating margin 1     Revenue £m     Operating profit 1 £m     Operating margin 1 £m  
                                       £m                    £m                     %                                                                     
  First Student                   1,553.5                 112.6                  7.2%        1,478.8                     114.9                      7.8%  
  First Transit                     864.8                  60.1                  6.9%          844.8                      59.7                      7.1%  
  Greyhound                         605.1                  35.5                  5.9%          609.6                      41.7                      6.8%  
  First Bus                         870.9                  52.0                  6.0%          896.1                      51.8                      5.8%  
  First Rail                      1,308.4                  72.9                  5.6%        2,207.1                      74.1                      3.4%  
  Group 2                            15.4                (32.4)                                 14.3                    (38.6)                            
  Total Group                     5,218.1                 300.7                  5.8%        6,050.7                     303.6                      5.0%  
  North America in US Dollars          $m                    $m                     %             $m                        $m                         %  
  First Student                   2,332.7                 165.0                  7.1%        2,368.6                     177.3                      7.5%  
  First Transit                   1,303.4                  90.6                  7.0%        1,362.1                      96.1                      7.1%  
  Greyhound                         914.0                  54.4                  6.0%          986.0                      68.5                      6.9%  
  Total North America             4,550.1                 310.0                  6.8%        4,716.7                     341.9                      7.2%  
 
 1 Adjusted. 2 Tramlink operations, central management and other items.  
 
 First Student 
 
 First Student’s revenue was $2,332.7m or £1,553.5m (2015: $2,368.6m or
£1,478.8m). Revenue increases from improved prices, including the second year
of our successful contract pricing strategy, moderate organic growth and a
more normal weather season were offset by contracts not renewed. The decrease
of 1.5% on a US Dollar basis was driven principally by the lower number of
school days on which First Student operated in the year, due to the timing of
the school calendar. Schools will make these days up at the end of the
academic year or the start of the next, so will fall into our 2016/17
financial year. 
 
 Adjusted operating profit was $165.0m or £112.6m (2015: $177.3m or
£114.9m), resulting in an adjusted operating margin of 7.1% (2015: 7.5%). As
anticipated, the effect of the lower number of operating days was $17m of
profit, or a reduction in margin of 0.6%. Our operating results benefited from
the second year of improved contract portfolio pricing and recovery of
operating days lost to weather in the prior year, which more than offset
non-employee cost increases. However, worsening driver shortages in some of
our markets resulted in higher than planned employee costs in the year. Our
cost efficiency programme delivered $14m in savings in the year, less than
originally targeted as a result of the driver shortage challenges, which made
consistent implementation of best practice procedures more difficult in
affected locations. We have taken action to mitigate the impact of the driver
shortages going forward whilst continuing to deliver our cost efficiency
savings: shortly after the year end we realigned our regional management and
central service structures, resulting in the elimination of 130 positions,
which will assist in making margin progress in 2016/17. 
 
 Focused and disciplined bidding 
 
 Over the past two years, our bidding strategy has focused on increasing
contract pricing on new bids and renewals to ensure that we achieve
appropriate returns on the capital required to deliver our services. In the
year we completed our second bid season under the new pricing strategy,
achieving a higher average price increase of 5.3% compared with the first
season (4.5%). As is typical, approximately one-third of our bus portfolio was
up for renewal in the 2015 bid season. Our contract retention rate was
modestly ahead of our expectations at 86% for contracts at risk, or 94% across
our total portfolio. Pricing across the marketplace was firmer than in
previous years, though we continue to see limited organic growth or
conversions from in-house to private provision, and some smaller local
operators continue to bid aggressively to retain business. Net of ‘share
shift’ movements and our decision to retire a number of excess buses from
the fleet, our overall bus portfolio at the end of the year was approximately
47,000. In the 2016 bid season, which is now underway, we are reflecting the
cost inflation challenges we are experiencing in our pricing for new contract
bids and renewals, which we would expect to result in the loss of some
business as we have experienced in prior years. 
 
 Continuous improvement in operating and financial performance 
 
 Our biggest operating and financial challenge in the year was responding to
more significant than usual challenges recruiting and retaining drivers in
some of our locations, as a result of the improving US economy and tightening
employment markets. Short term remedies for a shortage of drivers result in
higher costs from more overtime, increased employee joining incentives and, in
the worst affected areas, expenditure required to bring in and house
additional drivers from elsewhere in our business. Shortages also limit the
growth of charter revenues and make implementation of best practice procedures
more difficult in the areas affected. We are deploying appropriate recruitment
incentives aligned to local conditions in the areas affected, investing in our
targeting and marketing to potential employees, and improving our retention
and on-boarding processes which we expect to assist in mitigating the impact
of this ongoing challenge. We have increased our target for cost efficiencies
in 2016/17, and shortly after the end of the year we took an important step
towards this with the realignment of regional management and central services
noted above. We are also upgrading our maintenance practices, benefiting from
the expertise of First Transit’s vehicle maintenance services segment. 
 
 Notwithstanding challenges elsewhere, we have made significant progress
reducing certain cost categories this year, by continued rigour in raising
compliance with best practice operational procedures, disciplined overhead
cost management across our 500 locations, reducing non-driving time through
our Focus GPS system, more efficient engineering via lean engineering
practices, and fuel efficiency savings from our DriveSMART driver training
scheme. Overall our management initiatives have delivered recurring cost
savings of $14m in the year. 
 
 Prudent investment in our key assets 
 
 We continue to be at the forefront of the industry for investment in systems
and processes that enhance customer service levels, improve fuel efficiency
and further differentiate our services. We have deployed MyFirstPass (swipe
card-based location tracking) in a number of locations, and we continue to
build our non-school charter offering, which is attractive from an asset
utilisation perspective and where revenues increased by 3.5% in the year. We
continue to invest in new buses, refurbishments and on-board technology in the
year; our average fleet age reduced slightly to 7.3 years. 
 
 Responsible partnerships with our customers and communities 
 
 Our services form an integral part of the school experience for the millions
of children in our care each day, and we take our responsibilities to them and
to their parents, schools and communities very seriously. We have maintained
last year’s high customer service scores, and continued to invest in safety,
completing the roll out of our new Be Safe training programme to all front
line managers and supervisors, resulting in a positive impact on our already
strong passenger and employee safety metrics. Continuous improvement in our
customer service and safety track record is deeply embedded in our values as
an organisation, and is a core part of our proposition to our customers and
passengers. In addition to cost savings, the fuel efficiency savings from our
DriveSMART programme continue to reduce our environmental impact, and we added
another 450 alternative fuel buses in the year, taking our fleet to more than
1,700 and making us one of the largest private operators of such school buses
in North America. 
 
 Future priorities 
 
 First Student is a leader in our marketplace, both in terms of our size and
the quality and safety of the services we provide. We will continue to improve
our financial performance through our contract pricing strategy and operating
efficiency programmes to drive appropriate returns on the capital we invest.
In the longer term, our unique market position, customer proposition and
improving operational efficiency will ensure we are increasingly well placed
to grow through further conversion, tuck-in acquisitions and organic
opportunities. 
 
 Outlook 
 
 In the year ahead we expect First Student’s ‘up or out’ contract
pricing programme to largely offset cost inflation and to benefit from further
cost efficiencies, a higher number of operating days and a reduction in our
fuel costs due to our hedging profile. Although these will be partially offset
by the driver shortage headwinds we are experiencing, we expect significant
margin progression for 2016/17 to at least 9%. 
 
 As usual, First Student’s operating results will be significantly weighted
to the second half because of the overlay of our financial year on the North
American school calendar.  
 
 First Transit 
 
 First Transit revenue was $1,303.4m or £864.8m (2015: $1,362.1m or
£844.8m). As expected, this is a reduction of 4.3% compared to the same
period last year in US Dollar terms, reflecting significantly reduced activity
in the Canadian oil sands region and hence demand for our shuttle services
there, as a result of lower oil prices. 
 
 Adjusted operating profit was $90.6m or £60.1m (2015: $96.1m or £59.7m),
resulting in a US Dollar adjusted operating margin of 7.0% (2015: 7.1%), which
is in line with our expectations and medium term goals. 
 
 Focused and disciplined bidding 
 
 In our sixtieth year of operation, First Transit’s seasoned management team
and bidding expertise have sustained our strong track record of new business
wins and high contract retention rates across a growing range of services and
geographies. In the year we were awarded 18 new contracts, of which nearly 20%
by value were outsourced by public authorities for the first time. New
business wins included paratransit contracts in Houston, Chicago and
Minneapolis, several Non-Emergency Medical Transportation (NEMT) call centre
management contracts in the Midwest, and three new vehicle maintenance
contracts in Florida, including one for Florida International University. 
 
 Our shuttle segment, which is the only part of the division in which we
provide capital for vehicles, also continues to win new business. In the
period we were awarded a contract at Sacramento Airport thanks to a new
partnership arrangement with LAZ Parking, one of the largest parking companies
in America, and expanded our presence at Philadelphia International Airport
with the award of the American Airlines passenger shuttle operations. 
 
 We also expanded our international footprint, partnering with the government
of Panama to provide transit management for the MetroBus system in Panama
City, and have signed a small employee shuttle contract in India, which has
meaningful potential for future growth. We are also active in the emerging
market for closed-system BRT services in North America, where we are managing
the CTfasttrak system in Connecticut. 
 
 Retaining existing clients is also an important element of our bidding
strategy. 90% by value of our contracts subject to rebid were renewed,
reflecting our customers’ trust in our service capabilities and competitive
pricing. We renewed key contracts in Antioch, Portland, Denver, New Jersey,
Hartford and Washington, DC in the year, maintaining our portfolio at around
350 contracts. 
 
 Continuous improvement in operating and financial performance 
 
 First Transit continues to be competitive due to our national service
platform, technology infrastructure and management expertise. Despite an
increasingly challenging employment market, our ongoing investment in
recruitment, retention and continuous training of our people (including the
applicant tracking system developed by First Bus that was introduced last
year) has ensured we have the depth of expertise required for our bid
submissions and for subsequent service delivery. 
 
 Prudent investment in our key assets 
 
 We continue to invest in technology initiatives, rolling out our paperless
engineering shop system and developing our predictive analytics tools
throughout our engineering operations. Our management information dashboard
and mobile apps enable us to continue to deliver a meaningful point of
difference compared to competitors, with cost efficiencies for our clients,
better information for passengers and improved financial performance for our
business. 
 
 Responsible partnerships with our customers and communities 
 
 Our commitment to safety, technical and operational knowledge and
professionalism is particularly recognised by our customers and we continued
to focus on improving our safety KPIs in the year, while our overall customer
satisfaction score remains high. We are at the forefront of the industry in
developing mobile apps for our clients allowing registered riders to access
timetables, the location of services in real time and monitor disruption to
services. 
 
 Future priorities 
 
 First Transit’s international scope, scale and management expertise,
coupled with our high level of investment in our people and technology and our
long-standing customer and industry relationships, will ensure we continue to
deliver good margins and returns into the medium term. We continue to see
attractive opportunities for additional growth in our core service markets,
particularly in paratransit work and in the shuttle segment. Potential
opportunities are also growing in light rail, commuter rail and BRT in North
America, where we continue to benefit from the strong expertise in our UK
divisions as we explore potential opportunities in these areas. Our
international team will continue to develop opportunities for geographic
growth in a disciplined and low risk way. 
 
 The expertise of our people and the quality of our technology gives First
Transit a competitive advantage. Our track record of innovation and cost
efficiencies ensures that, despite an increasingly competitive market, we will
remain the cost efficient supplier of choice for customers old and new. We
continue to anticipate achieving a margin of approximately 7% in the medium
term, which we believe is attractive in the context of the limited capital
employed in the division. 
 
 Outlook 
 
 Our pipeline of opportunities has strengthened over the year and we remain
very confident that our services offer a compelling outsourcing option for
local authorities and private customers. Although we expect some further
reductions in demand for our shuttle services to the Canadian oil sands sector
due to the oil price and the recent wildfire which devastated the city of Fort
McMurray, we anticipate that First Transit will return to overall growth in
2016/17, while maintaining margins.  
 
 Greyhound 
 
 Greyhound’s US Dollar revenue decreased to $914.0m or £605.1m (2015:
$986.0m or £609.6m) in the year, reflecting the more difficult customer
demand environment experienced across the intercity coach industry since fuel
prices fell sharply between September and December 2014. While lower fuel
prices reduce our own cost base they also improve the affordability of
alternative forms of transport for some trips (particularly from airlines on
longer distance trips), relative to Greyhound. We were encouraged by the
relatively more resilient performance of our point-to-point Greyhound Express
revenues, where like-for-like revenue decreased by 1.9% over the year,
compared with a like-for-like decrease of 4.9% for the division as a whole.
The rate of revenue decline began to moderate over the course of the year; in
our final quarter our overall like-for-like revenue decline for the division
was 2.1%, and Greyhound Express revenues were flat compared with the prior
year. 
 
 By comparison with previous periods of significant fuel price reductions we
have been more successful flexing our business model by actively managing
timetables and other costs to partially mitigate the impact of lower demand on
our margins. Greyhound’s adjusted operating profit was $54.4m or £35.5m
(2015: $68.5m or £41.7m), an adjusted US Dollar operating margin of 6.0%
(2015: 6.9%). 
 
 Compared with our US operations, the lower oil price has had a more adverse
effect on passenger demand for our services in Canada (approximately 16% of
Greyhound's revenues), both directly and through the impact on the health of
the economy. There are regulatory and structural constraints in this market
and, despite extensive management action, Greyhound Canada was loss-making in
2015/16. We are pursuing further options to address the performance of our
Canadian business. 
 
 Driving growth through attractive commercial propositions 
 
 Greyhound is one of the most iconic brands in transport, with a unique
national network. Passengers from our traditional network, which operates
across North America, also help us feed our point-to-point Greyhound Express
service. Since inception, our point-to-point brands have operated modern buses
equipped with free Wi-Fi, power outlets, leather seats, extra legroom and
guaranteed seating, and all of these amenities have now been extended across
our traditional network. Moreover, Greyhound Express and BoltBus have always
operated with airline-style yield management, real-time pricing and customer
relationship systems, and we have been investing in recent years to bring
these systems to bear on our much larger, traditional Greyhound network
nationwide. From a passenger-facing perspective the key additions in the past
year include our upgraded responsive website, new mobile apps (which include
Uber and Apple Wallet integration), investment in customer relationship
management systems and services such as ‘where’s my bus?’ tracking
technology. We are now retraining and redeploying our passenger-facing
terminal employees to focus on delivering an improved customer experience,
both through the new technologies available and by learning from the
hospitality industry. 
 
 All of these changes complement the complex transformation of our entire
pricing and ticketing business model, which has now been upgraded to give us
access to algorithmic pricing and yield management tools across our entire
network of 3,800 locations generating more than 50,000 different journey
combinations in a typical month. Amongst other opportunities, these tools will
increase our ability to stimulate demand throughout the macro-economic cycle,
and allow us to shift demand to off-peak times more easily, resulting in
better utilisation of existing seat inventory. This project enhances
Greyhound’s opportunities for growth, margin expansion and returns over the
medium term. The benefits of these new systems will take time to build as we
develop our database of passenger demand trends and our expertise in using the
tools throughout our network. The overhaul of our IT infrastructure has also
allowed us to enhance our business model in other ways, such as permitting
bus-side ticket scanning via a drivers’ smartphone app (allowing real-time
inventory management). We will continue to build on these systems in the
future, including through further changes to our loyalty programmes. 
 
 During the year we also extended our geographic presence, becoming the first
international coach operator to launch domestic services in Mexico, and we are
pleased with the progress to date. The Mexican coach market offers significant
opportunities for future growth. 
 
 Continuous improvement in operating and financial performance 
 
 In a volatile demand environment, our financial performance is highly
dependent on our ability to rapidly flex mileage and to maintain tight control
of all our operating costs. Overall mileage was reduced across the business by
5.8% in the year. We have also continued to review our location footprint and
property portfolio for opportunities to improve the customer experience, which
resulted in the disposal of properties in Raleigh, Fresno and Baltimore in the
year. In addition, we took the decision to discontinue our separately branded
YO! Bus services, folding the key routes into our wider network. We have also
adjusted our marketing, maintenance and central overhead expenses and
practices to reflect the demand environment. 
 
 Prudent investment in our key assets 
 
 Our most important area of investment is the customer experience programme to
equip our traditional business with real-time dynamic pricing and yield
management capabilities, together with improved customer relationship
management tools. As the IT investment phase begins to wind down, our focus
will move to enhancing employee training, particularly in the new tools
becoming available to passengers. 
 
 In light of recent demand trends, we opted not to acquire additional vehicles
during the year. Our expansion into the Mexico domestic market – which under
relevant legislation is terminal-based – did not require significant
investment in the year, but is projected to increase over time. 
 
 Responsible partnerships with our customers and communities 
 
 The increased customer engagement that our new systems are bringing will
allow us to deliver a more personalised service, responsive to the individual
needs of our passengers. Through the rollout of a refreshed safety programme
to our employees, we have made significant progress in the year across our key
metrics. 
 
 Future priorities 
 
 Completing the transformation of our business into a customer-centric,
IT-enabled enterprise, with real-time pricing and yield management and the
latest customer relationship management capabilities is a key priority in the
coming years. Coupled with the improvements already made to the on-board and
terminal amenities, we have a significant opportunity to revive Greyhound’s
iconic brand and reputation in the minds of customers. We are also determined
to improve our returns in Canada, which currently mask our performance in the
US, and will seek to deliver on the growth opportunity we see in the Mexican
coach market. 
 
 Greyhound, Greyhound Express and BoltBus now offer a productive, relaxing and
cost-effective travel proposition for our customers across the US, with a
business model that is cash generative and creates value for the Group. Our
systems upgrades are making this business more resilient and more capable of
stimulating demand in a range of market conditions. 
 
 Outlook 
 
 Although the passenger revenue decline trend has begun to moderate, we expect
2016/17 to be a year of muted passenger demand. We anticipate modest margin
benefits as our systems upgrades begin to build and we continue to flex
operations in response to the demand environment, recognising the impact that
fluctuations in the oil price will continue to have.  
 
 First Bus 
 
 First Bus reported revenues of £870.9m (2015: £896.1m) for the year, with
like-for-like passenger revenue (excluding the contribution from closure and
disposal of businesses) increasing by 0.3%. Revenues in the second half of the
year were adversely affected by lower than expected passenger volumes, driven
by lower high street retail footfall, exceptionally wet weather, flooding and
congestion impairing services in several of our markets. This has been coupled
with a reduction in tendered contracts funded by local authorities in a number
of our markets, and some evidence of lower fuel prices encouraging more car
usage. We continued to experience weakening concessionary revenues throughout
the year, while like-for-like commercial passenger revenues increased by 1.1%.
Our markets in the south of the UK continue to see more positive trends than
our operations in the north and Scotland. 
 
 We have been taking action throughout the year to offset the challenging
market backdrop by merging or closing a number of depots and reducing
administrative overheads in order to maintain our margin progress. Adjusted
operating profit was £52.0m (2015: £51.8m) and adjusted operating margin was
6.0% (2015: 5.8%), after the restructuring costs of £3.8m (2015: £1.4m)
incurred in the year. Overall we delivered cost efficiencies of more than
£20m in the year. 
 
 Driving growth through attractive commercial propositions 
 
 Our local management teams are continually reviewing networks, timetables and
pricing strategies to ensure we are focused on local market needs and growth
opportunities. We work closely with all our local authority partners as they
respond to their own financial pressures and review their tendered services,
looking to find ways to integrate such services into the commercial network
wherever possible. Networks serving universities and hospitals are also
important to our local growth plans. During the year we secured rights to
serve both York and West of England university campuses and developed a
commercial network serving Swansea University’s new site. We have enhanced
our service to Bristol’s Southmead Hospital and the new Queen Elizabeth
University Hospital in Glasgow. In Bristol several changes to key corridors
and the night bus network have also contributed to good volume growth. We have
also been progressively replacing single deck vehicles with double deckers to
increase capacity. However, our ambitions in Bristol and some other cities are
increasingly hindered by growing congestion, which frequently sees central
Bristol gridlocked. 
 
 We continue to bid for tender contracts, securing a five year car park
contract at Dublin Airport and beginning operation of the first Park & Ride
service in Leeds. We are the preferred bidder for the second. In Manchester we
secured the contract for Vantage, a flagship investment in BRT by Transport
for Greater Manchester, which started operating in April 2016. We were also
the lead contractor for the Rugby World Cup, providing spectator transport to
Twickenham and Milton Keynes stadia and VIP and media transport for all
venues. 
 
 Continuous improvement in operating and financial performance 
 
 Through our depot optimisation and maintenance enhancement programmes, and
continued investment in our bus fleet, we remain focused on punctuality and
service reliability, which alongside value for money are key drivers of
passengers’ appetite for bus services. We have also delivered cost
reductions of more than £20m in the year. Across the business, efficiencies
have been delivered through reduced fuel consumption and better procurement,
scheduling and engineering processes. We have further optimised our operating
bases – depots at Parkhead in Glasgow and Newcastle-under-Lyme have been
closed with operations transferring elsewhere. In Colchester we invested in a
new depot replacing three sites and Bracknell and Braintree operations have
been scaled back with certain services now operated from nearby sites. The
year saw the closure of our Hereford depot and the sale of the residual South
Devon business. Structural changes have also been made to our final salary
pension schemes to reduce cost. 
 
 Undertakings dating back more than a decade, which placed several
restrictions on our flexibility to adjust fares and timetables in our Glasgow
and Scotland East businesses, have now been lifted by the Competition and
Markets Authority. After the year end we announced the closure of two depots
in the region as we respond to current market conditions. 
 
 Prudent investment in our key assets 
 
 We continue to invest in our mobile and digital platforms to improve our
customers’ ability to find service information more simply and reliably. We
now offer mobile ticketing across all of our services and are developing
enhanced mobile capability to provide multi-modal planning, real time travel
information and smart ticketing. We are also working with data aggregators
such as CityMapper and Google Transit to make our real-time information more
widely available. Our website has been relaunched with easy to use journey
planning, latest information and search functionality. We have delivered our
commitment to multi-operator smart ticketing across the city regions in
England and are working to deliver a similar scheme for the key city regions
in Scotland. We have also committed to work over the coming year with other
operators to develop plans to bring contactless EMV technology to our
services. 
 
 A fundamental part of our transformation is fleet renewal. In the year we
took delivery of 385 vehicles and have announced a £70m order for a further
305 buses since the year end. All buses delivered since mid-2015 are equipped
with Euro VI engines, Wi-Fi as standard and an increasing number have USB
charging points and next stop audio visual announcements. These investments
improve our customer offer, ensure our compliance with disability access
legislation and make a major contribution to the clean air agendas of the
cities we serve. 
 
 Responsible partnerships with our customers and communities 
 
 Buses remain a critical enabler of economic growth, with more commuters
reliant on the UK national bus network every day than on any other form of
public transport. We share the aim of local councils and national Government
to get more people out of their cars and using buses. In November we welcomed
confirmation that Government funding of the Bus Services Operators’ Grant
(BSOG) in England will be maintained through to 2020/21. We are delighted that
the new Bus Services Bill gives strong support for enhanced partnerships and
provides additional tools for councils and operators jointly to deliver
improvements for customers. We believe that local authorities’ objectives
for bus services in their area are best delivered through partnerships where
the commercial incentive remains with the operator, rather than a complex
franchise-based alternative which may not deliver changes or benefits for some
years, and where financial risk and additional cost passes to the local
authority. 
 
 We continue to explore opportunities to work in closer partnership with local
authorities in our markets, building on the success we have had to date in
increasing both passenger volumes and satisfaction. In November the Sheffield
Bus Partnership introduced a new network focused on the economic and social
needs of the city while ensuring resources are closely matched with demand. We
have also worked to deliver a Rotherham Partnership and one for Doncaster
(implemented in May 2016). In Cornwall, we are working increasingly closely
with the County Council to deliver a fully integrated public transport network
embracing information, ticketing and connections with rail. We were a sponsor
of Bristol European Green Capital 2015, during which we trialled a number of
bio-methane and advanced hybrid buses, which are influencing our discussions
with Bristol on future fuel technologies. 
 
 Future priorities 
 
 Our strategy is based on delivering an increasingly digitally enabled
customer proposition coupled with sustainably improved operating disciplines
and strong local authority partnerships. We believe this is the most
responsive, efficient and cost-effective way to deliver the outcomes that bus
passengers, local authorities and taxpayers want and we will continue to
enhance our ability to deliver these outcomes going forward. 
 
 Outlook 
 
 We expect market conditions to remain challenging in the year ahead. We
therefore expect moderate margin progression from the full year benefits of
past cost saving actions, additional cost and operational efficiency
initiatives and some benefits from our fuel hedging programme. 
 
 First Rail 
 
 Our First Rail division continues to benefit from growth in passenger
volumes, which increased by 2.9% on a like-for-like basis, although we have
experienced some slowing in passenger demand growth after recent terror
attacks in Paris and Brussels and in areas affected by flooding over the
winter. Our continuing operations increased like-for-like passenger revenues
by 6.3%. Revenues declined on a reported basis to £1,308.4m (2015:
£2,207.1m), reflecting the end of the First Capital Connect and First
ScotRail franchises. 
 
 Our financial performance was towards the top of our range of expectations
with adjusted operating profit of £72.9m (2015: £74.1m), representing a
margin of 5.6% (2015: 3.4%). This reflects strong financial performances
across all our networks as well as the change in the basis of estimate for
accounting for pensions. The latter change, which has been made to more
accurately reflect the commercial terms of our current franchises and the
pension contributions expected to be paid, had a full year benefit of £18.6m
to operating profit. 
 
 Focused and disciplined bidding 
 
 In September we began operating Great Western Railway (GWR) under the
commercial terms of a new direct award which runs to 1 April 2019, with a
further extension of up to one year at the discretion of the Department for
Transport (DfT). 
 
 TransPennine Express (TPE) also operated under the terms of a year-long
direct award during the course of the year but we were awarded the competed
franchise contract in December 2015. Our new franchise, which will operate
from April 2016 until at least 2023, will result in new, faster and more
frequent intercity train services between the north of England and
Scotland’s major towns and cities. 
 
 Outside of franchising, the Office of Rail and Road (ORR) recently approved
our application for new open access services between London, north east
England and Edinburgh, offering a single class of service on a new fleet of
trains designed to encourage travellers to switch from air or coach travel to
rail. The ten year track access agreement will allow us to start running five
trains a day each way by 2021. In March Hull Trains also secured a further ten
years of track access running until December 2029. The agreement enables us to
procure new bi-mode trains that will take full advantage of the benefits of
the electrified East Coast Mainline in due course. 
 
 Continuous improvement in operating and financial performance 
 
 We have a strong track record for close partnership working with Network Rail
and other industry participants to deliver infrastructure upgrade projects
whilst minimising disruption for passengers. The Government’s investment in
rail infrastructure continues, with the £7.5bn investment in the Great
Western Mainline and work on the TransPennine route both key parts of the
national programme. Following Network Rail’s review of its schedule of
projects, we are working closely with them and with the DfT to support the
substantial infrastructure upgrades taking place throughout the network and
ensure delivery of work within appropriate timescales. We also support the
Shaw Report’s conclusions which enhance the 

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