REG-FirstGroup PLC: Final Results <Origin Href="QuoteRef">FGP.L</Origin> - Part 1
01/06/2017 07:05
FIRSTGROUP PLC
PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2017
Overview:
*
Significant improvement in operating results and substantial cash generation
delivered as planned
*
Contract portfolio enhanced with South Western rail award and other wins
across the Group
Adjusted (1) Statutory
2017 2016 £m Change Change in constant currency (2) 2017 2016 £m Change
£m £m
Revenue 5,653.3 5,218.1 +8.3% (0.5)% 5,653.3 5,218.1 +8.3%
Operating profit 339.0 300.7 +12.7% +2.3% 283.6 246.3 +15.1%
Operating profit margin 6.0% 5.8% +20bps +20bps 5.0% 4.7% +30bps
Profit before tax 207.0 168.3 +23.0% 152.6 113.5 +34.4%
EPS 12.4p 10.3p +20.4% 9.3p 7.5p +24.0%
Net debt (3) 1,289.9 1,410.2 (8.5)% (11.2)%
Financial summary:
*
+8.3% Group revenue growth and +12.7% adjusted(1) operating profit growth,
driven by First Student and First Transit and favourable currency translation
*
In constant currency, Group revenue was (0.5)% and adjusted(1) operating
profit +2.3%. Excluding First Rail where revenue and margin rebased under new
contracts, the ‘Road’ divisions increased revenue and adjusted operating
profit by +0.3% and +10.3% in constant currency respectively
*
Group adjusted(1) operating margin improved to 6.0% with 250bps increase in
First Student margin partially offset by rebased First Rail margin and higher
fuel costs due to stronger dollar in UK businesses
*
Adjusted(1) EPS increased by 20.4%
*
Statutory operating profit increased by 15.1% and statutory EPS increased by
24.0%, with gains on disposal of a Greyhound property largely offset by
reorganisation and restructuring costs
*
Substantial increase in net cash inflow to £147.2m (2016: £36.0m before rail
franchise outflows);
net debt: EBITDA ratio reduced to 1.9x (2016: 2.3x)
Divisional summary:
*
First Student delivered 250bps adjusted(1) margin progress to 9.6% following
successful execution of our pricing, cost efficiency and recruitment plans,
despite ongoing driver shortage challenges
*
First Transit revenue +4.4% in constant currency despite lower Canadian oil
sands activity; strong contract execution in second half resulted in 7.0%
adjusted(1) margin for the year
*
Greyhound like-for-like(4) revenue (1.7)% due to competition from other
transport modes; improved adjusted(1) margin through disciplined cost
management and benefits of business model transformation
*
First Bus like-for-like(4) passenger revenue (0.6)% with continued demand
challenges across the industry; cost control actions partially mitigated the
margin impact of currency fluctuations on our fuel costs
*
First Rail like-for-like(4) passenger revenue +1.3%, reflecting industry-wide
slowdown and infrastructure upgrades on Great Western network; adjusted(1)
margin rebasing towards industry norms as expected
*
We continue to work closely with Transport for London and others to assist
those affected by the tragic Tramlink incident which occurred in November
2016, and to support the ongoing investigations
Looking ahead:
*
The Group faces a mixed trading environment with opportunities for steady
progress in the North American divisions but continued economic uncertainty in
the UK
*
Further progress expected from the Road divisions, with First Rail’s margin
reducing; continued free cash generation expected after disciplined investment
to support our customers’ and communities’ needs
Commenting, Chief Executive Tim O'Toole said:
“We report our results today against the backdrop of the derailment of a
tram operated by one of our subsidiaries on behalf of Transport for London in
Croydon on 9 November 2016, a tragedy that has shocked and saddened us all. We
are profoundly sorry that such an incident could take place aboard a service
we operate. We are focused on understanding the exact cause of this incident
and will continue to provide our full support to the ongoing investigations.
Our thoughts remain with the families and friends grieving for the seven
people who lost their lives, and those who were injured and affected by this
terrible event.
“We are encouraged by this year’s improved financial results, with our
largest division First Student delivering a significant margin improvement
despite continued driver recruitment challenges, while our First Bus and First
Rail operations have faced more challenging market conditions this year.
Through rigorous focus on sustainable operational and capital efficiencies, we
were also able to generate substantially improved net cash inflow of £147m.
“In the year we have maintained our consistent and disciplined approach to
bidding for future business throughout the Group, with the recent award of the
South Western rail franchise being a good example of our focus on the service
quality improvements our customers and communities tell us they want.
Meanwhile, we continue to increase our use of technology across the Group to
make it easier for passengers to use our services, and to deepen our
understanding of our customers’ evolving needs.
“Looking ahead, our financial objectives are to make further progress while
maintaining our focus on cash generation, despite the mixed trading
environment in our markets. Overall this year’s results demonstrate the
progress we have made in repositioning FirstGroup to deliver for our customers
while creating value for our shareholders, commensurate with our leading
market positions and scale.”
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
(1 ) ‘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.
(2 ) Changes ‘in constant currency’ throughout this document are based
on retranslating 2016 foreign currency amounts at 2017 rates.
(3 ) Net debt is stated excluding accrued bond interest.
(4 ) References to ‘like-for-like’ revenue throughout this document
adjust for certain factors which distort the period-on-period trends in our
passenger revenue businesses as described on page 17.
FirstGroup plc (LSE: FGP.L) is a leading transport operator in the UK and
North America. With £5.7 billion in revenue and more than 100,000 employees,
we transported around two 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 44,000
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 coaches. In the UK, First Bus
is one of Britain's largest bus operators, transporting 1.6 million passengers
a day, and we are one of the country's most experienced rail operators,
carrying around 130 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.
Chief Executive's report
Croydon tram incident
On 9 November 2016 a tram we operate on behalf of Transport for London (TfL)
derailed in Croydon. Seven people lost their lives in the incident and many
other passengers were injured. This tragic incident deeply shocked and
saddened us all, and we feel the effect throughout our organisation. We are
profoundly sorry that such an incident could take place aboard a service we
operate. Our thoughts remain with the families and friends grieving for people
who lost their lives, and those who were injured and affected by this terrible
event.
A number of regulatory bodies are conducting investigations into the incident;
due to their complex nature the outcomes may not be known for many months. We
are focused on understanding the exact cause of this incident and will
continue to provide our full support and assistance to the ongoing
investigations.
Each year our trains and buses carry more than 2 billion passengers, more than
10 billion miles and we are responsible for over 100,000 employees. We are
dedicated to safety and it is central to our culture and values as a transport
operator. Our commitment to the safety of our passengers, our employees and
other parties who engage with us is unwavering.
Our financial performance in the year
We have achieved the financial ambitions set out at the start of the year,
including delivery of a significant increase in net cash generation, and those
results were delivered notwithstanding a number of changes in the environment
in which we operate. Overall, this year’s results demonstrate the progress
we have made in repositioning FirstGroup to deliver for our customers while
creating value for our shareholders, commensurate with our leading market
positions and scale. We have done so by adapting our plans and remaining
flexible 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.
First Student delivered an excellent performance, with another well-executed
bid season and timely action to lock in cost efficiencies at the start of the
year. For the team to deliver a 250bps improvement in margin to 9.6% this year
given the ongoing driver shortage challenges besetting the industry was an
impressive performance, even with more operating days and lower fuel costs
assisting. First Transit continued to deliver growth from core and adjacent
markets despite the ongoing contraction of our Canadian oil sands business in
the year, and took rapid action to resolve cost challenges experienced in the
first half in order to maintain our longstanding track record of margin
delivery. In Greyhound we delivered an improvement in margin by continuing to
flex our operations in response to the evolving passenger demand environment,
while beginning to benefit from the transformation we have made to our
business model in recent years. In First Bus like-for-like passenger revenue
was 0.6% lower overall, with passenger demand across the industry affected by
high street retail footfall trends and worsening congestion. We continue to
respond with specific actions tailored to conditions in each of our local
markets. Similarly, First Rail like-for-like passenger revenue growth was
1.3%, with the slowdown seen across the industry compared with the prior year
clearly exacerbated by the magnitude of the infrastructure upgrade activity on
our Great Western Railway (GWR) franchise in the year. As previously
indicated, First Rail’s trading margin is also rebasing to reflect the terms
of the new TransPennine Express (TPE) franchise and GWR direct award, albeit
partially mitigated with cost efficiencies. Profitability at both First Bus
and First Rail were also adversely affected by the US dollar-denominated
nature of their fuel purchases, which together affected our results by
£19.8m.
We are pleased with this year’s improved financial results, with Group
revenue, adjusted operating profit and statutory operating profit increasing
by 8.3%, 12.7% and 15.1% respectively. In constant currency, Group revenue
decreased by 0.5% and adjusted operating profit increased by 2.3%. Excluding
the First Rail division where margin rebased under new contracts, our Road
divisions increased adjusted operating profit in constant currency by 10.3%.
The improvement in our operating performance combined with a rigorous focus on
capital efficiency resulted in a substantial increase in net cash inflow this
year, to £147.2m (2016: £36.0m before rail franchise outflows), and a
reduction in our net debt: EBITDA ratio to 1.9x (2016: 2.3x).
Investing in our future
In addition to improving our financial performance, we have continued to
invest in our future by making it easier for our passengers to use our
services and to deepen our interaction with our customers. Greyhound’s
business model transformation has led the way but throughout the Group we have
asked ourselves what would make our services more convenient or attractive for
our passengers, and the results include: making our tickets easier to book
online and through smartphone apps; increasing the provision of real-time
travel information to our passengers and contract authorities; and improving
our customer relationship systems and processes to allow us to offer an
increasingly personalised service. We are also integrating passenger revenue
and bus location information into our management systems, enhancing our
efficiency and productivity while saving cost. Technology is a key enabler for
driving future passenger growth by delivering insights from our customers and
creating new platforms for us to provide what our customers and communities
want.
We continued to make progress with our Group-wide Be Safe behaviour change
programme this year. Established and robust safety management systems are
embedded across our businesses, with risk evaluation, training and compliance
with our safety processes, policies and procedures at the core. The Be Safe
programme aims to accelerate progress towards our goal of zero harm. With the
aim of making safety a core personal value for colleagues across the Group,
this programme works together with our safety management systems and builds on
compliance by recognising and reinforcing safe behaviours. In the year more
than 5,000 managers and supervisors have been through the training across the
Group, bringing the total trained to 8,500. Be Safe is a major programme, and
we will continue to invest the necessary time, resource and effort into its
success, as such culture change takes time.
We have also invested in more training for our customer-facing employees in
the year, particularly in Greyhound, First Bus and First Rail, and have
enlarged our apprenticeship and graduate recruitment schemes in the UK. To
make the most of our scale and breadth of expertise across the UK and North
America, we have also invested in our collaboration tools and realigned some
of our structures to enhance best practice sharing across the organisation.
Group outlook
In the year ahead, the Group faces a mixed trading environment with
opportunities for steady progress in the North American divisions but
continued economic uncertainty in the UK. We expect to make further progress
from the Road divisions, with First Rail’s margin reducing, and to continue
to generate free cash after disciplined investment to support our customers’
and communities’ needs across the Group.
First Student is now executing the fourth bid season under our strategy to
move to a smaller but higher-returning contract portfolio, and therefore an
increasing proportion of ‘at risk’ contracts have already been awarded
under our ‘up or out’ strategy. As such, we expect the average price
increase achievable to moderate and our contract retention rate to trend
upwards over time; we will also continue to target further cost efficiencies
across the division. In First Transit we will continue to bid for
transportation management contracts offering good margins with modest capital
investment, seeking to replenish and grow our portfolio both within our core
and adjacent markets. With our pricing and yield management algorithms
continuing to increase in effectiveness we are confident that Greyhound can
return to growth in the year ahead. We will continue to focus on matching our
timetables to demand to maximise the considerable operating leverage in the
business. Our expectations for First Bus recognise that industry conditions
remain challenging and our focus therefore must remain on tailored cost
efficiencies to improve our margin. We therefore expect to continue to make
changes to the shape and breadth of our depot network, while continuing
disciplined investment to stimulate growth where appropriate. In First Rail we
remain cautious on the rate of passenger growth in light of current industry
conditions, and expect divisional margin to be lower as a result. We look
forward to commencing operation of the South Western franchise from August
2017 in conjunction with our partner MTR Corporation.
Tim O'Toole
Chief Executive
1 June 2017
Operating and financial review
Group revenue in the year increased by 8.3% due to translation of our US
dollar-based businesses into sterling at stronger rates than the prior year.
In constant currency, Group revenue decreased by 0.5% with growth in First
Transit offset by reduced subsidy receipts and the remapping of certain routes
out of the scope of First Rail’s new TPE franchise, together with lower
revenues in Greyhound and First Bus, while First Student revenue was flat.
Group adjusted operating profit in constant currency increased by 2.3%, with a
significantly higher contribution from First Student and good progress in
First Transit, partly offset by rebased First Rail margin under new contract
terms and challenging market conditions in First Bus. Overall Group adjusted
operating profit margin increased by 20bps to 6.0%. In reported currency,
adjusted operating profit increased by 12.7% to £339.0m (2016: £300.7m). In
the year favourable currency translation of North American profits (operating
profit benefit of £30.7m compared with prior year) was partially offset by
higher dollar-based UK fuel costs (additional cost of £19.8m compared with
prior year). Excluding First Rail where revenue and margin rebased under new
contracts, the rest of the Group (the ‘Road divisions’) increased revenue
and adjusted operating profit in constant currency by 0.3% and 10.3%
respectively.
Net finance costs were flat at £132.0m (2016: £132.4m) and adjusted profit
before tax increased by 23.0% to £207.0m (2016: £168.3m). Adjusted profit
attributable to ordinary shareholders was £149.4m (2016: £123.5m), with the
higher adjusted profit before tax and a lower non-controlling interest charge
due to the completion of the previous TPE partnership with Keolis, partly
offset by a higher effective tax rate. Adjusted EPS increased by 20.4% to
12.4p (2016: 10.3p), and EBITDA by 11.5% to £686.6m (2016: £615.9m).
Increases in statutory operating profit to £283.6m (2016: £246.3m) and
statutory profit before tax to £152.6m (2016: £113.5m) principally reflect
the increased adjusted operating profit, together with gains on disposal of a
Greyhound property largely offset by reorganisation and restructuring costs.
Statutory EPS increased by 24.0% to 9.3p (2016: 7.5p) in the year.
The net cash inflow for the year was £147.2m (2016: £36.0m before First Rail
end of franchise cash flows), with the £111.2m improvement year-on-year
driven by the increase in cash generated by operations and the proceeds from
the sale of a Greyhound terminal. This cash inflow, combined principally with
movements in debt due to foreign exchange, resulted in a decrease in net debt
of £120.3m (2016: £2.9m increase).
As at 31 March 2017, the net debt: EBITDA ratio was 1.9 times (2016: 2.3
times). Liquidity within the Group has remained strong; as at the year end
there was £941.1m (2016: £940.2m) of headroom on committed facilities and
free cash, being £800.0m (2016: £800.0m) of committed headroom and £141.1m
(2016: £140.2m) of free cash. Our average debt maturity was 3.6 years (2016:
4.4 years). In March 2017 the Group agreed to amend and extend our main
revolving bank facilities to July 2021.
During the year gross capital investment of £365.6m (2016: £413.3m) was
invested in our business. ROCE was 7.3% (2016: 6.7% at constant exchange rates
and 7.2% as reported).
Year to 31 March 2017 Year to 31 March 2016
Revenue Operating profit (1) Operating margin (1) Revenue £m Operating profit (1) £m Operating margin (1) %
£m £m %
First Student 1,780.3 171.1 9.6 1,553.5 112.6 7.2
First Transit 1,042.0 73.3 7.0 864.8 60.1 6.9
Greyhound 684.7 42.6 6.2 605.1 35.5 5.9
First Bus 861.7 37.0 4.3 870.9 52.0 6.0
First Rail 1,268.8 53.8 4.2 1,308.4 72.9 5.6
Group (2) 15.8 (38.8) 15.4 (32.4)
Total Group 5,653.3 339.0 6.0 5,218.1 300.7 5.8
North America in US Dollars $m $m % $m $m %
First Student 2,323.3 222.0 9.6 2,332.7 165.0 7.1
First Transit 1,358.9 95.2 7.0 1,303.4 90.6 7.0
Greyhound 894.0 55.2 6.2 914.0 54.4 6.0
Total North America 4,576.2 372.4 8.1 4,550.1 310.0 6.8
(1) Adjusted.
(2) Tramlink operations, central management and other items.
First Student
$m £m Change in
constant currency (1)
Year to 31 March 2017 2016 2017 2016
Revenue 2,323.3 2,332.7 1,780.3 1,553.5 (0.4)%
Adjusted operating profit 222.0 165.0 171.1 112.6 +34.1%
Adjusted operating margin 9.6% 7.1% 9.6% 7.2% +250bps
(1) Based on retranslating 2016 foreign currency amounts at 2017 rates.
First Student's revenue was flat in local currency at $2,323.3m (2016:
$2,332.7m), with revenue increases from the third year of our contract pricing
strategy, moderate organic growth and additional operating days compared to
the prior year offset by contracts not renewed and more days lost to bad
weather than the prior year. Reported revenue increased by 14.6% to £1,780.3m
(2016: £1,553.5m).
Adjusted operating profit in local currency increased by 34.5% to $222.0m
(2016: $165.0m) resulting in an adjusted operating margin of 9.6% (2016:
7.1%). The 250 basis point increase in adjusted operating margin benefited
from improved contract portfolio pricing net of inflation and lost business
and our cost efficiency programme, as well as the increase in operating days
noted above and a reduction in fuel costs due to our hedging profile. It was
partially offset by more days lost to weather than the prior year and a modest
increase in employee costs associated with continued driver shortage
challenges in parts of the US. In reported currency, adjusted operating profit
increased by 52.0% to £171.1m (2016: £112.6m).
Focused and disciplined bidding
The summer 2016 bid season represented the third year of our pricing strategy
to focus only on retaining or bidding for contracts at prices that reflect an
appropriate return on the capital we invest. We achieved an average price
increase on 'at risk' contracts of 7.3%, an increase of 200 basis points on
the prior year which in part reflected the driver cost inflation challenges we
and the rest of the industry are experiencing. About one third of our bus
portfolio was due for renewal in the 2016 bid season, and we retained 80% of
'at risk' buses in line with our budget, or 93% across our total portfolio.
Pricing across the market continues to be firmer, though some smaller local
operators continue to bid aggressively to retain business, and school boards
remain focused on strong execution and value for money. We continue to see
modest net organic growth or conversions from in-house to private provision.
More than 75% of our overall bus fleet of 44,000 at the end of the year are
operated under contracts awarded in the last three years which reflect our
strategy to operate a smaller but higher-returning bus fleet.
Continuous improvement in operating and financial performance
First Student continued to deliver cost efficiencies, including from a
simplification of our regional management and central services structure at
the start of the year, and from changes to our engineering practices using the
expertise of First Transit's vehicle maintenance services segment. Additional
efficiencies were delivered through relentless focus on best practice sharing
and standardised processes across the division, and continuing to use
real-time data and enhanced training to embed behaviour change at the local
depot level. During the year, these management initiatives have delivered
recurring cost savings of $26m, bringing the total delivered over the last
three years to almost $60m.
These cost improvements have been delivered despite the significant task of
responding to the ongoing challenge of recruiting and retaining drivers in
some locations, as a result of the strength of the US employment market. We
continued to improve our recruitment processes and marketing, particularly
ahead of the September start-up period, which allowed the school year to get
under way successfully. Revenue from our non-school charter bus offering,
which benefits our asset utilisation rates, was adversely impacted by net lost
business and the driver availability challenges noted above, but increased by
approximately 4% on a per bus basis.
Prudent investment in our key assets
We continue to invest in systems and processes that differentiate our offering
and enhance our customer service levels and safety performance. During the
year we successfully trialled our FirstView smartphone app, which provides
real-time bus location tracking for parents and school boards. The system can
be deployed on our bus fleets or offered on a standalone basis to school
boards operating their own fleets. Although we continued to make significant
investments in new and refurbished buses during the year, we also benefited
from our systematic approach to cascading buses around our operations, which
is a significant competitive advantage of our scale; our average fleet age
remained 7.3 years.
Responsible partnerships with our customers and communities
We are entrusted with the safety and security of millions of children every
day, and we take that responsibility extremely seriously. We maintained our
strong safety track record compared with industry benchmarks and continue to
invest to improve our performance. In the year we were delighted that our
customer service scores improved further from their already high levels. As
part of our commitment to support our communities, we invested in an
additional 120 alternative fuel buses, taking our fleet to more than 1,800
vehicles, which is one of the largest such fleets in North America.
Future priorities
In the 2017 bid season – which is now under way – and beyond, we will
continue to emphasise the overall value of our services in terms of the
quality of driver training, maintenance and safety standards, technology
capability and customer satisfaction as we continue our pricing strategy to
ensure our contract portfolio returns reflect the capital intensity of the
services we provide. We are confident that our unique market position,
customer proposition and improving operational efficiency put us in a strong
position to start to grow our portfolio of contracts in a disciplined way
through further organic, conversion and tuck-in acquisition opportunities.
First Student outlook
We are now executing the fourth bid season under our strategy to move to a
smaller but higher-returning contract portfolio, and therefore an increasing
proportion of ‘at risk’ contracts have already been won under our ‘up or
out’ strategy. As such, we expect the average price increase achievable to
moderate and our contract retention rate to trend upwards over time. We
continue to target incremental cost efficiencies across the division and
expect to benefit modestly from our fuel hedging profile. As usual, First
Student's operating results will be significantly weighted to the second half
because of the overlay of our financial year with the North American school
calendar.
First Transit
$m £m Change in
constant currency (1)
Year to 31 March 2017 2016 2017 2016
Revenue 1,358.9 1,303.4 1,042.0 864.8 +4.4%
Adjusted operating profit 95.2 90.6 73.3 60.1 +6.2%
Adjusted operating margin 7.0% 7.0% 7.0% 6.9% +10bps
(1) Based on retranslating 2016 foreign currency amounts at 2017 rates.
First Transit's revenue was $1,358.9m (2016: $1,303.4m), an increase of 4.4%
in constant currency. As expected, contract awards and organic growth in the
rest of the division was partially offset by lower shuttle bus demand in the
Canadian oil sands region compared with the prior year; divisional revenue
excluding these activities increased by 5.6% in constant currency. Reported
revenue increased by 20.5% to £1,042.0m (2016: £864.8m).
Adjusted operating profit in local currency was $95.2m (2016: $90.6m),
representing an adjusted operating margin of 7.0% (2016: 7.0%), modestly ahead
of our expectations at the half year due to favourable execution in certain
contracts during the second half. In reported currency, adjusted operating
profit increased by 22.0% to £73.3m (2016: £60.1m).
Focused and disciplined bidding
In the year, First Transit maintained its consistent track record of new
business wins and high contract retention rates across a broad range of
transport services and geographies. In the year we were awarded 19 new
contracts, including important new business wins in our long-standing core
markets such as a paratransit contract in Cobb County, Georgia, and a vehicle
services contract for Florida International University. We were also awarded
new contracts by PACE in Chicago and SEPTA in Philadelphia, both of which were
extensions of existing relationships with these authorities. Our shuttle
business, which is the only sub-segment of the division where we deploy
significant capital, won contracts at Los Angeles airport and in five other
cities.
Retaining existing clients is clearly as important as winning new business,
and we renewed significant contracts for the Denver Regional Transportation
District, Trimet in Portland, Eastern Contra Costa in California and COTA in
Columbus, Ohio in the year. Our retention rate on ‘at risk’ contracts was
82% during the year; whilst somewhat lower than our normal target range, this
included the loss of two relatively large existing contracts which had become
loss-making and on which we had bid significant price increases.
In the year we made further progress in applying our expertise to new
geographies and services to secure additional sources of growth. For example,
we were recently awarded a small streetcar management contract in El Paso, and
we are very pleased with the performance to date of our first US commuter rail
contract, which was awarded to us in July 2016 by the Denton County
Transportation Authority in Texas, and our ongoing management of the
CTfasttrak Bus Rapid Transit (BRT) system in Connecticut. These contracts
benefit from the expertise of colleagues in the Group's UK divisions, and give
us important credentials with which to pursue similar opportunities in these
growing markets in North America. We are also looking at international markets
in a measured way, and during the year we have been exploring growth
opportunities beyond our recent entries into Panama and India.
Continuous improvement in operating and financial performance
Our technology infrastructure, management expertise and national service
platform are significant barriers to entry. Notwithstanding this, sustaining
First Transit's margin in highly competitive markets requires continuous
improvement in efficiency to provide best value service provision. We also
continue to develop our recruitment, retention and training systems and
processes to ensure we maintain the necessary technical and driver capability
in what remains a tight US employment market.
Prudent investment in our key assets
In the majority of our contracts we operate or manage services on behalf of
our clients rather than providing vehicles, and our primary capital investment
is therefore into the systems and processes needed to support efficient
delivery. During the year we completed the roll out of our paperless
engineering shop system, and have made further progress in rolling out
enhanced real-time location information to our customers and passengers. These
systems also provide detailed performance and analytics information to our
management and engineering teams, allowing us to enhance our productivity and
efficiency.
Responsible partnerships with our customers and communities
We are committed to offering the best value package to our customers and the
communities we serve, which means our professionalism, technical and
operational expertise and safety standards are as important as our cost
effectiveness in winning or retaining business. We have completed the roll out
of our safety behavioural change programme, which has had a positive impact on
our safety performance, and we were pleased to have increased our already
strong customer satisfaction score during the year. We are also at the
forefront of low emissions vehicle technology, with almost one fifth of our
fleet now operating using alternative fuel sources.
Future priorities
First Transit has developed a diversified platform of sector expertise and
exceptional management strength in North American transit markets through
continuous investment in our people and technology, all of which will support
good margins and returns into the medium term. We have grown our business by
listening to what our customers want and finding cost efficient ways to
provide it. We continue to see opportunities for further growth in our core
markets, particularly in shuttle and in vehicle services, increasingly for
corporate as well as public clients.
We expect adjacent markets where we have now established our credentials –
such as light rail, commuter rail and BRT – will become increasingly
significant for our business. We will also continue to explore disciplined and
low-risk opportunities to grow our geographic coverage when our track record
means we are well placed to deliver.
We intend to remain at the forefront of technological change in our industry.
For example, at the end of 2016 we commenced an autonomous vehicle pilot in
conjunction with the Contra Costa Transportation Authority in California, and
are exploring partnerships to provide Americans with Disabilities
Act-compliant transportation for ridesharing and paratransit passengers.
The complexity and breadth of transport services continues to evolve, but our
focus remains on bringing the skills and capability to deliver an efficient
and effective service for our customers.
First Transit outlook
We remain confident that our services offer a compelling option for local
authorities and private customers to outsource their increasingly complex
transportation management needs. We will continue to bid for contracts
offering good margins with modest capital investment, seeking to replenish and
grow our portfolio of contracts both within our core markets and in new
service areas and geographies.
Greyhound
$m £m Change in
constant currency (1)
Year to 31 March 2017 2016 2017 2016
Revenue 894.0 914.0 684.7 605.1 (2.0)%
Adjusted operating profit 55.2 54.4 42.6 35.5 +2.7%
Adjusted operating margin 6.2% 6.0% 6.2% 5.9% +30bps
(1) Based on retranslating 2016 foreign currency amounts at 2017 rates.
Greyhound's revenue was $894.0m or £684.7m (2016: $914.0m or £605.1m) for
the year. Like-for-like revenue decreased by 1.7% for the year as a whole,
reflecting a decrease of 3.9% in the first half and an increase of 0.8% in the
second. Passenger demand throughout the intercity coach industry is adversely
affected by the increased competitiveness of both passenger cars and low-cost
airlines when fuel prices reduce year-on-year, as experienced in the first
half of our 2017 financial year. Our point-to-point Greyhound Express revenue
increased by 1.3%, with both Express and traditional Greyhound experiencing
greater resilience over shorter haul (up to 450 miles) distances than long
haul.
Adjusted operating profit was $55.2m (2016: $54.4m), or an adjusted operating
margin of 6.2% (2016: 6.0%). We have continued to flex mileage operated in
response to demand trends, resulting in modest improvements to revenue per
mile, supplemented by our transition to one-way ticket pricing in July 2016
and our other business model developments. In reported currency, adjusted
operating profit increased by 20.0% to £42.6m (2016: £35.5m).
Driving growth through attractive commercial propositions
Our transformation of Greyhound’s customer facing systems in recent years
now allows us to deploy airline-style yield management and real-time pricing
algorithms throughout the network, and we are developing our customer
relationship management systems and loyalty schemes to deepen our relationship
with our customers. The majority of our customers now buy tickets online or
via our new smartphone apps, and our fleet offers modern buses with amenities
such as free Wi-Fi, guaranteed seating and better legroom than the low-cost
airlines. In addition, we continue to promote our ‘point-to-point’
Greyhound Express and BoltBus brands, which offer higher density timetables
between popular city pair destinations.
In the year we have implemented more robust punctuality processes and systems,
significantly improving on-time departure performance. We have upgraded our
terminal environments in terms of cleanliness and security, simplified our
baggage processes, and regularly review our sites for opportunities to move to
intermodal transport hubs or new facilities tailored to our needs. We continue
to make upgrades to our web offerings – we now offer one-click purchasing
capabilities on our website and improvements to our mobile apps have resulted
in us becoming one of the top rated apps in the travel industry.
We are now in a better position than ever before to offer potential customers
a competitively priced, comfortable journey to their destination without the
hassle of long airport queues or driving themselves.
Continuous improvement in operating and financial performance
Our financial performance is highly dependent on matching our timetables to
demand and maintaining tight control of operating costs. The transition of our
business model to more sophisticated, digitally-enabled systems enhances our
ability to do both. In the year, mileage operated across the division
decreased by 4.8%, with reductions weighted to the first half.
Our Canadian operations (15% of Greyhound revenue) have remained particularly
challenging, with the lower oil price directly impacting on competitiveness
compared with other modes but also affecting the health of the economy,
particularly in western Canada. Despite considerable regulatory and structural
constraints, we continue to take action including reducing mileage further but
Greyhound Canada remained loss-making.
We continue to review our property portfolio for opportunities to strengthen
the passenger experience, which resulted in decisions to sell sites in Reno,
Barrie and El Paso. We also completed the sale of a terminal in San Jose,
resulting in a gain on sale of £21.6m in the year, which has been reported
separately.
Prudent investment in our key assets
In the year we have continued to invest in our business systems to improve the
customer experience, with expenditure on the dynamic pricing systems, website
and customer relationship management systems. However our investment focus has
increasingly moved to enhancing employee training, in particular by building
customer feedback into our priority setting process. During the year we
retired more buses from the fleet than we replaced, modestly reducing the
average age of our 1,600 bus fleet to 9.9 years. Our continued investment in
growing our services in the Mexican domestic market has been successful in the
year, and we will continue to expand in this market in future.
Responsible partnerships with our customers and communities
Our service to our customers is becoming more personalised and responsive, and
we are increasingly focused on using customer feedback scoring, benchmarking
and complaints data to diagnose common 'pain points' and remove them. We have
also invested considerable effort in refreshing our safety culture, with
encouraging overall progress in the year across our key passenger and employee
safety metrics.
Future priorities
Over recent years we have upgraded our fleets, transformed our yield
management, pricing, ticketing and purchase options, and made major steps to
improve our terminal experience. While the benefits of these changes have been
offset somewhat by the passenger demand challenges of a falling fuel price
environment, we are confident that Greyhound is now in a strong position to
take full advantage of its unique brand and scale. Our opportunity is to marry
Greyhound's unique nationwide network and iconic brand, the refreshed fleet,
locations and technology platforms we now have in place with a reinvigorated
customer service ethos, and thereby attract and retain new passengers to
Greyhound. We will also continue to deliver on the opportunities available to
us in the Mexican coach market.
Greyhound outlook
With our pricing and yield management algorithms continuing to increase in
scope and effectiveness, and assuming a somewhat less volatile oil price
environment in the near term compared with the last three years, we are
confident that Greyhound can return to growth in the year ahead. We will
continue to focus on matching our timetables to demand, with the objective of
maximising the considerable operating leverage in the business from additional
passenger volumes, in order to enhance divisional margin.
First Bus
£m Change in
constant currency (1)
Year to 31 March 2017 2016
Revenue 861.7 870.9 (1.4)%
Adjusted operating profit 37.0 52.0 (29.9)%
Adjusted operating margin 4.3% 6.0% (170)bps
(1) Based on retranslating 2016 foreign currency amounts at 2017 rates.
First Bus reported revenue of £861.7m (2016: £870.9m) for the year. Although
the like-for-like passenger revenue trend improved through the year, it was
still negative for three quarters, ending 0.6% lower overall. Market
conditions for the industry remain challenged by muted high street footfall,
worsening congestion in several localities, and some evidence of lower fuel
prices encouraging car use, as well as general macroeconomic uncertainty in
the UK. Revenue trends show wide variation across the division, with some
markets (especially in the South and Wales) achieving good growth while others
have been more challenged. Overall like-for-like commercial passenger volumes
increased by 0.4%, while concessionary volumes decreased by 2.2%. Our contract
and tendered revenue decreased by 3.0% as a result of reduced spending by
local authorities on supported services.
We continue to take action in response to the challenging growth environment
by taking opportunities to merge or close certain depots and reducing
overheads, delivering cost efficiencies of £14.2m in the year. However these
cost savings have not been sufficient to offset lower volumes and cost
inflation. Adjusted operating profit was £37.0m (2016: £52.0m) and adjusted
operating margin was 4.3% (2016: 6.0%), of which £11.5m or 130bps is directly
attributable to the adverse impact of foreign exchange movements on our
purchases of US dollar-denominated fuel. In light of the extent of the changes
we have reported restructuring and reorganisation charges of £10.9m
separately.
Driving growth through attractive commercial propositions
We continue to adjust our networks, fares and commercial offering in response
to customer needs. We have increased our focus on improved convenience and a
simpler offering for passengers, with several initiatives including fare
discounts designed to increase take-up of mobile and other cashless tickets,
which also speeds boarding times. We have trialled contactless ticketing using
bank cards in Bristol and are planning a wider roll out of this technology
during 2017 and 2018. In the year we have also stepped up the emphasis on
customer service in our driver training programmes.
We have also focused on increasing our share of student markets across our
networks through enhanced services, competitive fares and increased marketing,
with particular success in York, Swansea, Bristol and Bath. We also
reorganised our network serving Stansted Airport, successfully stimulating
growth.
In the contract tender market, we were awarded contracts for Bristol Airport
and its environs, and for the Hinkley Point construction project through a
joint venture. Our expertise in managing park and ride services was rewarded
with wins including in Bristol, Chelmsford and Leeds, and success in
developing a solution for the local authority in Ipswich. The Vantage Bus
Rapid Transit ('BRT') scheme in Manchester has exceeded expectations since its
April 2016 launch, carrying more than two million passengers in its first
year. Additional services have been added to meet this demand.
Continuous improvement in operating and financial performance
We continue to take action to enhance our cost efficiency for the long term.
In the year we closed Rotherham depot and transferred the operation of all
services to other depots in South Yorkshire. Shortly after the year end we
consolidated from six to four depots serving the Greater Manchester area.
Following the release of certain restrictions by the Competition and Market
Authority, we sold local networks in East Scotland to Lothian Buses in summer
2016, and in March 2017 the Galashiels-based Borders network to West Coast
Motors. This network had been adversely affected by the opening of the Borders
Railway in 2015.
We continue to achieve savings from division-wide procurement, productivity
and lean engineering projects, supplemented by ongoing efforts to increase our
fuel efficiency through driver behaviour change and investment in more
efficient buses. These actions are also focused on supporting improvements in
service reliability and punctuality, which are fundamental to our customers.
In April 2017, we launched our upgraded bus app providing door-to-door journey
planning, showing all bus services and other modes such as light rail with
real-time location information and alerts for the bus stop of choice. Our
long-established mobile ticket app will be integrated with this app later in
2017. Through embracing digital technology, we are rapidly integrating our
location tracking, revenue collection and other back office systems to
increase the availability of accurate real-time data. Our passengers will
increasingly have access to more accurate information on their bus, and
greater visibility of disruption. The availability of this information also
increasingly enables us to plan and tailor our services more accurately.
Prudent investment in our key assets
We continue to invest in our fleets in a disciplined way, and took delivery of
272 vehicles in the year. As a result of our fleet investment programme our
fleet is now fully compliant with the Disability Discrimination Act, and like
all our recent fleet purchases, these new additions meet the latest Euro VI
emissions standards, are fitted with Wi-Fi and most have next stop audio
visual announcements and USB charging points. We are now one of the largest
DfT-certified 'Low Carbon Bus' operators in the UK, and were recently
recognised as Low Carbon Vehicle Operator of the Year.
Responsible partnerships with our customers and communities
More commuters rely on the national bus network than any other form of public
transport in the UK, and we are aligned with the national Government and local
councils in wanting to get more people out of their cars and on the buses.
Buses have a fundamental role to play in delivering Clean Air Zones with
authorities supporting greater use of public transport in their towns and
cities as they take measures to tackle congestion and improve air quality. We
believe that local authorities' objectives for bus services in their areas are
best delivered through partnerships with innovative and commercially
incentivised bus operators. We are delighted that the proposed Bus Services
Act recognises the importance of such partnerships and provides additional
tools for councils and operators to work together to deliver improvements for
customers.
In Leeds, one of our largest markets, we entered into a partnership with the
City Council aiming to double patronage by 2025, supported by a £173.5m
public funding package over four years to develop new bus priorities, park and
ride sites and passenger facilities, while First Bus is preparing to invest in
a fully ultra-low emissions fleet there by 2020. A partnership was also
launched in September 2016 with Doncaster Council and South Yorkshire Combined
Authority, which follows the successful launch of similar schemes in Sheffield
and Rotherham. We are working with Bristol City Council and the West of
England Combined Authority to launch the Metrobus network later in 2017. We
are excited to be delivering the services on these priority routes which will
significantly improve the bus offering and attract new users.
Future priorities
Bus services will continue to play a critical role in any local transport
strategy that recognises the problems of congestion, air quality, parking and
issues of social exclusion. Our objective is to continue to focus our
investment and energy on local markets where these imperatives are recognised
and our customers and the communities we serve have the most to gain from our
services. Our focus remains on enhancing our ability to deliver the efficient,
cost effective and customer-focused services our stakeholders need.
First Bus outlook
Although like-for-like passenger revenue increased by 0.8% in the final
quarter of the year, industry conditions remain challenging and our focus
therefore must remain on tailored cost efficiencies to raise our margin. We
will continue to make changes to the shape and breadth of our networks in
response to market conditions, whilst continuing to stimulate growth through
delivering high quality services and identifying opportunities to grow our
markets.
First Rail
£m Change
Year to 31 March 2017 2016
Revenue 1,268.8 1,308.4 (3.0)%
Adjusted operating profit 53.8 72.9 (26.2)%
Adjusted operating margin 4.2% 5.6% (140)bps
First Rail division revenue decreased to £1,268.8m (2016: £1,308.4m),
reflecting like-for-like passenger revenue growth of 1.3% offset by reduced
subsidy receipts and the remapping of certain routes out of the scope of the
new TPE franchise. Passenger volumes increased by 0.7%, reflecting a slowdown
in growth due to macroeconomic uncertainty, modal shift due to sustained lower
fuel prices, and the effect of non-recurring events such as the Rugby World
Cup in the prior year. The magnitude of the infrastructure upgrade works
taking place on the GWR network has exaggerated the impact of these factors on
that franchise, while revenue performance for TPE has been better than the
industry average during the year.
Adjusted operating profit of £53.8m (2016: £72.9m) represents a margin of
4.2% (2016: 5.6%), which in part reflects the rebasing toward industry norms
under the terms of the TPE and GWR contracts agreed during the prior year as
well as the slowing revenue growth environment, partially offset by cost
efficiencies and resolution of historic performance regime discussions with
the DfT. The adjusted operating margin was also reduced by the £8.3m impact
of adverse currency movements on US dollar-denominated diesel fuel costs.
Focused and disciplined bidding
GWR continues to operate under the commercial terms of a direct award which
runs to 1 April 2019. The Department for Transport (DfT) is now assuming that
it will exercise its option to extend this direct award to April 2020 in its
latest franchise timetable, published in December 2016. We successfully
launched the new TPE franchise in April 2016, which will run until at least
2023. Outside franchising, our plans continue for new open access services
between London, north east England and Edinburgh from 2021, which will offer a
single class of service on a new fleet of trains designed to encourage
travellers to switch from air or coach travel to rail.
In March the DfT announced that our 70:30 partnership with MTR Corporation had
been selected to operate the new South Western rail franchise from 20 August
2017 until at least August 2024. Over the course of the franchise, £1.2bn
will be invested to raise the quality of every aspect of train journeys on the
South Western network. In the year our bid to operate the East Anglia
franchise was not successful.
Continuous improvement in operating and financial performance
The Government’s investment in key national rail infrastructure continues,
including the £7.5bn investment in the Great Western Mainline and work on the
TransPennine route. We have a strong track record for close partnership
working with all industry partners to deliver infrastructure upgrade projects
whilst minimising disruption for passengers. We are working closely with
Network Rail and with the DfT to support these infrastructure upgrades, which
will help us deliver capacity, frequency and journey time improvements for
customers.
In the latest independent Transport Focus National Rail Passenger Survey
(completed during autumn 2016) all of FirstGroup’s three train operating
companies again scored above the national average for overall satisfaction.
Hull Trains continued to top the national table with a score of 97%, 11 points
higher than the average of long-distance operators. GWR saw a slight
year-on-year fall from its previous record high to 82%, although scores for
ticket purchasing, train comfort and station environments all showed
improvement. TPE scored 84%, up a point year-on-year, with improvements in 25
out of 37 categories.
Prudent investment in our key assets
We continue to deliver new trains for all three of our rail companies. By
2020, 90% of our customers will be travelling on a train less than five years
old.
On GWR, alongside the ongoing investment in the rail network, the biggest
fleet upgrade in a generation has started. New Hitachi InterCity Express
trains are scheduled to be introduced later this year, and GWR will be the
first operator to run this class of rolling stock. We introduced the first
electric trains to run on GWR’s London suburban routes from September,
providing more capacity; the service is being extended along the Thames Valley
from May 2017. Overall, we will create three million more seats across the
network by December 2018, as well as quicker journey times and more frequent
services.
The new TPE franchise connecting major cities across the North and Scotland
was launched with a new brand during the year. More than £500m is being
invested to transform rail services across the region including 220 new
carriages, comprising a mix of new Hitachi InterCity trains and a further
intercity fleet from CAF. The first of the new trains will be introduced from
summer 2018, providing 13 million more seats, and we are also completely
refurbishing the remaining TPE rolling stock. Hull Trains will also benefit
from a new Hitachi InterCity fleet. Passenger benefits from these new trains
include more seats and space, Wi-Fi and on-board infotainment options. As well
as transforming the customer experience, the extra capacity will allow us to
deliver future passenger growth.
Responsible partnerships with our customers and communities
We are introducing a redesigned passenger app that allows customers to
purchase tickets and reserve seats via mobile phone as well as plan their door
to door multi-modal journey. This was launched in TPE in December 2016 and was
extended to all GWR and Hull Trains customers in May 2017, with further
functionality being introduced over time.
At our stations we are delivering additional car parking spaces, as well as
new and upgraded customer information screens, and improved waiting,
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