REG-FirstGroup PLC: Half-year Report <Origin Href="QuoteRef">FGP.L</Origin>
14/11/2017 07:05
FIRSTGROUP PLC
HALF-YEARLY RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2017
Overview
*
Overall trading for the Group in the first half was consistent with plans
outlined at start of the financial year
*
Strong cash performance in addition to inflows from recent start of South
Western Railway (‘SWR’)
Financial summary
*
Group revenue +8.1% including new SWR rail franchise from 20 August and
favourable foreign exchange; excluding these, Group revenue was +0.9%
*
Adjusted(1) operating profit flat, with solid trading performances and
favourable foreign exchange offset by c.£6m impact of severe North American
hurricanes, mainly on First Transit’s three contracts in Puerto Rico; in
constant currency, adjusted(1) operating profit (9.1)%
*
Adjusted(1) EPS +35.7% reflecting lower interest costs tempered by
significantly higher tax rate as expected; adjusted(1) EPS flat in constant
currency
*
Net cash inflow of £97.0m (H1 2016: outflow of £64.3m) in the period
includes a cash flow improvement of £86.2m in addition to a £75.1m working
capital inflow from the start of the SWR franchise
*
Net debt: EBITDA improved to 1.7 times at the half year, compared to 2.4 times
a year ago
*
Statutory operating profit decline of £20.5m, statutory loss before tax of
£1.9m and statutory EPS reduction to 0.2p principally reflect a gain on
disposal of property in the prior period which did not recur
Adjusted (1) H1 2017 H1 2016 £m Change Change in constant currency (2) SWR-adjusted change in constant currency (3)
£m
Revenue 2,771.3 2,564.7 +8.1% +3.5% +0.9%
Operating profit 89.4 89.0 +0.4% (9.1)%
Operating profit margin 3.2% 3.5% (30)bps (50)bps
Profit before tax 30.5 21.9 +39.3% +2.0%
EPS 1.9p 1.4p +35.7% flat
Net debt (4) 1,179.9 1,491.5 (20.9)% (20.3)%
Statutory H1 2017 H1 2016 £m Change
£m
Revenue 2,771.3 2,564.7 +8.1%
Operating profit 57.4 77.9 (26.3)%
Operating profit margin 2.1% 3.0% (90)bps
(Loss)/profit before tax (1.9) 11.1 n/m (5)
EPS 0.2p 0.7p (71.4)%
Divisional summary
*
First Student delivered +5.3% average price increases and 83% retention
through our ‘up or out’ bidding strategy, successfully managed school
start up despite ongoing driver shortages, and completed an acquisition in the
period
*
First Transit growth and contract wins continued but margin affected by severe
hurricane impact mainly on our Puerto Rico operations, and higher driver
shortage costs due to strength of US employment market
*
Greyhound like-for-like(6) revenue +1.2%, including +7.8% in Greyhound Express
and other short haul growth while long haul declined; fuel and cost savings
partially offset higher inflation and maintenance costs
*
First Bus like-for-like(6) passenger revenue +0.6% including +1.3% from
commercial passengers; adjusted(1) margin improved 50bps in period, driven by
systematic programme of management actions
*
First Rail like-for-like(6) passenger revenue +3.2% and cost efficiencies
contributed to an increased margin; SWR franchise commenced towards end of
period
Looking ahead
*
Our overall trading and cash performance in first half, excluding the short
term impact of the severe hurricanes, affirms our confidence that the Group
will make further progress and deliver substantial cash generation for the
full year
Commenting, Chief Executive Tim O'Toole said:
"The overall trading performance and significantly increased free cash
generation of the Group in the first half was consistent with the plans we
outlined at the start of the financial year. Solid performances from most of
our businesses are partially obscured by the impact of the recent severe
hurricane on our operations in Puerto Rico. In the second half we will benefit
from our normal seasonal bias, our ongoing focus on cost efficiencies and from
additional business which commenced in the period, including the South Western
Railway franchise. We expect to make further progress and deliver substantial
free cash generation for the year as a whole."
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:
Andrew Porter / Alison Kay, Tel: +44 (0) 20 7404 5959
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.
Notes
(1) ‘Adjusted’ figures throughout this document are before other
intangible asset amortisation charges and certain other items as set out in
note 3 to the condensed consolidated financial statements.
(2) Changes 'in constant currency' throughout this document are based
on retranslating H1 2016 foreign currency amounts at H1 2017 rates.
(3) Growth excluding revenue associated with the South Western Railway
franchise which became part of the First Rail portfolio towards the end of the
period, in constant currency.
(4 ) Net debt is stated excluding accrued bond interest, as
explained on page 11.
(5) Period on period percentage change not meaningful.
(6) References to like-for-like revenue adjust for certain factors
which distort the period-on-period trends in our passenger revenue businesses,
as described on page 11.
Legal Entity Identifier (LEI): 549300DEJZCPWA4HKM93. Classification as per
DTR 6 Annex 1R: 1.2.
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 more than 40,000
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
Our overall trading performance and free cash generation in the first half was
consistent with the plans we outlined at the start of the financial year, with
solid performances from most of our businesses partially obscured by the
impact of the recent severe hurricanes, particularly on our operations in
Puerto Rico.
First Student continued to execute our pricing strategy, focusing on retaining
or bidding for contracts at prices that reflect appropriate returns, and
delivered ongoing price increases and contract retention. Margin in the
seasonally weaker first half was lower than the prior period mainly due to
fewer operating days, as anticipated. With school start-up completed we are
well positioned to deliver further progress for the full year, notwithstanding
the ongoing industry-wide driver shortage challenges in parts of the US. In
August we acquired Falcon Transportation in Illinois, a 94 bus operation which
extends our relationship with the Chicago public school system and offers
synergies with our other operations in the city.
First Transit had a difficult first half, with continued revenue growth
insufficient to offset higher costs resulting from driver shortages and the
impact of the severe hurricanes including Maria, which devastated the island
of Puerto Rico where we have two vehicle services contracts and a fixed route
business. We are confident margins will be restored to more typical levels for
the division in the second half and beyond, and First Transit has continued to
retain existing business and win new contracts in the period.
Greyhound's overall growth modestly accelerated in the period, and it is
becoming increasingly clear that in current market conditions our opportunity
is strongest for our point-to-point Greyhound Express and other short haul
trips, where we saw significant growth in the period. Long haul demand
currently remains weak in the face of competition from budget airlines. We
continue to adapt our business in response to these divergent trends, in order
to capture the opportunities for profitable growth available to us as a result
of our unique nationwide coverage and the new business tools at our disposal.
First Bus delivered encouraging like-for-like passenger revenue growth overall
in the period, though industry conditions remain uncertain. Margin in the
period mainly benefitted from our systematic programme of management actions
to maximise patronage, increase efficiency and reduce cost, including the
recent closure of three depots. We anticipate an acceleration of efficiencies
and savings in the second half, as we focus our investment only on those local
markets where our stakeholders recognise the value to the community of
successful bus services, and where our ability to generate sustainable value
is strongest.
First Rail revenues increased significantly, reflecting the inclusion of the
South Western Railway franchise for the first time as well as passenger
revenue growth in our pre-existing businesses. Our plans for each of our
franchises are based on improving the experiences of our passengers through
fleet upgrades, timetable improvements and performance enhancements, though
some of these are reliant on infrastructure upgrades managed by our industry
partners, particularly in GWR, which are progressing at a slower pace than
originally envisaged.
In the second half we will benefit from our normal seasonal bias, our ongoing
focus on cost efficiencies and from additional business which commenced in the
period. Notwithstanding some of the challenges faced in the first half, we
expect to make further progress over the full year, while our cash performance
so far affirms our confidence in generating substantial free cash flow for the
year as a whole.
Last Thursday marked one year since the fatal derailment of a tram we operate
on behalf of Transport for London in Croydon, a tragedy which continues to
weigh heavily on us. We continue to provide our full support to the ongoing
investigations into the incident, as it is absolutely essential that the
reasons for the derailment are established.
Tim O'Toole
Chief Executive
14 November 2017
Operating and financial review
Group revenue in the first half increased by 8.1% reflecting the impact of
First Rail’s new SWR franchise and translation of our US dollar-based
businesses into sterling at more favourable rates than the prior period. Group
revenue increased by 0.9% in constant currency and after adjusting for the new
SWR franchise, with revenue growth on this basis in all divisions except First
Student, where our pricing strategy continues to result in a smaller but
higher returning portfolio of contracts.
Group adjusted operating profit in the first half increased modestly to
£89.4m (H1 2016: £89.0m), with growth, ongoing cost efficiencies and
favourable currency translation offset by the impact of the recent severe
hurricanes, particularly for First Transit's operations in Puerto Rico, fewer
First Student operating days in the first half as expected and the initial
impact of the SWR franchise, which commenced during the Waterloo platform
upgrade in late August.
Net finance costs before adjustments were £58.9m (H1 2016: £67.1m) with the
decrease principally reflecting the lower level of net debt and lower interest
rates, and adjusted profit before tax increased by 39.3% to £30.5m (H1 2016:
£21.9m). Adjusted profit attributable to ordinary shareholders was £22.4m
(H1 2016: £16.3m) with higher adjusted profit before tax and a loss
attributable to non-controlling interest due to the start of the SWR franchise
partly offset by a higher effective tax rate of 30.0% (H1 2016: 25.1%).
Adjusted EPS increased by 35.7% to 1.9p (H1 2016: 1.4p). Excluding the changes
in First Rail's franchise portfolio and in constant currency, adjusted EPS
increased by 10.5%. EBITDA increased by 10.5% to £278.2m (H1 2016: £251.7m).
Statutory operating profit decreased by 26.3% to £57.4m (H1 2016: £77.9m),
principally reflecting the gain on disposal of a Greyhound terminal of £21.6m
in the prior period. Statutory profit attributable to equity shareholders was
£2.1m (H1 2016: £9.0m), and statutory EPS decreased to 0.2p in the period
(H1 2016: 0.7p).
The net cash inflow for the period of £97.0m (H1 2016: outflow £64.3m)
represents an improvement of £86.2m compared with the prior period together
with a First Rail start of franchise cash inflow of £75.1m. The improvement
in cash flow before First Rail start of franchise cash flows was driven by
higher EBITDA, timing of certain working capital flows and lower capital
expenditure partly offset by lower proceeds from the disposal of property,
plant and equipment primarily due to the sale of a Greyhound terminal in the
prior period. The net cash inflow, combined with movements in debt due to
foreign exchange, resulted in a net debt decrease in the first half of
£110.0m relative to the 31 March position (H1 2016: increase of £81.3m). As
at 30 September 2017, the net debt: EBITDA ratio was 1.7 times (H1 2016: 2.4
times). Liquidity within the Group has remained strong; as at 30 September
2017 there was £844.1m (H1 2016: £824.8m) of committed headroom and free
cash, being £800.0m (H1 2016: £745.0m) of committed headroom and £44.1m (H1
2016: £79.8m) of free cash. Our average debt maturity was 3.2 years (H1 2016:
3.9 years).
During the period gross capital investment of £205.9m (H1 2016: £161.3m) was
made in our business. As previously indicated this increased investment was
primarily in First Rail (increasing to £56.5m from £22.8m in H1 2016), and
is incorporated into our franchise bidding assumptions. ROCE was 7.9% (H1
2016: 8.3% at constant exchange rates).
6 months to 30 September 2017 6 months to 30 September 2016 Year to 31 March 2017
Revenue Operating profit (1) Operating margin (1) Revenue £m Operating profit (1) £m Operating margin (1) % Revenue £m Operating profit (1) £m Operating margin (1) %
£m £m %
First Student 763.1 14.8 1.9 719.5 14.0 1.9 1,780.3 171.1 9.6
First Transit 536.4 20.9 3.9 482.5 30.0 6.2 1,042.0 73.3 7.0
Greyhound 358.8 23.5 6.5 333.4 25.8 7.7 684.7 42.6 6.2
First Bus 428.2 15.8 3.7 426.1 13.5 3.2 861.7 37.0 4.3
First Rail 677.4 31.1 4.6 595.8 22.1 3.7 1,268.8 53.8 4.2
Group (2) 7.4 (16.7) 7.4 (16.4) 15.8 (38.8)
Total Group 2,771.3 89.4 3.2 2,564.7 89.0 3.5 5,653.3 339.0 6.0
North America in $m $m % $m $m % $m $m %
US Dollars
First Student 982.8 18.1 1.8 1,004.5 26.2 2.6 2,323.3 222.0 9.6
First Transit 692.0 26.7 3.9 663.6 41.4 6.2 1,358.9 95.2 7.0
Greyhound 463.0 30.5 6.6 457.5 34.3 7.5 894.0 55.2 6.2
Total North America 2,137.8 75.3 3.5 2,125.6 101.9 4.8 4,576.2 372.4 8.1
(1 ) Adjusted.
(2 ) Tramlink operations, central management and other items.
First Student
6 months to 30 September $m £m Change in
constant currency (1)
2017 2016 2017 2016
Revenue 982.8 1,004.5 763.1 719.5 (1.9)%
Adjusted operating profit 18.1 26.2 14.8 14.0 (26.7)%
Adjusted operating margin 1.8% 2.6% 1.9% 1.9% (70)bps
(1 ) Based on retranslating H1 2016 foreign currency amounts at
H1 2017 rates.
In the recently completed bid season, First Student continued to execute our
pricing strategy focusing on retaining or bidding for contracts at prices that
reflect an appropriate return on the capital we invest. In light of the
substantial proportion of the portfolio which has now been bid under the
strategy, the moderating 5.3% average price increase on ‘at risk’ business
and higher retention rate of 83% on ‘at risk’ contracts compared with
prior year were as expected. Across the entire portfolio of multi-year
contracts, retention was 94%, with overall price increases of 3.4%. Combined
with a modest level of organic growth and conversion of previously insourced
work, we expect to operate a slightly smaller, but higher returning, bus fleet
of approximately 43,000 vehicles for the balance of the year, in line with our
strategy. First Student's revenue in the first half was $982.8m or £763.1m
(H1 2016: $1,004.5m or £719.5m). Compared with the prior period, revenues
principally reflect the net effect of our pricing strategy noted above and
fewer operating days in the half as anticipated, due to the timing of Easter
at the start of the period.
Adjusted operating profit was $18.1m or £14.8m (H1 2016: $26.2m or £14.0m),
resulting in an adjusted operating margin of 1.8% (H1 2016: 2.6%). Excluding
the effect of fewer operating days in the period, the adjusted margin was
flat, with management actions, fuel savings and weather recoveries offsetting
ongoing employee cost pressures due to driver shortages as a result of the
strong employment market in parts of the US.
In August we acquired Falcon Transportation, a Chicago-based provider of
school and charter transportation services. Falcon started in 1996 and
expanded to a fleet of 94 school buses. With this acquisition, First Student
extends its market presence in Illinois and its relationship with Chicago
Public Schools.
Overall First Student's first half performance has been solid and we were
pleased with this year’s school start-up, notwithstanding continued driver
recruitment challenges in some markets. The division’s results are always
heavily weighted to the second half because of the overlay of our financial
year on the North American school calendar, so as usual our performance in the
second half is key. However our performance in the first half means we are
positioned to deliver progress for the full year.
First Transit
6 months to 30 September $m £m Change in
constant currency (1)
2017 2016 2017 2016
Revenue 692.0 663.6 536.4 482.5 +4.3%
Adjusted operating profit 26.7 41.4 20.9 30.0 (34.9)%
Adjusted operating margin 3.9% 6.2% 3.9% 6.2% (230)bps
(1 ) Based on retranslating H1 2016 foreign currency amounts at
H1 2017 rates.
First Transit’s revenue in the first half was $692.0m or £536.4m (H1 2016:
$663.6m or £482.5m), an increase of 4.3% in constant currency. The revenue
performance benefitted from contract awards and organic growth, partially
offset by the impact of recent severe hurricanes, particularly on our Puerto
Rico operations.
Adjusted operating profit was $26.7m or £20.9m (H1 2016: $41.4m or £30.0m),
resulting in an adjusted operating margin of 3.9% (H1 2016: 6.2%). First
Transit’s adjusted operating profit was reduced by approximately $6m due to
the effects of the recent hurricane season, principally the impact of
hurricane Maria which devastated the island of Puerto Rico in September.
Margin was also affected by higher costs driven by driver shortages in certain
regions, as the US employment market continues to tighten. First Transit also
experienced higher costs in relation to certain poorly performing contracts
which completed in the period.
We were awarded 14 new contracts and achieved a 94% retention rate in the
period. Wins or retentions included large fixed route contracts in Los Angeles
and Denver, vehicle services business for Seminole County, the City of
Arlington and the Maine Department of Transport, and shuttle contracts for
Clemson University and the University of Connecticut. In the period First
Transit also signed an agreement with GoMentum Station, a California-based
proving ground, to use the facility as a test site for a pilot project to
deploy the first commercially operated shared autonomous vehicle on public
roads in the US.
Through the continued delivery of our longstanding strategy, First Transit is
focused on continuing to drive growth by applying our skills and capabilities
in both our core and adjacent markets; and we expect to restore margins to
more typical levels in the second half and beyond.
Greyhound
6 months to 30 September $m £m Change in
constant currency (1)
2017 2016 2017 2016
Revenue 463.0 457.5 358.8 333.4 +1.3%
Adjusted operating profit 30.5 34.3 23.5 25.8 (11.7)%
Adjusted operating margin 6.6% 7.5% 6.5% 7.7% (100)bps
(1 ) Based on retranslating H1 2016 foreign currency amounts at
H1 2017 rates.
Greyhound’s revenue was $463.0m or £358.8m (H1 2016: $457.5m or £333.4m)
in the first half, and overall like-for-like revenue increased by 1.2%. Short
haul journeys, including our point-to-point Greyhound Express business which
delivered like-for-like revenue growth of 7.8%, outperformed long haul, where
competition from the budget airlines remains most intense. We are also
experiencing muted cross-border traffic in the US south west region due to
tighter immigration enforcement. In the period we continued to reduce mileage
modestly while achieving load factor and revenue per mile growth.
Adjusted operating profit was $30.5m or £23.5m (H1 2016: $34.3m or £25.8m),
or an adjusted operating margin of 6.6% (H1 2016: 7.5%). With the growth
prospects in different parts of our business diverging, we are adapting our
business in response, and we expect adjusted operating performance this year
to be less seasonally weighted to the first half than in previous years.
However in the period cost savings and a fuel cost benefit were not sufficient
to offset the impact of higher fleet maintenance and driver costs including
training. We are modestly increasing marketing spend to support awareness of
the changes we have made to our service, and investing additional resources in
our fleet and elsewhere: Greyhound launched e-tickets in September in selected
city pairs, bus-side ticket scanning continues to roll out and further
customer service training and terminal development was undertaken in the
period. Greyhound also ended its cooperation arrangements with Peter Pan Lines
in the US North East region at the end of the period, while in Canada
Greyhound has recently applied to the authorities in British Columbia for
certain reductions to its services in the province.
With the inherent strengths of our unique nationwide coverage, and the new
tools at our disposal, we are well positioned to capture the opportunities for
profitable growth available to us.
First Bus
6 months to 30 September £m Change in
constant currency (1)
2017 2016
Revenue 428.2 426.1 +0.3%
Adjusted operating profit 15.8 13.5 +15.3%
Adjusted operating margin 3.7% 3.2% +50bps
(1 ) Based on retranslating H1 2016 foreign currency amounts at
H1 2017 rates.
First Bus reported revenue of £428.2m (H1 2016: £426.1m) in the period, with
like-for-like passenger revenue increasing by 0.6%, though demand patterns
vary widely across the division's local markets. Industry conditions remain
uncertain, with high street retail footfall trends and congestion affecting
passenger demand in many of our markets, particularly in the North and
Scotland. Commercial passenger revenue increased by 1.3% while commercial
passenger volumes decreased by 0.3% in the period. We continue to focus on
improving the reliability of our services and the convenience of our ticket
options to drive patronage. In some cases we are adjusting our fares to
encourage passengers to move to mobile ticketing and cashless payment.
Adjusted operating profit was £15.8m (H1 2016: £13.5m) and adjusted
operating margin was 3.7% (H1 2016: 3.2%), reflecting depot consolidation
actions from second half of the prior year, further cost efficiency actions in
the period including an additional depot closure, additional optimisation of
our mileage and network structures at a local level, and a benefit from fuel
hedging, partially offset by inflation. In the second half we anticipate the
pace of our cost efficiency programme to accelerate.
We are investing in First Bus at lower levels than the prior year, as we begin
to focus our capital budget only on those markets where the local transport
strategy recognises the importance of bus services in responding to the
problems of congestion, air quality, parking and issues of social exclusion.
For the current year we expect to take delivery of approximately 180 new buses
(year to March 2017: 272 buses). We also continue to invest in technology
which simplifies our passengers' journeys, and are particularly pleased with
the success of our contactless ticketing trials in Aberdeen and Bristol.
We have had an encouraging first half in First Bus, despite industry
conditions remaining relatively challenging. In the face of these market
uncertainties, our systematic programme of actions to raise margin and restore
our ability to create sustainable value in First Bus envisages an acceleration
in the second half – including further changes to the shape and breadth of
our networks. We are focusing our investments on those local markets where our
stakeholders recognise the value of bus services, allowing us to capture the
best opportunities for growing patronage and generate acceptable returns.
First Rail
6 months to 30 September £m Change
2017 2016
Revenue 677.4 595.8 +13.7%
Adjusted operating profit 31.1 22.1 +40.7%
Adjusted operating margin 4.6% 3.7% +90bps
First Rail revenues increased to £677.4m (H1 2016: £595.8m), reflecting four
weeks of the new SWR franchise and like-for-like passenger revenue growth of
3.2% on our pre-existing businesses. Passenger volumes in the first half
increased by 1.0%, showing tentative signs of improvement compared with prior
periods, though the key drivers of the recent slowdown – macroeconomic
uncertainty, modal shift due to sustained lower fuel prices, and the magnitude
of the infrastructure upgrade works taking place on the GWR network – have
not definitively improved. Adjusted operating profit was £31.1m (H1 2016:
£22.1m), principally benefitting from the stronger revenue performance and
cost efficiencies, partially offset by the initial impact of SWR which
commenced during the Waterloo platform upgrade in late August and a lower
margin on TPE.
Trading in SWR in the short period since taking over the franchise has been in
line with our expectations, and our plans for the network commenced with the
launch of the new brand on 4 September. Network Rail's electrification work
continues on the Great Western mainline, albeit at a slower pace than
originally envisaged, and we are working with our industry partners to reflect
the impact of these delays in the level of our franchise commitments and
model. Shortly after the period end, GWR introduced into service the first of
the new Hitachi Intercity Express Train fleet, which will continue to roll out
across the network over the coming year. The new trains, which are performing
well following some initial teething issues, have substantially greater
seating capacity than the trains they replace as well as a range of other
passenger improvements; once Network Rail’s electrification programme has
been completed the fleet will add 40% more seats than today and provide
quicker, more frequent journeys. TPE's first fully-refurbished ‘Class 185’
trainset returned to service; upgrades as part of the £32m programme include
brand new seats throughout, information screens, free, fast Wi-Fi and an
on-board entertainment system. We are progressing our franchise commitments to
transform TPE into a true intercity service for the North, which call for
substantial passenger journey growth, facilitated by additional capacity from
our plans to introduce 220 new carriages from summer 2018, together with the
denser operating timetable permitted by the upgraded fleet.
Once again Hull Trains was the UK’s top performing long distance operator in
the independent National Rail Passenger survey, and GWR was named rail
operator of the year at the recent National Transport Awards, having scored
their highest ever National Rail Passenger Survey customer satisfaction
figures in 2016.
We remain cautious on the rate of passenger growth for the balance of the year
in light of recent industry conditions, and continue to expect the full year
margin to be lower than prior year as a result. With the successful start-up
of SWR, we would expect to make modest progress for the year as a whole in
First Rail.
Finance costs and investment income
Net finance costs before adjustments were £58.9m (H1 2016: £67.1m) with the
decrease principally reflecting the lower level of net debt and lower interest
rates.
Profit before tax
Adjusted profit before tax as set out in note 3 to the condensed consolidated
financial statements was £30.5m (H1 2016: £21.9m). An overall charge of
£32.4m (H1 2016: £10.8m) for adjustments including other intangible asset
amortisation charges of £32.0m (H1 2016: £28.5m) resulted in a statutory
loss before tax of £1.9m (H1 2016: profit before tax of £11.1m).
Tax
The tax charge, on adjusted profit before tax, for the period was £9.2m (H1
2016: £5.5m) representing an effective rate of 30.0% (H1 2016: 25.1%). The
effective rate is higher due to the anticipated increased weighting of North
American profits for the full year, where corporate tax rates are higher than
in the UK. There was a tax credit of £12.1m (H1 2016: credit of £3.5m)
relating to other intangible asset amortisation charges and other adjustments.
The total tax credit was £2.9m (H1 2016: charge of £2.0m). The actual tax
paid during the period was £7.1m (H1 2016: £5.1m).
EPS
Adjusted EPS was 1.9p (H1 2016: 1.4p). Basic EPS was 0.2p (H1 2016: 0.7p).
Shares in issue
As at 30 September 2017 there were 1,206.4m shares in issue (H1 2016:
1,204.3m), excluding treasury shares and own shares held in trust for
employees of 2.8m (H1 2016: 0.9m). The weighted average number of shares in
issue for the purpose of basic EPS calculations (excluding treasury shares and
own shares held in trust for employees) was 1,206.2m (H1 2016: 1,204.3m).
Reconciliation to non-GAAP measures and performance
Note 3 to the condensed consolidated financial statements sets out the
reconciliations of operating profit and profit before tax to their adjusted
equivalents. The principal adjusting items are as follows:
Other intangible asset amortisation charges
The charge for the period was £32.0m (H1 2016: £28.5m). The increase
primarily reflects the higher charge for software intangible amortisation this
period.
Ineffectiveness on financial derivatives
There was a £0.4m non-cash charge (H1 2016: credit £0.3m) in the period due
to ineffectiveness on financial derivatives.
Capital expenditure
Cash capital expenditure was £191.1m (H1 2016: £206.5m) and comprised First
Student £69.5m (H1 2016: £97.2m), First Transit £9.2m (H1 2016: £6.9m),
Greyhound £14.4m (H1 2016: £14.9m), First Bus £39.7m (H1 2016: £58.7m),
First Rail £57.1m (H1 2016: £28.5m) and Group items £1.2m (H1 2016:
£0.3m). First Rail capital expenditure is typically matched by franchise
receipts or other funding. In addition, during the period we entered into
operating leases for passenger carrying vehicles with capital values in First
Transit of £nil (H1 2016: £8.0m).
Gross capital investment (fixed asset and software additions plus the capital
value of new operating leases) was £205.9m (H1 2016: £161.3m) and comprised
First Student £123.8m (H1 2016: £84.2m), First Transit £9.4m (H1 2016:
£13.6m), Greyhound £11.6m (H1 2016: £6.8m), First Bus £3.4m (H1 2016:
£33.6m), First Rail £56.5m (H1 2016: £22.8m) and Group items £1.2m (H1
2016: £0.3m).
Balance sheet
Net assets have decreased by £176.0m since the start of the period. The
principal reasons for this are translation reserve movements of £210.0m
partly offset by actuarial gains on defined benefit pension schemes (net of
deferred tax) of £19.1m and favourable after tax hedging reserve movements of
£16.3m.
Cash flow
The net cash inflow for the period of £97.0m (H1 2016: outflow £64.3m)
represents an improvement of £86.2m compared with the prior period together
with a First Rail start of franchise cash inflow of £75.1m. The improvement
in cash flow before First Rail start of franchise cash flows was driven by
higher EBITDA, timing of certain working capital flows and lower capital
expenditure partly offset by lower proceeds from the disposal of property,
plant and equipment primarily due to the sale of a Greyhound terminal in the
prior period. The net cash inflow, combined with movements in debt due to
foreign exchange, resulted in a net debt decrease in the first half of
£110.0m relative to the 31 March position (H1 2016: increase of £81.3m), as
follows:
6 months to 30 September Year to 31 March 2017 £m
2017 2016 £m
£m
EBITDA 278.2 251.7 686.6
Other non-cash income statement charges/(credits) 7.7 8.0 (6.2)
Working capital excluding First Rail start of franchise cash flows 57.7 (6.0) 23.9
Movement in other provisions (19.3) (19.8) (30.6)
Pension payments in excess of income statement charge (31.0) (26.1) (37.6)
Cash generated by operations excluding First Rail start of franchise cash flows 293.3 207.8 636.1
Capital expenditure and acquisitions (194.0) (206.5) (404.3)
Proceeds from disposal of property, plant and equipment 7.0 29.1 43.0
Interest and tax (80.0) (81.3) (116.3)
Dividends paid to non-controlling minority shareholders - (11.9) (11.9)
Other (4.4) (1.5) 0.6
Net cash inflow/(outflow) before First Rail start of franchise cash flows 21.9 (64.3) 147.2
First Rail start of franchise cash flows 75.1 - -
Net cash inflow/(outflow) after First Rail start of franchise cash flows 97.0 (64.3) 147.2
Foreign exchange movements 13.9 (16.0) (26.5)
Other non-cash movements (0.9) (1.0) (0.4)
Movement in net debt in the period 110.0 (81.3) 120.3
Funding and risk management
Liquidity within the Group has remained strong. At 30 September 2017, there
was £844.1m (H1 2016: £824.8m) of committed headroom and free cash, being
£800.0m (H1 2016: £745.0m) of committed headroom and £44.1m (H1 2016:
£79.8m) of free cash. Largely due to the seasonality of First Student,
committed headroom typically reduces during the financial year up to October
and increases thereafter. Treasury policy requires a minimum of £150m of
committed headroom at all times. Our average debt maturity was 3.2 years (H1
2016: 3.9 years). The Group’s main revolving bank facilities require renewal
in July 2021. The Group does not enter into speculative financial transactions
and uses only authorised financial instruments for certain financial risk
management purposes.
Net debt
The Group’s net debt at 30 September 2017 was £1,179.9m (H1 2016:
£1,491.5m) and comprised:
Analysis of net debt 30 September 2017 30 September 2016 £m 31 March 2017 £m
£m
Sterling bond (2018) 299.3 298.8 298.8
Sterling bond (2019) 249.8 249.8 249.8
Sterling bond (2021) 348.3 348.3 348.3
Sterling bond (2022) 321.1 320.5 321.1
Sterling bond (2024) 199.6 199.6 199.6
Sterling bank loans - 52.5 -
HP contracts and finance leases 144.2 207.4 183.7
Senior unsecured loan notes 36.9 115.5 80.0
Loan notes 9.5 9.6 9.5
Gross debt excluding accrued interest 1,608.7 1,802.0 1,690.8
Cash (44.1) (79.8) (141.1)
First Rail ring-fenced cash and deposits (383.8) (228.0) (255.8)
Other ring-fenced cash and deposits (0.9) (2.7) (4.0)
Net debt excluding accrued interest 1,179.9 1,491.5 1,289.9
Under the terms of the First Rail franchise agreements, cash can only be
distributed by the Train Operating Companies (TOCs) either up to the lower
amount of their retained profits or the amount determined by prescribed
liquidity ratios. The ring-fenced cash represents that which is not available
for distribution or the amount required to satisfy the liquidity ratio at the
balance sheet date. First Rail ring-fenced cash increased by £128.0m in the
period principally due to the commencement of the SWR franchise and working
capital inflows at GWR.
Interest rate risk
We seek to reduce our exposure by using a combination of fixed rate debt and
interest rate derivatives to achieve an overall fixed rate position over the
medium term of at least 50% of net debt.
Foreign currency risk
‘Certain’ and ‘highly probable’ foreign currency transaction exposures
may be hedged at the time the exposure arises for up to two years at specified
levels, or longer if there is a very high degree of certainty. The Group does
not hedge the translation of earnings into the Group reporting currency
(pounds Sterling), but accepts that reported Group earnings will fluctuate as
exchange rates against pounds Sterling fluctuate for the currencies in which
the Group does business. During the period, the net cash generated in each
currency may be converted by Group Treasury into pounds Sterling by way of
spot transactions in order to keep the currency composition of net debt
broadly constant.
Fuel price risk
We use a progressive forward hedging programme to manage commodity risk. We
have hedged 89% of the 'at risk' crude requirements for the current year in
the UK (1.9m barrels p.a.) at an average rate of $60 per barrel, 63% of our
'at risk' UK crude requirements for the year to 31 March 2019 at $55 per
barrel and 26% of our requirements for the year to 31 March 2020 at $50 per
barrel.
In North America, we have hedged 63% of current year 'at risk' crude oil
volumes (1.4m barrels p.a.) at an average rate of $56 per barrel, 38% of the
volumes for the year to 31 March 2019 at $50 per barrel and 21% of our volumes
for the year to 31 March 2020 at $50 per barrel.
Foreign exchange
The most significant exchange rates to Sterling for the Group are as follows:
6 months to 30 September 2017 6 months to 30 September 2016 Year to 31 March 2017
Closing rate Effective rate Closing rate Effective rate Closing rate Effective rate
US Dollar 1.35 1.27 1.30 1.45 1.25 1.29
Canadian Dollar 1.67 1.96 1.71 2.01 1.67 1.74
Seasonality
First Student generates lower revenues and profits in the first half of the
financial year than in the second half of the year as the school summer
holidays fall into the first half. Greyhound operating profits are typically
higher in the first half of the year due to demand being stronger in the
summer months.
Pensions
We have updated our pension assumptions as at 30 September 2017 for the
defined benefit schemes in the UK and North America. The net pension deficit
of £358.5m at the beginning of the period has decreased by £62.3m to
£296.2m at the end of the period, principally due to a higher real discount
rate in the UK together with favourable foreign exchange movements. The
increase in assets, liabilities and adjustments during the period principally
relate to the SWR franchise. The main factors that influence the balance sheet
position for pensions and the sensitivities to their movement at 30 September
2017 are set out below:
Movement Impact
Discount rate +0.1% Reduce deficit by £37.3m
Inflation +0.1% Increase deficit by £31.7m
Dividends
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. The Board is not proposing
to pay a dividend in respect of the six months to 30 September 2017 but will
continue to review the appropriate timing for restarting dividend payments.
Forward-looking statements
Certain statements included or incorporated by reference within this document
may constitute ‘forward- looking statements’ with respect to the business,
strategy and plans of the Group and our current goals, assumptions and
expectations relating to our future financial condition, performance and
results. By their nature, forward-looking statements involve known and unknown
risks, assumptions, uncertainties and other factors that cause actual results,
performance or achievements of the Group to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Shareholders are cautioned not to place undue
reliance on the forward-looking statements. Except as required by the UK
Listing Rules and applicable law, the Group does not undertake any obligation
to update or change any forward-looking statements to reflect events occurring
after the date of this document.
Other information
Unless otherwise stated, all financial figures for the six months to 30
September 2017 (the ‘first half’, the 'period' or ‘H1 2017’) include
the results and financial position of the First Rail business for the period
ended 16 September 2017 and the results and financial position of all the
other businesses for the 26 weeks ended 23 September 2017. The figures for the
six months to 30 September 2016 (the ‘prior period’ or ‘H1 2016’)
include the results and financial position of First Rail for the period ended
17 September 2016 and the results and financial position of all the other
businesses for the 26 weeks ended 24 September 2016. Figures for the year to
31 March 2017 include the results and financial position of the First Rail
division for the year ended 31 March 2017 and the results and financial
position of all the other businesses for the 52 weeks ended 25 March 2017.
Full year results for 2018 will include the results and financial position of
First Rail for the year to 31 March 2018 and the results and financial
position of all the other businesses for the 53 weeks ended 31 March 2018.
All references to 'adjusted' figures throughout this document are before other
intangible asset amortisation charges and certain other items as set out in
note 3 to the condensed consolidated financial statements.
‘ROCE’ or Return on Capital Employed is a measure of capital efficiency
and is calculated by dividing adjusted operating profit after tax by all year
end assets and liabilities excluding debt items.
'EBITDA’ is adjusted operating profit less capital grant amortisation plus
depreciation.
'Net debt' is the value of Group external borrowings excluding the fair value
adjustment for coupon swaps designated against certain bonds, excluding
accrued interest, less cash balances.
References to ‘like-for-like’ revenue adjust for changes in the
composition of the divisional portfolio, holiday timing, severe weather and
other factors, for example engineering possessions in First Rail, that distort
the period-on-period trends in our passenger revenue businesses.
Principal risks and uncertainties for the remaining six months of the
financial year
There are a number of risks and uncertainties facing the Group in the
remaining six months of the financial year. The principal risks and
uncertainties, which are set out in detail on pages 32 to 37 of the Annual
Report and Accounts 2017, are summarised below:
Economic conditions including Brexit implications
A worsening economic outlook could result in reduced demand particularly in
First Rail; while an improving economic climate, particularly combined with
lower fuel prices, may result in reduced demand for Greyhound and First Bus as
alternative transport modes become relatively more affordable. Improving
conditions may also lead to a tightening of labour markets resulting in
employee shortages or pressure to increase pay.
Political and regulatory
The political and regulatory landscape – including government policy,
funding regimes, or the legal and regulatory framework – within which the
Group operates is constantly changing, which may result in structural market
changes or impact the Group’s operations.
Contract businesses including rail franchising
The Group's contract-based businesses are dependent on the ability to renew
and secure new contract wins on profitable terms in a competitive environment.
Incorrect modelling or bid assumptions could lead to higher costs or losses,
while failure to comply with contract terms could result in termination,
litigation and financial penalties and failure to win further contracts. Our
rail franchises cover a period during which there is significant change (major
infrastructure work, electrification and resignalling, introduction of new
trains). These changes require careful planning, management and negotiation
with industry partners, in particular where delays can impact the delivery of
franchise assumptions. Failure to manage these risks adequately could result
in financial and reputational impacts to the Group.
Competition and emerging technologies
The Group competes in the areas of pricing and service and faces competition
from a number of sources, including the private car, existing and new public
and private transport operators across all our markets, and emerging
technologies such as Uber, ride sharing apps and price comparison websites.
Information technology and cyber security
The Group relies on IT in all aspects of our businesses. Any service
interruption, accident or misappropriation of confidential information
resulting from significant disruption or failure of IT, or failure to properly
manage the implementation of new IT systems, may lead to revenue loss or
increased costs, fines, penalties or additional insurance requirements.
Treasury and credit rating
Treasury risks include liquidity risks, risks arising from changes to foreign
exchange and interest rates and fuel price risk, and ineffective hedging
arrangements may not fully mitigate losses or may increase them. A downgrade
in the Group’s credit ratings to below investment grade may lead to
increased financing costs and other consequences and affect the Group’s
ability to invest in its operations.
Pension scheme funding
The Group sponsors or participates in a number of significant defined benefit
pension schemes, primarily in the UK. Future accounting cost and cash
contribution requirements may increase or decrease materially based upon
various factors outside of the control of the Group.
Compliance, litigation and claims, health and safety
The Group’s operations are subject to a wide range of legislation and
regulation, and failure to comply can lead to litigation, claims, damages,
fines and penalties. The Group has three main insurable risks: third party
injury and other claims arising from vehicle and general operations, employee
injuries and property damage. The Group is also subject to other litigation,
which is not insured, particularly in North America, including contractual
claims and those relating to employee wage and hour and meal and break
matters.
Labour costs, employee relations, recruitment and retention
Employee costs represent the largest component of the Group’s operating
costs, and political or union pressure to increase wages could increase these
costs. Competition for employees or high employee turnover can lead to
shortages which increase costs and affect service delivery. Similarly,
industrial action could adversely impact customer service and have a financial
impact on the Group’s operations.
Disruption to infrastructure/operations
Our operations, and the infrastructure on which they depend, can be affected
by a number of different external factors, many of which are not within our
control, including terrorism, adverse weather events and potentially climate
change or pandemics.
Condensed consolidated income statement
Notes Unaudited Unaudited 6 months to 30 September 2016 £m Year to 31 March 2017 £m
6 months to
30 September 2017
£m
Revenue 2, 4 2,771.3 2,564.7 5,653.3
Operating costs (2,713.9) (2,486.8) (5,369.7)
Operating profit 57.4 77.9 283.6
Investment income 5 0.4 0.7 1.2
Finance costs 5 (59.7) (67.5) (132.2)
(Loss)/profit before tax (1.9) 11.1 152.6
Tax 6 2.9 (2.0) (36.5)
Profit for the period 1.0 9.1 116.1
Attributable to:
Equity holders of the parent 2.1 9.0 112.3
Non-controlling interests (1.1) 0.1 3.8
1.0 9.1 116.1
Earnings per share
Basic 7 0.2p 0.7p 9.3p
Diluted 0.2p 0.7p 9.2p
Adjusted results (1)
Adjusted operating profit 3 89.4 89.0 339.0
Adjusted profit before tax 3 30.5 21.9 207.0
Adjusted EPS 7 1.9p 1.4p 12.4p
(1 ) Adjusted for certain items as set out in note 3.
Condensed consolidated statement of comprehensive income
Unaudited Unaudited 6 months to 30 September 2016 £m Year to 31 March 2017 £m
6 months to
30 September
2017
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