REG-FirstGroup PLC: Strategy update

FirstgroupAnnouncement

30/05/2019 07:05

FIRSTGROUP PLC
STRATEGY UPDATE
* FirstGroup today announces plans to rationalise our portfolio with the
Group’s future emphasis on First Student and First Transit, our core North
American contracting businesses, which have the greatest potential to generate
sustainable value and growth over time
* Accordingly, a process to sell Greyhound has commenced and we are pursuing
structural alternatives to separate our First Bus operations from the Group
* We have an existing portfolio of rail franchises in the UK which we will
operate in accordance with their terms
* We will secure best value for shareholders by executing these plans with
pace, having regard for the regulatory procedures and stakeholder
consultations, including pensions, that will be required
Portfolio rationalisation plans

FirstGroup has a portfolio of five market leading public transportation
businesses in the UK and North America. The Board regularly reviews all
appropriate means to mobilise the considerable value inherent in the Group,
recognising that there are certain constraints and friction costs to overcome
in the case of some potential options, and will continue to do so. In light of
the performance improvements we have achieved through our divisional
strategies, and the changes in the wider environment, we believe that the most
appropriate means to deliver enhanced sustainable value is through the
rationalisation of the portfolio being announced today.

Our North American contract businesses

In future our core market will be North America, and centred on First Student
and First Transit, our market leading contract-based businesses, which
together generated 60% of the Group’s operating profits in 2019. They share
increasingly similar attributes and opportunities to grow and create value,
and between them we have established a strong and profitable platform in North
American mobility services.

We have improved First Student’s margins substantially to 9.5% in 2019
through a combination of our rigorous returns-based contract bidding strategy
and sustained cost and process efficiencies. We are confident that our largest
business is now restored to a position of generating sustainable growth, cash
and returns from its multi-year contract portfolio, which remains by far the
largest in the North American home-to-school bus market. Looking ahead, First
Student is targeting development of complementary transportation and mobility
technologies and services, entry into adjacent markets as well as organic and
M&A-led growth in the home-to-school market.

First Transit has delivered long term growth as North American transit markets
continue to outsource, and has built a diversified transit management contract
portfolio that generates attractive returns and cash flow given the relatively
modest capital requirements. We are targeting further long term growth from
First Transit’s core markets, particularly in shuttle and in vehicle
services, and have already established our credentials in a number of
attractive adjacent markets – such as commuter rail and bus rapid transit
(BRT). First Transit is at the front end of the Group in capturing
opportunities in Mobility as a Service (MaaS) and Shared Autonomous Vehicles
(SAV). Our business is in a strong position to generate value as transit
management markets continue to evolve, as we leverage our partnerships with
ridesharing and other Transportation Network Companies to remain at the
forefront of innovation.

First Student and First Transit are increasingly overlapping in terms of the
technologies and management skillsets required to thrive in response to the
market opportunities in front of them. As we drive our core contracting
businesses forward we will ensure that our management and functional
structures are positioned to capitalise further on the platform we have built
in the emerging North American mobility services market.

Separation plans

First Bus is one of the largest operators in the UK with a fifth of the market
outside of London. We have improved our offering by investing in our fleet and
transforming our networks, payments systems and passenger information services
to improve simplicity and convenience for customers. We have significantly
improved cost efficiency in the division, through investment in operations and
maintenance systems and by rationalising our footprint via network changes,
depot sales and closures. As a result, First Bus margins have improved to 7.5%
in 2019 and it is now on a much stronger footing as a business. First Bus has
limited synergies with our other operations and, having set the business on
the path to increased profitability, we believe now is the right time to
pursue structural alternatives to continue this progression and deliver value
to shareholders while managing the division’s longer term liabilities.

Greyhound is the only operator of scheduled intercity coaches in North
America, with a unique nationwide network and an iconic brand. We have
invested in Greyhound to implement airline-style yield management and
real-time pricing, up-to-date booking and ticketing options and improved
customer communications channels. We have also reduced Greyhound’s footprint
in Western Canada and continue to release value by optimising its property
portfolio. Greyhound has limited synergies with our other, predominantly
contract-based, North American businesses and we believe that value for
shareholders can best be delivered by seeking new owners that will further
support the continued development of this business. As such a formal sale
process for Greyhound is underway.

As part of our portfolio rationalisation plans to separate Greyhound and First
Bus from the Group, we will evaluate our capital structure and capital
allocation policy as we move forwards, to ensure it is optimal for supporting
future growth and shareholder returns while still maintaining an appropriate
balance sheet.

First Rail

We have a portfolio of separately managed rail franchise businesses in the UK
which we will operate in accordance with their contractual terms. First
Rail’s goal remains to add value through our operational expertise and
strong industry relationships. Our UK rail franchise portfolio has generated
£330.9m in adjusted profit with net cash and dividends to the Group over the
last five years. However, given our reduced expectations for our two most
recently awarded franchises, we have concerns with the current balance of risk
and reward being offered. We await the outcome of the UK government’s review
into the structure of the whole rail industry chaired by Keith Williams as it
seeks to address these and other industry issues. Any future commitments to UK
rail will need to have an appropriate balance of potential risks and rewards
for our shareholders.

Commenting, Chief Executive Matthew Gregory said:

“Since becoming Chief Executive in November 2018, I have been focused on
setting the Group on a clear path to enhance value. By executing the portfolio
rationalisation plans we are announcing today, our future emphasis will be on
First Student and First Transit, our core contracting businesses in North
America. We see significant potential to generate long term, sustainable value
and growth from the solid platforms these businesses provide in the North
American mobility services sector. We are intent on executing this strategy at
pace, having full regard to the regulatory and stakeholder procedures and
approvals that will be required.

“In parallel with our portfolio rationalisation plans we will continue to
drive forward the clear strategies now established in each of our divisions to
ensure they deliver further progress and growth in existing and adjacent
markets, underpinned by our plans to enhance our cost base further.

“Our plans will create a more focused portfolio, with leading positions in
our core North American contracting markets, and is the most appropriate means
for us to deliver enhanced sustainable value for all our stakeholders.”

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 Lea, Tel: +44 (0) 20 7404 5959

The portfolio rationalisation plan will be discussed further at a presentation
for investors and analysts of the Group’s Results for the year to 31 March
2019, which 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.

Legal Entity Identifier (LEI): 549300DEJZCPWA4HKM93. Classification as per
DTR 6 Annex 1R: 2.2. This announcement contains inside information. The person
responsible for arranging the release of this announcement on behalf of
FirstGroup is Michael Hampson, Group General Counsel and Company Secretary.

FirstGroup plc (LSE: FGP.L) is a leading provider of transport services in the
UK and North America. With £7.1 billion in revenue and around 100,000
employees, we transported 2.2 billion passengers last year. Whether for
business, education, health, social or recreation – we get our customers
where they want to be, when they want to be there. We create solutions that
reduce complexity, making travel smoother and life easier.

We provide easy and convenient mobility, improving quality of life by
connecting people and communities.

Each of our five divisions is a leader in its field: In North America, First
Student is the largest provider of home-to-school student transportation with
a fleet of 42,500 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 companies with 1.6 million
passengers a day, and First Rail is one of the country's largest and most
experienced rail operators, carrying 345 million passengers last year.

Visit our website at www.firstgroupplc.com and follow us @firstgroupplc on
Twitter.



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