REG-FirstGroup PLC: Update on trading and portfolio rationalisation

FirstgroupAnnouncement

11/03/2020 07:05

2020 WINTER TRADING UPDATE AND SALE PROCESS
FOR NORTH AMERICAN CONTRACT BUSINESSES UNDERWAY

FirstGroup plc, a leading provider of transport services in the UK and North
America, today provides an update on the portfolio rationalisation strategy
and on trading since the end of September 2019.

Progress with portfolio rationalisation
* Board has commenced formal process to sell our North American contract
businesses First Student and First Transit, with significant interest
expressed by a range of potential buyers
* First Bus and First Rail to form the core of the ongoing Group, following
the conclusion of the North American transaction processes
Recent trading summary
* Group revenue +7.5% YTD, or +6.0% in constant currency(1)
* Trading trends in First Student, First Transit and First Bus broadly similar
to first half, with industry cost inflation and volatile passenger demand
largely mitigated by management action and growth. Greyhound’s trading
environment remains difficult, though this has been offset by a stronger First
Rail financial performance following GWR’s successful introduction of new
trains and a major timetable upgrade
* We have seen no significant impact from the coronavirus (COVID-19) outbreak
to date, however we are monitoring the situation closely while planning for a
range of scenarios including changes to current government guidance or policy
* Overall, based on the above the Group’s outlook for adjusted operating
profit (pre-IFRS16) in constant currency for the year to 31 March 2020 is in
line with our expectations, though we are mindful that the final month of the
year is traditionally a significant trading period for the Group
 Increase/(decrease) vs comparable period, in constant currency (1)        End Sept 2019      Year to  
                                                                           – end Feb 2020   date (YTD) 
 First Student revenue                                                              +4.0%        +4.1% 
 First Transit revenue                                                              +5.7%        +6.6% 
 Greyhound like-for-like revenue                                                   (9.2)%       (3.5)% 
 First Bus like-for-like passenger revenue                                          +2.0%        +1.8% 
 First Rail like-for-like passenger revenue                                         +3.8%        +4.4% 

Commenting on today’s announcement, FirstGroup Chairman David Martin said:

“We have now commenced a formal process to sell our North American contract
businesses. We firmly believe that a sale of these assets is the best way to
unlock material value for all FirstGroup shareholders, having completed a
detailed review and analysis with advisers appointed by the Board to explore
all options.

“FirstGroup’s bus and rail businesses in the UK will play a key role in
supporting the Government’s plans to stimulate economic growth throughout
the country while reducing the environmental impact of transport. With the
emphasis on building a stronger business for the future, they will continue to
benefit from the improvement programmes already underway as well as from the
Government’s infrastructure spending plans announced earlier this year.

“Despite near-term uncertainty in the wider markets, there remains a
fundamental need for people to travel safely and conveniently for business,
education, social or recreational reasons which is essential to sustainable
and thriving economies and communities. We are resolutely focused on
delivering our plans – including the portfolio rationalisation strategy –
in the best interests of all shareholders.”

Commenting, FirstGroup Chief Executive Matthew Gregory said:

“Our market leading businesses have attractive long term prospects and
during the period we have continued to execute the clear commercial strategies
that will capture their potential and create value, underpinned by our
comprehensive cost efficiency programmes. Notwithstanding the challenging
trading environment, we have made good progress towards our objectives to
improve services for customers and unlock the inherent value within the Group.

“In First Student and First Transit we have well-invested long term contract
businesses with excellent customer relationships, strong management teams and
opportunities for growth, and we look forward to seeing these characteristics
being reflected in the outcome of the formal sale process that is now
underway.”

First Student and First Transit sale process

The Board of FirstGroup today announces that it has begun a formal sale
process to exit our North American contract businesses, First Student and
First Transit. Significant interest in the North American contract businesses
has been received, and Rothschild & Co, together with Goldman Sachs and JP
Morgan Cazenove, have been appointed to lead a sale process. Under the
leadership of our Chairman, David Martin, the Group has now undertaken
thorough preparations for a carve-out and sale of First Student and First
Transit. This work has involved expert third party consultants and advisers
who have helped design the optimal structure to be implemented and put
together the detailed materials and reports appropriate for a transaction of
this scale.

First Student and First Transit are market leaders in the provision of core
contracted public transportation services across 40 US states and seven
Canadian provinces. The businesses have long term trusted relationships with a
high quality, diversified client base of principally schools, universities and
other public sector entities, generating stable predictable revenues. In
addition, the businesses benefit from their substantial scale, best-in-class
operating track records and highly experienced management teams. Both
businesses are run in a decentralised way and will be capable of clean
separation from FirstGroup’s other operations.

Financial and operational highlights of First Student and First Transit (as
of 31 March 2019) include:
* Reported combined revenues of $3.8 billion for the financial year ended 31
March 2019, of which $2.4 billion is attributable to First Student;
* Reported combined EBITDA for the same period of $558 million of which $465
million is attributable to First Student;
* A wholly-owned fleet of 43,000 revenue-producing vehicles in First Student,
with an average fleet age under seven years, servicing more than 1,000 client
contracts, out of 460 locations.
Following careful evaluation, the Board believes that upon completion, the
sale of First Student and First Transit will unlock material shareholder value
for all FirstGroup shareholders.

The sale process will be conducted with the objectives of optimising value for
FirstGroup shareholders and minimising uncertainty for our customers and
employees. The sale of First Student and First Transit will be subject inter
alia to FirstGroup shareholder approval, which the Board anticipates would
lead to completion of the process during the second half of the upcoming
financial year. 

First Bus and First Rail in the UK

On conclusion of the North American divestments the Group will become a
UK-based transportation provider with bus and rail operations at the core of
its business. Accordingly, there are no further plans to pursue a separation
or sale of First Bus. We will continue to capture the benefits of our
improvement programmes and strong market positions to deliver enhanced
performance in First Bus, while playing a key role in delivering the benefits
of the UK Government’s announced plans to invest in improving bus networks
and sustainability across the country. Public transport has a unique role to
play in transitioning to a carbon neutral society and, with a leading position
in low emission vehicles and deep local authority relationships, we have a
strong platform for the future. We will continue to actively manage First
Rail’s existing portfolio of rail franchises to deliver sustainable benefits
for passengers, shareholders and our other stakeholders. We also look forward
to the publication of the Williams review, which we hope will provide much
anticipated clarity around the future shape of rail franchising.

Divisional updates

In our largest business First Student we are benefiting from the pricing and
contract retention rates we achieved in last summer’s bid season, as well as
from three acquisitions made in the year. Our key bidding metrics are on track
with our objectives at this stage of the current bid season, and we are
pleased that our strong safety record and consistently high customer service
scores continue to result in additional contract wins in the competitive
market. We remain confident that First Student will deliver further revenue
growth and robust cash flow and returns from its market leading multi-year
contract portfolio for the full year, despite the ongoing wage inflation and
driver shortages resulting from the strength of the US employment market noted
previously.

First Transit continues to deliver revenue growth from pricing, new contract
opportunities throughout its portfolio and some pass-through revenue. We
continue to expect that the cost efficiency programmes underway in the
division will deliver improvements in the second half margin relative to the
prior year, notwithstanding the previously noted cost headwinds faced by the
division this year, being driver shortages in certain areas, changing business
mix and the two legacy legal judgments in the first half of the year.

Greyhound’s trading environment remains challenging, with further reductions
in fuel price which typically makes travel by car more cost-competitive,
continuing reductions in immigration-related demand in the southern border
states and intensifying competition in several markets from both coach and
low-cost airline operators. Despite further management action including
commercial initiatives, mileage reductions and profit on certain property
sales, this difficult demand environment continues to drop through to
Greyhound’s profitability. Negotiations in respect of the Greyhound sale
process are ongoing and we will update the market, as appropriate, when they
conclude.

As previously noted, all of our North American businesses continue to be
affected by the industry-wide hardening of the motor claims insurance
environment. The long term provision required to be held in respect of such
claims is also sensitive to the market based discount rate used in the
actuarial calculation, which has come down sharply since the half year end.

First Bus like-for-like passenger revenue growth was +2.0% in the period with
higher revenue per mile from our fare and network optimisation actions.
Like-for-like passenger volumes were (1.7)% in the period, reflecting the
economic and political uncertainty and poor weather in the UK during the
period. We continue to prioritise investment in local markets where
stakeholders support our ambitions to deliver thriving and sustainable bus
services, and we are pleased that there is a growing recognition at all levels
of government that the bus has a huge role to play in achieving social and
environmental ambitions and improving local economies. In particular we
welcome the Government’s announcement in February of a new £5 billion,
five-year funding package which will include support for simpler fares,
thousands of new green buses, improved routes and higher frequencies. From a
strategic perspective our priority is to ensure First Bus is a more effective
and efficient business and our focus is on achieving improved performance and
a stronger bus division for the future. We therefore continue to actively
address our cost base through our comprehensive efficiency programme, the
benefits of which we expect will be more evident in our next financial year.

First Rail's like-for-like passenger revenue growth was +3.8% in the period,
with the financial performance in each of our rail operations continuing to
vary considerably. GWR’s operational and financial performance has exceeded
our expectations in the period, following our successful introduction of a
major timetable upgrade and new train fleets. We continue to make progress on
discussions with the Department for Transport (DfT) to extend our operation of
GWR. Since our First Trenitalia partnership commenced operations in December,
our new Avanti West Coast franchise has performed broadly in line with our
expectations. We were pleased with Government’s announcement that the HS2
programme will proceed, and we look forward to performing the role of 'Shadow
Operator' to the programme. TPE experienced difficult operating conditions
during the period, with the delayed delivery of new train sets and network
issues affecting our performance, and which may have a consequential impact on
future passenger growth. SWR’s performance continues to be challenged
principally by deep-rooted Network Rail infrastructure problems outside of our
control. We believe the best way forward for SWR is a new contract that
reflects a more realistic view of these issues and has an appropriate balance
of risk and reward for our shareholders in that context, and we are currently
negotiating on this basis with the DfT. We were pleased that in the most
recent independent National Rail Passenger Survey (NRPS) all of the rail
operations we controlled in the period achieved year-on-year improvements in
overall satisfaction, with GWR being a standout performer.

Investor information

A conference call for investors and analysts will be held at 9:00am today.
Please call +44 (0) 20 7725 3354 in advance of the call to register and
receive joining details. A playback facility will be available together with a
pdf copy of this announcement at www.firstgroupplc.com/investors.

The Group is scheduled to announce results for the year to 31 March 2020 on
Thursday 28 May 2020.

Contacts at FirstGroup:
Faisal Tabbah, Head of Investor Relations
Stuart Butchers, Group Head of Communications
Tel: +44 (0) 20 7725 3354

Contacts at Brunswick PR:
Andrew Porter / Simone Selzer, Tel: +44 (0) 20 7404 5959

Notes

(1       ) Changes 'in constant currency' throughout this announcement
are based on retranslating prior period foreign currency amounts at current
period rates. Group and Rail revenue growth includes the Avanti West Coast
rail franchise.

Legal Entity Identifier (LEI): 549300DEJZCPWA4HKM93. Classification as per DTR
6 Annex 1R: 3.1.

Unless otherwise stated, all financial figures for the 'period' include the
results of the First Rail business for the 20 weeks to 1 February 2020 and the
results of all the other businesses for the five months to 22 February 2020,
with increases or decreases compared to the comparable period in the prior
year. All 'year to date' or 'YTD' financial figures include the results of the
First Rail business for the 44 weeks to 1 February 2020 and the results of all
the other businesses for the eleven months to 22 February 2020, with increases
or decreases compared to the comparable period in the prior year. 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. Full year results
for 2020 will include the results and financial position of First Rail for the
year to 31 March 2020 and the results and financial position of all the other
businesses for the 52 weeks ended 30 March 2020.

Figures presented in this announcement are not audited. Certain statements
included or incorporated by reference within this announcement 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 announcement.

About FirstGroup

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 43,000 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 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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