FirstGroup plc

[Pages:5]FirstGroup plc Annual Report and Accounts 2018

Our vision is to provide solutions for an increasingly congested world... keeping people moving and communities prospering.

FirstGroup plc is a leading transport operator in the UK and North America. With ?6.4 billion in revenue and around 100,000 employees, we transported 2.1 billion passengers last year. Each of our five divisions is a leader in its field:

First Bus

One of the largest bus operators in the UK, transporting 1.6m passengers a day, with a fifth of the market outside London.

Passengers per day

1.6m

Buses in operation

5,800

See page 18

First Student

The largest provider of student transportation in North America ? twice the size of the next largest competitor.

Student journeys per day

5m

Number of yellow buses

42,000

See page 12

First Transit

First Transit is one of the largest private sector providers of public transit management and contracting in North America. Vehicles owned or operated

12,600

Passengers transported a year

340m

See page 14

Greyhound

Greyhound is the only national operator of scheduled intercity coaches in the US and Canada, with a unique nationwide network and iconic brand. Vehicles

1,600

Journey destinations

4,000

See page 16

First Rail

One of the UK's largest and most experienced rail operators, carrying more than 260m passengers last year across our three franchises and open access operation.

Passenger miles

7.4bn

Franchise payments to Government

?227m

See page 20

Strategic report

Our North American divisions Our three North America-based divisions First Student, First Transit and Greyhound generated 55% of our revenues in 2018.

Puerto Rico Puerto Rico

Alaska Alaska

First Student First Transit Greyhound Greyhound Express Affiliated Greyhound carriers in Mexico

Our UK divisions With three First Rail franchises, our open access rail operation and our local First Bus operations, we offer services throughout the country.

Aberdeen

Stirling Glasgow

Edinburgh

Belfast

Newcastle

Cork

Hull Trains Great Western Railway TransPennine Express South Western Railway First Bus operations

Dublin

Bradford Manchester

York Leeds Hull

Sheffield

Stoke-on-Trent

Worcester

Leicester

Norwich

Ipswich

Swansea

Cardiff Weston-super-Mare

Bristol

Reading

Chelmsford

London

Bath

Southampton

Weymouth

Brighton

Plymouth Penzance

Contents

Strategic report

Chairman's statement

04

Chief Executive's report

06

Our markets

08

Our strategy and business model

10

Business review

12

Corporate responsibility

23

Key performance indicators

30

Principal risks and uncertainties

34

Financial review

40

Governance

Board of Directors

46

About the Board

48

Governance framework

49

Corporate governance report

50

Directors' remuneration report

68

Directors' report and additional disclosures

95

Directors' responsibility statement

98

Financial statements

Consolidated income statement

100

Consolidated statement of comprehensive income 101

Consolidated balance sheet

102

Consolidated statement of changes in equity

103

Consolidated cash flow statement

104

Notes to the consolidated financial statements 105

Independent auditor's report

157

Group financial summary

167

Company balance sheet

168

Statement of changes in equity

169

Notes to the Company financial statements

170

Shareholder information

174

Financial calendar

175

Glossary

176

FirstGroup Annual Report and Accounts 2018

01

Financial summary of the year

Group revenue +1.0% in constant currency excluding benefit of new South Western Railway (SWR) franchise and 53rd week

Adjusted1 operating profit decreased by 10.4% in constant currency excluding SWR and 53rd week, reflecting Greyhound long haul challenges, severe weather effects on both sides of the Atlantic in the final quarter and ongoing US driver shortages, partially offset by good performances in UK divisions in the year

Balance sheet strengthened by net cash flow of ?199.0m and bond refinancing

Stable adjusted EPS in constant currency, reflecting lower finance costs and change to US tax rates

Net cash inflow of ?110.5m (2017: ?147.2m including proceeds from sale of a Greyhound terminal) before First Rail start of franchise cash flows, and ?199.0m after SWR start of franchise cash flows of ?88.5m

Reported net debt: EBITDA improved to 1.5 times (2017: 1.9 times); Rail ring-fenced cash adjusted net debt: EBITDA improved to 2.1 times (2017: 2.3 times)

Statutory loss before tax ?326.9m (2017: profit of ?152.6m), reflecting ?277.3m Greyhound goodwill and other asset impairments, ?106.3m TransPennine Express (TPE) onerous contract provision and other adjusting items

Statutory EPS was (24.6)p (2017: 9.3p)

Change in constant

Change currency2

Adjusted revenue

?6,398.4m

2017: ?5,653.3m

+13.2%

+14.0%

Statutory revenue

?6,398.4m

2017: ?5,653.3m

Adjusted1 operating profit

?317.0m

2017: ?339.0m

(6.5)%

(4.3)%

Statutory operating (loss)/profit

?(196.2)m

2017: ?283.6m

Adjusted1 operating profit margin

5.0%

(100)bps

2017: 6.0%

(90)bps

Statutory (loss)/profit before tax

?(326.9)m

2017: ?152.6m

Adjusted1 profit before tax

?197.0m

2017: ?207.0m

(4.8)%

(1.2)%

Statutory EPS

(24.6)p

2017: 9.3p

Adjusted1 EPS

12.3p

2017: 12.4p

(0.8)% +3.4%

Net debt3

?1,070.3m

2017: ?1,289.9m

(17.0)% (15.5)%

Change

+13.2% n/m5 n/m5 n/m5

1 `Adjusted' figures throughout this document are before Greyhound goodwill impairment, TPE onerous contract provision, 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 2017 foreign currency amounts at 2018 rates.

3 Net debt is stated excluding accrued bond interest, as explained on page 43.

4 Central costs allocated by adjusted profit contribution.

5 Not meaningful.

02

FirstGroup Annual Report and Accounts 2018

Revenue (as % of Group)

First Student First Transit Greyhound First Bus First Rail

27% 17% 11% 14% 31%

Adjusted operating profit4 (as % of Group)

First Student First Transit Greyhound First Bus First Rail

45% 17%

7% 14% 17%

Number of employees (as % of Group)

First Student First Transit Greyhound First Bus First Rail

48% 19%

6% 16% 11%

Strategic report

Strategic report

In this section, we review our performance in the year and our strategy and prospects going forward. We summarise our business model, the markets in which we operate, and how we performed against our key performance indicators. We also set out the key risks that may affect our business and strategy.

Strategic report

Chairman's statement

04

Chief Executive's report

06

Our markets

08

Our strategy and business model

10

Business review

12

Corporate responsibility

23

Key performance indicators

30

Principal risks and uncertainties

34

Financial review

40

FirstGroup Annual Report and Accounts 2018

03

Chairman's statement

Wolfhart Hauser Chairman

The Group has leading market positions in each of its five divisions and has considerable opportunities for value creation, but this year's results fell short of its potential.

A clear focus on the challenges and opportunities of each of the businesses will mobilise more of the Group's inherent strengths.

FirstGroup has a diverse portfolio of market leading transport businesses, with half of revenues underpinned by multi-year contracts with national or local authorities. The Group has the long-standing bidding and operational expertise that is critical to success in its markets and it is investing to create a customer experience where improved passenger convenience helps to drive future growth. We are now a more stable and a more resilient enterprise, with a growing ability to capitalise on the leading positions we have in our markets.

However, this year's results fell short of our ambitions ? we are disappointed that we did not make the further progress we intended, based on the trends we saw at the end of the previous financial year.

Results Overall, Group revenue increased by 13.2% and adjusted operating profit decreased by 6.5%. In constant currency excluding the benefit of the new SWR franchise and 53 weeks of trading in the Road divisions, revenue increased by 1.0% and adjusted operating profit decreased by 10.4%. Adjusted EPS was broadly stable, reflecting lower finance costs due to the improving balance sheet and the US tax reforms enacted in December 2017.

It is encouraging, however, that the Group was able to deliver a net cash inflow of ?110.5m (2017: ?147.2m, or ?123.8m excluding the proceeds from sale of a Greyhound terminal in the year), whilst maintaining investment levels in our services for passengers. This excludes the ?88.5m of start of SWR franchise cash flows; taken together the Group recorded ?199.0m of free cash flow, helping to reduce our net debt: EBITDA ratio to 1.5 times (2017: 1.9 times), or to 2.1 times (2017: 2.3 times) on a Rail ring-fenced cash adjusted basis.

Strategy The Board is examining all appropriate means to mobilise the considerable value inherent in the Group. Initial actions from its evaluation are underway, including:

a full external review of Greyhound's business model and future prospects, which will conclude in the coming months

growth opportunities in First Student

greater operational efficiency

partnering opportunities to provide new solutions

investment in modern customer convenience.

As we do so, we will continue to strengthen the Group by using the sustained cash generated after disciplined investment in our services to reduce leverage further and for targeted growth. Although our balance sheet is less of a constraint on our structural options than previously, our pension deficit clearly remains an important consideration for the risk profile of the Group, and we continue to actively manage it. Overall we see considerable opportunity to create shareholder value in a sustainable way while enhancing the services we provide to our customers and communities.

The Board recognises that dividends are an important component of total shareholder return for many investors. We remain committed to reinstating a sustainable dividend at the appropriate time, having regard to the Group's financial performance, balance sheet and outlook. The Board will not be recommending payment of a dividend in respect of the year to 31 March 2018 at the Group's Annual General Meeting but will continue to review the appropriate timing for restarting dividend payments.

04

FirstGroup Annual Report and Accounts 2018

Strategic report

The Board With effect from the date of this report, the Group announced that Tim O'Toole had stepped down from the Board and his role as Chief Executive. The process to select a new Chief Executive is underway. Until such time as a successor is appointed, the Board has asked me to perform the role of Executive Chairman. Matthew Gregory has been appointed Interim Chief Operating Officer and will also continue his responsibilities as Chief Financial Officer.

On behalf of the Board I would like to thank Tim for his distinguished leadership of the company since 2010. During that time the Group has reinvested in its businesses, restored free cash generation and substantially strengthened its balance sheet.

In February 2018 we welcomed David Robbie to the Board as an independent Non-Executive Director and Chair of the Audit Committee. The Board is already benefiting from his extensive experience.

Our people Our frontline employees are key to the success of the Group. Across the businesses this year our employees have had to contend with extreme challenges such as hurricanes, wildfires and severe winter weather which tested their resilience to the limit. In August we welcomed thousands of SWR employees to the Group while they were in the midst of doing an outstanding job helping passengers through the London Waterloo station upgrade programme, which caused major disruption across the network. I am very proud of the way colleagues throughout the Group have put customers first despite these significant challenges and I am inspired by their extraordinary dedication to serving our customers and communities.

On behalf of the Board I would like to extend my sincere gratitude to our 100,000 employees for their continued commitment and hard work this year.

Corporate governance Sound corporate governance is a vital facet of meeting our responsibilities to all our stakeholders, and in the year the Board has focused on further development of the Board's understanding and approach to risk appetite, delivery of the transformation plans, mobilisation of SWR, development of the Group's strategy and business objectives, and reviewing the Board performance in light of the Board evaluation exercise.

Overall, despite the issues this year, I am clear that the Group has significant potential to improve services for our customers while creating value for shareholders and other stakeholders, and that it is making progress toward that goal.

The Board's focus is firmly on taking the actions necessary to accelerate and cement that progress, so as to secure substantially increased shareholder value going forwards.

Wolfhart Hauser Chairman 31 May 2018

FirstGroup Annual Report and Accounts 2018

05

Chief Executive's report

Tim O'Toole Chief Executive

Although we are not satisfied with our progress this year, the Group delivered stable adjusted earnings per share and strong cash flow, despite operating challenges for some of our businesses. We have also strengthened our balance sheet through the bond refinancing and further deleveraging.

Performance in the year First Student's continued progress from the fourth year of our `up or out' contract pricing strategy and cost efficiency programmes was offset by continued driver cost inflation and shortages in parts of the US, a lower contract retention rate than targeted and the effects of the severe weather in the second half. We have had an encouraging start to this year's bid season as we continue to factor the driver cost inflation being experienced in many parts of the US into our contract pricing.

First Transit continued to grow and to win net new business, though our shuttle bus operation in the Canadian oil sands did not renew two contracts towards the end of the year, which will have an impact on the margin of the division going forward. The business delivered a 5.5% margin for the year, with a 7% margin in the second half as planned, despite ongoing cost pressure from driver shortages in certain regions, higher medical costs and some costs in relation to certain poorly performing contracts which were resolved during the year.

Greyhound's significant short haul and Express growth was more than offset by declines in long haul demand as a result of intensifying competition from the ultra low cost airlines, which are bringing significant additional aircraft capacity into operation while also connecting to a growing number of secondary airports. The growth in these businesses represents a meaningful shift in US travel patterns. Our ability to mitigate

these revenue challenges through further cost efficiencies is limited by ongoing increases in fleet maintenance and driver costs, resulting in a significant reduction in Greyhound's margin. We are currently investing to support Greyhound's growth opportunities while continuing to trim our timetables, and the Group is conducting a full external review of Greyhound's business model and prospects to help determine the most appropriate response to this long term structural challenge. We have also updated our view of the carrying value of the division's goodwill and other assets in light of these issues, impairing them by a total of $387.3m or ?277.3m accordingly.

We are encouraged that like-for-like passenger revenue growth in First Bus accelerated in each quarter of the financial year, though market conditions for the industry remain uncertain and vary by local market. We would have had an even better outturn for the year had several of our local businesses not been forced to shut down for several days in the face of the severe weather conditions in the final quarter of the year. We are pleased that stabilising volumes, the cumulative effect of our actions to tailor our network, fares, depot footprint and other costs and a fuel tailwind have resulted in a significant improvement in our margin. We shall maintain this momentum in order to meet our ambitions to catch up with the most efficient in the industry.

Year in review

April 2017 Investing in First Bus fleet First Bus commits ?71m to introduce 284 new low emission buses in Leeds by 2020.

May 2017 Greyhound route information integrated with Google Maps Our Greyhound customers can now plan their journeys more efficiently through a partnership with Google Maps.

June 2017 Shortlisting for West Coast Partnership FirstGroup is shortlisted alongside our partner Trenitalia to bid for the West Coast Partnership franchise which will include initial HS2 operations.

July 2017 Hull Trains tops passenger survey Scoring 97% for satisfaction, Hull Trains is named the best long distance operator in the National Rail Passenger Survey for the fourth year running.

August 2017 First Student acquires Falcon Transportation in Illinois This transaction extends our relationship with the Chicago public school system and offers synergies with our other First Student operations in the city.

September 2017 South Western Railway launched Having taken over SWR operations during the Waterloo upgrades in August, Transport Secretary Chris Grayling formally launched the new franchise at a Waterloo station event on 4 September.

06

FirstGroup Annual Report and Accounts 2018

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