FirstGroup plc Growth in revenue, adjusted operating profit and adjusted EPS

FirstGroup plc (LON:FGP), a leading provider of transport services in the UK and North America, today reported growth in revenue, adjusted operating profit and adjusted EPS, and announces portfolio rationalisation plans

Results overview

Underlying1 Group revenue +5.7%, underlying1 adjusted2 operating profit +10.5%; adjusted2 EPS +15.2%3
Adjusted2 operating profit ahead of our expectations at £332.9m, led by growth and margin expansion in First Student and First Bus
Net cash inflow4 of £197.3m, above expectations due to the phasing of certain First Rail cash inflows
Due to a number of uncertainties, FirstGroup’s share of future losses on SWR franchise of £102.1m recognised while negotiations continue with the Department for Transport; statutory operating profit of £9.8m also adversely impacted by a North America self-insurance charge of £94.8m
Plans announced to rationalise the portfolio with the Group’s future emphasis on First Student and First Transit, our core North American contracting businesses

Commenting, Chief Executive Matthew Gregory said:

“Our trading performance was ahead of our expectations for the year, with First Student returning to growth with increased margins, First Bus delivering growth and higher margins, and First Rail adjusted profit ahead of expectations in the year; Greyhound faces challenging market conditions but we are seeing early results from the plan we put in place last year.

“Although our UK rail franchise portfolio has generated £330.9m5 in adjusted profit with net cash and dividends to the Group over the last five years, we have concerns with the current balance of risk and reward being offered. We await the outcome of the Williams review 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.

“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 have detailed in a separate announcement 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 platform 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 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.”

Financial summary (percentage changes in constant currency unless otherwise stated)

• Underlying1 Group revenue +5.7%; including the South Western Railway (SWR) franchise that started in August 2017 and the 53rd week in the prior year, reported Group revenue growth was +11.0%
• Underlying1 adjusted2 operating profit growth +10.5%, reflecting growth and adjusted2 margin improvement in First Student and First Bus, and a higher First Rail contribution, partially offset by lower Greyhound and First Transit performances
• Road divisions’ growth excluding 53rd week +2.0% in revenue and +3.6% in adjusted2 operating profit
• Adjusted2 profit before tax +13.1% and adjusted2 EPS +15.2%, reflecting refinancing and minority interests
• Increased net cash inflow of £197.3m (2018: £110.5m before SWR First Rail start of franchise cash flows); overperformance reflects approximately £90m of First Rail working capital inflows, and capital grant and external funding receipts which will unwind as the related capital projects are undertaken
• Reported net debt: EBITDA reduced to 1.3 times (2018: 1.5 times); Rail ring-fenced cash adjusted net debt: EBITDA 2.1 times (2018: 2.1 times)
• Charge of £94.8m recognised in the year to increase the level of North American self-insurance reserves, following a number of adverse judgments and deterioration in the claims environment and subsequent impact on actuarial risk calculations. An external review of the claims portfolio has been carried out as well as an additional independent actuarial review, resulting in a decision to increase the estimated value of the provision. The majority of these claims are expected to be settled over the next five years
• Statutory loss before tax of £(97.9)m (2018: loss before tax of £(326.9)m), reflects the self-insurance reserve charge noted above, the SWR onerous contract provision of £145.9m in total of which FirstGroup’s 70% share is therefore £102.1m, £21.5m in respect of equalisation of guaranteed minimum pensions in the UK defined benefit schemes, £24.1m for restructuring and reorganisation costs principally from withdrawal of Greyhound services in Western Canada and £16.2m for loss on disposal and asset impairments of First Bus assets in Manchester, partially offset by a £9.3m gain on disposal of a major Greyhound depot
• Statutory EPS was (5.5)p (2018: (24.6)p)

Divisional performance

First Student delivered revenue and fleet growth from strong contract retention and new business; ongoing pricing discipline and cost efficiencies outweighed driver inflation with adjusted1 margin expanding 50bps to 9.5%
First Transit delivered increased contract retention and won new business in both core and adjacent areas; adjusted1 margin reduced by 70bps reflecting higher costs in the year partially offset by efficiencies
Greyhound contribution lower year-on-year, with like-for-like8 revenue +0.2%; action plan and withdrawal from Western Canada beginning to drive some progress during the second half
First Bus delivered +1.6% like-for-like8 passenger revenue and 180bps of adjusted1 margin expansion to 7.5%, maintaining focus on making journeys simpler for customers and investing in our key markets
First Rail like-for-like8 passenger revenue +5.8%, with increased financial contribution driven mainly by GWR. Operational performance issues in the first half began to improve in the second

Group outlook

In 2019/20, we expect to deliver revenue growth and financial progress in the Road divisions, offset by Rail’s particularly strong adjusted profit contribution in 2018/19 moderating to more normal levels in the year ahead. Overall, we expect adjusted earnings to be broadly in line with our expectations