Final Results - Year Ended 31 March 2000, Part 1
FirstGroup PLC
16 May 2000
FIRSTGROUP PLC
PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2000 - Part 1
Turnover £1,795.1m up 22%
Profit before tax £142.1m* up 28%
Adjusted basic earnings per share 28.3p** up 25%
Net dividend per share 8.5p** up 16%
Free cash flow £260.3m*** up 36%
Debt reduction ahead of plan
Record turnover, profit and cash flow
Total UK bus volumes maintained
UK Rail passenger volume + 5.0%
Strong performance from FirstGroup America
Sale of 26% stake in New World First Holdings for £38.7m (post year end)
Strong interest in purchase of Bristol International Airport
Commenting, FirstGroup Chief Executive, Moir Lockhead said:
'We have a clear strategy to focus investment on our core UK and US
operations where we see the best opportunities for growth. We will also
utilise our strong cash flow and the proceeds from the divestment of non-core
activities to reduce debt, re-purchase equity and grow dividends.
This has been a very important year for us in establishing FirstGroup as a
major international passenger transport company. I am pleased to report that
our business in America is performing ahead of our expectations at the time
of the acquisition. The outlook for the Group remains very positive and our
management team is focused on delivering continued increases in value for
shareholders. I look forward to the future with confidence.'
* Before goodwill, restructuring and other exceptional
items
** 1999 figures restated to reflect bonus element of the rights issue
*** Group operating profit before ESOP, goodwill and restructuring and other
exceptional costs, plus depreciation
Enquiries:
FirstGroup plc
Moir Lockhead, Group Chief Executive
Tel: 020 7291 0502
Tony Osbaldiston, Deputy Chief Executive and Group Finance Director
Tel: 020 7291 0510
Michael Mitchell, Corporate Communications Director
Tel: 020 7291 0504
Results
I am pleased to report another year of substantial progress and record
profits for FirstGroup. Operating profit, before ESOP, goodwill,
restructuring and other exceptional costs, rose to £190.9m, an increase of
32% (1999: £144.8m) with all divisions showing increases. Group profit before
tax increased by 28% to £142.1m (1999:£111.1m) before goodwill amortisation,
restructuring and other exceptional costs and property profits. Underlying
earnings per share rose to 28.3p (1999: 22.7p as adjusted for the bonus
element of the rights issue) an increase of 25%. The Board has recommended a
final dividend of 5.8p giving a total for the year of 8.5p per share
(1999:7.3p as restated), an increase of 16%. The dividend is covered 2.6
times and will be paid on 25 August 2000 to shareholders on the register on
28 July 2000.
Strategy
Our strategy is to continue to create increased value for shareholders
through the focused development of FirstGroup as an international public
transport leader. The Group aims to maximise returns by investing only in
markets which offer shareholders excellent prospects for growth.
As part of our ongoing policy we have engaged DuPont Safety Resources to
carry out a full review of standards at all levels within the business. We
believe that this will help us to continue to keep safety at the top of the
agenda in the workplace and at the forefront of our minds. We will also build
on the valuable experience gained from our operations in America where safety
is an integral part of the day to day business culture.
During the year the Group made an important strategic step to strengthen and
diversify its business through the acquisition of Ryder Public Transportation
Services in the United States. This purchase makes the Group the second
largest operator of school buses and a leading private sector operator of
transit management and vehicle maintenance services in the US. I am pleased
to report that the integration of this business has gone extremely well and
we are now even more optimistic about its growth potential.
The Group now has three core operations which comprise UK buses, UK passenger
rail franchises and US school buses and transit management.
In the UK we are the largest private sector bus operator and, through our
excellent portfolio of urban based businesses, we believe that we have the
best opportunity to work with Government and Local Authorities to develop
buses as an integral part of a sustainable transport policy. We will focus
resources on those areas where we are able to work in partnership with local
authorities to create growth in passenger volumes and maximise the
utilisation of our existing asset base.
Our three UK passenger rail franchises have given us representation in
intercity, commuter and rural services. We believe that we are well placed to
work with the shadow Strategic Rail Authority (sSRA) as it redefines
passenger rail requirements for the future. The regulatory environment should
however, recognise the commercial risks and returns for public companies. We
believe that the private sector has a great deal to offer in running a safer
and more efficient railway system.
The acquisition of FirstGroup America (formerly Ryder Public Transportation
Services) has established the Group as a leading player in the US
transportation market. This acquisition fits precisely with our stated
strategy and was the result of careful planning and extensive research into
the North American transportation market. We believe that the school bus and
transit management markets offer a unique opportunity for us to use our
management skills to develop and grow these businesses.
We believe that the Group's core businesses offer good potential for further
organic growth particularly in the US. We will also continue to seek
strategic acquisitions for our core businesses that are earnings enhancing
for shareholders. The Group will use its strong cash flows on the development
of those parts of its businesses and investments which offer the best
returns, including where appropriate, re-purchasing Group equity. We will
continue to ensure that the Group's funding and balance sheet structures
optimise earnings growth for shareholders.
UK Bus
Turnover increased by 8% to £744.3m (1999: £686.1m) and operating profits by
9% to £111.4m (1999: £102.1m). We estimate that underlying passenger volumes
were again maintained with encouraging growth in those areas where Quality
Partnership initiatives with local authorities have enabled us to improve the
services we offer. Operating margins have been maintained despite above
average levels of cost inflation particularly in drivers' wages. During 1999
we continued our high level of investment in new vehicles with expenditure of
£68m on 634 new buses. The average age of our fleet is now at 8 years, in
line with the target given to the industry by the Government at the bus
summit last year. We expect capital expenditure to fall substantially in
future years as we maintain the age profile of our fleet.
The emphasis of our strategy is to continue our efforts to grow bus passenger
volumes through improvements to our services, better marketing, simplified
route and fares structures and increased comfort and reliability for
passengers. In Glasgow the new simplified network structure launched in
August last year as 'The Overground' has resulted in an increase of 4% in
passenger volumes. We are now rolling out this concept to a number of other
cities in the UK. Over the next year we will be re-organising the structure
of our UK bus division to meet the long term challenge of continuing to grow
this business. We intend to reduce overheads by centralising support
functions not directly linked to service delivery. In addition we will set up
local business units with a much clearer focus on the management of
individual route teams, concentrating on local markets and customer
requirements.
We believe that continued co-operation with local authorities through Quality
Partnerships is the right way to move forward. We have now implemented some
50 Quality Partnership schemes on individual corridors. The Group is also
assisting with infrastructure developments through its TwinTrack proposals
which will enable Local Authorities in Leeds, Bradford, Aberdeen and Glasgow
to bring forward major new bus priority schemes linked directly to passenger
growth.
We are encouraged that the Transport Bill, which will soon be passed into
law, endorses our approach, and we look forward to working closely with local
authorities to achieve significant improvements in our urban transport
networks. FirstGroup is at the forefront of innovative developments in the
bus industry. We were the first company to develop and operate guided busways
with local authorities; we have the largest fleet of low-floor articulated
buses in the country; we operate more Quality Partnerships than any other bus
company; we are the first private operator in the UK to introduce a system
wide smart card ticketing system which we launched in Bradford in April; and
in Glasgow we operate the largest private sector integrated city wide bus
network in the UK.
We believe that buses have an essential role to play in the fight against
urban congestion and pollution. Buses offer the most immediate and cost
effective solution to traffic problems in our cities. We have the resources
and the management expertise to deliver real benefits to the communities in
which we serve.
UK Rail
Turnover in the Group's three train operating companies was £767.4m (1999:
£753.3m) an increase of 2%. Operating profit was £46.2m (1999: £41.6m) an
increase of 11% despite a reduction in the revenue support grant of £21.2m.
This excellent performance reflects the continued strong growth in passenger
numbers and further cost reductions throughout the business. Passenger
revenues increased by 6.5%, 8.9% and 5.6% in First Great Eastern, First Great
Western and First North Western respectively. The financial results from
First North Western remain disappointing, however we have already presented
innovative proposals to the sSRA which we hope will result in re-negotiation
of the franchise on commercial terms before its expiry in 2004.
During the year all of our train operating companies showed improved
operational performance with First North Western moving up from grade D to
grade B in the sSRA's performance grading system. Over the next 12 months
passengers on both First North Western and First Great Western will benefit
from new rolling stock which is being progressively introduced in their
areas. Seventy new carriages are now entering service with First North
Western, replacing rolling stock which is up to 40 years old. The new trains
incorporate air conditioning, better ride quality and improved access for
disabled passengers. They will operate on services from North Wales to
Manchester and Birmingham and on our increasingly well used services from
Manchester Airport. On First Great Eastern we will be placing orders later
this year for new rolling stock to replace the last of our slam door trains.
New 125 mph train sets will enter service on First Great Western later in the
year. These will supplement the existing fleet and will provide an intensive
half-hourly service from London to Cardiff in 2001. Additionally, Bristol
will have trains every 15 minutes either to Temple Meads or Parkway. All of
First Great Western's trains use the Automatic Train Protection system on the
mainline between Paddington and Bristol. First Great Western is the only UK
intercity train operator to incorporate this safety system and is the first
UK intercity train operator to have introduced safety information cards for
passengers on all its trains. Lord Cullen's inquiry into the Ladbroke Grove
accident has now commenced and we will be participating with the railway
industry to ensure that any further safety lessons are learnt and implemented.
The Group's rail franchises expire in 2004 (First Great Eastern and First
North Western) and 2006 (First Great Western). The sSRA has invited
interested parties to put forward proposals for renewal of those franchises
expiring in 2004. FirstGroup has already entered into discussions with the
sSRA in respect of its current franchises and has indicated that it would be
interested in re-bidding for these or for franchises in adjacent operating
areas.
FirstGroup is well placed to secure its existing franchises. It has an
excellent performance record at First Great Eastern and has turned
performance around at both First Great Western and First North Western in the
two years since the Group took over the franchises. The Group will deliver
further bus rail integration and other innovative passenger service
enhancements. However, FirstGroup will only renew its franchise agreements on
commercial terms that create value for shareholders as well as providing
better services for passengers.
North America
In September 1999 the Group completed the acquisitions of FirstGroup America
(formerly Ryder Public Transportation Services) and Bruce Transportation
Services (Bruce). These businesses, which operate within a total market
estimated to be worth $25 billion, comprise three separate operations; First
Student - (incorporating Bruce) - school bus operations; First Transit -
urban bus contracting and management; First Vehicle Services - fleet
maintenance services. In the period from 13 September 1999 to 31 March 2000
turnover was £246.4m and operating profit was £34.5m, in line with estimates
given at the time of the acquisition.
First Student is the second largest operator of school buses in the United
States with 11,000 vehicles, carrying over 650,000 students every day in 26
states. The school bus market which is estimated to be worth approximately
$11-14 billion per annum is highly fragmented and only 30% of the 450,000
school buses operated each day are run by private companies. During the last
10 years there has been a steady increase in outsourcing to the private
sector and First Student is well placed to benefit from this continuing
trend. First Student has an enviable record of contract retention with over
95% renewed. Safety is the overriding culture of the business together with
high service quality and excellent relations with the school districts that
we serve. Net new school bus contracts involving 347 buses have already been
won in the last few months to commence in the second half of 2000/01.
The urban transit contracting and management market is estimated to be worth
around $7-8 billion per annum with only 20% currently outsourced to private
companies. First Transit has built up an excellent record in the management
of urban bus fleets in cities such as Dallas and Los Angeles. Since
acquisition we have been re-awarded major contracts in Birmingham, Alabama,
Dallas and Houston, Texas. Very substantial savings have been made when
transit operations are outsourced to the private sector. We believe that
there are significant opportunities for us to expand this business as these
benefits become more widely known.
The fleet maintenance market is worth approximately $4 billion per annum.
First Vehicle Services is the largest private sector operator in this field
where less than 10% of the market is outsourced. Typically maintaining fleets
such as police cars, ambulances and para-transit vehicles, the division has
built up a strong reputation with its public sector clients. Opportunities
for further expansion are excellent.
In the period since acquisition, the existing US management team has been
strengthened and reorganised. Tony Osbaldiston, FirstGroup's Deputy Chief
Executive and Finance Director, took over direct responsibility for the
Group's US operations. Steve Hebborn, formerly Group Corporate Finance
Director, has been appointed Chief Financial Officer of FirstGroup America.
Operational reporting lines have been simplified with three separate profit
centres established. Marketing functions have been strengthened and head
office staffing levels reduced.
Significant reductions in the cost base have already been achieved and it is
anticipated that operating margins will be further improved during the year
to March 2001. The business is well positioned to withstand cost pressures
within the industry. The strength of the US economy has continued to make the
recruitment and retention of drivers difficult. Whilst this problem has been
a feature of the industry for several years, we are addressing it through
improved labour scheduling and cost control. The recent fuel price increase
will not have a full impact on the business. A very large proportion of our
customers purchase their own fuel directly, or are billed separately by us
for it. These arrangements greatly reduce FirstGroup America's exposure to
increased oil prices. The project to transfer FirstGroup America from Ryder
Group's in-house systems is progressing very well and will be completed on
schedule and within our cost expectations.
After six months of ownership we are increasingly confident that FirstGroup
America is proving to be a very successful and valuable acquisition within a
growth market.
Joint Ventures
Bristol International Airport (BIA) achieved another year of excellent
performance. Operating profit rose to £9.9m (1999: £9.7m) an increase of 2%.
Passenger numbers increased by 8% to over 2m.
In March the new state of the art passenger terminal was formally opened. The
new facility is capable of handling up to four million passengers per annum
and will enable the airport to double its throughput. New Category 3 'all
weather' landing systems will be fully operational by spring 2001 enabling
aircraft to use the airport in poor weather conditions. New routes are being
opened up for both charter and scheduled services and the prospects for the
airport remain strong. Since the year end the Group has received a number of
expressions of interest to purchase its holding in BIA. The Group will only
dispose of BIA if it is earnings enhancing and will enable the Group to
better focus resources on its core businesses.
Tramlink the new light rail system for Croydon opened in May this year. The
28 kilometre system which links Croydon town centre with Wimbledon, Beckenham
and New Addington will carry some 25 million people per year and replace up
to 2 million car journeys. FirstGroup is a 20% shareholder in Tramtrack
Croydon Ltd the concession company that is responsible for building and
operating Tramlink. Through First CentreWest, FirstGroup will operate and
manage the system on behalf of the consortium.
On 16 May the Group announced that it is disposing of its 26% shareholding in
New World First Bus to the majority shareholder for £38.7m, giving a profit
before tax of approximately £14m on our investment over the eighteen months
since trading began.
Technology
We believe that over the next decade new technology will revolutionise the
transport industry and offer real opportunities for the Group and its
passengers. We have therefore formed a new subsidiary called 'FirstInfo'
which will develop and co-ordinate our activities and exploit new
opportunities to grow our business over the next ten years.
The Group, through FirstInfo, is working in partnership with the industry and
Government to develop a National Passenger Telephone Enquiry System, as well
as internet-based information systems for our bus and rail companies. We are
also working with British Telecom on a pilot mobile phone based, real time
passenger transport information system. In addition, FirstInfo is developing
plans to roll out 'Train Direct', First Great Western's recently launched
online rail enquiry and ticketing system.
In January this year we purchased a shareholding in Prepayment Cards Ltd
which is pioneering the development of cashless payment systems for use on
public transport. In April this year we were delighted to launch the UK's
first citywide smartcard operation in Bradford and we will shortly be rolling
this technology out throughout our operating companies.
These exciting developments will transform attitudes to public transport,
making it more convenient and accessible than ever before and open up our
services to new markets.
Management
In recognition of the importance of our US operations, Tony Osbaldiston,
Group Finance Director, was appointed to the new position of Deputy Chief
Executive with responsibility for FirstGroup America. In November, Dr Mike
Mitchell was appointed to the Board and now heads up the Group's rail
division. We also welcome David Dunn, Chairman of Scapa Group plc and Jim
Forbes, Chief Executive of Scottish and Southern Energy plc to the Board as
non-executive directors. George Law also joined the board as non-executive
employee director, replacing Jean Weatherhead who retired in December at the
end of her three-year-term. We continue to strengthen our middle management
team and we are pleased that trainees from our Graduate Recruitment Programme
are now filling a number of senior positions in the Group.
Outlook
The outlook for the Group remains very positive. We have the best portfolio
of urban bus operations in the UK, a balanced involvement in UK rail
operations and a strong base to grow our business in the US. Our vehicle
fleets in the UK and USA are at or below half-life and future capital
expenditure will be greatly reduced. Combined with the Group's low effective
tax charge this means that we anticipate an enhanced free cash flow and
further substantial reductions in the level of Group debt. Our management
team is focused on delivering continued increases in value for shareholders.
I look forward to the future with confidence.
Moir Lockhead
Group Chief Executive
16 May 2000
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