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FirstGroup’s chief steps down as annual results disappoint

Public Transport

Andrew Forster
08 June 2018

FirstGroup chief executive Tim O’Toole has stepped down  following disappointing results for 2017/18. 

O’Toole, an American who has led the British company since 2010, was placed on ‘gardening leave’ last week. He will leave at the end of September.  

“The time is right for me to step aside,” said O’Toole. “Today’s results clear the way for the new approach sought by our chairman and the board.” 

Group revenue in 2017/18 rose 1.0 per cent in constant currency and excluding the benefit of the new South Western Railway (SWR) franchise, which FirstGroup took over last August. 

Adjusted figures, which include SWR, show revenue of £6,398m in 2017/18, up from £5,653m in 2016/17. But operating profit fell 10.4 per cent, from £339m to £317m, and the operating profit margin fell from 6.0 per cent to 5.0 per cent.

FirstGroup’s statutory results look far worse as they include £277.3m of Greyhound goodwill impairments (goodwill being the intangible value of the business and brand), and £106.3m written off for anticipated losses on the TransPennine Express franchise contract up to its end date in 2023. The statutory results record an operating loss of £196.2m in 2017/18 versus profit of £283.6m in 2016/17. The loss before tax was £326.9m, compared with a profit of £152.6m in 2016/17. 

Following O’Toole’s departure, Wolfhart Hauser, FirstGroup’s chairman since 2016, has been made executive chairman and Matthew Gregory has taken up the position of interim chief operating officer alongside his chief finance officer role. 

“Clearly, we’re disappointed with this year’s results,” said Hauser. “If you look at the last financial year, everything looked quite positive for further development, but it has not continued in that way as we had expected.

“The group delivered stable adjusted earnings per share and sustained cash generation this year, and the balance sheet has been strengthened through the bond refinancing and further deleveraging. It is now a more stable and a more resilient enterprise, with a growing ability to capitalise on the leading positions we have in our markets.”

FirstGroup recently rejected a takeover offer from US private equity firm Apollo Management (LTT 13 Apr)?but Hauser said the board would listen to other approaches. “If there is a bid that would create value for shareholders we’re totally open. We’re open to all options, but it must create value.”

FirstGroup’s share price was 88p this week, giving it a market capitalisation of £1.067bn. The shareprice was 144p last June. The company has not paid a dividend to shareholders since a rights issue in 2013. 

The group has five divisions: First Bus and First Rail in the UK and First Transit, First Student, and Greyhound in North America. The latter deliver about 55 per cent of revenue. 

The board is examining a range of options for the future. “We have now the opportunity to take a fresh look into everything, including the portfolio,” said Hauser. “I’m confident that in the not too distant future you will hear about the steps we are taking but it does not mean that we tear the whole portfolio apart. 

“We still have to see that we are a group with all the obligations in relation to the debt we have, in relation to the pensions we have, and everything that we decide also on the portfolio would have to make sense that at the end there is more value for shareholders than it is today.”

FirstGroup has commissioned an external review of the business model and prospects for its North American coach operations, Greyhound, which faces increased competition from low cost airlines. Greyhound revenue rose from £684m to £690m but adjusted operating profit fell from £42.6m to £25.5m.

Summarising the performance of each of the divisions, Gregory told analysts: “We’re clearly disappointed with this year’s operational performance, with weaker results in our US businesses outweighing the better results in the UK. 

“In the year, our largest division First Student was broadly stable and First Bus took an encouraging step forward in its margin improvement plans. This was offset by the cost challenges experienced by First Transit in the first half and by Greyhound’s inability to overcome the structural shift taking place in its long haul markets, as ultra-low cost airlines significantly increase capacity and extend into new markets.

“In First Rail, although our Great Western Railway and South Western Railway rail franchises have operational challenges to overcome, they are both profitable and are adding value to the group. However, our TPE [TransPennine Express]  franchise was loss-making, and we have taken the decision to provide for forecasted losses of up to £106.3m over the remaining life of the contract. This does not affect our plans for the remainder of the franchise to increase capacity on the TPE network by more than 80 per cent and create a true inter-city railway for the North.”

FirstGroup expects group earnings in constant currency to be broadly stable in the year ahead. It predicts an improvement in the road divisions’ margins but adds: “We expect First Transit’s continuing growth to be tempered by the loss of high margin Canadian oil sands business, and that sustaining Greyhound’s earnings will be challenging given the changes in the long haul competitive environment.”

Progress in the road divisions is expected to be offset by a smaller contribution from First’s rail portfolio, “reflecting the slower rate of industry growth and the rebasing of our margins under new contract terms”. 

UK Bus brings cheer, TPE makes loss 

FirstGroup’s chief finance officer Matthew Gregory described the performance of First Bus as a “bright spot” in the group’s 2017/18 results. UK bus revenue climbed from £861.7m (2016/17) to £879.4m and adjusted operating profit rose from £37m to £50.2m. The operating margin rose from 4.3 per cent to 5.7 per cent.

FirstGroup attributes the improvements to actions including reducing network size, changes to fares, reducing the number of depots, and cutting back office costs. The results would have been better but for heavy snow that prompted some operations to shut down for a number of days in the final quarter.

Like-for-like passenger revenue growth was 1.1 per cent. Like-for-like commercial passenger volumes increased by 0.2 per cent, though overall like-for-like volumes fell 0.7 per cent, reflecting further reductions in concessionary passholders due to the increasing age of bus pass entitlement and service reductions. Contract and tendered revenue increased 1.1 per cent.

Said Gregory: “Looking ahead, the commercial offering of the business has been radically improved, with the installation of contactless payment card readers on 80 per cent of our fleet. We’ll have completed the roll-out by July and we’ll become the first national bus company to do so.”

FirstGroup said the UK bus market’s prospects remained “uncertain” and varied by local market. Gregory reiterated that the company was reducing investment in its fleet, and focusing on markets where stakeholders recognised the importance of bus services. He cited Leeds and Bristol as examples. 

First’s UK rail revenues climbed 55 per cent from £1.268bn to £1.968bn, reflecting the commencement of the South Western Railway franchise last August. Adjusted operating profit rose from £53.8m to £57.8m but the operating margin fell from 4.2 per cent to 2.9 per cent.

First Rail’s like-for-like passenger revenue (i.e. excluding SWR) rose 4.1 per cent and passenger volumes grew 1.4 per cent. 

GWR and SWR both recorded a profit but this was partially offset by a loss of £6.5m at TransPennine Express (TPE).

TPE’s like-for-like passenger revenue growth, though substantial at 10.0 per cent, was lower than the bid projection. 

“Our assessment is that this growth will be short of our bid assumptions due to current market conditions, and we have therefore taken the decision to provide for forecast losses of up to £106.3m over the remaining life of the TPE contract [to 31 March 2023].”

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