Interim Results - Part 1

FirstGroup PLC 7 November 2000 PART 1 FIRSTGROUP PLC RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2000 Summary of results for the period * Further strong growth in sales and operating profit * US operating profits 10% ahead of acquisition plan * Outperformance in UK rail operations - passenger volumes up 7.5% * UK bus volumes up by 0.5% * Encouraging growth in urban bus initiatives * Bristol airport disposal progressing well * Turnover £987m up 30% * Group operating profit £94.2m* up 29% * Cash generation £138m** up 37% * Adjusted basic earnings per share 11.2p * Net interim dividend per share 3.0p * Before ESOP,goodwill, restructuring and other exceptional items ** Group operating profit before ESOP, goodwill and restructuring and other exceptional costs, plus depreciation Commenting, FirstGroup Chief Executive, Moir Lockhead said: 'This is another set of strong results for FirstGroup confirming our strategy of focusing on our three core business areas. Our US operations are performing ahead of the targets set at the time of the acquisition and we are now seeing increased opportunities to grow these businesses. In the UK, our rail division has delivered excellent results and we are actively involved in the re-franchising process. In the UK Bus Division the 0.5% underlying growth in passenger volumes confirms that, despite operating within a mature market, we are able to grow the business in the key urban areas in which we operate. The Group's strong cashflow ensures we are well placed to continue our strategy of enhancing shareholder value by growing our core businesses, reducing debt and buying back equity as the opportunities arise.' Enquiries: FirstGroup plc Moir Lockhead, Group Chief Executive Tel: 020 7291 0510 Iain Lanaghan, Group Finance Director Tel: 020 7291 0510 Michael Mitchell, Corporate Communications Director Tel: 020 7291 0504 Brunswick Craig Breheny Tel: 020 7404 5959 Chief Executive's statement Results for the period Overall Group trading in the six months to 30 September 2000 has continued to be strong, with turnover of £986.6m (1999: £756.5m) and operating profit of £ 94.2m (1999: £73.1m), up by 30% and 29% respectively. These results include a full half year's results from FirstGroup America which was acquired in September 1999, together with a strong performance from UK rail operations. Profit before tax, restructuring, goodwill amortisation and profit on disposal of New World First Holdings was £58.9m (1999: £55.0m) an increase of 7% compared to the same period last year. Adjusted basic earnings per share were 11.2p per share (1999: 11.2p per share). The flat earnings per share in the period reflects the higher number of shares in issue following the rights issue in August 1999 and the seasonality of earnings from the Group's US business. The board has declared an interim dividend of 3.0p per share (1999: 2.7p per share) an increase of 11% over 1999. This will be paid on 14 February 2001 to shareholders on the register on 19 January 2001. Highlights Safety remains our highest priority. As part of our on-going programme of safety improvements, DuPont Safety Resources have now completed an audit of our systems and are working with us to introduce appropriate measures to strengthen the culture of safety at all levels throughout the organisation. All directors and senior divisional managers have undergone a safety management refresher programme. This programme is being extended to include a further 200 managers across the Group. During the half year the Group has continued to develop and integrate its US school bus and transit businesses. The operating results are ahead of expectations at the time of the acquisition in September 1999 and contracts to operate a further 620 school buses for the 2000/01 year have been won. Operating margins have been enhanced and the transfer of systems from Ryder Group has now been successfully completed on time and within budget. In the UK the Rail Division has continued to perform very strongly with excellent passenger growth in all three operating companies. Passenger volumes increased by 7.5% overall. UK bus volumes have shown underlying growth of 0.5%. These results are encouraging and confirm that, despite operating within a mature market, we are able to grow the business through initiatives in the key urban areas in which we operate. The sale of Bristol airport is progressing well and we are optimistic that a conclusion will be reached by the end of the financial year. Bus Division Whilst for the six months to 30 September 2000 turnover increased to £392.7m (1999: £367.2m), operating profit fell to £47.4m (1999: £50.8m), primarily due to the cost of industrial action, which has now been settled, together with wage increases and inflationary pressures that were not fully passed on through the fare box. The Group has endeavoured to keep fare increases in line with the general level of inflation during the period and is fully hedged against fuel price increases until March 2001. Following the recent sharp rise in world oil prices we are reviewing all options carefully in order that we can maintain operating profit whilst minimising the impact on fares. However, if costs in the key areas of drivers' wages and fuel continue to rise in the future, such increases will be passed on through fares. Underlying passenger volumes have increased by approximately 0.5% in the period. The 'Overground', the Group's simplified route and fares structure, was introduced in Glasgow in 1999 where we have seen a 5% growth in passenger volumes. The Overground has been successfully extended to Bradford and Sheffield in the period and will be introduced in Aberdeen and Leeds in the second half of the year. The concept has also been refined for smaller route networks and has been introduced as 'Metro' in Leicester. Metro will be introduced in Southampton and York in the second half year. Initial results from these new networks are very positive, and further Overground and Metro networks will be introduced in our urban operating areas during 2001. Capital investment in the bus division was £46.7m in the period which includes £17m carried forward from last year. With the average fleet age now at eight years, in line with the targets given to the industry in the Transport White Paper, a lower level of investment will be required to maintain the fleet at this age. This reduced level of capital investment will only be made in areas where passenger growth can be delivered. The Government's 10-year Transport Plan is encouraging for the Group's bus division. Within this review £59 billion has been earmarked for local transport, much of it associated with measures to relieve traffic congestion and develop more effective urban bus networks. Details of specific schemes, including an increase in bus priority measures, will be announced in December when new, five year Local Transport Plans (LTPs) are finalised. We have worked very closely with local authorities to develop their LTPs and, with a predominantly urban network, the Group is uniquely placed to work at a local level to deliver increased bus usage in line with Government transport policy. In rural areas the Group continues to work with local authorities to identify and introduce a range of different solutions to develop bus services often using the Rural Bus Subsidy Grant. During the half year the Group has developed innovative proposals to introduce US style, yellow school bus networks to the UK. As the second largest operator of school buses in the US and the largest bus operator in the UK, we are ideally placed to deliver the concept. By encouraging children to travel to school by bus, the proposals will help to reduce the traffic congestion and associated accidents and environmental pollution caused by the 'school run'. The scheme is very much in line with Government transport aims and has been enthusiastically received by many Local Authorities. Proposals for a test area are under discussion and it is hoped to have prototype vehicles operating in early 2001. If the scheme is successful it would provide a substantial source of new business for our bus division. Rail Division For the six months to 30 September 2000, rail revenues increased strongly. Turnover increased to £365.3m (1999: £350.6m) and operating profit increased to £26.9m (1999: £17.8). These excellent results reflect further growth in passenger volumes, which increased by 7.5% overall, and tight control of costs in the businesses. Passenger income increased by 9.0% in First Great Western, 7.3% in First Great Eastern, and 7.0% in First North Western. Operating performance in our three train companies has been good. Both First Great Eastern and First Great Western were top of their respective classes in the shadow Strategic Rail Authority's (sSRA) second quarter performance tables. Additionally, First Great Eastern was voted Best Commuter Rail Operator of the Year in the recent Rail Industry Awards. Train services on First Great Western and First Great Eastern were severely disrupted by emergency engineering work carried out by Railtrack after the derailment at Hatfield in October 2000 and by the severe weather conditions at the end of the month. At this stage we believe that we will be able to recover short term revenue losses caused by the disruption, but we are still assessing the longer term impact of the disruption. However, previous experience suggests a fairly swift recovery in passenger volumes after any disruption. New class 175 trains are entering service on First North Western. Testing has now commenced on the prototype class 180 train for First Great Western and deliveries will commence in 2001. This new fleet, which is fully fitted with Automatic Train Protection, will comprise the first new 125mph diesel trains introduced in the UK for over 25 years. They will provide extra capacity on routes to the South West and Wales. In June 2000 the sSRA outlined its proposals for new and revised franchises for Britain's passenger railways. Under this reorganisation First North Western will become part of three new rail franchises. The Group is therefore in discussion with the sSRA about terms for the early surrender of this franchise which runs to 2004. The sSRA has not yet invited formal submissions for the renegotiation of the Group's two remaining franchises (First Great Eastern and First Great Western). Proposals for the retention and extension of these franchises for longer terms will be submitted in due course. As part of the Group's objective of maintaining a balanced portfolio of railway operations, we are forming joint ventures with NS (Dutch Railways) and Via GTI (part of SNCF French Railways) to bid for a number of other new rail franchises. We have been shortlisted with NS for the South West Trains franchise and with Via GTI for the new Trans Pennine franchise. We have also pre-qualified to bid for Thameslink 2000 with NS and we have expressed interest in the new Wales and the Borders franchise. We believe that our partners bring valuable additional expertise and resources in order to help us win and operate these new franchises. The Group will only bid for new or replacement franchises on terms that balance risk and opportunity and increase shareholder value. North America In the six months to 30 September 2000 the performance of FirstGroup America was strong. Both turnover at £201.8m and operating profit at £16.1m are ahead of our expectations at the time of the acquisition. This has been achieved concurrently with setting up all of the division's systems and staff functions from scratch and is an excellent achievement by the US management team. First Student sales in the current financial year are running 7% ahead of pre-acquisition levels. At the commencement of the new school year in September 2000, additional school bus contracts representing 6% of turnover had been won by First Student for the school year 2000/01. The largest of the new contracts is based in Charleston South Carolina, an area in which First Student was not previously represented. We are confident that we have the resources in place and can continue to grow this business in all geographic areas of the US. We now believe that we can achieve growth rates well above those assumed at the time of the acquisition. The division has improved its margins reflecting our focus on increasing return on capital employed. In total, First Student now has a fleet of approximately 11,500 school buses and has daily custody of some 3/4 million students across 500 schools in 27 states. In the first full year post acquisition, contracts accounting for 40% of First Transit's revenue came up for renewal. The Division has achieved considerable success in retaining these contracts and improving margins, without any overall loss of sales revenue. We now expect sales to grow at least in line with the sector. First Transit was re-awarded the contract to run bus services in Dallas, Texas. This is one of the largest and most prestigious transit contracts in the USA and First Transit have been appointed to run it for the next five years with an option to extend for a further two years. Another major success in the year was the renewal by the Los Angeles Metropolitan Transit Authority of a contract to supply and operate 95 buses in the region for 5 years with an option to extend for a further 3 years. The Dallas and Los Angeles contracts alone will generate revenues of $430 million over their full lives. First Transit is currently bidding for a number of other new contracts and we believe that there are excellent prospects for the further expansion of this business. First Vehicle Services, the smallest of our three divisions, is the leader in the market for outsourced public sector vehicle and equipment maintenance. We anticipate substantial growth in this market over the next few years and believe that the division will continue to grow strongly. Both First Transit and First Vehicle Services require little investment in fixed assets and therefore the return on capital employed is very attractive as we are rewarded for our management skill and operational expertise. Consequently, growth in these businesses is particularly value enhancing for shareholders. The reorganisation and strengthening of divisional management has continued with a number of changes being made in all three divisions. Overall, substantial reductions in the cost base have already been achieved through improved management focus and operational control. Although labour and fuel cost pressures continue to be a feature of trading in the US we are confident that we have opportunities to contain these cost pressures and that further profit growth will be achieved ahead of expectations at the time of acquisition. Airport and other operations Bristol International Airport continues to perform well with operating profit increased by 25% to £8.9m (1999: £7.1m) and passenger volumes up by 10.7%. There has been a substantial level of interest from potential purchasers of the Group's 51% share in the airport, and it is anticipated that the sale will be completed by the end of the financial year. The full service for Croydon Tramlink has now commenced and the build up in passenger volumes has been very encouraging, making it the busiest tramway in the UK carrying 45,000 passengers per week. This flagship project gives the Group a valuable shop window to demonstrate its ability to operate light rail systems. First Info, the Group's technology and e-commerce division has developed a number of new projects including Smartcard sales for First Bradford, on-line ticket sales for our rail companies and season ticket sales for our bus division. We have also successfully bid for an extension to our contract to operate a call centre for the National Rail Enquiry Service which deals with ten million calls per year, and we are operating the Passenger Transport Information Service South West zone call centre. We continue to develop a number of other projects. The future prospects for this new business are excellent as the move to technology led information systems gains momentum. Outlook The outlook for the Group remains very positive with excellent prospects for growth across our operations, despite some specific cost pressures in certain of our businesses and the recent disruption on the UK rail network. The Group's strong cashflow ensures we are well placed to continue our strategy of enhancing shareholder value by growing our core businesses, reducing debt and buying back equity as the opportunities arise. Moir Lockhead Chief Executive 6 November 2000 Financial review Overall Turnover in the half year increased by £230.1m (30%). Of this, £183.8m is attributable to North America, where last year's results only included two weeks' post-acquisition trading. Operating profit before ESOP, goodwill and exceptional costs was £94.2m, an increase of £21.1m over last year. North America was up by £13.4m and Rail by £9.1m. Divisional results 6 months to 30 September 2000 Turnover Operating profit* Operating £m margin* £m % UK Bus 392.7 47.4 12.1 North America 201.8 16.1 8.0 Rail 365.3 26.9 7.4 Bristol International 23.5 8.9 38.0 Airport Other** 3.3 (5.1) Total 986.6 94.2 9.5 6 months to 30 September 1999 Turnover Operating Operating profit* margin* £m £m % UK Bus 367.2 50.8 13.8 North America 18.0 2.7 15.0 Rail 350.6 17.8 5.1 Bristol International 18.1 7.1 39.2 Airport Other** 2.6 (5.3) Total 756.5 73.1 9.7 Year to 31 March 2000 Turnover Operating profit* Operating £m margin* £m % UK Bus 744.3 111.4 15.0 North America 246.4 34.5 14.0 Rail 767.4 46.2 6.0 Bristol International 31.3 9.9 31.6 Airport Other** 5.7 (11.1) Total 1,795.1 190.9 10.6 * Before ESOP, goodwill and restructuring and other exceptional costs ** Tram operations, central management, Group information technology and other items Turnover in the UK Bus division increased by 6.9% overall, or 3.0% after adjusting for an extra week's trading this year. Passenger volumes rose 0.5% on a comparable basis, after allowing for the extra week and the effects of industrial action in Manchester. Fuel purchases are fully hedged for the current year, so there is no impact on the result from current high spot oil prices. Cost pressures, particularly on drivers' wages, combined with the one-off impact of the industrial action and implementation costs of the Overground networks led to reduced margins. It is anticipated that additional fare increases in the second half will help to close the gap on last year. We are currently exploring various possibilities for dealing with fuel costs in the next financial year. These include further fares increases and reducing vehicle mileage. Meanwhile the industry is lobbying for a reduction in fuel duty. The North American businesses performed ahead of expectations. New contracts for 620 school buses have led to 6% growth in First Student. Margins have improved through winning additional profitable contracts and improved efficiency. The school bus business is very seasonal, with much higher margins in the second half of the year than in the first half, because of the school holidays in the summer. The Rail Division also performed ahead of expectations, returning an operating profit of £26.9m, against £17.8m last year and despite a £10.2m reduction in subsidies. Net passenger volume growth was 7.7% at First Great Eastern, 7.6% at First Great Western and 5.9% at First North Western. During the second half, we shall start to see an increase in costs as more new rolling stock comes into service at First North Western. Bristol International Airport continues to produce strong results, with operating profits up 25% to £8.9m and passenger volumes up 10.7%. Joint ventures and associates Tramtrack Croydon Limited commenced operations of tram services in May 2000. Included in the results is a £0.1m share of losses at Prepayment Cards Limited. In May, we sold our 26% interest in New World First Holdings to the other shareholder, New World Development Company, for HK$457m (£38.7m). This gave rise to a pre-tax profit on disposal of £13.9m. Restructuring and other exceptional costs Exceptional costs of £3.0m were incurred in the half year. These include £2.0m costs in respect of bringing new trains into service at First North Western, being mainly duplicated costs for the replacement rolling stock and setting up the new Chester depot. The remaining £1.0m was incurred in respect of restructuring in North America. Interest The net interest charge for the half year was £32.8m against £15.2m in the same period last year, the rise principally reflecting the increase in net debt arising from the US acquisitions last year. The interest charge is covered 4.2 times by cash generation. Taxation The taxation charge for the half year has been based on the estimated likely effective rate for the full year by division. The low effective rate of 18.2% on profits before the Hong Kong disposal reflects the high level of investment that has taken place in recent years, particularly in new buses. In the US, tax relief is also obtained for goodwill amortisation. The total charge includes £4.8m in respect of the New World First Holdings disposal gain. Earnings per share The adjusted basic earnings per share figure is 11.2p. This is unchanged on last year, because of the seasonality of the North American profits and the increased number of shares in issue. Cash flow and investment in the business Cash generation (operating profit, before ESOP, goodwill and one off costs, plus depreciation) rose from £100.8m to £138.0m. Capital expenditure for the period amounted to £96.5m. This included £80.5m for new vehicles (£43.2m in the UK and £37.3m in the US) with a further £25m committed for new vehicles in the second half. The UK Bus figures include £17m for vehicles outstanding from the previous year. Net debt Net debt increased in the half year by £43.7m to £823.5m. Capital expenditure was much higher in the first half than is expected in the second half. This is because of the £17m carried forward from last year in the UK, and because US school bus purchases tend to be in the first half in preparation for the new school year. There were also working capital outflows which are expected to reverse in the second half, plus a £15m increase in the sterling value of dollar borrowings, the exchange rate having moved from £1:$1.60 to £1:$1.46. £38.7m was received from the sale of our share of New World First Holdings, of which £31.1m was used to repurchase shares. Of the £15.3m deposits for First North Western rolling stock that were outstanding at March 2000, £2.9m was received in the first half as the first trains were accepted into service, and the balance of £12.4m is expected in the second half. It is expected that an operating lease agreement will also be entered into during the second half in respect of the First Great Western rolling stock, with similar financing arrangements. The first repayments of the £16.1m deposits on the First Great Western vehicles should be received during the second half as the new trains start to be delivered and accepted into service. In line with the policy of reducing exposure to interest rate risk, over 70% of the Group's net debt is on fixed terms. Borrowings included bank loans of US$262m to hedge the net assets of the US businesses. Analysis of net debt Fixed Variable Total £m £m £m Cash - 30.1 30.1 Rail ring-fenced cash - 31.3 31.3 Rail season ticket bonded cash - 35.1 35.1 Sterling bank loans and overdrafts - (504.9) (504.9) US dollar bank loans - (179.1) (179.1) HP and finance leases (153.8) (45.7) (199.5) Loan notes (9.6) (26.9) (36.5) Interest rate swaps (445.9) 445.9 - Total (609.3) (214.2) (823.5) Balance sheet and net assets Net assets increased in the half year by £44m to £380m, mainly reflecting the £30m retained profits and a £43m foreign exchange movement, less the £31m share repurchase. The US dollar borrowings broadly match the US dollar denominated net assets excluding goodwill, and so the foreign exchange movement principally arises from the impact on the US goodwill of the 9% strengthening of the US dollar against sterling since March. Shares in issue During the first half, 12.7m shares (2.9% of the original share capital) were repurchased and cancelled at a total cost of £31.1m. This leaves 420.8m in issue. For the purpose of the earnings per share calculation (excluding own shares held), the average number of shares in issue during the first half was 424.1m. Since the half year end, 2.5m SAYE options have matured and been exercised. If there are no other movements in the second half, the average number of shares in issue will be 422.2m for the full year. Dividend The interim dividend is 3.0p per ordinary share against 2.7p last year, an increase of 11%, and it is covered 3.3 times. Foreign Exchange The profits from North America have been translated at an average rate of £1: $1.50, while the period end exchange rate was £1:$1.46, which compares with £ 1:$1.64 at 30 September 1999 and £1:$1.60 at 31 March 2000. Accounting Standards There have been no new accounting standards to implement in the current financial year. Iain Lanaghan Group Finance Director 6 November 2000 MORE TO FOLLOW

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