10th Jul 2014 08:27
LONDON (Alliance News) - Bus and rail operator FirstGroup PLC Thursday said trading in its fiscal first quarter has been in line with its expectations, and the steps it is taking to turn around businesses like its UK bus, US Greyhound coach and First Student operations are delivering improvements.
The UK-based transport operator had pledged earlier this year to turnaround its underperforming businesses, after rebuffing demands by activist shareholder Sandell Asset Management to break itself up by spinning off its US operations. Sandell said a company breakup would improve shareholder returns, a claim disputed by FirstGroup, even though it currently isn't paying a dividend as it puts money into the turnaround plan.
Last month, Sandell said it would vote against the company's annual remuneration report at next week's annual general meeting, claiming that that the chief executive's package has risen 209% over the past five years, making Tim O'Toole the highest paid CEO amongst his peers, even though the shares have underperformed the peer group.
There isn't any indication that Sandell has gathered widespread support from other shareholders at this point.
In a statement, FirstGroup said it has now accelerated its programme to address issues with its contract portfolio pricing at its US First Student educational transport business, making sure it achieves an "appropriate" level of return on contracts it wins or retains.
"Our results to date in this year's bidding season, which we are currently two thirds of the way
through, are at the upper end of our planning range. We have achieved average price increases of 4%, with many instances of significantly greater rises. We expect the proportion of low margin contracts in our portfolio to be below 30% in 2014/15, from 36% in 2013/14, and as additional multi-year contracts come up for renewal we will continue to reduce this further," it said.
It said contract retention rates are 88% even though it is raising process.
"During this bid season we also secured additional business through newly outsourced contracts as well as contracts won from competitors. The underlying market has been largely supportive with school districts bolstered by economic recovery and we have continued to see modest organic growth within existing contracts," it said.
FirstGroup said it is also achieving further costs savings at the First Student business and is targeting further savings of USD50 million annually over the medium-term having delivered USD11 million since the start of the current financial year.
It is still expecting First Student's full-year revenue to come in towards the upper end of its own planning assumptions, and for the unit's operating margin to be above 7.5%, even though operating profit in the first half of the year will be down on the year earlier because of a lower number of trading days due to the timing of Easter.
The company's financial year runs from April 1 to March 31.
It said like-for-like revenue grew 3.4% on the year at Greyhound in the first quarter, driven by demand for long-distance services and like-for-like revenue growth of 6.9% at Greyhound Express.
"Our programme to enhance Greyhound's commercial proposition is on schedule, and includes the necessary IT development, recruitment and training work to bring airline-style yield management to the traditional network. During the period we continued to expand our sales channels, driving increased online transactions through dedicated mobile apps and the recent launch of a mobile version of our website. We expect to see Greyhound's performance continue to improve
throughout the year as we work towards our medium term target of a 12% margin," it said in its statement.
Its UK bus operations delivered like-for-like passenger revenue growth of 2.7% in the quarter, as the company continued improving its commercial offering, driving up volume growth and regaining pricing competitiveness.
"As we rebase our local fares and networks we are stimulating passenger growth with like-for-like volumes increasing by 2.7% in the first quarter. To date, we have completed 12 major redesigns together with numerous other upgrades and initiatives. The programme of significant network changes is now nearing completion, though our management structure is now locally focused
to ensure that commercial opportunities continue to be developed," it said.
"While there is still some way to go, we are delivering our plan as forecasted to restore double digit margins to UK Bus by 2017. We expect improvements in underlying revenue and margin in both the first and second half of 2014/15 compared with the prior year, with progress particularly weighted to the second half of the year as we reach the anniversaries of a number of fares changes," it added.
Its better-performing businesses continue to do well. Its US First Transit business delivered a "solid" performance, winning new business in paratransit, fixed route and vehicle maintenance. It said it expects to deliver "good" margins with relatively modest capital investment.
Its largest unit by revenue, UK rail, posted 6.6% growth in like-for-like passenger revenue during the quarter.
The division suffered a big blow in late May when it lost out on a new giant new rail franchise covering a swathe of southeast England to rival Go-Ahead. The deal meant it will also lose its Thameslink franchise, which is being incorporated into the new super-franchise, from September.
"Although we did not secure one of the first three franchise competitions that came to market, we remain confident of delivering on our medium term targets through disciplined bidding to generate an economic return for shareholders. Going forward, we will participate in a range of competitions with the objective of achieving earnings on a par with the last round of franchising, at an acceptable level of risk," it said.
It is currently shortlisted for two other UK rail franchise competitions in the current financial year, is in talks with the UK government about extending its First TransPennine Express franchise until
February 2016, and is also in talks with the government about a potential longer direct award for First Great Western during the period when a substantial programme of works will take place on the network.
It reiterated that it expects a cash outflow of about GBP70 million due to the end of the Thameslink contract. Added to that, it also expects an outflow because contract retention at First Student is at the upper end of its forecasts. It said it currently expects a total cash outflow of GBP100 million for the current financial year.
FirstGroup shares were up 1.8% at 127.90 pence Thursday morning, one of the biggest gains on the FTSE 250.
By Steve McGrath; [email protected]; @stevemcgrath1
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