11th May 2005 06:00
Embargoed until 07:00hrs on Wednesday 11 May 2005 FIRSTGROUP PLC PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2005 GROUP HIGHLIGHTS * Strong performance * + Turnover up 8.6% + Adjusted basic earnings per share1 up 3.3% + Dividend up 10.0% + ‚£30m share buy backs + ‚£115m returned to shareholders through share buy backs over last 5 yrs * Excellent UK Rail division performance * + Solid operating performance at all of our Train Operating Companies + Commenced operation of First ScotRail in October + New franchises performing ahead of expectations + Shortlisted for 4 new franchises - worth up to ‚£1.1bn turnover * Continued growth in North America * + Student - acquisition of Cardinal - now operating >20,000 school buses + Transit - successfully growing in call centre, paratransit and shuttle markets + Services - earnings growth almost doubled during the period, successful integration of SKE - platform for growth in Federal services market * UK Bus overall revenue growth +6% * + Good growth in urban Quality Partnership areas + Launch of `f t r' + Focus on service reliability FINANCIAL SUMMARY * Turnover ‚£2,693m (2004: ‚£2,479m) * Operating profit1 ‚£211.6m (2004: ‚£204.1m) * EBITDA2 ‚£319.2m (2004: ‚£307.1m) * Profit before tax ‚£128.9m (2004: ‚£122.8m) * Profit on ordinary activities after tax ‚£96.2m (2004: ‚£92.2m) * Adjusted basic earnings per share1 28.2p (2004: 27.3p) * Basic earnings per share 22.5p (2004: 22.3p) * Interest cover3 6.6x (2004: 7.2x) * Dividend per share 12.815p (2004: 11.65p) * Net debt ‚£663.1m (2004: ‚£630.7m) 1Before goodwill amortisation, bid costs, other exceptional items and profit ondisposal of fixed assets, as shown in the consolidated profit and loss accounton page 22.2Group operating profit before goodwill amortisation, bid costs and otherexceptional items plus depreciation.3Calculated as EBITDA divided by net interest payable and similar chargesbefore exceptional items.Commenting, FirstGroup's Chief Executive, Moir Lockhead said:"I am pleased to report another solid set of results. The UK Rail divisioncontinues to outperform. Our First ScotRail and First Great Western Linkfranchises have been successfully integrated and we continue to focus onimproving the service offered to passengers. In North America, our studentbusiness has continued to expand and I am particularly pleased with theperformance of our Services division which has almost doubled in size andearnings growth during the period. In UK Bus overall revenue growth has beenstrong and we continue to see good passenger growth in those areas where we areable to work with Local Authorities to provide bus priority and other trafficmanagement measures. We continue to bear down on costs and focus on servicereliability.We are delighted to be shortlisted for four new rail franchises: IntegratedKent, Greater Western, Thameslink/Great Northern and Docklands Light Railwayand we look forward to consulting widely and working with all of thestakeholders to develop our exciting proposals for the future of thesefranchises.The Group has strong and predictable cash flows with 50% of our revenues comingfrom contracted business in the UK and North America. The Board is committed toincreasing shareholder value by growing our core business and through aprogramme of progressive dividend growth and share repurchase. Over the lastfive years we have returned ‚£115 million to shareholders by way of share buybacks. Trading in the new financial year has started well and is in line withour expectations."Enquiries FirstGroup plc :Moir Lockhead, Chief Executive Tel: 020 7291 0512Dean Finch, Finance Director Tel: 020 7291 0512Rachael Borthwick, Head of Corporate Communications Tel: 020 7291 0508PHOTOGRAPHS FOR THE MEDIA ARE AVAILABLE AT WWW.NEWSCAST.CO.UKNOTES TO EDITORS:FirstGroup plc is a UK based international transport company with a turnover of‚£2.7 billion a year and over 67,000 employees throughout the UK and NorthAmerica.¯â€š· The Group is Britain's largest bus operator running more than one in five ofall local bus services. A fleet of some 9,300 buses carries 2.8 millionpassengers a day in more than 40 major towns and cities.¯â€š· The Group is also one of the UK's largest rail operators with four passengerfranchises - First Great Western, First Great Western Link, First TransPennineExpress and First ScotRail - and one open access operator Hull Trains.¯â€š· The Group operates nearly one-sixth of the UK passenger rail network, with abalanced portfolio of intercity, commuter and regional services.¯â€š· The Group is shortlisted for the new Integrated Kent, Greater Western,Thameslink/Great Northern and Docklands Light Railway franchises.¯â€š· The Group also operates freight services through GB Railfreight.¯â€š· The Group holds the operating contract for the Croydon Tramlink network,which carries over 20 million passengers a year.¯â€š· In North America the Group has three operating divisions: Yellow School Buses(First Student), Transit Contracting and Management Services (First Transit)and Vehicle Fleet Maintenance and Support Services (First Services).Headquartered in Cincinnati the businesses operate across the US and Canada.¯± First Student is the second largest provider of student transportation inNorth America with a fleet of over 20,000 yellow school buses, carrying nearly2 million students every day across the USA and Canada.¯± First Transit is one of the largest private sector providers of transitmanagement and contracting, managing public transport systems on behalf oftransit authorities in cities such as Atlanta, Los Angeles, Houston andSeattle. We are one of the largest providers of airport shuttle bus services inthe USA, serving airports in cities such as Cincinnati, Miami and Philadelphia.We also manage call centres, paratransit operations and other light transitactivities.¯± First Services is the largest private sector provider of vehicle maintenanceand support services in the US. We provide fleet maintenance for public sectorcustomers such as the Federal Government, cities and fire and policedepartments. We also provide a range of support services including vehiclemaintenance, logistics support and facilities management to public and privatesector clients including the US Navy and US Air Force.Chairman's statementThe accident at Ufton Nervet in November, in which one of our First GreatWestern trains collided with a vehicle obstructing the line at a levelcrossing, resulted in the tragic loss of seven lives, including our traindriver. On behalf of the Board of FirstGroup plc and all of our employees Iwould like to express our condolences to the families of the bereaved and tothe injured.The safety of passengers and staff is our highest priority. Buses and trainsremain among the safest ways to travel and we continuously strive to improveour performance to achieve the highest standards.I am pleased to report another year of good progress across the Group. Turnoverhas increased to ‚£2,693m (2004: ‚£2,479m) and profit before tax increased to ‚£128.9m (2004: ‚£122.8m). EBITDA (Group operating profit* plus depreciation)increased to ‚£319.2m (2004: ‚£307.1m). Adjusted basic earnings per share hasincreased to 28.2p (2004: 27.3p) and the Board has proposed a final dividend,subject to approval by shareholders, of 8.69p making a full year payment of12.815p, an increase of 10%. Before goodwill amortisation and exceptionalitems, the dividend is covered 2.2 times and will be paid on 26 August 2005 toshareholders on the register on 22 July 2005. The dividend increase reflectsthe Board's confidence in the Group's strong cash generation and growthprospects. The Board is confident that this level of dividend growth issustainable for the medium term.A number of strategic acquisitions and rail franchise wins occurred during theyear which further strengthened our core business. In October we commencedoperation of First ScotRail, Scotland's national railway and the UK's largestrail franchise, providing over 2,000 passenger services a day. We have alsobeen shortlisted for four new rail franchises; Greater Western, IntegratedKent, Thameslink/Great Northern and Docklands Light Railway. In North Americawe made the strategic acquisition, through First Services, of SKE SupportServices Inc. enabling us to enter the large Federal services market and almostdoubling the size of our existing services operation. I am pleased to reportthe successful integration of this business which we expect to be able toexpand further. During the year we made a significant acquisition in our NorthAmerican student business adding a further 1,900 school buses to our fleet.Dr Mike Mitchell, previously Business Change Director, who stepped down fromthe Board last year prior to his planned retirement, left the Group in April2005 and subsequently took up the post of Director General of Railways at theDepartment for Transport. I would like to thank Mike for his contribution tothe Group and wish him every success in his new role.I would like to take this opportunity to thank our employees for theircontinued hard work and commitment in delivering another year of strong growthand earnings, including those employees at First North Western who left theGroup during the year. I would also like to welcome new employees includingthose at First ScotRail and First Great Western Link and staff who joinedthrough acquisitions made in North America.Our UK Bus business continues to generate strong cash flows and we are activelyworking with Government and Local Authorities to introduce services that meetthe needs of the communities, alongside bus priority schemes and other measuresto reduce traffic congestion. We look forward to building on our strong recordof delivery in the rail industry and submitting our exciting proposals for thedevelopment of new franchises. In North America we continue to grow ourStudent, Transit and Services businesses. Since we entered the market six yearsago we have grown First Student by some 10,000 buses and overall we haveincreased earnings in our North American businesses by over 70%.Our strategy remains to increase shareholder value by continuing to grow in ourcore businesses and explore opportunities to develop in new markets. While wecontinue to invest for growth we remain committed to a progressive dividendpolicy and share repurchases of up to ‚£30 million per annum, while retainingour BBB credit rating.Martin GilbertChairman*Operating profit referred to in this statement and in the Chief Executive'sReview and Financial Review refers to operating profit before goodwillamortisation, bid costs and other exceptional items.Chief Executive's operatingreviewOVERVIEWSafetyThe safety and security of our passengers and staff is at the forefront ofeverything we do and we continue to promote a culture of `Safety First'throughout our business. We continually assess our processes and workingpractices and strive to meet the highest possible standards. I am pleased toreport that during the period we have again seen some encouraging trends in keysafety indicators and we will continue to ensure that we build on theseimprovements. The separate Corporate Responsibility Report details the progresswe have made to further improve our performance in respect of safety,environmental management and other key areas of our business.ResultsI am very pleased to report another successful year with expansion in our coremarkets in the US and UK. Group turnover increased by 8.6% to ‚£2,693m (2004: ‚£2,479m). Operating profit was ‚£211.6m (2004: ‚£204.1m). The Group generatedEBITDA (operating profit plus depreciation) of ‚£319.2m (2004: ‚£307.1m) enablingus to continue to invest in the business as well as increasing the dividend by10% and returning ‚£29.7m to shareholders through the further repurchase ofequity during the year.Since the acquisition of our North American business and the growth of our UKrail operations the Group's revenue profile has substantially altered. Some 80%of the revenue in our North American operations is secured under medium termcontracts. The Group has contracts with government agencies and other largeorganisations in both North America and the UK representing a secure revenuestream worth ‚£4.9 billion. As we expand our North American businesses andcontinue to grow our UK rail operations we expect this figure to increasesignificantly.UK RAILThe UK Rail division operates passenger and freight services in the UK.Passenger rail franchises consist of First Great Western, First Great WesternLink, First TransPennine Express and First ScotRail. We also operate HullTrains, a non-franchised open access intercity passenger train operator, and weprovide rail freight services through GB Railfreight.ResultsTurnover in the Group's rail division increased to ‚£1,059.7m (2004: ‚£945.0m)and operating profit was ‚£67.7m (2004: ‚£49.8m). These excellent results reflectthe strong operating performance and increased passenger volumes across all ofour train operating companies and the commencement of First ScotRail in October2004.Current operationsOn 17 October we commenced operation of First ScotRail. The handover wentsmoothly and, despite the adverse weather at the start of the year, operatordelays have been reduced by 5% on the comparable period last year. Thisreflects the enormous effort and investment being applied to fleet reliabilityand performance. Passenger journeys have increased by 8% on the comparableperiod last year and we have introduced an improved timetable to provideincreased capacity and cleaner, more frequent services. In April we introducedthe final delivery of new Class 170 Turbostar trains, funded by the ScottishExecutive and Strathclyde Passenger Transport, which will provide longer trainsand extra seats on a number of routes. In February we launched JourneyCheck,the UK's first fully integrated train information service, enabling passengersto receive instant information on how services are running and details ofplanned engineering works using real time information via website, WAP and PDAphones and through SMS text messaging.First TransPennine Express, which commenced operation on 1 February 2004, hasperformed well with passenger income increased by 11.5%. Passenger volumes arerunning ahead of our expectations as a result of increased road congestion onthe main commuter corridor between Manchester and Leeds. A new timetable wasintroduced in December offering passengers faster journey times, additionalservices and extra capacity. In March work commenced to build a new train-caredepot in Manchester with a second new depot planned for York. In spring 2006 wewill introduce 51 new Siemens trains for the franchise, offering passengers inthe region a modern, high performance intercity fleet and a step-change in thequality of service we are able to offer.Operational performance on First Great Western has continued to improve. InJanuary we opened a new First Class business lounge at London Paddington forFirst Great Western passengers. Our investment in the new lounge recognisesthat the ability to `work on the move' is a key attraction of train travel andprovides a range of facilities including a meeting room, internet access aswell as complimentary newspapers and refreshments. In February First GreatWestern launched the redesigned High Speed Train carriages in preparation forthe Greater Western franchise bid. A number of improvements have been made tothe exterior including a striking new livery. The interior has been redesigned,with customer input, to create a contemporary and modern on-board environmentwith improved customer services such as an updated buffet facility and Wi-Fitechnology. We were delighted that First Great Western's Chippenham Station wonthe award for `Station Excellence' at the HSBC Rail Awards. This award, whichhas been won by Great Western for the last two years, follows a significantinvestment in the refurbishment of the station.On 1 April 2004 we commenced operation of the First Great Western Linkfranchise which operates surburban services from London Paddington. In Decemberwe launched an integrated timetable for First Great Western and First GreatWestern Link. This major overhaul to the scheduling of services enables us tooffer up to 20% increased capacity on surburban services and improved longdistance services to Wales and the South West. In June we will launch the newHeathrow Connect service, in partnership with British Airports Authority,calling at intermediate stops between London Paddington and Heathrow using newelectric trains.Hull Trains, our non-franchised, open access intercity train company operatingbetween London Kings Cross and Hull, performed well during with the year withpassenger growth of 20%. In June we introduced a new weekday service andreceived further regulatory approval in December for an additional Saturdayservice.GB RailfreightGB Railfreight (GBRf), our rail freight company, has continued to showencouraging growth. New business was won during the year including contractsfor Royal Mail and the Tarmac Group. During the period GBRf took delivery ofnew container wagons and refurbished locomotives to support the new contracts.We were delighted that GBRf won `Rail Business of the Year' and picked up the`Rolling Stock Excellence' award at the HSBC Rail Awards in February this year.We believe that there is scope to further expand this business by offering ahigh level of service and a flexible business model.Franchise biddingWe are delighted to be shortlisted for a further four new enlarged railfranchises; Integrated Kent, Greater Western, Thameslink/Great Northern andDocklands Light Railway. We have an excellent track record of delivery andoperation of various types of railway franchises including intercity, Londoncommuter, suburban and regional railways. In addition we have managed andimplemented the introduction of new rolling stock across four of our railfranchises. We have a highly experienced team in place and look forward toconsulting widely and working with all of the stakeholders to develop excitingproposals for the future of these franchises.Outlook UK RailThe strong performance of our rail operations reflects the innovation andinvestment we have put in to the business. Our aim is to bring a consistentlyhigh standard of service at affordable prices to our passengers. We have anactive programme of new franchise bids underway which offer excellent prospectsfor the future growth of the division.NORTH AMERICAIn North America the Group is the second largest operator of studenttransportation with over 20,000 yellow school buses carrying nearly 2 millionstudents every day across the US and Canada. We operate the largest transitcontracting and management business in North America and we have an expandingservices division.ResultsThis has been another year of strong growth within our North American Division.Turnover from our three businesses increased to ‚£665.8m or $1,230.2m (2004: ‚£620.7m or $1,051.6m), an increase in dollar terms of 17%. Operating profit was‚£61.2m or $113.2m (2004: ‚£63.5m or $109.2m). Operating profit in First Studentwas impacted by $5.2m as a result of fewer trading days in the year dueprimarily to a late Labor Day in the calendar, which meant that the NorthEastern and mid Atlantic regions of the US had a later school start, and theearly occurrence of Easter this year. The lost revenue days will be added tothe end of the school year and therefore will be recognised in our results in2005/06.Our three North American businesses continue to generate excellent returns withEBITDA of ‚£108.1m or $199.9m (2004: ‚£107.1m or $183.7m) and remain self-financing for maintenance capital expenditure, organic growth and in-fillacquisitions.First StudentI am pleased with the performance of this business during the year. During theperiod we retained over 90% of our current business that came up for renewal.US Dollar turnover increased by 9.4%. Operating profit was impacted by thereduced number of trading days this period, as outlined above, which will beadded to 2005/06. In addition we also experienced an increase in Stateemployer's payroll taxes in the states in which we operate. We now operate over20,000 yellow school buses in the USA and Canada. The increase in the period islargely due to the acquisition of Cardinal Coach Lines, made in the lastquarter of the year, which operates some 1,900 school buses in the provinces ofAlberta, British Columbia, Ontario and the North West Territories of Canada andLos Angeles, California. We continued to make good progress throughout the yeargaining contracts to operate approximately 700 buses gained through newbusiness wins, in-fill acquisitions and organic growth within existingcontracts.Looking forward we are confident that we will be able to continue to growthrough a combination of organic growth, share shift, conversions andacquisitions at our target margins.First TransitUS Dollar turnover increased by 15.2% and operating profit by 3.7%. We won newcontracts to operate and manage transit systems in Virginia, Massachusetts,Ohio, New Hampshire, Idaho, Georgia, California, Pennsylvania, New Jersey,Texas, Arkansas, South Carolina and North Carolina. During the year we werevery pleased to retain the contract to operate the largest paratransit callcentre in New York and to win two further contracts for call centres inPortland, Oregon. In November we acquired a small business in New Yorkproviding paratransit services in the Greater Buffalo area. We havesignificantly developed our shuttle business, providing buses at airports,universities and for corporate organisations. We are now one of the largestoperators of airport shuttle services in the US, providing bus services atairports in cities such as Cincinnati, Miami, Houston and Philadelphia. Duringthe year we were pleased to win further shuttle service contracts to serveBaltimore Airport and for the University of Texas.First Transit's strategy is to focus on the higher margin, faster growing callcentre, paratransit, logistics consultancy and public/private shuttle busservices markets where we can utilise our management expertise and continue toprofitably expand these businesses.First ServicesThis has been a very successful year for our Services division, which providesa range of outsourced vehicle maintenance, operations and support services tothe public and private sectors. US Dollar turnover increased by 67.6% andoperating profit by 96.1% reflecting eight months trading contribution from oursupport services business acquired in August, together with strong growth inFirst Vehicle Services.We were very pleased to retain all of our contracts that came up for renewalduring the period. In addition we won new business to provide vehiclemaintenance services to customers including the State of Virginia, City ofPittsburgh and McGuire Air Force Base in New Jersey.We were particularly pleased that two of our vehicle maintenance contractsreceived recognition, from leading industry publications, in the categories of`Best Fleets' and `Top Fleet Managers' in the US.In August we acquired SKE Support Services Inc, now First Support Services,which has annualised turnover of $88 million and provides a range of servicesincluding vehicle fleet maintenance, logistics support and facilitiesmanagement to the US Federal Government and the private sector.In December First Support Services, with their joint venture partners The Dayand Zimmerman Group Inc and Parsons Corporation, won the substantial contractto provide a range of land-based support services to the US Navy.We are delighted with the performance of this strategic acquisition which hasintegrated well and provides us with entry to the growing US Federal market,one of North America's largest procurers of support services.InvestmentOur North American business is self-funding for capital expenditure and growththrough contract wins and in-fill acquisitions. Each new investment, includingnew contract bids, must meet our internal rate of return targets. All of theacquisitions made by this division have delivered excellent returns reinforcingour rigorous criteria for investment.Outlook North AmericaWe are extremely pleased with the performance of our North American divisionwhich continues to deliver excellent returns for shareholders. We are confidentthat further growth will be achieved through our proven strategy of combiningorganic growth with well matched acquisitions.UK BUSThe Group is the largest bus operator in the UK with a fleet of 9,300 buses,and a market share of approximately 23%. We carry some 2.8 million passengersevery day.ResultsTurnover increased to ‚£960.7m (2004: ‚£906.2m) and operating profit before leasefinancing costs was ‚£107.1m (2004: ‚£111.2m). Operating profit was impacted by ‚£5.0m as a result of a strike in South Yorkshire that was settled in the summer.We continue to focus on service quality with the aim of improving vehiclereliability and minimising lost mileage. During the year we have madesignificant investment in our maintenance and engineering functions. We expectto see the full benefit of this increased investment over the next few yearsand are encouraged to see that during the period lost mileage was significantlyreduced. While margins remain under pressure in UK Bus our focus is to achievesustainable growth in profits through high-quality customer service andincreased patronage.Contracted bus servicesWe have continued to see good growth in our London bus operations. Growth inthe London tendered bus market is moderating following the successfulimplementation of the congestion charge in 2003 and the substantial increase inbuses introduced to meet the additional service requirements. We are wellplaced with enlarged depot facilities at Willesden Junction that will enhanceour competitive advantage if the congestion charge is extended to West London.Similarly we are developing a facility in Dagenham that will provide increasedcapacity and position us well for the significant demographic growthanticipated in the Thames Gateway area.In addition to developing our commercial services we have grown our contractedbus and coach operations. Private Hire and Contract business is now organisedon a national basis and a dedicated sales and delivery team is in place. Duringthe period contracts were secured with customers including Network Rail, VirginTrains, National Express Coaches and Manchester Metrolink. We operated contractservices in connection with special events such as the Glastonbury Festival,York Railfest and Royal Ascot.Urban areasIn urban operations outside London, which represent almost 60% of UK Busturnover, we continue to see growth in those areas where we are able to workwith Local Authorities to provide traffic management measures to improvecongestion. Passenger growth continues to be driven by a mixture of marketinginitiatives and partnerships with Local Authorities to develop bus priorityschemes. Our policy is to target capital investment to those areas where thereis a clear commitment to support the use of public transport.Passenger growth was strong in areas such as Bristol and York where we haveQuality Partnerships in place. The Overground, our successful simplified routeand fares structure, continues to provide growth in areas such as Leicester andLeeds where passenger growth has increased by up to 60% on individual routessince introduction.In York, where we have seen passenger growth of up to 40% on individual routes,we now operate five park and ride schemes. During the year we carried over 3million passengers in our Park & Ride operations across the city.In March we launched our premium urban travel concept known as f t r. TheSecretary of State for Transport joined over 175 key stakeholders, includingLocal Authorities, to launch the `Streetcar' vehicle which will be used todeliver the f t r package. We developed Streetcar in partnership with theWright Group and Volvo after consulting extensively with customers, engineersand drivers. It is designed to offer an economical alternative to light railservices, giving passengers an exceptionally high-quality, light rail-like,product with dedicated road space in congested areas, but with the routeflexibility of a bus. The advantage of f t r is that it can be introducedquickly, without major upheaval on roads and at a fraction of the cost of alight rail scheme. The first f t r service will begin in York later this yearand detailed plans are being developed for other schemes in cities such asLeeds, Sheffield, Swansea, Reading, Bath and Glasgow.We continue to develop new initiatives to promote our services to a wide rangeof customers. During the year we successfully piloted a high-frequency, lowfare shuttle service using mid-life vehicles to link lower-income inner citysuburbs with the city centre in Leicester. This proved extremely successfulwith encouraging passenger and revenue growth and we plan to extend this trialto other targeted areas during 2005.Rural operationsIn our rural operations, which represent approximately 20% of our UK Busbusiness, we are developing projects that will meet the Government's jointobjectives of social inclusion and reducing traffic congestion. Kickstartfunding, which provides support for services which have the potential to becomecommercially viable, is already active in Scotland and has recently beenintroduced in England and Wales with further schemes expected later in theyear.We continually look for innovative ways in which we can better serve the ruralcommunities in which we operate. Our dial-a-ride service operating inCarmarthenshire recently won the `Community Transport Award' at the WelshTransport Awards. In the South West we have worked with Plymouth and Cornwallcouncils to provide a new fleet of specially branded buses for operation on theferry bus corridor between South East Cornwall and Plymouth, a key travel towork corridor.Yellow school busDuring the year we were pleased to commence operation of two further yellowschool bus operations in Northampton and Carmarthenshire. This initiativecontinues to attract interest and it is our view that, with support fromGovernment and Local Authorities, there is significant potential to developthis business.InvestmentWe have continued to focus our capital expenditure on areas of high passengergrowth in urban areas such as Glasgow, Portsmouth, Halifax and Huddersfield.During the year ‚£66.2 million was spent on new, low-floor, easy access vehiclesand ‚£11.7 million has been spent on facilities, including a new depot inChelmsford. New buses have also been ordered for Aberdeen, Bath, Edinburgh,Leicester, Manchester, Northampton and Swansea and will be delivered later thisyear.CostsThis was a year of significant investment in our engineering function with thecontinued roll out of standardised maintenance procedures across all companiesand depots, new approaches to the timing of inspection and repair, togetherwith greater emphasis on staff training. We expect these reforms to reduce unitcosts over the medium term.Lost mileage, our principal measure of service quality, improved during theyear and we have targeted further reductions for 2005/06. Towards the end oflast year the Traffic Commissioners and Department for Transport published newstandards for bus service punctuality, and Local Authorities in England weregiven new duties to take account of bus services under the Traffic ManagementAct. We are currently developing Punctuality Improvement Partnerships withlocal highway authorities to progress these changes which we believe will givefurther impetus to bus priority measures.Outlook UK BusWe welcome the Government's announcement that free concessionary travel forpensioners and disabled people will be introduced in England from April 2006.We will be reviewing our networks in advance of the introduction to enableconcessionary fare passengers to benefit from the new travel opportunities thatwill be created.Our UK business continues to generate strong cash flow. Overall revenue growthhas been strong and we expect this to continue in the current year. Our focusremains on increasing passenger volumes, continuing to develop the business inother areas such as contracted bus services, while maintaining a rigorous costcontrol and process improvement programme.EMPLOYEESWe further strengthened the Executive Management Team with the appointments ofNicola Shaw, formerly Managing Director of Operations at the Strategic RailAuthority and Andrew Haines, formerly Managing Director of South West Trains.Nicola, who joins as Business Change Director, will focus on the Group's busoperations. Andrew will become Managing Director of the Rail Division. Both arehighly respected within the industry and I am confident that they will make asignificant contribution to the Group.I would like to thank all our staff for their continued commitment to theGroup. Our aim is to offer our staff opportunities to develop and grow to reachtheir full potential. We continually engage with our staff to better understandtheir views and concerns through a range of informal meetings at depot level toa more formal staff satisfaction survey.The recruitment and retention of high quality staff is a key issue within ourindustry. We continue to implement a range of initiatives within our operatingcompanies to address this important issue. In our UK Bus division we were thefirst in the industry to source drivers and engineers from alternative labourmarkets primarily in Eastern Europe. We have recruited some 350 staff fromPoland, the Czech Republic, Portugal, Malta and Slovakia. We are pleased thatemployee turnover in our North American division has reduced again this year.We continue to encourage our staff to further their development and careerswithin the Group. During the year we extended our National VocationalQualification (NVQ) and BTEC programmes in the UK. Some 16% of bus drivers arenow qualified to NVQ level 2 in Road Passenger Transport and within the lastyear 60 supervisors and managers gained qualifications in Team Leadership. Weare actively developing workplace learning centres, in partnership with theTransport and General Workers Union, and now have 32 learning centres reaching30% of employees in the UK. We have plans to significantly increase thecoverage over the next two years so that more of our UK employees can gainaccess to workplace learning.In the US both First Transit and First Vehicle Services participate in theAutomotive Service Excellence (ASE) programme for training and testingtechnicians. Within First Transit 35% of eligible employees hold ASEcertificates and within First Vehicle Services the figure is 70%. First VehicleServices continues to support staff development through non-vocational trainingand encourages employees in self-development activities. At First Student wehave introduced the `Smith System of Defensive Driving' to enable school busdrivers to perform their duties safely in all traffic conditions.In FirstGroup America we continue to develop our management trainingprogrammes. First Student implemented two new programmes this year. The firstis designed to update managers on communication techniques, interviewing andrecruitment, financial reporting and customer service skills. The secondprogramme has been designed for new Contract Managers and covers FirstStudent's approach to safety, operations management and human resources such asthe importance of diversity in the workplace.First Transit continues to train frontline supervisors in an intensive four-daytraining course through `First Transit University' which teaches new andexisting managers the company's approach to safety, operations management,client relations and human resources. First Transit has also formed a GeneralManagers Advisory Group with representatives from eight contract locations. TheGroup provides a focus group to discuss specific issues for feedback to theBoard.ENVIRONMENT AND COMMUNITYOur environmental management framework is now well established and all ourcompanies and depots are audited against the requirements of the Groupenvironmental management system. During the year we established the GroupEnvironment Forum to set the minimum performance standards for each operatingcompany and identify key objectives and targets for improvement.As a result of local depot initiatives, an environmental awareness campaign andincentives for staff, energy usage in our depots continued to reduce during theyear. For example water usage fell by a further 4.4% and energy consumption by6% in our UK bus division alone. Our bus operating companies reduced theoverall general waste arising by a further 5%. As part of our ongoing awarenesscampaign an additional 7,027 staff have received environmental training overthe past 12 months.During the year we continued to support Future Forests "carbon neutral" treeplanting initiative to offset CO2 emissions. Through our support 1,500 treeshave been planted in Devon. In connection with Future Forests we also supportedan awareness campaign for primary school children in the South West to promotethe environmental benefits associated with public transport.We are pleased to feature in the FTSE4Good Environmental Index as well as inthe Business in the Community Corporate Social Responsibility Index, coveringthe broader corporate social responsibility issues. In recognition of ourcommitment to improving the environment we were delighted to receive theNational Green Apple Award for the fourth consecutive year as well asenvironmental awards from Network Rail, the Bus Industry Awards and the RailwayIndustry Innovation Awards.During the year the Group and its staff in the UK and North America havecontinued to support a number of local and national charities. All of ouroperating companies support local events either through donations, sponsorshipor use of resources and facilities made available to them by the Group. Furtherdetails of all these activities can be found in our Corporate ResponsibilityReport which is published separately and is available on our websitewww.firstgroup.com.GROUP OUTLOOKI look forward to continued growth in our three North American businesses allof which have highly dependable revenue streams of which approximately 80% arecovered by medium-term contracts. In UK Rail we are well positioned to benefitfrom rail re-franchising having been shortlisted for four new rail franchises,worth up to ‚£1.1 billion of turnover, in the current round. In UK Bus we areseeing further growth in areas where we can work with Local Authorities toimplement bus priority and other traffic management measures and we continue tofocus on cost control and process improvements. Our strategy remains to use theGroup's strong free cash flows to invest in the business and exploreopportunities for growth in new markets, increase dividends and buy back shareswhile maintaining a strong balance sheet. I am confident about our futureprospects. Trading in the new financial year has started well and is in linewith our expectations.Moir LockheadChief ExecutiveFinance Director's reviewOverviewThe Group has a portfolio of businesses in the UK and North America whichgenerate strong and predictable revenue streams with 48% of turnover arisingfrom contracts with government and statutory bodies in the UK and NorthAmerica. The Group's strong free cash flows are used to increase shareholdervalue by investing for growth, increasing dividends and repurchasing shares.The results for the year to 31 March 2005 have to be taken in the context ofthe changes in rail franchises. First Great Eastern and Anglia were exited atthe start of the year and First Great Western Link commenced on 1 April 2004.Subsequently we lost the First North West Trains franchise. However the awardof the First ScotRail franchise together with a very strong performance byFirst TransPennine Express resulted in UK Rail exceeding last year's operatingprofit by ‚£17.9m.The overall results represent a 5.0% improvement in profit before tax withoperating profit and adjusted basic EPS up by 3.7% and 3.3% respectivelydespite a 9.5% drop in the average US$ exchange rate compared to 2003/04. Thefinal dividend has been set at 8.69 pence per share which together with theinterim dividend of 4.125 pence gives a full year dividend of 12.815 pence, anincrease of 10% on 2003/04. We are confident that this level of dividend growthcan be sustained in the medium term. Dividend cover, pre goodwill amortisationand exceptional items, was 2.2 times. In addition during 2004/05 we haveinvested over ‚£170m in capital expenditure and acquisitions and have returned ‚£29.7m to shareholders through share repurchase. Over the last five years thegroup has returned ‚£115m to shareholders by way of share buy-backs.The group has a strong balance sheet backed by a secure long-term financialstructure with an average debt duration of 9.0 years at 31 March 2005. Thefinancial structure was further enhanced in March 2005 with the signing of anew committed ‚£520m five year bank facility which significantly improvedpricing and terms and increased the duration of the group's medium termcommitted borrowing facilities.ResultsTurnover was ‚£2,693.4m (2004: ‚£2,479.0m), an increase of 8.6%. Operating profitwas ‚£211.6m (2004: ‚£204.1m), an increase of 3.7% and profit before tax was up5.0%. The results for the year reflect a particularly strong performance fromthe Rail division where the performances of all our new franchises haveexceeded expectations. There were lower profits in UK Bus due to a strike inSouth Yorkshire and North American profits were down due to a lower number ofoperating days during the year, increased costs of unemployment taxes andadverse foreign exchange movements year on year. Year to Year to 31 March 2005 31 March 2004 Divisional Turnover Operating Operating Turnover Operating Operatingresults ‚£m profit * Margin * ‚£m profit * Margin * ‚£m % ‚£m % UK Bus 960.7 107.1 11.1 906.2 111.2 12.3 UK Rail 1,059.7 67.7 6.4 945.0 49.8 5.3 North America 665.8 61.2 9.2 620.7 63.5 10.2 Financing - (9.0) - - (8.3) -element of leases ** Other *** 7.2 (15.4) - 7.1 (12.1) - Total Group 2,693.4 211.6 7.9 2,479.0 204.1 8.2 * Before goodwill amortisation, bid costs, other exceptional items and profiton disposal of fixed assets** Financing element of UK PCV operating lease costs*** Tram operations, central management, Group information technology and otheritemsThroughout the financial review, operating profit, operating margin and EBITDAare defined as being before goodwill amortisation, bid costs and otherexceptional itemsUK Bus turnover was ‚£960.7m (2004: ‚£906.2m), an increase of 6.0%. Operatingprofit was ‚£107.1m (2004: ‚£111.2m), a reduction of 3.7%. In our London divisionwe successfully increased activity by starting contracts to operate 91additional buses and revenues have increased by 13% when compared to last year.UK Bus results were hit by a strike in South Yorkshire that had a profit impactof approximately ‚£5m. The year also saw a ‚£7m investment in engineering thathas already led to improved reliability and lower lost mileage. This investmentis supported by the arrival of over 300 new buses during the first quarter of2005/06. Consequently we anticipate another strong year of revenue growth.UK Rail turnover was ‚£1,059.7m (2004: ‚£945.0m), an increase of 12.1%. Operatingprofit was ‚£67.7m (2004: ‚£49.8m), an increase of 35.9%. Inclusion of theoperating results for a full year of First TransPennine Express and First GreatWestern Link franchises and the commencement of the First ScotRail franchisemore than made up for the loss of the First Great Eastern and First NorthWestern franchises. The first full year of First TransPennine Express saw an11.5% increase in passenger revenue. Similarly First ScotRail has started wellwith strong revenue growth.North American turnover was ‚£665.8m (2004: ‚£620.7m). At constant exchangerates, this represents an increase of 17.0%. Operating profit was ‚£61.2m (2004:‚£63.5m). In US Dollar terms this represents an increase of 3.7%. During theyear, both First Transit and First Services delivered improved profits. FirstServices operating profit increased year on year by 96.1% and included thesuccessful acquisition of SKE, gaining entry to the important federal market.First Student earnings were adversely affected by ‚£2.8m due to a lower numberof operating days in the year compared to 2003/04 which is expected to berecovered in 2005/06. In addition First Student results were impacted by ‚£3.6mdue to higher costs for State Unemployment Taxes in many of the States in whichit operates. This reflects changes in the way that the rules are applied. TheCardinal acquisition sees the number of yellow school buses operated rise to20,200 and this coupled with the reversal of the 2004/05 operating days issuemeans that prospects for 2005/06 remain excellent.Central costs were higher than last year due to a number of non-recurringinitiatives including an upgrade of information technology systems, theInternational Financial Reporting Standards convergence project and developmentof new human resources policies and procedures.PropertyProperty gains on disposal of ‚£3.3m (2004: ‚£19.6m) were realised during theyear as part of the Group's ongoing programme of disposing of older UK Busdepots in high value city centre locations and re-investing in out of townbrownfield sites with more modern and efficient facilities.GoodwillThe goodwill amortisation charge was ‚£25.8m (2004: ‚£25.9m) with favourableforeign exchange movements of ‚£0.8m offsetting ‚£0.7m of incremental goodwill onacquisitions made either during 2004/05 or the preceding financial year.Bid costs and other exceptional itemsBid costs of ‚£11.9m (2004: ‚£6.7m) were incurred during the year and comprisedprincipally rail refranchising costs for the ScotRail, Integrated Kent, EastCoast and Greater Western franchises. There were no other costs categorised asexceptional during the year (2004: ‚£6.8m).Interest payable and similar chargesThe net interest charge was ‚£48.3m (2004: ‚£42.8m) with the increase of ‚£5.5mprincipally due to a higher average level of net debt and an increase in thenotional interest charge on long-term insurance provisions. The net interestcharge is covered 6.6 times (2004: 7.2 times) by earnings before interest,taxation, depreciation and amortisation (EBITDA).There was no exceptional interest charge during 2004/05 whereas in 2003/04there was an exceptional charge of ‚£18.7m in relation to the cancellation ofcertain interest rate swaps.TaxationThe taxation charge on profit before goodwill amortisation, bid costs and otherexceptional items was ‚£44.4m (2004: ‚£48.4m) representing an effective rate27.2% (2004: 30.0%). The reduction in the effective rate reflects favourablesettlements achieved during the year and it is anticipated that these benefitswill extend into 2005/06. Tax relief on US goodwill, bid costs and otherexceptional items reduced the tax charge to ‚£32.7m (2004: ‚£30.6m). No tax hasbeen provided on property gains as it is not envisaged that tax will becomepayable on these gains.The actual cash cost of taxation to the group was ‚£19.0m (2004: ‚£21.3m) whichis 15% (2004: 17%) of profit before tax. The group pays a minimal amount of taxon its profits in the US. At 31 March 2005, in excess of $200m of accumulatedtax losses were carried forward to be used against future profits in the US. Wetherefore believe that the level of the cash tax in the US will remain at aminimal level for the medium term.DividendsThe final dividend of 8.69 pence per ordinary share together with the interimdividend of 4.125 pence per ordinary share, gives a full year dividend of12.815 pence, an increase of 10.0%. The final dividend will be paid on 26August 2005 to shareholders on the register of members at the close of businesson 22 July 2005.EPSAdjusted basic EPS, before goodwill amortisation, bid costs, other exceptionalitems and profit on disposal of fixed assets, was 28.2 pence (2004: 27.3pence), an increase of 3.3%. Basic EPS was 22.5 pence (2004: 22.3 pence).Cash flowThe Group's businesses continue to generate strong operating profits which areconverted into cash. EBITDA for the year was ‚£319.2m (2004: ‚£307.1m) up 3.9%.EBITDA from North American operations was up 8.8% in US Dollar terms. EBITDA bydivision is set out below: Year to Year to 31 March 2005 31 March 2004 Turnover EBITDA EBITDA Turnover EBITDA EBITDA ‚£m ‚£m % ‚£m ‚£m % UK Bus 960.7 160.5 16.7 906.2 163.4 18.0 UK Rail 1,059.7 72.6 6.9 945.0 55.2 5.8 North America 665.8 108.1 16.2 620.7 107.1 17.3 Financing element - (9.0) - - (8.3) -of leases Other 7.2 (13.0) - 7.1 (10.3) - Total Group 2,693.4 319.2 11.9 2,479.0 307.1 12.4 During the period there was a working capital outflow of ‚£62.0m of which thelargest element was the working capital outflow on the loss of the First GreatEastern and First North Western franchises. Offsetting this was an inflow of asimilar magnitude on the commencement of the First Great Western Link and FirstScotRail franchises. In addition there was a working capital outflow of ‚£17m inrelation to cash settlements with the SRA and a ‚£12m outflow from the reversalof the First TransPennine position from last year. Pension payments of ‚£12mwere made during the year over and above the profit and loss charge and growthin both the UK and North America accounted for ‚£17m of the working capitaloutflow.Capital expenditure and acquisitionsCapital expenditure, as set out in note 11 to the financial statements, was ‚£135.3m (2004: ‚£164.7m). Capital expenditure was predominantly in North Americanoperations of ‚£36.7m, UK Bus operations of ‚£70.4m, UK Rail ‚£14.1m and UKproperties ‚£11.7m.All the acquisitions made in 2004/05 were in North America. The principalacquisitions during the year were SKE Support Services Inc, which gained theGroup entry into the Federal market, and Cardinal Coach Lines Limited whichoperates 1,900 yellow school buses. In addition three smaller yellow school busbusinesses and one Call Centre were acquired. The total consideration for allacquisitions made during the year was ‚£37.2m and provisional goodwill arisingon all acquisitions amounted to ‚£25.8m.Funding and risk managementIn February 2005 the Group's BBB stable rating was reconfirmed by Standard andPoors.At the year end, total bank borrowing facilities amounted to ‚£595.9m of which ‚£526.6m is committed. Of these ‚£526.6m committed facilities, ‚£213.6m wereutilised at 31 March 2005, of which ‚£180.2m was drawn in cash and the balanceof ‚£33.4m drawn in letters of credit.The maturity profile of committed banking facilities is regularly reviewed andwell in advance of their expiry such facilities are extended or replaced. InMarch 2005 the group entered into a new five year ‚£520m bank facility providedby a strong bank group.At 31 March 2005 the Group's debt maturity profile was 9.0 years (2004: 9.7years).As the Group is a net borrower, it minimises cash and bank deposits, whicharise principally in the Rail companies. The Group can only withdraw cash andbank deposits from the Rail companies on a permanent basis to the extent ofretained profits. The Group limits deposits to short terms, and with any onebank to the maximum of ‚£30m, depending upon the individual bank's creditrating, which must not be less than "A" rated.The Group does not enter into speculative financial transactions and usesfinancial instruments for certain risk management purposes only.Interest rate riskWith regard to net interest rate risk, the Group reduces exposure by using acombination of fixed rate debt and interest rate derivatives to achieve anoverall hedged position over the medium term of between 75% to 100%.Commodity price riskIn the year, the UK was insulated from the rise in crude oil prices due to afully hedged position. North America also benefited from having 80% of itsrequirements hedged against crude oil price risk. Looking ahead, we now haveover 80% coverage of our UK requirements for 2005/06 (total annual usage 2.5million barrels) at an average rate of $36 per barrel (2003/04: average of $25per barrel). In North America (total annual usage 0.7m barrels) for 2005/06 wehave 64% coverage on crude oil price risk at an average price of $27 per barrel(2003/04: average of $27 per barrel).We anticipate that the impact of rising fuel prices will be partly mitigated byfuture pricing/yield activities.Foreign currency riskGroup policies on currency risk affecting cash flow and profits are maintainedto minimise exposures to the Group by using a combination of hedge positionsand derivative instruments where appropriate.With regard to balance sheet translation risk, the Group hedges part of itsexposure to the impact of exchange rate movements on translation of foreigncurrency net assets by holding currency swaps and net borrowings in foreigncurrencies. At 31 March 2005 foreign currency net assets were hedged 35% (2004:34%).Net debtThe Group's net debt at 31 March 2005 was ‚£663.1m and was comprised as follows:Analysis of net debt Fixed Variable Total ‚£m ‚£m ‚£m Cash - 83.8 83.8 Rail ring-fenced cash and deposits - 70.3 70.3 Sterling bond (2013 6.875%) (296.0) - (296.0) Bond (2019 6.125%) * (231.9) - (231.9) Sterling bank loans and overdrafts - (227.1) (227.1) US dollar bank and other loans and overdrafts (0.9) (1.1) (2.0) Canadian dollar bank and other loans and (6.9) (8.2) (15.1)overdrafts HP and finance leases (13.7) (10.4) (24.1) Loan notes (8.7) (12.3) (21.0) Interest rate swaps,net (57.0) 57.0 - Total (615.1) (48.0) (663.1)* The 2019 bond was swapped to US Dollars, and is shown net of arrangementcosts and foreign exchange gains on translation to Sterling at year-end.Balance sheet and net assetsNet assets increased by ‚£3.2m over the year principally reflecting retainedearnings for the year of ‚£39.1m, net movement in minority interest (net ofdividends paid to minority shareholders) for the year of ‚£8.5m. These positivemovements were partly offset by unfavourable foreign exchange movements of ‚£14.2m and share repurchases of ‚£29.7m.Shares in issueDuring the year 9.4m shares were repurchased for a total consideration of ‚£29.7m. Of these 4.2m shares were cancelled during the year whereas 5.2m shareswere held as treasury shares at year end. As at 31 March 2005 there were 393.6m(2004: 403.0m) shares in issue excluding treasury shares. The weighted averagenumber of shares in issue for the purpose of EPS calculations (excluding ownshares held in trust for employees and treasury shares) was 399.2m (2004:410.0m).Foreign exchangeThe results of the North American businesses have been translated at an averagerate of ‚£1:$1.85 (2004: ‚£1:$1.69). The period end rate was ‚£1:$1.87 (2004: ‚£1:$1.81).PensionsPensions and post retirement costs have continued to be accounted for on a SSAP24 basis. The total charge to the profit and loss account was ‚£47.0m (2004: ‚£34.2m). The group has continued to apply the transitional rules and disclosuresunder FRS 17. At 31 March 2005, after taking account of deferred taxation, theFRS 17 net deficit in the group pension funds, excluding Rail franchises, wasapproximately ‚£139m (2004: ‚£162m). In addition it should be noted that apost-tax deficit of ‚£43m (2004: ‚£28m) relates to Rail franchises where thegroup has an obligation to fund the pension scheme during the franchise periodbut does not have any liability beyond the end of the franchise.International Financial Reporting Standards (IFRS)The Group is well advanced in the conversion to IFRS and will report under IFRSfor the first time in the Interim results for financial year 2005/06. Theprincipal differences in accounting treatment under IFRS are considered to bepensions, goodwill, intangible assets, dividends, taxation, financialinstruments and share based payments. Although the impact will vary bydivision, we do not anticipate a material impact on group operating profit.Accounting policiesThe Group has adopted UITF 38 "Accounting for ESOP Trusts". Investments in ownshares are now deducted from shareholders' funds whereas previously suchinvestments were treated as fixed assets. Further details are set out in note 1to the financial statements.Dean FinchFinance DirectorConsolidated profit and loss accountFor the year ended 31 March 2005 Notes Before Goodwill Total Before Goodwill Total goodwill amortisation 2005 goodwill amortisation, 2004 amortisation and ‚£m amortisation, bid costs and ‚£m and bid costs bid costs and exceptional bid costs 2005 exceptional items 2005 ‚£m items 2004 ‚£m 2004 ‚£m ‚£m Turnover Continuing 2,649.0 - 2,649.0 2,479.0 - 2,479.0operations Acquisitions 44.4 - 44.4 - - - Group turnover 2 2,693.4 - 2,693.4 2,479.0 - 2,479.0 Operating profit Continuing 204.7 (37.0) 167.7 204.1 (39.4) 164.7operations Acquisitions 6.9 (0.7) 6.2 - - - Group operating 2 211.6 (37.7) 173.9 204.1 (39.4) 164.7profit Group operating 211.6 - 211.6 204.1 -Related Shares:
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