Half-yearly Report

FIRSTGROUP PLC - Half-yearly Report

PR Newswire

London, November 11

Thursday 12 November 2015

FIRSTGROUP PLC

HALF-YEARLY RESULTS FORSIX MONTHS TO 30 SEPTEMBER 2015

Group overview:

Divisional summary:

1 Before amortisation charges and certain other items as set out in note 3 to the condensed consolidated financial statements. All references to 'adjusted' figures throughout this document are defined in this way.

2 Adjusted operating profit less capital grant amortisation plus depreciation.

3 Period on period percentage change not meaningful.

4 Net debt is stated excluding accrued bond interest.

Commenting, Chief Executive Tim O'Toole said:

"Overall trading for the Group during the first half was in line with our expectations, with outperformance in some areas offsetting the more challenging market environment in others. The continued progress of our transformation plans are not fully reflected in these first half results because of previously indicated rail portfolio changes and the timing of the school calendar on First Student this year. In First Student we concluded this year's bid season with higher average price increases than in the previous year and a solid contract retention rate. This will improve the margins and returns in our largest business, despite a more challenging environment for driver recruitment and retention in some of our markets. We have been able to expand our cost efficiency actions in First Bus and are maintaining our margin progress despite the mixed market conditions seen across the industry, particularly for concessionary revenues. Our yield management and real-time pricing systems in Greyhound have now been launched as planned and their benefits will build over time. First Transit continues to win additional business, though as anticipated, demand in both Greyhound and First Transit has been affected by the substantial reduction in the oil price. On a comparable basis, our First Rail division is performing towards the top of our range of expectations, underpinned by strong passenger volume growth.

"Our expectations for the Group's overall trading performance for the full year are slightly increased as a result of the change in the basis of estimate for rail pensions. We continue to expect underlying net cash flow for the full year to be broadly flat. Our multi-year transformation plans are now driving the improvements in our underlying performance that are central to sustainable value creation and cash generation over the medium term.

"In December Matthew Gregory joins the Group as Chief Financial Officer, succeeding Chris Surch on his retirement. We look forward to benefiting from Matthew’s financial, strategic and international experience. On behalf of the Board and everyone at FirstGroup, I would like to thank Chris for his commitment and contribution to the Group since he joined in 2012. He has played a key role in placing the business on a stronger footing and leaves with our good wishes for the future."

A presentation for investors and analysts will be held at 9:00am today – attendance is by invitationA live telephone 'listen in' facility is available – for joining details please call +44 (0) 20 7725 3354A playback facility will be available together with presentation slides anda pdf copy of this report at www.firstgroupplc.com/investors

Contacts at FirstGroup:

Faisal Tabbah, Head of Investor Relations

Stuart Butchers, Group Head of Media

Tel: +44 (0) 20 7725 3354

Contacts at Brunswick PR:

Michael Harrison / Andrew Porter, Tel: +44 (0) 20 7404 5959

Notes

Unless otherwise stated, all financial figures refer to the six month period ended 30 September 2015 (the 'first half' or the 'period'), with growth compared to the same period in the prior year. No account is taken of foreign exchange translation effects in the description of divisional performance and outlook.

FirstGroup plc (LSE: FGP.L; the 'Group') is the leading transport operator in the UK and North America. With approximately £6 billion in revenues and around 110,000 employees, we transported around 2.4 billion passengers last year. Each of our five divisions is a leader in its field: In North America, First Student is the largest provider of student transportation with a fleet of around 49,000 yellow school buses, First Transit is one of the largest providers of outsourced transit management and contracting services, while Greyhound is the only nationwide operator of scheduled intercity coach services. In the UK, FirstGroup is one of Britain's largest bus operators running a fleet of some 6,300 buses, and we are one of the country's most experienced passenger rail operators, carrying around 280 million passengers last year.

Our vision is to provide solutions for an increasingly congested world... keeping people moving and communities prospering.

Visit our website at www.firstgroupplc.com

OPERATING AND FINANCIAL REVIEW

Group results

Reported Group revenue decreased by 17.0% in the period to £2,440.9m (H1 2014: £2,941.1m), principally reflecting changes in the First Rail franchise portfolio and fewer operating days in First Student as a result of a later than normal start to this school year. Excluding these effects, Group revenue increased by 0.8% on a constant currency basis.

Group adjusted operating profit decreased by 14.7% to £88.4m (H1 2014: £103.6m). Excluding the effects noted above and the change in the basis of estimate for accounting for First Rail pensions under the new Direct Awards, Group adjusted operating profit increased by 1.6% on a constant currency basis. This reflects improved underlying financial performance in First Student, First Bus and the continuing First Rail operations, partially offset by a reduced contribution from Greyhound.

Adjusted profit attributable to ordinary shareholders was £14.9m (H1 2014: £21.6m), with lower adjusted operating profit partly offset by lower net finance costs and a higher effective tax rate.

Adjusted EPS was 1.2p (H1 2014: 1.8p). Excluding the rail portfolio changes, fewer operating days in First Student and the change in the basis of estimate for accounting for First Rail pensions, adjusted EPS would have increased by 0.6p on a constant currency basis. Adjusted EBITDA was £242.4m (H1 2014: £253.3m).

Statutory operating profit was £58.5m (H1 2014: £80.2m), principally reflecting lower profits in First Rail and Greyhound. Statutory loss before tax of £7.5m (H1 2014: profit before tax £9.9m) reflects lower statutory operating profit partly offset by lower net finance costs. The seasonally higher mid-year net debt:EBITDA ratio was 2.59 times as at 30 September 2015, compared with 2.25 times as at the last year end on 31 March 2015.

All references to 'adjusted' figures throughout this document are before amortisation charges and certain other items as set out in note 3 to the condensed consolidated financial statements.

1 Adjusted.

2 Tramlink operations, central management and other items.

First Student

First Student's revenue in the first half was $1,006.8m or £655.9m (H1 2014: $1,013.1m or £605.7m). Adjusted operating profit was $1.4m or £2.0m (H1 2014: $6.0m or £4.5m), resulting in an adjusted operating margin of 0.1% (H1 2014: 0.6%). Compared with the same period in the prior year, there were fewer school days on which First Student operated in the first half due to the timing of Labor Day, which resulted in many schools delaying the start of their academic year. This reduced operating profits by approximately $12m. The early Easter in 2016 will also reduce the number of school days operated in the second half, resulting in an expected overall impact on operating profits for the year of approximately $17m, as previously indicated. Schools will make these days up at the end of the academic year, which will fall into our next financial year to 31 March 2017. First Student's operating results are always significantly weighted to the second half because of the overlay of our financial year on the North American school calendar, and this effect will be exaggerated this year by the operating days impact noted above. Our operating results will benefit from the second year of our successful contract portfolio pricing strategy together with our ongoing cost efficiency programme in the second half and beyond. The improving economy and increasing availability of alternative employment opportunities in certain of our markets has resulted in additional costs from acute driver shortages in parts of our business at the start of this school year, which we continue to work hard to mitigate through our recruitment and retention programmes. Notwithstanding these challenges, we remain confident that our overall turnaround programme will deliver our double digit margin target for the 2016/17 financial year.

An important element of our turnaround plan remains addressing contract pricing on new bids and renewals to ensure we achieve appropriate returns on the capital required to deliver our services. Over the first half we completed our second bid season under the new pricing strategy, achieving a higher average price increase than in the first season. We achieved average price increases of 5.3% on the approximately one third of our bus portfolio up for renewal this year, whilst delivering a contract retention rate modestly ahead of our expectations at 86%. Pricing across the marketplace has been firmer than in previous years, though we continue to see very limited organic growth or conversions from in-house to private provision. Net of 'share shift' movements and our decision to retire a number of excess buses from the fleet, we expect our overall bus portfolio at the end of the current year to be approximately 46,000.

In addition to the pricing strategy, we remain on track to deliver the remaining $30m per annum of our cost savings plans over the current and next financial year. Our DriveSMART and Focus GPS initiatives continue to deliver driver and fuel productivity improvements, and we are benefiting from the ongoing roll out of lean engineering and other best practice procedures across our 500 depot portfolio. Our implementation of driver applicant tracking and retention systems first used in First Bus has helped us achieve over 4,500 hires year-to-date with a further 1,900 employees currently in training, which is helping to mitigate the impact of acute driver shortages in some locations. We continue to invest to raise customer service levels, enhance fuel efficiency and further differentiate our services. MyFirstPass (swipe card-based location tracking) pilots are underway in select locations in Canada and the Midwest, and we continue to build our non-school charter offering, which delivered 6.5% growth in the first half and is attractive from an asset utilisation perspective.

Overall, our turnaround of First Student has continued to make the progress we expected in the first half, though as ever our performance in the second half of our financial year is key to delivery of our full year expectations.

First Transit

First Transit revenue in the first half was $645.6m or £419.2m (H1 2014: $687.7m or £410.2m). As expected, this is a reduction of 6.1% compared to the same period last year, due to lower oil prices leading to significantly reduced activity in the Canadian oil sands region and hence demand for our shuttle services there. Further contract awards and organic growth in the rest of the division will partially mitigate these impacts over the course of our financial year, though as previously indicated we do not expect to deliver overall growth in the current year. Adjusted operating profit was $46.3m or £30.1m (H1 2014: $49.3m or £29.5m), resulting in an adjusted operating margin of 7.2% (H1 2014: 7.2%), in line with our medium term objective of around 7%.

In 2015 First Transit is celebrating its sixtieth year, and remains a strong business which continues to offer good returns for typically low capital employed. Through our seasoned management team and bidding expertise, we continue to achieve high contract retention rates, growth from existing business and new wins, signing 14 contracts in the first half. For example, we were recently awarded a paratransit contract in Houston, building on existing relationships we have in the area. In the shuttle bus segment we were awarded a contract with American Airlines at Philadelphia Airport. We renewed key contracts in Denver, New Jersey, Hartford and Washington DC. The market for closed-system Bus Rapid Transit ('BRT') services in North America continues to grow, including the launch of the CTfasttrak system in Connecticut where we are managing the route between New Britain and Hartford. During the period we also announced that we are partnering with the government of Panama to provide transit management for the MetroBus system in Panama City.

Our technology initiatives, including our paperless engineering shop systems, management information dashboard and mobile apps, enable us to continue to deliver a meaningful point of difference compared to the competition, with cost efficiencies for our clients, better information for passengers and improved financial performance for our business. First Transit’s international scope, scale and management expertise, coupled with our high level of investment in our people and technology and our long-standing customer and industry relationships, will ensure we continue to deliver good margins and returns into the medium term.

Greyhound

During the first half of the year like-for-like US Dollar revenue decreased by 6.2% to $481.6m or £312.4m (H1 2014: $527.0m or £314.0m), reflecting the adverse impact on customer demand experienced across the intercity coach industry since fuel prices fell sharply in the third quarter of the prior financial year. Lower fuel prices have improved the affordability of other forms of transport for some trips (particularly longer distance travel), relative to Greyhound. Greyhound Express was more resilient, with like-for-like revenue decreasing by 3.1% in the first half. Compared with previous periods of significant fuel price reductions, Greyhound's business model is now better able to flex in response to the resulting changes in demand. By actively managing our timetables and other costs we have maintained load factors within 1% of the prior year and been able to partially mitigate the impact on our margins. For the first half, Greyhound's adjusted operating profit was $40.2m or £25.8m (H1 2014: $50.3m or £29.9m), resulting in an adjusted operating margin of 8.3% (H1 2014: 9.5%). Since the end of the period, our yield management and real-time pricing systems have launched in several markets. We expect that these systems, together with the other customer relationship enhancements already delivered, will help us to deliver our target of 12% margins over the medium term, recognising that longer term oil price trends will impact the timing.

Our project to enhance Greyhound's opportunities for growth and returns over the medium term passed a key milestone at the end of September, when our algorithmic pricing and yield management engine was launched in its first markets, with additional regions brought online since. The systems will complete their phased roll out over the next six months. The benefits of these systems will build over time as we develop our database of passenger demand trends and expertise in deploying the new tools at our disposal. BoltBus continues to innovate and act as a test bed for our system-wide upgrades, with bus-side ticket scanning (allowing real-time inventory management) via a drivers' smartphone app, as well as Uber and Passbook integration into our passenger app being launched in the period, while real-time bus location tracking has also been extended across the traditional network. Over 60% of our business is now transacted through digital channels, which we expect to increase with our new commercial website launched recently and new loyalty programme due to begin during the second half. In the period we became the first international coach operator to launch domestic services in Mexico, and we are very pleased with the progress to-date. We continue to work on improving our returns in Canada which remains a challenging market for Greyhound, with lower oil prices impacting passenger demand both directly and through its impact on the health of the economy as a whole.

While Greyhound faces a challenging macro-economic environment at present, we are already benefiting from the investments made in strengthening the service offering and increasing our flexibility. We expect meaningful improvements in margins over time as our new yield management, consumer engagement and other systems allow us to optimise our schedules, assets and pricing to maximise passenger demand.

First Bus

In the first half, reported revenues were £437.5m (H1 2014: £449.2m). We delivered commercial passenger revenue growth of 2.2%, benefiting from our continuing efforts to stimulate growth at the local level and sustain market-based fare rises on the higher volume base. This was partially offset by the ongoing weakness in concessionary revenues being seen across the industry, resulting in overall like-for-like passenger revenue growth of 1.3%. We have expanded a number of actions to optimise our depot portfolio, reduce administrative overheads and ensure delivery of our medium term targets during the period. We expect these actions to result in restructuring costs of approximately £7m for the full year, as previously indicated. In the first half adjusted operating profit was £15.4m (H1 2014: £16.9m) and adjusted operating margin was 3.5% (H1 2014: 3.8%), after the restructuring costs of £4.0m (H1 2014: £1.8m) incurred in the period. Overall we have delivered cost efficiencies of approximately £10m in the first half and continue to see further opportunities to improve driver productivity, increase fuel efficiency and reduce maintenance expense during the remainder of the financial year and beyond, which reinforces our confidence in achieving our medium term target of double digit margins. For the full year trading margins are expected to improve by one percentage point and by slightly less when the depot restructuring costs are included.

Our efforts to drive fuel efficiency enhancements have benefitted from further testing work undertaken with Wrightbus, ADL and other manufacturers, which help to deliver improvements in the whole-life costs of our fleets as well as improved fuel consumption and lower emissions. In the first half we placed an order for 385 new buses, a significant portion of which were Micro Hybrid StreetLites, one of the most fuel efficient buses on the market. Almost all our deliveries this year are equipped with Euro 6 engines, with the bulk going into service in the second half. Our investments continue to improve efficiency and raise customer satisfaction. Mobile ticketing, now available on all of our networks, supports our customer relationship building strategy while improving operational efficiency. Multi-operator smart ticketing is being introduced to key English city regions, and has already been launched or is planned by the end of 2015 on networks including South Yorkshire, Manchester, West Yorkshire, Leicester and Bristol. Our industry leading apps now offer automatic vehicle location tracking in several areas including Manchester and South Yorkshire.

Buses are a critical enabler of economic growth and we share the aim of local councils and national Government to get more people out of their cars and using buses. We continue to explore opportunities to work in closer partnership with local authorities throughout our markets, building on the success we have had to-date in increasing both passenger volumes and satisfaction. In Sheffield, we have worked together with other operators, the Passenger Transport Executive and Sheffield City Council to implement a consolidated and sustainable network that has been shaped by feedback from more than 2,500 customers. Price reductions across a range of period and multi-operator tickets have also been introduced. We are at the leading edge of bus partnership work in the country with this agreement, that meets the objectives of the City Region through voluntary partnership rather than a complex franchised-based alternative which would not have delivered changes and benefits for some years, and where financial risk would have passed to the Authority. Agreements such as this help provide longer term stability for customers as well as greater certainty for transport operators to invest in new buses while maintaining good value fares. Similarly, in Cornwall we are seeing some encouraging passenger volume increases as we continue to work closely with our local authority partners, helping to bridge the gap left behind when another major operator ceased trading earlier in the year. We have also supported the opening of the new South Glasgow Hospital with an expanded network, while our portfolio of routes based around student campuses continues to increase with upgraded services at universities including York, Bath, Bristol West of England and Swansea. We are a sponsor of Bristol European Green Capital 2015 and are using the city as a test bed for several initiatives including the introduction of biomethane and advanced hybrid buses.

Having expanded our cost efficiency programmes we expect to maintain our progress toward our medium term double digit margin target, despite the more challenging market conditions – particularly for concessionary revenues – seen across the industry. Meanwhile we continue to emphasise close partnership working with our local authorities while improving our services for our customers.

First Rail

First Rail continued to benefit from passenger volume growth in the first half, which increased by 3.5% on a like-for-like basis. On a reported basis, revenues declined to £608.9m (H1 2014: £1,155.6m), principally due to the end of the Capital Connect and ScotRail franchises, while on a like-for-like basis our continuing operations increased passenger revenues by 7.0%. Underlying financial performance was towards the top of our range of expectations, with adjusted operating profit of £32.9m (H1 2014: £40.0m) also reflecting the change in the basis of estimate for accounting for pensions under the new Direct Awards, which has been made to more accurately reflect the commercial terms and shorter length of our current franchises and the pension contributions expected to be paid (see also p.7).

Towards the end of the period the recently rebranded Great Western Railway ('GWR') began operating under the terms of a Direct Award which runs to 1 April 2019, with a further extension of up to one year at the discretion of the UK Department for Transport ('DfT'). First TransPennine Express continues to perform under the terms of the current Direct Award, which commenced on 1 April 2015 and is due to complete on 1 April 2016 (the contract includes an extension clause of up to 11 periods at the DfT's discretion). We are one of three bidders who submitted bids earlier in the year for the subsequent seven-to-nine year franchise, and expect an award decision to be made by the DfT in December. We are also shortlisted for the East Anglia competition, the winner of which is expected to be announced in June 2016, and we have begun preparatory work ahead of several franchise competitions due to get underway in 2016 including South Western and West Coast.

GWR passenger improvements in the period included the upgrade of several stations and car park facilities including Trowbridge and Reading, the roll out of an upgraded timetable in the North Cotswolds in May 2015, and work continues to support the planned increase in Thames Valley seat capacity from spring 2016 onwards. In July 2015 a £360m investment in 29 new long distance trains was announced by the DfT, which is expected to increase capacity on London-Cornwall routes by up to 24% from 2018. Meanwhile the roll out of Wi-Fi throughout the fleet and stations continues. All of our operating companies achieved improved customer service ratings in the recent National Rail Passenger Survey in a period when industry average scores declined, and both GWR and First TransPennine Express franchises saw improvement in their punctuality metrics year-on-year. First TransPennine Express received the Putting the Customer First accreditation by Customer First UK, only the second rail company to do so nationwide, and was accredited as a WorldHost Recognised Business, also for its commitment to customer service, while GWR have won several awards for the "Be a Great Westerner" marketing campaign in the period.

We continue to demonstrate the extensive operational strengths as well as the fleet and infrastructure upgrade capabilities that we have built up through involvement in the industry since privatisation, and have a strong position to build on over the medium term. With approximately two thirds of the UK rail network by passenger revenue expected to be refranchised over the next five years, we will examine each opportunity on its merits and decide whether it represents an opportunity to deliver ambitious improvements for passengers and appropriate returns for shareholders, at an acceptable level of risk.

Outlook

Our expectations for the Group's overall trading performance for the full year are increased by £15m as a result of the change in the basis of estimate for rail pensions. We continue to expect underlying net cash flow for the full year to be broadly flat. Our multi-year transformation plans are now driving the improvements in our underlying performance that are central to sustainable value creation and cash generation over the medium term.

Change in the basis of estimate for accounting for First Rail pensions

The Group has re-estimated the calculation of the First Rail franchise pension adjustment under IAS19 (revised) to better reflect the commercial terms and shorter duration of the GWR and First TransPennine Express franchises. This change in accounting estimate has been triggered by the new Direct Awards operated by GWR and First TransPennine Express in the period and has been applied prospectively from 1 April 2015. As a result of this change in accounting estimate the overall income statement charge for First Rail pension schemes for the half year is £7.2m lower at £13.1m than it would otherwise have been, and the full year effect of the change will be approximately £15m. The change in the basis of estimate has no effect on the cash contributions made to the First Rail pension schemes in the period.

EBITDA

EBITDA by division is set out below:

1 Adjusted operating profit less capital grant amortisation plus depreciation.

2 Tramlink operations, central management and other items.

Reconciliation to non-GAAP measures and performance

Note 3 to the condensed consolidated financial statements sets out the reconciliations of statutory operating profit and statutory profit before tax to their adjusted equivalents. The principal reconciling items are as follows:

Amortisation charges

The charge for the period was £27.2m (H1 2014: £25.8m). The increase primarily reflects the additional amortisation in First Student on the contract intangible as a result of the Mile Square acquisition in August 2014.

First Bus depot sales and closures

There was a charge of £1.7m (H1 2014: £2.4m) in the period relating to operating losses on a legacy depot closure.

Legal claims

A legal claim that pre-dates the Laidlaw acquisition and was acquired with the former Laidlaw entities had further adverse developments during the period and has been settled for £1.0m more than was originally provided for within adjusted items.

Finance costs and investment income

Net finance costs, before adjustments, were £66.0m (H1 2014: £70.3m), with the decrease principally reflecting lower interest rates.

Profit before tax

Adjusted profit before tax as set out in note 3 to the condensed consolidated financial statements was £22.4m (H1 2014: £33.3m) with the decrease due principally to lower adjusted operating profit partly offset by lower net finance costs. An overall charge of £29.9m (H1 2014: £23.4m) for adjustments including amortisation charges resulted in a statutory loss before tax of £7.5m (H1 2014: profit before tax of £9.9m).

Tax

The tax charge, on adjusted profit before tax, for the period was £5.4m (H1 2014: £7.3m) representing an effective rate of 24.1% (H1 2014: 22.0%). There was a tax credit of £9.8m (H1 2014: credit of £4.9m) relating to amortisation charges and other items. This resulted in a total tax credit of £4.4m (H1 2014: charge of £2.4m). The actual tax paid during the period was £4.4m (H1 2014: £3.1m).

EPS

The adjusted EPS was 1.2p (H1 2014: 1.8p). Basic EPS was (0.4)p (H1 2014: 0.3p), with the reduction primarily due to lower operating profit partly offset by lower net finance costs.

Cash flow

The seasonality of our First Student business combined with the phasing of certain cash flows typically results in a cash outflow at the half year. The net cash outflow before First Rail end of franchise cash flows for the period was £168.1m (H1 2014: £91.0m). This cash outflow combined with the end of franchise cash flows of £20.3m (H1 2014: £nil) and the movements in debt due to foreign exchange contributed to a net debt increase of £180.7m (H1 2014: £99.4m), as follows:

There was a higher net cash outflow before First Rail end of franchise cash flows this half year compared with last half year principally due to lower EBITDA, lower proceeds of disposal of property, plant and equipment due to the Greyhound Miami garage disposal last year, higher working capital outflow (primarily as a result of the £19.3m settlement of a historic legal claim and the timing of payments and receipts), partly offset by lower capital expenditure.

We continue to expect underlying net cash flow for the full year to be broadly flat, and for the sustainable cash generation of the Group to increase over the medium term as our multi-year plans drive improvements in our financial performance.

Capital expenditure

We continue to invest in our businesses. During the period cash capital expenditure was £201.9m (H1 2014: £257.5m) and comprised First Student £131.8m (H1 2014: £128.5m), First Transit £9.2m (H1 2014: £15.7m), Greyhound £3.0m (H1 2014: £35.8m), First Bus £24.8m (H1 2014: £41.1m), First Rail £31.8m (H1 2014: £35.2m) and Group items £1.3m (H1 2014: £1.2m).

Funding and risk management

Liquidity within the Group has remained strong. At the period end there was £801.3m (H1 2014: £942.7m) of committed headroom and free cash, being £756.0m (H1 2014: £765.0m) of committed headroom and £45.3m (H1 2014: £177.7m) of free cash.

The Group’s average debt maturity was 4.8 years (H1 2014: 5.7 years). The Group’s main revolving bank facilities do not require renewal until 2019.

Interest rate risk

The Group reduces exposure by using a combination of fixed rate debt and interest rate derivatives to achieve an overall fixed rate position over the medium term of approximately 75% of net debt.

Fuel price risk

The Group uses a progressive forward hedging programme to manage commodity risk. We have hedged 91% of the 'at risk' crude requirements for the current year in the UK (1.9m barrels p.a.) at an average rate of $88 per barrel, 92% of our 'at risk' UK crude requirements for the year to 31 March 2017 at $73 per barrel and 72% of our requirements for the year to 31 March 2018 at $65 per barrel.

In North America we have hedged 71% of current year 'at risk' crude oil volumes (1.6m barrels p.a.) at an average rate of $86 per barrel, 63% of the volumes for the year to 31 March 2017 at $74 per barrel and 30% of our volumes for the year to 31 March 2018 at $62 per barrel.

Foreign currency risk

Group policies on foreign currency risk affecting cash flow, profits and net assets are maintained to minimise exposures to the Group by using a combination of natural hedge positions and derivative instruments where appropriate. Translation risk relating to US Dollar earnings arising in the US is mitigated by US Dollar denominated costs incurred in the UK, principally UK fuel costs, US Dollar interest and tax costs.

Net debt

The Group's net debt at 30 September 2015 was £1,588.0m (H1 2014: £1,403.2m) and comprised:

At 30 September 2015 the net debt:EBITDA ratio was 2.59 times (31 March 2015: 2.25 times). The seasonality of our First Student business combined with the phasing of certain cash flows typically means net debt at the half year is higher than at the full year. We continue to target a net debt:EBITDA ratio of 2.0 times in the medium term.

Shares in issue

As at 30 September 2015 there were 1,204.1m shares in issue (H1 2014: 1,204.5m), excluding treasury shares and own shares held in trust for employees of 0.8m (H1 2014: 0.4m). The weighted average number of shares in issue for the purpose of basic EPS calculations (excluding treasury shares and own shares held in trust for employees) was 1,204.0m (H1 2014: 1,204.4m).

Balance sheet

Net assets have decreased by £40.2m since the start of the period. The principal reasons for this are unfavourable translation reserve movements of £67.8m partly offset by actuarial gains on defined benefit pension schemes (net of deferred tax) of £35.4m.

Foreign exchange

The most significant exchange rates to Sterling for the Group are as follows:

Pensions

The Group has updated its pension assumptions as at 30 September 2015 for the defined benefit schemes in the UK and North America. The net pension deficit of £239m at the beginning of the period has decreased to £158m at the end of the period principally due to higher discount rates.

The main factors that influence the balance sheet position for pensions and the sensitivities to their movement at 30 September 2015 are set out below:

Seasonality

The First Student business generates lower revenues and profits in the first half of the year than in the second half of the year as the school summer holidays fall into the first half. Greyhound operating profits are typically higher in the first half of the year due to demand being stronger in the summer months.

Forward-looking statements

Certain statements included or incorporated by reference within this announcement may constitute 'forward-looking statements' with respect to the business, strategy and plans of the Group and our current goals, assumptions and expectations relating to our future financial condition, performance and results. By their nature, forward-looking statements involve known and unknown risks, assumptions, uncertainties and other factors which may cause actual results, performance or achievements of the Group to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Shareholders are cautioned not to place undue reliance on the forward-looking statements. Except as required by the UK Listing Rules and applicable law, the Group does not undertake any obligation to update or change any forward-looking statements to reflect events occurring after the date of this announcement. Nothing in this announcement should be construed as a profit forecast.

Principal risks and uncertainties for the remaining six months of the financial year

There are a number of risks and uncertainties facing the Group in the remaining six months of the financial year. These are the same as disclosed in the 2015 Annual Report. The principal risks and uncertainties, which are set out in detail on pages 45 to 49 of the Annual Report and Accounts 2015, are:

Responsibility statement

Each of the Directors confirms that to the best of his/her knowledge:

The Directors of FirstGroup plc are listed on the Group's website at www.firstgroupplc.com.

Tim O'Toole Chris Surch

Chief Executive Group Finance Director

12 November 2015 12 November 2015

Condensed consolidated income statement

1 Adjusted for certain items as set out in note 3.

Condensed consolidated statement of comprehensive income

Condensed consolidated balance sheet

Condensed consolidated statement of changes in equity

1 On 14 August 2014, the Group purchased the non-controlling interests share of Hull Trains Limited for a consideration of £3.0m and on 24 March 2015, the Group purchased the non-controlling interests share of Cardinal Coach Lines UCL for a consideration of CAD$17.0m. As both of these represented a transaction with minority equity owners of the business without a change of control, they have were recognised as an equity transaction in the Group’s reserves and not as a business combination or investment.

2 On 25 August 2014, the Group completed the acquisition of a 51% share in Mile Square Transportation, Inc, a school bus transportation company based in New York. Included within the purchase agreement is a put option for the Group to purchase the remaining 49% from the non-controlling interest party for a fixed price of US$19.1m. As the put option is a contract to purchase the Group’s own equity instruments it gives rise to a financial liability for the fixed price amount in accordance with paragraph 23 in IAS 32. The financial liability was recognised in the balance sheet and the initial recognition was treated as reclassified from equity.

Condensed consolidated cash flow statement

Cash and cash equivalents are included within current assets on the condensed consolidated balance sheet. Cash and cash equivalents includes ring-fenced cash of £197.7m (2014: £276.6m; full year 2015: £196.7m).

Note to the condensed consolidated cash flow statement - reconciliation of net cash flow to movement in net debt

Net debt includes the value of derivatives in connection with the bonds maturing in 2019 and 2021 and excludes all accrued interest. These bonds are included in non-current liabilities in the condensed consolidated balance sheet.

Notes to the half-yearly financial report

1 BASIS OF PREPARATION

This half-yearly financial report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The statutory accounts for the year ended 31 March 2015 have been delivered to the Registrar of Companies. The auditor reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The figures for the six months to 30 September 2015 include the results of the First Rail division for the period ended 19 September 2015 and the results for the other divisions for the 26 weeks ended 26 September 2015. The comparative figures for the six months to 30 September 2014 include the results of the First Rail division for the period ended 13 September 2014 and the results of the other divisions for the 26 weeks ended 27 September 2014.

The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with the DTR of the Financial Conduct Authority and International Accounting Standard 34, ‘Interim Financial Reporting’, as adopted by the European Union.

The accounting policies used in this half-yearly financial report are consistent with International Financial Reporting Standards as adopted by the European Union. The accounting policies applied are consistent with those described in the Group’s latest annual audited financial statements, except for the application of IFRIC 21 and amendments to IAS 19 which became effective in the period for the first time. There has been no material change as a result of applying these new accounting standards. We have also included certain non-GAAP measures in order to reflect management’s reported view of financial performance excluding non-recurring items and amortisation.

These results are unaudited but have been reviewed by the auditor. The comparative figures for the six months to 30 September 2014 are unaudited and are derived from the half-yearly financial report for that period, which was also reviewed by the auditor.

The Directors have carried out a review of the Group’s budget for the year to 31 March 2016 and medium term plans, with due regard for the risks and uncertainties to which the Group is exposed, the uncertain economic climate and the impact that this could have on trading performance. Based on this review, the Directors believe that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the financial statements have been prepared on the going concern basis in preparing this half-yearly report.

The operating and financial review statement contained in this half-yearly report, including the summarised principal risks and uncertainties, has been prepared by the Directors in good faith based on the information available to them up to the time of their approval of this report solely for the Company’s shareholders as a body, so as to assist them in assessing the Group's strategies and the potential for those strategies to succeed and accordingly should not be relied on by any other party or for any other purpose and the Company hereby disclaims any liability to any such other party or for reliance on such information for any such other purpose.

The operating and financial review considers the impact of seasonality on the group and also the principal risks and uncertainties facing it in the remaining six months of the financial year.

This half-yearly report has been prepared in respect of the Group as a whole and accordingly matters identified as being significant or material are so identified in the context of FirstGroup plc and its subsidiary undertakings taken as a whole.

This half-yearly financial report was approved by the Board on 12 November 2015.

3 RECONCILIATION TO NON-GAAP MEASURES AND PERFORMANCE

In measuring the Group adjusted performance, additional financial measures derived from the reported results have been used in order to eliminate factors which distort year on year comparisons. The Group’s adjusted performance is used to explain year on year changes when the effect of certain items are significant, including amortisation, business disposals, aged legal claims and revisions to onerous contracts, as the Directors consider that this basis more appropriately reflects operating performance and a better understanding of the key performance indicators of the business.

The principal reconciling items are as follows:

Amortisation charges

The charge for the period was £27.2m (H1 2014: £25.8m). The increase primarily reflects the additional amortisation in First Student on the contract intangible as a result of the Mile Square acquisition in August 2014.

First Bus depot sales and closures

There was a charge of £1.7m (H1 2014: £2.4m) in the period relating to operating losses on a legacy depot closure.

Legal claims

A legal claim that pre-dates the Laidlaw acquisition and was acquired with the former Laidlaw entities had further adverse developments during the period and has been settled for £1.0m more than was originally provided for within adjusted items.

4 SEGMENT INFORMATION

The segment results for the six months to 30 September 2015 are as follows:

The segment results for the six months to 30 September 2014 are as follows:

1Group items comprise Tramlink operations, central management and other items.

2Before amortisation charges and certain other items as set out in note 3.

4 SEGMENT INFORMATION continued

The segment results for the year to 31 March 2015 are as follows:

1Group items comprise Tramlink operations, central management and other items.

2Before amortisation charges and certain other items as set out in note 3.

The tax effect of the adjustments disclosed in note 3 was a credit of £9.8m (2014: credit of £4.9m; full year 2015: credit of £15.8m).

7 EARNINGS PER SHARE (EPS)

Basic EPS is calculated by dividing the loss attributable to equity shareholders of £5.2m (2014: profit £3.1m; full year 2015: profit £75.2m) by the weighted average number of ordinary shares in issue (excluding own shares held in the EBT and treasury shares) of 1,204.0m (2014: 1,204.4m; full year 2015: 1,204.0m).

The adjusted basic EPS is intended to highlight the recurring results of the Group before amortisation charges and certain other items as set out in note 3. A reconciliation is set out below:

Diluted EPS is based on the same earnings and on a weighted average number of ordinary shares in issue of 1,210.5m (2014: 1,208.6m; full year 2015: 1,207.6m). The difference in the number of shares between the basic calculation and the diluted calculation represents the weighted average number of potentially dilutive ordinary shares from the share option arrangements in place.

Disclosures including goodwill by cash generating unit, details of impairment testing and sensitivities thereon are set out on page 127 of the 2015 Annual Report. The projections for First Student assumed the incremental benefits of the existing recovery plan, and the programme to address contract portfolio pricing together with an economic recovery. The sensitivity analysis indicated that the First Student margin or long term growth rates would need to fall in excess of 132 or 114 basis points respectively compared to future projections for there to be an impairment to the carrying value of net assets in this business. An increase in the discount rate in excess of 93 basis points would have led to the value in use of the division being less than its carrying amount.

Intangible assets include customer contracts and the Greyhound brand and trade name which were acquired through the purchases of businesses and subsidiary undertakings. These are being amortised on a straight-line basis over their useful lives which are between nine and 20 years.

The rail franchise agreements’ intangible asset represented the part of the economic benefit that is realised as a result of recognising our share of the rail pension deficit on the date of commencement of each respective franchise and was amortised on a straight-line basis over the initial term of each respective franchise.

These comprise First Student yellow school buses which are surplus to requirements and are being actively marketed for sale. Gains or losses arising on the disposal of such assets are included in arriving at operating profit in the condensed consolidated income statement.

The fair value measurements of the financial derivatives held by the Group have been derived based on observable market inputs (as categorised within Level 2 of the fair value hierarchy under IFRS 7 (2009)).

14 DERIVATIVE FINANCIAL INSTRUMENTS continued

Fair value of the Group’s financial assets and financial liabilities that are measured at fair value on a recurring basis:

Level 1: Quoted prices in active markets for identical assets and liabilities.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly.

Level 3: Inputs for the asset or liability that are not based on observable market data.

There were no transfers between level 1 and level 2 during the current or prior period.

The current liabilities above are included within accruals in note 13.

The insurance claims provision arises from estimated exposures for incidents occurring prior to the balance sheet date. It is anticipated that the majority of such claims will be settled within the next six years although certain liabilities in respect of lifetime obligations of £18.5m (2014: £17.6m) can extend for up to 30 years. The utilisation of £74.0m (2014: £67.7m) represents payments made largely against the current liability of the preceding year.

Legal and other provisions relate to estimated exposures for cases filed or thought highly likely to be filed for incidents that occurred prior to the balance sheet date. It is anticipated that most of these items will be settled within 10 years. Also included are provisions in respect of costs anticipated on the exit of surplus properties which are expected to be settled over the remaining terms of the respective leases.

The pension’s provision relates to unfunded obligations that arose on the acquisition of certain First Bus companies. It is anticipated that this will be utilised over five to 10 years.

On 25 August 2014, the Group completed the acquisition of a 51% share in Mile Square Transportation, Inc, a school bus transportation company based in New York. The £12.2m consideration represented £11.0m cash paid and £1.2m of deferred consideration.

Included within the purchase agreement was a put option for the Group to purchase the remaining 49% from the non-controlling interest party for a fixed price of US$19.1m. As the put option is a contract to purchase the group’s own equity instruments it gives rise to a financial liability for the fixed price amount in accordance with paragraph 23 in IAS 32. We recognised the financial liability in the balance sheet and the initial recognition was treated as reclassified from equity.

The number of ordinary shares of 5p each in issue, excluding treasury shares and shares held in trust for employees, at the end of the period was 1,204.1m (2014: 1,204.5m). At the end of the period 0.8m shares (2014: 0.4m shares) were being held as treasury shares and own shares held in trust for employees.

19 RETIREMENT BENEFIT SCHEMES

The Group operates or participates in a number of defined benefit pension schemes which cover the majority of UK employees and certain North American employees. The scheme details are described on pages 149 to 151 of the Annual Report and Accounts for the year ended 31 March 2015.

First Greater Western Limited, Hull Trains Limited and First/Keolis TransPennine Express Limited have sections in the Railways Pension Scheme (RPS), which is an industry-wide arrangement. Under the terms of the RPS, any fund deficit or surplus is shared by the employer (60%) and the employees (40%). In calculating the Group’s pension obligations in respect of the RPS the Group has calculated the total pension deficits in each of the RPS sections in accordance with IAS 19 (Revised). These deficits are reduced by a “franchise adjustment” which is that portion of the deficit which is projected to exist at the end of the franchise and for which the Group will not be required to fund. The franchise adjustment, which has been calculated by the Group’s actuaries, is offset against the present value of the RPS liabilities so as to fairly present the financial performance, position and cash flows of the Group’s obligations.

The market value of the assets at 30 September 2015 for all defined benefit schemes totalled £3,536m (2014: £3,826m; full year 2015: £4,146m).

Contributions are paid to all defined benefit pension schemes in accordance with rates recommended by the schemes’ actuaries. The valuations are made using the Projected Unit Credit Method.

The key assumptions were as follows:

¹First Bus refers to LGPS, First Bus Scheme and Group scheme respectively.

Amounts (charged)/credited to the condensed consolidated income statement in respect of these defined benefit schemes are as follows:

The Group has revised the calculation of the Fist Rail franchise pension adjustment under IAS19 (Revised) to more accurately reflect the shorter duration and commercial terms of the GWR and First TransPennine Express franchises. This change in accounting estimate has been triggered by the new direct awards operated by GWR and First TransPennine Express in the period and has been applied prospectively from 1 April 2015. As a result of this change in accounting estimate the overall income statement charge for First Rail pension schemes for the half year is £7.2m lower at £13.1m than it would otherwise have been.

Actuarial gains and losses have been reported in the condensed consolidated statement of comprehensive income.

19 RETIREMENT BENEFIT SCHEMES continued

The amounts included in the condensed consolidated balance sheet arising from the Group’s obligations in respect of its defined benefit pension schemes are as follows:

1 The irrecoverable surplus represents the amount of the surplus that the Group could not recover through reducing future company contributions to Local Government Pension Schemes.