FIRSTGROUP PLC - Annual Financial Report

Released : 15.06.2017

FIRSTGROUP PLC
(the ‘Company’)

ANNUAL FINANCIAL REPORT

In compliance with Listing Rule 9.6.1R, the Company has today submitted a copy of the documents listed below to the UK Listing Authority and they will shortly be available for inspection via the National Storage Mechanism at www.morningstar.co.uk/uk/NSM. These documents have also been despatched or otherwise made available to shareholders.

  • 2017 Annual Report and Financial Statements (the ‘2017 Annual Report’);
  • Notice of the 2017 Annual General Meeting of the Company which will be held at Aberdeen Exhibition & Conference Centre at 1.30pm on Tuesday 18 July 2017 (the ‘2017 AGM Notice’); and
  • Form of Proxy and Notice of Availability for the 2017 AGM.

The 2017 Annual Report and the 2017 AGM Notice are also available on the Company’s website at www.firstgroupplc.com

A condensed set of the FirstGroup plc financial statements, including information on important events that have occurred during the year and their impact on the financial statements, were included in the Company's announcement of its full year results made on 1 June 2017. That information, together with the information set out below, which is extracted from the 2017 Annual Report, constitute the material required under the Disclosure Guidance and Transparency Rule (‘DTR’) 6.3.5R to be communicated to the media in unedited full text through a Regulatory Information Service.

This announcement is not a substitute for reading the 2017 Annual Report. Cross-references and page numbers in the extracted information below refer to sections in the 2017 Annual Report. To view the final results announcement, visit the Company website at www.firstgroupplc.com

PRINCIPAL RISKS AND UNCERTAINTIES

Our risk management methodology is aimed at identifying the principal risks that could:

  • adversely impact the safety or security of the Group’s employees, customers and/or assets

  • have a material impact on the financial or operational performance of the Group

  • impede achievement of the Group’s strategic objectives and financial targets; and/or

  • adversely impact the Group’s reputation or stakeholder expectations.

The Group’s principal risks are set out below. These risks have been assessed taking into account their potential impact (both financial and reputational), the likelihood of occurrence and any change to this compared to the prior year and the residual risk after the implementation of controls. Further information on our risk management processes is contained in the corporate governance report on pages 54 to 55.

Strategic objectives

To deliver our strategy, it is important that we understand and manage the risks that face the Group. The table below outlines our principal risks and identifies which of our strategic objectives may be affected by those principal risks.

Focused and disciplined biddingDriving growth through attractive commercial propositionsContinuous improvement in operating and financial performancePrudent investment in our key assetsResponsible partnerships with our customers and communities
Economic conditions----
Political and regulatory-----
Contracted businesses including rain franchising-----
Competition and emerging technologies----
Information technology-----
Treasury and credit rating---
Pension scheme funding---
Compliance, litigation and claims, health and safety----
Labour costs/employee relations/recruitment and retention-----
Disruption to infrastructure/operations----

   

Risk and potential impactMitigationComment and movement during the year
Economic conditions including Brexit implications
Changing economic conditions affect our different businesses in different ways.

A less positive economic outlook could have a negative impact on our businesses in terms of reduced demand and reduced opportunities for growth or to retain or secure new business. Our First Rail businesses are particularly sensitive to movements in key economic indicators. The same factors could also affect our key suppliers.

An improving economic climate, particularly when combined with lower fuel prices, may result in reduced demand for public
transportation in our Greyhound and First Bus businesses as alternative modes of transport become relatively more affordable.

Improving economic conditions may also result in a tightening of labour markets resulting in employee shortages, pressure to increase pay, or affect the availability of public funding for transport services.


To an extent, our First Bus and Greyhound operating companies are able to modify services to react to market changes.

All of our businesses focus on controlling costs to ensure they remain competitive.

Continued low oil prices have adversely affected our Greyhound business.

The UK departure from the European Union (‘Brexit’) may adversely impact the UK’s economic position which in turn may have an adverse impact on the Group’s UK operations.

These factors have increased the risk during the year.
Political and regulatory
The political landscape within which the Group operates is constantly changing. Changes to government policy, funding regimes, or the legal and regulatory framework may result in structural market changes or impact the Group’s operations in terms of reduced profitability, increased costs and/or a reduction in operational flexibility or efficiency.

The Group has dedicated legal teams in the UK and North America who advise on emerging issues.

The Group actively engages with the relevant government and transport bodies and policy makers to help ensure that we are properly positioned to respond to any proposed changes.

Our continued focus on service quality and delivery helps to mitigate calls for structural market change.

The Bus Services Bill came into force in April which includes devolved powers to regulate bus services in local areas, subject to certain criteria being met.

The risks has increased in the year as Brexit, the new administration in the USA, and the shift in the political landscape in the UK could bring about changes in both how we operate and in the markets we serve.
Contract businesses including rail franchising
Approximately fifty percent of the Group’s business is contracted, which is dependent on the ability to renew and secure new contract wins on profitable terms. Failure to do so would result in reduced revenue and profitability and incorrect modelling or bid assumptions could lead to greater than anticipated costs or losses.

Failure to comply with contract terms could result in termination, litigation and financial penalties and failure to win new contracts or non-renewal of existing contracts.

Competition for new rail franchises is intense. We bid against rail operators from both the UK and other countries. Failure to win franchises in the future will result in a lower First Rail division contribution and profitability.

The GWR, TPE and South Western franchises cover a period during which there will be significant change including major infrastructure work, electrification and resignalling as well as the introduction of new trains, which require careful planning and management. Failure to manage these risks adequately in accordance with our plans could result in financial and reputational impacts to the Group.

The relevant Divisions have experienced and dedicated bid teams who undertake careful economic modelling of contract bids and, where possible, seek to negotiate risk sharing arrangements with the relevant customer or contracting authority.

The Group also has a comprehensive review process for rail bids as they are developed and finalised involving a number of divisional and Group functions as well as final Board sign off.

Compliance with our rail franchise agreements is closely managed and monitored on a monthly basis by senior management and procedures are in place to minimise the risk of non-compliance.

No material change during the year, although the award of the South Western franchise will increase the size of our contracted operations.
Competition and emerging technologies
All of the Group’s businesses (both contract and non-contract) compete in the areas of pricing and service and face competition from a number of sources.
 
Our main competitors include the private car and existing and new public and private transport operators across all our markets. Emerging technologies such as Uber, ride sharing apps and price comparison websites make access to alternative transport solutions easier.
 
Increased competition could result in lost business, reduced revenue and reduced profitability.

The Group continues to focus on service quality and delivery as priorities in making our services attractive to passengers and other customers, across our portfolio of
businesses.

In the UK, we have established a dedicated cross-divisional Retail Services Committee and a Group wide Consumer Experience Area of Expertise focused on improving our service to customers and improving access to our services.

In our contract businesses, a competitive bidding strategy and a strong bidding team are key.

In addition, wherever possible, the Group works with local and national bodies to promote measures aimed at increasing demand for public transport and the other services that we offer.

No material change during the year.
Information technology (IT) and cyber security
The Group relies on IT in all aspects of our businesses. Any significant disruption or failure, caused by external factors, denial of service, computer viruses, or human error could result in a service interruption, accident or misappropriation of confidential information (including credit card and personal data). Process failure, security breach or other operational difficulties may also lead to revenue loss or increased costs, fines, penalties or additional insurance requirements. Prolonged failure of our sales websites could also adversely affect revenues.

Continued successful delivery and implementation of the Greyhound IT transformation plan is required to improve yield management and drive future growth.

Failure to properly manage the implementation of new IT systems may result in increased costs and/or lost revenue.

As a result of the continuing threat of cyber attacks, we have implemented new threat detection systems but continue to remain vigilant to security improvements when identified.

The Group has also increased its focus on asset management and further enhanced its IT security processes and procedures during the year.

The Group has further strengthened its IT project management capability during the year, particularly within Greyhound.

No material change in the year, however, web and mobile sales channels remain of increasing importance across many of our businesses.

Cyber security remains high risk.
Treasury and credit rating
As set out in further detail in note 24 to the financial statements on pages 116 to 117, treasury risks include liquidity risks, risks arising from changes to foreign exchange and interest rates and fuel price risk.

Foreign currency and interest rate movements may impact the profits, balance sheet and cash flows of the Group.

Ineffective hedging arrangements may not fully mitigate losses or may increase them.

The Group is credit rated by Standard & Poor’s and Fitch. A downgrade in the Group’s credit ratings to below investment grade may lead to increased financing costs and other consequences and affect the Group’s ability to invest in its operations.

The Group’s Treasury Committee manages treasury policy, and delegated authorities are reviewed periodically to ensure compliance with best practice and to control and monitor these risks appropriately.

The Group is continuously focused on improving operating and financial performance as part of our strategic objectives as outlined on page 8.

The reduction in the Group’s leverage from 2.3 times net debt:EBITDA to 1.9 times at the end of the financial year, and improved cash generation has reduced the level of risk.
Pension scheme funding
The Group sponsors or participates in a number of significant defined benefit pension schemes, primarily in the UK.

Future cash contribution requirements may increase or decrease based upon financial markets, notably investment returns and valuations, the rates used to value the liabilities and through changes to life expectancy and could result in material changes in the accounting cost and cash contributions required.

Diversification of investments, hedging of liabilities, amendment of the defined benefit promises and the introduction of defined contribution benefits for new starters in First Bus, Group, and our Canadian businesses, has reduced these risks.
 
The Group also seeks to remove liabilities from the balance sheet where it can be achieved cost effectively.

Under the First Rail franchise arrangements, the Group’s train operating companies are not responsible for any residual deficit at the end of a franchise so there is only short term cash flow risk within any particular franchise.

No material change in the year, however, the Company has given notice to the UK First Bus Pension Scheme to close to future accrual from April 2018. This will further reduce the size and volatility of the pension funding risk over the longer term.
Compliance, litigation and claims, health and safety
The Group’s operations are subject to a wide range of legislation and regulation. Failure to comply can lead to litigation, claims, damages, fines and penalties.

The Group has three main insurable risks: third party injury and other claims arising from vehicle and general operations, employee injuries and property damage.

The Group is also subject to other litigation, which is not insured, particularly in North America, including contractual claims and those relating to employee wage and hour and meal and break matters.

A higher volume of litigation and claims can lead to increased costs, reduced availability of insurance cover, and/or reputational impact.

A large single claim or a large number of smaller claims may negatively affect profitability and cash flow.

Compliance with Group and divisional policies and procedures.

The Group has a very strong focus on safety and it is one of our five values. The Group self-insures third party and employee injury claims up to a certain level commensurate with the historical risk profile. We purchase insurance above these limits from reputable global insurance firms. Claims are managed by experienced claims handlers.

Non-insured claims are managed by the Group’s dedicated in-house legal teams with external assistance as appropriate.

There has been no material change to the risk environment in the year, however, due to the scale and scope of our operation, risk mitigation in this area continues to be an area of focus for managers. 
Labour costs, employee relations, recruitment and retention
Employee costs represent the largest component of the Group’s operating costs, and political or union pressure to increase wages could increase these costs. Competition for employees, particularly in an improved economic climate, can lead to shortages which increase costs and affect service delivery.

High employee turnover could lead to higher than expected increases in the cost of recruitment, training and employee costs and operational disruption.

Similarly, industrial action could adversely impact customer service and have a financial impact on the Group’s operations.

The Group seeks to mitigate these risks via its recruitment and retention policies, training schemes and working practices.

Our working practices include building communication and engagement with trade unions and the wider workforce. Examples of this engagement include regular leadership conferences, employee surveys and the presence of Employee Directors (Directors voted for by the employees to represent them) on many of the Group’s UK divisional boards and the Board.

Where increased wages and incentives are necessary to attract and retain employees, those extra costs are factored into our bid models, where possible, to ensure appropriate returns are achieved.

No material change during the year
Disruption to infrastructure/operations
Our operations, and the infrastructure on which they depend, can be affected by a number of different external factors, many of which are not within our control. These factors include terrorism, adverse weather events and potentially climate change or pandemics.

The threat from terrorism is enduring and continues to exist in all of our markets. Public transport continues to be regarded as an attractive and viable target, and has previously been subject to attack. Across our businesses, we take all reasonable steps to help guard against such activity on the services we operate. An attack, or threat of attack, could lead to reduced public confidence in public transportation, and/or specifically in the Group’s security and safety record and could reduce demand for our services, increase costs or security requirements and cause operational disruption.

Greater and more frequent adverse weather could lead to interruptions or disruption to service performance and reduced customer demand with consequent financial impact, potential increased costs and accident rates.

As a leading transport provider, we face the challenge of addressing climate change, both through managing its impact and reducing emissions.

We continue to develop and apply good practice, and provide guidance to our employees to help them identify and respond effectively to any potential threat or incident.

We maintain close working relationships with specialist government agencies, in relation to terror threats, in both the UK and North America.

We employ dedicated security specialists in the UK and North America.

The geographic spread of the Group’s businesses offers some protection against specific incidents. In addition, some of our contract-based businesses have force majeure clauses in place.

We have severe weather action plans and procedures to manage the impact on our operations.

The Group continues to target reductions in our emissions, including through behaviour change initiatives and investment in new technology.

No material change during the year.

The risks listed are not all of those highlighted by our risk management processes and are not set out in any order of priority. Additional risks and uncertainties not presently known to us, or currently deemed to be less material, may also impact our business. Indication of a movement in a risk may not indicate a change in the overall net risk position after taking into account risk mitigations.

Statement of Directors’ responsibilities in respect of the annual report and the financial statement

The following responsibility statements are extracted from the Statement of Directors' responsibilities in respect of the annual report and the financial statements on page 84 of the 2017 Annual Report and are repeated here solely for the purpose of complying with DTR 6.3.5R. The statements relate to the 2017 Annual Report and not to the extracted information presented in this annual financial report announcement or the final results announcement.
 

The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have chosen to prepare the parent company financial statements in accordance with applicable UK Accounting Standards, including Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (FRS 101) and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the parent company financial statements, the Directors are required to:

  • select suitable accounting policies and then apply them consistently;

  • make judgements and accounting estimates that are reasonable and prudent;

  • state whether applicable UK Accounting Standards, including FRS 101, have been followed, subject to any material departures disclosed and explained in the financial statements; and

  • prepare the financial statement on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:

  • properly select and apply accounting policies;

  • present information including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

  • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and

  • make an assessment of the Company’s ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the 2006 Act. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities, and have adopted a control framework across the Group.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

responsibility statement

Each Director confirms to the best of his or her knowledge that:

  • the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

  • the Strategic report and Governance section include a fair review of the development and performance of the business and the position of the Company and the undertakings including in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

  • the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s and the Group’s position and performance, business model and strategy.

Matthew Gregory

Chief Financial Officer

RELATED PARTY TRANSACTIONS

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Remuneration of key management personnel
 

The remuneration of the Directors, which comprise the plc Board who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual Directors is provided in the Directors’ remuneration report on pages 63 to 79.

31 March31 March
20172016
£m£m
Basic salaries11.61.6
Performance-related bonuses0.50.3
Benefits in kind0.00.1
Fees0.60.6
Share-based payment0.80.3
3.52.9

1 Basic salaries include cash emoluments in lieu of retirement benefits and car and tax allowances.

Further information, FirstGroup plc:


Faisal Tabbah, Group Head of Investor Relations

Stuart Butchers, Group Head of Media

Silvana Glibota-Vigo, Deputy Company Secretary

Tel: +44 (0) 20 7291 0505