Returning to strength FirstGroup plc
Investor Day 23 January 2014 Agenda
10:00 Welcome Tim O’Toole, Chief Executive
Initial impressions John McFarlane, Chairman
Overview Tim O’Toole, Chief Executive
First Transit Brad Thomas, President First Transit
First Student Linda Burtwistle, First Student Dennis Maple, President First Student
11:30 Coffee break
Greyhound Dave Leach, President Greyhound
UK Rail Vernon Barker, Managing Director UK Rail
13:00 Lunch break
UK Bus Giles Fearnley, Managing Director UK Bus
Financial framework Chris Surch, Group Finance Director
Closing remarks and Q&A Chaired by Tim O’Toole, Chief Executive
16:00 Event closes
2 John McFarlane Chairman
3 Tim O’Toole Chief Executive
4 Returning to strength
• Clear direction for each division:
– Transit will continue its market leadership, achieving growth without sacrificing margin
– Student will deliver cost reductions, better asset utilisation and disciplined pricing to achieve a sufficient return on capital
– Greyhound will utilise the commercial advantage of its national network and continue to deliver profitable growth and improving margins
– UK Rail’s portfolio will deliver earnings on par with the last round of franchising
– UK Bus will return to competitive double digit margins through an equal coordination of efficiencies and revenue growth
• Clear opportunities for the sector and for our market leading businesses
5 First Transit Brad Thomas, President First Transit – overview
• Public transit ridership at the highest level in five decades; ageing population will increase the Market need for transportation services opportunity • Increasing federal government spend on transportation • Growing $24bn per annum market, with only 30% currently outsourced • Long-term contracted revenue streams with low customer credit risk and limited capital
• Established credentials and track record – First Transit has been a market leader for 50+ years Our • Diverse customer segments and large volume of relatively small contracts – exceptional strengths bidding and management expertise well embedded • Industry leading safety programme, technology solution-led – delivering what customers want
• Expanded portfolio to higher margin transit activity, including paratransit and shuttle Strategic • Disposed of non-core businesses progress • Leveraging expertise to win new business across segments • Continuing to exploit scale, technology differentiation and bidding expertise to grow profitably
• Deliver continued good growth whilst maintaining margins Our • Capex including investment in expanding shuttle network, particularly in university campuses objectives and Canadian oil fields
7 First Transit – a market leading position
• Continent-wide scope across nearly 40 US states and four Canadian provinces, Puerto Rico and US Virgin Islands • Operate and manage approximately 11,500 buses and provide maintenance services for approximately 38,000 vehicles and pieces of equipment • 317m passengers in FY13 over more than 360m fleet miles • Unrivalled reputation, credentials and experience offering a wide range of solutions in c.330 contracts • High contract retention rate >95% • Market leader in four major segments, which all contribute high returns and consistent growth: • Fixed Route • Shuttle • Paratransit • Vehicle Services
8 Business overview
9 First Transit – business overview
FY13 revenue - $1.2bn
Fixed Route, 37%
Vehicle Services, 11%
Shuttle, 22% Paratransit, 30%
Revenue ($m)
$1,200m $1,000m 1,195 1,078 1,129 $800m 1,007 1,026 $600m $400m $200m $0m FY09 FY10 FY11 FY12 FY13
10 First Transit – scale of operations
West $292m
Fixed Route 1,100 vehicles
Paratransit 1,745 vehicles
Shuttle 59 vehicles
Central $272m
Fixed Route 861 vehicles
Paratransit 1,069 vehicles
Montreal Shuttle 361 vehicles
East $304m
Fixed Route 656 vehicles
Paratransit 1,010 vehicles
Shuttle 629 vehicles Canada $190m
Fixed Route 513 vehicles
Paratransit 53 vehicles
Shuttle 334 vehicles
Vehicle Services $137m (nationwide) Vehicles/equipment 38,000 maintained
11 First Transit – business overview
Headcount Operated vehicle count
8,000 5,000
7,000 Totals: Totals: FY09 14,051 4,000 FY09 7,254 6,000 FY13 16,758 FY13 8,390 5,000 3,000 4,000
3,000 2,000 2,000
1,000 1,000
0 Fixed Route Paratransit Shuttle Vehicle Corp/Region 0 Services OH Fixed Route Paratransit Shuttle
FY09 FY13 FY09 FY13
Total miles (m)
140 Totals: 120 FY09 222.2 FY13 270.6 100
80
60
40
20
0 Fixed Route Paratransit Shuttle
FY09 FY13
12 Market background
13 The fixed route market
Market potential First Transit
90% of market Leader in market has not been contracted First Transit City/Counties/Municipalities Technology and scale revenue growth Growth will continue as customers seek cost competitive advantage greater than savings and expertise alternatives 6% annually First Transit has 28% of contracted Low capital investment market offers high returns
Market First Transit
• Competitors: • Metropolitan/Municipality customer base – MV Transport • Full turnkey transportation services
– Veolia Transportation 90% Total • High customer interaction market: – National Express • Low capital investment $15bn 7% – RATP Dev • 5-year contracts with options – Keolis • Average 55 vehicles per contract 3% • Price competition intensifying • 60 contracts averaging $7m in revenue
• Transit authorities becoming more Non-contracted market price sensitive Contracted market First Transit • Long established transit systems slow to embrace conversion to private operations
14 The paratransit market
Market potential First Transit
Major player in the paratransit segment
High growth customer base First Transit 25% of $4bn - Aging population increases demand for Expertise and scale revenue growth market has not future growth allows future growth greater than been contracted - ADA, NEMT, Medicaid requirements 4% annually - Affordable Care Act potential
Low-medium capital investment and attractive margins
Market First Transit
• Competitors: 67% • Municipality’s ADA, NEMT market – MV Transport • Complex business model increases outsourcing – Veolia Transportation Total market: – Physically disabled passenger base – National Express $4bn – Call taking/scheduling, coordinating – RATP Dev 8% services – Keolis • Low-medium capital investment • Growth segment as a result of an 25% • 3-5 year contracts with options ageing population and their increased Non-contracted market demand for independence • Average 60 vehicles per contract Contracted market • Transit authorities becoming more First Transit • 70 contracts averaging $5m in revenue price sensitive
15 The shuttle bus market
Market potential First Transit
Recent success in penetrating the shuttle segment
Universities, airports and corporate clients First Transit 10% of $2bn - Customers outsource non-core competency which Technology solutions and tools revenue growth market has not will facilitate growth competitive advantage greater than been contracted - High university enrolment and increasing technology expectations drives demand for future growth 13% annually
High capital investment required, but with high margins to drive returns
Market First Transit
• Competitors: • University, airports, corporate shuttle bus
– MV Transport 76% • Customer interaction low
– Veolia Transportation Total • Increased capital requirements, IRR market: thresholds • Competitors are few but have capital $2bn resources to fund contracts 15% • 7 year contracts with options • Customer focus on value versus price • Average 30 vehicles per contract 10% • High technology expectations • 50 contracts averaging $4m in revenue
Non-contracted market Contracted market First Transit
16 The vehicle services market
Market potential First Transit
Scale and profitability competitive advantage
Municipalities and corporate clients First Transit 67% of $3bn - Constrained local municipal budgets in need of cost revenue growth market has not savings will drive future growth Low capital, high margin and returns greater than been contracted - Customers seek cost savings along with non-core services 2% annually
Wide range of customer solutions to provide value
Market First Transit
• Competitors: • City municipal fleets, corporate entities – G4S • Maintenance services for wide range of 29% fleet solutions – Vector Total market: • Very low capital requirements – Serco $3bn 67% • Contracts generally annual renewals • Established in-house fleet maintenance programs resistant to 4% • Wide range in number of fleet maintained change per contract • Defined value proposition • 75 contracts averaging $1.8m in revenue Non-contracted market • High margin returns Contracted market First Transit
17 Business strategy
18 Continuing to leverage our successful model
People Success Solutions Expertise/structure Technology and tools
Price Low bidder
Fixed Route Paratransit
First Transit growth
Vehicle Shuttle Services
19 Strategic initiatives – capabilities to win
Best in People Best in Solutions
• Top management in the industry: • Technology-driven efficiencies and – Industry experience and tenure tools: – Solid reputation, results – MI Dashboard – Company preferred – GPS tracking • Training and development: – DriveCam – Promotions in-house – Infor – First Transit University – TimeForce – e-Learning • Engineering analytics: – Manager-in-Training programme – Real-time vehicle monitoring • Safety training and engagement • Maintenance technology solutions: • ASE certifications, etc – Paperless system • Safety behaviour data analysis
Best in Price
• Resources utilised by all business segments • People and technology drive efficiencies and price • National service platform/leverage infrastructure • Low bidder wins business = growth
20 First Transit – summary
• Proven business model in place for continued growth Our business • Diversified, balanced business segments all delivering solid returns
• Top performer/competitor for past five years and continues to build base capabilities for future growth
• Growth opportunities in all segments as customers continue to outsource to Our plans transit companies that provide expertise, solutions and savings • Continue to optimise technology solutions to enhance customer retention and growth
• Key acquisitions in each segment immediately increase market share, leverage scale and improve profits/returns
• Leader in market with exceptional management and technology solutions Value opportunity • Above cost of capital returns will continue to support future investments • Size and scale will facilitate and leverage growth initiatives
21 First Student Linda Burtwistle Dennis Maple, President First Student – overview
• $24bn market, $9bn currently outsourced; public sector customers – lower credit risk Market • Fragmented competition with c.5,000 small independents – consolidation opportunity opportunity • Safety remains paramount; increasing customer focus on technology and cost efficiency • Budget pressures causing short-term impact on discretionary element of spend, but will drive demand for high quality, high efficiency players in the medium term
• Clear market leader (bigger than next four competitors combined) – scale economies in Our buying, insurance, fleet management, technology development, etc strengths • Differentiated offering – technology, safety record, strong customer relationships and satisfaction scores
• Significant progress in cost efficiency programme – $100m run-rate achieved so far Strategic • Uniform best practice identified and rolled out to 500+ locations progress • Raising returns through disciplined management of contract portfolio (‘up or out’) and assets (charter growth, cascading) • Several avenues for growth available once margins restored
• Double digit margins through execution of recovery plan Our • Disciplined management of returns objectives • Position the business for profitable growth
23 Business overview
24 Scale of operations
Northwest • We transport 6 million students daily Rev ($m) $ 310 • We operate in 38 states and 8 Canadian Buses 6,600 provinces Southwest Rev ($m) $ 205 • We represent 1,300 school districts Buses 3,800 • We keep c.4 million cars off the road every day Central Rev ($m) $ 245 Buses 5,600 Atlantic Southeast Rev ($m) $ 305 Western Buses 6,900 Canada Great Lakes Eastern Rev ($m) $ 270 Buses 5,800 Canada Northeast Northeast Rev ($m) $ 275 Northwest Buses 5,700 SNE S New England Rev ($m) $ 355 Great Lakes Buses 6,300 Canada East Southwest Atlantic Rev ($m) $ 275 Southeast Buses 6,500 Central Canada West Rev ($m) $ 135 Buses 2,900
TOTAL Rev ($m) $2.4bn Buses 50,000 Locations 550
25 Large footprint, with many state-by-state variations
Michigan/Ohio – new Western Canada run the oldest administrations pushing conversion fleet in the company with good opportunities (pension-related) ancillary revenue opportunities Illinois is a former low bid state. Now allowed to consider quality and safety Eastern Canada - Ontario market Alaska – good market share with moving from evergreen to RFP significant competitive advantage
Massachusetts is a low bid state West Coast – trend toward alternative fuel solutions New Jersey uses unique buses not cascadable to any other state (but run for 15 years). All contracts bid annually
South Carolina – State provides all buses and maintenance California – legislation impedes further outsourcing but regulations Florida – Monitoring outsourcing and climate allow for an older fleet potential
26 Market background and the competitive environment
27 A review of the last ten years 2004 2006 2008 2010 2012 2014
3.3% market Global US Government Hyper- Organic growth recession stimulus competition growth Organic Eastern retraction Canadian RFP
600,000 533,000 492,000 500,000 +0.2% Student’s market share 500,000 2004 2013 400,000 342,000 (0.4%) 320,000 335,000 …of total market: 300,000 3.7% 10.0% 200,000
100,000 191,000 180,000 …of outsourced market: 157,000 +1.4%
0 11.5% 27.8% 2004 2007 2013 10 Year CAGR Schools Contractors
Source: School Bus Fleet Magazine 28 Sources of growth in the $24bn market
$9bn $15bn • Organic growth 100%
− Typically around 0.5-1.0% per annum 80% ~4,900 Mom and Pops − Recession caused three years of organic retraction 60% ~10,000 School Districts and ~12,000 other Next 4 schools 40% STA • Share shift Durham 20% − Through the competitive bidding process First Student
− Increases our share of the outsourced market 0% − Have averaged 700 buses over the last three years 20% 40% 60% 80% 100%
• Acquisitions − Many 100 – 500 bus companies which could enhance our portfolio
• Conversion − Relatively low volume and has been slow to develop − Have averaged 400 buses per annum, over the last three years
Source: First Student (Internal)/School Bus Fleet Magazine 29 The decision making process
• Key decision makers in academic and community institutions decide whether to contract out, or retain in-house
Key influencers and decision makers US school organisation and structure (impacting conversions and renewals)
Public school districts Private schools Activist State/local Union Bus parents lawmakers leaders contractors • 13,000 school districts • 7,500 elementary schools • 52,500 elementary schools • 900 secondary schools • 14,000 middle schools • 3,900 K-12 schools • 14,000 high schools School Board members School district • 2,100 K-12 schools (politicians) administrators
Catholic schools Other institutions
• 6,500 elementary schools • 4,000 year-round schools • 1,250 secondary schools • 2,500 special education Funding primarily from local and • 125 K-12 schools schools state governments • 1,900 magnet schools • 10,000 charter schools
Source: National Center for Education Statistics 30 The other national operators
Student Durham Transportation Atlantic Express Illinois Central of America
HQ Warrenville, IL Wall, NJ Staten Island, NY Channahon, IL
30+ states & 4 11 states & 1 Geography 7 states 5 states Canadian provinces Canadian province
Buses 20,000 10,000 5,300 3,500
Unionisation ~35% ~30% ~80% ~50%
Margin 10.2% 5.6% Not published Not published
• Top 5 companies (including First Student) account for almost 50% of the outsourced market
Source: Company websites 31 Business strategy
32 The business prior to the recovery programme
Retention rate Operating profit ($m) Margin
100% $300m 12%
281 90% $250m 10% 11.0% 91% 90% $200m 8% 80% 200 8.1% 81% $150m 170 6% 6.8% 70% $100m 4%
60% $50m 2%
50% $0m 0% FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12
Operations Culture • Inflexible business model in a difficult economic • Disengaged organisation environment • Default to status quo – no focus on continuous • Lack of standardisation improvement • Lack of accountability through clear performance • Overly negative environment management and incentives system • Short-term decision making resulting in siege • Excess layers of management resulted in mentality inefficient decision making • Poorly priced contracts
33 Step 1: Driving efficiency through the cost base
Driver labour costs - $1.1bn per annum Maintenance costs - $225m per annum
• Tighten standard hours without deteriorating service • Establish standard repair times and performance levels management system
• Active management of standard hours and exceptions • Optimise maintenance model and staffing levels - every minute saved is worth $2.5m • Implement lean processes and systems • Reduce non-driving time • Harmonise fleet to decrease complexity • Review wage and remuneration policy
Savings - $40m delivered from FY11 - FY14 Savings - $12m delivered from FY11 - FY14
Fuel expense - $195m per annum Other significant costs per annum
• Drive Smart programme targeting: • $15m downsizing in FY12, removing a layer of management from Student • Excess idling and speeding • Cumulative indirect procurement benefit of $10m, • Aggressive driving and the link with safety created First Market Place to deliver future benefits
• Measuring (technology) and communicating with • Plus the elimination of non-value added activities each driver across the organisation
Savings - $13m delivered from FY11 - FY14 Savings - $35m delivered from FY11 - FY14
34 Step 1: Snapshot of an average school bus location
Revenue • 2 – 3 school board contracts ($000) Per bus
• $4.4m in billing; 8% from charter work Total billed revenue $4,400 $47,825 • 92 buses at 7.3 years old Driver compensation 1,965 Driver compensation % to revenue 45% Driver operations • 100 drivers; 96,600 paid hours per year Maintenance costs 415 Maint Cost/Bus 4,500 • $70k in stand-by and overtime premium Fuel 360 Maintenance Insurance/other running costs 250 • 1 shop manager; 3 techs; 3 bays • Cost per bus = $4,500/year Location overhead 445
Depreciation 400 Fuelling
• Consume 100,000 gallons of diesel Operating profit (gross contribution) $565 $6,140 Contribution margin 13%
Location overhead • 1 location manager; 1 other manager Revenue generating fleet 92 Average age 7.3 • 1 - 2 dispatchers • $225k in facilities expense
35 Step 1: Right-sizing the cost base at the location level
Driver’s compensation
Paid hours 96,600 - Have removed 4,800 hours from the system (4.8%)
Average rate $15.63 - Minimizing the union/non-union discrepancy
Driver compensation $1,510k
Benefits/taxes $384k
Non-driving $70k - 2% reduction and targeting more
Total $1,965k
Percent of revenue 44.7% - Almost two full points improvement in efficiency
Maintenance Fuel
Labor costs $243k - $150/bus efficiencies in Gallons consumed 100,000 - 5% reduction overtime/tech wages Average price $3.60 - 8% off of retail Parts $134k - $50/bus savings through procurement Total $360k
Other maintenance $38k - $40/bus savings in outside Percent of revenue 8.2% - half point improvement services in efficiency
Total $415k
Cost/Bus $4,500 - $240/bus savings in efficiencies
36 Step 2: Disciplined approach to improving returns
Existing work New contracts Retention Share shift • Maximise retention while maintaining • Bid responsibly by being disciplined acceptable rates on pricing and pursuing a targeted − Extend higher margin business to approach protect against margin erosion − Assist lower margin business out to Acquisitions bid where we have competitive • Opportunistic, margin enhancing advantage acquisitions will be used to supplement share shift growth Organic • The market is expected to stabilise at Conversions 0.5% to 1.0% route growth per • Look to maximise our share of the annum bids while keeping strong returns
Charter growth • Maximise revenue potential of fixed asset base
37 Step 2: Contract portfolio management
% of FY14 contract portfolio
High 13% Manage margin erosion to retain >15% margin
Medium 51% Retain business and improve margins 5-15% margin
Low Look to shed poor performing contracts and improve 36% <5% margin margins significantly on remaining
• Protect high margin business through retention strategy • Improve mid-range contracts through consistent pricing • Disciplined approach on lower end work through rigid ‘up or out’ strategy
38 The roadmap to double digit margins
Cost efficiency ($m) 11% >1.0% Cost efficiency ($m) Driver comp c.2.0% >10.0% 10% c.(0.5%) $400 Depreciation c.2.0% $85 Maintenance $1,060 $195 Fuel 9%
$225 Insurance
$230 Other running 8% costs / overhead c.7.5%
PortfolioPortfolio ($m) ($m) 7% >1.0% $90 $105 6%
Contract revenue
Student charter 5% FY14 Cost Portfolio Above CPI FY17 Commercial efficiency increases $2,175 charter / other
39 First Student – summary
• Business turnaround is progressing Our business • $100m of cost efficiencies delivered to end of FY14
• Cost efficiency, uniform operating procedures and disciplined approach to managing the portfolio will provide solid returns and cash flows
• Completion of the turnaround programme will return the business to double digit Our plans margins • The business will be repositioned to take advantage of strategic growth opportunities
• Return to double digit margins and improve returns through execution of plan Value opportunity • Leverage market leading position and deliver profitable growth
40 Dennis Maple, President – first impressions
• Ten years experience providing contracted services to the education sector
• Established profile and contacts in this market
• Understand the issues facing decision makers
• First Student’s recovery programme has achieved significant change and greater efficiency, while improving safety and customer satisfaction
• Clear direction to drive programme forward, with further opportunity from: – Cost savings – Pricing – Capital
41 Greyhound
Dave Leach, President
42 Greyhound – overview
• Intercity coach market renaissance continues, especially amongst younger demographic Market • Car ownership declining, driven by continued urbanisation, congestion and costs of driving opportunity • Intercity coach beginning to attract users back to coach travel plus new customer demographics – and today’s share of customers’ addressable journeys is still low
• Iconic brand synonymous with long-distance coach travel • Only national network of scheduled intercity coach transportation – provides passenger feed Our and operating leverage to newer point-to-point services strengths • An operation that is re-engaged with the customer operating a refreshed fleet • Point-to-point product suite provides multiple price point approach to new markets
• Operating model transformed – reduced cost base, capital profile and improved flexibility Strategic • Disciplined renew/refurb programme to manage capital investment requirement progress • Point-to-point yield management expertise highly applicable to traditional network • IT transformation will unlock yield management, dynamic pricing and enhance customer convenience throughout the network – and transform load factors
• Investment in IT for Greyhound to facilitate better yield management and growth in excess of Our GDP objectives • Further roll out of successful new products such as BoltBus, YO!Bus, and Greyhound Express, and investment in fleet renewal and refurbishment
43 Business overview
44 The actions taken have driven results
Greyhound’s hard work in getting our house in order makes us poised for growth. IT transformation, increased marketing and further expansion of network and brands will leverage this foundation and accelerate future growth Network Growth era Rightsizing era Transformation era restructure era 200 Rev / Mile* 175 Yield* 150 Load* 125 Revenue* 100 Passenger Miles* 75 Fleet* 50 Coach Miles* 25 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 $150m $100m EBIT* $50m $0m • Fixed cost business model • Variable cost • Global recession • New coach opportunity business model • Long haul orientation • Benchmarking • Refocus on customer • Network exercise with • Promotions • Fleet restructured FirstGroup led to • Customer experience • Route networks around centres of substantial cost • Expanded sales channels demand connected reductions • Shorter haul price & network • Revenue at any cost orientation by long haul pipes • Massive fleet investment • Location • Greyhound Express & BoltBus • No investment, rationalisation • Beginnings of technology • Contribution margin too low to leveraged and • Limited transformation generate meaningful profits exhausted growth investment era assets • Leverage existing costs and • BoltBus launch infrastructure for growth – and learnings load gains
* Greyhound US Only 45 Initial stages of Greyhound’s transformation
Initial stages of Greyhound transformation give us confidence in our future
We have delivered consistent operating profit growth in the midst of a prolonged recession and new competition How did we do it? $140 • Reduced cost structure to a leveragable base by achieving $115m in cost savings over past 5 years $120 • Recapitalised the fleet, significantly mitigating required $100 maintenance capital, by introducing a refurbishment $80 programme that extends the life of coaches. Blue coaches represent 75% of the current fleet $60 • Transformed the business, refocusing on the customer $40 and delivering exceptional service $20 • Restructured our Canadian business to deliver a more commercially viable service $0 FY10 FY11 FY12 FY13 • Introduced growth brands (BoltBus and YO!Bus) and launched Greyhound Express, a point to point premium EBIT(Millions) EBITDA (Millions) service within the core Greyhound network
Ontime performance Customer complaints/100,000 Passenger survey stats Pax 95% 80% 75% 91% 800 575 70% 70% 90% 89% 552 87% 600 70% 400 330 85% 60% 200
80% 0 50% FY11 FY12 FY13 FY11 FY12 FY13 FY12-H2 FY13-H1 FY13-H2 Respondents "Very Likely or Likely To Use Greyhound Again"
46 Greyhound’s passenger brands
Multi level brand strategy achieves broader market potential Learnings in the three growth offerings give us confidence to continue transformation into core network
Description Markets served Fleet size
2000+ destinations in the US
Iconic national network Access to Mexico and Canada
1,675
Between most Premium service US and Canadian cities within the core network with connectivity to the core network
Most Canada Markets US Northeast Premium brand US Northwest (incl. Vancouver) 100 California
New York – Philadelphia Chinatown brand 20 New York – Boston
47 Market background
48 Size of the potential US coach market
Size of the potential market presents a significant opportunity for growth
Market size based on segmentation study results of people who have taken or have considered a coach trip
• More than 42m people currently consider coach travel in the US • We estimate that we currently serve a quarter of this population • Of the people who travel by coach, they choose other modes 75% of the time • New offerings and better products, services and price have the potential to growth this market and the frequency of use
49 The network advantage
50 Greyhound network breadth
Applying what we have learned from Express across the rest of the network offers substantial growth potential
North America Express sales ($m)
150 121 100 48 50 2 0 10/11 11/12 12/13
• Greyhound Express footprint covers over 30% of our US network and already most of the major city pairs • Significant opportunity in applying Greyhound Express learnings across the network
51 Greyhound’s network – a true competitive advantage
The power of the network provides a significant competitive advantage and an established base for further growth
Background: US coach market can be classified into two broad segments: • Prolific Midwest and Northeast markets with high density city to city demand and high acceptance of public transport systems • Longer haul markets with low density between city pairs and under developed public transport systems
Case Study 1: Northeast market
Express Montpelier Portland
Ex. New York - Boston RPM/CPM Load Yield Concord Syracuse Albany Boston O&D Specific $3.39 35 9.7 Network Rochester Hartford passengers Binghamton Express to Express Feed $0.10 1 10.1 New York account for only 20% of total Longhaul Feed $0.16 2 8.0 Pittsburgh ticket RPM Average Daily Round Trips Small City Feed $0.54 5 10.8 New York - Boston Washington Total Ticket $4.19 43 9.7 Network Point-to-Point GLI infrastructure Richmond Competitor Facility Income $0.51 - - supported ancillary products Legacy 3 Parcel Service $0.05 - - Raleigh and services Greensboro Express 15 12 increased Asheville Charlotte Boltbus 12 Food Service $0.17 - - Wilmington Spartanburg passenger RPM Myrtle Beach Yo!Bus 6 Total Ancillary $0.73 - - Columbia by a further 17% Total 36 12 Total RPM $4.92 43 11.4 Charleston
• Short haul routes, high acceptance of public transport systems and congested freeways result in high density • These markets are ideal breeding grounds for new entrants because they offer expedited paths to profitability • While network feed is not the primary component of RPM in these markets, it helps maintain competitive pricing
52 Greyhound’s network – a true competitive advantage
The power of the network provides a significant competitive advantage and an established base for further growth
Case Study 2: Texas market Tulsa Oklahoma City Express Little Rock Lawton Ex. Houston - Dallas RPM Load Yield Texarkana O&D Specific $1.07 8 13.4 Fort Worth Dallas Network El Paso Tyler Express to Express Feed $0.43 3 14.3 passengers San Angelo accounted for Baton Rouge Longhaul Feed $0.68 5 13.6 Bryan Beaumont 70% of total New Orleans Small City Feed $1.41 10 14.1 ticket RPM Houston Total Ticket $3.59 26 13.8 Network Average Daily Round Trips Facility Income $0.51 - - infrastructure supported Dallas - Houston Parcel Service $0.15 - - ancillary products Point-to-Point McAllen GLI Food Service $0.17 - - and services Competitor increased Legacy 3 Total Ancillary $0.83 - - passenger RPM Express 8 Total RPM $4.42 26 13.8 by a further 23% Total 11 4 • Long haul routes with lower density city pair demand and underdeveloped public transport system
• Lack of network feed can potentially put the viability of a coach operation in these markets at risk
Conclusions • Network feed from 42 thousand city pairs delivers profit before the coach leaves the station • Ancillary revenues, leveraging network infrastructure provide an additional 23% of revenue • Ability to price as necessary to grow markets and gain share in competitive ones • Ability to offer more frequency than competitors from serving the broader network
53 Growth strategy
54 Growth strategy: one more passenger
Investment in customer-facing technology that provides value to the customer will deliver profitable growth on existing capacity and resources
Illustration: impact of one extra passenger per coach Enablers to load growth Maximum capacity of a coach 50 • Frictionless commerce making it easier for our customers to Average load 35 transact with us Average ticket price $45 • Ability to deliver personalised offerings that mean Assumed fleet size 1,000 something Incremental passenger/coach 1 • Right information for customers wherever and whenever Price of incremental ticket at 75% of average $34 they want it Incremental revenue/day (tickets*price*coaches) $33,750 • Proactive problem solving, anticipating needs before they EBIT impact/day at 90% flow through $30,375 happen Annual EBIT impact $11,086,875 • Yield and capacity management
• Leveraging available capacity and adding one extra passenger per coach daily will generate $11m in annual incremental EBIT assuming 1,000 coaches operated • IT transformation will open up many new ways to interact with new and existing customers to better leverage and monetise the existing network capacity • Loyalty and ease of doing business with Greyhound post-transformation will also lead to greater shares of existing customers’ travel wallet • We expect to invest $30-50m to complete the programme over the next three years
55 ‘Airline style’ revenue management offers significant value
Dynamic pricing enables yield and capacity optimisation
High Demand Management Network Management • Maximizing revenue in high Current State Future State demand corridors
Peak Off-Peak Peak Off-Peak Current State Future State – Peak pricing opens up seats for those willing to pay – Price conscious consumers fill out open schedules
• Ability to sell existing excess network inventory Moved from peak schedule to off- peak schedule – Aggressively price ‘free’
Don’t make it on network inventory to to the bus in the current state grow demand
Load: 50 Load: 30 Load: 50 Load: 42 Load: 27 Load: 32 Yield: 0.12 Yield: 0.12 Yield: 0.20 Yield: 0.10 Yield: 0.1462 Yield: 0.1327 • Initial capabilities expected RPM: 6.00 RPM: 3.60 RPM: 10.00 RPM: 4.20 RPM: 3.95 RPM: 4.25 to be delivered in Q1 of FY15 Can’t Board Current State Can’t Board Future State Load: 40 Load: 46 Yield: 0.12 Yield: 0.15 RPM: 4.80 RPM: 7.10
Legend
Price Conscious Customer Premium Customer Empty Greyhound Coach Seat
56 Greyhound – summary
• Conversion to a lower cost business model offers flexibility in any market Our business • Solid margins and returns provide a platform poised for future growth
• Uniquely positioned with a strong national network and iconic brand
• IT transformation to deliver customer value and empower front line employees Our plans • Ample opportunity to expand footprint and grow within existing network
• Improved operational performance and efficiency
• Network leverage delivers top line growth and operating profit margin of Value approximately 12% in the medium term opportunity • Ample opportunities to expand penetration and footprint with multiple brands and services
• Fleet recapitalisation and maintenance transformation offer further margin enhancement
57 UK Rail
BusinessVernon Review Barker, Managing Director UK Rail
PLC 26th November 2013 UK Rail – overview
• £8bn of long-term contract-backed passenger revenue available – 19 major franchise Market opportunities opportunity • Third generation of government procurement process with capital-light characteristics • New franchises expected to have clearer upfront contingent capital requirements, greater revenue risk but earlier exogenous protection
• Market participant since 1997; experienced in running all types of franchise Our • Strong commercial, rolling stock and major project (including infrastructure upgrade) strengths capabilities • Highly experienced bidding team – most successful in previous franchising rounds
• Delivered more than £600m of pre-tax cash from franchises managed since 2006 Strategic • Outperformed industry in delivering punctuality and customer satisfaction improvements progress since 2006 • Already shortlisted for five bids representing 29% of current passenger revenue receipts
• Maintain a significant share of UK rail market, with similar levels of profit and risk Our objectives
59 UK Rail – scope of operations
• UK Rail division started operating in 1997 and has operated eight separate franchises, contracting to Government
• Only provider with experience across commuter, regional, long distance and sleeper operations
• Largest UK operator: ─ 23% of total industry passenger revenue ─ Employs 13,500 members of staff ─ Operates 2,800 diesel and electric rolling stock vehicles daily ─ Runs 395m vehicle miles per annum ─ Operates 662 stations
Major market Premium / Franchise Contract period Comments sector(s) Subsidy First Great Western InterCity, Apr 06 to Sep 15 Premium InterCity element operated since 1998. New Commuter, agreement signed in Oct 13 Sleeper, Regional
First Capital Connect Commuter Apr 06 to Mar 14 Premium In discussions with DfT on short contract award from Mar 14 to Sept 14 First Transpennine Express InterCity Feb 04 to Mar 15 Subsidy Joint Venture with Keolis (who own 45%) and potential contract award to Feb 16
First ScotRail InterCity, Apr 04 to Mar 15 Subsidy Shortlisted to bid for new franchise Commuter, Sleeper, Regional
First Hull Trains InterCity Open Access n/a Operated by FirstGroup since 2004 with 20% minority shareholders
60 Our successful record in rail
FirstGroup’s annual profit and share of UK national rail passenger revenue 30% £120m
25% £100m
20% £80m £m operating profit less non- 15% £60m recurring charges % share of franchise passenger 10% £40m revenue
5% £20m
0% £0m 06/07 07/08 08/09 09/10 10/11 11/12 12/13
• FirstGroup’s portfolio of franchises have been operated since 1 April 2006 and successfully delivered in excess of £0.6bn pre-tax cash generation for FirstGroup, including franchise investment spend and bid costs
• The main determinate on annual profit levels is variance from the bid model, especially passenger revenue growth (CAGR since 1 April 2006 is 6.9%)
• Have retained a constant share of the total UK Rail franchise passenger revenue at 24% over the seven year period
61 Industry opportunity
62 UK Rail sector overview
The UK Rail market • Revenue £8bn • 19 current UK rail franchises – operated by 11 Owning Groups (including Directly Operated Railways) • High barriers to new entrants; regulated environment and rigorously defined contracting process • Contingent investment only – good cash flow potential
Forthcoming opportunities
• Third round of post privatisation franchising competition underway
• In total, £5bn (including £1bn relating to FCC and Southern) of the current passenger revenue value is available for franchising in the period to April 2017
• Process has started with FirstGroup shortlisted for the first five available franchises
63 DfT and Transport Scotland refranchising programme
Franchise Short 11/12 listed Market sector Passenger 2014 2015 2016 2017 2018 2019 2020 2021 revenue share TSGN (cost risk only) includes Yes London and South East 15% Sept First Capital Connect
Essex Thameside Yes London and South East 2% Sept East Coast Yes InterCity 8% Feb Caledonian Sleeper (Transport Yes Specialist n/a Apr Scotland) First ScotRail (Transport Yes Regional 4% Apr Scotland) Northern Regional 3% Feb First TransPennine InterCity 2% Feb First Great Western InterCity 10% Jul Greater Anglia London and South East 8% Oct West Coast InterCity 11% Apr London Midland London and South East 3% Jun East Midlands InterCity 4% Oct South Eastern London and South East 8% Jun Wales & Borders Regional 2% Oct South West London and South East 11% Apr Cross Country InterCity 5% Nov Chiltern London and South East 2% Dec
Source:: ORR, DfT and Transport Scotland 64 The franchise model
65 Rail franchise bids in the UK
• Normally two years from start of bid consultation process until new franchise commences
• Typically bid costs for FirstGroup range between £4m to £6m covering financial and legal advisors, revenue and market assessments and specialist advisors
• The pre-qualification and bid requirements can create a significant barrier for new market entrants because:
– The high cost means it cannot be undertaken speculatively. New entrant cost likely to be much higher as it cannot rely on FirstGroup’s economies of scale and level of expertise
– Pre-qualification requires the bidder to demonstrate credentials with a relevant track record and experience in similar operations
– Difficulty in building up market expertise as limited pool of contract opportunities and experienced people
– Different contractual market from other large outsourced environments
• Margins based on revenue and cost risk profiles of individual bids
Source: DfT 66 The franchise model – passenger revenue
• Income characteristics in a franchise with passenger growth generation is subject to a number of different factors including: – Exogenous GDP growth – Fare changes Passenger revenue base of FirstGroup UK Rail franchises – – Regulated fares 2012/13 Leisure – Advance purchase and yield management 20%
– Changes to timetable services Business – Train performance and track engineering works 48% – Revenue protection Commuter 32% – Marketing – Crowding constraints
• Financial protection mechanisms include: – Anticipation that DfT will provide a mechanism for sharing revenue risk linked to economic factors – Government changes to regulated price regime are compensated – Network Rail compensation
67 The franchise model – franchise costs
Network Rail charges – Mainly fixed, covering access charges for track, stations and depots – Office of Rail Regulation (ORR) five yearly
Network Rail charging review changes covered Cost base of FirstGroup’s UK by franchise payment adjustment mechanism Rail franchises – 2012/13
12% Network Rail Rolling stock charges 3% – Fixed operating lease costs 29% Staff costs – A variety of lease structures depending on 8% the level of maintenance responsibilities Rolling stock Fuel and utilities Staff costs – Staff TUPE 21% Commission – No long term pension funding liabilities payable 27% Other Assets and investment – Few owned assets – Mainly rolling stock, stations and depot operating leases – Franchise payment includes value for any direct investments
68 Parent company contingent financial support
• New franchises are SPVs with the signatories to the Franchise Agreement being the SPV, Parent Company and the Franchising Authority
• Typically the SPV has no significantly level of initial capitalisation and the Franchising Authority relies on the Parent to:
– Provide a minimum loan facility to the SPV
– Provide a re-let/performance bond payable on demand in the event of any default
– Provide a Season Ticket Bond to protect the season ticket cash for future rail travel
• Current levels of performance bonds and inter-company loan facilities total: £138m
• For the forthcoming franchises the following published levels are: Essex East Franchises Thameside TSGN Coast ScotRail Re-Letting / Performance Bond (RPI indexed) £6m £20m £20m £35m Loan Facility (Minimum) £30m £50m £50m £25m • In addition further loan facilities may be required depending on franchise requirements
Source: DfT 69 Our strong rail credentials
70 UK Rail – expertise and a record of delivery
Delivering growth
• Average FTPE revenue growth of 13% per annum delivered over the past nine years
• First ScotRail has seen significant passenger growth since 2004, with annual journeys up by more than 30% to 83.3m in FY13
Delivering capacity upgrades
• Four successful new fleet introductions in recent years
• Currently involved in programmes delivering a further 1,500 further new vehicles
• Major timetable service changes delivered across all four franchises
71 UK Rail – expertise and a record of delivery
Delivering infrastructure upgrades
• £850m Reading station remodelling project partnership between FGW and Network Rail
• FCC working with Network Rail on £6bn Thameslink programme doubling train capacity
• FSR worked with Network Rail to electrify and transform Paisley Canal line through innovative alliance
• Working with DfT on electrification of Great Western mainline in preparation for InterCity Express Programme, Crossrail and new fleet of local electric trains
72 UK Rail – quality improvement
• First Great Western recorded the largest Train Performance Improvement from 06/07 Public Performance Measure (PPM) – as measured by PPM improvement of any franchised TOC – 5% 5.9% since 2006/07
4% FirstGroup • The improvement in National Passenger 3% Survey (NPS) includes FGW increasing
Total Overall Satisfaction score by 8% 2% industry (excluding FirstGroup) • FCC has seen challenges due to 1% 07/08 08/09 09/10 10/11 11/12 12/13 infrastructure and Thameslink Programme works, but still increased by Customer Satisfaction as measured by NPS Spring 5% over the period Results – increase from Spring 07 (franchised only)
8% • Innovations improving customer 7% 6% experience: FirstGroup 5% 4% – 1.6m journeys on FSR made with 3% Total smart tickets Industry 2% (excluding FirstGroup) 1% – More than one million downloads 0% of our customer app, providing 2008 2009 2010 2011 2012 2013 journey planning and mobile retailing capabilities
Source: Network Rail and Passenger Focus surveys 73 Leveraging our expertise and capability
Industry recognition
• More than 200 external awards within rail industry and wider since 2006
• FTPE: National Rail Awards – Passenger Operations 2013 and European Intercity Operator of the Year 2013
• FSR: National Rail Awards – Rail Operator 2010 (UK) and Passenger Transport Operator of the Year 2013 (Scotland)
• Franchises all recognised by the British Quality Foundation with 4- and 5- star Business for Excellence ratings. FTPE first UK rail franchise to achieve 5 star
• All TOCs accredited by Investors in People
• FirstGroup first public transport operator to achieve British Standard for collaborative business relationships, as highlighted in McNulty Value for Money Report
74 UK Rail – summary
• Profitable, successful division with ‘light’ direct capital requirement Our business • Only owning group with scope and experience across a range of franchise opportunities
• Highly experienced management team
• Delivering quality improvement in all operational areas, strong project management, partnering and rolling stock capability
• Delivering rail services with customers at the heart of what we do Our plans • Bid to replenish portfolio, similar levels of profitability and risk
• £5bn of UK rail turnover available for bid pre-April 2017 Value opportunities • Shortlisted for five franchising competitions to date
75 UK Bus
Giles Fearnley, Managing Director
76 UK Bus – overview
• Total revenues of £4.4bn per annum – UK, excluding London Market • Market segmentation offers great potential opportunity
• 20% market share outside London Our • Operating in seven of the 12 most densely populated cities strengths • 57% of operations across major northern and Scottish conurbations
• Delivering service quality through rigorous focus on disciplined operations The • Designing networks to maximise demand and offering real value for money fares proposition • Developing ticketing and customer-facing technologies that stimulate growth and loyalty
• Transformation programmes across whole division Strategic • Network and fares reviews proving growth potential progress • Passenger volume growth 2.0% to date (FY14)
• Strong revenue growth underpinned by sustained volume growth and tight cost controls Our • Double digit margins by 2017 objectives
77 The UK Bus market remains attractive
Bus trips by journey purpose Other Escort FirstGroup captures 20% of UK market (outside London): 2% Business 2% Personal - £871m revenues (FY13) business 10% Shopping 25% - Carrying 577m passenger (FY13)
Education/ education escort - Operating principally in major urban areas 17%
Commuting Leisure and 23% other • Growth strategies targeting each market segment: 21% - By journey purpose and by age
Bus trips by age band • Young people provide a great growth opportunity: - Between 1997 and 2012 the number holding
70+ 5 - 16 full car driving licences fell by: 14% 15% Age 17-20 7% 60-69 17-20 12% 10% Age 21-29 9%
50-59 21-29 9% 16% 40-49 • Significant spare capacity to accommodate growth 12% 30-39 12%
Source: DfT National Travel Survey, Great Britain 2012 78 We have compelling positions in key markets
Aircoach Wales 5% 3% Ireland 3% Cymru 5% Glasgow 15% Essex 6% Mid & West 6% Norfolk/Suffolk Lothian 4% 6% Scotland 6% 24% Midlands Aberdeen 6% 3%
South West 2% Revenue £866m£865m 63% South & North Yorkshire 9% 25% Hants Dorset & Berks 7% England 68%
Bristol & Avon 9% West Yorkshire 15% Manchester Fare paying passengers Concessions Tenders Other 10%
Financial year 2012/13 revenues 79 UK Bus – a snapshot of our operations
80 The UK Bus strategy has changed
160.0%
Cost per mile 120.0% Average fare +22 Public Funds RPI % Commercial/Other Rev 80.0% +5% Mileage Commercial Pax
-3% 40.0% 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14
Historic strategy – pre 2012 The transformed business Maximise yield per passenger and per bus by: Maximise revenue growth through: - Raising fares above inflation - Fares offering real value for money - Reducing service frequency - High standards of service - Variable service quality - Tight cost disciplines - Under-investment - Focused investment
Poor customer proposition, increasingly not offering Deliver a strong, attractive customer proposition, value for money, leading to: creating: - Customer dissatisfaction - Responsive networks - Local authority despair - Valuable partnerships with local authorities - Increased competition - Increasing volumes - Greater market share
RESULT: VOLUMES DECLINED RESULT: PROFITABLE VOLUME GROWTH 81 Bus transformation plan – the levers for change (1)
Lever Initiative Progress to date Portfolio • Sale of non-core assets • Completed Disciplined • Core operating procedures and • Breakdowns reduced by 27% Operations standards • Vehicle defects reduced by 29% • Cost efficiencies • Engineering lost mileage reduced by 21% Network • Design – to maximise growth • Numerous route upgrades and initiatives Delivery opportunities and increase market share • 10 major redesigns completed to date
• Partnerships – to create strong • Examples of deeper arrangements including Sheffield Bus delivery mechanisms with local Partnership and the Eclipse network in Hampshire authorities, improving service • Award of Better Bus Area status in Bristol, Sheffield and delivery York
• Providing the strongest defence to the regulatory agenda
• Fares and fare structures – a new • Reductions in selected fares products, particularly day approach to deliver volume and and weekly tickets, have now been applied to c.65% of revenue growth the business. Volume growth is achieving expectations
• Focus on discounts to young people
Together these measures deliver a compelling offer to customers
82 Bus transformation plan – the levers for change (2)
Lever Initiative Progress to date People • Training and development for all • Driver CPC courses and on-the-job training for engineers employees, directly related to individual roles and • Leaders and managers receiving personal development responsibilities support and training
• Creating a customer centric • Managing Director appointments to each business unit culture • Recruitment of specialist commercial and technology experts
• 30% of senior managers recruited to role since 2012
• Significant cultural change
Investment • Core operating procedures and • Deliveries on track and achieving reduction in average standards fleet age from 9.4 to 8.2 years in 2016
• Cost efficiencies • Plans developed to deliver smart and mobile products through 2014
• Apps and web channel upgraded; real time service information, working alongside local authorities
Together these measures deliver a compelling offer to customers
83 Bus transformation plan – cost efficiency opportunities
Drivers • New starter rates • Scheduling and rostering • Terms and conditions Non Building Other Overheads 5% Overheads Fuel 8% Building • DriveGreen – driving behaviours Overheads 3% Parts & • Working with manufacturers for continuous Support improvement Services - Lightweight and flybrid technologies 14% PCV 9% - Low carbon certification for Streetlite
Traffic Drivers Total Engineering 7% Dep'n 43% Labour • Labour recording system 6% 56% • Investment in diagnostic equipment reducing breakdowns Engineering • Increasing skill levels 15% • Benchmarking by depot and vehicle type • Purchasing and supplier management Other Direct & Fuel 16% Semi Direct Costs • Benefits from new buses 2 % Fuel - Fewer vehicle types 16% - Lower maintenance costs
Overheads • Continuous review of all support functions • Depot rationalisations • Energy efficiency programmes • Investing to support frontline delivery
Financial year 2012/13 costs 84 Commercial volume growth – strategy delivering results
April-December 2012 vs. April-December 2013
Mileage Commercial Commercial Area Actions Comments % Volumes % Revenue %
• Service enhancements Major fares realignment Bristol +4% • Performance improvements +7% +3% introduced Nov 2013 following • No fares increase consultation • Stable network Pricing initiatives (day and • Performance improvements Leeds +4% +9% +5% weekly products) launched Jan • Inflation only fares increases 2014 (18 months) • Day and weekly prices Manchester +1% reduced by 30% (Apr 2013) +13% +1% Volumes continue to increase • Performance improvements • Partnerships from Oct 2012 Total ridership (all operators) for Sheffield 0% • Fares realigned +17% +12% adult fare-paying passengers • Performance improvements increased by 9%
Significantly increasing the customer base
Commercial volumes represent fare paying passengers Commercial revenue excludes concessionary fares reimbursement and tendered service support 85 UK Bus case study – Bristol
Consolidated Mayor of Fares Public from 3 to 2 Bristol increase consultation depots elected deferred of fares
2012/13 2011/12 2013/14 Pax –4% Pax +3% Pax +6% Complaints +3% Complaints +4% Complaints +4%* STA – no STA +2% STA -1%* change Focus on Increased Fares changes service evening and implemented performance night services
The issues Actions taken The results • Service performance badly • Additional resource to maintain • Service performance improved through affected by congestion timetable – but congestion lost mileage reduction of 21% • Over complex and anomalous remains a major issue • Passenger volumes increased by a fare structures leading to a • Responding to growing night- further 6% following November fares perception of over-pricing time economy with additional late changes • Difficult relationships with the evening and night services • Overall passenger satisfaction score rises West of England local authorities • Following a major public to 93% and the newly-elected Mayor of consultation (6,500 respondents) • Working closely with the Mayor to drive Bristol – launched a new fares structure the city’s economy from November 2013 – focused on zonal and young persons’ • The future products – Fares consultation for Greater Bristol networks, Spring 2014 – Comprehensive marketing campaigns
STA – start time adherence Complaints – per 100 passengers 86 * STA and complaints metrics for 2013/14 are impacted by a significant programme of roadworks and construction activity in central Bristol UK Bus case study – Leeds
Delivery of Fare 100 Olympic increase buses deferred
2011/12 2012/13 2013/14 Pax –4% Pax -4% Pax +10% Complaints +4% Complaints +2% Complaints -6% STA +2% STA -1% STA +3%
Multiple fare Opening of Student rises Trinity Shopping campaign Centre
The issues Actions taken The results • Poor service performance • Transformation programme • 100k additional passengers per week • Driver training backlog focusing on all aspects of service • 32% of new passengers new to bus and • Frequent service changes delivery 71% travelling only 1-3 times per month • History of above inflation fares • Acceleration of training • Service performance improved through increases programmes lost mileage reduction of 24% • Little confidence from local • Stable service network with • Delivering best defence to a regulatory authority (West Yorkshire PTE) additional growth mileage regime • Fares increase deferred six months and then applied at • The future inflation – From January 2014 reduction in day • Pro-active in developing and weekly tickets partnership proposals with local – Aligned to the city’s growing authority economy – Opportunity for partnership working
STA – start time adherence Complaints – per 100 passengers 87 UK Bus case study – Manchester
Evolving marketing Oldham campaign FirstGroup / M60 Fare fined by traffic fare reductions commissioner trials through GM 2011/12 2012/13 2013/14 Pax +2% Pax –9% Pax +14% Complaints +2% Complaints +3% Complaints -2% STA -1% STA +3% STA +1%
FirstGroup fares Delivery of Announced Delivery of considerably higher 100 Olympic intention to 30 new than competitors buses acquire Finglands buses
The issues Actions taken The results • Poor passenger and local • Transformation programme • 150k additional passengers per week authority (Transport for Greater focusing on all aspects of service • 46% of new passengers new to bus and Manchester) perceptions: delivery 67% now travelling 1-3 times per month – Variable service performance • Following trials, permanent • Service performance improved through – Fares c.40% higher than reductions of c.30% in day and lost mileage reduction of 32% other operator comparables weekly products • Stronger relationships with local – Tired fleet • Marketing strategy to maximise authority • Low employee morale awareness including extensive door drops targeting car users • An eroding market • The future • Cross city services introduced – Marketing campaigns continue • 130 new buses – Benefits of Finglands acquisition • Staff engagement throughout
STA – start time adherence Complaints – per 100 passengers 88 UK Bus case study – Sheffield
Strong yields from inflationary fare Extensive increases student Phased price campaign 2011/12 reductions 2012/13 2013/14 Pax –8% Pax –4% Pax +20% Complaints +1% Complaints +7% Complaints -10% STA +1% STA -3% STA +2% Bus partnership Targeted route New and launched campaigns building refurbished on fare position vehicles
The issues Actions taken The results • Highly competitive network • Transformation programme • Total passenger volume growth of 20% • FirstGroup’s fares 30-50% above focusing on all aspects of service on FirstGroup’s services (adult fare competitors delivery paying is 30%+) • Poor service quality • Fares reductions (c.30% on day • Volumes for all operators’ services now • Elderly fleet and weekly tickets) growing by 9% • Disillusioned employees • Sheffield Bus Partnership from • Service performance improved through October 2012 delivering: lost mileage reduction of 32% • Deservedly poor reputation – Co-ordinated route structures • The future – Elimination of over- – Strong partnership foundation to resourcing deliver further growth – Strong network promotion – Network changes following • 37 new buses + 30 refurbished consultation • Strong staff engagement
STA – start time adherence Complaints – per 100 passengers 89 UK Bus case study – Glasgow: network redesign
2005 2012 SimpliCITY from May 2013
services operating at frequencies of 10 minutes or better
The issues Actions taken The results • Continual mileage reductions • SimpliCITY network introduced • Against backdrop of a struggling local had focused on reduced May 2013 following extensive economy: frequencies consultation with public and – SimpliCITY outperforming the rest of • Route structure complex and local authorities the Glasgow network many journeys not direct • High frequencies (10 mins or – Against pre-launch trends SimpliCITY • An impossible proposition for better) restored to core services +1.2%, non-SimpliCITY +0.2% effective marketing • Better co-ordination across all volume growth • Opportunities for competitor services • SimpliCITY represents 68% of the entry • Simpler links to and from city network’s revenue and 65% of resource centre • The future • Achieved with no increase in – 420k households receiving direct mileage marketing • A strong marketable proposition – Further network strengthening planned
90 UK Bus capital investment Total capex (£m) PCV capex (£m) 140 120 120 100 100 80 60 80 Other 40 60 PCV's 20 0 40 Property 08/09 09/10 10/11 11/12 12/13 20 London/Regulated Rest of UK/De-regulated 0
Additionally – mid-life refurbishments of: 379 buses in 2013/14 273 buses in 2014/15 Fleet age and DDA compliance (ex London) Reduction of 24 vehicle types by 2017 9.6 100% 9.4 90% 9.2 80% Focus on fuel efficiency: 9.0 70% - lightweight, micro Hybrid and Flybrid technologies 8.8 60% delivering 10%+ fuel efficiency 8.6 50% - low carbon certification on Streetlite qualifies for 8.4 40% 8.2 30% 6p increase in BSOG payments 8.0 20% 7.8 10% Alternative fuel source trials – in 2014 include: 7.6 0% - electric for York’s Park & Ride services Average Age DDA Compliance - hydrogen for Aberdeen
Reducing average fleet age and achieving DDA compliance
91 The roadmap to double digit margins
Costs (£m) 12%
£73 Drivers c.3.0% c.3.0% c.10.0% Fuel (net) 10% £70 Tyres £52 £339 Engineering 8% c.3.0% £114 Traffic 0.1% PCV 1.0% £126 6% £6 Overheads 4.7%
Revenue (£m) 4% Portfolio ($m) (1.8%) £62 c.3.0% £49
Fare paying 2% passengers Concessions
£546 Tenders £214 0% FY13 Portfolio Headwinds Cost Growth FY17 Other revenues efficiency
92 UK Bus – summary
• The transformation plan is working by: Our business – driving the potential in each market
– utilising spare capacity to meet this increasing demand
– successfully partnering with local authorities – aligning objectives and underpinning the delivery of high quality bus services
• Each component of the transformation plan is coming together to enable the full Our plans potential within each market to be achieved • The introduction through 2014 of smart and mobile ticketing, together with enhancements to customer information channels will spur further growth
• Exploiting the compelling position held in each market Value opportunity • Profitably expanding the customer base – passenger volumes are increasing at unprecedented levels
• In combination, these strategies are creating a robust business
• Restoring double digit margins by 2017
93 Financial framework Chris Surch Group Finance Director
94 Key topics
Group profile
Financial objectives and supporting management framework
Capital structure
Medium term potential
95 Group profile
Revenue Operating profit
UK Rail 12% First Student 22% First Student 36% UK Rail 41%
UK Bus 18% First Transit 12%
Greyhound 18% Greyhound 9% First Transit UK Bus 16% 16%
Group ROCE at 31 March 2013 was 7.6%
Financial year 2012/13: post-IAS19 excluding Group items 96 Medium term financial objectives
• Four-year financial objectives: – Grow Group revenue (excluding UK Rail) at a faster rate than the underlying economy – First Student and UK Bus: improve margins to 10% – Greyhound: improve margins to approximately 12% – First Transit: maintain margins while investing to take advantage of key outsourcing opportunities – UK Rail: maintain similar levels of profitability and risk – Post-tax ROCE* in the range of 10%-12%
• Treasury objectives: – Net debt : EBITDA ratio of 2.0x in the medium term – Maintain appropriate liquidity headroom – Maintain investment grade credit rating
* Defined on next page
97 Return on capital employed
ROCE FY13 (£m) Operating profit after tax All assets and liabilities, excluding debt items Operating profit (post-IAS19) 275.5
Effective tax rate 20.1% • Calculation based on statutory accounts disclosures Operating profit post-tax 220.1 • ROCE includes tax structuring benefits Balance sheet net assets 819
• Capital employed includes goodwill, excludes net debt Less: gross cash (Note 21 to Annual Report) (682) and accrued interest Plus: gross debt (Note 22 to Annual Report) 2,759
Capital employed 2,896
ROCE FY13 (as reported) 7.6%
Medium term ROCE target of 10% to 12%
98 Framework for managing and driving improved returns
1 Revenue growth
Operational Divisional turnaround Margin expansion returns: 2 plans ROCE 10-12%
Capital structure: Drive Investment Grade 3 Operating leverage EPS Objectives returns Rating 2.0x net debt / EBITDA in Capital expenditure 4 medium term control Free cash flow Strong cash flow
5 Capital structure
Returns FirstGroup to being a reliable and consistent cash generative business
99 1 Revenue growth
• General: GDP growth – GDP based businesses: economic recovery from 2015
• First Student: Contract growth and – Optimise existing portfolio and share shift optimisation – Charter growth to maximise utilisation of assets
• First Transit: Continued growth – Continual focus on bid pipeline (retention and new opportunities) – Growth in context of margin maximisation and ROCE for shuttle
• Greyhound: Yield management – Capacity and yield management on core network and Express services – New point-to-point services
• UK Bus: Network rationalisation – Refreshed commercial proposition less funding – Passenger, concessions, other revenue volumes – Pricing and funding
• UK Rail: Rail franchises – Passenger volumes – New contract bids
100 2 Divisional turnaround plan – First Student
Cost efficiency ($m) 11% >1.0% Cost efficiency ($m) Driver comp c.2.0% >10.0% 10% c.(0.5%) $400 Depreciation c.2.0% $85 Maintenance $1,060 $195 Fuel 9%
$225 Insurance
$230 Other running 8% costs / overhead c.7.5%
PortfolioPortfolio ($m) ($m) 7% >1.0% $90 $105 6%
Contract revenue
Student charter 5% Commercial FY14 Cost Portfolio Above CPI FY17 charter efficiency increases $2,175 / other
First Student roadmap to double digit margins
101 2 Divisional turnaround plan – UK Bus
Costs (£m) 12%
£73 Drivers c.3.0% c.3.0% c.10.0% Fuel (net) 10% £70 Tyres £52 £339 Engineering 8% c.3.0% £114 Traffic 0.1% PCV 1.0% £126 6% £6 Overheads 4.7%
Revenue (£m) 4% Portfolio ($m) (1.8%) £62 c.3.0% £49
Fare paying 2% passengers Concessions
£546 Tenders £214 0% FY13 Portfolio Headwinds Cost Growth FY17 Other revenues efficiency
UK Bus roadmap to double digit margins
102 3 Operating leverage – improved margins
Margin FY13 Medium term plan Objective
• Transformation Student 7.4% Double digit • Growth and efficiency
7.6% • Growth Transit Stable (underlying) • Cost containment
• Growth Greyhound 8.4% c.12% • Cost containment
• Transformation UK Bus 4.7% Double digit • Growth and efficiency
Increased margins from revenue growth, investment and sharing of best practice
* All margins post-IAS19
103 Profit – building blocks to future value
600
500
400
300
Operating profit Operating 200
100
0 Actual FY13 Turnaround Trading Economic Potential Potential FY17 programmes recovery Rail wins
104 4 Capital expenditure
Annual capex Maintenance capex Fleet growth and other capex
Gross capex (£m)
Student 180 - 200 Student Share shift at good returns Transit 30 - 40 Expansion in growing 1.2x depreciation Transit shuttle market Greyhound 50 - 70 = Greyhound Yield management system UK Bus 110 - 120 c.£320m Reinvestment in fleet UK Bus Smart ticketing Group 10 - 20 Depot rationalisation
Gross capex 400
Returns-focused capital expenditure
* All capital expenditure excludes Rail 105 5 Capital structure – funding
Gross debt £3.0bn • Net debt ‘right sized’ through rights issue
£2.5bn • Simple Net Debt/EBITDA reduced to 2.4x at
£2.0bn September 2013, from 3.3x at March 2013
£1.5bn • Strong liquidity £1.0bn • Primarily Bond and Lease financed £0.5bn
£0.0bn • Considerable bank financing available under RCF Mar 13 Sep 13 ($1.25bn) due Dec 15 Bank Debt Finance leases Private Placement Bonds £400m • Additional bonding and letter of credit £300m requirements met through bank and surety £200m markets
£100m • Plan to bring interest costs down whilst £0m maintaining adequate liquidity and appropriate risk
management policies
17/18H2 22/23H1 14/15H1 14/15H2 15/16H1 15/16H2 16/17H1 16/17H2 17/18H1 18/19H1 18/19H2 19/20H1 19/20H2 20/21H1 20/21H2 21/22H1 21/22H2 22/23H2 23/24H1 23/24H2 24/25H1
Lease Finance Loan Notes Private Placement Notes £200m Bond 2024 (6.875%) £325m Bond 2022 (5.250%) £350m Bond 2021 (8.750%) £250m Bond 2019 (6.125%) £300m Bond 2018 (8.125%)
On plan to achieve net debt/EBITDA of circa 2.2x by March 14 Medium term objective is c.2.0x
106 5 Capital structure – Investment Grade status
S&P Fitch
Current Rating (Outlook) BBB- (Negative) BBB- (Stable) Key Metric FFO/ Net Debt Net lease adjusted FFO Leverage Target level 25% 3.5x Reported March 2013 15.8% 4.6x
Continued commitment to Investment Grade rating
• Rights Issue put us on track to meet Investment Grade metrics in medium term, whilst allowing funding of significant investment programme in the short term
• No change in rating or outlook from S&P following methodology changes announced in December
• Recent affirmation of rating and outlook by Fitch (December 2013)
• Credit positives cited by Agencies include competitive position, strong liquidity and diversified portfolio
107 5 Capital structure – pensions
Magnitude of pension schemes P&L vs. cash charges
Scheme assets Net deficit Op profit P&L Cash: Cash: Cash: £m 30 Sep 13 30 Sep 13 2012/13 £m 2012/13 accrual deficit total UK Bus 1,936 (45.3) 53.5 UK Bus 24.7 29.1 20.0 49.1
Rail 1,334 (7.9) 38.0 Rail 45.4 42.4 - 42.4 Student 78 (17.4) 109.9 North America 15.7 4.5 23.9 28.4 Greyhound 393 (134.6) 54.5 Total 85.8 76.0 43.9 119.9 Transit - - 49.1 Corporate - - (29.5) Service cost (£85.6m) + deficit contributions (£43.9m) – other (£9.6m) = £119.9m total cash charges P&L charge includes service cost plus £0.2m net interest charges Total 3,741 (205.2) 275.5
Characteristics Interest rate movement since 2010 valuations
5.0 20 year fixed interest gilt yield • Size of schemes 4.5 • Discount rate volatility 4.0
• Strength of covenant 3.5
3.0
2.5
2.0 Mar-2010 Sep-2010 Mar-2011 Sep-2011 Mar-2012 Sep-2012
Yield reduced by 1.78% over period
108 Returning to sustainable cash flows
Cash sources and uses
Net cash inflow
Net cash outflow W.cap/other W.cap/other Pensions
Pensions Interest Interest & tax
& tax EBITDA Cash flow £'m flow Cash EBITDA
Cash Cash capex capex
2012/13* Medium term plan*
Cash generation available to distribute as dividends or reinvest for further growth
* Before dividends and corporate disposal proceeds
109 Tim O’Toole Chief Executive
110 Q&A
111 Appendix: abbreviations
ADA Americans with Disabilities Act NPS National Passenger Survey ASE Automotive service excellence – qualification NR Network Rail awarded by the National Institute for O&D Origin and destination Automotive Service Excellence ORR Office of Rail Regulation CAGR Compound annual growth rate PCV Passenger carrying vehicle CPC Certificate of Professional Competence (bus driver training) PPM Public performance measure (UK Rail industry punctuality and reliability measure) CPI Consumer price index PTE Passenger Transport Executive DDA Disability Discrimination Act RCF Revolving credit facility DfT Department for Transport RFP Request for Proposal FCC First Capital Connect ROCE Return on capital employed FFO Funds from operations (measure of cash flow used by ratings agencies) ROSCO Rolling Stock Company FGW First Great Western RPI Retail price index FSR First ScotRail RPM Revenue per mile FTPE First TransPennine Express SPV Special purpose vehicle GDP Gross domestic product STA Student Transportation of America Inc. GLI Greyhound Lines Inc. STA Start Time Adherence (UK Bus measure of punctuality) HHI Household income TOC Train operating company IEP InterCity Express Programme TSGN Thameslink, Southern and Great Northern IRR Internal rate of return TUPE Transfer of Undertakings Protection of NEMT Non-emergency medical transport Employment (UK employment regulation)
112 Disclaimer
Certain statements included or incorporated by reference within this presentation may constitute “forward looking statements" in respect of FirstGroup plc's operations, performance, prospects and/or financial condition. Such statements are based on FirstGroup plc's current expectations and beliefs concerning future events and are subject to a number of known and unknown risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward looking statements. Such statements are also based on numerous assumptions regarding FirstGroup plc's present and future strategy and the environment in which it operates, which may not be accurate. FirstGroup plc undertakes no obligation to update any forward looking statements contained in this presentation or any other forward looking statements it may make.
Nothing in this presentation should be construed as a profit forecast. Past performance cannot be relied upon as a guide to future performance and persons needing advice should consult an independent financial adviser.
Nothing contained in this presentation is intended to constitute an invitation or inducement to engage in investment activity for the purposes of the prohibition on financial promotions in the UK Financial Services and Markets Act 2000. In making this presentation available, FirstGroup plc makes no recommendation to buy, sell or otherwise deal in shares of FirstGroup plc or in any other securities or investments whatsoever and you should neither rely nor act upon, directly or indirectly, any of the information contained in this presentation in respect of any such investment activity.
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