Returning to strength FirstGroup plc Annual Report and Accounts 2013 FirstGroup plc Annual Report and Accounts 2013 FirstGroup plc is the leading transport operator in the UK and North America. With revenues of more than £6.9 billion per annum and approximately 120,000 employees, we transport more than 2.5 billion passengers every year. Contents Overview Financial statements 01 Business summary 76 Consolidated income statement 01 Financial highlights 2012/13 77 Consolidated statement of comprehensive income 02 Chairman’s statement 78 Consolidated balance sheet 04 Chief Executive’s strategic review 79 Consolidated statement of changes in equity 06 Our business model 80 Consolidated cash flow statement 08 Our businesses 81 Notes to the consolidated financial statements 10 Our markets 128 Independent auditor’s report Performance 129 Group financial summary 130 Company balance sheet 16 Operating and financial review 131 Notes to the Company financial statements 40 Key performance indicators 138 Independent auditor’s report 42 Corporate responsibility 139 Glossary 46 Risks and uncertainties 140 Shareholder information Governance 141 Financial calendar 52 Board of Directors 54 Corporate governance 63 Directors’ remuneration report 72 Directors’ report 75 Directors’ responsibilities statement Find out more about FirstGroup on our website www.firstgroup.com Business summary Solid performance for the year with overall First Student recovery plan is on track, building on trading in line with management’s expectations progress made from a more efficient operating model and transformation plans on track and uniform practices Fully underwritten c.£615m rights issue to remove First Transit saw strong growth underpinned by Overview balance sheet constraints and enable continued good contract wins. The disposal of First Support investment for future returns whilst reducing leverage Services allows us to focus on our core businesses £1.6bn capital programme over four years to drive Greyhound delivered margin improvement despite growth, margins and returns economic headwinds. Strong growth in Greyhound Express No final dividend proposed. New progressive dividend policy announced UK Bus completed portfolio reshaping with c.£100m of disposals, including the sale of eight London depots announced in April. Comprehensive programme to restore performance and increase revenue and patronage is delivering early positive results UK Rail achieved continued strong performance. Franchise extensions are currently being negotiated for First Great Western and First Capital Connect and we are well positioned for resumption of franchising process Financial highlights 2012/13 Revenue Underlying EBITDA2,3 Underlying operating profit2 £6,900.9m £667.0m £335.4m 2012: £6,678.7m1 2012: £742.9m1 2012: £428.5m1 Underlying profit before tax2 Underlying EPS2 Statutory operating profit £172.4m 26.9p £205.7m 2012: £271.4m1 2012: 40.0p1 2012: £448.0m1 Statutory profit before tax Statutory EPS Net debt4 £37.2m 7.3p £1,979.1m 2012: £279.9m1 2012: 42.7p 2012: £1,837.5m For all businesses excluding UK Rail this year includes 52 weeks compared to 53 weeks last year. 1 Excluding discontinued operations. 2 Before amortisation charges, ineffectiveness on financial derivatives, exceptional items, (loss)/profit on disposal of properties and discontinued operations. All references to ‘underlying’ figures throughout this report are defined in this way. 3 Underlying operating profit less capital grant amortisation plus depreciation. 4 Net debt is stated excluding accrued bond interest. FirstGroup Annual Report and Accounts 2013 01 Chairman’s statement In a sector that is a key enabler of economic development, the Group’s diverse portfolio offers an attractive platform for sustainable growth. During the year we continued to take action to mitigate the effects of prolonged economic weakness and to place the business on a firmer footing to continue to invest for the future and deliver improved growth and returns. The Group has grown rapidly over the last 20 years through a combination of acquisition, organic growth and contract wins, and we Martin Gilbert have established a broad-based portfolio of market leading transport Chairman businesses in the UK and North America with unrivalled scale and breadth. We believe that our stakeholders benefit from the diversity of the Group which underpins the wealth of expertise and unique As we continue to manage knowledge that we have of many different markets, networks, contracts and assets. in a climate of uncertainty, The diversity of our portfolio also means that each of our businesses responds differently to changes in the economic cycle. As the problems of congestion from urban growth continue we have taken significant to multiply, the need for more efficient transport solutions is recognised as being ever more critical. steps this year to The external headwinds we have faced this year have been considerable. The sustained economic weakness across the UK and North America continued to affect our passenger revenue enhance our flexibility businesses, and the impact of reduced Government support for the bus industry in the UK during the year has been marked. It has and strengthen the also been an exceptionally challenging period for the UK rail industry and for our rail business in particular, following the unexpected cancellation of the InterCity West Coast franchise competition. Group for the future. Notwithstanding the public statements from the Department for Transport (DfT) that we were not at fault, having followed due process and submitted a strong bid in strict accordance with their terms, we were frustrated that our employees and our shareholders had to endure this extraordinary series of events. In March, following the completion of two independent reviews, the DfT issued a detailed timetable for rail franchise awards over the next eight years. As the UK’s largest and most experienced rail operator, we remain committed to maintaining a leading position in the market, and look forward to submitting further high quality bids that create value for passengers, taxpayers and shareholders. 02 FirstGroup Annual Report and Accounts 2013 Overview As we continue to manage in a climate of uncertainty, we have taken The Group remains a strong and profitable business with market significant steps this year to enhance our flexibility and strengthen the leading positions. During the year we continued to take action to Group for the future. Across the business there is a resolute drive to mitigate the effects of the prolonged economic downturn and to place harness our scale by developing and sharing our global expertise for the business on a firmer footing to continue to invest for the future. the benefit of our local markets. Led by Tim O’Toole, the management Having comprehensively reviewed other options, the Board is team remain focused on detailed plans to strengthen the business to confident that the rights issue announced in May is the best address the challenges we are facing today, and to achieve sustainable solution for the Group, to remove the risk of a credit rating growth for the future. downgrade, remove the constraints of the balance sheet and give management the resources necessary to deliver their value- During the year we took steps to further strengthen the Board through enhancing strategy for the Group. a number of new appointments. We are targeting an appropriate, progressive and sustainable On 1 August 2012 we were pleased to welcome Brian Wallace dividend policy with cover of 2.0 to 2.5 times in the medium term. In and Jim Winestock to the Board as Independent Non-Executive the short term the Board proposes that no final dividend will be paid Directors. Brian has held executive board positions within a number in respect of the year to 31 March 2013, nor an interim dividend for of FTSE 100 and FTSE 250 organisations, most recently as Group the year to 31 March 2014. Payments will recommence with a final Finance Director of Ladbrokes plc. Prior to joining Ladbrokes he was dividend for the year to 31 March 2014, subject to performance in Group Finance Director and Deputy Chief Executive of Hilton Group. line with expectations, as a transition to re-establishing a progressive dividend policy thereafter. While the exact quantum will be determined Jim Winestock served in a number of senior roles and was a member at that time, the Board’s intent is to pay a transitional final dividend of the Management Committee during his career at United Parcel of up to £50m for the year to 31 March 2014. Service, Inc. Most recently he was Senior Vice President and Director of US Operations and Global Security with responsibility for all US The rights issue will not only strengthen the Group and support its operations and 360,000 employees. continued growth, but also underpin its ability to remain a dividend paying stock as well as supporting an investment grade credit rating. Chris Surch was appointed to the Board as Group Finance Director When this project is complete, I intend to step down as Chairman on 1 September 2012. Chris joined from Shanks Group plc where he once a successor has been identified. I have led the business for was Group Finance Director. Prior to that, he held a number of senior 27 years, from start-up to its current position as the leading transport financial roles including at Smiths Group plc and TI Group plc. operator in the UK and North America and I am extremely proud of Together with strong financial leadership, he brings considerable what we have achieved during that time. While I am sorry to leave, operational, strategic and international knowledge and experience I am pleased that this fund raising will open the way to the next of significant business improvement programmes. stage of the Group’s development. On behalf of the Board, I would like to extend our sincere thanks and gratitude to our 120,000 employees. They are the backbone of our organisation and our greatest strength.