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.
- 2018 Annual Report and Financial Statements (the ‘2018 Annual
Report’);
- Notice of the 2018 Annual General Meeting of the Company which
will be held at the Aberdeen Exhibition & Conference Centre at
1.30pm on Tuesday 17 July 2018 (the ‘2018 AGM Notice’); and
- Form of Proxy and Notice of Availability for the 2018 AGM.
As required under the Disclosure Guidance and Transparency Rule
(‘DGTR’) 6.3.5R(3), the 2018 Annual Report and the 2018 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 31 May 2018. To view the
final results announcement, visit the Company website at
www.firstgroupplc.com That information, together with the
information set out below, which is extracted from the 2018 Annual
Report, constitute the material required under the DGTR 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 2018
Annual Report. Cross-references and page numbers in the extracted
information below refer to sections in the 2018 Annual Report.
PRINCIPAL RISKS
AND UNCERTAINTIES
Our risk management approach
We take a holistic approach to risk management, first building a
picture of the principal risks at divisional level, then
consolidating those principal risks alongside Group risks into a
Group view.
Risk management structure
Whilst some risks such as treasury risk are managed at a Group
level, all of our businesses are responsible for identifying,
assessing and managing the risks they face with appropriate
assistance, review and challenge from the Group functions as
necessary.
The current structure is as follows:
Responsibility |
Process |
The Board has overall
responsibility for the Group’s systems of internal control and
their effectiveness.
The Audit Committee has a specific responsibility to review and
validate the systems of risk management and internal control. |
The Board reviews and
confirms Group and divisional risks and the Audit Committee reviews
the Group’s risk
management process. |
The Executive Committee
reviews the Group’s risk management processes.
Internal Audit provides assurance on the key risk mitigating
controls and ensures that the audit plan is appropriately
risk-based. |
The Executive Committee
and other Group
management review and challenge Group and
divisional risk submissions. |
The divisions and Group functions
management have responsibility for the identification and
management of risks, developing appropriate mitigating actions and
the maintenance of risk registers. |
Divisional and Group
risk champions maintain and
update risk registers for their function or division.
Risks and mitigating actions are monitored through normal business
management processes. |
Areas of focus
We seek to continue to improve the quality of risk management
information generated by
our businesses. In 2018 we will implement a new risk management
system across the
business, and refresh our risk appetite.
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 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 on page 36 onwards.
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 page 57.
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.
Risk |
Change in
year |
Focused and
disciplined bidding |
Driving growth
through attractive commercial propositions |
Continuous
improvement in operating and financial performance |
Prudent investment
in our key assets |
Responsible
partnerships with our customers and communities |
Economic conditions |
No change |
- |
- |
- |
- |
|
Political and regulatory |
Up |
- |
- |
- |
- |
- |
Contract businesses including rail
franchising |
Up |
- |
- |
- |
- |
- |
Competition and emerging
technologies |
Up |
- |
- |
- |
- |
|
Information technology |
No change |
- |
- |
- |
- |
- |
Data security (inc. cyber
&GDPR) |
New |
- |
- |
- |
- |
- |
Treasury and credit rating |
Down |
- |
|
- |
- |
|
Pension scheme funding |
No change |
- |
|
- |
- |
|
Compliance, litigation and claims,
health and safety |
No change |
- |
- |
- |
|
- |
Labour costs, employee relations,
recruitment and retention |
Up |
- |
- |
- |
- |
- |
Disruption to
infrastructure/operations |
No change |
- |
- |
- |
|
- |
Risk and potential
impact |
Mitigation |
Comment 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, rising 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. |
No change.
Low oil prices have adversely affected our Greyhound and Fort
McMurray First Transit businesses.
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. |
Political and
regulatory
The political landscape within which the Group operates is
constantly changing. Changes to government policy, funding
regimes, infrastructure initiatives, 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. |
Up.
The political landscape in the US and the UK continues to present
both risks and opportunities. For example, in the UK we have
continued to invest in our fleet to
meet the challenge of tighter environmental regulations. |
Contract businesses
including rail franchising
Approximately half 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 SWR 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. |
Up.
We continually review our contracts to take account of changing
circumstances such as economic environment or
infrastructure changes. Our rail franchise contracts are examples
of this. |
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.
Airline competition impacts demand for bus travel, especially in
Greyhound’s long haul business. Emerging services such as Uber,
ride sharing apps and price comparison websites make access to
alternative transport solutions easier. However, emerging
technologies such as autonomous vehicles and on demand schemes also
provide opportunities to grow and develop our market segments.
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.
We have a dedicated cross-divisional Consumer Experience Team
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.
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. |
Up.
In North America, Greyhound
has implemented new pricing
technology tools to allow for a more rapid response to an
increasingly competitive
marketplace driven by low
cost airline competition.
We currently have a number of
autonomous vehicle pilot projects
in the US and are working on
one in the UK. We are also running pilots for on demand technology
both in the USA and UK. |
Information
technology (IT)
The Group relies on IT in all aspects of our business. 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. 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. |
The Group has increased its focus on asset management and further
enhanced its IT security processes and procedures.
The Group has further strengthened its IT project
management capability during the year, particularly within
Greyhound. |
No change.
No material change in the year,
however, web and mobile sales
channels are of increasing
importance across many of
our businesses. |
Data security
(including cyber security & GDPR)
All business sectors are targeted by increasingly sophisticated
cyber security attacks. Across our divisions, we are seeing
increased
use of mobile and internet sales channels which gather large
amounts of data and therefore the risk of unauthorised access
to,
or loss of, data in respect of employees or our customers is
growing.
A failure to comply with the General Data Protection Regulation
(GDPR), which came into force in May 2018, could result in
significant penalties and could have adverse impact on
consumer confidence in the Group. |
We have threat detection systems across our business but continue
to remain vigilant to security improvements when identified. |
New.
In the year, we appointed a
Data Protection Officer to oversee
the completion of our GDPR
compliance project. From May 2018, the Data Protection
Officer will undertake the tasks
set out in the GDPR, including
monitoring compliance.
We have also implemented a
number of staff training initiatives
to raise awareness of data security
risks and responsibilities. |
Treasury and credit
rating
As set out in further detail in note 24 to the financial
statements
on pages 130 to 134, 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 11. |
Down.
The continued reduction in the
Group’s leverage from 1.9 times
net debt: EBITDA to 1.5 times at
the end of the financial year as a
result of strong cash generation
and the bond refinancing has
further reduced refinancing 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, FirstGroup
corporate functions and our Canadian businesses have
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 change.
The Group has closed the UK
Group and First Bus Pension
Schemes to future accrual from
April 2018. and consolidated other
First Bus legacy schemes. This will further reduce the size and
volatility of the pension funding risk over the longer term.
During the year, The Pensions
Regulator (‘TPR’) has been in
discussion with the Railways Pension Scheme (the ‘Scheme’)
regarding the funding assumptions
which could result in changes to
contributions. The Scheme is the
industry-wide pension scheme. The outcome of the review, which
could impact all rail operators, is
not yet known. The Rail Delivery
Group is engaging with rail
operators to understand and
assess TPR’s concerns and to
develop an industry-wide solution. |
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.
Increased frequency of accidents, clusters of higher severity
losses,
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. |
No change.
The legal climate in North America, particularly in the US,
continues to deliver judgements which are disproportionately in
favour of plaintiffs, and at times
unpredictable. The costs of dealing with this challenging legal
environment is factored in the
budgets. Due to the scale and scope of our operations, risk
mitigation in this area continues to
be an area of focus for the Group. |
Labour costs,
employee relations, recruitment and retention
Employee costs represent the largest component of the Group’s
operating costs, and new regulation or 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 labour 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 employee
communication, satisfaction surveys, and the presence of Employee
Directors (who are voted for by the employees to represent them) on
many of the Group’s UK operating company boards and the FirstGroup
plc 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. |
Up.
Strong economic conditions,
particularly in North America, continue to impact retention
and recruitment.
During the year, we have refreshed our recruitment approach and
offer in First Student
and First Transit to reflect local
market conditions. |
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 change.
No material change during the
year, although severe weather
has led to service disruption in
both our North American and
UK operations. |
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 statement is extracted from the
Statement of Directors' responsibilities in respect of the annual
report and the financial statements on page 99 of the 2018 Annual
Report and is repeated here solely for the purpose of complying
with DGTR 6.3.5R. The statement relates to the 2018 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
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
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 their knowledge that:
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 included 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.
The Strategic report comprising pages 4 to 44 and the Governance
section comprising
pages 46 to 97, and including the sections of the Annual Report
and Accounts referred to
in these pages, have been approved by the Board and signed on
its behalf by:
Matthew Gregory
Interim Chief Operating Officer & 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 68 to 94.
|
Year to 31
March |
31 March |
|
2018 |
2017 |
|
£m |
£m |
Basic salaries1 |
1.6 |
1.6 |
Performance-related bonuses |
0.1 |
0.5 |
Benefits in kind |
0.1 |
0.0 |
Fees |
0.7 |
0.6 |
Share-based payment |
1.1 |
0.8 |
|
3.6 |
3.5 |
1 Basic salaries include cash emoluments in lieu of retirement
benefits and car and tax allowances.
Further information, FirstGroup plc:
Faisal Tabbah, Head of Investor
Relations
Stuart Butchers, Group Head of Media
Silvana Glibota-Vigo, Deputy
Company Secretary
Tel: +44 (0) 20 7725 3354
Legal Entity Identifier: 549300DEJZCPWA4HKM93. Classification as
per DGTR 6 Annex 1R: 1.1