Firstgroup Regulatory News (FGP)

FIRSTGROUP PLC - Half-year Report

PR Newswire

London, November 13

FIRSTGROUP PLC

HALF-YEARLY RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2019

FirstGroup plc, a leading provider of transport services in North America and the UK,today reports first half adjusted trading in line with expectations, underpinning outlook for full year

Overview

Commenting, Chief Executive Matthew Gregory said:

“In the first half we continued to execute the clear commercial strategies in each of our divisions to ensure they deliver future progress and growth. In particular, we were pleased to have delivered another strong bid season and two complementary acquisitions in our largest business First Student, as well as the award of the West Coast Partnership to our rail venture with Trenitalia. We are, however, disappointed with the further deterioration in the US motor claims environment which has required an increase in insurance costs for our North American businesses. As ever, first half trading mainly reflects the highly seasonal nature of the Group’s operations, given the timing of the North American school holidays in our First Student business. Based on current trends and underpinned by our activities to reduce the cost base further, we are confident in delivering our trading expectations for the full year.

“We are focused on rationalising our portfolio and are progressing through the detailed work to prepare for separation. We have taken a number of important steps since our announcement in May including the sale process for Greyhound, future UK Bus pension scheme funding and the strengthening of our Rail portfolio. We are intent on realising value for shareholders and will actively manage our entire portfolio by all appropriate means. We look forward to reporting on further progress in the second half.”

Financial summary (percentage changes in constant currency1 unless otherwise stated)

Divisional performance

Group outlook for the 2019/20 financial year

Contacts at FirstGroup:

Faisal Tabbah, Head of Investor Relations

Stuart Butchers, Group Head of Media

Tel: +44 (0) 20 7725 3354

Contacts at Brunswick PR:

Andrew Porter / Simone Selzer, Tel: +44 (0) 20 7404 5959

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

Notes

1 Changes 'in constant currency' throughout this document are based on retranslating H1 2018 foreign currency amounts at H1 2019 rates.

2 ‘Adjusted’ figures throughout this document reflect the adoption of IFRS 16 in the period and are before the Greyhound impairment, North American self-insurance charge, restructuring and reorganisation costs, other intangible asset amortisation charges and certain other items as set out in note 3 to the financial statements.

3 'Like-for-like' revenue adjust for certain factors which distort the period-on-period trends in our passenger revenue businesses, described on page 16.

4 Net debt is stated excluding accrued bond interest, as explained on page 15.

5 ‘Adjusted cash flow’ is described in the table shown on page 13.

6 Following adoption of IFRS 16 at the start of April 2019, rolling twelve month adjusted earnings and EBITDA data incorporating IFRS 16 is not available.

Legal Entity Identifier (LEI): 549300DEJZCPWA4HKM93. Classification as per DTR 6 Annex 1R: 1.2.

FirstGroup plc (LSE: FGP.L) is a leading provider of transport services in the UK and North America. With £7.1 billion in revenue and around 100,000 employees, we transported 2.2 billion passengers last year. Whether for business, education, health, social or recreation – we get our customers where they want to be, when they want to be there. We create solutions that reduce complexity, making travel smoother and life easier.

We provide easy and convenient mobility, improving quality of life by connecting people and communities.

Each of our five divisions is a leader in its field: In North America, First Student is the largest provider of home-to-school student transportation with a fleet of 43,000 yellow school buses, First Transit is one of the largest providers of outsourced transit management and contracting services, while Greyhound is the only nationwide operator of scheduled intercity coaches. In the UK, First Bus is one of Britain's largest bus companies with 1.6 million passengers a day, and First Rail is one of the country's largest and most experienced rail operators, carrying 345 million passengers last year.

Visit our website at www.firstgroupplc.com and follow us @firstgroupplc on Twitter.

Chairman’s Statement

I am pleased to have joined as Chairman at a pivotal stage for the company. Since my appointment in mid-August, I have been actively engaged across the portfolio and have had the opportunity to assess the various options available to each division. As a result I have confidence that there is significant value to be unlocked across the Group’s portfolio of leading public transportation businesses, albeit I agree with the Board’s assessment that there are limited synergies between the divisions, particularly between the UK and North America. I have also met with our major stakeholders and have a clear understanding of their views and perspectives.

There is broad alignment in the view that the task of extracting greater value from the Group is the clear priority. I agree that this is best achieved through a rationalisation of the current portfolio, and the company committed earlier this year to work towards simplifying the structure at pace, starting with a formal sale process for Greyhound which is now well advanced.

The Board and I are clear that the imperative is to get on and deliver shareholder value without further delay. Since the full year results announcement in May, a number of important steps in this process have been taken, and I look to forward to working with management to ensure further progress.

We will continue to actively evaluate all options across our entire portfolio to ensure we remain focused on the most appropriate and deliverable means to realise shareholder value. I look forward to bringing to bear my experience, together with the management team’s resolute focus on our objective, to deliver value for all our stakeholders.

David Martin

Chairman

14 November 2019

Chief Executive’s overview

In the first half we continued to execute the clear commercial strategies in each of our divisions to ensure they deliver future progress and growth. In particular, we were pleased to have delivered another strong bid season and two complementary acquisitions in our largest business First Student, as well as the award of the West Coast Partnership to our 70:30 rail venture with Trenitalia. We are, however, disappointed with the further deterioration in the US motor claims environment which has required an increase in the insurance costs and reserves provided for our North American businesses. Based on Greyhound’s financial performance relative to budget in recent months, we have also recognised a non-cash impairment charge of £124.4m on the value at which we carry the business in our accounts.

As ever, first half trading mainly reflects the highly seasonal nature of the Group’s operations, given the timing of the North American school holidays in our First Student business. Based on current trends and underpinned by our activities to reduce the cost base further, we are confident in delivering our trading expectations for the full year.

The announcement in May of our portfolio rationalisation plans enabled us to undertake more detailed engagement in the development of a framework for funding the First Bus pension scheme towards self-sufficiency. Importantly, it is anticipated that this framework will be deliverable in a range of transaction scenarios. The recent award of the West Coast Partnership has significantly strengthened the company’s rail portfolio in the UK. In addition, discussions continue with the DfT to extend GWR, and we continue to pursue commercial and contractual remedies for SWR and TPE. We have undertaken a significant amount of work to develop structural alternatives for separating First Bus which, as previously noted, involves a number of regulatory, pension, operational and stakeholder considerations. In parallel, we continue to actively address the cost base of First Bus through a comprehensive efficiency programme. The benefits of this programme will be more evident in the second half. Recent political commitments to increase funding for local bus services and innovation are also encouraging. As a result, we have greater visibility of the further improvements in the financial performance of First Bus that we intend to deliver prior to any launch of a formal sale process in 2020.

Our North American contracting divisions First Student and First Transit continue to demonstrate that they are valuable assets and well positioned in markets with profitable growth potential. Accordingly, we will ensure that we take advantage of all opportunities to maximise further value creation. In summary, we are intent on realising value for shareholders and will actively manage our entire portfolio by all appropriate means. We look forward to reporting on further progress in the second half.

Matthew Gregory

Chief Executive

14 November 2019

Operating and financial review

Group revenue in the first half increased by 6.9%, principally reflecting growth in First Student, First Transit and First Rail; like-for-like passenger revenue growth in Greyhound and First Bus was offset by disposals and withdrawals from loss-making routes compared with the prior period. Group revenue increased by 4.1% in constant currency, with the Road divisions increasing by 1.8%, principally driven by First Student and First Transit; Greyhound and First Bus revenues were lower as noted above. Rail revenue growth was 8.1% driven by passenger growth, higher subsidy receipts and certain GWR contractual amendments.

Adjusted operating profit increased by 2.1% in constant currency. The Road divisions' contribution to adjusted operating profit decreased by £17.6m in constant currency, reflecting fewer operating days in First Student compared with the prior period, two adverse legal judgements in First Transit, and poorer UK summer weather in First Bus compared with prior period. The adjusted operating profit contribution from First Rail in the period was higher due to the factors noted above and the first time adoption of IFRS 16. Group adjusted operating profit margin in constant currency was flat at 2.8%, reflecting a 130bps increase in the Rail margin partly offset by a 90bps decrease for the Road divisions. In reported currency, adjusted operating profit increased by 5.7% to £97.7m (H1 2018: £92.4m).

1 ‘Adjusted’ figures throughout this document are before the Greyhound impairment, North American self-insurance charge, restructuring and reorganisation costs, other intangible asset amortisation charges and certain other items as set out in note 3 to the financial statements. The statutory operating loss for the period was £118.1m (H1 2018: profit of £46.3m) as set out in note 3.

2 Tramlink operations, central management and other items.

Net finance costs before adjustments were £69.0m (H1 2018: £50.4m) with the increase mainly reflecting the transition to IFRS 16, resulting in adjusted profit before tax of £28.7m (H1 2018: £42.0m). Adjusted earnings were £24.5m (H1 2018: £34.9m) with the decrease due to the lower adjusted profit before tax together with lower non-controlling interest and the lower effective tax rate of 14.6% (H1 2018: 22.5%). Adjusted EPS was 2.0p (H1 2018: 2.9p). In constant currency, adjusted EPS decreased by 35.5%, or by 19.4% excluding the net effect of implementing IFRS 16, which has a disproportionate effect on the first half due to the greater weighting of Group earnings to the second half relative to the financing costs. EBITDA was £434.2m (H1 2018: £255.1m). Excluding the effect of adopting IFRS 16, EBITDA was £252.9m a decrease of 0.9% over the prior period, with Road EBITDA decreasing by 10.4% in constant currency and Rail EBITDA increasing by 18.3%.

The statutory operating loss for the period was £118.1m (H1 2018: profit of £46.3m), principally reflecting the Greyhound impairment charges of £124.4m (H1 2018: nil), a charge in relation to North America self-insurance of £59.3m (H1 2018: nil), restructuring and reorganisation charges of £15.4m (H1 2018: £28.5m) and a legacy pension settlement of £4.9m (H1 2018: nil), partly offset by higher adjusted operating profit and lower other intangible asset amortisation charges. The statutory loss attributable to equity shareholders was £172.9m (H1 2018: £6.9m), and statutory EPS decreased to (14.3)p in the period (H1 2018: (0.6)p).

The half year typically represents a low point in the cash flow due to the seasonality of our business, in particular First Student. The pre IFRS 16 adjusted cash outflow of £78.0m (H1 2018: inflow of £50.6m) includes a Rail net cash outflow of £31.5m (H1 2018: inflow of £89.1m). This includes a net £37m of capital expenditure for which funding was received in prior periods and a £60m outflow for the utilisation of onerous contract provisions at SWR and TPE. Rail ring fenced cash reduced by £27.9m. The Road divisions’ cash inflow was £62.0m, with capital expenditure broadly in line with the corresponding period last year.

Net debt increased in the period to £2,084.1m (H1 2018: £1,047.7m), with the majority of the increase relating to the recognition of lease liabilities on adoption of IFRS 16 and working capital movements. Net debt: EBITDA on the ‘frozen accounting standards basis’ relevant to the Group’s banking covenants was flat at 1.6 times (H1 2018: 1.6 times) and Rail ring-fenced cash adjusted net debt: EBITDA on the same basis was 2.3 times (H1 2018: 2.2 times). Liquidity within the Group has remained strong; as at 30 September 2019 there was £496.6m (H1 2018: £727.3m) of committed headroom and free cash, being £394.4m (H1 2018: £587.0m) of committed headroom and £102.2m (H1 2018: £140.3m) of free cash. The reduction in committed headroom principally reflects the repayment of the £250m 2019 bond from our revolving bank facilities in January 2019. Average maturity of our bond debt, senior unsecured loan notes and bank facilities was 3.8 years (H1 2018: 4.0 years).

During the period, gross capital expenditure of £371.6m (H1 2018: £269.6m) was invested in our business, with the Road divisions’ capital expenditure being £251.3m (H1 2018: £223.3m) including new leases with a capital value of £60.4m (H1 2018: £40.2m). The increase in the Road divisions' gross capital expenditure was driven principally by the higher retention rates and new business wins achieved in First Student's recent bid season and investment in fleet.

ROCE before the impact of IFRS 16 was 10.1% (H1 2018: 8.8% at constant exchange rates and 9.2% as reported).

Impact of new accounting standards (IFRS 16)

The new accounting standard, IFRS 16 (Leases) came into effect on 1 January 2019, and was adopted by the Group from 1 April 2019. The new standard eliminates the operating lease classification and therefore on the balance sheet the lessees will be required to recognise an asset (the right to use the leased item) and lease liabilities for all leases unless they have a remaining term of less than 12 months or are of low value. On the income statement, the operating lease expense will be replaced by a combination of depreciation and interest.

IFRS 16 has been adopted in the period using the modified retrospective method. This resulted in a right of use asset of £1,140.4m and a lease liability of £1,168.2m recognised on 1 April 2019. The transition method has not required the balance sheet comparatives to be restated. All statutory and adjusted figures for H1 2019 throughout this document are reported under IFRS 16 unless otherwise stated.

The impact of IFRS 16 is detailed further in note 1, and is summarised below:

In accordance with IAS 36 (impairment of assets) the opening onerous contract provision for SWR of £145.9m was reclassified as an impairment on right of use assets (ROUA) on adoption of IFRS 16. Similarly, £62.7m of the opening TPE onerous contract provision was reclassified as an opening impairment on ROUA with the remaining balance of £44.2m being reclassified as impairment on ROUA additions in the period.

The adoption of IFRS 16 has impacted the Rail division’s results more significantly than the Road divisions. The difference reflects the high value of rolling stock leases as well as the change in accounting for onerous contract provisions. To aid understanding, set out overleaf are the impacts by division on adjusted operating profit and EBITDA:

First Student

1 Based on retranslating H1 2018 foreign currency amounts at H1 2019 rates.

As ever, First Student’s financial results are heavily weighted to the second half because of the overlay of our financial year with the North American school calendar, so performance in the second half is key. However, in the period First Student revenue increased to $1,078.3m (H1 2018: $1,038.5m), representing growth in constant currency of 4.2%, despite fewer operating days in the period compared with the same period in 2018. Reported revenue was £851.6m (H1 2018: £775.2m). Adjusted operating pro?t was $26.7m (H1 2018: $36.6m), resulting in an adjusted operating margin of 2.5% (H1 2018: 3.5%), with revenue growth and cost ef?ciencies exceeding inflation but offset by the fewer operating days and higher self-insurance costs in the period. The division reported a statutory loss of £18.7m (H1 2018: profit of £16.2m) after amortisation of intangibles and First Student’s portion of the North American self-insurance charge.

Following another strong bid season over the summer of 2019, First Student has grown our already market-leading school bus fleet and market share for the second year in a row; we expect to be operating approximately 43,000 buses for the remainder of the school year (H1 2018: 42,500) as a result of our balanced growth approach.

Our consistent bid discipline, supported by our excellent safety track record and consistently high customer satisfaction scores, allowed us to secure average price increases in excess of the employee and other cost inflation we continue to experience. Notwithstanding the pricing requirements we have had to seek from our customers due to the tight US employment market and resulting persistent driver shortages, our customer retention rate of 88% on contracts up for renewal was ahead of our expectations. Across our entire portfolio of multi-year relationships, retention stands at 96%.

In addition to retaining existing business, we have made good progress in the other growth areas we target, with good net market share gains from our larger competitors, some organic growth, and a continuing modest rate of conversions from in-house to private provision.

We also continue to build out our ability to supplement growth and expand our addressable market via acquisitions in this fragmented segment of the mobility services industry. Since the start of the financial year we have closed two transactions adding a total of 300 buses. The most recent was Hopewell Transportation in Chicago, which is a leader in services for special needs children and their families, a faster growing part of the overall student transportation market. Earlier in the year we acquired a 70-bus business in New York state to complement our other operations in the area. Our capital allocation approach is to assess all of our transaction opportunities on the same returns criteria as any other avenue for growth. Our capital efficiency and returns continue to be supplemented by our charter services offering, which now accounts for 9% of divisional revenues.

School start-up this autumn has gone well, and we continue to improve the efficiency of our procurement, maintenance and operational practices as well as investing in innovations to enhance the quality of our services for our school board customers, student passengers and their parents. Overall our first half performance means we are confident that for the full year, First Student will deliver further revenue growth, robust cash flow and returns on its market leading multi-year contract portfolio.

As previously announced, we were also delighted to announce the appointment of Paul Osland as President of First Student in September. Paul has already contributed extensively to the improvement of the division through his operational leadership and delivery of several business improvement initiatives since joining First Student as Chief Operating Officer in 2016. Prior to joining First Student, Paul worked for Chicago Public Schools as both Chief Facility Officer and Executive Director, Transportation.

First Transit

1 Based on retranslating H1 2018 foreign currency amounts at H1 2019 rates.

First Transit’s revenue in the first half was $740.6m or £588.7m (H1 2018: $691.3m or £519.6m), an increase of 7.3% in constant currency. Recent contract awards and organic growth more than offset the end of a number of relatively large contracts in revenue terms. Adjusted operating profit was $17.6m or £13.8m (H1 2018: $32.5m or £24.4m), resulting in an adjusted operating margin of 2.4% (H1 2018: 4.7%), which reflects higher self-insurance costs of $11.5m, the current challenging environment for driver recruitment, business mix, and two adverse legal judgements. We continue to drive through further cost efficiencies from lean maintenance, procurement, systematic employee engagement/retention programmes and further back office alignment with First Student in order to retain our position as a best value operator. The division reported a statutory loss of £11.4m (H1 2018: profit of £23.3m) principally adjusting for a legacy pension settlement and First Transit’s portion of the North American self-insurance charge.

First Transit continues to focus on profitable growth through winning and retaining business in both existing and emerging mobility services markets. Our contract retention rate decreased slightly in the period from 96% to 93%, reflecting the loss of two contracts which required significant price increases to properly address cost challenges in their respective local markets. Awards in the period ranged from wins in traditional transit markets, such as a fixed route contract in Arlington, VA and paratransit contracts in Spokane, WA and Alhambra, CA, to shuttle wins for private companies, including in the British Columbia gas mining region. Additionally, we were awarded a contract to provide transportation services between airport terminals and the new taxi/Transportation Network Company (TNC) passenger waiting lots at Los Angeles airport, while also expanding our technology offerings with the launch of an autonomous vehicle (AV) pilot with Houston Metro. We continue to position ourselves as the leader in both the maintenance and operations of electric vehicle (EV) technology with the addition of a 50-bus electric fleet in the university shuttle market. In the period we are excited to have started a partnership with Lyft to provide wheelchair accessible and other paratransit services in several US cities via the existing Lyft platform.

As the market for mobility services in North America continues its evolution, we are embracing the disruption and staying at the forefront of the changes, providing simplified mobility solutions that enhance our customers’ lives. Our services remain a compelling option for both local authorities and private customers to outsource their transit management needs. Our ongoing cost efficiency programme will ensure we deliver improvements in our second half margin relative to the prior year and with our significant sector expertise, longstanding customer relationships and profitable platform of business, we are already delivering returns and cash generation with relatively modest capital requirements from this rapidly changing marketplace.

Greyhound

1 Based on retranslating H1 2018 foreign currency amounts at H1 2019 rates.

Greyhound’s revenue was $422.0m or £335.4m (H1 2018: $455.4m or £342.6m) in the first half, with US revenues slightly ahead in local currency terms and Canadian revenues substantially lower, reflecting our decision to withdraw from significant parts of that business since the prior period. In the US, long haul journeys outperformed short haul in the period with increased competition in the North East during the second quarter; point-to-point Greyhound Express like-for-like revenue decreased by 1.3% in the period, while like-for-like revenue for the division as a whole was +0.7%. First quarter like-for-like revenue growth was higher, as the US experienced substantial growth in immigration at the Southern US border. In the second quarter, immigration related demand in the southern states slowed to a five year low. Recent reductions in the price of fuel have also had an impact on passenger demand for our coach services.

As a result, adjusted operating profit was $16.5m or £13.3m (H1 2018: $12.9m or £10.2m), or an adjusted operating margin of 3.9% (H1 2018: 2.8%) in the period. While Greyhound’s adjusted margin improved by 100bps in the period, this principally reflects our cost actions and the withdrawal from Western Canada and is despite a lower gain on sale of properties of $4.2m (H1 2018: $6.5m) in the period. In light of the profitability of Greyhound relative to our internal budget in recent periods, we have revised our short term and medium term financial forecasts for the division. The revised forecasts have led to an impairment of £124.4m to the carrying value of the net assets of Greyhound.

As announced in May, we are running a formal sale process for Greyhound which is now well advanced and we are engaged in ongoing discussions with bidders. Greyhound has generated £40.5m ($50.8m) in EBITDA over the past twelve months and following the impairment it is carried at a cash generating unit value of £179.2m ($220.2m). The net book value of £0.9m ($1.1m) is stated after £129.2m ($158.8m) for pensions deficits under IAS19 and £95.6m ($117.5m) relating to the self-insurance reserve provision. The impairment has been recognised in the H1 2019 results on a pro-rata basis against the assets of the division excluding property. Recent valuations in excess of book value suggest no impairment to the carrying value of Greyhound’s property. In the period the division reported a statutory loss of £127.7m (H1 2018: loss of £24.2m) including the impairment charge as well as amortisation of intangibles, Greyhound’s share of the North American self-insurance charge and restructuring costs.

In response to the changes in demand noted above, we have stepped up our tactical commercial initiatives to deliver overall revenue per mile growth by optimising pricing and capacity allocation across our different markets. In addition to reducing planned mileage in the second half by approximately 5%, we have also undertaken a number of maintenance, procurement and operational initiatives in the period which are expected to deliver recurring savings in the second half and beyond. Meanwhile our disciplined fleet investment plan continues to improve customer perceptions, raise punctuality and reduce our maintenance costs.

First Bus

1 Based on retranslating H1 2018 foreign currency amounts at H1 2019 rates.

First Bus reported revenue of £424.5m (H1 2018: £433.9m) in the period, with like-for-like passenger revenue increasing by +1.6%. Commercial passenger volumes decreased by (1.7)% in the period and commercial revenue per mile increased by +1.6%. The environment overall for the bus market is improving, however, patterns of demand remain variable amongst our local markets particularly due to changing retail footfall trends and challenging traffic congestion in a number of cities. Across the country we also saw less favourable weather in the period than the record-breaking summer of 2018, which meant that comparative demand reduced in the summer months but has recovered strongly in the final weeks of the period and into the second half of the financial year. Adjusted operating profit was £21.5m (H1 2018: £24.8m) and adjusted operating margin decreased by 60bps to 5.1% (H1 2018: 5.7%), mainly reflecting this reduced summer demand and higher hedged fuel prices, partially offset by continued cost efficiencies and innovative actions taken to improve the passenger experience. The division reported a statutory operating profit of £15.7m (H1 2018: £24.7m) after restructuring and reorganisation costs and losses to date on disposal in respect of the Manchester depot sales.

We continue to drive forward our plans as set out over the last two years, including further cost efficiencies. These include additional steps to optimise our networks and mileage to ensure we maximise demand and improve route performance for passengers informed by the rich GPS and passenger flow data we now have on all our networks. We are also implementing improvements to our work practices, for example, through redesigning engineering procedures. Our shared service centre in Leeds has allowed us to centralise a variety of customer service functions, offering a consistent experience for passengers, and a series of back office roles. Following a review of our Manchester operations in light of changes proposed to the structure of that market we completed the sales of our Queen’s Road and Bolton depots during the first half.

We have offered contactless payment for all our customers since last year, which simplifies payment, enhances convenience and supports our objective to speed up journeys by reducing boarding time. We have further enhanced our cashless offering in the period through continued upgrades to our passenger app, which is now the highest ranked bus app in the iOS App Store with almost one million regular users. In the period contactless and mobile app became our most significant payment mechanisms, overtaking on-bus cash transactions for the first time. We have launched two ticketing trials offering customers capped fares via their contactless devices in Aberdeen and Doncaster. Further roll outs will take place in the coming months as we respond to the increasing demand for this option from our customers, which we expect to be a meaningful driver of further growth. During the period we had a successful start-up for our Bright Bus tour services in Edinburgh, competing well against the market leader. We have taken commercial responsibility for services to Swansea’s Park & Ride site, expanding the range of destinations served by integrating the routes into our network. We have also upgraded our services to Glasgow and Stansted airports through investments in both vehicles and service.

We support the Confederation of Passenger Transport’s new strategy for the industry – Moving Forward Together – which commits us to working closely with local authority stakeholders in order to meet air quality targets, improve congestion and strengthen local connectivity. We applaud the renewed focus which UK governments, including the devolved assemblies, are increasingly giving to bus services, including the development of a national bus strategy. At the end of the period the Government announced a further £220m in additional funding to increase local bus patronage. One of the first outputs is a Government-funded four-year pilot in Cornwall to subsidise fares and create an enhanced network, to be introduced from May 2020. Separately the Scottish Government has announced a landmark investment of more than £500m to improve bus infrastructure through new priority routes and other schemes to reduce congestion across the country and encourage more people to use public transport.

Through our early commitment to the Euro VI-compliant generation of diesel buses and our adoption of self-funded and government-assisted zero emission buses, we are a leader in the industry for low emission buses, with 30% of our fleet either Euro VI-compliant diesels or gas, electric or fuel cell vehicles. For the current year we expect to take delivery of approximately 235 new Euro VI buses (year to March 2019: 328 buses), including 77 gas powered vehicles for Bristol and 30 electric vehicles including 21 double decker buses for the York Park & Ride services, partly funded by OLEV (Office for Low Emission Vehicles) grants.

Our programme of investment and efficiencies will continue to drive patronage growth and margin progress despite challenging conditions in certain markets, and we are pleased that there is a growing realisation at all levels of government that the bus has a huge role to play in social and environmental ambitions. Having set the business on this path, we continue to explore structural alternatives for the future of the division, ensuring continued progression and the best future for our employees and customers.

First Rail

First Rail like-for-like passenger revenue growth was +4.9% across our portfolio. Industry conditions remain very challenging with macroeconomic uncertainty, infrastructure upgrade works across our networks and the industrial action in SWR all affecting our franchise performance levels. Like-for-like passenger volumes increased by +4.1% in the period, continuing to reflect changing work patterns and lifestyles resulting in a shift away from season tickets towards pay-as-you-go offerings. Divisional revenues increased to £1,323.5m (H1 2018: £1,224.2m), reflecting passenger revenue growth, higher subsidy receipts and final settlement of certain GWR contractual amendments. Adjusted operating profit was £48.9m (H1 2018: £29.3m), with the margin increasing to 3.7% (H1 2018: 2.4%). Divisional profitability was driven by GWR, where customers are seeing more capacity and services as a result of the introduction of new trains, and also reflects the first time adoption of IFRS 16 which affects First Rail’s results more significantly than the other divisions. The division reported a statutory operating profit of £48.4m (H1 2018: £27.5m) including intangible asset amortisation.

GWR have brought into service new commuter Electrostar trains and all 93 bi-mode InterCity Express Trains (IETs), delivering more seats and increased levels of punctuality. Our diesel HST trains stopped serving London in the period and have been reconfigured and redeployed to enhance capacity on routes in the South West. These changes, in turn, have led to the highest levels of customer satisfaction GWR has recorded and a 9% improvement in the independent National Rail Passenger Survey scores. The GWR team are preparing for the largest timetable change in decades to be introduced in December, which will take advantage of the new train fleets to offer faster journey times and more frequent services to key locations, and a major passenger information campaign is underway to advise of these changes.

SWR performance was at a more stable level in the early part of the period than in 2018. Towards the end of the period systemic issues outside of our control including the impact of infrastructure reliability issues, delays to timetable changes and continued industrial action once again led to a deterioration in performance, and we will continue to work with our partners to mitigate this. We remain focused on delivering a resolution to the unnecessary industrial action by the RMT trade union, which continues despite our offer of a framework agreement that keeps the guard on every train. This industrial action needlessly disrupts travel for our customers although we do everything we can to keep people moving during strikes. We are committed to finding a solution that will help us build a better railway for everyone. As previously reported, there is considerable uncertainty about the level of future passenger revenue growth and the revenue protection mechanisms in place, and we remain in discussions with the DfT concerning commercial and contractual remedies. Meanwhile we continue to focus on delivering improvements to the passenger experience in accordance with our commitments, with new and refurbished trains to be introduced into service in the coming months. The May 2019 timetable change resulted in more than 300 more services a week across the network and the December timetable change will add 60 more. During the period we also announced a major investment into the Isle of Wight’s railway, one of our franchise commitments for passengers.

Although TPE delivered growth and traded ahead of expectations during the period, the key to the long term success of the franchise remains the delivery of the significant fleet and network changes to increase the frequency and level of service required under the franchise agreement. Industry wide delays to the timetables assumed when the TPE franchise was bid have delayed the implementation of a number of the key changes which were included in the original franchise bid model. The industry delays cover the timetable changes that were not implemented as planned in December 2017, May 2018 and May 2019 and will not be implemented as planned for December 2019. Our forecast revenue and costs assumptions have been adjusted accordingly.

Under schedule 9 of the franchise agreement we have contractual entitlement to recover the financial impact of these changes and accordingly we have submitted a significant franchise change request to the Department for Transport (“DfT”) and the Rail North Partnership (”RNP”) for our estimate of the amounts that are owed in respect of the May 2018 timetable change. We will submit further requests in respect of May 2019 and December 2019 in due course. The DfT and RNP are considering our May 2018 timetable change submission and we are at an early stage in our discussions with them. In determining the value of the May 2018, May 2019 and December 2019 franchise change amounts we have estimated that the significant majority of the requested change will be agreed with, and recovered from, the DfT and RNP. We have considered a number of factors in deriving our estimate of the amounts that will be recovered including the settlement we have achieved with the DfT and RNP in connection with the December 2017 timetable change. Until concluded there is uncertainty as to the value at which these negotiations will be settled.

The forecast loss over the franchise term of £106m recognised as a provision in the year to 31 March 2018 remains our estimate of the financial outlook for the franchise including our expectation of the outcome of the May 2018, May 2019 and December 2019 franchise change requests. It should be noted that on adoption of IFRS16 Leases, £106m previously recognised as an onerous contract provision is now recognised as an impairment of the right of use asset.

If the settlement we achieve with the DfT and RNP is below our estimate and we do not recover the significant majority of the amounts included in our franchise change requests there would be a material impact on the reported financial results, including increases in the loss for the relevant period, the value of the impairment to the right of use assets, and the recoverability of amounts recognised as amounts recoverable on contracts. If our estimate of the settlement is not achieved the maximum additional unavoidable loss under the TPE franchise contract would be £83m, £5m lower than at the start of the year due to the repayment of Additional Funding Commitment in the first half of the year.

In addition, there is also uncertainty regarding the timing and scope of the TransPennine Route Upgrade and accordingly the potential impact of any upgrade on our original bid submission. The matter continues to be closely monitored as it will have implications for our recoverable amounts under the franchise agreement.

Meanwhile our open access operator Hull Trains is performing in line with our expectations and is also due to begin operating a new leased fleet worth £60m from December.

In August we were pleased our 70:30 rail venture with Trenitalia was awarded the West Coast Partnership contract to operate existing InterCity services on the West Coast Mainline, and to help deliver High Speed 2. First Trenitalia takes over from the current operator on 8 December 2019 and mobilisation is proceeding well. As anticipated, the Competition and Markets Authority have conducted a review and the proposed remedies are in line with our expectations at the time of the bidding process.

Our rail portfolio generates good returns overall despite challenging industry conditions and a difficult operating environment. The UK’s rail franchising system is currently undergoing a major review and there is uncertainty as to the balance of risks and rewards for franchising going forwards. We are interested in the outcome of this review; however our focus is on delivering sustainable benefits for all our stakeholders from our current rail portfolio, which we will actively manage accordingly.

Reconciliation to non-GAAP measures and performance

Note 3 to the financial statements sets out the reconciliations of operating profit/(loss) and loss before tax to their adjusted equivalents. The adjusting items are as follows:

Other intangible asset amortisation charges

The charge for the period was £11.8m (H1 2018: £17.6m) with the reduction due to a number of customer contract intangibles which have now been fully amortised.

Greyhound impairment charges

Operating profit has been below budget in recent months. This principally reflects the decline in immigration-related flows on the Southern US border states in the second quarter and increased competition on some routes. In light of this, we have revised our short term and medium term financial forecasts for the Greyhound division. The revised value in use forecasts indicate an impairment to the carrying value of Greyhound of £124.4m. The impairment has been recognised in the H1 2019 results on a pro-rata basis against the assets of the division excluding property. Valuations in excess of book value suggest no impairment to the carrying value of property. Whilst we are engaged in ongoing discussions regarding a possible sale of all or part of the business, we remain focused on balancing commercial initiatives to optimise pricing and capacity allocation with mileage reduction.

North America insurance provisions

First Group North American insurance arrangements involve retaining the working loss layers in a captive and insuring against the higher losses. Based on our actuaries’ recommendation and a second additional, independent actuarial review, last year we increased our reserve to $533m. During the first six months of this financial year we have continued to see a deteriorating claims environment with legal judgements increasingly in favour of plaintiffs and punitive in certain regions. In this hardening motor claims environment, we have seen further significant new adverse settlements and developments on a number of aged insurance claims, and as a result our actuaries have increased their expectation of the reserve required on prior year claims.

In addition, there has been a significant change in the market based discount rate used in the actuarial calculation from 2.7% to 1.6%, creating the requirement to increase the provision.

In light of the continued change in claims environment we have increased the provision further by $34m to provide more protection for prior year claims, and the resulting self-insurance reserve level is above the midpoint of the actuarial range. These changes in accounting estimates combined with the discount rate movement has resulted in the Group recording an additional charge of $83.2m or £67.5m; $73.1m or £59.3m relating to the prior year settlements is disclosed as an adjusting item, and $10.1m or £8.2m relating to the change in the discount rate movement has been included in operating profit and treated as non-adjusting. It is expected that the majority of these claims will be settled over the next five years. The charge to the operating profit for the current period reflects this revised environment. Following the half year charges, the provision at 30 September 2019 stands at $588m compared with the actuarial range of $490m to $610m.

The Group has a strong focus on safety and risk management in this area and this will continue to be a key area of focus for the Group.

Restructuring and reorganisation costs

There was a charge of £15.4m for restructuring and reorganisation costs relating to a Group-wide initiative to achieve systematic and structured cost savings across the businesses with the assistance of a market leading organisation in this field. In addition, trading losses in the two Manchester depots to the date of disposal have been included. The H1 2018 charge of £28.5m related to restructuring and reorganisation costs from Greyhound's withdrawal of services in Western Canada.

Legacy pension settlement

This relates to a legacy pension liability from a business disposal which First Transit made in 2013.

Finance costs and investment income

Net finance costs were £69.0m (H1 2018: £50.4m) with the increase principally reflecting the additional interest charges under IFRS 16.

Profit before tax

Adjusted profit before tax as set out in note 3 to the condensed consolidated financial statements was £28.7m (H1 2018: £42.0m). An overall charge of £215.8m (H1 2018: £46.6m) for adjustments principally reflecting the Greyhound impairment of £124.4m (H1 2018: nil), North America self-insurance reserve charge of £59.3m (H1 2018: £nil), restructuring and reorganisation charges of £15.4m (H1 2018: £28.5m), a legacy pension settlement of £4.9m (H1 2018: £nil) and other intangible asset amortisation charges of £11.8m (H1 2018: £17.6m), resulted in a statutory loss before tax of £187.1m (H1 2018: loss before tax of £4.6m).

Tax

The tax charge, on adjusted profit before tax, for the period was £4.2m (H1 2018: £9.4m). There was a tax credit of £18.4m (H1 2018: £4.8m) relating to other intangible asset amortisation charges and other adjustments. The total statutory tax credit was £14.2m (H1 2018: charge of £4.6m). The actual tax paid during the period was £2.0m (H1 2018: £4.3m).

EPS

Adjusted EPS was 2.0p (H1 2018: 2.9p). Basic EPS was (14.3)p (H1 2018: (0.6)p).

Shares in issue

As at 30 September 2019 there were 1,214.0m shares in issue (H1 2018: 1,205.9m), excluding treasury shares and own shares held in trust for employees of 1.4m (H1 2018: 6.0m). The weighted average number of shares in issue for the purpose of basic EPS calculations (excluding treasury shares and own shares held in trust for employees) was 1,211.3m (H1 2018: 1,205.0m).

Cash flow

The half year typically represents a low point in the cash flow due to the seasonality of our business, in particular First Student. The pre IFRS 16 adjusted outflow of £78.0m (H1 2018: inflow of £50.6m) includes a Rail net cash outflow of £31.5m (H1 2018: inflow of £89.1m). This includes a net £37m of capital expenditure for which funding was received in prior periods and a £60m outflow for the utilisation of onerous contract provisions at SWR and TPE. Rail ring fenced cash reduced by £27.9m. The Road divisions’ cash inflow of £62.0m includes capital expenditure at a broadly similar level to the corresponding period in the prior year.

Net debt increased in the period to £2,084.1m (H1 2018: £1,047.7m). The increase is principally due to a £1,168.2m adjustment on transition to IFRS 16. The cash flow on a pre- and post- IFRS 16 basis is set out below:

Capital expenditure

Road cash capital expenditure was £141.6m (H1 2018: £142.8m) and comprised First Student £81.1m (H1 2018: £101.5m), First Transit £16.4m (H1 2018: £10.8m), Greyhound £28.2m (H1 2018: £15.7m), First Bus £13.9m (H1 2018: £14.8m) and Group items £2.0m (H1 2018: nil). First Rail capital expenditure was £51.9m (H1 2018: £46.8m) and is typically matched by franchise receipts or other funding. In addition, during the period we entered into leases in the Road divisions with capital values in First Student of £48.9m (H1 2018: £7.8m), First Transit of £0.1m (H1 2018: £3.4m), Greyhound of £6.2m (H1 2018: £10.2m) and First Bus of £5.2m (H1 2018: £18.8m) and Group items £0.1m (H1 2018: nil). During the period First Rail entered into leases with a capital value of £70.5m.

Gross capital investment (fixed asset and software additions plus the capital value of new operating leases) was £371.6m (H1 2018: £269.6m) and comprised First Student £189.4m (H1 2018: £168.3m), First Transit £15.0m (H1 2018: £14.2m), Greyhound £32.8m (H1 2018: £19.3m), First Bus £12.0m (H1 2018: £21.5m), First Rail £120.3m (H1 2018: £46.3m) and Group items £2.1m (H1 2018: nil). The balance between cash capital expenditure and gross capital investment represents new leases and creditor movements in the year.

Balance sheet

Net assets have decreased by £84.9m since the start of the period. The principal reasons for this are the retained loss for the period of £172.9m, unfavourable after tax hedging reserve movements of £10.5m, actuarial losses on defined benefit pension schemes (net of deferred tax) of £34.8m and the adjustment on transition to IFRS 16 of £15.6m partly offset by favourable translation reserve movements of £142.4m.

Fuel price risk

We use a progressive forward hedging programme to manage commodity risk. As at 30 September 2019, 87% of our ‘at risk’ UK crude requirements for the current year in the UK (1.7m barrels p.a.) were hedged at an average rate of $65 per barrel, 53% of our requirements for the year to 31 March 2021 at $66 per barrel, and 30% of our requirements for the year to 31 March 2022 at $69 per barrel.

In North America 57% of 2019/20 ‘at risk’ crude oil volumes (1.3m barrels p.a.) were hedged at an average rate of $62 per barrel, 28% of our requirements for the year to 31 March 2021 at $65 per barrel, and 13% of our requirements for the year to 31 March 2022 at $69 per barrel, predominantly in relation to First Student and First Transit. Greyhound’s fuel exposure is largely unhedged because its competitors – passenger cars and the airlines – have no hedging on their exposures, so Greyhound’s pricing is responsive to fuel price changes.

Funding and risk management

Liquidity within the Group has remained strong. At 30 September 2019, there was £496.6m (H1 2018: £727.3m) of committed headroom and free cash, being £394.4m (H1 2018: £587.0m) of committed headroom and £102.2m (H1 2018: £140.3m) of free cash. The reduction in committed headroom principally reflects the repayment of the £250m 2019 bond from our revolving bank facilities in January 2019. Largely due to the seasonality of First Student, committed headroom typically reduces during the financial year up to October and increases thereafter. Treasury policy requires a minimum level of committed headroom is maintained. Average maturity of our bond debt, senior unsecured loan notes and bank facilities is 3.8 years (H1 2018: 4.0 years). The Group’s main revolving bank facilities require renewal in November 2023. The Group does not enter into speculative financial transactions and uses only authorised financial instruments for certain financial risk management purposes.

Interest rate risk

We seek to reduce our exposure by using a combination of fixed rate debt and interest rate derivatives to achieve an overall fixed rate position over the medium term of at least 50% of net debt.

Foreign currency risk

‘Certain’ and ‘highly probable’ foreign currency transaction exposures including fuel purchases for the UK divisions may be hedged at the time the exposure arises for up to two years at specified levels, or longer if there is a very high degree of certainty. The Group does not hedge the translation of earnings into the Group reporting currency (pounds Sterling) but accepts that reported Group earnings will fluctuate as exchange rates against pounds Sterling fluctuate for the currencies in which the Group does business. During the year, the net cash generated in each currency may be converted by Group Treasury into pounds Sterling by way of spot transactions in order to keep the currency composition of net debt broadly constant.

Foreign exchange

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

Net debt

The Group’s net debt at 30 September 2019 was £2,084.1m (H1 2018: £1,047.7m) and comprised:

Under the terms of the First Rail franchise agreements, cash can only be distributed by the Train Operating Companies (TOCs) either up to the lower amount of their retained profits or the amount determined by prescribed liquidity ratios. The ring-fenced cash represents that which is not available for distribution or the amount required to satisfy the liquidity ratio at the balance sheet date. First Rail ring-fenced cash decreased by £27.9m in the period principally due to working capital movements. Net debt excluding Rail ring-fenced cash and deposits increased to £2,580.9m (H1 2018: £1,501.5m).

Pensions

We have updated our pension assumptions as at 30 September 2019 for the defined benefit schemes in the UK and North America. The net pension deficit of £307.2m at the beginning of the period has increased to £331.1m at the end of the period principally due to declining yields, partially offset by higher investment returns than expected. The main factors that influence the balance sheet position for pensions and the principal sensitivities to their movement at 30 September 2019 are set out below:

The Trustee and Company have made good progress with the 2019 funding valuation for the First UK Bus Pension Scheme. Based on the initial valuation results as at April 2019 and taking into account the parent company guarantee provided by FirstGroup plc, the draft funding deficit is below that of the previous triennial valuation (£302m as at April 2016), however it is approximately £80m higher than the balance sheet position on an accounting basis at the equivalent date.

Recognising that the Scheme is a key stakeholder, the Trustee has been engaged with the First Bus separation process from the outset. As that engagement continues, we expect that the focus will move on from the funding valuation to agreement on continued funding level improvement, liability management options, covenant, de-risking the investment strategy and securing member benefits.

Low dependency (often referred to as self-sufficiency) is not a precisely defined term, but if it is achieved by setting a funding target in line with a discount rate for liabilities in the range of Gilts to Gilts +50bps, then in our opinion funding the Scheme to such a level whilst continuing to reduce exposure to investment risk within a reasonably short time horizon in the context of a material change to the Group’s portfolio through executing the strategy, is both realistic and achievable, especially given the rate at which the Scheme is now maturing following closure first to new entrants and then subsequently to ongoing accrual.

Whilst a range of outcomes are possible, we have devised a framework for benchmarking the possible impact of pensions on the First Bus separation. We are confident that this framework can be accommodated in any transaction, and noting that the impact of addressing the First Bus Pension Scheme deficit to a level of low dependency will be sensitive to market conditions at the time, we believe that our framework, as part of the separation, could be in the region of £360-400m.

Seasonality

First Student generates lower revenues and profits in the first half of the financial year than in the second half of the year as the school summer holidays fall into the first half.

Forward-looking statements

Certain statements included or incorporated by reference within this document may constitute ‘forward- looking statements’ with respect to the business, strategy and plans of the Group and our current goals, assumptions and expectations relating to our future financial condition, performance and results. By their nature, forward-looking statements involve known and unknown risks, assumptions, uncertainties and other factors that cause actual results, performance or achievements of the Group to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Shareholders are cautioned not to place undue reliance on the forward-looking statements. Except as required by the UK Listing Rules and applicable law, the Group does not undertake any obligation to update or change any forward-looking statements to reflect events occurring after the date of this document.

Definitions

Unless otherwise stated, all financial figures for the six months to 30 September 2019 (the ‘first half’, the 'period' or ‘H1 2019’) include the results and financial position of the First Rail business for the period ended 14 September 2019 and the results and financial position of all the other businesses for the 26 weeks ended 28 September 2019. The figures for the six months to 30 September 2018 (the ‘prior period’ or ‘H1 2018’) include the results and financial position of First Rail for the period ended 15 September 2018 and the results and financial position of all the other businesses for the 26 weeks ended 29 September 2018. Figures for the year to 31 March 2019 include the results and financial position of the First Rail division for the year ended 31 March 2019 and the results and financial position of all the other businesses for the 52 weeks ended 30 March 2018. Full year results for 2020 will include the results and financial position of First Rail for the year to 31 March 2019 and the results and financial position of all the other businesses for the 52 weeks ended 29 March 2019.

References to the 'Road' divisions combine First Student, First Transit, Greyhound, First Bus and Group items.

All references to 'adjusted' figures throughout this document reflect the adoption of IFRS 16 in the period and are before the Greyhound impairment, North American self-insurance charge, restructuring and reorganisation costs, other intangible asset amortisation charges and certain other items as set out in note 3 to the financial statements.

‘ROCE’ or Return on Capital Employed is a measure of capital efficiency and is calculated by dividing adjusted operating profit after tax by all year end assets and liabilities excluding debt items.

'EBITDA’ is adjusted operating profit less capital grant amortisation plus depreciation.

'Net debt' is the value of Group external borrowings excluding the fair value adjustment for coupon swaps designated against certain bonds, excluding accrued interest, less cash balances.

References to ‘like-for-like’ revenue adjust for changes in the composition of the divisional portfolio, holiday timing, severe weather and other factors, for example engineering possessions in First Rail, that distort the period-on-period trends in our passenger revenue businesses.

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

There are a number of risks and uncertainties facing the Group in the remaining six months of the financial year in addition to those mentioned in the Operating and Financial Review. The underlying principal risks and uncertainties in our operating businesses remain as set out in detail on pages 44 to 48 of the Annual Report and Accounts 2019, namely:

A change of Government in the UK could lead to the renationalisation of our First Rail operations as the expiry dates of our various agreements with the DfT are reached.

The implications regarding Brexit for the Group have continued to be monitored. The principal risk of the UK leaving the European Union remains the potential adverse impact on the economy, which if it materialised could affect the performance of our First Rail and First Bus businesses.

In addition, there are a number of risks and uncertainties in the Group’s ability to deliver the rationalisation of the Group’s business portfolio, including (but not limited to) satisfactory resolution of the necessary stakeholder consultations, including pensions, that will be required, and the receipt of relevant third party and/or regulatory approvals and the timing of any future divestments.

Condensed consolidated income statement

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

Condensed consolidated statement of comprehensive income

Condensed consolidated balance sheet

Condensed consolidated statement of changes in equity

Condensed consolidated cash flow statement

Cash and cash equivalents are included within current assets on the condensed consolidated balance sheet. Cash and cash equivalents includes ring-fenced cash of £497.7m in H1 2019 (H1 2018: £454.7m; full year 2019: £525.6m).

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

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

Notes to the half yearly financial report

1 Basis of preparation

This half-yearly financial report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The statutory accounts for the year ended 31 March 2019 have been delivered to the Registrar of Companies. The auditor reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The figures for the six months to 30 September 2019 include the results and financial position of the First Rail division for the period ended 14 September 2019 and the results and financial position for the other divisions for the 26 weeks ended 28 September 2019. The comparative figures for the six months to 30 September 2018 include the results and financial position of the First Rail division for the period ended 15 September 2018 and the results and financial position of the other divisions for the 26 weeks ended 29 September 2018.

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

The accounting policies used in this half-yearly financial report are consistent with International Financial Reporting Standards (IFRS) as adopted by the European Union. The accounting policies applied are consistent with those described in the Group’s latest annual audited financial statements, except for the adoption of new accounting standards noted below which became effective for the financial year beginning on 1 April 2019. We have also included certain non-GAAP measures in order to reflect management’s reported view of financial performance excluding other intangible asset amortisation charges and certain other items.

Adoption of new and revised standards

The Group has applied for the first time IFRS 16 Leases. As required by IAS 34, the nature and effect of these changes are disclosed below.

IFRS 16 Leases replaces IAS 17 Leases and three interpretations (IFRIC 4 Determining whether an Arrangement contains a lease, SIC 15 Operating Leases – Incentives and SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease). On transition the Group has applied IFRS 16 using the modified retrospective approach, with the cumulative effect on adoption being recognised as an adjustment to opening retained earnings. Prior periods have not been restated.

Prior to the adoption of IFRS 16, leases were either classified as operating or finance leases. Payments made in respect of operating leases were charged to the income statement on a straight line basis over the duration of the lease. Finance leases were recognised on the balance sheet with depreciation and interest being charged to the income statement.

For leases previously classified as finance leases, the Group has recognised the carrying amount of the finance lease asset and liability under IAS 17 as at 31 March 2019 as the carrying amount of the right of use asset and the lease liability under IFRS 16 at 1 April 2019.

The Group has elected not to include initial direct costs in the measurement of the right of use asset for operating leases in existence at the date of transition. At this date, the Group has also elected to measure the right of use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition.

On transition, for leases previously accounted for as operating leases with a remaining lease term of less than 12 months and for leases of low value assets the Group has applied the available practical expedients, therefore these have not been recognised as right of use assets but have been accounted for as a lease expense on a straight line basis over the remaining lease term.

1 Basis of preparation (continued)

On transition to IFRS 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under IFRS 16 was 3.21%.

1 Lease liabilities are included within borrowings on the condensed consolidated balance sheet.

2 As at 1 April 2019, lease liabilities due within one year were £549.7m. Lease liabilities due after one year were £678.4m.

Right of use assets of £1,140.4m were recognised at 1 April 2019, £829.4m related to rolling stock, £217.2m related to leases of land and property, £89.5m related to PCV’s and £4.3m related to the lease of other assets.

The lease liabilities as at 1 April 2019 can be reconciled to the opening lease commitments as at 31 March 2019 as follows:

3 Within First Rail, £1.0bn relates to track, station and depot access charges which do not meet the definition of a lease under IFRS 16. This reflects the fact that either no identified asset exists or that the Group does not have the right to obtain substantially all of the economic benefits from the use of the assets throughout the period of use, or that Network Rail, not the Group, directs how and for what purpose the assets are used.

4 IAS 17 lease commitments for ongoing rolling stock maintenance costs which comprise of non-lease components and do not meet the definition of a lease under IFRS 16.

In respect of the income statement impact, the application of IFRS 16 resulted in a decrease in other operating expenses and an increase in depreciation and interest expense compared to IAS 17. During the six months ended 30 September 2019, in relation to leases under IFRS 16 the Group recognised the following amounts in the consolidated income statement:

1 Basis of preparation (continued)

The Group’s ongoing accounting treatment per IFRS 16

Lease identification

At inception of a contract, the Group shall assess whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Right of use asset (ROUA)

At the commencement date, the right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, less any incentives received, plus any initial direct costs incurred and an estimate of costs to be incurred by the Group to dismantle and remove the underlying asset or restore the underlying asset or the site on which it is located.

The right of use asset is depreciated on a straight line basis over the shorter of the estimated useful life of the asset or the lease term. In addition, the right of use asset is periodically reduced by impairment losses, if applicable, and adjusted for certain remeasurements of the lease liability.

Lease liability

At the commencement date of the lease, the lease liability is initially measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid by the Group under residual value guarantees. The lease payments also include the exercise price of a purchase option if the Group is reasonably certain to exercise that option. Payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate the lease, are also included.

The lease liability is measured by increasing the carrying amount to reflect the interest on the lease liability and reducing the carrying amount to reflect the lease payments made. The carrying value is re-measured when there is a change in future lease payments arising from the effective date of a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option.

In accordance with IAS 36 Impairment of assets the opening onerous contract provision for SWR of £145.9m was reclassified as an impairment on ROUA on adoption of IFRS 16. Similarly, £62.7m of the opening TPE onerous contract provision was reclassified as an opening impairment on ROUA with the remaining balance of £44.2m being reclassified as impairment on ROUA additions in the period. Uncertainties relating to the TPE franchise are set out on page 11.

Short-term leases and leases of low-value assets

The Group applies the short-term lease recognition exemption to selected leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option and where it is not reasonably certain that the lease term will be extended. It also applies the low-value assets recognition exemption to leases of assets of low value based on the value of the asset when it is new, regardless of the age of the asset being leased. Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term.

On the balance sheet, right of use assets have been included in property, plant and equipment and lease liabilities have been included in borrowings

These results are unaudited but have been reviewed by the auditor. The comparative figures for the six months to 30 September 2018 are unaudited and are derived from the half-yearly financial report for that period, which was also reviewed by the auditor.

The Directors have carried out a review of the Group’s budget for the year to 31 March 2020 and medium term plans, with due regard for the risks and uncertainties to which the Group is exposed, the uncertain economic climate and the impact that this could have on trading performance. Based on this review, the Directors believe that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the condensed consolidated financial statements have been prepared on the going concern basis in preparing this half-yearly report.

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

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

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

This half-yearly financial report was approved by the Board on 13 November 2019.

2 Revenue

Disaggregated revenue by operating segment is set out in note 4.

3 Reconciliation to non-GAAP measures and performance

In measuring the Group and divisional adjusted operating performance, additional financial measures derived from the reported results have been used in order to eliminate factors which distort year-on-year comparisons. The Group’s adjusted performance is used to explain year-on-year changes when the effect of certain items are significant, including restructuring and reorganisation costs, material property gains or losses, aged legal and self-insurance claims, significant adverse development factors on insurance provisions, onerous contract provisions, impairment charges and pension settlement gains or losses including GMP equalisation. In addition, management assess divisional performance before other intangible asset amortisation charges as these are typically a result of Group decisions and therefore the divisions have little or no control over these charges. Management consider that this overall basis more appropriately reflects operating performance and provides a better understanding of the key performance indicators of the business.

The principal adjusting items are as follows:

Other intangible asset amortisation charges

The charge for the period was £11.8m (H1 2018: £17.6m) with the reduction due to a number of customer contract intangibles which have now been fully amortised.

Greyhound impairment charges

Greyhound profit has been below budget in recent months. This principally reflects the decline in immigration related flows on the Southern US border states in the second quarter and increased competition on some routes. In light of this, we have revised our short term and medium term financial forecasts for the Greyhound division. The revised value in use forecasts have led to an impairment to the carrying value of Greyhound of £124.4m. The impairment has been recognised in the H1 2019 results on a pro-rata basis against the assets of the division excluding property. Valuations in excess of book value suggest no impairment to the carrying value of property. Whilst we are engaged in ongoing discussions regarding a possible sale of all or part of the business, we remain focused on balancing commercial initiatives to optimise pricing and capacity allocation with mileage reduction.

3 Reconciliation to non-GAAP measures and performance (continued)

North America insurance provisions

First Group North American insurance arrangements involve retaining the working loss layers in a captive and insuring against the higher losses. Based on our actuaries’ recommendation and a second additional, independent actuarial review, last year we increased our reserve to $533m. During the first six months of this financial year we have continued to see a deteriorating claims environment with legal judgements increasingly in favour of plaintiffs and punitive in certain regions. In this hardening motor claims environment, we have seen further significant new adverse settlements and developments on a number of aged insurance claims, and as a result our actuaries have increased their expectation of the reserve required on prior year claims.

In addition, there has been a significant change in the market based discount rate used in the actuarial calculation from 2.7% to 1.6%, creating the requirement to increase the provision.

In light of the continued change in claims environment we have increased the provision further by $34m to provide more protection for prior year claims, and the resulting self-insurance reserve level is above the midpoint of the actuarial range. These changes in accounting estimates combined with the discount rate movement has resulted in the Group recording an additional charge of $83.2m or £67.5m; $73.1m or £59.3m relating to the prior year settlements is disclosed as an adjusting item, and $10.1m or £8.2m relating to the change in the discount rate movement has been included in operating profit and treated as non-adjusting. It is expected that the majority of these claims will be settled over the next five years. The charge to the operating profit for the current period reflects this revised environment. Following the half year charges, the provision at 30 September 2019 stands at $588m compared with the actuarial range of $490m to $610m.

The Group has a strong focus on safety and risk management in this area and this will continue to be a key area of focus for the Group.

Restructuring and reorganisation costs

There was a charge of £15.4m for restructuring and reorganisation costs relating to a Group wide initiative to achieve systematic and structured cost savings across the businesses with the assistance of a market leading organisation in this field. In addition, trading losses in the two Manchester depots to the date of disposal have been included. The H1 2018 charge of £28.5m related to restructuring and reorganisation costs on Greyhound’s withdrawal of services in Western Canada.

Legacy pension settlement

This relates to a legacy pension liability from a business disposal which First Transit made in 2013.

Reconciliation of constant currency1

1 Changes ‘in constant currency’ throughout this document are based on retranslating H1 2018 foreign currency amounts at H1 2019 rates.

4 Business segments information

The segment results for the six months to 30 September 2019 are as follows:

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

2 EBITDA is adjusted operating profit less capital grant amortisation plus depreciation.

3 Net debt includes lease liabilities recognised under IFRS 16 of £1,115.6m and comprises First Student £181.7m, First Transit £29.5m, Greyhound £97.7m, First Bus £71.3m, First Rail £726.1m and Group items £9.3m.

4 Business segments information (continued)

The segment results for the six months to 30 September 2018 are as follows:

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

2 EBITDA is adjusted operating profit less capital grant amortisation plus depreciation.

4 Business segments information (continued)

The segment results for the year to 31 March 2019 are as follows:

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

2 EBITDA is adjusted operating profit less capital grant amortisation plus depreciation.

5 Investment income and finance costs

6 Tax on profit on ordinary activities

The tax effect of the adjustments disclosed in note 3 was a credit of £18.4m in H1 2019 (H1 2018: credit of £4.8m; full year 2019: credit of £40.8m).

7 Earnings per share (EPS)

EPS is calculated by dividing the loss attributable to equity shareholders of £172.9m in H1 2019 (H1 2018: loss £6.9m; full year 2019: loss £66.9m) by the weighted average number of ordinary shares in issue of 1,211.3m (H1 2018: 1,205.0m; full year 2019: 1,205.9m). The number of ordinary shares used for the basic and diluted calculations are shown in the table below.

The difference in the number of shares between the basic calculation and the diluted calculation represents the weighted average number of potentially dilutive ordinary share options.

The adjusted EPS is intended to highlight the recurring results of the Group before amortisation charges, ineffectiveness on financial derivatives and certain other adjustments as set out in note 3. A reconciliation is set out below:

8 Goodwill and impairment of assets

8 Goodwill and impairment of assets (continued)

Disclosures including goodwill by cash generating unit (CGU), details of impairment testing and sensitivities thereon are set out on page 129 of the 2019 Annual Report.

The sensitivity analysis performed at 31 March 2019 indicated that no reasonably possible changes in the assumptions would cause the carrying amount of the CGUs to exceed their recoverable amount in respect of the First Student, First Transit, First Bus and First Rail divisions.

At 31 March 2019 the carrying value of the Greyhound CGU was reviewed for impairment in accordance with IAS 36 Impairment of Assets. For the purposes of this impairment the carrying value was tested for impairment on the basis of discounted future cash flows arising. As at 31 March 2019 the calculated value in use of the Greyhound division exceeded its carrying amount of £295.4m by £85.2m. Following their review at 31 March 2019, the Directors concluded that there should be no impairment in Greyhound.

Following a marked decline in immigration related cash flows, we have revised our short term and medium term value in use forecasts for the Greyhound division. The revised forecasts indicate an impairment of £124.4m.

For the purposes of the impairment review a risk adjusted view of the discounted future cash flows for the next three years was prepared to determine the value in use for the Greyhound CGU. Short and medium term cash flows have been adjusted for recent immigration trends and increased competition in certain routes. A long term revenue growth rate of 2.8% (March 2019: 2.8%) has been assumed. Cash flows are discounted using a pre-tax discount rate of 7.8% (March 2019: 8.3%). The pre-tax discount rates applied are derived from a market participant’s weighted average cost of capital. The assumptions used in the calculation of the Group’s weighted average cost of capital are benchmarked to externally available data.

This indicated an impairment of £124.4m which has been recognised in the H1 2019 results on a pro-rata basis against the assets of the division excluding property. Valuations of property suggest no impairment to the carrying value of property. The carrying value of the CGU after recognising an impairment of £124.4m is £179.2m ($220.2m).

The Greyhound impairment is sensitive to a change in the assumptions used, most notably to changes in the discount rate, terminal growth rate or terminal margin. A summary of the movements in the impairment charge recorded at 30 September 2019 from a 1% change in these assumptions is as follows:

9 Other intangible assets

Intangible assets include customer contracts and the Greyhound brand and trade name which were acquired through the purchases of businesses and subsidiary undertakings and software. These are being amortised on a straight-line basis over their useful lives which are between 3 and 20 years.

The impairment charges of £16.7m in H1 2019 relates to assets associated with Greyhound (£11.7m of brand and trade name and £5.0m of software).

10 Property, plant and equipment

Owned assets

The impairment charge of £75.1m relates to Greyhound.

Right of use assets

The impairment charge of £32.6m relates to Greyhound.

10 Property, plant and equipment (continued)

Owned assets and right of use assets

11 Assets held for sale

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

12 Trade and other receivables

13 Trade and other payables

14 Borrowings

15 Loan notes

The Group had the following loan notes issued as at the balance sheet dates:

16 Derivative financial instruments

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

16 Derivative financial instruments (continued)

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

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

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

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

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

17 Provisions

The insurance claims provision arises from estimated exposures for incidents occurring prior to the balance sheet date. It is anticipated that the majority of such claims will be settled within the next six years although certain liabilities in respect of lifetime obligations of £32.4m in H1 2019 (H1 2018: £22.8m) can extend for up to 30 years. The utilisation of £119.0m in H1 2019 (H1 2018: £100.7m) represents payments made largely against the current liability of the preceding year.

The insurance claims provision at H1 2019 by division is as follows:

The insurance claims provisions contain £22.8m in H1 2019 (H1 2018: £15.5m) which is recoverable from insurance companies and is included within other receivables in note 12.

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

In accordance with IAS 36 Impairment of assets the opening onerous contract provision for SWR of £145.9m was reclassified as an impairment on ROUA on adoption of IFRS 16. Similarly, £62.7m of the opening TPE onerous contract provision was reclassified as an opening impairment on ROUA with the remaining balance of £44.2m being reclassified as impairment on ROUA additions in the period.

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

18 Acquisition of businesses and subsidiary undertakings

On 19 August 2019, the Group completed the acquisition of the contracts for Longwood School District from East End Bus Lines, Inc. a provider of school and charter transportation services. The £3.0m consideration represents £3.0m cash paid in the period.

19 Called up share capital

The Company has one class of ordinary shares which carries no right to fixed income. The number of ordinary shares of 5p each in issue, excluding treasury shares and shares held in trust for employees, at the end of the period in H1 2019 was 1,214.0m (H1 2018: 1,205.9m). At the end of the period in H1 2019 1.4m shares (H1 2018: 6.0m shares) were being held as treasury shares and own shares held in trust for employees.

20 Net cash for operating activities

21 Analysis of changes in net debt

1 Lease liabilities ‘other’ includes £237m decrease in leases formerly classified as operating leases net of the £131m inception of new leases.

All values above exclude accrued interest.

22 Retirement benefit schemes

The Group operates or participates in a number of defined benefit pension schemes which cover the majority of UK employees and certain North American employees. The scheme details are described on pages 154 to 155 of the Annual Report and Accounts for the year ended 31 March 2019.

The Group currently sponsors six sections of the Railways Pension Scheme (RPS), relating to its franchising obligations for its TOCs, and for Hull Trains, its Open Access operator. The RPS is governed by the Railways Pension Trustee Company Limited, and is subject to regulation from the Pensions Regulator and relevant UK legislation. The RPS is a shared cost arrangement. All costs, and any deficit or surplus, are shared 60% by the employer and 40% by the members. For the TOC sections, under the franchising obligations, the employer’s responsibility is to pay the contributions requested by the Trustee, whilst it operates the franchise. There is no residual liability or asset for any deficit, or surplus, which remains at the end of the franchise period.

Since the contributions being paid to each TOC section are lower than the share of the service cost that would normally be calculated under IAS19, the Group does not make any contribution towards the sections’ deficits. Therefore, the Group does not need to reflect any deficit on its balance sheet. A franchise adjustment (asset) exists that exactly offsets any section deficit that would otherwise remain after reflecting the cost sharing with the members.

The market value of the assets at 30 September 2019 for all defined benefit schemes totalled £5,601m (H1 2018: £5,275m; full year 2019: £5,239m).

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

The key assumptions were as follows:

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

22 Retirement benefit schemes (continued)

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

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

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

23 Contingent liabilities

To support subsidiary undertakings in their normal course of business, the FirstGroup plc and certain subsidiaries have indemnified certain banks and insurance companies who have issued performance bonds for £937.6m (H1 2018: £796.3m, March 2019: £806.5m) and letters of credit for £393.3m (H1 2018: £352.3m, March 2019: £369.2m). The performance bonds relate to the North American businesses of £652.4m (H1 2018: £557.8m, March 2019: £570.8m) and the First Rail franchise operations of £285.2m (H1 2018: £238.5m, March 2019: £235.7m). The letters of credit relate substantially to insurance arrangements in the UK and North America. The parent company has committed further support facilities of up to £145.2m to First Rail Train Operating Companies of which £74.7m remains undrawn.

The Group is party to certain unsecured guarantees granted to banks for overdraft and cash management facilities provided to itself and subsidiary undertakings. The Company has given certain unsecured guarantees for the liabilities of its subsidiary undertakings arising under certain loan notes, HP contracts, finance leases, operating leases and certain pension scheme arrangements. It also provides unsecured cross guarantees to certain subsidiary undertakings as required by VAT legislation. First Bus subsidiaries have provided unsecured guarantees on a joint and several basis to the Trustees of the First Bus Pension Scheme. The Company’s North American subsidiaries participate in a number of multi-employer pension schemes in which their contributions are pooled with the contributions of other contributing employers. The funding of these schemes are therefore reliant on the ongoing participation by third parties.