Release Date: November 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- FirstGroup PLC (FGROF, Financial) reported strong performance in the first half of 2025, demonstrating progress on strategy with revenue growth and margin expansion in both bus and rail sectors.
- The company has increased its interim dividend by 13% to 1.7p per share, reflecting confidence in its strategic delivery.
- FirstGroup PLC (FGROF) has announced a new GBP50 million share buyback program, indicating a commitment to returning excess capital to shareholders.
- The company has made significant progress in sustainability, with MSCI upgrading its ESG ranking to AAA, supported by investments in electrifying its bus fleet and depot infrastructure.
- FirstGroup PLC (FGROF) continues to explore organic and inorganic growth opportunities, with recent acquisitions in the bus sector and plans to expand open access rail services.
Negative Points
- The commencement of the transfer of train operating companies to the public sector is expected to offset growth in bus and open access rail, impacting earnings per share in full year 2026.
- The company faces challenges from government policy changes, including the impact of the budget change to employer's national insurance contributions.
- FirstGroup PLC (FGROF) anticipates incurring GBP50 million to GBP55 million in interest, primarily due to IFRS 16 accounting related to no-risk DfT rail leases.
- The transition to a franchise model in the bus sector could lead to lower margins, although it may also result in substantial cash release depending on the ownership model adopted.
- The nationalization of train operating companies by the government presents uncertainty, with potential impacts on the company's rail operations and earnings.
Q & A Highlights
Q: How has the Net Promoter Score (NPS) for the bus service evolved, and what factors are driving its positive score? Additionally, what is the cost difference between repowering a bus versus purchasing a new electric vehicle (EV), and what is the useful life of a repowered bus?
A: The NPS is a new metric for us, introduced about six months ago, and it's too early for significant learnings. However, a positive NPS indicates we're generally meeting customer expectations. Regarding repowering, the cost of a battery for a repowered bus is similar to that for a new EV, and the useful life aligns with the mid-life engine change of a diesel bus. We target about 700 vehicles for repowering, focusing on specific diesel models that are most efficient for this conversion.
Q: Could you elaborate on the cost efficiencies planned in the bus segment, and will mileage reductions be necessary as the bus fare cap ends? Also, how will the shift to franchising affect EBIT margins and cash flows?
A: We view market changes as normal and continuously assess route profitability and cost efficiencies. The end of the fare cap will prompt us to review pricing and network profitability. Regarding franchising, while margins may be lower, we expect to maintain cash flows through potential capital releases, depending on the ownership model of assets and depots.
Q: What is the expected ramp-up and margin impact of the new open access route from Euston to Stirling? Also, how are other open access applications progressing, and has the change in government affected their pace?
A: We will soon announce the launch plan for the Euston to Stirling route. While current high margins from Hull Trains and Lumo may not be sustained, we anticipate strong revenue and absolute margin growth. Other open access applications are progressing, with some expected responses by mid-2025, though those with competing applications may take longer.
Q: How do you foresee cost inflation trends in the bus business, particularly in terms of wages and other costs, for FY26? Additionally, why is the new share buyback set at GBP50 million, and does this indicate potential M&A activity?
A: We anticipate some wage pressure above inflation, but trends are flattening, and we are well-positioned for FY26. The GBP50 million buyback reflects our commitment to returning excess capital to shareholders and confidence in our strategy. We are actively exploring M&A opportunities to diversify earnings, with a focus on quality acquisitions at fair prices.
Q: Can you discuss the opportunities for bus franchising in UK regional markets and any progress outside of Manchester? In which regional markets do you see M&A opportunities in the bus segment?
A: Liverpool is expected to initiate franchising in early 2025, with activity also in Cambridge, Peterborough, West Midlands, West Yorkshire, South Yorkshire, and the Northeast. For M&A, we focus on adjacent services and B2B markets, where we've seen significant revenue growth and margin improvements.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
