Thomas Cook Regulatory News (TCG)

1 August 2013 Thomas Cook Group plc

Interim Management Statement for the three months ended 30 June 2013

DELIVERING THE TRANSFORMATION

"We have continued to make significant progress transforming Thomas Cook. The success of our recent £1.6 billion capital refinancing has enabled yet more focus on the transformation, which continues apace. Since the announcement of our half year results eleven weeks ago, we have again delivered improved operating results, stronger margins, further cost out benefits, improved cash conversion and a number of exciting new web and other product developments. However, this is just the start. We see huge potential in Thomas Cook and its realisation remains our overriding priority. We look forward to delivering much more for all our stakeholders."

Harriet Green, Group Chief Executive

Delivering a stronger balance sheet

·; Completed £1.6 billion capital refinancing with extended maturity (£431 million equity raising, £691 million syndicated bank facility due 2017 and Euro 525 million bond due 2020)

·; Net debt more than halved from £1,099 million as at 30 June 2012 to £452 million as at 30 June 2013

·; Credit rating upgraded

Delivering improved financial results

·; Q3 underlying EBIT on a like for like basis improved to a profit of £1 million, an increase of £46 million compared with the same period last year

·; Nine months ended 30 June underlying EBIT on a like for like basis improved by £104 million to £(197) million compared with the same period last year

Delivering stronger margins

·; Q3 underlying gross margin on a like for like basis improved by 110 basis points to 19.8% compared with the same period last year

·; Nine months ended 30 June underlying gross margin on a like for like basis improved by 110 basis points to 20.3% compared with the same period last year

·; UK underlying EBIT margin on a last 12 months ("LTM") basis improved by 60 basis points to 1.7% (H1 2013: 1.1%)

Delivering more cost out and profit improvement benefits

·; In Q3 we delivered an additional £31 million of cost out and profit improvement benefits taking the cumulative total to £138 million, representing significant progress and on track to meet our FY13 target of £170 million

·; We have increased the total cost out and profit improvement target for FY15 from £390 million to £400 million, reflecting a further £10 million of benefits that have been identified as being deliverable from existing initiatives reflecting risk weighting changes

Delivering more operational cash flow

·; Cash conversion ratio at 58%, on a last 12 months basis

Delivering our web strategy

·; Web penetration rate of 35% on a last 12 months basis

·; www.thomascook.com is the most visible holiday website on Google UK, attracting 59 per cent of all generic holiday searches made via laptops and desktops. It is also the second most visible website for generic holiday searches made via tablets and smartphones, accounting for 68 per cent and just below travelsupermarket.com on 69 per cent (Greenlight report dated May 2013)

Delivering new products

·; Concept hotel customer bookings for the Summer 2013 season are up by 38%, which is encouraging progress against our FY13 aim to increase the number of concept hotel passengers by 25% from approximately 450,000 in FY12

Continued positive trading

·; Approximately 85% of planned capacity is now sold for the Summer 2013 season

·; Disciplined management of committed capacity to demand has led to 9% less committed capacity "left to sell" in the "lates" market compared with last year

·; Recent political and social unrest in Egypt and Turkey is not currently having a significant impact on the Group

Summary Financial Results

Outlook

Overall, the Board is confident of a satisfactory result for the full year. Current bookings match our expectations and, as we continue to focus on managing capacity with demand, we are optimistic that we will maintain satisfactory prices and margins during the remainder of the summer season. We do, however, recognise that the "lates" market last year was particularly strong due to inclement weather throughout much of Europe, which has not been replicated this year.

Pre-close period trading update

A short trading update will be made on 26 September 2013

Enquiries

Conference calls

A WebEx will be held for equity investors and analysts today at 9.00 a.m. (BST) and a second call for fixed income investors and analysts will be held today at 10.30 a.m. (BST).

The dial-in details for these calls, and the presentation to accompany them will be made available at 8.30 a.m. (BST) on our corporate website: http://www.thomascookgroup.com.

Note: Throughout this document the term 'underlying' refers to trading results after adjusting for separately disclosed items that are significant in understanding the on-going results of the Group. The term 'like for like' reflects the comparison in the underlying results after removing identifiable non-recurring items in the prior year. A reconciliation of 'like for like' is shown on page 15.

GROUP CHIEF EXECUTIVE'S REVIEW

Transformation update

The transformation of Thomas Cook continues apace. The recent success of our £1.6 billion capital refinancing, which reduced the very high levels of debt that we inherited, lengthened its repayment profile and resulted in credit rating upgrades by Standard & Poor's and Fitch, has enabled even more focus on delivering results.

The key to successful transformations is people and I am delighted to report that we continue to attract the very highest calibre to Thomas Cook. Earlier this week, we announced the appointment of Sandra Campopiano as our new Group People Officer. Sandra is a world-class human resources professional, bringing over 20 years of experience in global customer focused organisations and major brands in the digital and technology space. She joins from Premier Farnell, where she was Chief People Officer and, before that, worked with Arrow Electronics, Guilbert, which is now part of Office Depot, as well as Psion and Barclays Retail and Online Business. She was also recognised by the UK's leading human resources magazine as "HR Director of the Year" for her transformational work. A further key appointment is Karl Schattmaier as Managing Director Group Hotel Unit, Thomas Cook Hotels & Resorts. Karl has worked in the hotel industry for over 35 years and prior to joining us oversaw the merger of Iberotel and Rui to become the leading resort hotel company at the time, led the Steigenberger Hotel corporation and is Chairman of the Supervisory Board of the SRS Hotel Group, a sales and marketing organisation bringing together over 400 hotels worldwide.

Targets and KPIs

In March we set ourselves clear targets and key performance indicators ("KPIs"), shown in the table below, to measure the successful implementation of our strategy for profitable growth. At H1 2013, eleven weeks ago, we demonstrated early progress. We can confirm that this momentum has continued in Q3 and that the FY15 target for the cost out and profit improvement programme is now £400 million.

New products

While new product revenue of more than £500 million is not targeted until FY15, the product development that underpins this is well underway.

Our holiday makers continue to be delighted by the consistent, personalised and trusted holiday experience offered by our concept hotels. Customer bookings for Summer 2013 are up by 38% compared with the previous year, which is encouraging progress towards our FY12/13 aim to increase the number of concept hotel passengers by 25% from approximately 450,000 in FY11/12. With the 93 hotels that we announced in May all fully open for this summer season, we expect further significant growth. We are aiming for approximately four times more of our package and dynamic package customers to enjoy our concept hotels in FY16/17 than in FY11/12.

To meet the increasing demand, we plan to open a further 46 concept hotels in time for the FY14 season. We are also working on innovative product enhancements based on customer feedback, with a new mid-priced hotel concept currently in development stage.

If there is one factor that confirms Thomas Cook's position as a loved and trusted brand it is that our concept quality is assured. Building on this, we are making progress implementing an informed and trusted quality assurance standard for all our products Group wide. This will enable our customers to choose Thomas Cook safe in the knowledge that we will provide them with consistent and high quality holidays whatever, whenever and wherever they want.

Already successfully proven, we believe that the implementation risk of sharing these products more widely across our business is relatively low. As a result, we remain confident that we will achieve our new product revenue target and our compound annual sales growth of at least 3.5% from FY13 to FY15.

Web

Driven by a highly innovative team, led by recently appointed John Straw as Global Head of Web and supported by our Digital Advisory Board, we continue to enhance our "high touch, high tech" service. One such initiative has been the successful introduction of an interactive online tool called "Ask & Answer" for potential and existing customers looking to ask questions about their holidays before travelling. This all-new online resource allows customers to access Thomas Cook's extensive pool of knowledge and expertise digitally. On average more than double the number of visitors to "Ask & Answer" book with us and choose holidays with a higher value compared to www.thomascook.com as a whole. While more of our customers are booking online, we want to accelerate this trend. We have recently improved our website to make it easier for customers to browse and purchase holidays using tablets. We are also enhancing our decision making and payment options to ensure that booking a Thomas Cook holiday online is even more appealing and accessible.

We are very focused on increasing the 35% of holidays that are being currently booked on the web and there are lots of encouraging signs. A recent online report on the holiday sector by search and social media specialists, Greenlight, found www.thomascook.com to be the most visible holiday website on Google UK, attracting 59 per cent of all generic holiday searches made via laptops and desktops. It is also the second most visible website for generic holiday searches made via tablets and smartphones, accounting for 68 per cent and just below travelsupermarket.com on 69 per cent. Capitalising on this strength, our initiative last year to sell advertising space to third party brands has proved particularly successful, generating valuable incremental online revenues of over £3 million in the twelve months ended 30 June 2013.

In addition to our high profile on Google UK, Thomas Cook was ranked by Headstream as one of the UK's top five social media brands and our Neckermann brand recently won the "best webshop award 2013" for the second year running.

Further evidence that Thomas Cook's brand is going from strength to strength is confirmed by YouGov's recent Brand Health Index of UK travel companies. This shows us achieving the largest improvement over the year, with a particularly encouraging rise in consumer impressions of the brand over the last three months.

Cost out and profit improvement

Our cost out and profit improvement programme continues to deliver excellent results. As at the end of June, the cumulative total of cost out savings were £138 million. Of this, the UK turnaround contributed £105 million and the Group-wide cost out a total of £33 million. This means that we are well on our way to meeting our target of £170 million for FY13, which we increased at H1 to reflect the fact that we were delivering benefits faster than originally planned.

Reflecting risk weighting changes to existing initiatives, a further £10 million of targeted benefits have been identified over the three months to the end of June. These are targeted for FY15, taking the cumulative total expected by then to £400 million.

Internally risk weighted for execution risk, independently reviewed by two major international accountancy firms and rigorously embedded within our financial reporting and performance assessment systems, we remain confident that we will exceed this target of £400 million of benefits in FY15.

Profitability and cash flow

Our focus on profitability remains key. Not only have we maintained the strong improvement in our underlying Group gross margin achieved at H1, but the measures that we are taking in our UK business continue to have a positive impact on its underlying EBIT margin. On a last 12 months basis, this has improved by 60basis points to 1.7% (H1 2013: 1.1%).

Building on our successful £1.6 billion capital refinancing, it is vital that we convert our profits to cash to reduce debt. Reflecting the benefits of improving working capital management, free cash flow improved by £303 million to £118 million in the three months ended 30 June, compared with the same period last year. Our Q3 cash conversion ratio, measured as net cash from operating activities less interest paid as a percentage of EBITDA, improved to 58% on a last 12 months basis. 

Encouraging current trading

Overall, bookings for the Summer 2013 season are developing well with approximately 85% of planned capacity now sold. Strong bookings along with planned reductions in committed capacity of approximately 6% leave the Group with 9% less committed capacity "left to sell" in the ''lates'' market compared to last year.

Current trading continues to be encouraging and reflects our strategy of optimising returns by more closely managing our committed capacity to demand, giving increased flexibility as the season develops.

The reduction in capacity continues to allow us to focus on achieving quality business, reflected in increased average selling prices and gross margin on these bookings. UK planned capacity has been reduced by 3% with bookings reduced by slightly less - however average selling prices have increased by over 5% improving gross margins. With committed capacity left to sell over 6% lower, compared with the same time last year, our ability to preserve this quality of business is increased.

Bookings in Continental Europe excluding France are up just over 1% from last year despite implemented capacity reductions of 10%. Average selling prices are up by almost 2% with the gross margin percentage also ahead of last year. Our French business, which is now reported within the Continental Europe segment, is already benefitting from our turnaround plan. Bookings in France are down by just over 12% compared with capacity reductions of 20% leaving committed capacity left to sell down by 35% on this time last year.

 Our Northern European business continues to perform well with bookings up by over 1% and average selling prices and gross margins also higher than last year. This business has increased capacity slightly with capacity left to sell now at a similar level to last year.

Our airline business in Germany is benefitting from increased alignment with our group airline resource management. Bookings are up over 3% on last year, with capacity 3% higher, and average selling prices have increased by over 3.5%.

Recent political and social unrest in Egypt and Turkey is not currently having a significant impact on the Group.

FINANCIAL REVIEW

Financial results and performance review

Group

Basis of preparation

On 1st May 2013 the Group completed the sale of its North American business. In accordance with IFRS5 the FY12 results are restated to exclude the results of the North American business on a consistent basis. 

Underlying EBIT

The continued improvement in the trading performance of the Group is reflected in the return to third quarter positive EBIT after last year's £23 million loss over the same period. This stronger third quarter performance left the underlying EBIT for the first nine months of FY13 as a seasonal loss of £197 million, £74 million better than the corresponding period last year. Reported EBIT on a last twelve months basis has increased steadily from full year FY12's figure of £168 million (excluding India and North America) to £252 million by the end of the third quarter.

After adjusting for timing / non-recurring items (detailed below) the 'like for like' improvement in EBIT for the third quarter and nine months of the current year was £46 million and £104 million respectively.

The main drivers of the year on year improvement in the third quarter and nine month EBIT results were:

(i) In the third quarter £25 million impacted operating expenses and £6 million impacted gross profit

The delivery of this year to date comparable trading improvement has been achieved despite the impact of fuel price increases unchanged from the half year position of £42 million, and has been driven by the combination of continued focus on capacity management to achieve a better balance with customer demand giving improved prices and margins and the previously announced UK turnaround plan and Group wide cost out initiatives.

Revenue

Group revenue in the third quarter of £2,354 million represented a 4.9% increase on the third quarter of last year. This growth was influenced by exchange rate movements and on a 'like for like' basis (as outlined in the table below) third quarter sales grew by £68 million (3.0%) compared with the same period last year.

Sales of £5,578 million for the nine months ended 30 June 2013 represent a 0.4% increase on the same period in the prior year. On a 'like for like' basis this nine month growth is £56 million (1.0%).

Gross Margin

Third quarter gross margin is seasonally low (due to sales mix and 'shoulder' period pricing), however gross margin for the third quarter of 19.8% represents maintenance of the year on year improvement in 'like for like' gross margin of 110 basis points achieved in the first half of the year. The main components of the like for like adjustments to gross margin in the quarter and year to date are set out below:

In the first half of the year the Group was subject to fuel price increases of £42 million. In the third quarter fuel price increases were not significant. This change in the run rate of fuel price increases does not impact gross margin as it is the Group's policy to reflect hedged fuel price movements in consumer pricing.

Operating Expenses

Operating expenses in the third quarter were impacted by foreign exchange movements which resulted in a £15 million translational increase. This increase significantly offset the £25 million of cost out realised in the quarter.

In the year to date operating expenses have now reduced by £53 million (3.8%) on a like for like basis compared with the same period in the prior year.

Separately disclosed items

Separately disclosed items consist of restructuring costs, refinancing costs, notional financing costs, non-recurring tax resolution costs and certain derivative related charges. These are costs or profits that have been recognised in the period which management believes are not the result of normal operating activity and performance. They are therefore disclosed separately to give a more comparable view of the year-on-year underlying trading performance.

The table below summarises the separately disclosed items in the first nine months of the current year.

(i) The cash column above represents items that will impact cash in the current period or in the future.

Restructuring costs

Restructuring costs include £47 million in relation to implementation of the cost out and profit improvement programme, £38 million in relation to group wide restructuring activity, and other market specific restructuring costs covering group Airlines, Continental Europe (including France), Northern Europe and Group functions.

Refinancing costs

£15 million of costs not attributable to specific elements of the refinancing have been charged to the profit and loss account.

Finance related charges

The group has certain provisions for future liabilities arising from separately disclosed circumstances - primarily deferred acquisition consideration. A notional interest charge of £6 million on the discounted value of such provisions is recognised within separately disclosed finance related charges. Also recognised are excess liquidity management swap costs of £3 million that were incurred in the period prior to the recent refinancing as the group was operating with restricted hedge facilities. Accelerated amortisation of £6 million of capitalised financing fees from cancelled facilities is also recognised.

Impairment of goodwill and amortisation of business combination intangibles

Non-cash costs of £12 million (2012: £20 million) are in relation to the amortisation of business combination intangibles arising from prior acquisitions. In the prior year goodwill in respect of the then West Europe segment totalling £94 million was impaired. Also in the prior year an impairment of £96 million was made in respect of India prior to its disposal. Due to improved business performance no goodwill impairments are made in the current year. A £4 million impairment charge arising in the current nine month period relates to the write off of intangible assets.

Provision for tax dispute resolution

 A provision of £13 million has been made following an adverse third party sales tax judgement (under appeal). The Group will continue to monitor the progress of the case but takes a prudent view of the outcome.

Other (IAS 39)

IAS 39 (as amended) requires the time value element of options used for hedging the Group's fuel and foreign currency exposure to be written off to the income statement as incurred. These are separately disclosed due to their unpredictable and market driven nature. The current year charge is £9 million (2012: gain of £4 million).

Net finance costs

Net finance costs (excluding separately disclosed items) for the nine months ended 30 June 2013 were £111 million (2012: £102.7 million) up £8 million mainly as a result of costs arising from the sale and leaseback of aircraft in 2012. Interest before aircraft financing was largely in line with prior year.

We expect that full year net interest before aircraft financing will also be in line with prior year. The impact of the capital refinancing will be an increase in bond interest in the fourth quarter but this will be offset by savings on bank interest and amortisation of facility fees.

Operating lease charges

Capital Restructuring & Financing

On 27th June 2013 the financing arrangements announced on 15th May became effective. The capital restructuring comprises:

1. Raising £431 million equity capital through the issuance of approximately 88 million ordinary shares via placing at 137p and approximately 409 million ordinary shares via rights at 76p. The Group's rights issue was taken up by 96.8% of existing shareholders.

2. The issuance of €525 million 7.75% 7 year Loan Notes

3. A new 4 year £500 million banking facility with a second £191m tranche available from 2015

Of the total expected costs of £74 million arising upon the capital refinancing, £19 million has been recognised as a reduction in the net proceeds of the equity issue, and £39 million has been capitalised against the carrying value of the bond and bank debts. £15 million of costs have been separately disclosed within operating profit in the third quarter.

Following the successful completion of the Group's refinancing plans the Group obtained secure funding for the next round of our aircraft fleet rotation - with lease financing for 9 airbus A321s being delivered in 2015 being agreed.

We now have financing in place to replace 23 of our current fleet of 86 aircraft - which significantly improves efficiency as well as the customer experience.

Discontinued Operations

On 20 March 2013 the Group completed the disposal of its businesses comprising Thomas Cook North America ('TCNA') to Red Label Vacations Inc. for 5.3 million Canadian Dollars. In accordance with IFRS 5 detailed trading results on TCNA are excluded from the Profit and Loss account. In the period prior to 1st May TCNA reported a trading loss of £22.3 million. The disposal resulted in a gain of £1.8 million in the current year.

Net Debt & Cash

The group continues to make progress in improving the management of working capital and the optimisation of cash generation.

Free cash flow in the nine months ended 30 June 2013 of £118 million represents an improvement of £303 million over the same period in the prior year and contributed to a reduction in net debt of £647 million to £452 million. The net proceeds of the Group's refinancing as at 30 June 2013 contributed £399 million to this reduction in net debt.

The combination of improved cash management and financing activity results in the Group's funding headroom at the end of the third quarter reaching £1,004 million - an increase of £425 million on the same period in the prior year.

Hedging

The Group hedges its principal market risks - which are exposure to fluctuation in the sterling / euro and sterling / US dollar exchange rates and fuel price movements. The proportion of forthcoming requirements hedged are as noted below

Definitions for "Targets and KPIs" (see page 4)

Reconciliation of underlying to 'like for like' basis for the 9 months ended 30 June

Reconciliation of underlying to 'like for like' basis for the 3 months ended 30 June

Notes