30 Jan 2008 07:01
Thomas Cook Group PLC30 January 2008 30 January 2008 Thomas Cook Group plc Audited results for the year ended 31 October 2007 Highlights Financial • Group pro forma profit from operations** was €375.3m (up 26%). • Group audited statutory profit before tax was €284.3m (up 30%). • Final dividend of 5p per share recommended for 2007. • The Board intends to seek shareholder approval at an EGM to be held in March for a share buy-back programme of around €375m. Current trading and Outlook • Trading for the winter 07/08 season is in line with expectations, with demand ahead of capacity. • Trading for summer 08 is encouraging in all markets and we are in a strong position for the rest of the year. • The Board is encouraged by the performance of the business since the year end and ongoing current trading. ** As shown in Appendix 1, profit from operations is defined as earnings beforeinterest and tax, and has been adjusted to exclude exceptional items andamortisation of business combination intangibles. It also excludes our share ofthe results of associates and joint ventures. Manny Fontenla-Novoa, Chief Executive, Thomas Cook Group plc said: "The integration of Thomas Cook AG and MyTravel Group plc to form Thomas CookGroup plc has been very successful and is now largely complete. I am delightedwith our first set of results, which show a healthy increase in profit fromoperations. Our company has a great brand and heritage and we have laid a firmfoundation for the future by integrating the two businesses quickly andeffectively. We now have a clear strategy for growing the business and I look tothe future with confidence." EnquiriesThomas Cook Group plc Today +44 (0) 20 7404 5959 Thereafter +44 (0) 1706 746464Manny Fontenla-Novoa Chief ExecutiveLudger Heuberg Chief Financial OfficerSteven Olivant IR & Financial Communications Director Brunswick +44 (0) 20 7404 5959Fiona AntcliffeSophie Brand A presentation to analysts will take place today at 9.30am (GMT) at 2 SavoyPlace, London, WC2R 0BL. A copy of the slides and a recording of the presentation will be available onour website at www.thomascookgroup.com. CHIEF EXECUTIVE REVIEW Overview of results The results included within this announcement reflect both unaudited pro formaand audited statutory information for Thomas Cook Group plc. The pro formainformation reflects the underlying results for the 12 months to 31 October 2007and the 12 months to 31 October 2006 for each of MyTravel Group plc, Thomas CookAG and Thomas Cook Group plc and has been prepared by the Directors toillustrate the effect of the merger of Thomas Cook AG and MyTravel Group plc asif the transaction had taken place prior to 1 November 2005 (the first day ofthe comparative accounting period presented). The statutory results reflect theresults of Thomas Cook AG for the whole of the current and prior year and theresults of MyTravel Group plc and Thomas Cook Group plc from 19 June 2007, beingthe date that the merger completed. Pro forma highlights Thomas Cook Group plc today confirmed that Group pro forma revenue for thetwelve months to 31 October 2007 was €11,714.5m (2006: €11,870.6m). Group profitfrom operations** increased by 26% to €375.3m (2006: €297.7m). This resultmainly reflects considerably higher operating profits in the UK, Northern Europeand Airlines Germany. Pro forma EBITDA (defined as profit from operations**before depreciation and amortisation) increased by 11% to €560.5m (2006:€503.7m). Pro forma adjusted earnings per share increased by 35% to €27 cents(2006: €20 cents). Statutory highlights The audited statutory Group profit from operations** also increased to €455.4m(2006: €180.9m). Profit before tax increased to €284.3m (2006: €219.0m). Furtherdetails on other statutory numbers is given on pages 29 to 33. Merger integration Following the merger between MyTravel Group plc and Thomas Cook AG on 19 June2007, the successful integration of the two companies, which was our primaryobjective for 2007, has now been largely completed: •The senior management team is in place and meets regularly as the Group Management Board to coordinate the operational management of the Group. €144 shops in the UK have been closed to bring our retail estate to what we believe is the current optimum size. Most of our remaining 812 shops are now branded Thomas Cook, although the Going Places brand has been retained where this gives us a local advantage. •The UK headquarters has been established in Peterborough and a number of sites have been closed to rationalise offices and call centres in the UK. •Our new UK and Ireland brand strategy has been implemented, with Thomas Cook as our leading brand, supported by a strong portfolio of brands including Airtours in the mass market segment, Direct Holidays, the UK's number one brand for holidays sold direct to the consumer, and specialist brands such as Thomas Cook Signature, CruiseThomasCook, Cresta, Tradewinds, Nielsen and Club 18-30. •Thomas Cook Airways is now our integrated UK airline, operating with a single flight programme with effect from spring 2008. •Our major UK tour operator reservation systems have been operating successfully on a common platform since the end of October 2007. •Our UK finance back office systems have been fully integrated since November 2007. We are on track to achieve merger synergies of at least €200m by 2008/09, whichis an increase of €60m on our original prediction and up to a year ahead ofschedule. Strategy The Group's new senior management team carried out a strategic review over thesummer and we announced detailed plans in November. We now have a clear strategy, which is to improve performance in mainstream touroperating, make significant advances in independent travel, travel-relatedfinancial services and emerging markets, and grow overall revenue and profit. Wehave set four key targets: •Group profit from operations** to exceed €620 million in 2009/10 which implies EBITDA of more than €800 million. •Group revenue to grow to approximately €13 billion in 2009/10. •Revenue from financial services to grow from €215 million in 2005/06 to around €370 million in 2009/10. •Revenue from independent travel to grow from €2.2 billion in 2005/06 to €3.3 billion in 2009/10. Mainstream tour operating continues to generate the majority of our profit but,as the Group's revenue increases and with our focus on harnessing the strongergrowth potential in independent travel and financial services, the balancebetween our revenue streams should change over time. We expect that revenue frommainstream (excluding financial services) will decline as a proportion of thetotal from 80% in 2005/06 to 72% in 2009/10. Revenue from independent travel isexpected to increase as a proportion of the total from 18% in 2005/06 to 25% in2009/10, while revenue from financial services is expected to increase as aproportion of the total from 2% in 2005/06 to 3% in 2009/10. We have a successful UK financial services business, which generated €215million of revenue and €52 million of profit from operations in 2005/06. Weintend to grow this business significantly and, within the financial servicesbusiness, we plan to develop our credit card business so that the proportion ofrevenue from that business rises from zero in 2005/06 to 13% in 2009/10. Thismeans that the proportion of revenue from foreign exchange is expected to fallfrom 69% to 56%, while the proportion from insurance is expected to remain at31%. Since presenting our strategy to the market in November, we have announced plansfor a €375 million share buy-back programme. The Board recognises fully thebenefits of an efficient capital structure in helping to deliver value to shareholders. The Board also believes that in current economic conditions, theprice of Thomas Cook Group shares is not representative of the true value ofthe business. It believes that a share repurchase programme will make the Group's shares more attractive to investors by increasing earnings per share instep with the percentage of shares repurchased. Consequently, the Boardintends to proceed with a programme of repurchasing around €375m worth of the Group's shares and to seek approval from shareholders at an EGM to be held on 12March 2008. This level of share buy-back programme is consistent with theGroup's financial strategy for developing the business through acquisitions andorganic growth. Our approach to acquisitions remains as we set out when wedescribed our strategy in November 2007. We are not seeking significanttransactions but we are concentrating on looking for smaller acquisitions of complementary businesses. It is anticipated that a circular setting out fulldetails of the share buy-back programme will be sent to shareholders inFebruary 2008. The share repurchase programme will involve both on-marketpurchases and corresponding off-market purchases from Arcandor AG that willmaintain Arcandor's shareholding at its current level. We aim to increase the proportion of sales through controlled distribution inall our markets. The key to achieving this increase will be growing onlinesales. For 2007, online sales ranged from 5% in Continental Europe to 35% inNorthern Europe, with an average for the Group of 13%. Our target is to increaseGroup online sales to 35% of the total by 2009/10. Condor In September, we reached agreement on the terms for Condor Flugdienst GmbH, theGroup's German airline, to be merged into Air Berlin plc. The merger is subjectto approval by the Bundeskartellamt (Federal Cartel Office), whose primaryevaluation process is due to be completed by 7 April 2008. It is intended thatthe merger will be completed in two stages - 75.1% in February 2009 and 24.9% inFebruary 2010 or earlier. The Group will receive new Air Berlin shares with a value between €380m and€475m and a cash payment, expected to be approximately €120m, in respect ofsurplus cash held in Condor. The deal is expected to be earnings enhancing in2008/09. The Group will experience an estimated reduction in net financial debtof €185m and in pension obligations of €266m. The combination of Condor with Air Berlin will create one of the leading lowfare airlines in Europe. Air Berlin will remain the Group's long-term strategicpartner, providing us with continued access to flying capacity, as well as afoothold in the German independent travel market. As a significant shareholderin Air Berlin we will be able to benefit from the strong market position, growthpotential and expected synergies of at least €70m per annum by 2010. This is asignificant step in the realisation of our asset-light strategy, maximisingflexibility and reducing risk. There has been press speculation recently about the potential future of AirBerlin following significant purchases of the company's shares by Vatas HoldingGmbH, an investment company. It should be noted that our contract with AirBerlin is binding and is unaffected by changes in control of the company'sshares. Current trading Since our last update, current trading has continued to be strong, with demandfor both winter and summer holidays ahead of capacity. Together with ourexcellent capacity left to sell position, this places us in a good position forthe rest of the financial year. Winter 07/08Year on year pro forma variation % Average selling price Bookings CapacityUK +2 -5 -7Northern Europe +8 +7 +7Continental Europe +3 -1 -North America -4 -2 -1 Note: Figures above are as at 19/20 January 2008. The figures above for UK,Northern Europe and North America represent Risk bookings only. In ContinentalEurope, all bookings are included. Trading for the winter season continues to track in line with our expectations. In the UK, bookings for the current winter season are now 5% lower than theprior year. Capacity on sale is currently 7% below the prior year and as aresult we have fewer holidays left to sell than a year ago. Average sellingprices and margins are ahead of the prior year. Year on year pro forma variation % Left to sell CapacityShort haul -18 -21Medium haul -8 -4Long haul* -15 -12UK total -9 -7 Capacity to short haul destinations has been reduced by 21% as we rationalisethe product offering and exit unprofitable business. Bookings are in line withthis capacity reduction and selling prices are better year on year. Trading in medium haul is currently very pleasing. Whilst overall bookings areslightly down on the prior year, the load factors achieved to date on departedpassengers have been ahead. In addition, selling prices are currently ahead ofthe prior year and we expect to see this trend continuing throughout theremainder of the season as we fulfil demand for February half-term and Easter. *Capacity to long haul destinations has been reduced by 12% year on year andlargely reflects programme rationalisation to exit loss-making routes. Thebooked load factor is currently tracking ahead of the prior year and averageselling prices are strong. Trading in Northern Europe for winter 07/08 remains very strong. Bookings are up7% on the prior year with 7% more capacity. Average selling prices are 8% aheadyear on year. In Continental Europe, trading for winter 07/08 has shown a significantimprovement over the last few weeks and is very encouraging. Total bookings arecurrently 1% down year on year and average selling prices are 3% ahead of theprior year. Following sizeable capacity reductions, we are pleased with tradingin Germany, where we now have significantly fewer holidays to sell than in theprior year and are utilising our capacity better. Trading in Belgium, our next largest market, has also continued strongly withboth bookings and selling prices well ahead of the prior year. In theNetherlands, overall bookings are behind the prior year but this reflects areduction in non-risk car holidays. Air-inclusive bookings, where we are onrisk, are ahead year on year. Selling prices are significantly ahead followingthe change in bookings mix from car holidays to more air-inclusive holidays. Trading in France, where volumes are much lower, is satisfactory. Trading in theEastern markets (Poland, Hungary and the Czech Republic) is very strong, withbookings significantly ahead year on year. In North America, winter trading has improved in the last few weeks and bookingsare now 2% lower than last year and average selling prices are 4% lower thanlast year. The bookings position reflects the continued difficult marketconditions. However, management are taking steps to mitigate the impact wherepossible and we remain confident about achieving our expectations for animproved financial performance year on year. The booked seat load factor in Airlines Germany for winter is currently 7% aheadof the prior year. Summer 08Year on year pro forma variation % Average selling price Bookings CapacityUK +2 -2 -9Northern Europe +10 +14 +2Continental Europe +1 +5 - Note: Figures above are as at 19/20 January 2008. The figures above for UK,Northern Europe and North America represent Risk bookings only. In ContinentalEurope, all bookings are included. The post-Christmas trading period is very important in all our major markets.Whilst it is still early, we are pleased with trading in that period and haveexperienced robust demand for holidays. Trading in the UK for the summer season 2008 has continued well and earlyindications are that selling in the peak post-Christmas period is encouragingwith strong sales to our key medium haul destinations of Turkey and Egypt. Year on year pro forma variation % Left to sell CapacityShort haul -25 -21Medium haul -6 -3Long haul* -25 -9UK total -14 -9 Overall bookings are currently 2% behind the prior year, however, as with winter07/08, we are adjusting the combined flying programme to exit unprofitablebusiness and optimise yield management. Capacity is currently 9% lower than forsummer 2007. *Capacity in long haul has been reduced by 9%, however, this islargely due to the increase in the aircraft seat pitch. In addition, we haveexited unprofitable routes to China and other long haul destinations as part ofour review of flight programmes. As a result of the capacity reductions,particularly in short haul and long haul, we expect to have considerably fewerholidays left to sell in the lates market, which we expect will improveprofitability. Average selling prices are currently 2% ahead. Early trading for summer 2008 in Northern Europe has continued strongly.Bookings are currently 14% ahead year on year even though capacity has only beenincreased by 2%. Average selling prices are 10% ahead. Early indications for summer trading in Continental Europe, and in particularGermany, are very encouraging with total bookings 5% up and average sellingprices 1% up year on year. The summer programme in North America has only very recently been launched buthas started well. The booked seat load factor in Airlines Germany for summer is currently 3% aheadof the prior year. Fuel and foreign currency Fuel and foreign exchange rate volatility have a material impact on the Group'svariable cost base. It continues to be our policy, to manage this volatility, tohedge fuel and foreign currency trading requirements over an 18-24 month period.We are comfortable with our overall hedged position for the current financialyear. Outlook The Board looks to the future with confidence. In the short term, we areencouraged by the business's performance since the year end and ongoing currenttrading. In the longer term, merger synergies of at least €200m provide a soundplatform for the achievement of our target of at least €620m operating profit in2009/10. The Board has reviewed current and forecast economic conditions and consideredthe impact these could have on our business. We have not seen any effect on ourtrading, which continues to improve in the markets which generate most of ourprofits. We believe this can be primarily attributed to (i) the high prioritythat European consumers place on their major foreign holidays, and (ii) ourability, through our asset-light model, to effectively manage the balancebetween supply and demand. By managing the number of holidays to be sold, webelieve we are in a position to benefit from higher average selling prices andare less exposed to any future change in demand. The outlook therefore continuesto be positive for both winter 2007/08 and summer 2008. FINANCIAL REVIEW PRO FORMA (UNAUDITED) FINANCIAL RESULTS AND PERFORMANCE REVIEW To assist investors in understanding the performance of the Group, pro formafinancial information has been prepared to show the results of the Group as ifthe two former groups had always been combined. The pro forma financialinformation has been prepared on an adjusted basis which means beforeexceptional items, amortisation of intangible assets that arose from thebusiness combination, interest and tax (unless otherwise indicated), andexcludes our share of the results of associates and joint ventures. Group Key performance indicators Year ended Year ended 31 October 2007 31 October 2006 Change •m •m % Revenue * 11,714.5 11,870.6 -1.3%Profit from operations ** 375.3 297.7 +26.1%Operating profit margin % *** 3.2% 2.5% +28.0%Adjusted EPS (euro cents) < 27 20 +35.0%Adjusted dividend cover > 2.5 See Appendix 1 for key. Group pro forma revenue for the year was €11,714.5m, a decrease of 1.3% on theprior year. Revenue decreased year on year in the UK (down €22.3m), ContinentalEurope (down €90.4m), North America (down €124.8m) and Corporate (down €34.9m).These decreases were offset by increases in Northern Europe (up €42.9m) andAirlines Germany (up €73.4m). Pro forma profit from operations** increased by 26% to €375.3m. Improvementswere seen in all segments except for North America where over-capacity in themarket place affected margins. Pro forma exceptional operating items amounted to €211.2m (2006: pro formaprofit of €13.6m) and largely related to the post merger integration process. More details of the movements in revenue and profit from operations** are givenin the pro forma segmental review below. Pro forma adjusted earnings per share for the period was €27 cents compared with€20 cents in the pro forma prior year period. Pro forma adjusted earnings pershare has been calculated using the pro forma profit for the period beforeexceptional items and amortisation of business combination intangibles dividedby the number of shares in issue at the end of 06/07. Adjustments have beenmade to reflect a normalised tax charge. As announced on 21 November 2007, the Board expects to recommend dividends pershare in respect of each full year in the range of 40-50% of earnings per shareand to pay one third of an annual dividend as an interim and two thirds as afinal dividend. The Board believes it is desirable to provide shareholders withdividend payments increasing progressively over time. Applying this policy, theBoard is recommending a final dividend of 5 pence per share for the year ended31 October 2007, for payment after, and subject to shareholder approval at, theAnnual General Meeting expected to be held on 10 April 2008. Based on theadjusted earnings per share figure noted above, this equates to a 40% payout forthe full year (assuming an interim dividend of one third had been applicable). Pro forma unaudited segmental performance review Year ended Year ended 31 October 2007 31 October 2006 Change •m •m %Revenue *UK 4,714.3 4,736.6 -0.5%Northern Europe 1,194.8 1,151.9 +3.7%Continental Europe 4,477.4 4,567.8 -2.0%North America 559.8 684.6 -18.2%Airlines Germany 767.8 694.4 +10.6%Corporate 0.4 35.3 -98.9% Group 11,714.5 11,870.6 -1.3% Profit from operations **UK 121.5 89.2 +36.2%Northern Europe 109.7 92.6 +18.5%Continental Europe 99.5 99.2 +0.3%North America 7.9 15.7 -49.7%Airlines Germany 68.1 38.1 +78.7%Corporate (31.4) (37.1) +15.4% Group 375.3 297.7 +26.1% See Appendix 1 for key. UK Key performance indicators Year ended Year ended Change 31 October 2007 31 October 2006 %FinancialRevenue (•m) * 4,714.3 4,736.6 -0.5%Profit from operations (•m) ** 121.5 89.2 +36.2%Operating profit margin % *** 2.6% 1.9% +36.8% Non-financialPassengers (000's) + Risk -4.0% Non-Risk -4.0%Capacity (000's) ++ -3.5%Average selling price (£) # +1.6%Load factor % +++ -0.5%Brochure mix % ## -2.4%Controlled distribution % #### 68.3% 65.5% +4.3%Internet distribution % #### 16.2% 13.6% +19.1% See Appendix 1 for key. The UK business consists of the previous Thomas Cook businesses in the UKtogether with the previous MyTravel UK businesses. Both companies operated ahighly integrated tour operator model throughout the period of this review.Given the relatively long lead time between programme planning and holidaydeparture, the two businesses have operated largely autonomously for the summer2007 season departures. However, we were able to unlock some operationalsynergies, particularly in selling lates towards the end of the season, andsuccessfully merged the two businesses onto one reservation system without anydisruption to the selling process during October. Pro forma revenue for the year was down 0.5% on the prior year. This reductionlargely reflects lower passenger numbers offset by the increase in averageselling prices achieved. Within the risk tour operating business, where capacityis committed prior to the start of the season, one of the key success factors isensuring that supply and demand remain in balance and the sale of loss-makingprogrammes and holidays are minimised. In order to manage this, capacity on salewas reduced in the period, particularly in the former MyTravel risk business,and average selling prices achieved were 1.6% higher than in the previousperiod. Despite a strong late trading performance which saw our marginssignificantly ahead of last year and a continuation of our strategy to move moreof our capacity into medium haul destinations, these increases were notsufficient to compensate for the slow market conditions earlier in the year. Asa consequence of this, and along with the additional charges placed upon thesector for air passenger duty and the increase in the cost of fuel, the grossmargin achieved was lower year on year. The shortfall in gross margin, however, was more than offset by reductions inoverhead costs, such that the pro forma profit from operations** increased by€32.3m year on year. As outlined in our strategy presentation which was given to analysts on 21November 2007 (and a copy of which is available on our website atwww.thomascookgroup.com), control of distribution and, in particular, growth ofsales through the internet is one of the cornerstones to our future success.During the period, our share of internet distribution grew to 16%, an increaseof 19% over the prior year. Our share of controlled distribution also grew inthe period by 4% to 68%. Northern Europe Year ended Year ended Change 31 October 2007 31 October 2006 % Revenue (•m) * 1,194.8 1,151.9 +3.7%Profit from operations (•m) ** 109.7 92.6 +18.5%Operating profit margin % *** 9.2% 8.0% +15.0% Passengers (000's) + Risk -2.3% Non-Risk +8.7%Capacity (000's) ++ -3.2%Average selling price (SEK) # +8.2%Load factor % +++ +0.9%Brochure mix % ## -1.3%Controlled distribution % #### 76.5% 73.5% +4.1%Internet distribution % #### 35.3% 28.0% +26.1% See Appendix 1 for key. The Northern Europe division is made up of fully integrated mainstream touroperating businesses in Sweden, Denmark, Norway and Finland. It also operates anairline which services a large proportion of the tour operators' flightrequirements and has an exclusive hotel concept, Sunwing Resorts. In thisdivision, we had a very successful year reflecting a strong performance in bothwinter and summer in a mature market. As noted above, the balance between supply and demand in an integrated touroperator model is fundamental to success, and during the year, we reducedcapacity in Northern Europe by 3.2% through the removal from the fleet of anA320 aircraft. Despite this reduction in capacity, pro forma revenue increasedin the year by 3.7%. Whilst brochure mix was slightly lower than the prior year,the overall average selling price achieved improved by 8.2% and the load factorby 0.9%. These improvements reflect growth in long haul products in the winterand strong demand in the summer lates market following an unseasonably wetsummer. The winter long haul growth is predominantly to Thailand, where weopened a new Sunwing Resort in winter 06/07. We also opened a Sunwing Resort inTurkey during the year. During the period, our share of internet distribution grew to 35%, an increaseof 26% over the prior year. Our share of controlled distribution also grew inthe period, but more modestly, as we closed 13 shops in Sweden and 2 in Norway. As a result of the strong trading performance, the pro forma profit fromoperations** increased by €17.1m to €109.7m. The operating profit margin alsorose to 9.2%, maintaining our industry-leading margin position in this segment. Continental Europe Year ended Year ended Change 31 October 2007 31 October 2006 % Revenue (•m) * 4,477.4 4,567.8 -2.0%Profit from operations (•m) ** 99.5 99.2 +0.3%Operating profit margin % *** 2.2% 2.2% - Passengers (000's) + Flight-inclusive -7.7% Non-flight inclusive -0.8%Average selling price (•) # +1.5%Controlled distribution % #### 33.2% 31.2% +6.4%Internet distribution % #### 5.4% 4.8% +12.5% See Appendix 1 for key. The Continental Europe division is made up of businesses operating out ofGermany, France, Belgium and Holland (West), and Poland, Hungary and the CzechRepublic (East). The businesses in the Continental Europe segment are, ingeneral, less vertically integrated than in the UK and Northern Europe segments,with Belgium being the only business where we have both an in-house airline anda strong presence in retail. In Germany, approximately half of the airline seatcapacity is sourced from the Airlines Germany segment but the airline isoperated independently of the tour operator business. In France, we have astronger retail than tour operator presence, although the tour operator businessis growing. In Holland, Poland, Hungary, and the Czech Republic, we have astrong tour operator and retail presence. Pro forma revenue in the year in Continental Europe was down 2% from the prioryear at €4,477.4m. This largely reflects lower flight-inclusive passengers (down7.7%), offset by an increase in the average selling price achieved (up 1.5%). The reduction in flight-inclusive passengers largely occurred in the Germanbusiness. Challenging trading conditions prevailed throughout the year inGermany, particularly in the short haul business. Average selling pricesachieved were higher year on year, however, demand for holidays was weaker thanexpected and consequently we were able to utilise less of our committed aircraftcapacity than originally planned. However, management actions taken to reducethe capacity throughout the year, where possible, together with increased salesthrough controlled and internet distribution, ensured that the impact of thedifficult trading conditions was minimised. Successful cost management alsomitigated some of the disappointing trading performance. We were very pleased with the trading performance in the Belgian and French touroperating businesses, where both passengers carried and average selling pricesachieved were much improved year on year. In addition, the retail business inFrance performed very well. In Holland, we had a steady performance year on yearwith lower passenger numbers being offset by increased selling prices as the mixof holidays shifted from car holidays to air-inclusive. In Poland and Hungary, the operating performance year on year was satisfactory.We are expanding our presence in the East European market and recently acquireda retail business in the Czech Republic as well as establishing our own touroperator. During the period, our share of internet distribution in the Continental Europesegment grew over the prior year, but still stands at a modest 5% and is a keyarea of focus for our strategy going forward. Our share of controlleddistribution also grew in the period to 33%, but is still below our targetedlevel. As a result of the strong performance in Belgium and France and the successfulcapacity and cost management to minimise the impact of the disappointing tradingin Germany, the pro forma profit from operations** increased slightly to €99.5m.The operating profit margin remained static at 2.2%. North America Year ended Year ended Change 31 October 2007 31 October 2006 % Revenue (•m) * 559.8 684.6 -18.2%Profit from operations (•m) ** 7.9 15.7 -49.7%Operating profit margin % *** 1.4% 2.3% -39.1% Passengers (000's) + Risk -12.1% Non-Risk +6.3%Capacity (000's) ++ -11.5%Average selling price (C$) # +3.6%Load factor % +++ -0.6%Brochure mix % ## +4.2%Controlled distribution % #### 16.1% 16.5% -2.4%Internet distribution % #### 6.9% 5.9% +16.9% See Appendix 1 for key. The North America segment largely comprises a tour operator and a retailbusiness in Canada, although there are also some smaller independent businessesin Canada and some speciality travel services businesses in the USA. Unlike inthe UK and Continental Europe, where the peak holiday season is summer, theCanadian peak is in winter. Pro forma revenue in the year reduced by 18.2% to €559.8m. In response toover-capacity issues in the market place, management reduced the capacity onsale by 11.5% year on year. However, the majority of this reduction came in thesummer season. In the winter season, capacity in our North American tour operator was reducedby 4%, but this was not sufficient to fully mitigate the impact of over-capacityin the market place (we estimate that the capacity in the market increasedoverall by 8% despite our reduction). Selling prices achieved in winter wereslightly better year on year; however this increase was not sufficient to coverincreased direct costs, resulting in significantly lower margins being achieved. The poor winter performance was partially offset by improved trading in thesummer, where management actions to reduce capacity on poor performing routeshad a greater impact and resulted in significant increases in average marginsachieved. Given the counter-cyclical nature of the North American businesses,however, these summer improvements were not sufficient to offset the wintershortfall. As a result, the pro forma profit from operations** for the year wasreduced by €7.8m to €7.9m. During the period, our share of internet distribution in the North Americasegment grew by 17% over the prior year to 7%. Our share of controlleddistribution fell slightly as the acquisition of Encore Cruises at the end of2006 temporarily diluted our overall share. Airlines Germany Year ended Year ended Change 31 October 2007 31 October 2006 % Revenue - external (•m) 767.8 694.4 +10.6%Revenue - internal (•m) 494.6 547.9 -9.7%Total revenue 1,262.4 1,242.3 +1.6% Profit from operations (•m) ** 68.1 38.1 +78.7%Operating profit margin % *** 5.4% 3.1% +74.2% Sold seats (000's) ++++ TC tour operators -17.5% 3rd party tour operators +20.9% External seat only -9.0%Total sold seats -7.7% Sold seats (000's) ++++ Europe (excl. Cities) -9.6% Long haul +6.7% Cities -15.3%Total sold seats -7.7% Capacity (ASK m) ++ -3.0%Yield (•) ### +9.1%Seat load factor % +++ +0.8% See Appendix 1 for key. Our Airlines Germany segment consists of Condor, our low fare leisure-travelairline which operates out of Germany. The airline operates a fleet of 36aircraft, of which 27 operate within Europe and 9 operate long haul. The airlineis independent of the German tour operator, however, in 06/07 44% of its seatssold was to service the requirements of the Thomas Cook Germany tour operator(05/06: 50%). Total pro forma revenue in 06/07 increased by 1.6% year on year to €1,262.4m.This reflects an increase in long haul volumes and yields achieved, offsetpartly by a reduction in European flying, largely as a result of the capacityreductions in our German tour operator business and the resultant removal of oneaircraft from the fleet. Operating costs reduced year on year largely as a result of having one lessaircraft in the fleet. Pro forma profit from operations** increased in 06/07 to €68.1m (05/06: €38.1m).This result comes despite the difficult trading conditions in Germany andreflects a strong performance in long haul and the successful completion of theturnaround of this business, with management focusing on profitable routes andsuccessful cost control. Corporate Year ended Year ended Change 31 October 2007 31 October 2006 % Revenue (•m) * 0.4 35.3 -98.9%Loss from operations (•m) ** (31.4) (37.1) +15.4% See Appendix 1 for key. The Corporate segment largely represents unallocated head office costs and theresults of businesses held for sale. The significant reduction in revenue inthe year reflects the completion of the planned divestment of non-corebusinesses within the former Thomas Cook AG. The loss from operations** reduced by €5.7m to €31.4m year on year. Thisreduction partly reflects the divestment programme noted above and partlyreflects effective cost control within the corporate functions. RECONCILIATION OF PRO FORMA AND STATUTORY PROFIT FROM OPERATIONS ** The table below sets out the key reconciling differences in profit fromoperations** on a pro forma basis compared with a statutory basis for 2007 andthe comparative period. Year ended Year ended 31 October 2007 31 October 2006 Pro forma Group profit from operations ** 375.3 297.7Adjustments:Pre-merger operating loss/(profit) ofMyTravel 79.1 (90.7)Pre-merger impact of fair valueadjustments (16.7) (26.1)IAS 39 business combination adjustment 17.7 - Statutory Group profit from operations ** 455.4 180.9 See Appendix 1 for key. The statutory Group profit from operations** reflects 100% of the results ofThomas Cook AG for the full financial year (and the full comparative period) and100% of MyTravel Group plc and Thomas Cook Group plc from 19 June 2007, beingthe date of the merger. Consequently, the first adjustment in the table aboveremoves the pre-merger results of MyTravel Group plc. As MyTravel Group plc madelosses in the winter period 2007 but profits in the full year 2006, thisadjustment improves statutory profitability in 2007, whilst reducing the 2006profitability. In preparing the pro forma profit from operations**, account was taken of theimpact of acquisition accounting. As part of the fair value adjustments, aprovision was made in respect of above market rate hotel lease rentals. Inaddition, the value of aircraft held on the balance sheet was reduced. In thepro forma figures, we have assumed that both of these adjustments were madeprior to 1 November 2005 and, as a result, the impact of a full year of lowerrental costs and reduced depreciation has been reflected in the pro forma profitfrom operations** in both 2006/07 and 2005/06. The net effect of these fairvalue adjustments has been to increase the pro forma profit from operations**for both years by €26.1m. The second adjustment above, therefore, removes theimpact of this adjustment from the pre-acquisition period. The IAS 39 business combination adjustment represents unrecognised losses onhedging instruments taken to reserves within the MyTravel business prior to thedate of the business combination. On consolidation these amounts are includedwithin goodwill and are therefore not recognised in the pro forma figures butincrease statutory profit from operations. AUDITED STATUTORY FINANCIAL RESULTS As noted above, the statutory results for Thomas Cook Group plc for the yearended 31 October 2007 contain a full year of results for the former Thomas CookAG businesses and four months and 11 days of results for the former MyTravelGroup plc and Thomas Cook Group plc on an acquisition accounting basis. Income statement highlights Revenue and profit from operations** Revenue in the year amounted to €9,439.3m compared with €7,780.2m in the prioryear. Profit from operations before exceptional items and amortisation ofbusiness combination intangibles was €455.4m compared with €180.9m in the prioryear. Exceptional operating items Total net exceptional operating costs in the year were €184.8m compared with anet profit of €37.3m in the prior year. Exceptional items are defined as costsor profits that have arisen in the period which management do not believe are aresult of normal operating performance and which, if not separately disclosed,would distort the year on year comparison of trading performance. Included within the net €184.8m of exceptional items are €133.3m of costsassociated with the integration of the former MyTravel and Thomas Cookbusinesses. The majority of these costs have arisen in the UK businesses andlargely reflect property costs, redundancy and other people-related costs ofclosing down a number of operational sites. Other exceptional costs include impairment of property, plant and equipment andother assets (€13.0m), irrecoverable air passenger duty (€9.4m), abortedacquisition costs (€10.5m), non-merger related business restructuring (€19.6m),and other merger related costs (€16.9m). These have been partially offset byexceptional gains on the disposal of businesses and assets (€17.9m). Amortisation of business combination intangibles Amortisation of business combination intangibles in the year amounted to €43.1mof which €15.0m relates to the amortisation of brand names, customerrelationships and computer software, and €28.1m to the amortisation of the orderbacklog that existed at the time of the combination. Associates and joint ventures The profit on disposal of associates during the year of €52.4m (2006: €20.4m)largely reflects the sale, to Arcandor (formerly KarstadtQuelle), on an arm'slength basis, of our 50% interest in SunExpress, an airline based in Turkey. Theproceeds from the sale amounted to €54.0m. This disposal realised a profit of€50.1m. In addition, during the year, the Group disposed of its interests inFalstacen S.L., Thomas Cook Thailand and Troll Reisen GmbH, realising furtherprofits of €2.3m. Our share of results of associates and joint ventures was €2.6m (2006: €4.9m).The reduction in profitability relates largely to the disposal of SunExpress.Net investment income which reflects dividends and interest received frominvestments was €2.5m (2006: €0.9m). Net finance costs Net finance costs in the year were €0.7m (2006: €25.4m). The reduction in netcosts year on year largely reflects an increase in the expected return onpension plan assets. This is as a result of the increase in the scheme assetsyear on year, the main contributor to which was the special one-off contributionpayment made in 2006 into the Thomas Cook UK defined benefit scheme of €124.5m. Profit before tax for the year ended 31 October 2007 was €284.3m (2006:€219.0m). Tax The tax charge in the year was €58.8m (2006: €39.2m). Excluding the effect ofadjustments to tax provisions made in respect of previous years, this representsan effective tax rate of 30% on the profit for the year. The cash tax rate will continue to be considerably lower than 30% as a result ofbeing able to utilise the losses available in the UK and Germany. Total lossesavailable to carry forward in the Group at 31 October 2007 are €1.8 billion.Deferred tax assets have been recognised in respect of €1.0 billion of thisamount. Profit after tax for the year ended 31 October 2007 was €225.5m (2006: €179.8m). Earnings per share and dividends The basic and diluted earnings per share for the year was €33 cents (2006: €35cents). To allow a more like-for-like comparison to the prior year, earnings pershare before exceptional items and amortisation of business combinationintangibles has also been calculated. This was €54 cents for 2007 (2006: €25cents). However, it should be noted that the earnings per share figures notedhere are impacted by the weighted average number of shares in issue which aresignificantly lower for the comparative period due to the nature of the mergertransaction. As a result, management believes that the adjusted earnings pershare figures included within the pro forma financial results and performancereview section of this report are a better measure of return. As noted in the pro forma financial results and performance review section ofthis report, the Board is recommending a final dividend of 5 pence per share forthe year ended 31 October 2007, for payment after, and subject to shareholderapproval at, the Annual General Meeting expected to be held on 10 April 2008. Balance sheet Net assets at 31 October 2007 were €3,042.4m (2006: €598.1m). The businesscombination of Thomas Cook AG and MyTravel has been accounted for on the basisthat Thomas Cook AG is the acquirer. Consequently, the MyTravel acquisitionbalance sheet has been the subject of a fair value exercise under IFRS 3. Thisfair value exercise resulted in the recognition of goodwill and purchasedintangibles of €2,903.1m, of which goodwill was €2,396.3m, brand names, customerrelationships and other intangibles were €457.3m and order backlog was €49.5m. Net funds at 31 October 2007 were €357.0m (2006: €65.9m). Cash flow and net funds The net cash inflow from operating activities during the year was €237.6m (2006:€182.7m). This includes the profits from operations during the year, partlyoffset by a net outflow on working capital of €235.1m. The working capitaloutflow results from the timing of the acquisition of MyTravel by Thomas Cook.As at 19 June 2007, MyTravel would have received cash due from customersdeparting on the peak season summer holidays, as these amounts are due someweeks prior to departure. However, payments to airlines, hoteliers and othersuppliers are generally made later in the cycle, being just prior to departurein the case of airlines and when customers return from holiday in the case ofhoteliers. Consequently, cash in hand in MyTravel at the time of the acquisitionwould have been approaching its peak with the post-acquisition period (being thepart consolidated into the Thomas Cook Group plc accounts) showing significantcash outflow to settle creditors. The net cash inflow from investing activities was €51.4m (2006: €76.3m). Thisincludes €265.9m net cash acquired with businesses, the majority of whichrelates to the acquisition of MyTravel; proceeds on disposal of subsidiaries andassociates of €102.0m (2006: €151.5m); proceeds on disposal of property, plantand equipment of €46.2m (2006: €54.9m); and proceeds on disposal of non-currentassets held for sale of €32.7m (2006: nil). These have been offset by €294.0moutflow for the purchase of short term securities (2006: €59.6m), and €101.4moutflow on the purchase of assets (2006: €76.5m). The net cash outflow from financing activities was €152.8m (2006: €200.5m) andlargely comprises capital repayments and interest payments on finance leases andsimilar borrowings. Also included is €17.9m of expenses associated with theissue of ordinary shares, part of which relates to the Thomas Cook/MyTravelbusiness combination. Cash and cash equivalents on the balance sheet at 31 October 2007 were €892.8m(2006: €736.0m). This excludes cash held in short term securities of €366.7m(2006: €72.7m). However the balance does include restricted cash of €166.7m (2006: •nil) which is held in escrow accounts in the US and Canada, in respectof local regulatory requirements, and held by White Horse Insurance IrelandLimited, the Group's captive insurance company. In addition it should be noted that the Group's working capital cycle is such that cash balances are at theirlowest in the winter months and at their peak in the summer months. Change of accounting reference date The Board has decided that it will change the accounting reference date to 30September with effect from the current financial period. The current financialperiod will therefore cover eleven months. Information showing what the impactof the change would have been on the pro forma results for 2007 will be providedas part of the Half Year reporting. Group Income Statement For the year ended 31 October 2007 Audited Audited 2007 2006 Pre-Adj's* Adj's* Total Pre-Adj's* Adj's* Total Note •m •m •m •m •m •m Revenue 3 9,439.3 - 9,439.3 7,769.4 10.8 7,780.2Cost ofprovidingtourismservices (7,191.4) (16.2) (7,207.6) (5,966.7) - (5,966.7)Gross profit 2,247.9 (16.2) 2,231.7 1,802.7 10.8 1,813.5 Otheroperating 55.7 0.9 56.6 48.5 - 48.5incomePersonnelexpenses (988.0) (97.0) (1,085.0) (833.5) (6.9) (840.4)Depreciation& (152.5) (1.7) (154.2) (156.7) - (156.7)amortisationAmortisationof businesscombinationintangibles - (43.1) (43.1) - - -Otheroperating (707.7) (88.7) (796.4) (680.1) (20.0) (700.1)expensesProfit ondisposal ofbusinessesand - 3.0 3.0 - 53.4 53.4P,P & EProfit ondisposal ofnon-currentassets heldforsale - 14.9 14.9 - - - Profit fromoperations 3 455.4 (227.9) 227.5 180.9 37.3 218.2 Share ofresults ofassociatesand jointventures 5 2.6 4.9Profit ondisposal ofassociates 52.4 20.4Netinvestment 6 2.5 0.9incomeFinance 7 109.3 76.4incomeFinance 7 (110.0) (101.8)costs Profit 284.3 219.0before taxTax 8 (58.8) (39.2) Profit forthe 225.5 179.8year Attributableto:Equityholders oftheparent 224.1 176.7Minorityinterests 1.4 3.1 225.5 179.8 Earnings pershare 10Basic and €0.33 €0.35diluted * Adjustments relate to exceptional operating items (2007: •(184.8)m; 2006:€37.3m) and amortisation of business combination intangibles (2007: •(43.1)m). All revenue and results arose from continuing operations.Group Statement of Recognised Income and Expense For the year ended 31 October 2007 Audited Audited 2007 2006 Notes •m •m Losses on cash flow hedges (91.3) (60.4)Gains/(losses) on available-for-sale investments 0.6 (0.6)Exchange differences on translation of foreign (38.6) 2.4operationsActuarial gains/(losses) on defined benefit pension 147.3 (17.8)schemesTax on items taken directly to equity 8 (32.8) 26.9Net expense recognised directly in equity (14.8) (49.5) TransfersTransferred to profit or loss on cash flow hedges 93.6 (58.4)Transfer of translation losses to profit or loss on (0.6) 5.6disposalTransfer of losses on available-for-sale investments toprofit or loss on disposal (0.7) -Tax on items transferred from equity 8 (28.5) 19.8 63.8 (33.0) Profit for the year 225.5 179.8 Total recognised income and expense for the year 274.5 97.3 Attributable to:Equity holders of the parent 273.1 94.2Minority interests 1.4 3.1 274.5 97.3 Note: The impact of the change in policy for pension accounting was a reductionin the opening reserves in 2006 of €204.6m. Group Balance Sheet As at 31 October Audited Audited 2007 2006 Notes •m •mNon-current assetsIntangible assets 4,126.8 1,214.3Property, plant & equipment - aircraft and aircraft spares 813.5 635.0 - other 384.7 240.4Investment inassociates and jointventures 51.2 40.9Other investments 38.2 22.1Deferred tax assets 418.5 260.0Tax assets 5.3 -Trade and otherreceivables 141.8 84.3Pension asset 0.4 -Derivative financialinstruments 29.9 11.9 6,010.3 2,508.9Current assetsInventories 27.4 10.5Tax assets 29.2 8.9Trade and otherreceivables 1,240.1 600.6Derivative financialinstruments 113.7 30.2Cash and cashequivalents 892.8 736.0 2,303.2 1,386.2Non-current assets heldfor sale 18.2 47.2Total assets 8,331.7 3,942.3 Current liabilitiesRetirement benefitobligations (4.7) (4.4)Trade and otherpayables (2,046.1) (1,208.7)Borrowings (74.7) (17.5)Obligations underfinance leases (116.2) (35.3)Tax liabilities (109.3) (72.9)Revenue received inadvance (953.5) (525.8)Short-term provisions (265.2) (160.7)Derivative financialinstruments (168.2) (52.5) (3,737.9) (2,077.8)Liabilities related toassets held for sale (9.7) (14.1) Non-current liabilitiesRetirement benefitobligations (247.1) (411.1)Trade and otherpayables (177.9) (86.7)Long-term borrowings (187.0) (167.8)Obligations underfinance leases (515.3) (513.1)Tax liabilities (3.0) -Deferred taxliabilities (120.2) (0.1)Revenue received inadvance (0.7) (0.4)Long-term provisions (257.9) (60.4)Derivative financialinstruments (32.6) (12.7) (1,541.7) (1,252.3)Total liabilities (5,289.3) (3,344.2) Net assets 3,042.4 598.1 Group Balance Sheet (continued) As at 31 October Audited Audited 2007 2006 Notes •m •mEquityCalled up share capital 11 97.7 303.7Share premium account 10.1 539.7Merger reserve 2,933.9 -Translation and hedging reserves (70.7) (22.7)Retained earnings surplus/(deficit) 66.8 (255.2)Investment in own shares (7.3) -Equity attributable to equity holders of the parent 13 3,030.5 565.5Minority interests 11.9 32.6Total equity 3,042.4 598.1 Group Cash Flow Statement For the year ended 31 October 2007 Audited Audited 2007 2006 Notes •m •mCash flows from operating activitiesCash generated by operations 281.5 227.0Income taxes paid (43.9) (44.3)Net cash from operating activities 14 237.6 182.7 Investing activitiesDividends received from associates - 6.0Proceeds on disposal of subsidiaries (net of cash 12 46.2 97.1sold)Proceeds on disposal of associated undertakings 55.8 54.4Proceeds on disposal of property, plant & equipment 46.2 54.9Proceeds on sale of non-current assets held for sale 32.7 -Purchase of subsidiaries (net of cash acquired) 12 265.9 -Purchase of tangible and financial assets (35.6) (48.3)Purchase of intangible assets (58.6) (28.2)Purchase of non-current financial asset (7.2) -Purchase of short-term securities (294.0) (59.6)Net cash from investing activities 51.4 76.3 Financing activitiesInterest paid (47.4) (49.7)Dividends paid to minority shareholders - (1.8)Repayment of borrowings (22.5) (114.7)Repayment of finance lease obligations (68.3) (34.3)Purchase of own shares (7.3) -Proceeds from issue of ordinary shares 10.6 -Expenses of issue of ordinary shares (17.9) -Net cash used in financing activities (152.8) (200.5) Net increase in cash & cash equivalents 136.2 58.5 Cash & cash equivalents at beginning of year 733.7 670.9Effect of foreign exchange rate changes (14.9) 4.3 Cash & cash equivalents at end of year 855.0 733.7 Liquid assets 892.8 736.0Cash classified as held for sale - 0.2Bank overdrafts (37.8) (2.5)Cash & cash equivalents at end of year 855.0 733.7 Notes to the Financial Information 1. General information and basis of preparation On 19 June 2007, Thomas Cook AG (TCAG) merged with My Travel Group plc to becomeThomas Cook Group plc (TCG plc). For statutory purposes the transaction istreated as a business combination effected by a new parent company, TCG plc.Whilst for accounting purposes this is a reverse acquisition of TCG plc by TCAG,the overall effect is that TCAG is treated as the acquirer of both TCG plc andMyTravel Group plc. The statutory results for TCG plc for the year to 31 October2007, therefore, include the full year of trading for TCAG and the trading of MyTravel Group plc for the period from 19 June 2007 to 31 October 2007. Thecomparative information includes the full year of trading of TCAG for the yearended 31 October 2006 and none of the MyTravel Group plc results. All of theTCAG results have been prepared based on the accounting policies referred to innote 2. The financial information contained in this preliminary announcement, whichcomprises the Group income statement, Group balance sheet, Group cash flowstatement, Group statement of recognised income and expense and related notes,is derived from the full Group financial statements for the year ended 31October 2007 and does not constitute full accounts within the meaning of section240 of the Companies Act 1985 (as amended). In addition, whilst the financial information included has been prepared inaccordance with IFRS, this announcement does not of itself contain sufficientinformation to comply fully with IFRS. The financial information has been prepared under the historical costconvention, except for the revaluation of certain financial instruments. The 2007 Annual Report, on which the joint auditors have given an unqualifiedreport and which does not contain a statement under section 237(2) or (3) of theCompanies Act 1985, will be delivered to the Registrar of Companies in duecourse, and posted to shareholders in February 2008. Further copies will beavailable for members of the public on our website at www.thomascookgroup.com,or on application to the Company Secretary, The Thomas Cook Business Park,Conningsby Road, Peterborough, Cambridgeshire, PE3 8SB. At the date of authorisation of these financial statements, the followingStandards and Interpretations that are expected to impact on the Group, butwhich have not been applied in these financial statements, were in issue but notyet effective. 1. General information and basis of preparation (continued) With the exception of changes in disclosure, the Directors anticipate that theadoption of these Standards and Interpretations in future periods will have nomaterial impact on the financial statements of the Group. The Directorsanticipate that the Group will adopt these Standards and Interpretations ontheir effective dates. IAS 1 Capital disclosures, is effective for periods commencing on orAmendment after 1 January 2007.IFRS 7 Financial instruments: Disclosures, issued in August 2005, is effective for periods commencing on or after 1 January 2007.IFRS 8 Operating segments, issued in November 2006, effective for periods beginning on or after 1 January 2009.IFRIC 11 Group and treasury share transactions, issued in November 2006, effective for annual periods beginning on or after 1 March 2007.IFRIC 13 Customer loyalty programmes, issued in June 2007, effective for annual periods beginning on or after 1 July 2008.IFRIC 14 IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction, issued in July 2007, effective for annual periods beginning on or after 1 January 2008.IAS 23 Borrowing costs, revised version issued in March 2007, effective for annual periods beginning on or after 1 January 2009.IAS 1 Presentation of financial statements, revised version issued in September 2007, effective for annual periods beginning on or after 1 January 2009. 2. Accounting policies A copy of the Group's accounting policies is included in Appendix 2. 3. Segmental information For management purposes, the Group is currently organised into five geographicoperating divisions: UK and Ireland, Continental Europe, Northern Europe, NorthAmerica and Airlines Germany. These divisions are the basis on which the Groupreports its primary segment information. Certain residual businesses andcorporate functions are not allocated to these divisions and are shownseparately as Corporate. The primary business of all these operating divisions is the provision ofleisure travel services and, accordingly, no separate secondary segmentalinformation is provided. Segmental information for these activities is presented below. Year ended 31 October 2007 Audited UK & Cont. North. North Airlines Corp. Total Ireland Europe Europe America Germany 2007 2007 2007 2007 2007 2007 2007 •m •m •m •m •m •m •m RevenueSegment sales 3,635.6 4,482.5 446.2 122.2 1,262.4 0.4 9,949.3Inter-segmentsales (6.2) (5.7) (3.5) - (494.6) - (510.0)Total revenue 3,629.4 4,476.8 442.7 122.2 767.8 0.4 9,439.3 ResultProfit/(loss)fromoperationsbeforeexceptionalitems andamortisationof businesscombinationintangibles 250.1 99.5 63.9 (3.3) 68.1 (22.9) 455.4Exceptionalitems (158.1) 3.9 (3.1) (0.2) 0.2 (27.5) (184.8)Amortisationof businesscombinationintangibles (17.0) - (26.5) 0.4 - - (43.1)Segmentalresult 75.0 103.4 34.3 (3.1) 68.3 (50.4) 227.5 Share ofresults ofassociatesand jointventures 2.6Profit ondisposal ofassociates 52.4Netinvestment 2.5incomeFinance 109.3incomeFinance costs (110.0) Profit beforetax 284.3Tax (58.8)Profit forthe 225.5year Inter-segment sales are charged at prevailing market prices. 3. Segmental information (continued) Year ended 31 October 2006 Audited UK & Cont North. North Airlines Corp. Total Ireland Europe Europe America Germany 2006 2006 2006 2006 2006 2006 2006 •m •m •m •m •m •m •m RevenueSegment sales 2,484.9 4,574.6 - - 1,242.3 54.6 8,356.4Inter-segmentsales (2.2) (6.8) - - (547.9) (19.3) (576.2)Total revenue 2,482.7 4,567.8 - - 694.4 35.3 7,780.2 ResultProfit/(loss)fromoperationsbeforeexceptionalitems 80.7 99.2 - - 38.1 (37.1) 180.9Exceptionalitems 39.1 (24.8) - - 4.4 18.6 37.3Segmentalresult 119.8 74.4 - - 42.5 (18.5) 218.2 Share ofresults ofassociatesand jointventures 4.9Profit ondisposal ofassociates 20.4Netinvestment 0.9incomeFinance 76.4incomeFinance costs (101.8) Profit beforetax 219.0Tax (39.2)Profit forthe 179.8year 4. Exceptional items Audited Audited 2007 2006 •m •m Property costs, redundancy and other costs incurred inintegrating the Thomas Cook and MyTravel businesses (133.3) -Disposal of businesses - 32.4Disposal of property, plant & equipment 3.0 21.0Disposal of non-current assets held for sale 14.9 -Disposal of brand rights - 10.8Exceptional past service credit in pension scheme - 31.2Property costs, redundancy and other costs incurred inother reorganisations (19.6) (46.5)Impairment of property, plant & equipment, intangibleassets, non-current investments and assets held for sale (11.2) (8.4)Loan write offs, impairment of trade receivables and otherassets (1.8) (3.2)Cost of irrecoverable aircraft passenger duty (9.4) -Abortive transaction fees (10.5) -Other expenses incurred as a result of the merger (16.9) -Exceptional items included within operating profit (184.8) 37.3 Audited Audited 2007 2006 •m •mExceptional items have been included in the incomestatement as follows:Revenue - 10.8Cost of providing tourism services (16.2) -Other operating income 0.9 -Personnel expenses (97.0) (6.9)Depreciation and amortisation (1.7) -Other operating expenses (88.7) (20.0)Profit on disposal of businesses and property, plant &equipment 3.0 53.4Profit on disposal of non-current assets held for sale 14.9 - (184.8) 37.3 Share of associates' exceptional itemsImpairment of investments in associates - (7.5)Profit on disposal of associates 52.4 20.4 52.4 12.9 Total exceptional items (132.4) 50.2 The profit on disposal of associates of €52.4m principally relates to thedisposal of the Group's 50% interest in SunExpress, an airline based in Turkey,to Arcandor on an arm's length basis. The proceeds from the sale amounted to€54.0m in cash and resulted in a profit on disposal of €50.1m. 4. Exceptional items (continued) In addition, during the year, the Group disposed of its interests in FalstacenS.L., Thomas Cook Thailand and Troll Tours Reisen GmbH, realising furtherprofits of €2.3m. Deferred consideration of €5.8m in relation to these disposalsis expected to be received by 1 November 2008. 5. Share of results of associates and joint ventures Audited Audited 2007 2006 •m •mGroup's share of the results of associates and jointventures before exceptional items 2.6 12.4Exceptional items - impairment of investments inassociates - (7.5) 2.6 4.9 6. Net investment income Audited Audited 2007 2006 •m •mDividends received from other investments 1.8 0.9Interest on fixed asset investments 0.7 - 2.5 0.9 7. Finance income and costs Audited Audited 2007 2006 •m •mFinance incomeIncome from loans included in financial assets 1.3 0.3Other interest and similar income 49.7 35.6Expected return on pension plan assets 57.4 39.0Fair value gains on derivative financial instruments 0.9 1.5 109.3 76.4 Finance costsInterest payable (30.3) (17.8)Finance costs in respect of finance leases (19.0) (30.2)Interest cost on pension plan liabilities (56.0) (51.0)Fair value losses on derivative financial instruments - (0.1)Interest on overdue tax (0.4) -Other finance costs (including discounting charges) (4.3) (2.7) (110.0) (101.8) 8. Tax Analysis of tax charge in the year Audited Audited 2007 2006 •m •mCurrent taxUK corporation tax charge for the year - 33.6 income/reimbursements in respect of prior periods (0.4) (6.6) (0.4) 27.0Overseas corporation tax charge for the year 37.0 35.8 income/reimbursements in respect of prior periods (23.8) (19.9) 13.2 15.9 Total current tax 12.8 42.9 Deferred tax tax charge/(credit) for the year 47.9 (3.7) adjustments in respect of prior periods (1.9) - Total deferred tax 46.0 (3.7) Total tax charge 58.8 39.2 In addition to the amount charged to the income statement, deferred tax relatingto actuarial losses on pension schemes and the fair value of derivativefinancial instruments of €61.3m has been charged directly in equity (2006:€46.7m credited). UK corporation tax is calculated at 30% (2006: 30%) of the estimated assessableprofit for the year. Taxation for other jurisdictions is calculated at the ratesprevailing in the respective jurisdictions. At the balance sheet date, the Group had unused tax losses of €1,800.0m (2006:€478.0m) available for offset against future profits. Deferred tax assets havebeen recognised where there is sufficient probability that there will be futuretaxable profits against which the assets may be recovered. No deferred tax assethas been recognised in respect of tax losses in the UK and Germany of €800.0m(2006: €162.0m) due to the unpredictability of future profit streams. 9. Dividends Audited Audited 2007 2006 •m •m Proposed final dividend for the year ended 31 October 2007of 5 pence (sterling) (•cents 7.17) per share (2006: nil). 70.0 - No dividends were declared or paid during the year (2006: nil). The proposed final dividend is subject to approval by shareholders at the AnnualGeneral Meeting and has not been included as a liability in these financialstatements. 10. Earnings per share The calculations for earnings per share, based on the weighted average number ofshares, are shown in the table below. The weighted average number of sharesshown excludes 0.5m shares held by the employee share ownership trusts (2006:Nil). Adjusted earnings per share figures are presented below. These exclude theeffects of exceptional items and amortisation of business combinationintangibles and the combined tax effect thereon. Adjusted earnings per sharefigures are presented to allow comparison to the prior period on a like-for-likebasis. Audited Audited 2007 2006Basic and diluted earnings per share •m •mNet profitattributableto equityholders of theparent 224.1 176.7 millions millionsWeighted average number of shares for basicearnings pershare 681.1 508.8Effect ofdilutivepotentialordinaryshares - shareoptions* 0.8 -Weighted average number of shares for dilutedearnings pershare 681.9 508.8 * Awards of shares under the Thomas Cook Group plc executive share option schemewill be satisfied bythe purchase of existing shares in the market and will therefore not result inany dilution of earnings pershare. The outstanding share options of MyTravel Group plc will result in theissue of a further 1,533,551ordinary shares of Thomas Cook Group plc which are potentially dilutive. • •Basic earningsper share 0.33 0.35Dilutedearnings pershare 0.33 0.35 Adjusted earnings per share •m •mNet profitattributableto equityholders of theparent 224.1 176.7Amortisationof businesscombinationintangibles 43.1 -Tax relatingtoamortisationof businesscombinationintangibles (7.2) -Exceptional items Included in profit from operations 184.8 (37.3) Included in share of associates and joint ventures (52.4) (12.9)Tax relatingto theexceptionalitems (22.1) - Adjusted net profit attributable to equity holders oftheparent 370.3 126.5 • •Basic adjustedearnings pershare 0.54 0.25Dilutedadjustedearnings pershare 0.54 0.25 11. Share Capital Thomas Cook Group plc was incorporated on 8 February 2007 and on that dateissued 50,000 ordinary shares of £1 each at par which were paid up as to 25p onissue. On 29 April 2007, the authorised share capital was increased by the creation of2,000,000,000 ordinary shares of €0.10 each. Also on that date, the initial50,000 ordinary shares of £1 each held by MyTravel and Arcandor werereclassified as deferred shares. On 19 June 2007, 508,754,846 ordinary shares of €0.10 each were allotted toArcandor on completion of the acquisition of the entire ordinary share capitalof Thomas Cook AG and 463,157,278 ordinary shares of €0.10 each were allotted inconsideration for the acquisition of the entire ordinary share capital ofMyTravel Group plc. A further 4,929,028 ordinary shares of €0.10 each weresubsequently issued in exchange for additional shares issued by MyTravel Groupplc consequent to the exercise of outstanding share options. 12. Acquisitions On 19 June 2007, the Group acquired 100% of the share capital of MyTravel Groupplc, a leading provider of package holidays, with operations in the UK andIreland, Northern Europe and North America. As explained in note 1, for accounting purposes, Thomas Cook AG is treated asthe acquirer of both Thomas Cook Group plc and MyTravel Group plc. Details of the net assets acquired are set out in the table below: Audited Carrying amount Fair value Amount recognised before combination adjustments at acquisition date •m •m •mIntangible assets 211.3 313.3 524.6Property, plant &equipment 525.3 (80.6) 444.7Deferred tax assets 16.0 277.1 293.1Investments 11.3 20.0 31.3Other non-currentassets 75.8 (1.3) 74.5Current assets 541.1 (3.1) 538.0Cash and cashequivalents 338.7 - 338.7Current liabilities (1,686.0) (20.4) (1,706.4)Non-currentliabilities (38.0) - (38.0)Borrowings and finance leaseobligations (235.7) - (235.7)Deferred taxliabilities (29.0) (110.1) (139.1)Provisions (125.5) (145.1) (270.6)Net liabilitiesacquired (394.7) 249.8 (144.9)Goodwill 2,396.3Total consideration 2,251.4 Satisfied by:Issue of ordinaryshares 2,205.6Directly attributablecosts (of which€31.8m cash costsduring period) 45.8 2,251.4 12. Acquisitions (continued) Consideration took the form of one ordinary share in Thomas Cook Group plc inexchange for the cancellation of each ordinary share in MyTravel Group plc. Intotal 463,157,278 ordinary shares in Thomas Cook Group plc were issued inrespect of the acquisition. The fair value of the consideration was determinedby the closing price of the MyTravel Group plc shares on 18 June 2007 of £3.22per share. Costs associated with the acquisition were €45.8m. Since 19 June 2007, Thomas Cook Group plc has acquired a further 4,929,028ordinary shares of MyTravel Group plc issued pursuant to the exercise ofoutstanding MyTravel share options. The cost of acquisition ofthese shares was €10.6m and was satisfied by the issue of the same number of newThomas Cook Group plc ordinary shares for cash. Goodwill includes the fair value of the synergies expected to arise followingthe combination and the fair value of the expertise of the acquired entity'sworkforce. The fair value adjustments detailed above are provisional as the fairvalue review has not been wholly completed. Any adjustments to the above valueswill be incorporated in the Group's interim financial statements for 2007/08. The main elements of the significant provisional fair value adjustmentsrecognised are described below: • Intangible assets in respect of acquired brands and customer lists in accordance with IFRS 3 - Business Combinations; • Deferred tax assets in recognition of acquired accumulated tax losses; • Deferred tax liabilities in relation to the acquired intangible assets; and • Provisions in respect of off-market leases. From the date of acquisition, MyTravel Group has contributed €48.0m to theGroup's profit before tax for the period. If the transaction had taken place atthe start of this financial period, the revenue of the Group would have been€11,684.6m and the Group's profit before tax would have been €176.5m. The transaction has been accounted for by the purchase method of accounting. On 31 August 2007, the Group acquired the business of Travel Plus s.r.o., aCzech distributor of leisure travel services. Travel Plus also owns thesubsidiaries Dusek Tours s.r.o. (100%) and Cestovni Kancelar Oriana s.r.o.(51%). The purchase price was CZK 70m of which CZK 49m has been paid in cash andthe balance of CZK 21m is deferred to the end of a guarantee period which cannotexceed five years. Details of the net assets acquired are set out in the table below: Audited Fair value •mNet assets acquiredProperty, plant & equipment 0.1Non-current asset investments 0.1Trade and other receivables 1.3Cash and cash equivalents 0.8Trade and other payables (1.9) 0.4Goodwill 2.1Total consideration 2.5 Satisfied by: cash 1.8 deferred consideration 0.7 2.5 12. Acquisitions (continued) The transaction has been accounted for by the purchase method of accounting. The purchase price of each asset component of the acquisition is considered torepresent its fair value. The companies contributed €0.1m to the Group's profit before tax for the period. The agreement between Arcandor and Lufthansa on 2 April 2007, whereby Arcandoracquired the remaining 50% interest in Thomas Cook AG that it did not alreadyown, also affected the interests of Thomas Cook AG in its subsidiaries, TCTouristik GmbH (TCT), the German tour operator, and Condor Flugdienst GmbH, theGerman airline. Before the transaction, Thomas Cook AG owned 90% of bothcompanies. As part of the agreement, Thomas Cook AG acquired the remaining 10%interest in TCT at a value of €40m and sold 14.9% of the total Condor sharecapital to Lufthansa for €46.2m. Based on the Condor sales agreement, Thomas Cook AG has the right to acquire andLufthansa has the right to sell Lufthansa's 24.9% interest in Condor for a fixedprice of €77m (put/call option). These options are exercisable on 9 February2009 at the earliest. As a result of the call and put options, all risks andrewards of the Condor investment remain with Thomas Cook AG. The effect of these transactions on the Group balance sheet was: Audited Fair value •mGoodwill Condor 25.1 TCT 29.1Cash and cash equivalents 6.2Minority interests 18.4Trade and other payables (1.2)Liability for option (77.6) - Audited MyTravel Travel Plus TCT Total •m •m •m •m Net cash inflow arising on acquisitions:Cash consideration: shares - (1.8) (40.0) (41.8) attributable costs (31.8) - - (31.8)Cash and cash equivalentsacquired 338.7 0.8 - 339.5 306.9 (1.0) (40.0) 265.9 Net cash inflow arising on disposalCash consideration Condor 46.2 13. Equity attributable to equity holders of the parent The movements in equity attributable to equity holders of the parent during theperiod were as follows: Audited •mBalance at 1 November 2005 471.3 Total recognised income & expense for the year 94.2 Balance at 31 October 2006 565.5 Total recognised income & expense for the year 273.1 Equity credit in respect of share based payments 0.9Capital increase 0.6Issue of equity shares net of expenses (7.9)Acquisition of MyTravel 2,205.6Purchase of own shares (7.3) Net change directly in equity 2,191.9 Total movements 2,465.0 Balance at 31 October 2007 3,030.5 14. Notes to the cash flow statement Audited Audited 2007 2006 •m •m Profit before tax 284.3 219.0Adjustments for: Finance income (109.3) (76.4) Finance costs 110.0 101.8 Net investment income (2.5) (0.9) Share of results of associates and joint ventures (2.6) (4.9) Depreciation of property, plant & equipment 126.8 132.0 Impairment of property, plant & equipment 4.8 - Amortisation of intangible assets 27.4 24.7 Impairment of intangible assets 4.1 - Amortisation of business combination intangibles 43.1 - Impairment of non-current investments 2.3 - Impairment on non-current assets held for sale - 8.4 Profit on disposal of businesses and property, plant & equipment (3.0) (53.4) Profit on disposal of non-current assets held for sale (14.9) - Profit on disposal of associates (52.4) (20.4) Share based payments 0.9 - Other non-cash items (16.0) (39.0) Contribution to pension scheme - (124.5) Increase in provisions 68.1 25.0 Income received from other non-current investments 1.8 0.9 Interest received 43.7 35.9 Operating cashflows beforemovements inworkingcapital 516.6 228.2 Increase ininventories (3.9) (2.1)Decrease inreceivables 117.4 1.4Decrease inpayables (348.6) (0.5) Cash generatedby operations 281.5 227.0Income taxespaid (43.9) (44.3) Net cash fromoperatingactivities 237.6 182.7 Cash and cash equivalents, which are presented as a single class of assets onthe face of the balance sheet, comprise cash at bank and other short-term highlyliquid investments with a maturity of three months or less. 15. Net funds Audited At Other At 1 Nov Cash non-cash Acquisitions/ Exchange 31 Oct 2006 flow changes disposals movements 2007 •m •m •m •m •m •m LiquidityCash and cashequivalents 736.0 171.7 - - (14.9) 892.8Cash classified asheld forsale 0.2 (0.2) - - - -Tradingsecurities 72.7 294.0 - - - 366.7 808.9 465.5 - - (14.9) 1,259.5 Current debtBank overdrafts (2.5) (35.3) - - - (37.8)Short termborrowings (3.7) - - - - (3.7)Current portion oflong-term borrowing (11.3) (7.5) - (14.4) - (33.2)Borrowingsclassified asheld for sale (9.3) - - - - (9.3)Obligations underfinanceleases (35.3) (54.7) - (26.2) - (116.2) (62.1) (97.5) - (40.6) - (200.2)Non-current debtLong-termborrowings (167.8) 30.0 3.6 (57.2) 4.4 (187.0)Obligations underfinanceleases (513.1) 123.0 - (137.9) 12.7 (515.3) (680.9) 153.0 3.6 (195.1) 17.1 (702.3)Total debt (743.0) 55.5 3.6 (235.7) 17.1 (902.5) Net funds 65.9 521.0 3.6 (235.7) 2.2 357.0 Appendix 1 Key Performance Indicators Definitions * Revenue for the Group and segmental analysis represents external revenue only,except in the case of the Airlines Germany segmental key performance analysiswhere revenue of €494.6m (2006: €547.9m) largely to the Continental Europedivision have been included. ** Profit from operations is defined as earnings before interest and tax, andhas been adjusted to exclude exceptional items and amortisation of businesscombination intangibles. It also excludes our share of the results of associatesand joint ventures. *** The operating profit margin is the profit from operations (as defined above)divided by the external revenue, except in the case of the Airlines Germanysegmental key performance analysis where total revenue has been used as thedenominator to more accurately reflect the trading performance. In the case of pro forma profit from operations, the figures reflect theunderlying results for the 12 months to 31 October 2007 and the 12 months to 31October 2006 for each of MyTravel Group plc, Thomas Cook AG and Thomas CookGroup plc and have been prepared by the Directors to illustrate the effect ofthe merger of Thomas Cook AG and MyTravel Group plc as if the transaction hadtaken place prior to 1 November 2005 (the first day of the comparative periodpresented). < Adjusted earnings per share is calculated as pro forma net profit after tax,but before exceptional items and amortisation of business combinationintangibles, divided by the number of shares in issue at 31 October 2007 (alsofor 2006 comparative). Profit after tax has been calculated using a notional taxrate of 30%. > Adjusted dividend cover is calculated by dividing the adjusted earnings pershare (see above) by the pro forma full year proposed dividend in euro(translated at the rate prevailing on 31 October 2007). + Passengers in the case of UK, Northern Europe and North America represents thetotal number of passengers (in thousands) that departed on a Thomas Cook Groupplc holiday in the period. It excludes customers who booked third party touroperator products through Thomas Cook retail channels. For Continental Europepassengers represents all tour operator passengers departed in the period,excluding those on which only commission is earned. Risk passengers in UK, Northern Europe and North America represent thoseholidays sold where the business has financial commitment to the product(flights and accommodation) before the customer books. The analysis excludesaccommodation only passengers. Non-Risk passengers in UK, Northern Europe and North America represents thoseholidays sold where the business has no financial commitment to the product(flights and accommodation) before the customer books. ++ Capacity for UK, Northern Europe and North America represents the totalnumber of holidays available to sell. This is calculated by reference tocommitted airline seats (both in-house and third party). In the case of Airlines Germany, capacity represents the total number ofavailable seat kilometres (ASK). ASK is a measure of an airline's passengercarrying capacity and is calculated as available seats multiplied by distanceflown. # Average selling price for UK, Northern Europe and North America represents theaverage selling price (after discounts) achieved per mainstream passengerdeparted in the period (excluding accommodation only passengers). ForContinental Europe, average selling price represents the average selling price(after discounts) achieved per passenger departed in the period. +++ For UK, Northern Europe and North America, load factor is a measure of howsuccessful the mainstream businesses were at selling the available capacity.This is calculated by dividing the departed mainstream passengers in the period(excluding accommodation only) by the capacity in the period. For Airlines Germany, seat load factor is a measure of how successful theairline was at selling the available capacity. This is calculated by dividingthe revenue passenger kilometres (RPK) by the available seat kilometres (ASK -see capacity definition above) and is the recognised IATA definition of loadfactor used for airlines. RPK is a measure of the volume of passengers carriedby an airline. One RPK is flown when a passenger is carried one kilometre. ## Brochure mix is defined as the number of mainstream holidays (excludingaccommodation only) sold at brochure prices divided by the total number ofholidays sold and is a measure of how successful a business was at sellingholidays early. Holidays are generally discounted closer to departure. #### Controlled distribution is defined as the proportion of sales generatedthrough our in-house retail shops, call centres and websites. Internetdistribution is a sub-set of controlled distribution and is defined as theproportion of sales generated through in-house websites. Both performanceindicators are calculated on sales value of departed passengers in the period. ++++ Sold seats in Airlines Germany represents the total number of one-way seatssold on aircraft (in thousands) that departed in the period. ### Yield in Airlines Germany represents the average price achieved per seatdeparted in the period. Appendix 2 Group Accounting Policies These financial statements have been prepared in accordance with IFRS and IFRICinterpretations and with those parts of the Companies Act 1985 applicable togroups reporting under IFRS. The financial statements have also been prepared inaccordance with IFRS adopted for use in the European Union and therefore complywith Article 4 of the EU IAS Regulation. The only new standard or interpretation adopted during the current period wasIFRIC 10 - Interim financial reporting and impairment. This interpretation hadno effect on the financial statements for the period or those for the priorperiod. The financial statements have been prepared under the historical costconvention, except for revaluation of certain financial instruments. The principal accounting policies applied in the preparation of the financialinformation presented in this document are set out below. These policies havebeen applied consistently to the periods presented. Basis of preparation The Group's financial statements consolidate those of the Company and itssubsidiary undertakings. The results of subsidiaries acquired or disposed of areconsolidated for the periods from or to the date on which control passed.Subsidiaries are entities controlled by the Company. Control is achieved wherethe Company has the power to govern the financial and operating policies of aninvestee entity so as to obtain benefits from its activities. Acquisitions are accounted for under the purchase method. Where a transaction is a business combination amongst entities under commoncontrol, the requirements of IFRS 3 are applied and the combination is accountedfor using the purchase method. Where audited financial accounts are not coterminous with those of the Group,the financial information has been derived from the last audited accountsavailable and unaudited management accounts for the period up to the Company'sbalance sheet date. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. On 19 June 2007, Thomas Cook AG (TCAG) merged with MyTravel Group plc to becomeThomas Cook Group plc (TCG plc). For statutory purposes the transaction istreated as a business combination effected by a new parent company, TCG plc.However, for accounting purposes this is a reverse acquisition of TCG plc byTCAG with the overall effect being that TCAG is treated as the acquirer of bothTCG plc and MyTravel Group plc. These financial statements therefore include thefull year of trading for TCAG and the trading of MyTravel Group plc for theperiod from 19 June 2007 to 31 October 2007. The comparative informationincludes the full year of trading for TCAG and none of the MyTravel Group plcresults. All of the TCAG financial information has been presented in accordancewith the accounting policies set out below. Following the business combination, TCAG changed its accounting policy forpension accounting and made certain changes to the presentation of financialinformation from that in the TCAG financial statements for the year ended 31October 2006. These presentational changes related to certain classificationsand had no impact on the income statement or on net assets. In its financial statements, TCAG had previously applied the corridor method torecognise in the income statement actuarial gains and losses over the expectedworking lives of employees in the plans. The Group now recognises all actuarialgains and losses arising from defined benefit plans directly in equity. As aconsequence of listing in the UK and to bring the Group in line with prevailingpractice in the UK, the Directors consider full recognition of the actuarialgains and losses in the Statement of Recognised Income and Expense is moreappropriate. The change in accounting policy has been recognised retrospectively and the 2006comparatives have been restated from the TCAG financial statements. The impactof the change in policy is shown in the notes to the Statement of RecognisedIncome and Expense. Interpretation guidance included within SIC Interpretation 12 - Consolidation -special purpose entities indicates that certain special purpose entities(SPE's), which are involved in aircraft leasing and other arrangements with theGroup, should be interpreted as being controlled by the Group, and thereforesubject to consolidation, even though the Group has no direct or indirect equityinterest in those entities. As a consequence, the Group has consolidated twelveSPE's. The Directors consider that the principal functional currency of the Group isthe euro and have therefore decided to adopt the euro as the presentationalcurrency. Associates and joint ventures Entities, other than subsidiaries, over which the Group exerts significantinfluence, but not control or joint control, are associates. Entities which theGroup jointly controls with one or more other party under a contractualarrangement are joint ventures. The Group's share of the results of associates and joint ventures is included inthe Group income statement using the equity accounting method. Investments inassociates and joint ventures are included in the Group balance sheet at cost asadjusted for post-acquisition changes in the Group's share of the net assets ofthe entity, after adjustment for goodwill. Other non-current asset investments Investments in equity instruments that do not have a quoted market price in anactive market are measured at cost. Loans and receivables are initiallyrecognised at fair value plus any directly attributable transaction costs andare subsequently measured at amortised cost using the effective interest method.Any impairment losses are recognised in the income statement. Intangible assets - goodwill Goodwill arising on an acquisition represents any excess of the fair value ofthe consideration given over the fair value of the identifiable assets andliabilities acquired. Goodwill is recognised as an asset, and is reviewed forimpairment at least annually. Any impairment is recognised immediately in theGroup's income statement and is not subsequently reversed. On disposal of a subsidiary, joint venture or associate, the attributable amountof goodwill is included in the determination of the profit or loss on disposal. Intangible assets - other Intangible assets, other than goodwill, are carried on the Group's balance sheetat cost less accumulated amortisation. Intangible assets with indefinite usefullives are not amortised, for all other intangible assets amortisation is chargedon a straight-line basis over the asset's useful life, as follows: Brands 10 years to indefinite lifeCustomer relationships 1 to 5 yearsComputer software 3 to 10 years Other acquired intangible assets are assessed separately and useful livesestablished according to the particular circumstances. Intangible assets with indefinite useful lives are tested for impairment atleast annually by comparing their carrying amount to their recoverable amount.All other intangible assets are assessed at each reporting date for indicationsof impairment. If such indications exist, the recoverable amount is estimatedand compared to the carrying amount. If the recoverable amount is less than thecarrying amount, the carrying amount is reduced to the recoverable amount andthe impairment loss is recognised immediately in the income statement. Property, plant and equipment Property, plant and equipment is stated at cost, net of straight linedepreciation and any provision for impairment. Where costs are incurred as part of the start-up or commissioning of an item ofproperty, plant or equipment, and that item is available for use but incapableof operating in the manner intended by management without such a start-up orcommissioning period, then such costs are included within the cost of the item.Costs that are not directly attributable to bringing an asset to the locationand condition necessary for it to be capable of operating in the manner intendedby management are charged to the income statement as incurred. Depreciation on property, plant and equipment, other than freehold land, uponwhich no depreciation is provided, is calculated on a straight line basis andaims to write down their cost to their estimated residual value over theirexpected useful lives as follows: Freehold buildings 40 to 50 yearsLeasehold properties Shorter of remaining lease period and 40 yearsNew aircraft 12 to 20 years (or remaining lease period if shorter)Aircraft spares 5 to 15 years (or remaining lease period if shorter)Other fixed assets 3 to 15 years Estimated residual values and useful lives are reviewed annually. Non-current assets held for sale The Group classifies non-current assets as held for sale if their carryingamount will be recovered principally through a sale transaction rather thanthrough continuing use. To be classified as held for sale, the assets must beavailable for immediate sale in their present condition subject only to termsthat are usual and customary for the sale of such assets and their sale must behighly probable. Sale is considered to be highly probable when management arecommitted to a plan to sell the assets and an active programme to locate a buyerand complete the plan has been initiated, at a price that is reasonable inrelation to their current fair value and there is an expectation that the salewill be completed within one year from the date of classification. Non-current assets classified as held for sale are carried on the Group'sbalance sheet at the lower of its carrying amount and fair value less costs tosell. Aircraft overhaul and maintenance costs The cost of major overhauls of owned and finance leased engines, auxiliary powerunits and airframes is capitalised and then amortised over between two and tenyears until the next scheduled major overhaul, except where the maintenance ofengines and auxiliary power units is carried out under fixed rate contracts, inwhich case the cost is spread over the period of the contract. Provision is madefor the future costs of major overhauls of leased engines, auxiliary power unitsand airframes by making appropriate charges to the income statement, calculatedby reference to hours flown and/or the expired lease period, as a consequence ofobligations placed upon the Group under the terms of certain operating leases. Inventories Inventories are stated at the lower of cost and net realisable value. Costrepresents purchase price. Net realisable value represents the estimated sellingprice less all costs to be incurred in marketing, selling and distribution. Revenue recognition and associated costs Revenue represents the aggregate amount of gross revenue receivable frominclusive tours, travel agency commissions receivable and other servicessupplied to customers in the ordinary course of business. Revenue and directexpenses relating to inclusive tours arranged by the Group's leisure travelproviders, including travel agency commission, insurance and other incentives,are taken to the income statement on holiday departure. Revenue relating totravel agency commission on third party leisure travel products is alsorecognised on holiday departure. Other revenue and associated expenses are takento the income statement as earned or incurred. Revenue and expenses excludeintra-group transactions. Income statement presentation Profit or loss from operations includes the results from operating activities ofthe Group, before its share of the results of associates and joint ventures. Exceptional items are items that are unusual because of their size, nature orincidence and which the Group's management consider should be disclosedseparately to enable a full understanding of the Group's results. Material business combination intangible assets were acquired as a result of themerger between Thomas Cook AG and MyTravel Group plc. The amortisation of theseintangible assets is significant and the Group's management consider that itshould be disclosed separately to enable a full understanding of the Group'sresults. Tax Tax represents the sum of tax currently payable and deferred tax. Tax isrecognised in the income statement unless it relates to an item recogniseddirectly in equity, in which case the associated tax is also recognised directlyin equity. Tax currently payable is provided on taxable profits based on the tax rates andlaws that have been enacted or substantively enacted at the balance sheet date.Provision is made for deferred tax so as to recognise all temporary differenceswhich have originated but not reversed at the balance sheet date that result inan obligation to pay more tax, or a right to pay less tax, in the future, exceptas set out below. This is calculated on a non-discounted basis by reference tothe average tax rates that are expected to apply in the relevant jurisdictionsand for the periods in which the temporary differences are expected to reverse. Deferred tax assets are assessed at each balance sheet date and are onlyrecognised to the extent that their recovery against future taxable profits isprobable. Deferred tax liabilities are recognised for the retained earnings ofoverseas subsidiaries, joint ventures and associates unless the Group is able tocontrol the timing of the distribution of those earnings and it is probable thatthey will not be distributed in the foreseeable future. Pensions Pension costs charged against profits in respect of the Group's definedcontribution schemes represent the amount of the contributions payable to theschemes in respect of the accounting period. The Group also operates a number of defined benefit schemes. The pensionliabilities recognised on the balance sheet in respect of these schemesrepresent the difference between the present value of the Group's obligationsunder the schemes and the fair value of those schemes' assets. Actuarial gainsor losses are recognised in the period in which they arise within the statementof recognised income and expense. Other movements in the pension liability arerecognised in the income statement. Past service costs are recognisedimmediately in the income statement. Foreign currency Average exchange rates are used to translate the results of all subsidiaries,associates and joint ventures that have a functional currency other than theeuro. The balance sheets of such entities are translated at period end exchangerates. The resulting exchange differences are dealt with through a separate componentof equity. Transactions in currencies other than the functional currency of an entity aretranslated at the exchange rate at the date of the transaction. Foreign currencymonetary assets and liabilities held at the period end are translated at periodend exchange rates. The resulting exchange gain or loss is dealt with in theincome statement. Leases Leases under which substantially all of the risk and rewards of ownership aretransferred to the Group are finance leases. All other leases are operatingleases. Assets held under finance leases are recognised within property, plant andequipment on the balance sheet and depreciated over the shorter of the leaseterm or their expected useful lives. The interest element of finance leasepayments represents a constant proportion of the capital balance outstanding andis charged to the income statement over the period of the lease. Operating lease rentals are charged to the income statement on a straight linebasis over the lease term. Derivative financial instruments Derivatives are recognised at their fair value. When a derivative does notqualify for hedge accounting as a cash flow hedge, changes in fair value arerecognised immediately in the income statement. When a derivative qualifies forhedge accounting as a cash flow hedge, changes in fair value that are determinedto be an effective hedge are recognised directly in the hedging reserve. Anyineffective portion of the change in fair value is recognised immediately in theincome statement. If a hedged transaction subsequently results in the recognition of anon-financial asset or a non-financial liability, the associated cumulative gainor loss is removed from the hedging reserve and is included in the initial costor other carrying amount of the asset or liability. For all other cash flowhedges, the associated cumulative gain or loss is removed from the hedgingreserve and recognised in the income statement in the same period or periodsduring which the hedged forecast transaction affects profit or loss. When a derivative qualifies for hedge accounting as a fair value hedge, changesin fair value of the derivative are recognised in the income statement when theyoffset changes in the fair value of the hedged asset or liability, attributableto the hedged risk. Non-derivative financial instruments Financial assets and liabilities are recognised when the Group becomes a partyto the contractual provisions of the instrument. Financial assets arederecognised when the Group transfers the financial asset or when thecontractual rights expire. Financial liabilities are derecognised when theobligation is discharged or cancelled or expires. The measurement of particularfinancial assets and liabilities is set out below. Trade receivables Trade receivables are recognised at their fair value and subsequently recordedat amortised cost using the effective interest method as reduced by allowancesfor estimated irrecoverable amounts. Available-for-sale financial assets Available-for-sale financial assets are recognised and subsequently recorded attheir fair value. Gains or losses (except for impairment losses and foreignexchange gains and losses) are recognised directly in equity until the financialasset is derecognised. At this point, the cumulative gain or loss previouslyrecognised in equity is recognised in the income statement. Any impairmentlosses, foreign exchange gains or losses or dividends receivable are recognisedin the income statement. Held for trading investments Short-term investments are classified as held for trading and are recognised andsubsequently recorded at their fair value. Gains or losses are recognised in theincome statement. Trade payables Trade payables are recognised at their fair value and subsequently recorded atamortised cost using the effective interest method. Borrowings Interest bearing borrowings are recognised at their fair value net of anydirectly attributable transaction costs. They are subsequently recorded atamortised cost using the effective interest method. Provisions Provisions are recognised when the Group has a present obligation as a result ofa past event, if it is probable that an outflow of resources will be required tosettle the obligation and a reliable estimate of the amount of the obligationcan be made. Provisions are recognised and subsequently recorded at theDirectors' best estimate of the expenditure required to settle the obligation atthe balance sheet date. Where the effect of the time value of money is material,the provision is discounted to its present value. Share-based payments The Group issues share options to certain employees as part of their totalremuneration. The fair values of the share options are calculated at the date ofgrant, using an appropriate option pricing model. These fair values are chargedto the income statement on a straight line basis over the expected vestingperiod of the options, with a corresponding increase in equity reserves. Insurance contracts and reinsurance contracts Premiums written relate to business incepted during the year, together with anydifferences between the booked premiums for prior years and those previouslyaccrued, less cancellations. Premiums are recognised as revenue (earnedpremiums) proportionally over the period of coverage. Premiums are shown afterthe deduction of commission and premium taxes where relevant. Claims and loss adjustment expenses are charged to income as incurred based onthe estimated liability for compensation owed to policyholders or third partiesdamaged by policyholders. The Group does not discount its liabilities for unpaidclaims. Liabilities for unpaid claims are estimated using the input ofassessments for individual cases reported to the Group and statistical analysisfor the claims incurred but not reported. Contracts entered into by the Group with reinsurers under which the Group iscompensated for losses on one or more contracts issued by the Group and thatmeet the classification requirements for insurance contracts are classified asreinsurance contracts held. The benefits to which the Group is entitled under its reinsurance contracts heldare recognised as receivables from reinsurers. The Group assesses itsreinsurance assets for impairment on an annual basis. Receivables and payables are recognised when due. These include amounts due toand from insurance policyholders. Critical judgements in applying the Group's accounting policies In the process of applying the Group's accounting policies, described above,management has made the following judgements that have the most significanteffect on the amounts recognised in the financial statements. Residual values of tangible fixed assets Judgements have been made in respect of the residual values of aircraft includedin property, plant and equipment. Those judgements determine the amount ofdepreciation charged in the income statement. Recoverable amounts of goodwill and intangible assets with an indefinite life Judgements have been made in respect of the amounts of future operating cashflows to be generated by certain of the Group's businesses in order to assesswhether there has been any impairment of the amounts included in the balancesheet for goodwill or intangible assets with an indefinite life in relation tothose businesses. Special purpose entities The nature of the relationship with Certain Special Purpose Entities involved inleasing aircraft to the Group shows that they should be interpreted ascontrolled by the Group, and therefore consolidated, even though the Group hasno direct or indirect equity interest in those entities. Key sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimationuncertainty at the balance sheet date that have a significant risk of causing amaterial adjustment to the carrying amounts of assets and liabilities within thenext financial year are discussed below. Impairment of goodwill and intangible assets with an indefinite life Determining whether goodwill or intangible assets with an indefinite life areimpaired requires an estimation of the value in use of the cash-generating unitsto which goodwill has been allocated. The value in use calculation requires theGroup to estimate the future cash flows expected to arise from thecash-generating unit and a suitable discount rate in order to calculate presentvalue. The carrying amounts of goodwill and intangible assets with an indefinitelife at the balance sheet date were €3,550.0m and €282.4m respectively. Noimpairment losses were recorded during the year. Recoverable amounts of deposits and prepayments Estimates have been made in respect of the volumes of future trading withhoteliers and the credit-worthiness of those hoteliers in order to assess therecoverable amounts of deposits and prepayments made to those hoteliers. Aircraft maintenance provisions Provisions for the cost of maintaining leased aircraft and spares are based onforecast aircraft utilisation, estimates of future maintenance costs and plannedrollover and renewal of the aircraft fleet. Tax The Group operates in many tax regimes and the tax implications of itsoperations are complex. It can take several years for tax liabilities to beagreed with the relevant authorities. Tax assets and liabilities representmanagement's estimates of tax that will be payable or recoverable in the futureand may be dependent on estimates of future profitability. In addition, estimates have been made in respect of the probable futureutilisation of tax losses and deferred tax assets have been recognised. Therecoverability of these assets is dependent on the agreement of the losses withthe relevant authorities and the estimates of future profitability. This information is provided by RNS The company news service from the London Stock Exchange
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