Thomas Cook Regulatory News (TCG)

 19 May 2016

Results for the six months ended 31 March 2016

Further progress despite continued market disruption

The comments below are based on like-for-like comparisons unless otherwise stated, as Management believes this provides a clearer view of ongoing business performance

Continued improvement in profitability in the first half

· Group revenue up slightly at £2,672 million

· Underlying Gross margin increased by 10 basis points to 21.7%

· Underlying EBIT loss improved by 5% to £163 million

· Loss before tax improved by 5% to £288 million on a statutory basis

· Moody's assigned new B1 credit rating to Thomas Cook, one notch higher than our existing ratings

Trading well to destinations other than Turkey

· Summer 2016 bookings to destinations excluding Turkey up 6% compared to last year

· Growing sales to the Western Mediterranean and long haul in line with increased demand:

- Summer 2016 bookings to the Balearics up 14%; Canaries up 23%; and USA up 29%

· Strong growth to alternative destinations not yet fully offsetting weak demand for Turkey:

- Bookings for Summer 2016 currently down 5% overall

Customers responding to increased focus on quality and service

· Group Net Promoter Score ('NPS') increased by 4 points, with better NPS scores across every market

· Successfully launched 24-hour satisfaction promise in 1,500 hotels for Summer 16

· Investments in online leading to step change in performance:

- Web sales grew 10% in UK and 21% in Germany in Q2

· Strengthening own brand hotels and airlines:

- Sales to own-brand hotels increased 21% year-on-year

- Added 10 new destinations to our airline network including Los Angeles and Cape Town

Peter Fankhauser, Chief Executive of Thomas Cook commented:

"Thomas Cook has made significant progress in the last six months. Despite disruption in some of our key markets, we've managed to slightly grow our revenues on a like-for-like basis, having anticipated the shift in demand away from Turkey, Tunisia and Egypt and into the Western Mediterranean and long haul destinations.

"At the same time, we've increased our underlying gross margin by 10 basis points thanks to our focus on selling higher quality holidays. The launch of Casa Cook in Rhodes this month is a great example of how we are widening our appeal to independent, style-conscious travellers.

"Underpinning these results has been a fundamental change in our approach to our customers. The Corfu inquest was a turning point for Thomas Cook. It was clear to me that we needed to change our mindset and put the customer back at the heart of our business.

"I am proud of the way in which my colleagues across the business have embraced all the changes we have made. We've created a comprehensive new training scheme for all customer-facing staff, rolled out new software to better serve customers in resort, and introduced a 24-hour customer promise in 1,500 of our most popular hotels. It's early days and there is more to do, but we've already seen a positive reaction from our customers, with improvements in the net promoter score across all our markets.

"As we look ahead to our busiest period, Thomas Cook is trading well to destinations other than Turkey, with particularly strong bookings to Spain and the USA. However demand for Turkey - our second largest market last year - remains significantly below last year's levels. This has impacted our German Airlines business in particular. We've also seen a sharp decline in demand in Belgium following the tragic attack at Brussels airport in March. As a result, taking into account anticipated foreign exchange translation gains, we expect underlying EBIT for the full year to be between £310 million and £335 million1. We continue to expect to pay a dividend in respect of the current year's earnings.

"Despite the current market environment, I am confident that the actions we are taking to focus on customer excellence, strengthen our holiday offering, invest in omni-channel distribution, and bring our businesses closer together mean we're well positioned to meet our existing growth expectations to FY18, creating value for both customers and shareholders."

Analyst and Investor Presentation

A presentation will be held for equity analysts and investors today at 9.00 a.m. (BST) at Farmers & Fletchers In the City, 3 Cloth Street, London EC1A 7LD. A live webcast of the presentation will be available via the following link and dial in:

http://webcasts.thomascookgroup.com/thomascook010/default.asp  

United Kingdom: 020 3059 8125

All other locations: +44 20 3059 8125

Forthcoming announcement date

The Group intends to announce its results for the third quarter ended 30 June 2016 on Thursday 28 July 2016.

Enquiries

1. Thomas Cook Group considers the current range of analyst estimates of FY16 underlying EBIT to be £310 million to £359 million 

FINANCIAL HIGHLIGHTS

The comments below are based on like-for-like comparisons unless otherwise stated, as Management believes this provides a clearer view of ongoing business performance

· Group revenue was slightly higher at £2,672 million (H1 2015: £2,663 million) following successful strategy to rebalance programme away from Turkey and towards Spain and long-haul destinations

· Underlying Gross margin grew by 10 basis points to 21.7% (H1 2015: 21.6%) due to a focus on higher quality holidays within our Winter Sun offering

· Underlying EBIT improved by £8 million to a £163 million loss (H1 2015: £171 million loss), excluding a £5 million benefit from Easter falling earlier this year

- Northern Europe achieved strong growth, increasing underlying EBIT by over 70%, or £17 million, to £40 million (H1 2015: £23 million)

- Our UK business also performed well, improving underlying EBIT by £5 million and achieving a last twelve month ('LTM') underlying EBIT margin of 5.1%, up 60 basis points year-on-year

- Continental Europe outperformed a difficult market to grow EBIT by £1 million

- Airlines Germany was impacted by weaker demand to Turkey where it is a market leader and increased competition, resulting in a decline in underlying EBIT of £19 million

· Net debt increased by £50 million (£125 million on a statutory basis) to £825 million (H1 2015: £700 million on a statutory basis) reflecting lower bookings and working capital timing differences

· Moody's Investor Service has assigned Thomas Cook a B1 rating, one notch higher than the ratings already assigned by Standard & Poor's and Fitch

· Programme to repurchase up to £100 million of our outstanding bonds to be launched shortly, ahead of plan, in line with strategy for the reduction of fixed-term debt

· Signed new £150 million additional bank facility to provide flexibility to refinance outstanding bonds

CURRENT TRADING AND OUTLOOK

Winter 2015/16

Trading for the Winter 2015/16 season closed out in line with our expectations as set out in our Pre-Close Statement on 22 March 2016.

Summer 2016

Our Summer 2016 programme is 63% sold for the Group as a whole, 2% below this time last year.

Having acted early to rebalance capacity away from Turkey, Tunisia and Egypt, we have seen strong growth to alternative popular and profitable destinations such as Spain, the USA, Cuba and Mexico. Across the Group, bookings to all destinations other than Turkey are up 6% compared to last year; excluding Turkey, Tunisia and Egypt, bookings are up 13%.

Demand for Turkey remains significantly below last year, with some customers leaving it later to book their holidays - Summer bookings so far have, on average, been made almost two weeks later than last year. As we continue to focus on driving margins rather than volumes, we have reduced our risk capacity by 4%. Reflecting this capacity reduction and the later booking pattern, total bookings for the Group including Turkey are down by 5%, while overall pricing is firm, in line with this time last year.

In the UK, bookings are 3% lower than last year, reflecting the later booking pattern for Turkey. Package holiday pricing remains strong, up 3%, reflecting expansion of our differentiated holidays. Overall pricing is down 2%, reflecting the mix effect of continuing growth in our UK seat-only business, which has lower average selling prices than package holidays. We continue to expand our long haul programme in particular, with bookings up 19% so far.

Northern Europe continues to trade well, with Summer pricing up by 6%, and higher margins. Bookings are down 2% compared to last year, reflecting higher volumes to the Canaries and the Balearic Islands, offset by weakness to Turkey.

In Continental Europe, bookings are 10% lower than this time last year, reflecting continued weakness in consumer sentiment due to geopolitical events. Despite the weak environment, pricing remains resilient, in line with last year's levels. Our German business, with bookings down by 6% and pricing broadly in line with last year, is outperforming the wider tour operating market and is benefitting from cheaper third-party flights. However our Belgian business was directly impacted by the tragic attack on Brussels airport in March and, as a result, bookings in Belgium are significantly below last year.

For Condor (Airlines Germany), bookings are 4% lower than last year, mainly due to the later booking profile to Turkey where Condor is a market leader. Significant supply pressures in Germany have resulted in a decline in average selling prices of 2% compared to last year. These market conditions are expected to have a direct impact on Condor's profitability over the Summer holiday period, with the third quarter being especially weak due to low demand for Turkey in the "shoulder" season. However, we expect that further re-routing of Turkey capacity and cost efficiencies will improve Condor's performance in FY17.

Based on cumulative bookings to 14 May 2016

Notes: (i) Risk and non-risk customers

(ii) Risk customers only

(iii) UK average selling price is up by 3% for package holidays and unchanged for seat-only, resulting in a 2% decline on a blended basis due to the change in mix

(iv) For the tour operator only, the Summer 2016 season is 66% sold, 3% lower than last year

Winter 2016/17

With around 10% of the programme sold, early bookings for next Winter have started well, with bookings in all source markets well above last year at good average selling prices. For the Group as a whole, bookings are 16% higher than last year and average selling prices are up 2%.

Outlook

For the Summer period, most of our businesses are trading well to destinations other than Turkey, growing bookings excluding Turkey by 6% overall. Demand has been particularly strong so far to Spain and long haul destinations and, encouragingly, demand for Turkey has strengthened in recent weeks, consistent with the later booking pattern.

However, total bookings to Turkey remain significantly below last year's levels and, at the current run rate, we now expect a shortfall compared to our previous expectations, particularly in Airlines Germany. In addition, the attack at Brussels airport in March has significantly impacted our Belgian business, due to operational disruption to our flying programme, a high level of cancellations and a significant drop in customer demand. These effects are expected to be particularly acute in the third quarter. We expect foreign exchange translation gains (based on current exchange rates) to partly offset these headwinds. As a result, we expect underlying EBIT for the full year to be between £310 million and £335 million1.

In spite of these near-term challenges, we are confident that Thomas Cook remains on track to meet our existing growth expectations to FY18, supported by strong early trading for next Winter, significantly improved prospects for Airlines Germany and further benefits from continuing to implement our New Operating Model, as we bring our businesses closer together and generate further efficiencies.

1. Thomas Cook Group considers the current range of analyst estimates of FY16 underlying EBIT to be £310 million to £359 million 

PROGRESS IN EXECUTING OUR STRATEGY

We have made good progress in executing our strategy over the Winter period, supporting our financial performance in the first half. Our strategy, which we set out at our full year results in November 2015, is to provide our customers with high quality differentiated and flexible holiday experiences, supported by a total customer focus. By focusing relentlessly on customer excellence, and by implementing the New Operating Model, our Group-wide transformation programme, we believe we will grow profitably, increase cash flows and deliver shareholder value.

Our progress in these areas is described below.

Focus on customer excellence

We continue to invest in customer service across all areas of the business, in order to always give customers the very best holiday experience. We have reviewed and overhauled our customer training across the Group, including in our destinations where so far this year we have fully trained over 1,300 reps and managers in Customer and Service Culture. In addition, our 24-hour hotel satisfaction promise has been launched, reassuring customers that we are on hand to resolve problems within 24 hours. In order to consistently measure customer satisfaction, we have now fully embedded NPS as a core indicator against which management performance is measured. Reflecting our improving customer proposition, NPS has increased across all segments, resulting in a Group-wide improvement of 4 points (12%) compared to the first half of last year.

We have made good progress against the recommendations made in Justin King's independent review of our business last November. We are doubling our spend on health and safety by Summer 2017 and increasing the number of in-house health and safety staff by 50%. We are planning to introduce physical audits of our top 3,600 hotels by next season, going beyond Justin King's recommendations. We are also introducing more thorough audits on areas of particular risk such as swimming pools, and have rolled out new training to our resort staff with a focus on health and safety in order to supplement the physical audit cycle. Gas safety has been a particular area of focus and we are currently working with both Capita and CORGI to roll out our UK Gas Safety Policy to all major hotels across the group.

New Operating Model

Launched last year, our New Operating Model is a three-year transformation programme aimed at implementing our strategy in a clear and structured way. In the first half, the programme delivered EBIT benefits of £9 million, in line with our expectations, and we remain on track to achieve £100 million to £120 million of cumulative annualised net EBIT benefits by FY18. The cash costs of implementing the New Operating Model were £23 million in the first half.

The New Operating Model is focused on four main areas: own-brand hotels and flights, our broader holiday offering, omni-channel and efficiencies.

Own-brand Hotels and Flights

Our own-brand hotels and flights enable us to offer customers a consistent, high quality, exclusive experience, and to capture more margin.

Hotels

We currently have around 190 own-brand hotels, located across 16 destination countries and operating under six brands (Sunwing, Sunprime, Sentido, SunConnect, Smartline and Casa Cook), with each brand targeting a specific consumer segment. We continue to develop this portfolio by ensuring continued quality improvements, and as a result the online review scores for these hotels have increased to an average of 85%, up from 82% a year ago (according to meta-review data from Trust You).

In addition, we are developing new high quality hotels aimed at generating superior returns. In December 2015 we opened the Ocean Beach Club by Sunwing in Gran Canaria, a premium family concept hotel providing 137 rooms available all year round, with a guest satisfaction rating of 4.7 out of 5. In May 2016 we opened our first Casa Cook in Rhodes, a new lifestyle concept hotel providing 93 new hotel rooms aimed at independent modern travellers.

We are also continuing to work on a hotel investment fund to acquire hotels and resorts in our core destination markets, using capital from third-party investors, including Fosun and its portfolio companies. While recent geopolitical events in our key destinations and elsewhere have inevitably made progress more difficult, we continue to expect the fund to be implemented and to deliver benefits over the medium term.

Flights

Our fleet renewal programme is now complete. We took delivery of the final four brand new Airbus A321 aircraft before Easter, taking the total to 25 new aircraft delivered over the last three years. As a result, 95% of our fleet of 93 aircraft is now either brand new or fully refurbished, resulting in a significantly improved customer experience. We continue to expand our long-haul business, with long haul capacity across the Group up by 14% over the Winter, reflecting our continued focus on expanding Winter Sun holidays. For the Summer, long haul capacity is expected to grow by 26%, with new routes added to Los Angeles, Boston, Austin (Texas), Rio de Janeiro and Cape Town.

Currently approximately 45% of our airlines' seats are sold on a seat-only basis or to third party tour operators, with the remainder sold to our own package holiday customers. This is up by 4% compared to last year, reflecting the continued expansion of our profitable seat-only business. Our airlines account for two thirds of the Group's overall flying requirements, with the remaining flights being sourced from third party airlines.

Our holiday offering

Our holiday offering is focused on higher margin differentiated holidays - including holidays to both own-brand hotels and a closely-managed portfolio of selected partner hotels - supplemented by a wide range of complementary products that give customers greater choice and flexibility when choosing their holiday.

Our objective is to grow sales of differentiated holidays, by improving quality and service standards in our hotels, and by selling fewer, higher quality hotels across the Group (rather than in just one source market). In the first half we saw continued growth in customer demand for holidays to our own-brand hotels, with sales increasing by 21%, while sales of differentiated holidays overall was stable year-on-year. Excluding Turkey, Tunisia and Egypt, sales of differentiated holidays increased by 5%.

We are also sharing more of our hotel capacity within the Group, allowing us to maximise margins by allocating capacity where there is most demand. Across the Group, we now share capacity for 37% of differentiated hotels across the Group, compared with just 7% two years ago.

Omni-channel and customer

We are focused on using technology to improve our customer relationships across all channels. We have made a step change in our web performance, driven by recent investments in our online proposition. In the UK and Germany, our web sales were up by 10% and 21% respectively in the second quarter compared to last year. Conversion across devices is up significantly - by 10% for desktop, 31% for tablet and 48% for mobile devices in the UK - while in Germany the increase in conversion is even higher. In the UK, almost a third of visitors use their smartphone to access our website, up from just over a quarter last year.

We are the first UK tour operator to offer customers the ability to pay by Direct Debit, and it is proving very popular for forward bookings, with almost half of our Summer 2017 customers so far using this option. Direct debit enables our customers to easily spread the cost of a holiday over time.

We are also making it easier for customers to personalise their travel experiences with us by improving the way we offer ancillary products and services across the Group. As a result, revenue from ancillaries - including travel insurance, airline meals, seat selection, extra luggage, private transfers, room upgrades, excursions and entertainment whilst in resort - increased by 10% in the first half.

Efficiencies

We aim to provide best value to our customers through an efficient, low cost operating structure. As an initial stage of our "One Tour Operator" initiative, we have just launched a major efficiencies programme in Continental Europe, initially focused on Germany, Belgium and the Netherlands. The programme aims to streamline our processes and remove duplication within that segment, in order to significantly reduce operating costs from FY17 onwards, and deliver key New Operating Model initiatives. These include consolidating tour operating activities, integrating marketing and finance functions, and standardising our IT work. Once this programme has been implemented, the individual source markets in Continental Europe will focus mainly on sales, yield and trading, and merchandising, while a segment-wide structure will exist to carry out centralised support activities.

China JV

Our Chinese joint venture with Fosun continues to develop well. Established at the end of 2015, the business started market testing in January with pilot holidays from China to Thomas Cook hotels in South East Asia, and is now rapidly expanding its offering to encompass a range of additional destinations and services, including serving inbound and corporate customers. Headcount has now reached 25. A full marketing launch campaign is planned for Autumn 2016.

Financing

The reduction of fixed-term debt is a priority for the Group, as we move towards a more efficient capital structure with reduced interest costs. As we stated at our full year results in November, we intend to reduce our outstanding fixed-term debt by £300 million by the end of FY18. In keeping with this, we intend to launch a programme shortly to repurchase up to £100 million of our outstanding bonds, with the objective of reducing interest costs earlier than originally planned.

In addition, in order to provide greater financial flexibility, we have recently entered into a new two-year facility providing up to a further £150 million of liquidity. This is in addition to our existing £800 million revolving credit and bonding facilities. As well as providing additional liquidity for general purposes, this new facility will give the Group more flexibility when considering options to redeem its outstanding bonds and reduce interest costs.

Consistent with our aim to achieve an improved credit rating over time, we are pleased to announce that Moody's Investor Service has assigned a B1 rating to the Company. This is one notch higher than the ratings already assigned to the Company by Standard & Poor's and Fitch, and will further enhance the Company's access to liquidity and reduce our interest costs.

Dividends

At the same time as reducing debt, it remains our intention to recommence dividend payments. Based on current trading and the expected benefits from our New Operating Model, we expect to pay a dividend from FY16 profits.

Our policy will be to target a payout ratio of between 20% and 30% of reported net profit each year. We believe this represents an appropriate balance between debt reduction and providing a return to shareholders. A final dividend will be declared with the full year results announcement each year, starting with the announcement of our FY16 results. In view of the seasonality of the Group's profit profile, it is not our intention to pay interim dividends for the foreseeable future. The Board will review the policy annually as we reduce debt, to determine the scope to increase the payout ratio in the future.

Alongside making dividend payments, the reduction of fixed-term debt remains a priority for the Group, and we intend to continue to move towards a more efficient capital structure, with reduced interest costs.

FINANCIAL REVIEW

Overview

The comments below are based on like-for-like comparisons unless otherwise stated, as Management believes this provides a clearer view of on-going business performance

Our first half financial performance delivered continued improvement in like-for-like underlying Group EBIT, with an EBIT loss of £163 million, £8 million better than last year.

Group revenue increased by £9 million (0.3%), whilst underlying Gross Margin increased by 10 basis points to 21.7%. We achieved improved profitability, despite disruption and weak consumer demand in certain markets, through an improved product mix in our Winter Sun programme, together with cost efficiencies from the initial benefits of our New Operating Model.

The seasonal cash outflow of £650 million (H1 2015: £437 million outflow) has been adversely impacted by the timing of working capital movements as a result of the later customer booking pattern, together with the impact of changes to consumer law in Germany in April 2015, as previously highlighted.

As a consequence of the timing of working capital in the first half, and after reflecting non-cash changes such as foreign currency translation, Group net debt increased to £825 million at 31 March 2016, £50 million higher than at 31 March 2015, on a like-for-like basis.

Like-for-like Analysis

Certain items, such as the normal translational effect of foreign exchange movements, affect the comparability of the underlying performance between financial years. Accordingly, to assist in understanding the underlying year-on-year progression, 'like-for-like' (LfL) adjusted growth has been analysed as follows:

Year to date like-for-like analysis

Revenue

Group revenue increased by £9 million (0.3%) on a like-for-like basis to £2,672 million. This reflects a shift in our Winter destination strategy to meet the changing preferences of our customers, which resulted in a decrease in sales of holidays to Egypt, Turkey and Tunisia of £132 million. This impact has been offset by growth in departures to Spain (+£56 million) and Long Haul destinations such as the USA (+£38 million) and Cuba (+£25 million).

The main components of the changes in like-for-like revenue are as follows:

Gross Margin

Gross margin of 21.7% is 10 basis points ahead of last year, despite weak consumer demand in certain of our source markets. This reflects the initial benefits of our strategy of focusing on differentiated and exclusive holidays, which are generally more profitable than other types of holiday.

Operating Expenses / Overheads

Operating expenses reduced by £4 million (0.5%), mainly due to a £17 million (2.6%) reduction in operating costs, offset by a £13 million increase in depreciation due to the higher level of investment in IT and our airline in recent years.

Underlying EBIT

The Group generated an underlying EBIT loss of £163 million in the first half of the year, an improvement of £8 million (4.7%) compared with an H1 2015 loss of £171 million.

Benefits of £9 million have been delivered through our New Operating Model, in line with our expectations; given the seasonality of our business, we expect to deliver a greater amount of benefits in the second half of this year. However, profitability in our German Airline, Condor, has been affected by demand weakness to Turkey and market overcapacity in the short and medium haul sector of the market and, as previously guided, we have incurred a higher depreciation charge following our investment in our airline and in IT in recent years.

Segmental Review

Sources of Growth in Underlying EBIT

During the period the Group reported an improvement in underlying EBIT of £8 million on a like-for-like basis, analysed as follows:

*Negative revenue is a result of intercompany eliminations

The financial performance of each segment is considered below.

United Kingdom & Ireland

Our UK business traded strongly in the first half of the year, with a seasonal underlying EBIT loss of £124 million, representing an improvement of £5 million compared to the same period last year (H1 2015: £129 million loss). This improved performance reflects the continuing execution of our Winter Sun programme building on growth in the prior year, together with further improvement in product quality and our online capability.

Revenue of £700 million was £1 million (0.1%) higher than prior year, maintaining the growth achieved in FY15.

Underlying gross margin increased by 80 basis points on a like-for-like basis to 22.4%, reflecting the continuing benefits of improvements in product quality, with a higher proportion of customers staying in our own-brand hotels and the further expansion of our UK airline's long haul programme.

Continental Europe

Revenue and Underlying EBIT by Market within Continental Europe

(i) Germany has been restated to only include the performance of the German Tour Operator. The horizontal functions based in Germany have now been reported in Other Continental Markets. For reference in H1 2016 those functions delivered an underlying EBIT loss of £7m (H1 2015: EBIT loss £8m)

Continental Europe delivered a seasonal underlying EBIT loss of £48 million for the first half of the year, £1 million lower than last year. Revenue of £1,036 million was £47 million (4.3%) lower than last year due to weaker consumer demand in some of our source markets. Despite this reduced level of demand, EBIT performance has improved slightly due to our focus on margin maximisation and cost efficiencies.

Our German business has compensated for lower customer demand and improved its underlying EBIT result by £1 million by taking advantage of the lower cost flight capacity currently available in the market to strengthen margins, while also reducing overheads through operating efficiencies. These improvements follow the actions we took last year to strengthen our management team, improve relationships with our distribution partners, and improve our web proposition. Russia and France also recorded modest improvements in underlying EBIT. Other Continental markets include Belgium, Holland and Eastern Europe, as well as central support costs for our Continental businesses and the cost of in-destination services.

Northern Europe

Our Northern Europe business reported underlying EBIT of £40 million for the first half of the year, £17 million better than last year. Strong Winter trading has resulted from maintaining risk capacity at last year's levels while the market in general has sought to reduce capacity commitments. As a result, our Nordic business was well positioned to take advantage of poor weather in the early part of the booking period to deliver an exceptionally strong trading performance.

Revenue of £536 million was £28 million (5.5%) higher demonstrating the strong differentiation of our product offering, which has maintained its unrivalled popularity with our customers, together with a strong performance in ancillary sales.

Underlying gross margin increased by 290 basis points on a like-for-like basis to 26.7% reflecting strong Winter trading with seat load factors of 99% and growth in average selling prices.

Airlines Germany

As we previously reported Condor, our German airline, has been significantly impacted by weak consumer demand, particularly to Turkey where it is a market leader, and market overcapacity in the short / medium haul sector, which has resulted in a seasonal underlying EBIT loss of £18 million in H1 2016, £19 million higher than last year.

Revenues of £546 million were £19 million (3.6%) higher than last year, as increased capacity in both the short/medium and long haul sectors was partially offset by lower selling prices in challenging market conditions.

Corporate

Corporate underlying operating expenses of £13 million were £4 million lower than last year (H1 2015: £17 million), reflecting further cost efficiencies in our head office functions.

Other Financial Items

Net Finance Charges

Group underlying net finance charges for the year decreased by £6 million to £73 million (H1 2015: £79 million). The main reason for this reduction was the early refinancing of the Group's €400 million Eurobond (due in June 2015) in January 2015. As a consequence, there was a period when both of those bonds were outstanding in the comparative half year. A detailed analysis of net finance costs is set out Note 5 on page 27.

Separately Disclosed Items

Net Separately Disclosed Items (SDIs) for H1 2016 comprised a £52 million charge, which is in line with the prior year (H1 2015: £52 million) as analysed below:

Further information on Separately Disclosed Items is included within Note 4 on page 26.

Summary Cash Flow Statement(i)

Free cash outflow of £650 million was £213 million higher than last year (H1 2015: £437 million) reflecting mainly the timing of working capital changes due to the later booking profile, which has resulted in lower customer deposits at 31 March 2016, together with changes to German consumer law in April 2015.

The temporary timing of cash flows in H1 2016 has also affected the calculation of our Cash Conversion metric, resulting in negative free cash flow over the last 12 months.

The impact of lower customer deposits and German consumer law changes is expected to reverse as the Summer booking cycle progresses.

Net Debt

The Group sources debt and finance facilities from a combination of the international capital markets and its relationship banking group. During the last 12 months, the Group's net debt increased from £700 million to £825 million, equivalent to an increase of £50 million on a like-for-like basis. This increase in net debt is a direct result of the timing of working capital changes as described above.

The composition and maturity of the Group's net debt is summarised below:

The Group's £800 million Committed Facilities comprise a Revolving Credit Facility of £500 million, of which nil was drawn at 31 March 2016, and a £300 million bonding and guarantee facility of which £253 million was utilised for bonding facilities at 31 March 2016 (H1 2015: £250 million). These facilities expire in May 2019. In addition to our existing £800 million bank facilities, the Group has recently entered into a new two-year £150 million bank facility. As well as providing additional liquidity for general purposes, this new facility will give the Group more flexibility when considering options to redeem its outstanding bonds and reduce interest costs.

Treasury Management

The Group's funding, liquidity and exposure to foreign currencies, interest rates, commodity prices and financial credit risk are managed by a centralised Treasury function and are conducted within a framework of Board-approved policies and guidelines.

The principal aim of Treasury activities is to reduce volatility by hedging, which provides a degree of certainty to the operating segments, and to ensure a sufficient level of liquidity headroom at all times.

The successful execution of policy is intended to support a sustainable low risk growth strategy, enable the Group to meet its financial commitments as they fall due, and enhance the Group's credit rating over the medium term.

Cash Management

Due to the seasonality of the Group's business cycle and cash flows, a substantial amount of surplus cash accumulates during the Summer months. Efficient use and tight control of cash throughout the Group is facilitated by the use of cash pooling arrangements and the net surplus cash is invested by Treasury in high quality, short-term liquid instruments consistent with Board-approved policy, which is designed to mitigate counterparty credit risk. Yield is maximised within the terms of the policy but returns in general remain low given the low interest rate environment in the UK, the US and Europe.

A small portion of the Group's cash is restricted in overseas jurisdictions primarily due to legal or regulatory requirements. Such cash does not form part of our liquidity headroom calculation.

Hedging of Fuel and Foreign Exchange

The objective of the Group's hedging policy is to smooth fluctuations in the price of Jet Fuel and foreign currencies, in order to provide greater certainty for planning purposes. The proportion of our exposures that have been hedged are shown in the table below.

As at 13 May 2016

As Jet Fuel is priced in US Dollars, our net fuel costs are influenced by both the fuel price and the movements in the US Dollar against our base currencies.

While we expect net fuel costs to be around £100 million lower in FY16 compared to last year, these benefits will be partly absorbed by higher dollar-denominated non-fuel flying costs, and partly passed on to our customers through lower prices.

The Group's policy is not to hedge the translation impact of profits generated outside the UK. If current rates for Euro and Swedish Krona were maintained throughout the remainder of FY16, there would be a positive year-on-year translation impact of approximately £20 million.

The average and period end exchange rates relevant to the Group were as follows:

Credit Rating

The Group has maintained its 'B' ratings from both Standard & Poor's and Fitch and has recently been issued a rating of B1 from Moody's, recognising our continuing progress in the transformation of Thomas Cook despite external challenges.

PRINCIPAL RISKS & UNCERTAINTIES

· Our New Operating Model, the next phase of our transformation, fails to deliver our strategic and operational targets.

· Failure to align our products and services to customer preferences may have an adverse impact on our ability to improve our customers' experience of Thomas Cook holidays.

· Failure to achieve growth in our digital distribution channel may have an adverse impact on our market share, profitability and future growth.

· Failure to recruit or to retain the right people at the right time will lead to a lack of capability or capacity to enable the implementation of our business strategy.

· IT architecture is unable to support the needs of the business.

· Increasing information security and cyber threats.

· A decision or a course of action is perceived negatively by the media, investors and/or general public, which in turn impacts the corporate reputation of the Group and its share price.

· Cash generation limits the ability to strategically manage debt repayment and/or dividend payment.

· Due to the nature of its business, the Group will always be exposed to a risk of a health and safety incident that may impact our customers or colleagues together with associated reputational damage.

· Increasing security threats and general socio/political uncertainties negatively impacting our key markets and reducing the demand for travel related products. In particular, currently there is much uncertainty around security threats and the impact "Brexit" will have on the travel industry.

· Failure to comply with regulatory, legislative and corporate social responsibility requirements in the legal jurisdictions where Thomas Cook operates.

*£1m of forward points on foreign exchange cash flow hedging contracts has been re-presented from finance costs to cost of providing tourism services within separately disclosed items

The notes on pages 23 to 31 form an integral part of the condensed consolidated interim financial information.

The notes on pages 23 to 31 form an integral part of the condensed consolidated interim financial information.

The notes on pages 23 to 31 form an integral part of the condensed consolidated interim financial information.

The notes on pages 23 to 31 form an integral part of the condensed consolidated interim financial information. At 31 March 2016 Thomas Group plc, the Company, had net assets of £2,897m (30 September 2015: £2,696m) and distributable reserves of £290m (30 September 2015: £302m).

The unaudited movements in equity for the six months ended 31 March 2016 were as follows:

The unaudited movements in equity for the six months ended 31 March 2015 were as follows:

1 Basis of Preparation 

Thomas Cook Group plc ('the company') and its subsidiaries (together, 'the Group') is one of the world's leading leisure travel groups. The company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in England and Wales under the Companies Act 2006. The address of its registered office is 3rd Floor, South Building, 200 Aldersgate, London EC1A 4HD.

The condensed consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, the Listing Rules and with IAS 34, 'Interim financial reporting' as adopted by the European Union. This condensed consolidated interim financial information does not comprise statutory accounts of the Group within the meaning of Section 434(3) and 435(3) of the Companies Act 2006. They should be read in conjunction with the Annual Report for the year ended 30 September 2015 (the 'Annual Report'), which has been prepared in accordance with IFRSs as adopted by the European Union, approved by the Board of Directors on 25 November 2015 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The accounting policies used and presentation of these consolidated interim financial statements are consistent with those in the Annual Report except to comply with amendments in IFRS, as detailed below, none of which had a material impact on the consolidated results, financial position or cash flows of the Group.

The consolidated half-yearly financial information has been prepared on a going concern basis. The directors of the Group have a reasonable expectation that, on the basis of current financial projections and borrowing facilities available, the Group is well positioned to meet its commitments and obligations for the next 12 months from the date of this report. Having reassessed the principal risks, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.

The half year report for the six months ended 31 March 2016 was approved by the Directors on 18 May 2016. The half year report has been reviewed, not audited.

2 Significant Accounting policies

2a New and amended standards adopted by the Group

A number of amended standards became applicable for the current reporting period. However, the Group did not have to change its accounting policies or make retrospective adjustments as a result of adopting these standards.

2b New or amended standard and interpretations in issue but not yet effective or EU endorsed

At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRSs that have been issued but are not yet effective or EU endorsed:

IFRS 9 "Financial Instruments" is effective for annual reporting periods commencing on or after 1 January 2018. The standard will eventually replace IAS 39 but currently only details the requirements for recognition and measurement of financial assets. The group is assessing the impact of IFRS 9.

Amendments to IFRS 11 "Joint arrangements on acquisition of an interest in a joint operation" are effective for annual reporting periods commencing on or after 1 January 2016. The amendments provide guidance on the accounting for acquisitions of interests in joint operations in which the activity constitutes a business. The amendment is not expected to have a material effect on the financial statements.

IFRS 15 "Revenue from contracts with customers" is effective for annual periods beginning on or after 1 January 2018. The Group is assessing the impact of IFRS 15. It may have an impact on revenue recognition and related disclosures.

IFRS 16 "Leases" is effective for annual periods beginning on or after 1 January 2019. The leasing standard is expected to have a material impact on net debt, gross assets, profit from operations and interest.

2 Significant Accounting policies (continued)

Amendments to IAS 1 "Presentation of financial statements" are effective for annual periods beginning on or after 1 January 2016. The amendments clarify the application of materiality to all balances within the financial statements, provide guidance on the aggregation and disaggregation of line items in the Statement of financial position and Statement of profit or loss and other comprehensive income and clarify the treatment of an entity's share of OCI of equity-accounted associates and joint ventures. The amendment is not expected to have a material effect on the financial statements.

Amendments to IAS 7 "Statement of Cash Flows" are effective for annual periods beginning on or after 1 January 2017. The amendments introduce an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendment is not expected to have a material effect on the financial statements.

Amendments to IAS 12 "Income Taxes" are effective for annual periods beginning on or after 1 January 2017. The amendments on the recognition of deferred tax assets for unrealised losses clarify how to account for deferred tax assets related to debt instruments measured at fair value. The amendment is not expected to have a material effect on the financial statements.

Annual improvements to IFRSs 2012-2014 cycle are effective for annual periods beginning on or after 1 January 2016. The amendments have impacted various standards of which the amendments to IFRS 7 Financial Instruments: Disclosures, IAS 19 Employee Benefits and IAS 34 Interim Financial Reporting may be relevant to the Group. The amendment is not expected to have a material effect on the financial statements.

There are no further IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.

3. Segmental information

For management purposes, the Group is organised into four geographic based operating divisions: UK, Continental Europe, Northern Europe and Airlines Germany. These divisions are the basis on which the Group reports its primary segment information. Certain residual businesses and corporate functions are not allocated to these divisions and are shown separately as Corporate.

The primary business of all these operating divisions is the provision of leisure travel services and, accordingly, no separate secondary segmental information is provided.

Segmental information for these divisions is presented below.

Unaudited six months ended 31 March 2016

3 Segmental information (continued)