Thomas Cook Regulatory News (TCG)

18 May 2017

Results for the six months ended 31 March 2017

Strategic actions improve performance

The comments below are based on like-for-like comparisons unless otherwise stated, as Management believes this provides a clearer view of the Group's underlying year-on-year progression

Robust demand for holidays driving growth

· Revenue up 3% to £2,994 million, reflecting strong Winter demand to Spain and long-haul destinations

· Gross margin down 40 basis points, mainly due to weaker trading at Condor as previously highlighted

· Seasonal underlying EBIT loss improved by £2 million to £177 million

· Seasonal loss for the period (loss after tax) improved by £27 million to £272 million

· Net debt of £794 million, a £34 million improvement reflecting strong bookings for Summer 2017

Delivering for our customers

· More satisfied customers: Net Promoter Score (NPS) increased by 8 points across the Group

· 24-hour hotel promise rolled out to cover 80% of customers in core sun & beach hotels

· Growing in digital: online bookings up 15% in the UK and 35% in Germany

· Sales of higher margin holidays to own-brand hotels up 10% for the Summer

· Partnership with Webjet on track to improve efficiency in complementary hotels

Trading well for Summer 2017

· Strong customer demand for Greece and smaller European destinations like Cyprus and Bulgaria

· Double-digit growth in bookings from Northern Europe and Continental Europe

· UK managing through more competitive market to Spanish islands

· Improved trading and management actions on track to return Condor to profitability for the full year

Peter Fankhauser, Chief Executive of Thomas Cook, commented:

"Thomas Cook has delivered a good performance in the first six months. The progress we've made on our strategy helped achieve a 3 per cent increase in revenues, with strong customer demand for our holidays despite the competitive environment.

 "Importantly, the actions we've taken to improve our holiday offering, managing our portfolio of hotels more tightly for quality, are delivering good results. Our customer satisfaction score increased by eight points compared with the same time last year. I am confident we can increase this further, with the roll out of our successful 24-hour hotel satisfaction promise to 80% of customers in our core sun & beach hotels this summer, and other exciting new initiatives in the pipeline.

"We've also made great progress in developing our own-brand hotels and resorts, which give our customers a unique Thomas Cook experience. We're planning 11 new hotel launches this summer including our new family-friendly Casa Cook in Kos, complete with its own beach club, and our first hotel in Sicily, the Sentido Acacia Marina. We also have a further 11 openings in the pipeline for the next 18 months, including at least two new Casa Cook hotels.

"As we look ahead to the key summer season, we are seeing strong customer demand across most of our markets. Greece continues to be the standout destination for Summer 17 while customers are also seeking out smaller European destinations like Cyprus and Bulgaria, as well as travelling further afield. In contrast, following strong growth last year, bookings to the Spanish Islands have levelled off in a very competitive market.

"I'm also pleased with the progress we've made in our Group airlines business. Bookings are up significantly for the Summer, boosted by the addition of 15 new destinations to our flight programme, further expanding the choice and value we offer our customers. In our German airline, Condor, the actions we've taken after the market disruption of last year have started to come through, and we are confident that Condor will return to profit for the full year.

"Despite continued overcapacity in the airline market and strong competition particularly in our UK business, based on current trading we expect underlying EBIT for the full year to be in line with current market expectations.

"As I look across the Group, I see real momentum behind our strategy for profitable growth. By putting a clear focus on giving customers the very best experience when they holiday with Thomas Cook, and making our operations more efficient, I am confident that we can continue to transform the business and deliver increased value to 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://view-w.tv/798-1035-18233/en 

United Kingdom: 0808 109 0700

All other locations: +44 20 3003 2666

Call password: Thomas Cook

Forthcoming announcement date

The Group intends to announce its results for the third quarter ended 30 June 2017 on Thursday 27 July 2017.

Enquiries

FINANCIAL HIGHLIGHTS

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

· Group revenue of £2,994 million increased by 3% (H1 2016: £2,917 million), as growth to Spain and long haul destinations offset lower demand for Turkey. On a headline basis (before adjusting for the impact of foreign exchange translation and the change in Easter timing), Group revenue increased by 12%

· Gross margin declined by 40 basis points to 21.1% (H1 2016: 21.5%), mainly due to weaker trading at Condor, as previously highlighted

· Our seasonal underlying EBIT loss was £177 million, an improvement of £2 million (H1 2016: £179 million loss), after adjusting for currency and a £10 million negative impact from Easter falling in the second half

- Our UK business continued to improve its performance, achieving an underlying EBIT loss of £114 million (H1 2016: £128 million loss) 

- Continental Europe improved EBIT by £8 million to achieve an underlying loss of £50 million (H1 2016: £58 million loss)

- Northern Europe's EBIT in the first half was £42 million (H1 2016: £42 million), in line with a record Winter season last year

- As expected, Condor's losses widened by £19 million to £41 million (H1 2016: £22 million loss), although the year-on-year trend has improved during the period

· Loss from operations improved by £15 million to £205 million (H1 2016: £220 million loss), following a reduction in EBIT separately disclosed items of £13 million. The change in EBIT separately disclosed items is described on page 16

· Loss for the period improved by £27 million to £272 million (H1 2016: £299 million) due to a higher tax credit to recognise the tax effect of seasonal losses in the UK, partly offset by one-off finance charges connected with our successful bond refinancing in December 2016

· Net debt decreased by £34 million (£24 million on a statutory basis) to £794 million (H1 2016: £828 million), reflecting higher bookings for Summer 2017

CURRENT TRADING AND OUTLOOK

Winter 2016/17

Trading for the Winter 2016/17 season closed out in line with our expectations, as set out in our pre-close update on 28 March 2017.

Summer 2017

Our Summer 2017 programme is 61% sold, in line with last year. Bookings for the Group are up 12% compared to this time last year, with stronger demand for most destinations, especially Greece, Cyprus, Bulgaria and Croatia. In recent weeks Egypt has seen a significant increase in bookings, with customers attracted by the quality and value of the destination. Demand for Turkey has also improved recently, with bookings now in line with this time last year.

Following strong growth last year, bookings to the Spanish Islands have levelled off in a very competitive market.

Northern Europe continues to enjoy a very strong summer season with bookings up 10% and average selling prices up 2%, supported by strong demand for our own-brand hotels and differentiated holiday offering, particularly in Greece, Cyprus and the Spanish Islands.

Bookings in Continental Europe are up 15%, with good growth across all of our source markets. We have seen particularly strong volume growth in Germany and Russia. Overall pricing is in line with last year, while margins are slightly below last year's levels.

Having refocused its flying programme towards Greece and other short and long haul destinations, Condor's bookings have grown by 18%. This positive performance also reflects demand in the market for Condor's high-quality and reliable service. Average selling prices have decreased by 4%, in line with our expectations.

As we highlighted previously, our UK business is managing through a more competitive market to the Spanish Islands, focusing on selling higher margin, quality holidays rather than pursuing volume growth. As a result, charter risk pricing is up 8%, while bookings are slightly behind last year. For the UK as a whole, including seat-only and non-risk package holidays, both bookings and average selling prices are up by 2%.

Based on cumulative bookings to 6th May 2017

Notes: (i) Risk and non-risk customers

(ii) Risk customers only

(iii) UK average selling price is up 8% for charter risk and down 4% for seat only, resulting in an overall ASP up 2% on a blended basis

(iv) For the tour operator only, the Summer 2017 season is 66% sold, in line with last year

Winter 2017/18

While it remains very early in the booking cycle for next winter, bookings for Winter 2017/18 holidays are 1% higher than this time last year, against a strong comparative period. Overall pricing is up 5%, driven by growth to long-haul winter sun destinations.

Outlook

Trading for the Group overall is progressing in line with our expectations, despite continued overcapacity in the airline market and strong competition particularly in our UK business. Based on our current trading performance, and supported by further financial benefits from implementing our strategy, we continue to expect our full year underlying operating result to be in line with current market expectations.

TRANSFORMING OUR BUSINESS FOR PROFITABLE GROWTH

We continue to make good progress in implementing our strategy for profitable growth, by streamlining our business to focus on a number of key areas that will differentiate us from competitors, and by simplifying our organisational structure in order to deliver increased value to shareholders.

Customer At Our Heart

Our strategy is centred around giving our customers the very best holiday experience, leading them to return to Thomas Cook and to recommend us to others. To help embed this customer ethos throughout the organisation, we've rolled out customer values and behaviours training to more than 13,000 of our people to date. As a direct result of this and other actions we've taken, our Net Promoter Score (NPS), which we use to measure customer satisfaction, increased by 8 points in the first half, compared to the same time last year.

Customer care

A key differentiator of a Thomas Cook holiday is the level of care and reassurance we provide, whether through the advice we give when customers choose their holiday, the service we provide both before and after their holiday, or the support we offer while customers are on holiday.

In order to provide more transparent information to our customers, we have introduced clear links to the latest government travel advice on all our relevant web pages, customer-friendly blogs on key destinations from our Group Head of Welfare, and new training and advice to all retail and customer services staff.

We demonstrated our ability to act quickly to take care of our customers in a crisis in January, when we repatriated 3,500 customers from the Gambia within 48 hours of a change in government advice. By sending in special assistance teams, we ensured the repatriation went as smoothly for our customers as possible.

In response to positive feedback, we've also extended our 24-hour hotel satisfaction promise for Summer 2017, targeting around 80% of our sun and beach hotel customers across more than 2,000 differentiated hotels, up from 1,600 hotels at launch last year. This promise gives customers our commitment to resolve any problems they might have with their hotels within 24 hours.

Customer contact

Building closer relationships with our customers is key to sustained growth. In the last six months, the investment we've made in our websites has delivered growth in online bookings of 15% in the UK and 35% in Germany. We've also fully implemented OneWeb, our international web platform, in Belgium, with the Netherlands to follow shortly, giving a better customer experience based on more efficient technology.

To further improve customer engagement, we've significantly refreshed and expanded our web content, adding over 80,000 images, 1,000 room plans and 130 hotel videos for the Summer. Our websites now host over 325,000 hotel and resort images, and over 1,000 videos, making them a rich source of holiday information and inspiration for our customers.

We continue to reshape our retail store network, closing 46 smaller and less profitable UK "neighbourhood" stores during the first half and taking our UK store count to around 750 at the end of March. We also continued to open a small number of larger, new-concept "discovery" stores in high footfall areas. The Co-Operative Group's forthcoming exit from our retail joint venture allows us to take full control of the network, optimise our geographical presence, and bring all stores under the Thomas Cook brand by November 2018.

We are also taking steps to grow the proportion of sales through own-brand and strategic partner channels in Germany, to help us increase margins and improve the customer experience. By targeting agency sales through new franchise stores, strategic partners and key account distributors, we have signed 41 new agency agreements so far this year, well on the way towards our target of 60 new agencies for the full year.

Holidays

Our hotels

At the heart of our holiday offering is our portfolio of own-brand hotels and resorts, which give customers a unique Thomas Cook experience and achieve higher NPS scores and better margins. Reflecting strong demand, we've grown sales of holidays to own-brand hotels for the summer by 10% so far this year.

We continue to develop our own-brand hotel portfolio, with 11 new hotel launches planned for this Summer, and a further 11 currently in the pipeline over the next 18 months. This year's openings include the 100-room Casa Cook Kos, our second hotel under the Casa Cook brand which we created last year to bring an affordable boutique experience to the beach. Our first Casa Cook hotel, in Rhodes, has proved very popular since it opened last July, generating overwhelmingly positive customer reviews and attracting a new set of customers to Thomas Cook. Other new hotel launches this Summer include four new Sentido hotels, three new Smartline hotels, a Sunconnect and a Sunprime, covering destinations including Sicily, Bulgaria, Croatia, the Canary Islands and the Maldives.

We also offer holidays to a closely managed portfolio of selected partner hotels, where our aim is to streamline the portfolio in order to improve hotel utilisation, strengthen relationships with hoteliers and agree more exclusive terms. For Summer 2017 we will offer around 3,500 differentiated hotels (including own-brand and selected partner hotels), a reduction of around 150 compared to the previous year, and well on the way towards our target of around 3,000 differentiated hotels by Summer 2019.

We are also sharing more of our capacity across the Group, allowing us to maximise margins by allocating capacity where there is most demand. We now share capacity across source markets for 43% of our differentiated hotels, up from just 7% in 2014.

Our airline

Over the last four years we have further centralised our airline operations across the Group into a single business line, in order to achieve significant scale economies and deliver improved service and customer value. Operating principally out of Germany under the Condor brand, and the UK and Scandinavia under the Thomas Cook Airlines brand, our combined airline operations form one of the leading leisure airlines in Europe, serving around 17 million customers annually.

Our airline strategy is to profitably grow our position in the European leisure flights market, by opening new routes particularly to long haul destinations, by leveraging our unique distribution system including via our in-house tour operator channels, and by improving our customer proposition, underpinned by a constant focus on operational efficiency and safety.

We continue to expand in long-haul, with bookings up 5% over the Winter and 9% for the Summer, reflecting growth in demand particularly for the Caribbean and North America. We have also reshaped and grown our short and medium haul programme, with bookings up 10% for the Summer. We've added 15 new destinations for the Summer, including the Portuguese island of Porto Santo, Almeria and Malaga in Spain, and Mykonos in Greece, as well as San Diego, New Orleans and San Francisco in the USA. This brings the total number of destinations we serve globally to 134, flying from 57 departure airports across our source markets.

Around half of our airline's customers are in-house package holiday customers, de-risking our airline proposition by providing visibility on capacity requirements and helping the airline to optimise yields. We are also actively developing our other distribution channels where we are seeing good demand, including via third-party tour operators and our own websites.

In line with the rest of the Group, our airline is focused on delivering an excellent customer experience. Our fleet of 94 aircraft is now entirely new or recently refurbished, and through operational improvements we have reduced delays of 3-hours or more to a level where less than one in 200 of our flights is affected. These and other customer-focused initiatives have improved our airline NPS by 7 points in the first half. Further improvements this year include the introduction of a new in-flight entertainment system which streams music and movies direct to customers' smartphones.

As we've highlighted previously, Condor's financial performance has been impacted over the last year by tough trading conditions. As a result, we have implemented various profit improvement measures, which we expect will return Condor to profitability for the full year. This is further discussed on page 15.

In March we announced that Thomas Cook Belgium intends to widen its existing partnership with Brussels Airlines, giving our Belgian customers an expanded choice of flights and routes, and enabling us to manage our aircraft and personnel more efficiently. Subject to completion of the deal, the operations of Thomas Cook Airlines Belgium will be absorbed into Brussels Airlines from the end of this year.

Services

We increased our revenue from ancillary sales by 14% in the first half, reflecting growing customer demand for more personalised products and services. To meet this demand, we have invested in new systems to better integrate ancillary sales into the booking process, and we have improved the way we present ancillary offers to customers. This has led to growth from in-flight meals and seat selection, extra luggage, travel and booking insurance, and excursions and entertainment while in destination.

In addition, we are building on our trusted heritage in financial services by establishing a new division which will consolidate our existing financial services under one business unit, and roll out new financial services across the Group. Led by Anthony Mooney, formerly Director of Financial Services at Virgin Money, this new division aims to create an innovative holiday money offering, making it easy and rewarding for holiday customers to manage and protect their holiday money.

Partnerships

Our core areas of strategic growth are complemented by a series of partnerships which enable us to streamline our business while tapping into new opportunities for growth.

Complementary hotel sourcing partnership with Webjet

In August 2016 we announced a strategic hotel sourcing partnership with Webjet, a leading online digital services provider. Under the terms of the deal, we are moving the direct contracting for our complementary sun & beach hotels to Webjet, allowing Thomas Cook to focus on its core differentiated holiday offering and to harmonise and simplify IT platforms and business processes across the Group. By the end of June 2017 we expect to have moved well over half of the target hotel contracts to Webjet, in line with our intended timeframe. We are also now able to access Webjet's existing portfolio of 7,000 directly contracted hotels, enabling us to offer more choice to our customers.

Thomas Cook China

Thomas Cook China has expanded rapidly in the first half, already booking more guests so far this year than the whole of 2016. Around 60% of customers are outbound from China, reflecting rapidly growing demand from Chinese consumers for personalised holiday packages to destinations around the world. The remaining 40% travel inbound to China. The venture is also building a strong presence in the travel sports market, offering packages to watch European football teams playing at home, as well as inbound services to football clubs touring China for their summer pre-season. We expect our China business to continue to grow rapidly in the coming years.

Operational efficiencies and streamlined organisational structure

We have a number of efficiency programmes underway both as cross-Group initiatives and in each of our local markets, in order to remain competitive and provide best value for our customers. We've set up horizontal functions in the areas of IT, marketing, and contracting & product, in order to reduce duplication and share best practice across the Group. In Continental Europe, we are streamlining processes and removing duplication to achieve significant savings with a focus on Germany, Belgium and the Netherlands, while in France we are further restructuring support operations in order to improve profitability. We have also started a programme to consolidate finance support across the Group in our new shared service centre in Palma, Mallorca, which we expect to lead to further benefits.

New Operating Model benefits

The New Operating Model is our Group-wide transformation programme through which we manage, and measure the financial benefits from, a number of business change initiatives aimed at implementing our strategy for profitable growth. In the first half, this programme delivered annualised net EBIT benefits of £15 million, mainly from retail and online efficiencies relating to the growth of our web channel, higher ancillaries sales and other overhead savings. This takes the cumulative annualised net EBIT benefits delivered over the 18 months since the programme began to £41 million. We remain on track to deliver a total of £130 million to £150 million of cumulative annualised net EBIT benefits between FY16 and FY19.

Financing progress and dividends

We achieved significant progress in our financing strategy in the first half, extending maturities and reducing interest costs through our bond refinancing. The proceeds of our new €750 million bond, bearing a coupon of 6.25% and maturing in June 2022, enabled us to redeem in full both the outstanding £200 million principal of our £300 million bond due in June 2017, and our entire €525 million bond due in June 2020. The new bond was issued at a coupon 150 basis points lower than the two bonds it replaced. We continue to target a further £200 million reduction of fixed term debt by the end of 2018.

Reflecting the Group's improving financial performance, we recently resumed making dividend payments to shareholders, paying our first dividend for five years in April in respect of FY16 earnings. Our policy is to target a payout ratio of between 20% and 30% of reported net profit each year, as we believe this represents an appropriate balance between debt reduction and providing a return to shareholders. As previously announced, it is not our intention to pay interim dividends for the foreseeable future.

OPERATING AND 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 the Group's underlying year-on-year progression

The Group continued to improve its financial performance in the first half, achieving higher revenues, a lower seasonal EBIT loss and reduced net debt, compared to the first half last year.

Group revenue increased by £77 million, or 3%, on a like-for-like basis, and by £322 million, or 12%, on a headline basis (before adjusting for the positive benefits of foreign exchange translation differences), reflecting stronger demand for our holidays particularly to Spain and long-haul destinations. While gross profit increased by £6 million, gross margin decreased by 40 basis points to 21.1%, mainly as a result of weaker trading at Condor.

The Group's underlying EBIT loss improved by £2 million to £177 million, while the Group's loss from operations improved by £15 million to £205 million, as a result of lower EBIT Separately Disclosed Items.

Separately disclosed finance charges increased by £28 million as a result of costs arising from our bond refinancing in December. As a result, Group loss before tax increased by £14 million to £314 million.

Tax for the period was a credit of £42 million, which reflects the recognition of the tax effect of seasonal losses in the UK in the first half of the year. This results in an effective tax rate, based on pre-exceptional loss before tax, of 22.1% for H1 2017 (H1 2016: -1.8%).

Loss for the period improved by £27 million to £272 million due to the higher tax credit, partly offset by one-off finance charges connected with our successful bond refinancing in December 2016.

The seasonal cash outflow of £648 million is £2 million higher than last year, with the business achieving working capital improvements due to stronger Summer bookings, offset by the timing of tax payments and additional one-off financing costs associated with the bond refinancing.

As a consequence of the Group's improved working capital position, and after reflecting non-cash changes such as foreign currency translation, Group net debt reduced to £794 million, £34 million lower on a like-for-like basis than at 31 March 2016.

Like-for-like Analysis

Certain items, such as the normal translational effect of foreign exchange movements, affect the comparability of the Group's financial performance between years. Accordingly, to better represent the Group's underlying year-on-year progression, 'like-for-like' comparisons with H1 2016 are presented in addition to the change in reported numbers.

This year Easter fell in the second half of our financial year, resulting in a shift of holidays taken over Easter into the second half, compared to last year when Easter fell in our first half. The movement in the date of Easter is estimated to have adversely affected H1 2017 revenue and underlying EBIT by £55m and £10m, respectively, compared to last year.

'Like-for-like' adjustments to the Group's H1 2016 results and the resulting year-on-year changes are as follows:

Performance by source market

The Group reports the performance of its principal geographic source markets, as that best represents the Group's integrated operating activities (tour operator and airline) and customer experience in each market. The exception to this is Condor, our German airline, which operates independently of our German tour operator and has a high proportion of third party customers.

Performance by business line

In addition to the Group's source market reporting, we also provide supplementary information to give a better understanding of the separate financial performance of our tour operator and airline business lines. Although these functions are integrated to varying degrees in each of the Group's source markets, they are now separately reported for certain internal management purposes.

From a commercial perspective, we believe the pricing arrangements between our tour operator and airline businesses represent a reasonable approximation of third party arrangements that our tour operator businesses could secure in the market for an equivalent service.

Revenue

Group revenue increased by £77 million (2.6%) on a like-for-like basis to £2,994 million, as we have reshaped and expanded our Winter holiday programme to meet changing customer demand. This resulted in the growth of holiday sales to Spain (+£56 million), Greece (+£18 million) and to long haul destinations (+£65 million), which has more than offset lower customer demand for holidays to Turkey (-£80 million).

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

Underlying Gross Margin

Gross margin of 21.1% is 40 basis points lower than last year, principally reflecting market overcapacity which continued to affect our German Airline, Condor, putting downward pressure on yields.

The relative impact on the Group's gross margin performance form each of our sources markets is set out below.

Underlying Operating Expenses / Overheads

Operating expenses before depreciation decreased by £1 million to £699 million as the benefits of efficiency initiatives were offset by inflationary increases to the operating cost base. Depreciation increased by £5 million to £111 million following further investment in our aircraft fleet and IT enhancements.

Underlying EBIT

The Group reported an underlying EBIT loss of £177 million in the first half of the year, an improvement of £2m compared to last year.

Net benefits of £15 million were delivered in the first half of the year from the implementation of our New Operating Model, in line with our expectations for the Winter period. This contributed to an improved result in our UK and Continental Europe businesses, where seasonal losses were £14 million and £8 million lower than last year, respectively.

However, profitability in Condor has been affected by market overcapacity and weaker customer demand to certain destinations. As a result, Condor's EBIT loss was £19 million higher than last year, but with an improving trend in the second quarter (Q1 -£13m, Q2 -£6m year-on-year).

EBIT

The Group's statutory EBIT loss of £205 million represents an improvement of £15 million compared to last year due to the improvement in underlying EBIT explained above, together with lower separately disclosed items of £28 million (H1 2016: £41 million) (see page 16).

SEGMENTAL REVIEW

Performance by source market

A summary of the results for each geographical segment is set out below.

 United Kingdom & Ireland

Our UK business traded strongly in the first half, with revenue of £707 million, £43 million (6.5%) higher than last year, reflecting the continued growth of our Winter programme particularly to long haul destinations, and focus on quality. This also benefited gross margins, which improved by 40 basis points.

In addition to revenue and margin growth, operating efficiencies of £10 million were achieved in the first half, primarily relating to lower distribution costs as our customers increasingly book online, allowing us to selectively refine our retail store network.

As a result, the UK reported a seasonal underlying EBIT loss of £114 million for the period, representing an improvement of £14 million (H1 2016: £128 million loss).

As part of our distribution strategy, we have agreed to acquire The Co-operative Group's minority interest in our UK retail joint venture. In connection with this, we paid £32m in dividends to The Co-operative Group and will pay a further £56 million in November 2017.

In common with the rest of the UK package travel industry, we have seen an increase in illness related claims from UK consumers. At a time when customer satisfaction levels are increasing, we believe many of these claims are questionable and are motivated by the actions of certain claims management companies. We are working closely with our hotel partners and the authorities, particularly in Spain, to improve processes in resort and will continue actively to lobby government for changes to legislation in this area.

Continental Europe

Our Continental European businesses reported revenue of £1,206 million, in line with last year, and an underlying EBIT loss of £50 million, an improvement of £8 million. Revenue and underlying EBIT performance by key source market within Continental Europe is set out below.

Revenue and EBIT by Market

Our Central Europe business has successfully rebalanced capacity in response to changing customer demand, substituting alternative destinations to replace lower demand for Turkey. This has resulted in revenue being maintained at last year's levels. This strategy has enabled us to increase market share in a competitive market, despite margin pressures, enabling the business to report a result broadly in line with last year. We continue to take steps to improve controlled distribution, including expanding our relationships with distribution partners and growing our online presence. Our new web platform has contributed to a rise in online bookings of 35% so far this financial year, albeit from a low base.

In East/West, we have achieved modest profit improvements in France, Russia and Belgium, while our Dutch business traded in line with last year. Russia has benefited from the resumption of holidays to Turkey which, together with the successful expansion of our domestic Russian business, has resulted in strong sales growth of almost 40%. We have also continued to expand our Winter long haul holidays from France, growing revenue by 6% compared to last year. While customer demand in Belgium was below historical levels, due to the negative impact on customer demand after the Brussels airport attack in March last year, our focus on capacity control, margins and efficiency measures has enabled us to reduce seasonal losses in that market.

Other Continental Europe EBIT performance also benefitted from the ongoing streamlining of our structure, which has resulted in an improvement in profitability of £3 million.

Northern Europe

Our Northern Europe business reported revenue of £617 million, £34 million (5.8%) higher than last year, reflecting the benefits of our expanded range of own-brand hotels and increased focus on ancillary products. Although gross margin was 60 basis points lower following strong Winter trading last year, underlying EBIT was maintained at £42 million.

Revenue growth has been supported by our leading position in the package holiday market in Nordics and the expansion of our dynamic packaging business. During the Winter season, in response to customer demand, we increased sales of holidays to the Canary Islands and Cape Verde, which compensated for lower demand to certain long haul destinations. In addition, we continue to refine and streamline cost structures within the four Nordic source markets and to leverage the competitive strengths of our integrated business model.

Condor (Airlines Germany)

As we previously reported, Condor has been impacted by weak consumer demand, particularly to Turkey where it is a market leader, and by market overcapacity particularly to Spanish destinations.

Revenues of £609 million were £7 million (1.1%) lower than last year as we reduced short haul capacity (especially to Turkey) and continued to expand our flights to long haul destinations. Despite this resilient revenue performance, yield pressures have resulted in a seasonal underlying EBIT loss of £41 million, £19 million higher than last year (H1 2016: £22 million loss). However, the trend in Condor's profitability has improved in the second quarter (Q1: -£13m, Q2: -£6m year-on-year), reflecting the measures we have implemented to respond to market pressures.

We have made good progress on the profit improvement measures that we set out in our results announcement in November 2016, including rerouting capacity and increasing our operational flexibility. We estimate that these measures have delivered benefits of £7 million in the first half of the year and have helped to mitigate competitive pricing pressures in the market.

Corporate

Corporate operating expenses of £14 million were broadly in line with prior year.

Performance by Business Line

A review of the financial performance of each of the Group's principal business lines is set out below.

Group Tour Operator business 

Tour operator revenue of £2,284 million was £20 million (0.9%) higher than last year, primarily due to growth in our UK and Nordic businesses. The Group's tour operator businesses generated an underlying EBIT loss of £81 million, an improvement of £19 million (19.0%) compared to last year. Benefits from our New Operating Model have underpinned EBIT growth in our tour operator businesses, especially in the UK and Continental Europe, together with another strong performance from our Nordic business, which reported an EBIT result which was only slightly lower than an exceptionally strong result last year.

Group Airline business 

Airline revenue increased by 3.4% to £1,202 million as further expansion of our long haul business from the UK and Germany has offset lower capacity and demand in the short and medium haul sector, particularly in Germany and Belgium.

Overall capacity in Available Seat Kilometres was in line with last year, with a 4% reduction in short and medium haul being compensated by a 5% increase in long haul capacity. The seat load factor improved slightly from 88.3% to 88.6%.

The Group's Airline generated an underlying EBIT loss of £82 million, £16 million higher than in the prior year, impacted by lower profitability in Condor, as set out above. Average yields for long haul and short haul seats fell, by £5 (4.1%) and £17 (5.2%) per seat respectively, on a like-for-like basis.

OTHER FINANCIAL ITEMS

Net Finance Charges

Net finance charges increased by £1 million to £74 million (H1 2016: £73 million) and a detailed analysis is set out Note 5 on page 31. Our new bond issued in December 2016 refinanced a significant part of the Group's debt at a cheaper interest rate, which has further strengthened the Group's balance sheet and extended our debt maturity profile. The reduction of fixed term debt through operating cash flow remains a key priority for the Group, which will facilitate a consequent reduction in finance costs.

Separately Disclosed Items

Net Separately Disclosed Items totalled a charge of £63 million, which is £15 million higher than last year (H1 2016: £48 million), as analysed below.

Further information on Separately Disclosed Items is set out in Note 4 on page 30.

Summary Cash Flow Statement(i)

The seasonal free cash outflow of £648 million was £2 million higher than last year (H1 2016: £646 million). While the Group's working capital position has improved, reflecting an increased level of Summer bookings and customer deposits, this has been offset by the timing of tax payments in Germany, additional bond refinancing costs and the timing of interest payments.

Current year cash exceptional charges totalling £51 million are analysed as follows:

The Group uses a measure of cash conversion representing the percentage of underlying profit before tax that is converted into free cash flow. On this basis, cash conversion on a last twelve months basis to March 2017 is 36% as summarised below.

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 6 months, the Group's net debt has fallen from £818 million to £794 million, equivalent to an improvement of £34 million on a like-for-like basis.

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 £50 million was drawn at 31 March 2017 (nil at 31 March 2016), and a £300 million bonding and guarantee facility of which £273 million was drawn at 31 March 2017 (31 March 2016: £253 million). These Committed Facilities expire in May 2019.

In December 2016, we issued a new €750 million bond, bearing a coupon of 6.25% and maturing on 15 June 2022. The proceeds of the bond enabled us to redeem in full both the outstanding £200 million principal of our £300 million bond maturing in June 2017, and our entire €525 million bond maturing in June 2020. The new bond was issued at a coupon 150 basis points lower than the two bonds it replaced, helping to enhance our financial and operational flexibility.

Treasury and Cash 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.

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 proportion of our forthcoming requirements for Euros, US Dollars and Jet Fuel that have been hedged are shown in the table below

As at 30 April 2017

As Jet Fuel is priced in US Dollars, we buy forward the requisite amount of US Dollars from a mix of base currencies. For FY17, we estimate that our net fuel costs will fall by around £30 million compared to FY16.

The Group's policy is not to hedge the translation impact of profits generated outside the UK. If end-April rates for the Euro and Swedish Krona were maintained throughout the remainder of FY17, there would be a negative year-on-year translation impact on EBIT of approximately £11 million.

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

Credit Rating

Both Fitch and Standard & Poor's revised the outlook on the Group's 'B' ratings to 'positive' in February 2017, recognising the continuing progress in the transformation of Thomas Cook despite external challenges. Moody's affirmed the B1 rating assigned in May 2016.

The assessment indicated that the following risks are of a particular relevance to the likely outturn for September 2017 as their impact could have an immediate effect:

· 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.

· A significant decline in customer demand due to the growing threat of terrorist attacks in our key tourist destinations, may lead to decreased revenue.

· Cash generation is insufficient to strategically manage debt repayment and/or dividend payment.

· 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.

The potential likelihood and impact of these risks remain broadly unchanged since the September 2016 year-end evaluation was performed.

· Our transformation initiatives fail to deliver our strategic and operational targets.

· Inability to consistently meet customer expectations may have an adverse impact on Thomas Cook's market share.

· Failure to develop a more diverse product portfolio may have an adverse impact on our ability to improve the 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.

· Information security and cyber threats are currently a priority across all industries and remain a key Government agenda item. The Group recognises that we have high risk exposure in this area.

· The decision for the UK to exit the EU has a detrimental impact on the Group's operations.

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

The potential likelihood and impact of these risks remain broadly unchanged since the September 2016 year-end evaluation was performed.

In addition, in February 2017, the European Union Competition Commission launched an investigation into the travel industry regarding hotel accommodation agreements. As announced publicly on 3 February 2017, the Group notes the decision by the European Commission to investigate the availability of hotel bookings and pricing between member states. Across the Group's 15 European source markets, Thomas Cook is committed to fair and open competition and will cooperate fully with the Commission through this process.

This is the headline measure of the Group's performance, and is based on profit from operations before the impact of separately disclosed items. Underlying EBIT provides a measure of the underlying operating performance of the Group and growth in profitability of the operations.

The Group uses three non-statutory cash flow measures to manage the business. Operating Cashflow is net cash used in operating activities excluding the cash effect of separately disclosed items. Free Cash flow is cash from operating activities less capital expenditure and interest paid. Net Cashflow is the net decrease in cash and cash equivalents excluding the net movement in borrowings, facility set-up fees and finance lease repayments. These cash flow measures are indicators of the financial management of the business. They reflect the cash generated by the business before and after investing and financing activities and explain changes in the Group's Net Debt position.

The notes on pages 28 to 34 form an integral part of the condensed consolidated interim financial statements.

The notes on pages 28 to 34 form an integral part of the condensed consolidated interim financial statements. 

The notes on pages 28 to 34 form an integral part of the condensed consolidated interim financial statements.

The notes on pages 28 to 34 form an integral part of the condensed consolidated interim financial statements.

The unaudited movements in equity for the six months ended 31 March 2017 were as follows:

*Opening balances have been restated.

The restated unaudited movements in equity for the six months ended 31 March 2016 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 liability company limited by shares incorporated, registered and domiciled in England and Wales under the Companies Act 2006 and listed on the London Stock Exchange. The address of its registered office is 3rd Floor, South Building, 200 Aldersgate, London EC1A 4HD.

The 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 2016 (the 'Annual Report'), which has been prepared in accordance with IFRSs as adopted by the European Union, approved by the Board of Directors on 22 November 2016 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 and methods of computation used and presentation of these consolidated interim financial statements are the same as those in the Annual Report.

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 at least 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 2017 was approved by the Directors on 17 May 2017. The half year report has been reviewed, not audited. The auditor's review report is on page 35.

During the year a reassessment of contingent consideration to be settled in the period has been performed. This has resulted in a £4m reduction to the prior year separately disclosed items, within the Income Statement, and corresponding reduction in non-controlling interest. Refer to Note 4 for further details of the reassessment.

2. 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 periods commencing on or after 1 January 2018 and is applicable to the Group from 1 October 2018. IFRS 9 is a replacement for IAS 39 'Financial Instruments' and covers three distinct areas. Phase 1 contains new requirements for the classification and measurement of financial assets and liabilities. Phase 2 relates to the impairment of financial assets and requires the calculation of impairment on an expected loss basis rather than the current incurred loss basis. Phase 3 relates to less stringent requirements for general hedge accounting. The adoption of IFRS 9 is likely to have a significant impact on the Group in future periods, specifically in relation to the impairment charge recognised on financial asset balances. The Group is assessing the impact of IFRS 9. This is expected to impact the measurement and disclosures of financial instruments.

IFRS 15 'Revenues from Contracts with Customers' is effective for periods commencing 1 January 2018 and is applicable to the Group from 1 October 2018. IFRS 15 introduces a five-step approach to the timing of revenue recognition based on performance obligations in customer contracts. The Group is assessing the impact of IFRS 15.

IFRS 16 'Leases' is effective for annual periods beginning on or after 1 January 2019 and is applicable to the Group from 1 October 2019 subject to endorsement by the EU. IFRS 16 provides a single lessee accounting model, requiring lessees to recognise right of use assets and lease liabilities for all applicable leases. The leasing standard is expected to have a material impact on net debt, gross assets, profit from operations and interest. The Group await the result of on going HMRC consultation to understand the impact on taxes.

3. Segmental information

For management purposes, the Group is organised into four geographic based operating divisions: UK, Continental Europe, Northern Europe, and Condor.

These divisions are the basis on which the Group reports its segment information. Certain residual businesses and corporate functions are not allocated to these divisions and are shown separately as Corporate.

These reportable segments are consistent with how information is presented to the Group Chief Executive (chief operating decision maker) for the purpose of resource allocation and assessment of performance. The primary business of all these operating divisions is the provision of leisure travel services.

3. Segmental information (continued)

Segmental information for these activities is presented below: