Thomas Cook Regulatory News (TCG)

20 May 2015

Results for the six months ended 31 March 2015

Continued growth and improved profitability

· Substantially improved performance in line with management's expectations

· Our clear strategy has delivered sustainable profitable growth: 22% reduction in seasonal loss from operations, together with like-for-like revenue growth

· Summer trading is encouraging

· Good progress with our strategic partner, Fosun, towards implementing a hotel investment platform to accelerate our hotel development, and establishing a joint venture targeting the Chinese tourism market

· Extended £800 million financing facility signed, an increase of £330 million over the existing facility, helping to create a more efficient capital structure, reduce interest costs and increase financial flexibility

· Improving bottom-line profitability supports resumption of dividend payments in respect of FY16 earnings

Key financials

Notes: (i) The term 'Underlying' refers to trading results that are adjusted for separately disclosed items that are significant in understanding the ongoing results of the Group. Separately disclosed items are detailed on page 14

(ii) 'Like-for-like' change is quoted to improve the comparability of prior year data, by adjusting for the impact of disposals, foreign exchange translation and other factors that distorts the true performance of the business. The detailed like-for-like adjustments are shown on page 21

(iii) 'Like-for-like' net debt adjusts the prior year comparative for foreign exchange translation, the impact of changing finance lease arrangements, new equity investment and disposal proceeds to give a true, underlying change in Net Debt as set out on page 19.

Financial and trading highlights

The comments below are based on like-for-like comparisons unless otherwise stated

· Continued revenue growth: Group revenue increased by £37 million, or 1.2%, to £2,742 million (H1 2014: £2,705 million), as a result of growing New Product and long haul sales

· Gross margin was maintained at 21.3%, as improved yield management and cost efficiencies compensated for continued competitive pressures

· Significant improvement in profitability: Loss from operations improved by £66 million, or 23%, to £220 million (H1 2014: £286 million), helped by a 50% reduction in separately disclosed items

· Underlying EBIT improved by £18 million to a £173 million loss (H1 2014: £191 million loss), excluding a £5 million benefit from Easter falling earlier this year

− The UK business performed particularly well thanks to the business improvement measures taken in the last 2 years, achieving an LTM underlying EBIT margin of 4.5%, up 100 basis points year-on-year

− Airlines Germany also delivered strong growth through capacity expansion and a renewed customer experience, achieving an LTM underlying EBIT margin of 4.4%, up 80 basis points year-on-year

· Net debt reduced by £37 million on a like-for-like basis (£111 million on a statutory basis) to £700 million (H1 2014: £811 million) reflecting improved profitability

· We have signed, ahead of schedule, a new extended £800 million financing facility, which is £330 million more than our existing facility, to support the Group through the next phase of transformation

· Summer programme is 62% sold to date, 2% higher than last year, with average selling prices similar to last year's levels

Strategic highlights

· Our focus on differentiated and flexible holidays is paying off, with rapidly growing customer demand for holidays to our own-brand (concept) hotels, and for tailored packages and flexible durations

· Serving our customers better through technology: improved bookings and conversion on OneWeb, substantially increased mobile sales group-wide, digital mobile "companion app" gaining popularity

· Good progress in executing on joint initiatives with our strategic partner Fosun:

− Finalising model for a hotel investment platform to acquire 30 own-brand hotels, targeting the first few acquisitions this year

− Agreed key terms of a joint venture to be established in Shanghai to address the fast-growing Chinese tourism market

· Our cost out and profit improvement programme delivered a further £60 million of benefits, taking the cumulative total to £460 million, on track to exceed our target of £500 million by year end

· We are focused on implementing the next stage of our transformation from FY16 to FY18, to transition to a New Operating Model and deliver further substantial business efficiencies

· The Wave 2 initiatives form part of the New Operating Model. We have re-evaluated these, and now believe we can achieve similar risk-weighted benefits as before for a significantly lower cost

Outlook

Our Summer 2015 holiday bookings across the Group are encouraging, especially for our important fourth quarter, which is offsetting some weakness in the third quarter. The UK business and Airlines Germany continue to trade particularly well, our Northern European business has proven resilient in a difficult market, while our German tour operating business continues to experience tough trading conditions. Our growth initiatives are leading to more demand for our holidays, which, combined with our cost reduction and efficiency programmes, are improving bottom line profitability. We expect that these continuing improvements will lead to further growth in FY15, consistent with our expectations at the full year results last November, on a constant currency basis.

Peter Fankhauser, Chief Executive of Thomas Cook commented:

"Overall the Group has made positive progress during the first half. Thanks to the actions we have taken, both profits and like-for-like revenues have grown, and debt has been further reduced. We have formed a promising strategic partnership with Fosun, a leading Chinese investment group, under which we are developing further growth opportunities, both within and beyond our traditional European travel markets. In addition we have signed a new, significantly larger financing facility, giving us improved financial flexibility and liquidity for the future. Our performance in the first half provides a solid foundation for the full year and beyond. I am confident that we can continue to make Thomas Cook a stronger and more profitable holiday company, as we continue to implement our clear strategy for profitable growth, and move towards the resumption of dividend payments in respect of FY16 earnings."

Presentation to equity analysts

Management will present these results via a live webcast at 9.30 a.m. this morning. To access the webcast, please use the following link and dial-in:

http://webcasts.thomascookgroup.com/thomascook005/default.asp

The webcast will be available for replay after the event at www.thomascookgroup.com.

Forthcoming announcement dates

The Group intends to announce its third quarter results on 30 July 2015.

Enquiries

Progress in executing our strategy

We are making good progress in executing our strategy for sustainable profitable growth, through which we aim to generate higher quality and more competitively resilient revenues, improve profitability and increase cash flows. Our strategy consists of four main pillars: developing our holiday offering to provide more differentiated and flexible holiday experiences, best utilising our assets and capacity, enhancing our omni channel proposition, and generating operating efficiencies.

Our progress against each of our four strategic pillars is described below.

Developing our holiday offering

Our product strategy is to generate significant revenue and margin growth by offering our customers a range of core differentiated and exclusive holiday experiences, complemented by a broad spectrum of flexible, quality-assured hotels and flights.

Our differentiated and exclusive holiday offering is based on our own-brand (concept) hotels and other premium properties. Having developed in little more than two years a portfolio of 220 own-brand hotels, we are now aiming to grow bookings through better utilisation and occupancy of these properties and through an improved customer experience. We are pleased to report that own-brand hotel bookings for Winter 2014/15 increased by 30%, and bookings to date for Summer 2015 are up by 33%.

Alongside our differentiated and exclusive holiday experiences, we offer our customers a broad spectrum of quality-assured hotels and flights, providing flexibility, range and choice. In the UK, we have recently launched Thomas Cook City Escapes, offering competitive pricing on our widest choice of city destinations, covering 31,000 hotels in over 2,000 destinations around the world. We are also in the process of migrating these products to lowest cost, electronic sourcing platforms in order to grow margins, including the creation of a single hotel sourcing hub for the Group.

We also offer a range of 'specialist' holidays to address smaller but nevertheless strategically important target markets, including the long-haul and luxury markets. We have grown our presence in the long-haul market significantly in the first half, with capacity up by 8% and like-for-like revenues up by 12%. In December we re-launched Thomas Cook Signature as a brand for our luxury, tailormade holidays - resulting in an uplift in UK luxury holiday bookings of 15% so far for Summer 2015.

Our New Product KPI aims to indicate progress in these strategic areas since 2012. Incremental New Product revenue grew by a further £77 million in the first half to £357 million on a cumulative basis, including growth of £45 million in differentiated and exclusive holidays (to own-brand and partnership hotels) and £32 million in flexible products (including city breaks and non-differentiated hotels).

Best utilising our assets and capacity

Sourcing good quality hotels and flights efficiently and economically is key to our operations. This includes investing in hotel and flight capacity and utilising it well, balancing risk and non-risk capacity, and flexing allocations of this capacity within the Group to maximise profits.

In hotels, we take risk by securing guaranteed capacity mainly in our own-brand hotels and high-volume differentiated hotels, while sourcing other hotels on a spot basis according to demand. We have built a centralised Hotels & Resorts unit, dedicated to sourcing and managing our own-brand hotel portfolio, through which we deliver consistent quality-controlled holiday experiences to our customers. The focus is now on extracting more value from these hotels, by improving customer satisfaction and loyalty through a better experience, and by driving sales more effectively through our in-house sales channels. For example, over the winter we improved the customer experience by working with the owners of our 220 own-brand hotels to completely refurbish or rebuild more than a quarter of them. In one such refurbishment programme, we co-funded together with the hotel owners a EUR 12 million investment to renovate 10 mainly beachfront hotels in the Balearics and mainland Spain, in order to meet Thomas Cook brand standards and convert them into own-brand hotels. This resulted in more than 1,500 newly-renovated, high quality hotel rooms becoming available for Summer 2015.

We are also finalising the model for a joint hotel investment platform, developed in partnership with Fosun, which will invest in own-brand hotels in key holiday destinations, leading to consolidated ownership and tighter management control, and enabling us to better utilise these hotels and strengthen our differentiated product offering. Further details of the progress we have made are set out below, under the heading "Strategic Partnership with Fosun".

For our flight capacity, our in-house airlines enable us to benefit from guaranteed capacity and seat rates, while at the same time we take advantage of the flexible sourcing of seats at competitive spot prices from third party carriers. The flight experience is a key part of our customers' holidays, and we are in the process of completing a major fleet upgrade programme. This includes 25 brand new aircraft (21 delivered to date with a further 4 due for delivery in the next twelve months), and fully refurbished passenger cabins in 53 existing aircraft, as part of a £100m investment programme. By this Summer, we will have either replaced or fully refurbished more than 80% of our fleet, resulting in a significantly upgraded flying experience, increased customer satisfaction and greater operational efficiency.

Our airline in the UK has significantly developed its seat-only model, providing a better customer proposition, and making its inventory available through a wider range of sales channels. As a more effective distributor of profitable seat-only business, our tour operator is better able to flex air capacity in line with demand. This has resulted in an increase in seat-only volumes of 9% in the first half, compared to an increase of 4% for package holidays.

Enhancing our omni channel proposition

We are focused on using technology to serve our customers better, across all sales channels and customer interfaces, and to build closer relationships with our customers.

In our stores, we have led the market through the development of a virtual reality experience, allowing customers to "try before they buy" by providing a fully immersive 3D visual experience of our hotels and resorts, using special headsets. So far customers can view sample own-brand hotels in selected stores in three countries. We are currently expanding this specialist content to cover more hotels.

Our new international web platform, OneWeb, is generating a significant uplift in online bookings in the UK. On thomascook.com, our main UK site, package bookings grew by 12% in the first half, while conversion increased by 20%, reflecting improved site efficiency. Our OneWeb platform has recently gone live in The Netherlands and is expected to deliver increased bookings over the coming months. Belgium will follow later this year.

The increasing use of mobiles for online transactions and web browsing presents us with a significant opportunity to deepen our relationship with our customers. We are successfully capitalising on this trend - bookings of Thomas Cook holidays on mobile and tablet devices in the UK grew by 65% in the first half. We have also launched our digital "companion app", initially in Northern Europe at the end of last year, allowing customers to access their booking, make balance payments, view in-resort information and book excursions. This has so far achieved in excess of 100,000 downloads and is used on average six times per download. It complements our existing "Travelguide" app, available in Germany, which has achieved almost 300,000 downloads since launch in November 2012. Through our dedicated mobile technology development hub, we expect to continuously improve the functionality of this popular app.

We are also improving the customer experience by employing digital technologies to improve the way we work. For instance we are moving towards a single digital content repository from which holiday promotional materials can be sourced for both online and offline publication, eliminating duplication and enabling real-time updates to be provided via all sales channels, so customers receive the most up-to-date offers and holidays quickly and efficiently. We have also equipped our in-resort staff with tablet computers, automating much of their administrative work and enabling them to dedicate more time to serving our customers.

Generating operating efficiencies

We aim to provide best value to our customers through an efficient low-cost operating structure. A key part of our drive for efficiency has been our cost out and profit improvement programme, which has reduced costs through the integration of our airlines, through restructuring our UK business and through other targeted benefits. In the first half, this programme delivered further benefits of £60 million, of which £32 million benefited gross margin and £28 million reduced overhead costs. This takes the cumulative total of cost out and profit improvement to £460 million at the end of the first half, and we are fully confident of exceeding our target for the full year of £500 million.

Targets and key performance indicators

In March 2013 we set out a three year plan to transform and develop the business, including a set of key targets and KPIs which were intended to measure our progress in implementing our strategy between FY13 and FY15. We continue to implement and report against this plan, and are making good progress towards most of our full year targets. In particular, we are performing well against our critical cost out and profit targets and our New Product revenue target, while we expect cash conversion to make good progress towards the target by year-end. However as we've already disclosed, it is unlikely that we will achieve our full year sales growth and web penetration targets as our progress has been offset by the removal of certain low or no-profit business lines in order to focus on profits and to reduce business risk. The table below shows our achievements for the first half of FY15.

Notes: (i) Measured on a last 12 months (LTM) departed basis

(ii) Compound annual growth rate from FY13 to FY15 including new product revenue

(iii) Underlying gross margin, adjusted for disposals and shop closures to make all periods from FY12 - FY15 like-for-like

(iv) Cash conversion ratio is defined as free cash flow after exceptional items and before capital expenditure as a percentage of EBITDA

In terms of our cost out and profit improvement programme, the table below shows our performance up to H1 2015, as well as our targets for the full year.

Notes: (i) Run rate

(ii) One-off costs

(iii) One off costs in the income statement are included in separately disclosed items

New Operating Model

While we continue to implement the original transformation plan, we are now also focusing on the implementation of our new business improvement programme to deliver the next phase of Thomas Cook's transformation between FY16 and FY18, moving the business toward our New Operating Model. As communicated at our first quarter results in February, this programme aims to leverage our scale and eliminate duplicated activities by creating a set of efficient, common technology platforms and process methodologies, enabling us to operate as a single integrated tour operator across our geographical markets. Whereas our Wave 1 projects comprised a large number of mostly unrelated initiatives, the New Operating Model comprises a smaller number of focused, interlinked projects, including the former Wave 2 initiatives, to unlock further significant efficiency benefits for the Group. We will report on New Operating Model progress from FY16 onwards.

As part of our work on the New Operating Model we have re-evaluated the former Wave 2 initiatives and now believe we can deliver the same £180 million risk-weighted benefits we communicated in November for the significantly lower cost of approximately £100 million compared to our previous estimate of £145 million, over three years.

Liquidity and capital structure

As part of our plan to make our capital structure more efficient, we have recently signed a new £800 million financing facility, including a revolving credit facility (RCF), and a bonding and guarantee facility, maturing in May 2019. This replaces our existing facility, which provided £470 million of facilities until May 2017.

As our actions over the last three years have led to improved financial performance across the Group, the opportunities to improve Thomas Cook's liquidity and capital structure have increased. In January of this year we gained strong support for a 7 year, €400 million Eurobond to replace our existing 2015 bond which expires next month, while in March Fosun acquired 4.8% of the Company through a subscription to new equity for £92 million.

In the context of this improving financial position, our new financing facility enjoyed good levels of support from our existing banking group and also attracted new members. This new group of financial institutions is more appropriate in size and geographical reach to support the Company through the next phase of our transformation. The larger RCF is better aligned to our seasonal working capital swing, and will help to create a more efficient capital structure over time and reduce interest payments, as our operational cash flow generation continues to reduce the Group's financial leverage. The new facilities also remove certain onerous terms from our existing facility documentation, and permit the resumption of dividend payments which were restricted under the old facilities, reflecting the improving trend in our credit standing.

Strategic partnership with Fosun

On 6th March 2015 Thomas Cook announced a strategic partnership with Fosun International Limited, a leading Chinese investment group with global operations, to build international cooperation across a number of business areas, and to accelerate Thomas Cook's existing profitable growth strategy. Fosun invested £92 million in exchange for 4.8% of the enlarged share capital of Thomas Cook.

We have made good progress with our joint initiatives since March. We are now finalising the model for a hotel investment platform, which will enable us to better utilise our own-brand hotels through consolidated hotel ownership and tighter management control, supporting the improvement and further development of our differentiated hotel offering. Under the proposed model, Thomas Cook and Fosun will build a portfolio of hotel investments across key holiday destinations, which will be managed and operated by Thomas Cook's Hotels and Resorts division. A list of approximately 30 hotel investments has been initially identified. It is anticipated that these will be funded through the investment capital of insurance companies within Fosun's portfolio. We are aiming to complete the acquisition of several target hotels by the end of the year.

We have also agreed key terms for the establishment together with Fosun of a joint venture business based in Shanghai, to develop domestic, inbound and outbound tourism activities for Chinese travellers under Thomas Cook brands. Subject to obtaining the relevant regulatory licenses, we expect the JV to be operational in the autumn. The proposed structure combines Thomas Cook's expertise and know-how in tour operating, with Fosun's in-depth local market knowledge, operational resources and existing investments in the tourism industry.

Our discussions with Club Med, a subsidiary of Fosun, have also progressed well, and we are currently evaluating in detail collaboration opportunities between the two companies in all common source markets, building on the existing partnership in France, where Thomas Cook is Club Med's largest third party distributor.

People

To support the execution of the next stage of our strategy of sustainable profitable growth, in February we announced that Björne Sandströmhad taken up the position of Chief Touristic Platform Officer. We are now pleased to announce the appointment of Kirsten Feld-Turkis, formerly Executive Director Business Unit Luxury at TUI Germany, who will join us on 1 July 2015 as Group Head of Premium Product and Longhaul. Kirsten will accelerate the development of our exotic long haul and luxury Signature holidays across the Group and report to Björne.

We have also realigned a number of important management responsibilities to ensure that we maximise opportunities for growth, including the support of our strategic partnership with Fosun. Reto Wilhelm, Managing Director for our Eastern and Western European businesses, will assume responsibility for the implementation of our joint venture with Fosun. Magnus Wikner will combine his current responsibility for our Nordics business with that of Russia. Stefanie Berk, who has broad experience of all aspects of our business and is currently Product & Yield Director in UK, will lead the Central and Eastern European businesses.

Dividends

Since Thomas Cook suspended dividend payments in 2011, our business has been substantially transformed. We have focused on developing our core areas of strength while removing or disposing of non-core or low profit business lines, and we have removed substantial costs from the business, resulting in underlying operating profit improvements of more than £200 million since 2012. We have secured substantial additional financing, increased free cash flow and reduced debt. The restriction on making dividend payments under our old facility has been removed. In view of the good progress we have made in transforming the business to date, and the projected further benefits we believe are deliverable as part of the New Operating Model business improvement programme, we expect to be in a position to resume dividend payments, with the first payment to be made out of FY16 profits.

CURRENT TRADING

Winter 2014/15

Trading for the Winter 2014/15 season concluded in April and was consistent with our expectations as set out in our Pre-Close Statement on 31 March 2015.

Summer 2015

The Summer 2015 season is 62% sold for the Group as whole, 2% higher than this time last year. Overall, capacity for the important peak Summer season in the fourth quarter of the year is well sold, with improved margins compared to last year. However, booking performance for the third quarter has been impacted by a later booking profile and softer market demand. Overall, the outlook for the Summer season as a whole remains encouraging, and has not changed significantly from our Pre-Close statement published on 31 March 2015.

In the UK our strategy of more flexibly managing customer demand and in-house flight capacity has resulted in the Summer season being 3% better sold than last year with 69% of capacity sold. The peak Summer departure months of July and August are particularly well sold at good margins, which should better enable us to maintain improved prices and margins in the "lates" market. Although total average selling prices are 1% lower than last year, within the product mix, charter risk pricing has improved by 3%.

In Continental Europe, 55% of the Summer programme has been sold, with bookings 4% lower than last year against a strong comparative, particularly in our German business, which has experienced a later booking profile. We have reduced capacity commitments in certain markets, such as France, and have sought to increase the level of flexible capacity in Germany to better respond to market demand. As we have previously indicated, the market in Germany remains competitive with consequent pressures on margins, although with an improving outlook for the fourth quarter.

In Northern Europe, Summer bookings are 4% lower than last year while average selling prices are unchanged. Summer capacity has been rebalanced across our source markets to better match customer demand, with lower capacity in Norway and Finland partially offset by increases in Sweden and Denmark. Booking performance has improved markedly in recent weeks, with an improving year-on-year trend for both volumes and average selling prices.

Airlines Germany continues to perform well with Summer bookings 9% higher than last year. This reflects a similar increase in capacity, mainly to long haul destinations, where we have a strong customer proposition following the cabin refurbishments in our long haul fleet. The success of our long haul business has mitigated trading pressures in the short/medium haul market such that average prices are in line with last year and seat load factors have improved slightly.

Based on cumulative bookings as at 10 May 2015

Winter 2015/16

Although very early in the booking cycle, bookings for the Winter 2015/16 season have started well, particularly in our UK business where customer numbers are 4% higher than this time last year compared to a strong performance last Winter.

FINANCIAL REVIEW

Overview

The Group's results for the last six months demonstrate further progress in delivering our profitable growth strategy.

The seasonal underlying EBIT loss for the six months to 31 March 2015 of £173 million has improved by £18 million on a like-for-like basis compared to the same period last year (H1 2014 LFL: £191 million), excluding a £5 million benefit from Easter falling earlier this year.

Group revenue for the period of £2,742 million has grown by £37 million or 1.2% on a like-for-like basis, due to continued growth from our New Products and an expansion of our long haul flying programme with new routes and new destinations.

Gross margin has been maintained at 21.3% as we compensated for market pressures through a combination of improved yield management and continuing cost efficiencies.

Group operating expenses of £758 million are £9 million (1.2%) lower than last year on a like-for-like basis (H1 2014 LFL: £767 million), primarily as a result of the run rate benefit of cost reduction measures in the UK, France and Russia, and continued cost synergies from integrating our airline operations.

Improvements in underlying EBIT and lower separately disclosed items have combined to reduce the Group's seasonal loss from operations in the first half by £66 million to £303 million on a like-for-like basis.

Reflecting our progress over the past year, net debt has reduced from £811 million at 31 March 2014 to £700 million, strengthening our balance sheet position. We expect to continue to improve the Group's financial position through further deleveraging.

The new financing facility, with an increased level of committed funding and extended maturities, will provide additional flexibility over the next four years, supporting the implementation of our New Operating Model. Further deleveraging remains a priority for our business and will be balanced with our intention to provide a return to shareholders through the payment of dividends.

Revenue

Group revenue of £2,742 million has grown by £37 million (1.2%) on a like-for-like basis, with continued growth of New Products, including an expansion of our long haul flying programme with new routes and increased customer volumes.

The growth in revenue through New Products is partially offset through further discontinuation of less profitable products, including a reduction in component hotel sales in the UK and in our Continental Europe city breaks business. Capacities in France and Russia were also reduced to reflect weaker demand for foreign holidays in those markets.

The main components of like-for-like revenue movement are:

Gross margin

Gross margin of 21.3% is consistent with last year's level on a like-for-like basis. Increased costs for beds and airline services have been compensated by the benefit of stronger yields, lower fuel prices and further cost efficiencies. The improvement in product quality is reflected in both the price and the cost of these improved products.

The major components for the change in the Group gross margin are outlined below:

Operating Expenses / Overheads

Like-for-like operating expenses reduced by £9 million (1.2%), mainly due to the Group's profit improvement initiatives, which delivered a further £28 million of cost savings. This was partially offset by an £8 million increase in strategic operating investments, primarily investment in IT and strategic marketing expenditure focused on web transition. In addition, there were increases in aircraft depreciation (as a consequence of our cabin refurbishment programme) and volume-related increases of crew and maintenance costs in Condor to support the growth in our long haul business.

Underlying EBIT

The Group generated an underlying EBIT loss of £173 million in the first half, an improvement of £18 million (9.4%) compared with the H1 2014 EBIT loss of £191 million on a like-for-like basis.

This improvement is primarily due to continuing benefits in our UK business, through profitable growth and continued run rate savings in overheads. This has been partially offset by the impact of weaker trading margins in our German business.

£32 million of profit improvement measures were recorded within Gross Margin, although this was partly offset by margin re-investment to respond to market competition, and by £5 million of additional costs for customer compensation payments relating to flight delays under EC Regulation 261/2004.

We recorded Cost Out within our overhead cost base of £28 million in the first half. Part of these savings have been re-invested in the business, through strategic operating investments (£8 million), increased depreciation on our airline fleet (£6 million) and through additional volume-related costs in Condor to support the expansion of its flying long haul programme (£3 million).

Separately Disclosed Items

In total Separately Disclosed Items reduced by £57 million to £52 million for the half year (including finance related charges), and by £49 million to £47 million at an EBIT level. The table below summarises the year-on-year development by principal category. 

Note: Items labelled Cash will impact cash either in the period or in a future period. Non-cash items will not have any future effect on Cashflow

Details of separately disclosed items are set out on page 31.

Segmental Review

Sources of Growth in Underlying EBIT

The adjustments to reflect year-on-year growth in like-for-like EBIT, on a segmental basis are summarised as:

 The Group reported an improvement in underlying EBIT of £18 million on a like-for-like basis in the first half, 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, with a seasonal EBIT loss of £131 million, representing a like-for-like EBIT improvement of £25 million compared to the comparative period (H1 2014 £156 million loss). This improved performance, against a weak result in H1 2014, reflects the continuing execution of our medium-term strategic plan through improved product quality, enhanced online capability and increased cost efficiencies.

Our UK business now has a more effective product portfolio and a leaner cost structure. In addition, we have expanded our long haul business, which has further improved profitability, contributing to an increase in revenue of 3% on a like-for-like basis, and an improved gross margin percentage (+190 basis points). This improved margin performance reflects a strong recovery from a weak result in H1 2014, where margin was adversely impacted by market disruption in Egypt and consequent over-capacity to the Canary Islands.

On a last twelve month basis, EBIT margin has improved from 3.5% at the end of FY14 to 4.5% at 31 March 2015 and we expect further progress to be made over the remainder of FY15 and beyond.

Continental Europe

Revenue and EBIT performance by key market within Continental Europe is set out below:

Revenue by Market

EBIT by Market

Our Continental Europe segment reported an EBIT loss of £51 million for H1 2015, £6 million higher than last year on a like-for-like basis, primarily due to the impact of competitive pressures on margin.

Our German business reported a loss of £1 million for H1 2015, £7 million lower than last year on a like-for-like basis. Although revenue was at a similar level to last year, gross margin was 150 basis points lower due to weaker demand and a more competitive market. This is consistent with trend that we reported for the latter part of the Summer 2014 season, which continued into the Winter 2014/15 season and contrasts with a strong performance in H1 2014.

Although trading conditions have generally been challenging in other Continental markets, such as France and Russia, which have been impacted by well-publicised economic and geopolitical issues, the benefits of restructuring actions implemented in recent years has resulted in those markets improving their profitability slightly compared to last year.

Northern Europe

Northern Europe reported EBIT of £25 million in H1 2015, in line with last year on a like-for-like basis.

The operating environment in the Nordics remains challenging with lower demand in certain source markets, such as Norway, due to weaker economic conditions and increased competition from low cost carriers. However, the strong market position and high quality product of our Nordic business has resulted in a resilient performance during H1 2015, with passenger volumes maintained at levels consistent with H1 2014, although at slightly weaker margins. 

In addition to the resilient performance of our classic charter package products, our Nordic business continues to expand its dynamic packaging offering, as we seek to exploit this growing segment of the market. Sales of dynamic packages represented 14% of charter package sales in H1 2015, an increase from 10% in H1 2014 

Airlines Germany

Condor, our German airline, recorded an EBIT of £1 million for H1 FY15, which represents a like-for-like improvement of £6 million compared to last year.

This improved performance reflects an expansion of our Winter long haul programme resulting in better utilisation of the aircraft fleet, including the benefits of our newly refurbished and reconfigured cabins, and improved ancillary sales. Our strong performance in the long haul sector has compensated for continuing over-capacity in the short/medium haul market which has put pressure on yields.

Overall, revenues improved by £34 million (6%) on a like-for-like basis, through increased passenger volumes (+247,000). Gross profit increased by £7 million as a strong long haul performance, the continuation of our profit improvement programme and moderate upsides from fuel price reductions more than offset pricing pressure in the short/medium haul market and negative currency effects as the US Dollar strengthened against the Euro. As a consequence, like-for-like gross margin reduced slightly from 27.0% to 26.6%.

Overhead costs were £2 million higher due to increased personnel cost as a consequence of growth in our flying programme, as well as additional depreciation following our cabin refurbishment initiative. Our profit improvement programme delivered further benefits of £16 million, through gross profit and overhead cost efficiencies.

Corporate

Corporate overheads of £17 million for 1H FY15 were £7 million higher than last year, reflecting recruitment implemented in 2014 to add Group-wide roles and skills required to deliver the Group Transformation. In addition, the Corporate result for H1 2014 benefited from exchange gains. 

Summary Cash Flow Statement1

1 The Group uses three non-statutory cash flow measures to manage the business. Operating Cashflow is net cash from operating activities excluding interest income, aircraft related costs and the cash effect of separately disclosed items impacting EBIT. Free Cash flow is cash from operating activities less capital expenditure and interest paid. Free Cash flow also includes the net cash received on disposals. Net Cashflow is the net (decrease)/increase in cash and cash equivalents excluding the net movement in borrowings, finance lease repayments and facility set-up fees.

2 H1'14 underlying EBIT includes a £5m loss from disposed entities in the UK and Continental Europe

3 Operating cash flow is shown before exceptional items of £47m and aircraft related costs of £6m in H1 2015

4 Exceptional items include net cash proceeds of £19 million in H1 2015 (£74 million in H1 2014)

5 Aircraft related costs reflect maintenance cashflow relating to aircraft financed under operating leases which would otherwise be treated as capital expenditure if financed under finance leases

Free cash outflow of £437 million was £45 million higher than last year (H1 2014: £392 million) as improved underlying EBIT was offset by a higher working capital outflow and lower proceeds from the disposal of businesses. Excluding the impact of disposal proceeds, free cash flow in H1 2015 was £10 million better than last year.

Cash Conversion

The Group's measure of Cash Conversion is lower than prior year at 43% with improved trading offset by lower disposal proceeds and the timing of cash exceptionals.

Net Debt

During the last twelve months, Group net debt has reduced by £111 million, from £811 million to £700 million. The principal components of this reduction are as follows:

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

Subsequent to the balance sheet date, the Group signed new enlarged financing facilities totalling £800 million, which expire in May 2019. The new facilities comprise a £500 million Revolving Credit Facility and a £300 million Bonding and Guarantee Facility.

Corporate Credit Rating

During April 2015, S&P revised their previous "positive" outlook on the Group to "stable" following a similar change by Fitch in January 2015.Hedging of Fuel and Foreign Exchange

The Group operates a rolling programme of hedging to smooth fluctuations in the price of fuel and currency, in order to provide greater price certainty when planning for current and future seasons. 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 2015

For Jet Fuel, we are 100% hedged for FY15, 68% hedged for FY16 and 8% for FY17. As Jet Fuel is priced in US Dollars, we also buy forward the requisite amount of US Dollars from a mix of base currencies. For the first half, our fuel costs were £13 million lower than in H1 FY14, reflecting the lower hedge rates in place, partially offset by an increase in flying.

We also hedge our transactional exposure to a range of non-fuel related foreign currency costs, including the US Dollar, the Euro and a number other currencies. Currently 89% of these exposures are hedged for FY15, 48% for FY16 and 0% for FY17. 

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 FY15, there would be a full year negative year-on-year translation impact of approximately £25 million.

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

Like-for-like analysis

To assist in understanding the impact of exchange rate movements and other distorting factors on year on year progression, 'like-for-like' (LFL) adjusted growth from H1 FY14 to H1 FY15 has been analysed as follows:

Year to date like-for-like analysis

Last twelve months like-for-like analysis

PRINCIPAL RISKS & UNCERTAINTIES

The Board is responsible for maintaining the Group's risk management and internal control systems, with a mandate that includes defining risk appetite and monitoring risk exposures to ensure that the nature and extent of risks taken by the Group are aligned with its strategic objectives. This is more fully described in the Risk Management section of the Annual Report & Accounts for the year ended 30 September 2014, a copy of which is available on the Group's corporate website, www.thomascookgroup.com.

The principal risks and uncertainties are listed below:

· Failure to turn around our UK business will have a significant impact on the success of the overall Thomas Cook Transformation and may be viewed negatively by our Shareholders, impacting our share price

· Failure to transform Thomas Cook into a digital business may have an impact on our market share, as more and more customers use the web to research and purchase their holidays

· Our Transformation initiatives fail to deliver our strategic and operational targets

· Failure to expand our products and services may have an adverse impact on customer demand

· 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

· Our IT operating model fails to support the business through the Transformation and our business as usual activities

· Failure to build an accurate understanding of the customer means that we are unable to adequately tailor and target customer demand leading to reduced sales

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

· Cash generation does not enable debt repayment using the most commercially favourable terms

· A major health and safety incident impacting our customers and colleagues

· Socio/political uncertainties in particular the increasing incidence of political and terrorist activity in the Middle East region impacting our key markets, as well as marco-economic conditions and environmental factors reduce the demand for travel related products

· Management information required for the Company to deliver its strategic targets and objectives is not clearly defined and readily available

· Failure to comply with legislative requirements in the legal jurisdictions where Thomas Cook operates

Appendix 1 - Condensed consolidated interim financial statements

Group Income Statement

The notes on pages 28 to 35 form an integral part of the condensed consolidated interim financial information.