Thomas Cook Regulatory News (TCG)

Results for the six months ended 31 March 2014

STRONG PROGRESS UNDERPINS STRATEGY OF SUSTAINED PROFITABLE GROWTH

"Firstly, I'm delighted to report that we have delivered 39% underlying EBIT growth to £274 million and a 120 basis point improvement in underlying gross margin to 22.5% on a last 12 months like for like basis, despite around a quarter of a million fewer customers travelling to Egypt which reduced revenues and profits by £131 million and £14 million respectively. Secondly, concept hotel summer bookings are up 44% and UK 2014/15 winter bookings 11% higher, reflecting strong customer demand for our new products. Thirdly, 2014 Wave 1 cost out and profit improvements are £20 million ahead of plan, resulting in yet another increase in our 2015 Wave 1 target, from £440 million to more than £460 million. Finally, Standard & Poor's recently recognised our transformation progress by raising their outlook to 'positive' from 'stable'.

In respect of our 2018 Wave 2 target of over £400 million, we have so far identified an initial proportion of benefits, which we have fully risk weighted, of £150 million, with substantially more to come. We believe that these, in addition to over £1.2 billion in targeted incremental new product revenue in 2017, will transform our profitability and generate superior returns for our shareholders."

Harriet Green, Group Chief Executive

Key highlights

· Underlying EBIT up 39%, a rise of £77 million to £274 million on a last 12 months like for like basis (LTM ended 31 March 2013: £197 million); for the six months ended 31 March 2014 underlying EBIT improved by £30 million to £(187) million on a like for like basis (six months ended 31 March 3013: £(217) million)

· Wave 1 FY15 cost out and profit improvement target up £20 million to £460 million. Wave 2 FY18 target of over £400 million; initial risk weighted benefits identified so far of £150 million

· Online bookings increased to almost 39% over the last six months. Annual web booked revenues now represent approximately £3 billion; mobile and tablet bookings almost £0.5 billion

· Strong new product demand: Summer concept hotel bookings up 44%, UK Winter 14/15 bookings up 11%. Around a third of Group revenue is from more flexible rather than traditionally packaged products

· Summer 2014 booking performance is developing well with solid volumes in our main markets

Note: Throughout this document the abbreviation "LTM" refers to the last 12 months to 31 March. The term 'underlying' refers to trading results after adjusting results on a statutory basis for separately disclosed items that are significant in understanding the on-going results of the Group. Separately disclosed items are included on the face of the income statement and are detailed on p19. The term 'like-for-like' reflects the underlying results after removing identifiable non-recurring items in the prior year, including the timing of Easter, and adjusting for exchange rate movements. Like-for-like adjustments are shown on pages 15 to 19.

Full details of our financial performance are set out on pages 14 - 28. On 13 March 2013 we published specific and measurable targets and key performance indicators ("KPIs"), committing to report our progress towards achieving these at regular intervals, which at H1 2014 is as follows:

Further new product growth

· Incremental new product revenue rose by a further £46 million to £140 million on a cumulative basis to 31 March 2014 (FY13: £94 million), on track to achieving our FY14 target of more than £300 million

· Summer bookings at our Concept hotels have increased by 44% to 460,211 compared with the same period last year

· Summer bookings at our Partnership hotels have increased by 11% to 593,925 compared with the same period last year

· Our concept and partnership hotel portfolio continues to grow rapidly. Since the end of FY13, we have secured a further 166 new exclusive hotels, taking the total to 475, an increase of 54%, well on track to achieve our targeted 640 by FY15 and 800 by FY17. The pipeline remains strong with over 300 potential hotels identified for conversion against a requirement of 165 to achieve the FY15 target. Capitalising on this strong growth momentum, we are currently considering a number of strategic and financing options that could enable us to accelerate their development

· Our mix of business continues to extend beyond pure packaged to more flexible products that provide customers with greater optionality when choosing destinations, durations and departure dates for their holidays as well as access to an attractive range of ancillary offers. The proportion of business coming from these more flexible products now represents approximately £3 billion, equating to around a third of total Group revenue

Web penetration

· Significant progress is being made to transform Thomas Cook from a detached and disjointed web legacy to a fully integrated digital business. This includes consolidating 304 websites to around four per segment and reducing 17 web platforms to one

· We have now achieved approximately £3 billion in web generated annual revenues, supported by online bookings over the last six months, which have risen to 38.8%, as we continue to make encouraging progress towards our FY14 target of over 40%. Over the last 12 months and on the basis that bookings are only recognised once the customer departs on holiday, the online penetration rate is 36.4%. Backed by our encouraging progress over the last six months and supported by our recently enhanced customer website, we expect to generate further momentum in the second half of this year as we move towards a "tipping point" when we expect web penetration to accelerate

· Tour Operator bookings via tablets and mobile devices are up 72% compared with the same time last year, desktop conversion rates are up 17% and UK branded traffic on thomascook.com has increased by double digit percentage points since the launch of marketing campaigns in June 2013

· Our web penetration in mobile and tablet is especially promising, with mobile and tablet bookings delivering a run rate of almost £0.5 billion in annual revenue

· Further enhancing our growing team of digital talent, we are pleased to announce the appointment of Jo Hickson, Kathryn Parsons and Nicola Millard to our industry leading Digital Advisory Board. Jo Hickson is Group Head of Innovation at Home Retail Group plc, Kathryn Parsons is co-founder and co-CEO of the business, De-coded, which has been nominated as one of the top 5 most innovative businesses in the UK, and Nicola Millard is a senior member of BT Global Services where she specialises in analysing future trends for customers and organisations

· Of our 40 person senior digital team, over half are new hires, many joining from leading digital companies such as Expedia, ebay, booking.com, Orange and lastminute.com

· We are launching a new fully responsive web site with a substantially improved user interface. Initially introducing it in the UK, we plan to roll this out to other markets over the coming months

· We won the Chartered Institute of Marketing (CIM) award for Excellence in Digital Marketing and our new "Holidays to go! (@TCOffers)" was named one of the top social media campaigns for March 2014 by Econsultancy. In addition, our Swedish brand, Ving, recently won "The Service Award" for the best service in the holiday travel business

Continuing cost out and profit improvements

· In the six months to 31 March 2014, we delivered a further £83 million of Wave 1 cost out and profit improvement benefits, taking the cumulative total to £277 million, enabling us to absorb trading challenges such as the impact of the market disruption in Egypt

· Risk weighting adjustments to maturing initiatives whose realisable benefits are expected to be greater than those we had originally assumed have led our FY14 and FY15 cumulative Wave 1 targets to increase to £360 million and £460 million respectively, representing a further £20 million of benefits that have been identified in FY14 at minimal extra cost

· Through The Thomas Cook Business System we continue to identify significant opportunities to further professionalise the Group around our customers' needs, developing products, digitising the business and consolidating diffuse operations, overlaid by relentless performance management

· In the context of our FY18 Wave 2 target of over £400 million, we have so far identified an initial proportion of benefits, which we have fully risk weighted, of £150 million, with substantially more to come

· The estimated incremental one-off costs to deliver the target of more than £400 million in annual benefits by FY18 are cash costs of £145 million. 

· Identified initiatives include significant enhancements to our hotel and yield management systems, optimised channels and contact centres and increased digitisation, all enabled by a leaner and more focused functional support structure

· These benefits are anticipated not only to support further improvements in EBIT but also enable continuing investment in new product development that will ensure sustainable profitable growth over the long term

Sales growth

· The £131 million revenue reduction due to market disruption in Egypt more than offset sales growth elsewhere in the Group and resulted in sales falling by 0.7% on an LTM and like for like basis at H1 2014, a decrease of £60 million to £9,101 million (LTM ended 31 March 2013: £9,161 million). For the same reason, revenue for the six months ended 31 March 2014 fell by £213 million to £3,011 million (six months ended 31 March 2013: £3,224 million). Excluding this, year on year sales growth was up 0.8% on an LTM basis. While the impact of Egypt makes the achievement of our FY14 milestone more challenging, we remain confident that, supported by our encouraging new product momentum, we will achieve our sales growth target of more than 3.5% in FY15

Underlying gross margin improvement

· Underlying gross margin on an LTM and like for like basis improved by 120 basis points to 22.5% (LTM ended 31 March 2013: 21.3%), reflecting yield management enhancement as part of the continuing operating improvements under The Thomas Cook Business System. Underlying gross margin for the six months ended 31 March 2014 increased by 150 basis points to 21.7% (six months ended 31 March 2013: 20.2%)

UK EBIT margin improvement

· Underlying UK EBIT margin on an LTM like for like basis improved by 150 basis points to 2.1% (LTM ended 31 March 2013: 0.6%). This was achieved despite the adverse impact of Egypt and reflects the successful delivery of our cost out and profit improvements, which have compensated for its weaker gross margin in H1 2014. We remain confident that our transformational actions, including the acceleration of Wave 1 cost out and profit improvement benefits in FY14, will enable us to achieve the UK underlying EBIT margin target of more than 3.5% by FY14 and more than 5% by FY15

Cash conversion

· The cash conversion ratio on an LTM basis of 41% (LTM ended 31 March 2013: 61%) is better than the guidance of 35% provided at our Q1 2014 Interim Management Statement. Cash conversion has been impacted by changes to supplier payment terms and the incidence of aircraft maintenance events. The short term impact of these items is expected to reverse with a positive impact during the final quarter of this financial year

· We therefore remain on track to achieve our cash conversion targets of more than 55% in FY14 and of more than 70% in FY15

Disposals target completed ahead of plan

· £125 million of gross disposal proceeds completed (£119 million in the six months ended 31 March 2014), achieving our £100 million to £150 million FY15 target eighteen months early. Net consideration amounted to £107 million (£106 million in H1 14), after reflecting completion adjustments and transaction costs

· The FY13 revenue and EBIT contribution of those businesses disposed of at the beginning of 2014, which consequently will not make a full contribution to FY14, were £271 million and £13 million respectively

Outlook

· Our Summer 2014 booking performance is developing well with solid volumes in our main markets and cost out measures are offsetting some Summer season pricing softness in the UK

· Going forward, we expect the momentum that we are generating in new product development to have an increasingly positive impact on the Group's financial results. In the UK, for example, early Winter 2014/2015 bookings are over 11% higher and average selling prices are up 2%, reflecting the benefits of our enhanced product range including a significantly wider choice of Winter Sun destinations

· Since setting out on the transformation of Thomas Cook in the latter half of 2012, we have achieved significant results very quickly. We have turned around the business, announced a strategy for sustainable profitable growth, set out clear targets and KPIs, strengthened the balance sheet and delivered on everything we said we would do, plus promising more

· Directed through the Thomas Cook Business System, developing products that delight our customers, digitising the Group, consolidating diffuse operations and implementing a lean culture of efficiency, all designed with our customer at its heart, we look forward setting new parameters for profitability and generating superior shareholder returns

· Continuing delivery remains an overriding objective. So too, is our relentless realisation of further value within the business. Highly encouraged by the results of our new product development, such as the 11% rise in UK bookings for our new 14/15 Winter Sun vacations and the strong exclusive hotel pipeline which we are looking to accelerate, we are confident of delivering further momentum

Enquiries

Upcoming events

Q3 2014 Interim Management Statement will be announced on Thursday 31 July 2014

FY14 results will be announced on Wednesday 26 November 2014

Presentation to equity analysts

A presentation will be held for equity analysts by invitation today at 10.00 a.m. (BST), at FTI Consulting, 9th floor, North Building, 200 Aldersgate, London EC1A 4HD

A webcast of the presentation is available via the following link and dial in:

http://webcasts.thomascookgroup.com/thomascook001/default.asp

GROUP CHIEF EXECUTIVE'S REVIEW

These results mark a significant milestone in the successful delivery of our strategy for sustainable profitable growth, the progress on which Standard & Poor's recently recognised by raising their outlook to "positive" from "stable".

Firstly, despite around a quarter of a million fewer customers travelling to Egypt, which reduced revenues and profits by £131 million and £14 million respectively, Thomas Cook still delivered 39% like for like EBIT growth over the last 12 months ("LTM"). This demonstrates not only the benefits of the Group's increased financial strength that enables it to withstand such external events, but also, importantly, of its gathering earnings momentum.

Secondly, half way through our clear three year performance targets and KPIs, it is encouraging to see such strong progress. This is most notable in the critical area of cost out and profit improvement which has substantially over delivered. In just fourteen months since the target was presented at our strategy presentation, the FY15 target has almost doubled from the original target given in November 2012 to £460 million now.

Thirdly, looking further forward, we can deliver even more. In particular, we see significant opportunities as we increasingly professionalise the Group around our customers' needs, developing products, digitising the business and consolidating diffuse operations, all through relentless performance management. In the context of our FY18 ambition to deliver further cost out and profit improvements of a similar magnitude to Wave 1, I am pleased to announce that we have already identified internally risk weighted benefits of £150 million for Wave 2, with substantially more to come.

Further financial improvement

The further financial improvements continue to reflect the ongoing benefits of our implementation of The Thomas Cook Business System, increasingly professionalising the Group in the sustained interests of our customers, our employees and our owners.

The 39% increase in like for like LTM EBIT from £197 million to £274 million and the net EBIT margin improvement on the same basis of 90 basis points, from 2.1% to 3.0%, were primarily driven by cost out and profit improvements and initial contributions from new product developments that more than offset the reduced customer demand for holidays to Egypt. Full details of our financial results are set out from page 14.

Targets and KPIs

Delivery of our targets and key performance indicators ("KPIs") remains our top priority. As you can see from the following table, the clear targets and KPIs that we set in March 2013 remain consistent as does, based on our strong progress to date, our commitment to deliver them. What has changed is the quantum of some of the targets, specifically FY15 new product revenue, cost out and profit improvement and cash conversion, all of which have been increased since then. At our 2013 full year results announcement we increased our FY15 new product revenue target from £500 million to more than £700 million, our FY15 cost out and profit improvement target from £400 million to more than £440 million and FY15 cash conversion from 60% to more than 70%. Today at our 2014 half year results announcement, just six months later, I am delighted to announce yet another increase; this time taking our FY15 cost out and profit improvement target up from £440 million to more than £460 million.

These targets and KPIs are not just a set of disciplined metrics by which to measure the near term value of the transformation, they are also the embodiment of our approach to delivering sustained business excellence, encapsulated by The Thomas Cook Business System and further manifested by our longer term new product revenue targets and the new Wave 2 of cost out and profit improvement measures. Embedded within our employees' performance criteria, integrated into our financial reporting processes and instilled through a lean business culture, we look forward to delivering on these and more.

New product revenue

At our full year results announcement six months ago, we not only raised our target for incremental new product revenue growth by FY15 but also said that we expected this to increase to more than £1.2 billion by FY17, reflecting our encouraging new product development. I am pleased to report that we have made further rapid progress towards these goals.

At our half year, incremental new product revenue had risen by a further £46 million to £140 million, on track to achieve our targets of more than £300 million by FY14, £700 million by FY15 and £1.2 billion by FY17.

Customer purchase of new products is proving particularly promising. Summer bookings for our exclusive own brand Concept hotels are up an impressive 44% to 460,211 compared with the same period last year. Summer bookings at our Partnership hotels are also developing well, up 11% to 593,925 compared with the same period last year.

We have ambitious growth plans in place to welcome more customers to our exclusive, quality assured, higher margin hotels. We are targeting 800 concept and partnership hotels by FY17 and currently have 475 open, adding 166 in just the first six months of this year. Our FY15 target is for 640 hotels, which is double the number we had at FY13. With as many as 309 meeting our exacting requirements already in the pipeline compared with the 165 we need to meet our goal, we are confident of delivery. Capitalising on this strong growth momentum, we are currently considering a number of strategic and financing options that could enable us to accelerate their development.

Our relentless drive to enrich the product range doesn't stop there. At the launch of our strategy for sustained profitable growth fourteen months ago, we identified in one of the largest traveller surveys ever undertaken in our industry that 77% of our loyal Sun & Beach customers booked their City Breaks elsewhere, given our lack of product in this area. Rapidly responding to this opportunity, we immediately rolled out an extensive range of attractive City destinations, which we expect will represent an important new and growing source of incremental product revenue.

Winter Sun is another area of potential growth for Thomas Cook. The expansion of exclusive Winter Sun hotels continues apace, with 122 on offer currently and a further 50 in the pipeline for the coming Winter season, all in attractive locations such as Cape Verde, Barbados and Jamaica.

We are also growing the proportion of business coming from our more flexible products, rather than just the traditional packaged holidays. Broadening and adapting our product mix have been key priorities, and I am pleased to report that these more flexible products now represent approximately £3 billion in annual Group revenues, almost a third of our total business. Growing numbers of customers are seeking increased optionality in their choice of destination, duration and departure date, while also enjoying the assured protection and ease of booking provided by a trusted provider like Thomas Cook. Our offers in this area allow us to appeal to a broader pool of customers at a lower production cost, reducing our reliance on contracted capacity. We expect this development to continue, contributing to incremental new product revenue as well as representing a further facet to our strategy for sustained profitable growth.

Web penetration

Significant progress continues to be made transforming the Group from a detached and disjointed web legacy to a fully integrated digital business; delivering our web target in the context an overall IT transformation of Thomas Cook. This includes consolidating a dysfunctional collection of 304 websites to around four focused sites per segment, reducing 17 web platforms to one, reducing our past over reliance on external contractors and consolidating IT locations from eight to just four.

We have now achieved approximately £3 billion in web generated annual revenues supported by online bookings over the last six months, which have encouragingly risen to 38.8%, as we continue to make encouraging progress towards our FY14 target of over 40%. Over the last 12 months and on the basis that bookings are only recognised once the customer departs on holiday, the online penetration rate is 36.4%. Backed by our encouraging progress over the last six months, we expect to generate further momentum in the second half of this year as we move towards a "tipping point" when we expect web penetration to accelerate. This progress is supported by the recent launch of a new dynamic web site in the UK with a substantially improved user interface. We plan to roll this out to other markets over the coming months.

Tour Operator bookings via tablets and mobile devices are up 72% compared with the same time last year, desktop conversion rates are up 17% and UK branded traffic on thomascook.com has increased by double digit percentage points since the launch of marketing campaigns in June 2013.

Our web penetration in mobile and tablet is especially promising. Not only are we attracting a higher proportion of visitors using these devices to our site than a leading digital travel site, we are already seeing mobile and tablet bookings delivering a run rate of almost £0.5 billion in annual revenue.

To build on these achievements, we continue to invest in digital talent. In particular, we are pleased to announce the appointment of Jo Hickson, Kathryn Parsons and Nicola Millard to our industry leading Digital Advisory Board. Jo is Group Head of Innovation at Home Retail Group plc, Kathryn is co-founder and co-CEO of the business, De-coded, which has been nominated as one of the top 5 most innovative businesses in the UK and Nicola is a senior member of BT Global Services where she specialises in analysing future trends for customers and organisations. Of our 40 person senior digital team, over half are new hires, many joining from leading digital companies such as Expedia, ebay, booking.com, Orange and lastminute.com.

We are launching a new fully responsive web site with a substantially improved user interface. Initially introducing in the UK, we plan to roll this out to other markets over the coming months. In addition, we have launched our new FlyTC site, which has delivered excellent tablet conversion in its first month of launch. It was the first fully responsive major airline site launched in the UK, where its screen size automatically adjusts to fit mobile devices and tablets.

Thomas Cook continues to receive strong industry recognition for its achievements. Facebook is using our social media initiative in Germany as a case study in best practice in social media and our new "Holidays to go! (@TCOffers)" was named one of the top social media campaigns for March 2014 by Econsultancy. We won the Chartered Institute of Marketing (CIM) award for Excellence in Digital Marketing and our Swedish brand, Ving, recently won "The Service Award" for the best service in the holiday travel business.

Cost out and profit improvement

Concurrent with the focus on new product revenue and digital transformation is the continuing focus on cost out and profit improvement.

Wave 1

Wave 1 continues to deliver ahead of plan. In the six months to 31 March 2014, we delivered a further £83 million of Wave 1 cost out and profit improvement benefits, taking the cumulative total to £277 million, enabling us to absorb trading challenges such as the impact of the market disruption in Egypt.

Risk weighting adjustments to maturing initiatives whose realisable benefits are expected to be greater than those we had originally assumed have led our FY14 and FY15 cumulative Wave 1 targets to increase to £360 and £460 million respectively, representing a further £20 million of benefits that have been identified in FY14 at minimal extra cost.

Wave 2

At our full year results announced at the end of November 2013, we introduced plans for a second wave of cost out and profit improvement that will involve more structural changes than in Wave 1. We continue to expect that Wave 2 will deliver benefits of a similar scale to Wave 1, in other words over £400 million, and that it will be achieved by FY18.

Emanating from a comprehensive implementation of The Thomas Cook Business System, with our customer at the heart of everything we do, it is focused on delivering margin improvement and cost out. We plan to achieve this primarily by improving the way we manage yields through one Group inventory, digitising the business, consolidating diffuse contact centres, and transforming functional effectiveness through shared services.

The opportunity is significant. For example, the move to one central inventory will enable us to optimise margin at every level , selling each product in the best market for the best price at the best time. Fully automated and supported by our new IT architecture, it will allow us to deliver product to market significantly more quickly than before. Benefiting from improved customer knowledge, we also expect to be able to test price elasticities and booking behaviours effectively and serve our customers better.

We also need to improve the way we support our customers. We currently have a diffuse collection of 32 call centres spread across 18 European countries, as well as a further operation in Thailand. The benefits from a more streamlined operational approach in terms of better service expertise and consistency, improved staff training and management, scale economies and greater use of the web for less complex questions, are clear.

Similarly, there is an opportunity to realise value through the transformation of our organisation's functional support system; moving from a vertical business service structure to a Group wide shared service structure, including the reduction of management layers and increases in the spans of control. This is supported by a comprehensive "lean" programme, a continuous improvement process, that will allow us to deliver service in the most economically efficient way.

Based on our analysis so far, we have identified an initial proportion of benefits, which we have fully risk weighted, of £150 million, with substantially more to come. The estimated incremental one-off costs to deliver the target of more than £400 million in annual benefits by FY18 are cash costs of £145 million.

Of the currently identified risk weighted benefits of £150 million, approximately 60% are expected to arise from profit improvement initiatives and approximately 40% from cost out initiatives. The Wave 2 benefits are anticipated not only to support further improvements in EBIT but also enable continuing investment in new product development that will ensure sustainable profitable growth over the long term.

The capital expenditure costs to achieve both Wave 1 and Wave 2 are included within our previous guidance for total Group capital expenditure of approximately £180 million for FY14 and approximately £200 million for FY15.

Sales growth

The £131 million revenue reduction due to market disruption in Egypt more than offset sales growth elsewhere in the Group and resulted in compound annual sales falling by 0.7% on an LTM and like for like basis at H1 2014, a decrease of £60 million to £9,101 million (LTM ended 31 March 2013: £9,161 million). Excluding this, year on year sales growth was up 0.8% on an LTM basis. While the impact of Egypt makes the achievement of our FY14 milestone more challenging, we remain confident that, supported by our encouraging new product momentum, we will achieve our sales growth target of more than 3.5% in FY15.

Underlying gross margin improvement

Progress continues to be made improving the Group's profitability. Underlying gross margin on an LTM like for like basis improved by 120 basis points to 22.5% compared with 21.3% in the 12 months to 31 March 2013, reflecting further yield management enhancement as part of the operating improvements under The Thomas Cook Business System.

UK EBIT margin improvement

The UK's underlying EBIT margin on an LTM like for like basis also improved, increasing by 150 basis points to 2.1% compared with 0.6% in the 12 months to 31 March 2013. This was achieved despite the adverse impact of Egypt and reflects the successful delivery of our cost out and profit improvements, which have compensated for its weaker gross margin in H1 2014. We remain confident that our transformational actions, including the acceleration of Wave 1 cost out and profit improvement benefits in FY14, will enable us to achieve the UK underlying EBIT margin target of more than 3.5% by FY14 and more than 5% by FY15.

Cash conversion

The cash conversion ratio on an LTM basis of 41% (LTM ended 31 March 2013: 61%) is better than the guidance of 35% provided at our Q1 2014 Interim Management Statement. Cash conversion has been impacted by changes to supplier payment terms and the incidence of aircraft maintenance events. The short term impact of these items will reverse with a positive impact during the final quarter of this financial year. We therefore remain on track to achieve our cash conversion targets of more than 55% in FY14 and of more than 70% in FY15.

Disposals

As part of our ongoing successful transformation of Thomas Cook, it is particularly pleasing to report the completion of £125 million of gross disposal proceeds and thereby achieving our £100 million to £150 million FY15 disposal target eighteen months early. Net consideration amounted to £107 million, after reflecting completion adjustments and transaction costs.

Current trading

Winter 2013/2014

The Winter season is now complete. As reported in our Pre-Close Statement on 27 March 2014, Winter bookings were adversely impacted by social unrest in Egypt. Adjusting for the impact of market disruption in Egypt, bookings in all of our source markets were higher than, or in line with, last year, except for Continental Europe due to strategic reductions in capacity in France and Russia as we continue to transform those businesses in order to return them to profitability by FY15. 

(1) Based on cumulative bookings as at 3 May 2014

(2) Stated in local currency at constant intra-segment exchange rates

Summer 2014

The Summer season is currently approximately 60% sold, in line with last year. Trading performance across the group is in line with expectations against a strong prior year comparative.

Bookings for our UK business are 1% lower than last year in line with a similar reduction in capacity commitments. Summer capacity is 66% sold, the same as this time last year. Headline average selling prices are 3% lower than last year due mainly to product mix and a higher proportion of shorter duration holidays reflecting customer demand. Consistent with our strategy, we expect selling prices to improve as we sell a higher proportion of exclusive hotel product to UK customers. However, although bookings for these products have shown strong growth for the Summer 2014 season, they do not yet represent a significant part of the UK business.

Continental Europe continues to trade strongly with prices and bookings both 1% higher than last year, with volume growth being mainly driven by our German business where bookings are 4% higher than this time last year. Capacity commitments are 55% sold, in line with last year, due mainly to improved performances by our German and French businesses.

Bookings in Northern Europe are 1% higher than last year with the season 60% sold, slightly lower than at this time last year. Average selling price is 2% lower than last year, due to a lower proportion of peak season holidays being sold at this time of the year as part our strategy of promoting lower demand periods early in the booking cycle. As set out in our Pre-Close Statement, while average selling prices are 2% lower than last year, overall margins are expected to be maintained.

Airlines Germany bookings are 3% higher than last year with the seat load factor in line with the same time last year. Overall average selling prices are 3% lower than last year due to an increase in market capacity to short and medium haul destinations. However, long haul prices are 4% higher reflecting the introduction of an improved business class proposition. Despite lower prices, operating margins are expected to increase year-on-year due to improved operating efficiencies.  

(1) Based on cumulative bookings as at 3 May 2014

(2) Stated in local currency at constant intra-segment exchange rates

Outlook

Our Summer 2014 booking performance is developing well with solid volumes in our main markets. Although our UK business has experienced some pricing softness for the Summer season, profit performance has been improved through the successful delivery and acceleration of our Cost Out measures.

Our profitable growth strategy remains on track. The enhancement of our exclusive hotel products and the expansion of growth areas such as Winter Sun and City Breaks underpin our strategy of delivering revenue growth and improved margins over the medium term.

Given the early stage of development and the low season over the Winter period, the benefits of this strategy have not yet been fully reflected in the Group's results for H1 14. However, we are very encouraged by early Winter 14/15 bookings, which are over 11% higher than last year in the UK with an increase in average selling prices of 2%. This represents the first tangible benefits of our enhanced product and Winter Sun strategy.

Since setting out on the transformation of Thomas Cook in the latter half of 2012, we have achieved significant results very quickly. We have turned around the business, announced a strategy for sustainable profitable growth, set out clear targets and KPIs, strengthened the balance sheet and delivered on everything we said we would do, plus promising more.

Continuing delivery remains an overriding objective. So too, is our relentless realisation of further value within the business. Highly encouraged by the results of our new product development, such as the 11% rise in UK bookings for our new 14/15 Winter Sun vacations and the strong exclusive hotel pipeline which we are looking to accelerate, we are confident of delivering further momentum. Directed through the Thomas Cook Business System, developing products that delight our customers, digitising the Group, consolidating diffuse operations and implementing a lean culture of efficiency, all designed with our customer at its heart, we look forward setting new parameters for profitability and generating superior shareholder returns.

FINANCIAL REVIEW

Summary of Results

Throughout this document the term 'underlying' refers to trading results after adjusting statutory results for separately disclosed items that are significant in understanding the on-going results of the Group. Separately disclosed items are detailed on page 19. Within the Financial Review results are considered on an underlying basis unless otherwise stated.

During the six months ended 31 March 2014, the Group divested several businesses as summarised on page 24. The results for those businesses have been reported within our UK & Ireland segment for the pre-disposal period. In accordance with IFRS 5, those businesses have been treated as 'Assets Held for Sale', with unchanged income statement and cash flow disclosure.

Like-for-like analysis

In implementing our Transformation, the Group has undertaken activities that impact upon the comparability of underlying performance such as business divestments and retail store closures in the UK. In addition, the timing of the Easter holiday period has distorted year-on-year comparability as it fell during April in 2014 (H2 14) but during March in 2013 (H1 13).

To assist in understanding of underlying year-on-year performance, the impact of distorting factors has been removed in the 'like-for-like' analysis below:

(1) Adjustment has been made for the timing of Easter which fell during April in 2014 (H2 14) but during March in 2013 (H1 13) with an estimated impact of £40 million on revenues and £15 million on EBIT; the impact is double for the Last Twelve Months analysis as the twelve months to 31 March 2014 included no Easter holiday period whereas the twelve months to 31 March 2013 included two.

(2) Accounting changes relates to the treatment aircraft maintenance which in prior years was charged to the income statement based on flying hours but is now accounted for on a straight line basis; this change has no effect on the full year but impacts the timing in each half of the financial year.

(3) Net impact of provision releases in Northern Europe and Airlines Germany in the year ended 30 September 2012 where the underlying liability for aircraft related and other costs no longer exists.

Overview of Results

The past six months has seen a continued improvement in the financial health of Thomas Cook.

On a statutory basis, revenue fell by £213 million (6.6%) to £3,011 million due mainly to lower demand to Egypt (six months ended 31 March 2013: £3,224 million). Statutory EBIT for the period was a loss of £(283) million, an improvement of £31 million compared to last year (six months ended 31 March 2013: £(314) million).

The following analysis of the results deals with underlying and like-for-like numbers as we believe these better reflect underlying performance.

Group underlying EBIT loss for H1 14 was £187 million, an improvement of £11 million in headline terms compared to last year. On a like for like basis, after adjusting for the timing of Easter and other distorting factors, Group underlying EBIT improved by £30 million (13.8%).

The Group EBIT improvement in H1 14 was mainly due to higher profits in Northern Europe, reduced seasonal losses in Germany and improved performances in France and Russia in line with our strategy of returning both businesses to profitability by FY15. Our UK & Ireland business reported a seasonal loss of £154 million, in line with last year on a like for like basis, as the successful delivery of the first phase of our cost out and profit improvement programme has compensated for lower margins as a result of challenging market conditions and social unrest in Egypt.

On a like for like basis, Group underlying EBIT has increased by £77 million (39.1%) to £274 million for the twelve months ended 31 March 2014, primarily through the successful delivery of our cost out and profit improvement programme, which has enabled us to accelerate the targeted benefits for FY14 and FY15.

Separately disclosed items affecting EBIT were £96 million for the period, £20 million lower than last year, reflecting lower levels of restructuring charges offset by non-cash goodwill adjustments relating to the divestment of UK businesses concluded during H1 14.

Net finance charges at £71 million were only £1 million higher than last year as interest cost savings achieved through better utilisation of cash and flexible funding have offset increased interest relating to the 2020 bond issued in June 2013. 

Net debt at 31 March 2014 was £811 million, a reduction of £404 million compared to the same time last year. After adjusting for the recapitalisation completed in June 2013 and other non-recurring changes, net debt reduced by an underlying amount of £38 million compared to last year despite an increased capital expenditure investments of £20 million. 

During the period, the Group generated £119 million in gross disposal proceeds through the divestment of non-core businesses in the UK as we further streamline operations and focus on a smaller number of brands. After completion adjustments, net consideration in H1 14 totalled £106 million. Divested businesses contributed revenues of £271 million and EBIT of £13 million in FY13 as summarised on page 24.

The improving financial position underpins the delivery of the Group's profitable growth strategy through enhancement of our exclusive hotel products and the expansion of growth areas such as Winter Sun and City Breaks. Our strategy is designed to deliver revenue growth and improved margins over the medium term and, accordingly, the benefits have not yet been reflected in the Group's results for H1 14 given the early stage of development and the low season over the Winter period. However, bookings for our new products are strong for the Summer 2014 season and we expect to report the initial benefits from our profitable growth strategy from the second half of this financial year.

Revenue

Revenue for H1 14 of £3,011 million represents a decrease of £213 million (6.6%) compared to last year. However, year-on-year comparability has been impacted by the disposal of businesses in the UK, the timing of Easter and foreign exchange, which have been adjusted for to arrive at a like for like comparison as follows:

Like for like revenue decreased by £86m (2.8%) primarily as a result of market disruption in Egypt which reduced Group sales by £131 million compared to H1 13. During H1 14 the Group has continued to pursue a strategy of new product expansion and effective yield management to achieve improved andsustainable quality of earnings. This has improved underlying yield by £25 million compared to last year, while volume growth excluding Egypt contributed £20 million.

Gross Margin

Underlying gross margin of 21.7% represents an increase of 100 basis points compared to H1 13. On a like for like basis, H1 14 gross margin improved by 150 basis points, the major drivers of which are outlined below:

The incremental benefits realised in H1 14 from the Group's cost out and profit improvement programme totalled £83 million. Of this, £17m contributed to gross margin improvement, equivalent to a 60 basis points improvement in gross margin, with the remaining £66 million being reflected in reduced operating expenses (see below).

Pricing and yield benefits have been delivered through improved yield management as well as improved capability in dynamic pricing across our businesses which in net terms improved gross margin by 100 basis points after absorbing inflationary pressures.

Operating Expenses

Operating expenses before depreciation for H1 14 have reduced by £32 million (4.1%) from H1 13 as set out below.

On a like for like basis after adjusting for disposals and the impact of exchange rates, total operating expenses were £17 million lower as the benefits of cost out and profit improvement of £66 million were offset by strategic operating investment of £23 million, mainly to support the transformation through increased IT and marketing, increased volume in Airlines Germany and inflationary pressures.

Strategic operating investments in the period comprised the following:

The Group's strategic operating investments for H1 14 totalled £23 million, in line with our previous guidance of £50 million for FY14, including costs associated with:

· IT (£9m):

In order to facilitate the Group's structural transformation it is necessary to establish IT skill bases and infrastructure that facilitate future organisational efficiency and cost reduction through our Wave 2 initiatives. This results in operating investment in the areas of ecommerce development and IT that will be offset by future efficiencies across the Group as relevant transformational activity progresses.

· Marketing (£9m):

Market investment is required to support the Group's development of its web supported omni-channel strategy, especially in the initial period of growth. Further development of web penetration will result in a compensating reduction in traditional offline marketing.

· Other investments (£5m):

During H1 14 we have also invested in certain infrastructure and value-added areas such as Concept Hotels, the in-sourcing of duty free operations in our Airline and key management appointments to drive the transformation of the business.

Underlying EBIT

The Group's underlying EBIT loss for H1 14 was £187 million, an improvement of £11 million in headline terms compared to last year.

On a like for like basis, after adjusting for the timing of Easter and other distorting factors, Group underlying EBIT improved by £30 million (13.8%). Further details by business are provided in the segmental review on pages 25 to 28 below.

The like for like EBIT improvement has been analysed by major component below:

Separately disclosed items

Separately disclosed items represent costs or profits that have been recognised in the period which management believes are not the result of normal operating activity and performance. They are, therefore, disclosed separately to give a more comparable view of the year-on-year underlying trading performance.

The table below summarises separately disclosed items within these categories, the major components of which are set out on page 39 in Appendix 1.

1 The cash column above represents items that impacted cash in the current period or will impact cash in the future.

Net finance costs

Net interest charges before aircraft financing for the six months ended 31 March 2014 totalled £59 million, slightly higher than last year (H1 13: £56 million). Total net interest and finance costs for the period (excluding separately disclosed items) were £71 million (H1 13: £70 million).

On a last twelve months basis net interest and finance costs increased by £15 million mainly as a result of costs arising from the sale and leaseback of aircraft in 2012.

Operating lease charges

Taxation

Income tax is recognised based on our best estimate of the average annual effective income tax rate for each material tax jurisdiction and applied individually to the interim period pre-tax income of that jurisdiction. In previous periods income tax was recognised based on the best estimate of a weighted average annual income tax rate expected for the full financial period. Common to both estimation approaches is the exclusion of the effect of adjustments to tax provisions made in respect of exceptional items, impairment of goodwill and amortisation of business combination intangibles.

The tax rate on pre-exceptional continuing operations for the six months to 31 March 2014 on the revised basis of estimation is -3.3% (tax rate for the six months to 31 March 2013 was 41.9%).

Loss per share

The underlying basic loss per share was (17.8) pence (H1 13: (12.4) pence). The basic loss per share was (25.3) pence (H1 13: (27.9) pence).

Cash Flow Statement

(1) Cash impact of disposals includes client cash disposed with businesses and cash generated by businesses in the period

Free cash outflow for the period was £460 million, £53 million higher than last year, as an increased working capital out flow and higher capital expenditure and aircraft maintenance were partially compensated by improved EBITDA and lower cash exceptional costs.

As set out in our Q1 14 announcement, the increased working capital outflow in H1 14 of £49m mainly reflects the impact of extending supplier payment terms during 2013 which has resulted in a higher proportion of payments for the Summer 2013 season falling in the first half of the current financial. The year on year impact of improving credit terms and other timing effects will normalise during H2 14. We remain on track to deliver working capital improvements totalling £200 million over the period to FY15 in line with previous guidance.

Cash expenditure on aircraft related costs of £35 million mainly reflects the timing of maintenance events on aircraft under operating leases (£24m), which is similar in nature to capital expenditure on aircraft which are on balance sheet, together with pre-delivery payments for new aircraft which will be financed on delivery through contracted sale and leaseback arrangements (£11m).

Reconciliation of Cash Separately Disclosed Items to Cash Flow Statement

Cash Conversion

The Group uses a measure of cash conversion reflecting the amount of cash flow retained by the business and which can be used for investment in capital expenditure, debt repayment or payment of dividends.

Cash conversion calculated on a Last Twelve Months basis was 41% at 31 March 2014, better than the guidance provided in our Q1 FY14 results announcement of 35%. The year on year reduction by 20 percentage points compared to 31 March 2013 is due to the reduced free cash flow as a consequence of the working capital movements explained above and the timing of maintenance events on aircraft on operating leases. We remain on track to achieve our full year target for cash conversion of at least 55% in FY14.

Net Debt

The main components of the movement in Net Debt during the year to 31 March 2014 are as follows:

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

Corporate Credit Ratings

As set out in of Preliminary Announcement for FY13, Standard & Poor's and Fitch both currently assign a "B" credit rating to the Company. During April 2014, Standard & Poor's improved its outlook for the Company's credit from "stable" to "positive", consistent with the outlook currently held by Fitch.

Hedging of Fuel and Foreign Exchange

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

As at 31 March 2014

Exchange Rates

The average and year end exchange rates relevant to the Group were:

Ordinary Shares in Issue

Disposals

During H1 14, the Group completed the disposal of a number of non-core businesses and investments generating gross proceeds of £119 million. These divestments form part of the Group's strategy of focusing on core activities and have contributed towards the realisation of gross sale proceeds of £125 million in twelve months to 31 March 2014, achieving the Group's target 18 months ahead of schedule.

The disposals completed in H1 14 comprise:

Segmental Review

Segmental results are presented on an underlying basis with the relevant adjustments required to present results on a "like-for-like" basis:

Six months ended 31 March 2014

LTM ended 31 March 2014

The adjustments to reflect period on period growth in like for like EBIT, on a segmental basis for the six months ended 31 March 2014 are summarised as:

Cost out and profit improvement

The cost out and profit improvement programme produced the incremental gross margin and operating expense benefits noted below in the six months ended 31 March 2014:

UK & Ireland

Through the transformation process and Wave 1 of the Group's cost out and profit improvement programme, our UK business has been streamlined and repositioned to deliver profitable growth.

As part of that process, certain business have been divested during H1 14 as summarised on page 24. This has resulted in a reduction in revenues for the six months ended 31 March 2014 of c.£67 million, with a £1 million impact on EBIT. Adjusting for divestments and the timing of Easter, UK revenue was £44 million lower than last year due mainly to the impact of market disruption in Egypt and the consequent over-capacity to the Canary Islands.

Gross margin for the six months ended 31 March 2014 of 19.3% is 3.7 percentage points lower than last year on a headline basis. After adjusting for divestments and closed stores, on a like for like basis, gross margin is 2.1% lower compared to H1 13. This is primarily due to weaker trading in the month of October as a result of soft demand in the Summer 13 lates market and challenging market conditions over the Winter 13/14 season.

Market conditions in the Winter season were adversely impacted by disruption in Egypt and consequent over-capacity to the Canary Islands. Our profitable growth strategy is specifically designed to improve the quality and profitability of the Group's product offering over the medium term and the UK business is expected to one of the main beneficiaries of this strategy, which will drive revenue growth and improve margins.

Short term pressure on margins has been compensated by the benefits of the Group's cost reduction programme which has led to a £39 million reduction in operating expenses on a like for like basis. This reflects the actions taken to streamline the business by reducing management layers and improving operational efficiency through headcount reductions.

UK EBIT loss of £154 million is £7 million greater than last year in headline terms but in line with H1 13 on a like for like after adjusting for disposals and the timing of Easter.

Continental Europe

Revenue in H1 14 for the Continental Europe segment is £47 million (3.6%) below last year on a like for like basis, primarily due to strategic reductions in capacity in France and Russia to reduce risk and improve profitability in those businesses.

Gross margin for the six months ended 31 March 2014 of 14.9% is 1.2 percentage points higher than last year due mainly to improved profitability in Germany and Russia due to better yield and management and, in the case of Russia, the discontinuation of unprofitable routes.

Operating expenses were maintained at last year's level though the benefits the restructuring plans implemented in France and Russia together with the closer integration of our Dutch and Belgian businesses as part of our Wave 1 of our cost out and profit improvement programme.

Continental Europe EBIT loss of £51 million is £13 million lower than H1 13 on a like for like basis due mainly to improved performances in Germany (£7 million), France (£3 million) and Russia (£3 million). The improvement in France and Russia reflects our transformation plans in order to return those businesses to profitability in FY15.

Northern Europe

Revenue in our Nordic business is £8 million (0.9)% below last year on a like for like basis, in line with reductions in Winter capacity. Development of the traditional package market has been supplemented by continued expansion of our more flexible product business which reported revenue growth of 8% in H1 14.

Gross margin improved by 3.0 percentage points on a like for like basis to 25.2% due to improved capacity management and focus on profitable growth. Capacity in competitive markets such as Thailand has been reduced in recent years to better align supply with demand and has enabled capacity to be redirected to more profitable routes.

Operating expenses are slightly higher than last year mainly due to investment in strategic growth areas such areas such as concept hotels and the in-sourcing of duty free sales.

H1 14 EBIT has improved to £34 million, growth of £11 million on a like for like basis compared to last year, mainly reflecting improved gross margins.

Airlines Germany

Revenue for Airlines Germany is £15 million (2.7%) higher than last year on a like for like basis due mainly to improved ancillary sales. In addition, Winter capacity increased by 1.1% compared to last year, mainly to long haul destinations.

Gross margin has improved by 2.2 percentage points to 28.6% due to benefit from Wave 1 cost out and profit improvement measures which have reduced the cost base and improved the efficiency of operating structures within the business, together with an increased level of high margin ancillary sales.

Operating expenses are £12 million (7.5%) higher on a like for like basis due to investment in IT systems to support the transformation, higher flight crew costs and the in-sourcing of certain maintenance operations. Increased depreciation accounts for £3 million of the cost increase.

EBIT loss of £6 million for the six months ended 31 March 2014 is £5 million better than last year on a like for like basis due mainly to the benefits of the Group profit improvement programme improvements through enhanced gross margin.

Corporate

Corporate costs of £10 million for H1 14 are £2 million lower than last year as investment in Group roles and processes has been offset by the benefits of cost reduction initiatives.

PRINCIPAL RISKS & UNCERTAINTIES

Management have undertaken a broader review of the principal risks and uncertainties affecting the business activities of the Group. The outcome of this review has not identified new risks for the Group or changes to the Group's control environment which is more fully described throughout the Directors' Report of the Annual Report & Accounts for the year ended 30 September 2013, a copy of which is available on the Group's corporate website, www.thomascookgroup.com.

The principal risks are listed below:

· Threat of a continued downturn in demand due to adverse economic factors

· Recruitment, development or retention of talented people

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

· Geo-political and regulatory

· Commodity, currency and interest rate

· The business Transformation fails to deliver against strategic and operational targets

· Failure to expand products and services that meet customer demand

· Impact of competition upon price and market share

· Failure of IT infrastructure

· Internal control failure

· Shortfall in pension funding

IMPORTANT NOTICE

This announcement is not an offer of securities for sale in the United States or any other jurisdiction. No securities will be offered or sold in the United States absent registration or an exemption from registration, and any public offering of securities to be made in the United States would be made only by means of a prospectus, which would contain detailed information about the Company and its management as well as the Company's financial statements. However, Thomas Cook Group plc has no intention to register any securities for purposes of a public offering in the United States.

Forward-Looking Statements

This announcement contains ''forward-looking statements'' that are based on estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements are all statements other than statements of historical fact or statements in the present tense, and can be identified by words such as "targets", "aims", "aspires", "assumes" ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', "hopes", ''may'', ''would'', ''should'', "could", ''will'', ''plans'', ''predicts'' and ''potential'', as well as the negatives of these terms and other words of similar meaning. The forward-looking statements in this announcement are made based upon the Company's estimates, expectations and beliefs concerning future events affecting the Group and subject to a number of known and unknown risks and uncertainties. Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which it will operate, which may prove not to be accurate. The Company cautions that these forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in these forward-looking statements. Undue reliance should, therefore, not be placed on such forward-looking statements. Any forward-looking statements contained in this announcement apply only as at the date of this announcement and are not intended to give any assurance as to future results. The Company will update this announcement as required by applicable law, including the Prospectus Rules, the Listing Rules, the Disclosure and Transparency Rules, London Stock Exchange and any other applicable law or regulations, but otherwise expressly disclaims any obligation or undertaking to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

The notes on pages 36 to 48 form an integral part of the condensed consolidated interim financial information.

The notes on pages 36 to 48 form an integral part of the condensed consolidated interim financial information.