Thomas Cook Group (TCG) - Half Yearly Report RNS Number : 4725E Thomas Cook Group PLC 31 May 2012 31 May 2012 Thomas Cook Group plc Unaudited results for the six months ended 31 March 2012 Six months ended 31 March Six months ended 31 March 2012 2011 £m (unless otherwise Underlying Statutory Underlying Statutory stated) Revenue 3,516.7 3,516.7 3,431.2 3,431.2 Loss from operations (262.7) (643.1) (165.8) (197.9) Loss before tax (328.3) (712.9) (232.9) (269.4) Loss per share (p) (18.1) (68.2) (19.6) (23.5) Dividend per share (p) - - 3.75 3.75 Net debt 1,389.9 1,389.9 1,094.2 1,094.2  Underlying loss from operations is considered by management to give a fairer view of the year on year comparison of trading performance and is defined as earnings before interest and tax, excluding all separately disclosed items. It also excludes our share of the results of associates and joint venture and net investment income. · The first half has been difficult, but decisive action has been taken to improve the Group's position; o Secured £1.4bn of longer term flexible funding with no fixed repayments until 31 May 2015; o Disposal of HCV hotels and aircraft sale and leaseback, approved by shareholders on 29 May 2012, will add circa £239m of liquidity; o Agreed disposal of Thomas Cook India, on 21 May 2012, for gross proceeds of INR 8,174m (circa £94m) which will reduce debt; · A sound platform has been created from which to restore confidence and rebuild profitability; o UK turnaround programme making good progress and underperforming businesses being addressed; o An improvement in bookings achieved since the earlier part of the year; · Statutory losses of £643m include £300m of non-cash goodwill impairments as announced on 12 May 2012; · New management team appointed to lead the Group forward and rebuild shareholder value. Harriet Green appointed as Group CEO, with effect from 30 July 2012, and Michael Healy appointed as Group CFO, with effect from 1 July 2012. Sam Weihagen, Group Chief Executive, Thomas Cook Group plc said: "This has been a period of significant change for the Group. At the beginning of this month we were delighted to announce the agreement with our banking group of longer term and more flexible funding. This, combined with the sale of Thomas Cook India, the sale and leaseback of some of our aircraft and the disposal of other non-core assets, provides the Group with a much stronger financial platform. From this platform, we can re-energise our business and begin to rebuild profitability, reduce debt and continue to provide a fantastic holiday experience for our customers." Enquiries Thomas Cook Group plc Louise Bryant +44 (0) 20 7557 6413 Kathryn Rhinds +44 (0) 20 7557 6414 Finsbury Faeth Birch +44 (0) 20 7251 3801 Presentation to analysts A presentation will be held for equity analysts and shareholders by invitation today at 9am (BST), at Allen & Overy, One Bishops Square, London E1 6AD. Dial-in details: +44 (0) 20 3003 2666 Password: Thomas Cook Replay number: +44 (0) 20 8196 1998 Access number: 1435167 A live web-cast and a copy of the slides will be available on our website from 8.45am at www.thomascookgroup.com. OPERATING REVIEW The Group has faced a challenging six months. Since December last year, we have put in place a number of measures to improve the Group's stability. At the beginning of this month, we were delighted to announce that we had reached agreement on longer term and more flexible funding with our banking group. The disposals of India and HCV, and the sale and leaseback of aircraft will reduce debt and provide additional liquidity and headroom. These actions place the Group on a much firmer footing and provide a stronger financial platform from which our new management team can rebuild profitability, re-energise our business and continue to provide a fantastic holiday experience for our customers. The results reflect the continued difficult trading conditions being experienced in most of the Group's markets and particularly the impact of MENA on France and the poor trading in the Canadian mainstream business partly a result of overcapacity in that market. The acquisitions of the Co-op and Russia have also added to seasonal losses in the first half. Following a reorganisation, Central Europe now includes our Russian and Eastern Europe businesses. Revenue and underlying results Group revenue for the six months to 31 March 2012 was £3,517m (2011: £3,431m) up 3% (3% on a constant currency basis). Revenue benefited from the inclusion of acquisitions, specifically the Russian and Co-op joint ventures which added £111m, and additional capacity in Airlines Germany and in Northern Europe, but was offset by capacity reductions in other segments and weaker trading in North America and France. The Group seasonal underlying loss from operations was £263m, an increase of £97m on the prior year. This reflects the inclusion of losses from our acquired businesses in Russia (£10m seasonal loss) and the Co-op in the UK (£15m seasonal loss). The difficult trading environment increased losses, in particular the impact of MENA on the French result (£17m increased loss) and the poor trading in the North American business (£25m worse than prior year). Seasonal losses in the UK business are flat year on year excluding the acquired Co-op seasonal losses, whilst within Central Europe, our German business performed well with a 58% reduction in the seasonal operating loss at constant currency. The Group's underlying net interest charge for the period was £67m, an increase of £2m as a result of higher average debt and increased arrangement fees. Separately disclosed items Included within separately disclosed items of £385m is a £300m charge as a result of a review of the carrying value of goodwill in our North America, West Europe and India businesses. Further details are outlined on page 12. Whilst clearly a substantial sum, the exceptional items are largely of a non-cash nature. Cash exceptional costs were £39m (2011: £48m) and largely relate to the reorganisation and restructuring of our UK, North America and West Europe businesses and costs in relation to the Group's financing. Earnings and dividends As a result of the greater underlying operating loss and the separately disclosed items, the Group delivered a statutory loss before tax of £713m compared with £269m for the same period last year. The reported loss after tax was £605m (2011: £201m). The underlying basic loss per share was 18.1p (2011: 19.6p loss per share) and the basic loss per share was 68.2p (2011: 23.5p). As previously, announced the Group will not pay any further dividend this year. Cash flow and balance sheet The free cash outflow for the period was £522m, an increase of £267m on the comparable period last year. This was driven by the £97m higher seasonal operating loss and a £215m increase in working capital outflow. The Group's working capital profile has changed this year, largely as a result of capacity reductions and we would expect much of the first half working capital variance to reverse by the year end. The resulting net debt at 31 March 2012 was £1,390m (2011: £1,094m) which also reflects the £87m higher opening net debt position. Reducing debt and increasing liquidity remains a key objective for the Group and the agreement of longer term, more flexible banking arrangements and the recently announced asset disposals are a major step forward in achieving this objective. Strategic Review As previously announced on 5 May 2012, the Board has completed its strategic review of the Group, the primary purpose of which is to provide a stable platform for recovery and consider further actions to reduce debt. The outcome of the strategic review is a stabilisation plan which brings together a range of existing actions and new initiatives: · Continuing to drive the turnaround of our UK business; · Build on the solid performance in our Northern Europe and German businesses; · Address our under-performing businesses, particularly in North America, France and Russia; · Reducing debt and improving the resilience of our financing and capital structure through asset disposals, the sale and leaseback of aircraft and minimising our financial commitments; · Stabilising our capital structure through the agreement of longer dated more flexible facilities. Significant progress has been made since the beginning of the year and an update on the key highlights is outlined below: Turnaround of our UK business Implementation of the UK turnaround plan is well underway. Good progress across the initiatives has resulted in increased confidence in the scale of the benefits. We now expect over three years to deliver a fully annualised improvement in profitability of £140m (up from £110m as previously announced), for a total estimated cost of circa £70m (up from £60m previously). Although in the current financial year we expect to deliver benefits of £60m, these will help to mitigate the difficult trading environment and the weaker consumer sentiment towards the Group which we experienced earlier in the year. As a result of the adverse publicity the Group received in the UK, we suffered a weakening in brand sentiment. However, looking forward, we believe we are taking the right actions to stabilise the business and provide a more competitive cost base, which with a steady improvement in brand sentiment will better position the business for future growth. The annual improvement in profitability and the outlay in costs are anticipated to be phased as follows: £m FY 12 FY 13 FY 14 Annualised run rate Cumulative improvements 60 120 130 140 Costs to achieve 40 20 10 The initial focus of the UK turnaround plan has been on optimising yield, reducing retail and tour operator discounts, improving the operational efficiency of the organisation and facilitating faster, more focused decision making. The following are the key actions taken to date: 1. Optimise the UK airline (£10m improvement) We reduced the UK fleet by six aircraft during Winter 11/12 as part of right-sizing the UK tour operator programme, particularly in long-haul, to reduce the risk to the business. As previously announced, around 300 employees will have left the business by the end of the financial year. 2. Refocus the product strategy in mainstream package holidays (£15m improvement) Over 500 under-performing hotels have been removed from the Summer 12 programme (around 22% of properties), whilst we have introduced around 150 new properties, focused on differentiation and exclusivity. For Summer 12, customers choosing differentiated product are up 9%, making up 31% of overall passengers for the season to date. Further new properties are being added for Summer 13 as we continue to evaluate our product offering. 3. Improve yield management (£40m improvement, up £5m) A single commercial trading approach across the mainstream business has been implemented with a coordinated discounting approach to ensure that distribution channels are not competing against each other. The improved yield tools are allowing us to better manage fast selling stock and delivering better management information. Our revised discount policy has led to a substantial reduction in discount levels with retail shops now averaging around 3% compared to 5% previously. There remain opportunities to align our product portfolio so that they complement rather than compete against each other. 4. Rationalise Distribution (£30m improvement in the JV, up £5m) The integration within the retail JV continues to make good progress. Nearly 100 stores have closed since October 2011 with a further 15 to be closed or sold during the remainder of the current financial year, resulting in a headcount reduction as previously announced, of around 850 employees. Leverage of Thomas Cook's foreign exchange expertise across the combined retail estate, alongside improved contractual and commercial terms are driving substantial commercial benefits which largely account for the £5m increase in expected benefits. 5. Operational excellence (£45m improvement, up £20m) We are currently implementing the majority of projects identified within the "operational excellence" category. This process has allowed us to identify further opportunities, resulting in an increase in the expected benefits. As we outlined previously, operational excellence is about reducing and eliminating operational inefficiencies driven by a siloed structure and overlapping, manual processes. Since we announced the programme, we have implemented a new IT system to better manage yield on seat-only sales whilst automating processes and focusing on ancillary sales. Paperless ticketing has been launched during Summer 12 and we have reduced brochures by 20% for the current financial year with further efficiencies expected in FY13. We have also announced that we are working with software provider Anite to implement a new reservation platform in the UK to drive improved processes and increase the functionality for our on-line customers. The first phase of this is expected to be implemented in the first half of FY13 for departures in FY14. Building on the solid performances in our Northern Europe and German businesses Our businesses in Northern Europe and Germany have performed well over the last few years, despite difficult market conditions, and provide a stable base for the Group. We believe that there is scope for further improvement through strong leadership and building on market positions, increasing online distribution and differentiated hotel products whilst continuing to focus on cost control. Improving under-performing businesses As we have previously stated, the performance of our businesses in North America, Russia and France are disappointing and we believe that there is substantial scope to improve the results of these businesses. The North American mainstream business had a poor year in 2011 and a very weak Winter 11/12 season. We have taken action to reduce our flying commitments and manage our fixed costs and over-capacity. We have exited our flying arrangements with a third party supplier for the Winter 12/13 season onwards. Going forward we have an agreement with WestJet to provide our flying on a flexible basis, which not only reduces our costs, but also provides our customers with a greater choice of departure airports. Further restructuring is ongoing as the new management reposition the business for the future. Our Russian business, which was acquired on 12 July 2011, has been impacted by MENA as Egypt is an important destination. We have implemented management change and put the business under the Central Europe management team. A comprehensive restructuring programme focused on costs and better capacity management is underway and benefits are already being seen. In 2011 we changed the management team in our French business, which has suffered considerably from the impact of MENA and the weak consumer environment. We are working on plans to improve the performance and are continuing to evaluate our options. Disposals On 11 May the Group announced that it has agreed the sale and leaseback of 17 aircraft with agreements in principle for a further two aircraft. In total we will receive proceeds of USD 294m (circa £183m) for the 19 aircraft. On 29 May 2012 we received shareholder approval for the sale and leaseback of 19 aircraft. The proceeds are to be retained by the Group to provide significant additional liquidity. Following shareholder approval for the sale of HCV hotels, we will complete the disposal of non-core assets expected to reduce net debt by €94m (circa £75m). On 21 May we announced the disposal of Thomas Cook India for gross proceeds of INR 8,174m (circa £94m), the net proceeds of which will be used to reduce net debt. Stabilise our capital structure On the 5 May 2012 we announced a new financing package extending the maturity of the Group's financing until 31 May 2015 with no fixed repayments. Under the agreement the Group retains the proceeds of the sale of HCV hotels and the aircraft sale and leaseback which has increased liquidity and along with revised financial covenants ensure greater financial flexibility. Current trading Summer 12 We have been pleased with the recent booking patterns, particularly given the uncertain economic environment. Year on year variation % Average selling Cumulative Planned capacity price bookings UK - Total - -1 - - Specialist & - +10 - Independent +4 -8 -12 - Mainstream Central Europe +1 +1 Flat West Europe +4 -10 -13 Northern Europe +4 -6 -3 Airlines Germany +5 +4 +7 Note: Figures as at 26/27 May 2012. In Central Europe and West Europe, bookings represent all bookings including cars/overland, however capacity represents airline seat capacity only. Northern Europe summer season is April - September. The statistics reflect the transfer of the East Europe businesses into Central Europe. Overall, UK bookings are only slightly lower than prior year. Mainstream bookings are down 8%, well ahead of capacity reductions of 12% and we have 22% less left to sell compared to prior year. Mainstream average selling price is stable at +4% but would need to strengthen further to fully cover cost inflation. Our independent and specialist businesses continue to perform well, with bookings up 10%, but whilst consumer demand for the Olympics packages remains strong, corporate demand has been much weaker than expected which has impacted margins. In Central Europe, our German business is performing strongly and bookings (+2%) are ahead of planned capacity (flat), with sustained improvement in the last four weeks (+4%). Pricing is up 1% and margins remain stable despite the competition in the market. Trading in West Europe remains challenging, particularly in France. Bookings are ahead of capacity reductions, resulting in less left to sell and in recent weeks have begun to improve as we have seen uplift in bookings to Tunisia. Pricing remains stable at +4%. In Northern Europe, bookings are down 6% after a slow start to the year, but have continued to improve with bookings in the last four weeks up 5% and are trending towards capacity. Pricing is showing an improvement from the Winter season, and is up 4%. Bookings are up 4% in Airlines Germany and continue to improve. Yields are up 5%, partly driven by a higher share of intercontinental routes and the introduction of a fuel surcharge which partly mitigates the increase in fuel prices. Board and management changes Following the successful completion of longer term financing, Paul Hollingworth has decided to step down from the Board and his role as Group CFO at the end of June 2012. Paul will be replaced by Michael Healy, who will become Group CFO and join the Board on 1 July 2012. Michael joined the Group on 14 May 2012 and has been working closely with Paul to ensure an orderly handover. As announced on 24 May 2012, Harriet Green will succeed Sam Weihagen as Group CEO. Harriet will join the Group and the Board on 30 July 2012 at which time Sam Weihagen will step down from the Board. Sam will remain with the Group until 30 September 2012 to ensure an orderly handover. Outlook We continue to expect this year to be challenging given the economic backdrop, difficult trading environment with particularly poor performances in our North American and French businesses. Whilst our booking position for the second half has improved trading will be dependent on how well the Group performs during the important lates market. FINANCIAL REVIEW Financial results and performance review Group Six months ended Six months ended 31 March 2012 31 March 2011 Year on year change £m (unless otherwise stated) Revenue 3,516.7 3,431.2 +85.5 Underlying loss from (262.7) (165.8) -96.9 operations Share of results 1.0 (1.4) +2.4 of associates & joint venture Net investment income/(loss) 0.3 (1.2) +1.5 Finance charges (66.9) (64.5) -2.4 Underlying loss before tax (328.3) (232.9) -95.4 Separately disclosed items (384.6) (36.5) -348.1 Loss before tax (712.9) (269.4) -443.5 Underlying loss per share (p) (18.1) (19.6) +1.5 Basic loss per share (p) (68.2) (23.5) -44.7 Dividend per share (p) - 3.75 -3.75 Free cash flow (522.1) (255.2) -266.9 Net debt 1,389.9 1,094.2 -295.7 Underlying loss from operations is defined as earnings before interest and tax, and has been adjusted to exclude all separately disclosed items. It also excludes our share of the results of associates and joint venture and net investment income. Free cash flow includes cash from operating activities, purchase and proceeds of disposal of tangible and intangible fixed assets and interest paid. Income statement Revenue and underlying profit from operations Group revenue for the period increased by 2.5% to £3,516.7m, (3.1% at constant currency). The increase reflects the impact of acquisitions, particularly Intourist, our Russian business and the Co-op in the UK, in addition to volume growth in the Northern Europe and Airlines Germany segments, partially offset by the impact of capacity reductions in the other segments. The seasonal underlying loss from operations was £262.7m, an increase of £96.9m on the prior year. This result includes £29.4m of first time seasonal losses from operations of the acquired businesses, mainly the Co-operative businesses in the UK and Intourist. In addition, we have seen deteriorating trading in some of our businesses, particularly in France and North America where results are worse by £41.7m. Following the previously announced changes in management structure to transfer our East Europe businesses into the Central Europe segment, we have revised our segmental presentation and restated prior year segmental information to reflect the new structure. The Central Europe segment now includes the businesses in Poland, Hungary, the Czech Republic and Russia. The main drivers of the year on year increase in underlying loss from operations were: £m H1 2011 Group underlying loss from operations (165.8) Trading (11.2) Increased fuel and accommodation costs (71.3) Net impact of acquisitions and disposals (26.9) Cost savings 21.7 Inflation, depreciation, exchange translation and other (9.2) H1 2012 Group underlying loss from operations (262.7) Separately disclosed items Separately disclosed items consist of exceptional operating and finance items, IAS 39 fair value re-measurement, impairment of goodwill and the amortisation of business combination intangibles. These are costs or profits that have arisen in the period which management believes are not the result of normal operating performance. They are therefore disclosed separately to give a more comparable view of the year-on-year underlying trading performance. The table below summarises the separately disclosed items, which have been included in the interim accounts. Further details are provided in note 5 to the financial information in Appendix 1. Six months ended Six months Year on year 31 March 2012 ended 31 March reduction / £m 2011 (increase) Affecting profit from operations Exceptional operating items (67.3) (37.9) (29.4) Gain on pension curtailment - 24.5 (24.5) IAS 39 fair value re-measurement 1.4 (2.2) 3.6 Amortisation of business (14.9) (16.5) 1.6 combination intangibles (80.8) (32.1) (48.7) Impairment of goodwill (299.6) - (299.6) (380.4) (32.1) (348.3) Affecting net finance costs Exceptional finance charges (1.0) - (1.0) IAS 39 fair value re-measurement (3.2) (4.4) 1.2 (4.2) (4.4) 0.2 Total (384.6) (36.5) (348.1) Exceptional operating items Exceptional operating items were £67.3m (2011: £37.9m excluding gain on pension curtailment). The principal elements of this charge were reorganisation and restructuring costs of £37.6m relating to our UK, North American and West Europe businesses (£27.3m, £5.5m and £4.8m, respectively), a revised forecast of the cost to settle a dispute with HM Revenue & Customs over place of business, £11.8m, and professional and other fees of £14.0m incurred in relation to the Group's financing. IAS 39 fair value re-measurement IAS 39 (as amended) requires the time value element of options used for hedging the Group's fuel and foreign currency exposure be written off to the income statement as incurred. As this is purely a timing issue but can give rise to significant, unpredictable gains and losses in the income statement, management has decided to separately disclose the impact in the income statement to assist readers of the accounts in better understanding the underlying business development. For consistency, we also separately disclose the timing effect within net finance charges of marking to market the forward points on our foreign currency hedging. We have therefore separately disclosed a gain of £1.4m in the operating result (2011: loss of £2.2m) and a loss of £3.2m in net finance costs (2011: loss of £4.4m). Impairment of goodwill and amortisation of business combination intangibles As announced on 21 May 2012, we have reached agreement to sell Thomas Cook India. There was a formal process for disposal of this business underway at 31 March 2012 so it has been disclosed as held for sale at that date and recorded at a carrying value no greater than its fair value less costs to sell. This resulted in an impairment of goodwill previously recognised in respect of the business of £96.0m. Poor trading and subsequent reviews undertaken by new management in Canada and France have indicated that the goodwill carried in the North America and West Europe segments may be impaired. As a consequence, we have tested the goodwill in these segments for impairment and have recognised charges of £109.2m in respect of North America and £94.4m in respect of West Europe. During the period we incurred non-cash costs of £14.9m (2011: £16.5m) in relation to the amortisation of business combination intangibles. £9.5m of the amortisation relates to the merger of Thomas Cook and MyTravel and represents the amortisation of brand names, customer relationships and computer software. The remaining £5.4m relates to other acquisitions made post-merger. Income from associates and joint ventures Our share of the results of associates and joint ventures was a profit of £1.0m (2011: loss of £1.4m). This mainly reflects the disposal of a loss making business. Net investment income The net investment income in the period was £0.3m (2010: loss of £1.2m). The prior year result reflected the sale of legacy investments in our German business. Net finance costs Net finance costs (excluding separately disclosed items) for the six month period were £66.9m (2011: £64.5m) up £2.4m mainly as a result of higher average borrowing levels and increased arrangement fees. Tax The tax credit for the period was £107.9m (2011: £68.0m). Excluding the effect of separately disclosed items, changes in tax rates and the derecognition of a deferred tax asset, this represents an effective tax rate of 49% (2011: 28%) on the underlying loss for the period. Deferred tax assets of £33.3m relating to the UK have been derecognised following a revised assessment of the entities in which the forecast taxable profits are expected to arise and deferred tax assets of £11.7m relating to France have been derecognised following the deterioration in trading in that business and review by new management. In each case the derecognition reflects the reduced likelihood of utilising the related taxable losses within an acceptable time period. Loss per share and dividends The underlying basic loss per share was 18.1 pence (2011: 19.6 pence). The basic loss per share was 68.2 pence (2011: 23.5 pence). As previously announced, the Group has decided not to declare any further dividend payments this year. Borrowings and liquidity Six months ended Six months ended Year on year 31 March 2012 31 March 2011 reduction / £m (increase) Net cash outflow from operating (449.1) (142.2) (306.9) activities Capital expenditure (net of (42.3) (86.8) 44.5 disposals) Interest paid (30.7) (26.2) (4.5) Free cash flow (522.1) (255.2) (266.9) Acquisition of businesses 32.8 2.8 30.0 Disposal of businesses 6.9 - 6.9 Dividends paid (33.0) (32.0) (1.0) Other items (net) 0.7 1.8 (1.1) Net cash outflow (514.7) (282.6) (232.1) The seasonal net cash outflow from operating activities has increased by £306.9m to £449.1m. This reflects the increased operating losses for the first six months together with an increased working capital outflow resulting from reduced revenue in advance following capacity reductions and a later booking pattern. The lower capacity will also result in lower payments for accommodation and flying costs and as a result, we would expect to see some claw back in the working capital position by the year end. Net capital expenditure for the period was £42.3m (2011: £86.8m). The reduction of £44.5m reflects reduced expenditure and the benefit of proceeds from the disposal of non-core assets including a surplus office building in the Netherlands and Moranda, a vacant hotel in Mexico. The cash inflow from acquisition of businesses reflects cash acquired, principally with the Co-operative transaction. The interim dividend for 2011 was paid on 7 October 2011. The Group subsequently announced the suspension of dividend payments until the balance sheet has been rebuilt. Net debt at 31 March 2012 was £1,389.9m (2011: £1,094.2m) which comprised £517.7m of cash, £1,835.6m of borrowings and overdrafts and £72.0m of obligations under finance leases. Available cash and headroom under the Group's committed borrowing facilities at 31 March 2012 was £323m. Hedging Summer 12 Winter 12/13 Euro 95% 73% US Dollar 87% 64% Jet Fuel 86% 37% As at 25 May 2012 PRINCIPAL RISKS & UNCERTAINTIES The principal risks and uncertainties affecting the business activities of the Group and mitigating actions being taken by management were set out on pages 28 to 30, and more fully described throughout the Directors' Report, of the Annual Report & Accounts for the year ended 30 September 2011, a copy of which is available on the Group's corporate website, www.thomascookgroup.com. The key Group risks were summarised under the headings of: Operational and strategic risks · downturn in the global economy and in the economies of our source markets leading to a reduction in demand for our products and services; · fall in demand for traditional package tours and competition from internet distributors and low-cost airlines; · failure to implement the UK turnaround plan; · significant damage to the Group's reputation or brands; · environmental concerns; · a major health and safety incident; · loss of, or difficulty in replacing, senior talent; · natural catastrophe including closure of airspace; · disruption to information technology systems or infrastructure, premises or business processes; · performance failure by outsourced partners. Financial risks · liquidity and counterparty credit risks; · extent of borrowings; · commodity risk: fuel, foreign currency, and interest rate risks; · breakdown in internal controls; · tax risk; · pension liabilities. Other risks · security, political or terrorist risks in key tourist destination markets; · legal and regulatory risks, (in particular relating to licences and regulations for airlines, package holidays and consumer protection); · competition law and anti-trust. In the context of the risks arising from a downturn in the global economy, foreign currency risk and political risks in key tourist destination markets, the Group continues to monitor the recent sovereign debt crises in Greece, Spain and other European countries. In the view of the Board, the key risks and uncertainties for the remaining six months of the financial year continue to be those set out in the above section of the Annual Report & Accounts 2011. SEGMENTAL PERFORMANCE REVIEW Segmental performance presented here is based on underlying financial performance before separately disclosed items and the segmental narrative is provided on this underlying basis. UK Six months ended 31 Six months ended 31 Change March 2012 March 2011 Financial (£m unless otherwise stated) Revenue * 993.1 1,022.5 -2.9% Underlying loss from operations (173.6) (158.7) -9.4% ** Underlying operating margin % (17.5)% (15.5)% -12.9% *** Non-financial Mass market risk Passengers † -7.9% Capacity †† -8.0% Average selling price # +0.6% Load factor ††† - Brochure mix ## -5.4% Controlled distribution ‡‡ 82.6% 71.5% +15.5% Internet distribution ‡‡ 35.3% 35.6% -0.8% See Appendix 2 for key. Revenue in our UK segment was down £29.4m at £993.1m, reflecting reduced capacity in our UK mainstream tour operators and airline, partially offset by growth in dynamic packages, particularly through our Flexible Trips business. The Co-op contributed £38.8m of revenue in the first half. The seasonal underlying loss from operations grew by £14.9m to £173.6m due to the additional seasonal losses from the Co-op of £14.9m. Although we achieved benefits from cost savings and efficiencies, these were offset by the impact of lower revenues, fuel price rises and higher accommodation costs. Controlled distribution increased to 82.6% following the merger with the high street travel agency businesses of The Co-operative Group and the Midlands Co-operative. The transaction completed on 4 October 2011 and the additional stores are being integrated with our existing retail network. As previously announced, a rationalisation programme is underway to maximise the efficiency of the combined store portfolio with the main benefit of the merger expected to be seen in the second half of the year Central Europe Restated Change Six months ended 31 six months ended 31 March 2012 March 2011 Financial (£m unless otherwise stated) Revenue * 881.9 774.5 +13.9% Underlying loss from operations (20.8) (17.5) -18.9% ** Underlying operating profit (2.4)% (2.3)% -4.3% margin % *** Non-financial Mass market Passengers † +7.8% Flight inclusive +7.7% Non-flight inclusive +7.9% Average selling price # +3.2% Controlled distribution ‡‡ 23.6% 24.0% -1.7% Internet distribution ‡‡ 7.2% 7.6% -5.3% See Appendix 2 for key. Results for the six months ended 31 March 2011 have been restated to reflect the transfer of the East Europe businesses from the former West & East Europe segment to the Central Europe segment. Our Central Europe segment now includes the East Europe businesses in Poland, Hungary, and the Czech Republic as well as the Russian business, which was acquired in July 2011. Revenue has increased by £16.2m on a like-for-like basis (2.9% at constant currency), driven by increased average selling prices. The impact of the Russian acquisition added a further £72.0m to revenue and the specialist German tour operator, Tour Vital acquired in October 2011 added £19.2m to revenues. The underlying loss from operations increased by £3.3m but this included the initial recognition of seasonal operating losses of £10.4m from the Russian business, partly offset by £0.6m profit from operations within Tour Vital. On a like-for-like basis, the seasonal underlying loss from operations reduced by £6.5m (35.4% at constant currency), reflecting a strong performance from our German operations which also benefitted from improved margins. The Central Europe business, as historically reported (Germany, Austria & Switzerland), including the acquisition of Tour Vital, reported revenue of £786.2m, an increase of 6.1% at constant currency. The seasonal underlying loss from operations was £5.8m, a reduction of £8.9m (58.0% reduction at constant currency) on the prior year. Controlled and internet distribution have remained broadly stable despite the growth in passengers through acquisition. This reflects the increased conversion of customers through our in-house distribution channels. West Europe Restated Change Six months ended six months ended 31 31 March 2012 March 2011 Financial (£m unless otherwise stated) Revenue * 458.0 517.7 -11.5% Underlying loss from operations (65.6) (34.1) -92.4% ** Underlying operating margin % (14.3)% (6.6%) -116.7% *** Non-financial Mass market Passengers † -12.6% Flight inclusive -12.2% Non-flight inclusive -13.2% Average selling price # +2.0% Controlled distribution ‡‡ 55.7% 58.0% -4.0% Internet distribution ‡‡ 25.0% 22.7% +10.1% See Appendix 2 for key. Results for the six months ended 31 March 2011 have been restated to reflect the transfer of the East Europe businesses from the former West & East Europe segment to the Central Europe segment. Revenue in our West Europe segment, which includes our businesses in France, Belgium and The Netherlands, fell by £59.7m (10.6% at constant currency). This reduction reflects the capacity changes implemented as consumer confidence remains weak and the impact of unrest in the MENA region persists, particularly in the French market for which North Africa is an important winter destination. Losses in our French operation increased by £16.9m compared to prior year. Cost reduction programmes have been initiated in all these markets and whilst they are showing benefits in the period, further cost improvements are targeted for the second half of the year. The reduction in controlled distribution of mass market products is a result of the disposal of the retail operation in The Netherlands during the period, which reported an operating loss of £2.5m in the comparable prior year period. This disposal reduces overhead costs by approximately £7.0m for the period. Northern Europe Six months ended 31 Six months ended 31 March 2012 March 2011 Change Financial (£m unless otherwise stated) Revenue * 586.5 539.9 +8.6% Underlying profit from 25.0 34.0 -26.5% operations ** Underlying operating margin % 4.3% 6.3% -31.7% *** Non-financial Mass market risk Passengers † +9.5% Capacity †† +9.9% Average selling price # -4.7% Load factor ††† -0.2% Brochure mix ## -8.3% Controlled distribution ‡‡ 85.9% 84.0% +2.3% Internet distribution ‡‡ 63.1% 58.0% +8.8% See Appendix 2 for key. Revenue in Northern Europe grew to £586.5m reflecting constant currency growth of 9.2% as the business increased capacity to maintain market share in a competitive marketplace. Consumer confidence has declined in these source markets but load factors were maintained albeit at a lower average selling price as we saw a reduction in the proportion of full price brochure sales and a consequent increase in lower margin, late sales. Results were also affected by weaker demand for Thailand following flooding during the winter. Personnel costs rose as a result of increased staff in the airline following the capacity increase and although other costs were well controlled, the underlying profit from operations reduced by £9.0m to £25.0m (down 26.2% at constant currency). Controlled distribution and internet distribution continue to increase, the latter reflecting actions taken to make online booking for our Independent businesses more customer friendly. North America Six months ended 31 Six months ended 31 Change March 2012 March 2011 Financial (£m unless otherwise stated) Revenue * 206.6 241.4 -14.4% Underlying (loss)/profit from (15.5) 9.3 n/a operations ** Underlying operating margin % (7.5)% 3.9% n/a *** Non-financial Mass market risk Passengers † -16.6% Capacity †† -14.7% Average selling price # -3.0% Load factor ††† -2.2% Brochure mix ## +24.1% Controlled distribution ‡‡ 16.5% 12.9% +27.9% Internet distribution ‡‡ 31.6% 31.5% +0.3% See Appendix 2 for key. Note: Internet distribution % includes independent travel bookings. Our North America business has underperformed during the period in the face of difficult market and economic conditions. Revenue reduced by £34.8m to £206.6m (down 14.2% in constant currency), reflecting reduced capacity and lower average selling prices in a very competitive market place. The underlying result from operations reduced by £24.8m. The deterioration in the like-for-like result was principally margin driven through a combination of fuel cost increases and higher accommodation costs. During the period we changed the management of the business and the new management team has reviewed the operational approach and taken action to reduce costs and restructure the operations. The decision was taken in April to change our flying partner in this market in order to achieve a more flexible and less risky flying programme. The business will take smaller seat allocations across a wider number of departure airports rather than the previous operation of dedicated aircraft from a few airports and will increase the frequency of flights on certain key routes and departure days offering the customer greater choice and flexibility. The impact of operating Sears Travel for the full period has increased the proportion of controlled distribution to 16.5%. Airlines Germany Six months ended Six months ended 31 March 2012 31 March 2011 Change Financial (£m unless otherwise stated) Revenue - external * 390.6 335.2 +16.5% Revenue - internal * 115.8 119.8 -3.3% Total revenue * 506.4 455.0 +11.3% Underlying (loss)/profit from (3.0) 12.3 n/a operations ** Underlying operating margin % *** (0.6)% 2.7% n/a Non-financial Sold seats ‡‡‡ Thomas Cook tour operators +1.3% 3rd party tour operators +10.1% External seat only +35.2% Total sold seats +15.3% Sold seats ‡‡‡ Europe (excl. Cities) +17.4% Long haul +10.2% Total sold seats +15.3% Capacity †† +14.2% Yield ### -2.9% Seat load factor ††† +0.6% See Appendix 2 for key. Revenue has increased £55.4m to £390.6m for the period (17.7% at constant currency) following the addition of two long-haul aircraft to the fleet. The underlying seasonal operating result was reduced by £15.3m to a loss from operations of £3.0m. This reflects the reduced margins arising from increased fuel costs which have not been fully passed on to customers. For the summer season we have to been more successful in raising yields to partly mitigate much of the increase in fuel prices. Personnel costs and depreciation have increased as a result of the increased fleet size but this has been largely offset by operating cost efficiencies. Corporate Six months ended 31 Six months ended 31 March 2012 March 2011 Change Financial (£m) Underlying loss from operations (9.2) (11.1) +17.1% ** See Appendix 2 for key. Costs in the Corporate segment have reduced in the period principally as a result of lower IT related and other expenses. Appendix 1 - Condensed consolidated interim financial information Group Income Statement Unaudited Unaudited Six months ended 31 March 2012 Six months ended 31 March 2011 Underlying Separately Total Underlying Separately Totaltal results disclosed results disclosed items* items * (note 5) (note 5) notes £m £m £m £m £m £m Revenue 4 3,516.7 - 3,516.7 3,431.2 - 3,431.2 Cost of providing tourism (2,807.8) 0.7 (2,807.1) (2,714.2) (3.2) (2,717.4) services Gross profit 708.9 0.7 709.6 717.0 (3.2) 713.8 Personnel expenses (542.1) (24.6) (566.7) (491.2) 5.5 (485.7) Depreciation and amortisation (86.2) (0.1) (86.3) (80.3) - (80.3) Net operating expenses (343.3) (37.1) (380.4) (311.3) (19.3) (330.6) (Loss)/profit on disposal of assets 5 - (4.8) (4.8) - 1.4 1.4 Impairment of goodwill and amortisation of business combination intangibles 5 - (314.5) (314.5) - (16.5) (16.5) Loss from 4 (262.7) (380.4) (643.1) (165.8) (32.1) (197.9) operations Share of results of associates and joint venture 1.0 - 1.0 (1.4) - (1.4) Net investment income/(loss) 0.3 - 0.3 (1.2) - (1.2) Finance income 6 24.2 - 24.2 22.8 - 22.8 Finance costs 6 (91.1) (4.2) (95.3) (87.3) (4.4) (91.7) Loss before tax (328.3) (384.6) (712.9) (232.9) (36.5) (269.4) Tax 7 107.9 68.0 Loss for the period (605.0) (201.4) Attributable to: Equity holders (594.3) (200.8) of the parent Non-controlling (10.7) (0.6) interests (605.0) (201.4) Loss per share (pence) Basic and diluted 8 (68.2) (23.5) All revenue and results arose from continuing operations The notes on pages 27 to 43 form an integral part of the condensed consolidated interim financial information. * Separately disclosed items consist of exceptional operating items, IAS 39 fair value re-measurement, impairment of goodwill and amortisation of business combination intangibles. Group Statement of Comprehensive Income Unaudited Unaudited Six months ended Six months ended 31/03/12 31/03/11 notes £m £m Loss for the period (605.0) (201.4) Other comprehensive income and expense Foreign exchange translation (losses)/gains (24.0) 42.0 Actuarial (loss)/gain on defined benefit pension schemes 18 (46.7) 118.7 Tax recognised on actuarial movements 9.4 (32.9) Fair value gains and losses (Losses)/gains deferred for the period (57.8) 74.7 Tax on (losses)/gains deferred for the period 17.0 (20.3) Losses transferred to the income statement 50.2 44.9 Tax on losses transferred to the income statement (14.0) (12.6) Total comprehensive (expense)/income for the period (670.9) 13.1 Attributable to: Equity holders of the parent (660.2) 13.7 Non-controlling interests (10.7) (0.6) Total comprehensive (expense)/income for the period (670.9) 13.1 The notes on pages 27 to 43 form an integral part of the condensed consolidated interim financial information. Group Cash Flow Statement Unaudited Unaudited Six months ended Six months ended 31/03/12 31/03/11 notes £m £m Cash flows from operating activities Cash generated by operations (428.1) (123.2) Income taxes paid (21.0) (19.0) Net cash outflow from operating activities 15 (449.1) (142.2) Investing activities Proceeds on disposal of subsidiaries 6.9 - Proceeds on disposal of property, plant and equipment 27.1 10.3 Purchase of subsidiaries (net of cash acquired) 12 32.8 2.8 Purchase of tangible and financial assets (50.1) (62.5) Purchase of intangible assets (19.3) (34.6) Sale of non-current financial assets 0.4 2.3 Additional loan investment - (0.6) Proceeds on disposal of short-term securities 0.3 0.1 Net cash used in investing activities (1.9) (82.2) Financing activities Interest paid (30.7) (26.2) Dividends paid 9 (32.7) (32.0) Dividends paid to non-controlling interests (0.3) - Draw down of borrowings 817.4 251.3 Repayment of borrowings (122.8) (22.2) Payment of facility set-up fees (14.9) - Repayment of finance lease obligations (6.3) (8.1) Net cash from financing activities 609.7 162.8 Net increase/(decrease) in cash and cash equivalents 158.7 (61.6) Cash and cash equivalents at beginning of the period 341.7 316.8 Effect of foreign exchange rate changes (5.4) 5.0 Cash and cash equivalents at end of the period 495.0 260.2 Liquid assets 16 517.7 304.5 Bank overdrafts 16 (22.7) (44.3) Cash and cash equivalents at end of the period 495.0 260.2 Cash and cash equivalents are presented in the balance sheet as follows: Cash and cash equivalents 476.8 304.5 Assets held for sale 40.9 - Short term borrowings (16.7) (44.3) Liabilities related to assets held for sale (6.0) - 495.0 260.2 The notes on pages 27 to 43 form an integral part of the condensed consolidated interim financial information. Group Balance Sheet Unaudited Unaudited Audited as at as at as at 31/03/12 31/03/11 30/09/11 notes £m £m £m Non-current assets Intangible assets 10 3,233.6 3,963.0 3,550.0 Property, plant & equipment Aircraft and aircraft spares 10 614.2 654.5 638.6 Investment property 10 - 17.4 18.0 Other 10 251.2 340.4 280.3 Investment in associates and joint venture 22.3 37.8 22.1 Other investments 13.3 19.3 13.4 Deferred tax assets 404.0 441.1 281.3 Tax assets 4.9 4.8 4.2 Trade and other receivables 129.6 119.8 153.0 Derivative financial instruments - 3.4 12.6 4,673.1 5,601.5 4,973.5 Current assets Inventories 36.7 38.7 38.7 Tax assets 69.4 44.4 40.2 Trade and other receivables 1,414.4 1,301.1 1,090.5 Derivative financial instruments 79.2 191.1 117.2 Cash and cash equivalents 16 476.8 304.5 359.3 2,076.5 1,879.8 1,645.9 Assets held for sale 11 233.6 10.9 70.4 Total assets 6,983.2 7,492.2 6,689.8 Current liabilities Retirement benefit obligations 18 (6.4) (6.9) (6.8) Trade and other payables (1,653.1) (1,611.5) (2,008.2) Borrowings 13/16 (95.6) (422.0) (179.5) Obligations under finance leases 16 (17.9) (14.5) (18.6) Tax liabilities (103.6) (89.9) (92.7) Revenue received in advance (1,751.6) (1,773.6) (1,167.2) Short-term provisions 14 (163.1) (155.8) (187.6) Derivative financial instruments (54.9) (116.9) (88.2) (3,846.2) (4,191.1) (3,748.8) Liabilities related to assets held for 11 sale (107.8) - (35.0) Non-current liabilities Retirement benefit obligations 18 (359.9) (266.7) (324.2) Trade and other payables (104.5) (18.9) (42.4) Long-term borrowings 13/16 (1,695.7) (905.3) (967.8) Obligations under finance leases 16 (53.7) (56.9) (62.1) Non-current tax liabilities (0.6) - (0.6) Revenue received in advance (2.3) (1.0) (1.9) Deferred tax liabilities (119.1) (141.9) (120.9) Long-term provisions 14 (197.2) (204.5) (193.5) Derivative financial instruments (3.6) (9.4) (9.4) (2,536.6) (1,604.6) (1,722.8) Total liabilities (6,490.6) (5,795.7) (5,506.6) Net assets 492.6 1,696.5 1,183.2 Equity Called-up share capital 59.2 57.7 59.2 Share premium account 29.2 8.9 29.2 Merger reserve 1,617.8 1,984.2 1,617.8 Hedging and translation reserves 288.3 428.2 316.9 Capital redemption reserve 8.5 8.5 8.5 Retained earnings deficit (1,558.8) (800.0) (871.4) Investment in own shares (13.4) (13.3) (13.3) Equity attributable to equity holders of the parent 430.8 1,674.2 1,146.9 Non-controlling interests 61.8 22.3 36.3 Total equity 492.6 1,696.5 1,183.2 The notes on pages 27 to 43 form an integral part of the condensed consolidated interim financial information. Group Statement of Changes in Equity The unaudited movements in equity for the six months ended 31 March 2012 were as follows: Share Attributable capital Hedging & Retained to equity Non- & share Other translation earnings/ holders of controlling premium reserves reserve (deficit) the parent interests Total £m £m £m £m £m £m £m Opening balance at 1 October 2011 88.4 1,613.0 316.9 (871.4) 1,146.9 36.3 1,183.2 Loss for the period - - - (594.3) (594.3) (10.7) (605.0) Other comprehensive income/(expense): Foreign exchange translation losses - - (24.0) - (24.0) - (24.0) Actuarial loss on defined benefit pension schemes (net of tax) - - - (37.3) (37.3) - (37.3) Fair value gains and losses: Losses deferred for the period (net of tax) - - (40.8) - (40.8) - (40.8) Losses transferred to the income statement (net of tax) - - 36.2 - 36.2 - 36.2 Total comprehensive expense for the period - - (28.6) (631.6) (660.2) (10.7) (670.9) Equity credit in respect of share- based payments - - - 1.1 1.1 - 1.1 Purchase of own shares (BAYE) - (0.1) - - (0.1) - (0.1) Acquisition of Co-op - - - (56.9) (56.9) 36.8 (20.1) Exchange difference on non-controlling interests - - - - - (0.6) (0.6) At 31 March 2012 88.4 1,612.9 288.3 (1,558.8) 430.8 61.8 492.6 The unaudited movements in equity for the six months ended 31 March 2011 were as follows: Share Attributable capital Hedging & Retained to equity Non- & share Other translation earnings/ holders of controlling premium reserves reserve (deficit) the parent interests Total £m £m £m £m £m £m £m Opening balance at 1 October 2010 66.6 1,979.4 299.5 (626.9) 1,718.6 24.1 1,742.7 Loss for the period - - - (200.8) (200.8) (0.6) (201.4) Other comprehensive income/(expense): The story has been truncated, 1<GO> to download the complete version. 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Thomas Cook Group TCG Half Yearly Report
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