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Thomas Cook Group (TCG)

  Print      Mail a friend       Annual reports

Thursday 31 July, 2014

Thomas Cook Group

Interim Management Statement

RNS Number : 8013N
Thomas Cook Group PLC
31 July 2014
 



31 July 2014

Interim Management Statement for the three months ended 30 June 2014

Successful transformation continues with third quarter profit increase

"Our transformation is progressing very well. Today's announcement of a £32 million rise in underlying EBIT, represents our eighth consecutive quarter of increased profits.  Every business improved and the UK delivered the most significant contribution, accounting for over three quarters of the total rise, as we start to realise its full potential.      

Twenty four months into our transformation, we are confident that our deliberate actions to improve operating efficiency and yield management, digitise our business and develop new exclusive products that build on the strength and trust that our brand represents, will significantly improve Thomas Cook's profitability and growth trajectory. As a stronger and more resilient business, our operational performance remains in line with our expectations for FY14 and we look forward to delivering more value in FY15 and onwards."

Harriet Green, Chief Executive of Thomas Cook

Key points

Three months ended 30 June 2014 compared with three months ended 30 June 2013 (underlying):

·     All businesses delivered improved results, contributing to a Group EBIT increase of £32m; UK EBIT improved by £27 million

·    Strong 30 basis point improvement in gross margin; UK gross margin increased by 150 basis points

·     Customer demand for new products encouraging;  Summer 14 bookings for concept hotels up 43%

·     Additional Wave 1 cost out of £51 million since 31 March 2014; Wave 2 developing well

·     Substantial progress digitising the business; improved web penetration and mobile and tablet bookings up 73%

·     Business performance for FY14 in line with our expectations, in spite of increased European short haul airline market capacity

·     Our one airline integration performing strongly, delivering continued efficiencies

·     Stronger late Summer 14 bookings in the UK, Germany and Northern Europe; encouraging bookings for the Winter 14/15 and Summer 15 seasons

Summary financial results

£m (unless otherwise stated)

3 months ended June 2014

3 months ended June 2013


Underlying

Statutory

Underlying

Statutory

Revenue

2,219

2,219

2,354

2,354

Gross margin (%)

20.1%

20.1%

19.8%

19.8%

EBIT

33

(43)

1

(30)

EBIT margin (%)

1.5%

(1.9)%

0.0%

(1.3)%

EBIT like for like

33

(43)

15

(17)

Net debt

(507)

(507)

(452)

(452)





LTM ended June 2014

LTM ended June 2013


Underlying

Statutory

Underlying

Statutory

Revenue

8,966

8,966

9,218

9,218

Gross margin (%)

22.6%

22.6%

21.9%

21.9%

EBIT

306

31

252

51

EBIT margin (%)

3.4%

0.4%

2.7%

0.6%

EBIT like for like

306

31

250

49

 

 

Note: Throughout this document the abbreviation "LTM" refers to the last 12 months to 30 June. 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 p12. The term 'like-for-like' reflects the underlying results after removing identifiable non-recurring items in the prior year, including adjusting for the timing of Easter and exchange rate movements. Like-for-like adjustments are shown on page15.

Financial key points

Three months ended 30 June 2014 compared with three months ended 30 June 2013 (underlying):

·   EBIT improved to £33 million, an increase of £32 million (Q3 13: £1 million)

·   Like-for-like EBIT improved by £18 million after adjusting for the timing of Easter (c.£15 million impact)

Last Twelve Months ("LTM") ended 30 June 2014 compared with LTM ended 30 June 2013 (underlying):

·   LTM EBIT improved to £306 million, an increase of £54 million (Q3 13: £252 million); improving EBIT margin to 3.4% (Q3 13: 2.7%)

·    LTM gross margin improved by 70 basis points to 22.6% (Q3 13: 21.9 %)

At 30 June 2014 compared with 30 June 2013:

·   Net debt was £507 million, an increase of £55 million (30 June 2013: £452 million) due to aircraft capital investment and timing of revenue in advance from customers

Update on targets and key performance indicators ("KPIs")

On 13 March 2013 we published specific and measurable targets and KPIs. We are very encouraged by the progress we are making on these as we comprehensively transform Thomas Cook, particularly in those areas where we have most control; all of which support our strategy of sustainable profitable growth. With signs of discretionary consumer spending on holidays on the increase we are confident that our new products, digital development, enhanced yield management and lean operational efficiencies will enable us to more than deliver. We outline our progress on these targets and KPIs below.

New product revenue

Incremental new product revenue rose by a further £27 million to £167 million on a cumulative basis to 30 June 2014. Summer 2014 bookings for our Concept and Partnership hotels compared with the same period last year are up 43% to 615,492 and 10% to 746,559 respectively. More customers are booking Concept hotels early with an 11% increase in Winter 14/15 bookings and UK bookings and average selling prices for these exclusive hotels for next Summer 15 are already up significantly. Based on these trends and our more flexible and dynamically packaged products, we expect to achieve our new product revenue targets.

 

We plan to have 640 and 800 concept and partnership hotels by FY15 and FY17 respectively compared to 475 currently and we are improving occupancy rates through significantly enhanced inventory management.

 

Building on the success of our Concept hotels, we introduced  a dynamic packaging capability in our Northern European business at the beginning of this year, which is proving particularly successful. The software we developed and the new routes and hotels we introduced have given customers more flexibility in their ability to package their holidays. We have seen strong growth in demand for flexible trips with an increase of 55%since launch without any cannibalisation of our existing risk business.

 

As part of our new product initiatives and supporting our sales drive into the Summer lates market, we launched a new marketing campaign in the UK on 11 July. The 'We Love' campaign creates an emotional campaign, using photography, which demonstrates our appreciation of customers' needs and the value and benefits that we are offering them when booking a Thomas Cook holiday. Managed by three marketing experts from our Northern European team, this campaign is another example of how we are sharing best practice across the group.

Offering ancillary products to our customers is a further way in which we can substantially enhance and diversify our revenues. We have launched several initiatives which are already delivering significant revenue benefits. In our airlines business, for example, these ancillary products include meal concepts on short/medium haul flights, upgrade offers and pre-order duty free shopping (Airshoppen). Several improvements we made in our online insurance offering in Belgium have also resulted in improved conversion rates and margins.

Web penetration

We have significantly improved customer experience through our new UK website and are seeing improved online and mobile bookings as a result.  This website is being extended to our other markets and, combined with the progress that we are making in the UK, is expected to lead to an acceleration in Group web penetration from the current level of 37% (38% year-to-date), as we continue on our journey towards achieving more than 50% in FY15.

 

UK bookings via tablets and mobile devices, in particular, have improved markedly since we re-launched the site at the end of May 2014. Tour Operator bookings are up 73% compared with the same time last year and mobile conversion has doubled on thomascook.com.

 

We have continued to invest in our team of digital and product talent, recently recruiting Mark Maddock - previously managing director of Lastminute in the UK - to join our cities division.  Mark will be responsible for the UK growth of this important area, bringing his significant experience and transformation expertise to the development of our Group's city break business.

 

With digital at the core of our omni-channel delivery strategy, we have been embedding technological innovations as part of our selective UK store refurbishment programme.  For example, our new Concept store in Bluewater, which is one of the largest shopping centres in the country with annual footfall of over 28 million people, offers customers first-rate access to technology. This includes a new app for the advice bar that helps customers find the holidays they want and create a wish list which is then available to a consultant in store to discuss with them or which can be emailed directly to the customer to share with friends and family before booking online. Another such store at Lakeside has already been shortlisted for the Retail Week Interiors Award 2014.

Cost out and profit improvements

In Q3 14, we delivered a further £51 million of Wave 1 cost out and profit improvement benefits, taking the cumulative total to £328 million. The accelerated delivery of our Wave 1 initiatives has resulted in a current run rate which is ahead of our target of more than £360 million in FY14, providing increased confidence of delivering benefits of at least £460 million by FY15.

Of the cumulative benefits of £328 million at the end of June 2014, £119 million has improved gross margin and £209 million has reduced the Group's overhead cost base.

 

£m

FY 12

FY 13

Q3 14

FY 14

FY 15

UK turnaround

60

124

130

140

140

Group-wide cost out and profit improvement

-

70

198

220

320

̵    Integrated air travel strategy

-

27

67

73

110

̵    Organisational structure

-

30

74

87

105

̵    Product, infrastructure, technology, and other

-

13

57

60

105

Total targeted benefits(i)

60

194

328

360

460

Expected costs to achieve(ii)






̵   Income statement

36

47

14

24

9

̵   Cash flow

̵     Operating expenditure

30

29

24

31

18


̵     Capital expenditure

-

8

19

23

33

Notes

(i)

Cumulative run-rate

 


(ii)

One-off costs of delivery

 

As we previously announced, in the context of our FY18 Wave 2 cost out and profit improvement target of over £400 million, we have so far identified an initial proportion of benefits, which we have fully risk weighted, of £150 million. We will provide the next update on both Wave 1 and Wave 2 cost out and profit improvement benefits with our 2014 full-year results. In the meantime, we remain on track to achieve these targets.

Sales growth

LTM sales growth excluding Egypt was 0.8% driven by growth in dynamic packaging in Northern Europe and increased capacity in Airlines Germany. While FY14 sales growth has been inhibited by external events, we remain confident that our new product strategy will enable us to deliver an improved revenue performance in FY15, consistent with our target of 3.5% growth.    

Underlying gross margin improvement

Compared to the baseline of FY12, underlying gross margin on a last twelve months basis has improved by  150 basis points, which is already higher than our target of an improvement of more than 120 basis points for FY14.

All of our businesses have improved gross margins since FY12 with a recent strong performance in our UK business where Q3 gross margin is 150 basis points better than last year at 25.5%, which represents a significant improvement from the position we reported in May with our half-year results. We expect the gross margin performance to improve further over the medium term as the impact of our new product developments accelerate.

UK EBIT margin improvement

UK EBIT margin for the twelve months ended 30 June 2014 improved to 3.1%, reflecting the successful and sustained delivery of the first wave of our cost out and profit improvement measures.

We remain confident that our target EBIT margin of at least 3.5% is achievable for the UK business in FY14. We expect UK EBIT margin to improve further to over 5% in FY15 as our product strategy begins to deliver more substantial margin benefits to supplement the cost reduction measures that we have already implemented.  Over the medium term, we believe that those strategic initiatives will enhance the capacity for profitable growth in our UK business which will enable it to deliver a significantly improved performance.

Cash conversion

The cash conversion performance metric is subject to short term volatility depending on the timing of customer receipts and supplier payments around quarter ends, particularly during the peak summer period.

On a last twelve months basis, cash conversion at the end of June was 21% reflecting the timing of working capital movements.

Customer receipts are less due toa combination of lower sales, as we have reduced capacity in UK, France and Russia, and a later booking pattern in the UK and Germany.  These factors, together with the impact of currency translation, have also resulted in lower levels of hotel creditors compared with last year.

The cash conversion ratio will improve in Q4 once the reduced cash payments to these creditors are recognised in the cash flow statement. We remain committed to achieving our cash conversion targets of more than 55% by FY14 and more than 70% by FY15 and we expect net debt to reduce to c.£300 million by FY14 as working capital movements normalise.

Summary of Targets and KPIs


Actual

Target



FY 12

FY 13

Q3 14

FY 14

FY 15

Targets

New Product Revenue
(i)

-

£94m

£167m

> £300m

> £700m


Web Penetration(i)

34%

36%

37%

> 40%

> 50%


Cost out/ profit improvement (run-rate)

£60m

£194m

£328m

> £360m

> £460m

KPIs

Sales CAGR(i),(ii)

-

-

(1.2)%

> 2.5%

> 3.5%


Underlying Gross Margin Improvement(iii)

-

0.8%

1.5%

> 1.2%

> 1.5%


Underlying UK EBIT Margin(i)

0.1%

2.2%

3.1%

> 3.5%

> 5%


Cash Conversion(i),(iv)

11%

48%

21%

> 55%

> 70%

Notes

(i)

(ii)

 

(iii)

(iv)

Measured on an LTM basis

Compound annual growth rate from FY13 including new product revenue.  Q3 14 includes adverse impact of Egypt; excluding Egypt +0.8%

Underlying gross margins, adjusted for disposals and shop closures on a like-for-like basis from baseline FY12

Cash conversion defined as net cash from operating activities less interest paid as a percentage of underlying EBITDA

Strategic operating investments

Strategic operating investments for the nine months ended 30  June 2014 totalled £26 million, mainly on investment in marketing support for our web expansion programme (£12 million) and improvements to our IT infrastructure (£12 million).

We expect strategic operating investments for FY14 to be less than £40 million, lower than our previous guidance of £50 million. 

Disposals

During the period, we completed the sale of the UK corporate travel business (Co-operative Travel Management) to Mawasem Travel & Tourism Ltd for a consideration of £13.5 million, of which the Group's share was £8 million. The sale has resulted in a net loss on disposal of £6 million, primarily due to the write-off of intangible assets and goodwill recognised on creation of the joint venture with Co-operative Group and Midlands Co-operative in 2011 that have been allocated to the UK corporate travel business. The UK corporate travel business contributed net revenues of £11 million and earnings before interest and taxes (EBIT) of £2 million in the financial year ended 30 September 2013.

Fitch credit rating

On 11 July 2014, Fitch Ratings affirmed Thomas Cook Group plc's Long-term Issuer Default Rating at "B" with a Positive Outlook. The affirmation is based on improved results in 2013 and the significant cost cutting conducted since the appointment of the new management team, which has led to improved profitability. Fitch expects operating margins to remain resilient in FY14, despite the competitive UK travel operator environment. 

Board changes

The appointment of Annet Aris to the Thomas Cook Group plc Board was announced on 26 March 2014 and became effective on 1 July 2014. This appointment has resulted in us achieving over 40% female representation at Board level and we are in the top 1% of FTSE250 companies with four women on the Board.

Summer 2014 trading

The Summer season is currently approximately 83% sold, slightly better than last year.

Bookings and headline average selling prices for our UK business are broadly similar to when we previously updated the market in May, being flat and 4% lower respectively compared to last year. However, recent booking volumes in the "lates" market have improved significantly, indicating a later booking pattern for the Summer season than last year.

 

UK summer capacity is 85% sold, the same as this time last year. The lower average selling prices are mainly due to product mix and a higher proportion of shorter duration holidays reflecting customer demand. Of course, there are other factors, such as improved yield management and operating efficiency, that influence margin and  are included in our targets and KPIs. Consistent with our strategy, we expect selling prices to improve over the medium term as we sell a higher proportion of exclusive hotel product to UK customers. Bookings for these products have shown strong growth for the Summer 2014 season, and we expect that this will make a more meaningful impact on average selling prices in FY15 as we further expand our concept hotel offering in the UK market.

 

We are very encouraged by early Winter 14/15 bookings, which are over 7% higher than last year in the UK with an increase in average selling prices of 3%.  This demonstrates early tangible benefits of our enhanced product and Winter Sun strategy.

 

In our Continental Europe business, capacity commitments are 78% sold, 5% better than at the same time last year, due mainly to an improved performance in our German business and improved capacity management.  Although cumulative bookings and average prices are flat for Continental Europe as a whole, bookings in Central Europe, which comprises Germany and Austria, have been strong with volume up 2% on the previous year.  Volume growth in Germany has been offset by reduced fixed capacity commitments in France and Russia to focus on profitable routes as we make good progress in returning these businesses to profitability.  

 

Bookings in Northern Europe are 4% higher than last year with the season 87% sold, slightly higher than at this time last year.  Average selling price is 1% lower than last year, due to a competitive landscape, particularly in Norway. 

 

In Airlines Germany bookings are 2% higher than last year with a seat load factor slightly below the same time last year. Overall average selling prices are 4% lower than last year due to an increase in market capacity to short and medium haul destinations. However, long haul prices continue to hold up well and are 4% higher than last year. Despite the 6% increase in European short-haul airline capacity, which is impacting average selling prices, we closely manage our capacity throughout the season and have significant efficiency advantages given the composition of our fleet, quality and capacity of our cabins.

 

 









Summer 2014(1)

Year on year variation %


 

 

Risk business

Average selling price

(2)


 

Committed capacity

 

Cumulative bookings


UK

-4


-


-


Continental Europe

-


+1


-


Northern Europe

-1


+3


+4


Total Tour Operator

-1


+1


-


Airlines Germany

-4


+4


+2










(1)                Based on cumulative bookings as at 19 July 2014

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

Outlook

Due to the ongoing  transformation of our business, Thomas Cook is stronger, more resilient and better able to withstand the headwinds inevitable in a global travel business, as demonstrated by our ability to mitigate the impact of unrest in Egypt earlier in the year.

Recent demand in the Summer 14 "lates" market has been strong in the UK, Germany and Northern Europe and, although there is continuing pricing softness due to higher levels of market capacity, we are confident that the acceleration of our cost out and profit improvement programme will mitigate market pressures in order to achieve our FY14 gross margin target improvements of greater than 1.2% and achieve operational performance in line with our expectations for FY14. While it is early in the booking cycle, we are encouraged by booking and pricing trends for the Winter 14/15 and Summer 15 seasons.

Forthcoming announcement dates

The Group intends to release its 2014 full year results on 26 November 2014. In advance of the close period commencing on 1 October 2014 and a planned US investor roadshow at the end of September, the Group expects to issue a pre-close update on 16 September 2014.

Presentation to equity analysts

A webcast and teleconference will be held today at 9.30 a.m. (BST).

http://webcasts.thomascookgroup.com/thomascook002/default.asp

 

United Kingdom (local)

020 3059 8125

All other locations

+44 20 3059 8125

 

Enquiries

Analysts & Investors


Mav Wynn, Thomas Cook Group

+44 (0) 20 7557 6433

Media


Jenny Peters, Thomas Cook Group

+44 (0) 7568 105144

Andrew Lorenz, FTI Consulting

+44 (0) 7775 641807

 

Financial Review

Summary of financial results

 

 

£m (unless otherwise stated)

3 months ended 30 Jun. 2014

3 months ended 30 Jun. 2013

Change £'m

Change %

Revenue

2,219

2,354

(135)

(5.7)%

Gross Margin

20.1%

19.8%

0.3%


Underlying profit from operations (EBIT)

33

1

32

n.a.

EBIT Separately ++++Disclosed Items

(76)

(31)

(45)


EBIT

(43)

(30)

(13)

(43.3)%

Other income/expenditure

1

(0)

1


Net finance charges (underlying)

(27)

(30)

3


Separately disclosed finance charges

(9)

(19)

10


Loss before tax

(77)

(80)

3

3.8%
















£m (unless otherwise stated)

LTM ended 30 Jun. 2014

LTM ended 30 Jun. 2013

Change £'m

Change %

Revenue

8,966

9,218

(252)

(2.7)%

Gross Margin

22.6%

21.9%

0.7%


Underlying profit from operations (EBIT)

306

252

54

21.4%

EBIT Separately Disclosed Items

(274)

(201)

(73)


EBIT

31

51

(20)


Other income/expenditure

2

1

1


Net finance charges (underlying)

(139)

(147)

8


Separately disclosed finance charges

(21)

(47)

26


Loss before tax

(127)

(142)

15

10.6%












Like for like comparators

3 months ended 30 Jun. 2014

LTM ended 30 Jun. 2014


Revenue growth (£m)

(36)

(111)


Gross margin increase (%)

0.2

1.1


Overhead reduction (£m)

27

18


EBIT growth (£m)


18

56


Closing net debt improvement (£m)

(9)

(9)

 

Revenue

Revenue for Q3 FY14 of £2,219 million represents a decrease of £135 million (5.7%) compared to last year. On a like-for-like basis, after adjusting for the disposal of businesses and shop closures in the UK , the timing of Easter and foreign exchange movements, Q3 revenue was broadly unchanged, decreasing by £36m (1.6%).  Adjusting for these factors, provides a like-for-like Q3 comparison as follows:

 

£m


Q3 13 like for like Revenue

2,255

Egypt disruption

(54)

Volume

52

Pricing / Yield

(34)

Q3 14 Revenue

2,219

 

Over the last twelve months, revenue has fallen by £111 million (1.2%) on a like-for-like basis, mainly due to the impact of market disruption in Egypt of c.£180 million. Excluding reduced demand to Egypt, LTM sales growth would have been 0.8%.

Gross margin

Group gross margin for Q3 was 20.1%, an improvement of 30 basis points on last year. On a like-for-like basis, gross margin is  20 basis points better, mainly due to the benefits of our profit improvement initiatives:

%


Q3 13 like for like GM

19.9%

Cost out and profit improvement

0.5%

Pricing, yield and mix

(0.3)%

Q3 14 GM

20.1%

The improvement in Q3 gross margin reflects an improved performance in our UK business in the quarter where LFL margins were 180 basis points higher than last year due to cost out and profit improvement measures, including improved yield management. 

On an LTM basis, Group gross margin of 22.6% is 70 basis points better than last year due mainly to the benefits of Airline integration as part of Wave 1 of our cost out and profit improvement plans.

Operating expenses

Q3 operating expenses are £54 million lower than last year (£37 million lower on a LFL basis), reflecting continuing progress in the implementation and delivery of the first wave of our cost reduction and profit improvement plans.  This has resulted in lower headcount and greater operating efficiencies, particularly through the transformation of our UK business:

 

 

£m

Q3 14

Q3 13

Change

Personnel Costs

(244)

(275)

31

Net Operating Expenses

(128)

(151)

23

Subtotal

(372)

(426)

54

Depreciation

(41)

(40)

(1)

Total

(413)

(466)

53

 

 

Q3 13 like for like operating expenses

(440)

Cost out and profit improvement

39

Strategic opex. Investment

(3)

Depreciation movements

(2)

Inflation

(7)

Q3 14 operating expenses

(413)

Strategic operating investment for Q3 totalled £3 million, in addition to £23 million invested in the first half of the year, mainly on IT and marketing support for the transformation.  We expect total strategic operating investment to be below £40 million for the full year.

Underlying EBIT

The Group's underlying EBIT for Q3 14 was £33 million, an improvement of £32 million in headline terms compared to last year due mainly to the benefits from our cost out and profit improvement initiatives. Our UK business improved its Q3 EBIT result by £27m to £39 million, representing around three quarters of the Group's improved performance.

On a like-for-like basis, Group underlying Q3 14 EBIT improved by £18 million, despite a £6 million impact from reduced demand to Egypt , as outlined below:

 

£m


Q3 13 like for like EBIT

15

Egypt disruption

(6)

Volume

15

Net Price/Mix

(18)

Operating expenses reduction

27

Q3 14 EBIT

33

 

On last twelve months basis, the Group's underlying EBIT is £306 million, an improvement of £54 million (21.4%)  from the twelve months ended 30 June 2013, increasing the Group EBIT margin by 70 basis points to 3.4%.  On a like-for-like basis, LTM underlying EBIT has improved by £56 million (22.4%) from the 12 months ended 30 June 2013. 

 

Separately disclosed items

Separately disclosed items consist of restructuring costs, refinancing costs, non-recurring tax resolution costs and certain derivative related charges. These are costs or profits that have been recognised in the period which management believes are not the result of normal operating activity and performance and 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 in Q3:

 

 

£m, 3 months to 30 June 2014

Cash1

Non cash

Total

Q3'13

Restructuring costs

(22)

(8)

(30)

(11)

Refinancing costs

-

-

-

(13)

Onerous contracts and legal disputes

-

(41)

(41)

(1)

Amortisation of business combination intangibles

-

(1)

(1)

(5)

Other

-

(4)

(4)

(2)

Impacting EBIT

(22)

(54)

(76)

(32)

Finance related charges

-

(8)

(8)

(17)

Total

(22)

(62)

(84)

(49)

 

 

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

 

Restructuring costs

Restructuring costs of £30 million include £4 million in relation to implementation of the first wave of our cost out and profit improvement programme, £18 million in relation to group wide restructuring activity, and £8 million relates to disposals in the UK.

 

Onerous contracts and legal disputes

On 11 June 2014, the UK Court of Appeal ruled in Huzar v Jet2 that technical delays will rarely fall into the 'extraordinary circumstances' defence under EC Regulation 261/2004 as they are inherent in the normal activity of an airline. As such, UK airlines may now be liable to compensate customers for delays caused by normal technical problems. Jet2 are applying to the Supreme Court for permission to appeal the decision and, if allowed, this is likely to be heard in late 2015. In the meantime, and in accordance with CAA guidance, claims will be put on hold pending the outcome of the appeal process. The Group has made a provision of £29 million for the potential impact of the case on claims relating to historic delays. The Group has provided £1.6 million in Q3 2014 and going forward will make additional provisions of £1.5 million per month to address potential claims. Additionally, £10 million relates to the termination of an outsourcing contract.

 

Finance related charges

The group has certain provisions for future liabilities arising from separately disclosed circumstances - primarily deferred acquisition consideration.  A notional interest charge of £3 million on the discounted value of such provisions is recognised within separately disclosed finance related charges. £5 million notional net interest charge arising from the Group's pension scheme is included.

 

Cash flow and Cash Conversion

Net cash flow for Q3 was £283 million; last year net cash flow of £769 million benefited from £431 million of new equity:

 

£m

Q3 14

Q3 13

Change

Revenues

2,219

2,354

(135)





EBITDA

75

40

35

Working Capital

423

540

(117)

Tax

(5)

(7)

2

Pensions & other

(14)

(1)

(13)

Operating cash flow

479

572

(93)

Exceptional items

(46)

(37)

(9)

Capital expenditure

(33)

(40)

7

Aircraft related

(27)

-

(27)

Net interest paid

(84)

(72)

(12)

Free cash flow

290

422

(132)

Proceeds from disposals

8

4

4

Cash impact of disposals

(9)

(54)

45

New equity

-

431

(431)

Other

(5)

(34)

29

Net cash flow

283

769

(486)

 

Group free cash flow has been impacted by lower working capital inflows, mainly as a result of lower customer receipts in  advance (£70 million), hotel creditors (£40 million) and changes to other creditor balances (£10 million).

The cash conversion performance metric is subject to short term volatility depending on the timing of customer receipts in advance and supplier payments around quarter ends, particularly during the peak Summer period.

Cash conversion at 30 June 2014 on a last twelve months basis is set out below:

£m

LTM to 30 Jun 2014

LTM to 30 Jun 2013

Free cash flow

(128)

95

Capital expenditure

223

137

FCF before Capex

95

232

Underlying EBITDA

457

398

Cash conversion

21%

58%

Cash conversion at 30 June 2014 is affected by lower working capital inflows compared with last year. We expect the majority of those timing differences to reverse during Q4. We remain committed to achieving our cash conversion targets of more than 55% by FY14 and more than 70% by FY15.

Net debt

Net debt increased by £55 million (£9 million on an underlying basis) to £507 million at 30 June 2014 (30 June 2013: £452 million). The main components of the movement in net debt over the twelve months ended 30 June 2014 are:

 

£m


30 June 2013, closing net debt position

(452)

Net proceeds on disposals (i)

111

Client cash disposed with divestments(ii)

(32)

Exchange rate movements

25

Lease reclassification(iii)

(23)

Equity and pension payments(iv)

(13)

Net effect of recapitalisation(v)

(28)

Additional capex and airline investment

(86)

Underlying change

(9)

30 June 2014 closing net debt position

(507)

 

(i)

Net cash flow from the disposal of Egypt, Neilson, Gold Medal and other smaller disposals

(ii)

Net impact of exchange rate movements, primarily on GBP vs Euro and USD

(iii)

Net impact of reclassification of two aircraft leases (on extension) from operating to finance lease

(iv)

(v)

Net impact of issuance of equity, employee benefit plans and pension fund payments

Payment of costs related to the recapitalisation completed in June 2013

 

We expect net debt to reduce to c.£300 million by FY14 as working capital movements normalise.

Appendix

Reconciliation of underlying to 'like for like' basis for the 3 months ended 30 June

 

3 Months to 30 June

Revenue

Gross Margin

Operating Expenses

EBIT


£m

%

£m

£m

3 Months to 30 Jun. 2013 Reported (continuing)

2,354

19.8%

(466)

1

Easter Timing

40

0.3%

-

15

Disposals/Store Closures

(53)

(0.3)%

11

(1)

Impact of currency movements

(86)

0.1%

15

(1)

3 Months to 30 Jun. 2013 'Like for Like'

2,255

19.9%

(440)

15






3 Months to 30 Jun. 2014 Reported

2,219

20.1%

(413)

33

Like for Like' growth (£'m)

(36)

(9)

27

18

Like for Like' growth (%)

(1.6)%

0.2%

6.1%

120.0%











Last Twelve Months to 30 June

Revenue

Gross Margin

Operating Expenses

EBIT


£m

%

£m

£m

LTM 30 Jun. 2013 Reported (Continuing)

9,218

21.9%

(1,769)

252

Disposals/Store Closures

(224)

(0.4)%

40

(16)

Accounting Changes

-

-

(4)

(4)

Impact of currency movements

82

-

(1)

19

LTM 30 Jun. 2013 'Like for Like'

9,077

21.5%

(1,735)

250






LTM 30 Jun. 2014 Reported

8,966

22.6%

(1,717)

306

LTM 'Like for Like' growth (£'m)

(111)

38

18

56

LTM 'Like for Like' growth (%)

(1.2)%

1.1%

1.0%

22.4%

 

 

Nine Months to 30 June

Revenue

Gross Margin

Operating Expenses

EBIT


£m

%

£m

£m

YTD 30 Jun. 2013 Reported (Continuing)

5,578

20.4%

(1,331)

(196)

Disposals/Store Closures

(129)

(0.3)%

22

(1)

Accounting Changes

0

-

(4)

(4)

Impact of currency movements

(97)

-

17

(0)

YTD 30 Jun. 2013 'Like for Like'

5,352

20.1%

(1,296)

(202)






YTD 30 Jun. 2014 Reported

5,230

21.0%

(1,253)

(154)

YTD 'Like for Like' growth (£'m)

(123)

4

44

48

YTD 'Like for Like' growth (%)

(2.3)%

0.9%

3.3%

23.8%

 

Sources of growth in underlying EBIT

Three months ended 30 June 2014

£m

United Kingdom

Continental Europe

Northern Europe

Airlines Germany

Corporate

Group

Revenue

732

1,036

252

303

(105)

2,219

Gross margin %

25.5

12.0

25.2

24.2

n.a.

20.1

EBIT

39

6

8

(6)

(14)

33

EBIT growth

27

1

0

8

(5)

32

Like for like EBIT growth

22

(1)

(1)

3

(5)

18

 

LTM ended 30 June 2014

£m

United Kingdom

Continental Europe

Northern Europe

Airlines Germany

Corporate

Group

Revenue

2,781

4,084

1,194

1,316

(409)

8,966

Gross margin %

25.4

14.1

28.8

29.7

n.a.

22.6

EBIT

87

89

118

54

(42)

306

EBIT growth

29

6

12

17

(10)

54

Like for like EBIT growth

43

(3)

10

16

(10)

56

9 months ended 30 June 2014

£m

United Kingdom

Continental Europe

Northern Europe

Airlines Germany

Corporate

Group

Revenue

1,515

2,286

819

879

(269)

5,230

Gross margin %

22.3

13.6

25.2

27.1

n.a.

21.0

EBIT

(115)

(45)

42

(12)

(24)

(154)

EBIT growth

20

13

8

5

(4)

42

Like for like EBIT growth

22

13

10

8

(4)

48

Cashflow

9 months ended 30 June 2014

£m

9 months to 30 Jun 14

9 months to 30 Jun 13

Change

EBITDA

(32)

(81)

49

Working Capital

294

460

(165)

Tax

(26)

(27)

1

Pensions & other

(23)

(11)

(12)

Operating cash flow

213

341

(128)

Exceptional items

(82)

(109)

27

Capital expenditure

(116)

(103)

(13)

Aircraft related

(61)

-

(61)

Net interest paid

(124)

(114)

(10)

Free cash flow

(170)

15

(185)

Proceeds from disposals

114

-

114

Cash impact of disposals

(52)

(56)

4

New equity

-

431

(431)

Other

-

(32)

32

Net cash flow

(108)

358

(466)

 

Hedging

The Group hedges its principal 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.

 


Summer 14

Winter 14/15

Euro

71%

41%

US Dollar

72%

50%

Jet Fuel

73%

42%

Exchange Rates and Foreign Exchange Translation

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


Average Rate

Period End Rate


LTM 14

LTM 13

June 14

June 13

GBP/Euro

1.20

1.21

1.25

1.17

GBP/US dollar

1.63

1.57

1.70

1.55

GBP/SEK

10.63

10.33

11.47

10.24

The recent appreciation of Sterling against the Group's main transactional currencies, including the Euro, the Swedish Krona and the US Dollar, could, if sustained, lead to a translational impact on Q4 EBIT of c.£25 million compared to last year. This reflects an appreciation of Sterling against the Euro and the Swedish Krona of 7% and 12% respectively over the last year. As foreign exchange rates have been relatively stable year-on-year, there has been no material EBIT impact of currency translation in the nine months to 30 June.

Over the longer term, a stronger Sterling will be positive for the Group as consequent cost reductions in purchase transactions for hotels and fuel would outweigh the translation impact on Euro and Swedish Krona denominated profits.

Definitions for "Targets and KPIs" (see page 5)

Web penetration

Measured on a last 12 months basis ("LTM")

Sales CAGR

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

Underlying Gross Margin Improvement

Delivery measured against the underlying gross margin in FY12.  The gross margin improvement is on a like for like basis and based on a full year measure

UK EBIT Margin

Underlying profit from operations of the Group's UK operating segment (excluding Thomas Cook India) as a percentage of its revenue

Cash Conversion

Cash conversion defined as net cash from operating activities less interest paid as a percentage of underlying EBITDA

About Thomas Cook

Thomas Cook Group plc is one of the world's leading leisure travel groups with sales of over £9 billion and more than 20 million customers in the year ended 30 September 2013.  Thomas Cook is supported by c27,000 employees and operates from 17 countries; it is number one or two in all its core markets. Thomas Cook Group plc's shares are listed on the London Stock Exchange (TCG).

Further information can be found at www.thomascookgroup.com.

 

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.


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