Thomas Cook Group Plc (OTC:TCKGF) Q3 2016 Earnings Conference Call July 28, 2016 4:30 AM ET
Peter Fankhauser - CEO
Michael Healy - CFO
Christoph Debus - Chief Airlines Officer
Jamie Rollo - Morgan Stanley
Patrick Coffey - Barclays
Wyn Ellis - Numis
Jeffrey Harwood - Stifel
Stuart Gordon - Berenberg
Good morning, ladies and gentlemen. Thank you for joining our Third Quarter Results Conference Call.
Before I start, you may be surprised by the picture of a Victorian train on this Slide, rather than an up to date photograph of one of our flagship hotels. There's a reason for it. It marks the beginning of our Company, Thomas Cook, which was founded 175 years ago. It was in 1841 when Thomas Cook, a cabinet maker, chartered this train to take 500 people, at a shilling per person, 12 miles from Leicester to a temperance meeting in Loughborough, and so began our business and our great brand. Earlier in the month, we recreated this historic steam train journey. While the brand is still same, I like to think that Thomas Cook holidays are now significantly more appealing to a wider customer base.
On to our agenda for the call. I will start with the highlights of the third quarter, Michael Healy, Group Chief Financial Officer, will then present our financial results and current trading, and I will then return to talk about our strategic progress and outlook. Finally, we would be happy to answer your questions and for this part of the call Michael and I, will be joined by Christoph Debus our Chief Airlines Officer.
Our financial results for the third quarter was in line with our expectations when we last operated in May. Operating profit came in at GBP2 million for the quarter; GBP22 million lower than last year. This was due to weak demand for Turkey, which has particularly affected Airlines Germany and the attack on Brussels airport in March which led to a sharp drop in bookings in our Belgian source market.
Now, given the general marketing commentary at the moment, and the specific comment of some of our peers, I am sure it won't surprise you to hear that the current trading environment in travel remains extremely challenging.
Our business has been disrupted by various geopolitical events, including terror attacks in Nice, Istanbul, and Munich, and an attempted coup in Turkey, while Brexit has attacked to the general sense of uncertainty. And those are just the major events that have happened since we last reported in May.
This environment requires us to be flexible and practiced. Since May, we have continued to rebalance our destination mix to cater for changing customer demand. As a result, summer 2016 bookings excluding Turkey, are up by 8%. Including Turkey, they are down by 5% reflecting the fact that we now reduce capacity to Turkey by almost 40% compared to last year.
With these near-term headwinds, we continue to focus on executing well and on pulling the levers that are within our control to maximize the opportunities we have for further profitable growth. As you know, I have made it my mission to focus on our customer experience and service. So I'm pleased to see a continued improvement in our net promoter score across the Group as better hotels and better service are leading to more satisfied customers.
Overall, our strategic plans are delivering strong foundations for growth and implementation of the new operating model is on track.
Now, let me hand over to Michael, to take you through to financial results for the quarter and current trading.
Thank you, Peter, and good morning everyone. Slide 5 shows the financial overview of our results for the third quarter. As you know this quarter represents a shoulder period as the business moves from making seasonal losses in the winter to the highly profitable peak summer season in our fourth quarter. As usual, I will focus on the like-for-like changes in the right hand side of the chart.
Group revenue is almost GBP1.9 billion is GBP154 million below last year due to lower customer demand to Turkey and the effects of the tragic incidents at Brussels airport in March, which significantly affected demand in Belgium.
Gross margin performance in the quarter was strong increasing by 70 basis points which highlights our successful strategy to expand a range of differentiated products.
Underlying operating profit for the third quarter was GBP2 million which is GBP22 million below last year in line with the guidance we gave at our half year results in May.
Our net debt at June 30, of GBP515 million was GBP60 million higher than last year after adjusted for the impact of movements in exchange rates and other non-cash items.
Let's look at revenue development in more detail. A sort of similar slide to this at our previous results presentations as it highlights high customer demand to our principal destinations has changed. As we have explained in previous presentations during the year we proactively shifted our capacity away from destinations such as Turkey, Tunisia, and Egypt, and towards Spain and long-haul destinations such as the USA, Cuba, and Mexico.
The successful management of customer demand to alternative destinations has helped to minimize the impact of more sales to Turkey. Included in the above figures is the impact of lower demand from Belgium as a direct result of the Brussels airport attack, which reduced sales across our destinations by around GBP60 million.
Let's look at EBIT by business in the next Slide. Third quarter EBIT of GBP2 million, GBP22 million lower than last year. Our Northern Europe business continues to perform very strongly with an increase in EBIT of GBP8 million. Although the UK was done slightly year-on-year, we expect both our UK and Nordic businesses to report significantly improved profitability for the full year.
As we previously flagged, weaker trading in Condor, our German airline led EBIT to fall by GBP18 million. Condor was particularly affected by overcapacity in the short and medium haul sector from Germany and lower demand for Turkey where it is the market leader.
Finally, Continental Europe, EBIT declined by GBP10 million and a majority of this related to Belgium.
Let's now look at cash flow. Free cash flow for the third quarter was GBP337 million, an increase of GBP35 million over last year due mainly to the timing of working capital. This improved performance was despite a lower EBITDA results and higher CapEx. We expect that CapEx for the full year will be around GBP200 million in line with previous guidance.
The cash cost of exceptional items during the quarter was GBP16 million relating to a new operating model. We expect that cash exceptional items for the full year will be around GBP18 million, which is slightly higher than previous guided.
Net debt has increased by GBP123 million compared to the June 30 last year, GBP107 million of this were due to non-cash movements mainly the impact of foreign exchange leading to an underlying net debt increase of GBP16 million. For the full year, we now expect net debt to be in the range of GBP125 million to GBP200 million which is higher than previously guided due to the impact of foreign exchange movements.
We remain very comfortable with liquidity and cash positions. Our winter headroom has increased every year for the last three years and since we last reported in May, we bought back GBP100 million worth was of our June 2017 bonds, saving us roughly GBP8 million in interest cost on an annualized basis. This is ahead of plan and in keeping with our commitment to reduce fixed term debt by GBP300 million by the end of 2018.
I'll now give you an update on current trading. 81% of our summer program has been sold, 3 percentage points lower than at this time last year, due mainly to the continued disruption we've seen in some of our key source in destination markets. Nevertheless we're encouraged to see that overall bookings, excluding Turkey, have increased by 8% which is 2 percentage points higher than at the time of our half year results announcement.
Overall for the Group as a whole booking are down by 5%, while our holiday routes capacity is down by 4%. Northern Europe which has been less impacted by Turkey continues to trade well in line with capacity cuts and with strong pricing levels.
And in the UK while bookings are slightly lower than at this point last year; holiday pricing is up by 2% reflecting quality improvements and a shift away from cheaper destinations.
In Continental Europe, bookings are done due to weak demand for Turkey with significantly lower bookings in Belgium. Although notably in Germany we continue to outperform the wider tour operating market. Airlines Germany continues to be impacted by market overcapacity and pricing pressure has increased due to the high levels of competition in the short and medium haul market both to Turkey and more recently to Spain and the Spanish Islands.
For next winter, bookings are progressing well in line with expectations, although it is still early in the cycle. Specifically UK bookings are up strongly by 19% with prices remaining broadly flat. Northern Europe's bookings are flat with pricing up 1% against strong comparatives in the same period last year.
I'll now hand back to Peter to update you on our strategic progress.
Thank you, Michael. I said earlier that we are focusing on pulling the levers that are within our control in order to make the most of the opportunities we have for further profitable growth. And we are making good progress. We continue to focus on higher margins differentiated and own-brand hotels. For own-brand hotels in particular, sales are up by 7% so far this year which is a good performance especially considering that Tunisia and Egypt where number of these hotels are located are effectively closed.
And Casa Cook our new design hotel in Rhodes, which we mentioned at our half year results, has surpassed all expectations doubling its original target number of customers for this summer, attracting guests of whom 85% are new to Thomas Cook and achieving net promoter scores in the 70s. In light of this success we are in the process of planning further openings.
For our airlines the main force is in planning for next year as we reshape our holiday program to match the changing demand of our customers. We are expanding our successful long-haul offering, opening new routes to destinations such as San Diego, New Orleans, Martinique, and Sebago. And in short and medium haul, we are rebalancing our destination mix with more flights to Mainland Spain and to Greek Islands and fewer to lower demand destinations such as Turkey. We are also growing our network of departure airports introducing Leeds/Bradford and Luton in the UK and growing our existing long-haul presence in Munich. Our aim is to distribute our with our capacity more even the across Europe and beyond taking into account both industry supply and customer demand levels for each route by always trying to retain as much flexibility for future changes as possible.
We expect this approach, together this planned operational improvements such as aircraft swaps within the Group to benefit Condor in particular next year.
We continue to make good progress in improving our holiday offering, looking specifically at the customer experience in our hotels, NPS increased by up to 5 percentage points in the UK and Continental Europe. And we see the highest NPS in those 1,500 hotels where we offer our 24 hours satisfaction promise at 9 percentage points higher than our other hotels. We've also recently introduced our premium brands Thomas Cook Signature into the German market with a selection of holiday to four, five, and six star hotels to new destinations such as Mozambique, Myanmar, and Martini.
In omnichannel, our best investments in the UK and Germany are continuing to pay off with UK websites up by 23% in the quarter, but in Germany bookings were up by 26% with higher conversions across all devices.
And in China, our joint venture with Fosun continues to grow rapidly. Having soft launched its initial test products at the beginning of this year the business is now planning a full marketing launch in September.
Finally, in line with our new operating model objective to make our business as efficient as possible we are implementing a significant change program in Continental Europe to streamline processes and to remove duplications as we mentioned at our half year results and we remain vigil on cost generally across the business.
In summary, we are operating in a very tough market that it is been repeatedly disrupted by external events. We continue to address this through disciplined and practiced capacity management while ensuring to keep the flexibility to a chuff to further changing's in demand. As a result of the continued disruption, and in particular, the increased pricing pressure in the German short and medium haul flight market that Michael mentioned earlier, we now expect our full year underlying operating profit to be around GBP300 million. This includes the benefit of foreign exchange inflation gains, which based on the rate at the end of quarter three we expect to be about GBP32 million.
It's important to recognize that Thomas Cook is stronger, financially and operationally, and has a better product range than it has ever had. Our focus remains on executing well on the things we can control by positioning ourselves as best we can for the things we can't. I'm confident that our focus on strengthening our holiday offering, transforming our customer service, and bringing our businesses closer together, so the new operating model is laying a strong foundations for future growth.
We look forward to updating you again at our pre-closed statements on 27th of September. Michael and Christoph and I would now be delighted to take your questions. Thank you very much. Back to the operator.
Thank you very much. [Operator Instructions].
And the first question comes from Jamie Rollo from Morgan Stanley. Jamie, please go ahead.
I've got three questions, please. The first one is just on your hedging of your accommodation needs, your 80% to 90% hedge for the winter and 50% to 60% for next summer for your euro and dollar. I'm just wondering whether you think that will give you an advantage relative to independent holidays, whether you can keep some of that for yourself or, subsequently, it's all passed on. And secondly, if we look at the summer trading figures, the average selling prices have all sort of got a bit worse since the May figures, but you've reduced your profit guidance for Condor. Clearly, the tour operating model seems to be a bit more resilient than the sort of pure airline model right now. So I'm just wondering why there is that sort of discrepancy. Is it more about Turkey, for example, or is it more about the vertical integration in the sort of core tour operating business? And the final on is you mentioned headroom; clearly there's lots, given the additional facilities. But in terms of some of the covenants and the fixed charged covenants, how much would profit have to drop by if you were to come near your covenants? And if there were something like, God forbid, something terrible in Turkey which becomes closed under Foreign Office advice, and there's a very large, let's say, three-digit figure exceptional, would you still be within your covenants? Thank you.
Thank you, Jamie. I'll take the first two questions and a I give then the third question to Michael. So on your question about hedging and does it give us an advantage to our competition. I can't speak for our competition I can just speak for ourselves. We have a strong pricing position for next winter and next summer that means for our customer as well gives them the security that we have not a fierce increase in pricing for the holiday package. And despite all the movements in currency has been for outside our package if you value an all inclusive holiday resort then you are really safe on the pricing front. So that is an advantage what we can offer as an reputed travel package operator which are -- who are hedging the currency and the fuel for the next seasons and have a stringent policy on hedging.
On the second question, I really think that the package holiday is in volatile and in a volatile environment even a bigger advantage than when you book on the web or when you book single pieces of a holiday. We give the security that if something happens that we take care and this security is for the -- has a value for the customer. That is one big advantage what we have now in this situation.
Your question about the seat-only pricing, we repeatedly flagged that in Condor, and in Germany, Germany we have an overcapacity on the medium and short haul sectors and this was because first of all, a lower demand, and second, we were the first who shifted the capacity out of Turkey into Western Med. Others were then following and which came then to the situation that now we have as well, on the seat-only market, we have an overcapacity on the Western Med. That gives a certain pressure on the pricing on the seat-only that doesn't give such a pressure on the holiday packages because we have a lack of beds in those destinations. And we have no reason to give away our beds which we still have for a reduced price but on the seat-only that is a little bit different because there you just sell seats. But in combination seat and beds we are still in a strong pricing position as well in the Med and Mediterranean.
And now for the third question, I hand over to Michael.
Yes, as you reference yourself, Jamie, we did refinance our bank borrowings last year one year early, so we will get GBP 800 million of banking facilities which actually double the facilities that we previously would have had. And then in May, at our half year results, we announced that we had additional GBP150 million of additional facilities. So we are in a pretty strong liquidity position and that would give us the confidence to reduce our fixed term debt just after the half year results by over GBP100 million.
In terms of covenants, we did give some limited information in covenants within the Annual Report. But in our covenant tests are a private matter between ourselves and the banks. So we don't really get into detailed public information in how we calculate covenants. I mean, for sure, we remain fully compliant with all of our covenant measures and expect to do so in the future. I mean, the covenants that we do have, I think you will see in the Annual Report they're leveraged covenants which are EBITDA over net debt as well as fixed charge covenants, which look at EBITDA based on all of our operating leases.
So and the other aspect to bear in mind is that, for covenant purposes, we apply the same average 12 month ForEx rate to both sides of the covenant equation. So while you see, from an accounting basis, a spike in our debt position because of using the spot rates for debt, we actually use the 12-month average for both sides of our equation. So we're not materially impacted for covenant purposes by foreign exchange rate changes. So hopefully that gives you some explanation.
Thank you. Can I just clarify on my first question which I didn't ask very well? It was really a question about the UK tour operator, then not relative to your competition, but relative to people taking an independent holiday. Do you not have a cost advantage for at least 12 months because you've bought some --?
Yes we have. And we have an advantage as well towards the customer and then the -- yes, that was what it is.
The next question comes from Patrick Coffey from Barclays. Patrick, please go ahead.
Yes, hi everyone. Two questions from me, please. First one on Airlines Germany and the next one just on the cash flow. On Airlines Germany, you mentioned overcapacity, I was just wondering what you guys were doing about that in terms of your own capacity for next year. Secondly, I'm just interested in the cash flow. So this year you've given net debt guidance, Michael; what's the expectation for working capital in FY16? And then just looking forward to next year, are we still expecting CapEx to fall to around GBP180 million, and have you got any guidance for next year's cash exceptionals related to the new operating model? Thanks.
To the first question, capacity, we are balancing the capacity in Germany as well towards the destinations which have more demand and we are very carefully planning the capacity to Turkey and we have quite a lot of wet leases there for the summer season which we are taking in or we are not taking in and there as well that is our flexibility and adapting the capacity into planning but if the demand is recovering then we can up the capacity. Can you add something here on that, Christoph?
Yes, I think for our Germany airline Condor, how do we adjust the capacity for next year. I think we take several measures. I think most important is Turkey. I think Turkey 35% of our short and medium haul business in Germany. And I think we have to reduce to capacity this year by 40% and we have to do it basically in the mid of February which is basically the worst movement to do such a change due to these terrorist attacks. So I think we will plan now proactively, we will base the capacity on this year's level giving us the flexibility to address the capacity upwards if the demand picks up, but also having a schedule which is so flexible if we have to further reduce it that we can do it.
The other big point is the mentioned overcapacity this summer which we have seen, especially for the Spanish market Canaries, and Balearics mentioned by Peter, so I think that was 20% overcapacity compared to last year which we have I think, just on a weekly basis to give you a little bit of flavor. This is more than 180 flights more to the Balearic, and the Canaries per week to those two destinations. So I think this is 30,000 or 36,000 seats per week. So I think there we will -- we use a little bit our capacity in the short and medium haul market and we will do that by shifting capacities from Germany to the UK.
Thank you, Christoph. The question about cash flow, Michael, please.
Yes, I think your question for expectations for working capitals for 2016, Patrick, and I would say that we're looking at always difficult to get the working capital movement figured but around by GBP50 million is our expectation. And then you moved on to looking for guidance for next year and our CapEx will change to that. And for numeral and other exceptional cap costs for next year we are looking at round about GBP50 million.
The next question comes from Wyn Ellis from Numis. Please go ahead.
Just a couple of questions from me. First of all, looking at what you're saying about bookings for summer 2016, when you last reported you said bookings were down 5% and ASPs were flat, and at that stage you'd sold 63% of capacity. And now we've moved on to minus 5% for bookings, ASPs down 3%, and you've sold 81% of capacity. Just doing the math, that suggests to me that the additional 18% of capacity that you've sold, pricing is down around about 13.5%. And with the reduction as well in your capacity, risk capacity you said down by 4% for the summer, it suggests that the revenues are running down about 17.5% or so. Is that right; is there anything wrong with my math, or if there is, what's the change there? And then a second question just on the UK bookings; you say that UK bookings are down 1% on last year, but obviously, there's an increase in flight-only. So could you say what your bookings for the package holiday business are down?
Yes, but now I think Wyn is probably best to take your question offline really because I think you math doesn't sound right. I mean I can give you some broader explanations about, if there's less flights to Turkey, there's less long-haul pricing involved in that and we switch to the Western Mediterranean would probably more short and medium haul flying. So I think that possibly the explanation but I need to look at that. So perhaps James Sandford can give you a call after this to work through.
Very briefly, could you say what pricing is doing in the package holiday business?
Yes, package our ASPs for the UK business were up 2%, package business is doing pretty well actually as we price into the Mediterranean we get more differentiated product or own branded hotels and that's best driving increased ASPs.
Okay, and then the question about how much the package holiday bookings are down in the UK, given the higher percentage of flight-only?
Well, I mean the package holidays are down in the UK in line with the reduction in capacities were down about 4%.
The next question comes from Jeffrey Harwood from Stifel. Jeffrey, please go ahead.
Yes good morning, I've got two questions. First of all, on Condor, are you still as confident in the recovery -- expected recovery in profits next year as you were back in May? And secondly, can you give us an update on trading in France, please?
Yes. First question yes, we are confident that we do everything what is right in coming back to normal earning level in Condor. That means that we are going for further efficiency in Germany that means that we are rebalancing as a Christoph explains the capacity and that we are much more flexible in into Turkey and into the capacity planning with Turkey and now having a stable site plan, shifting as well plains within the Group to really adapt to the customer needs and to the customer bond stream.
So we are really confident that we can take this business again to where it was. And we have as well a strong pricing position because as we've mentioned before, we are hedged on fuel and on dollar most of it throughout winter and summer. So that gives us a much better driving position as well for next year in this field.
On trading in France we are -- as we said in half year, we are happy with the development in France and with the steps to reduce the loss and we are confident that we are getting this business as well, as we got the business in Russia on good profit levels in midterm. But we are making in France very good progress, we are doing there the right things having reshaped the product portfolio offering much more long-haul and despite all the tragic events what happened especially as well in France, we see a good recovery there.
If I could add, I would say that we're looking for France's losses to move into single-digit this year from about GBP30 million last year. So I think we're well in a positive trajectory. And in terms of sales already, we're already 82% sold in the French market. I think we've got reasonable visibility for the end term for this year.
The final question comes from Stuart Gordon from Berenberg. Stuart, please go ahead.
Yes good morning guys. Just wanted to catch up on one of the things you said in the comments. You spoke about you're expecting the UK and the Nordics to deliver significantly better performance in this full year, and just tying that in with the -- sort of where the bookings are just now, a couple of things off the back of that. The first one is, just to clarify, is that on the last 12-months performance that you expect the full year to be significantly better for both those territories? And secondly, if that's the case, and I guess particularly for the UK looking at where bookings are just now and numbers sold, it would imply that current pricing, so not the average pricing year-to-date, but current pricing must be looking much better than people are thinking. Could you confirm that that is the case? And then Northern Europe is it just simply a function of the margin is going to be so much better because, as you say, bookings are down similar to ASPs being up? So is this just a margin benefit that you're going to see in Northern Europe and over the full year? Thanks.
Yes, I think we're seeing, I think for the UK business, we're seeing improved profitability in the UK over the last three years. We've been undergoing a significant transformation of that business. I think we're -- a lot of the efficiencies that we're seeing in terms of closing down centers and consolidating production in our holidays and improving the quality of the product offering is all adding I think to profitability there. So we're seeing good levels of growth and continue to see that this year. Pricing is continues to be pretty sound and is sound because of the better product that we're offering from the UK business and our customers are responding to that.
In terms of the Nordics, we're seeing strong margins in Nordics. Again because of their high level of quality of differentiated product in own-brand hotels, we are seeing high levels of repeat customer bookings and all of that adds to improved margins.
And if I may add Nordics has lesser impact of Turkey, because they were not having so many get into Turkey as the other market. So we are market leader in Germany and UK to Turkey. In Nordics we are much stronger into Spain than what we are into Turkey. So Nordics was much less affected of this big shape we see in the whole group.
Okay, thanks. Just one quick follow-up, just on the UK there, Michael, I mean it is correct margins have improved, I mean equally over, if we're looking at the last 12-months margin it's contracted 40 basis points since December. So are you saying we should be expecting that to bounce back on the last 12-months basis?
Yes, because I think we -- you saw that the first half of the year the UK has performed very strongly. We had a bit of weakness in this current third quarter. But it's peak summer months we've been focused than we've got a strong position in the UK in the summer.
We have no further questions. So I'll turn the call back to the speakers to conclude.
Okay. Thank you very much ladies and gentlemen for listening to our third quarter results call. We wish you a very good day and a good summer. Thank you.
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