Thomas Cook Group Plc (OTC:TCKGF) Q1 2017 Earnings Conference Call February 9, 2017 3:30 AM ET
Peter Fankhauser - Chief Executive Officer
Michael Healy - Chief Financial Officer
Christoph Debus - Chief Airlines Officer
Tim Ramskill - Credit Suisse
Patrick Coffey - Barclays Capital Markets
Jamie Rollo - Morgan Stanley
Jeffrey Harwood - Stifel Nicolaus & Company, Inc.
Jaafar Mestari - JPMorgan
Mark Irvine-Fortescue - Panmure Gordon & Co.
Good morning, and welcome to the Thomas Cook Group Q1 2017 Results Call. My name is Chach, and I'll be coordinating your call today. After the presentation there will be a Q&A will you have the opportunity to ask question. [Operator Instructions]
I'll now hand you over to your host, Group Chief Executive Officer, Peter Fankhauser, to begin. Peter, please go ahead.
Good morning, everybody, and thank you for joining our first quarter 2017 results presentation. I am joined here this morning by Michael Healy, our Chief Financial Officer, and Christoph Debus, our Chief Airlines Officer. First, I will talk through the highlights of the quarter. Michael will then present our financial results. I will return to talk briefly about current trading and the outlook. We will then open the call up to take your questions.
We delivered a solid performance in the first quarter. Despite continued uncertainty and the challenges of the German airline market, we achieved underlying operating profits that were in line with last year on a headline basis, and £1 million up on a like-for-like basis. Revenue grew by 1% in the quarter. This was helped by a strong close to the summer season, along with robust winter demand for Spain and certain long-haul destinations helping offset further declines to Turkey.
We improved our gross, thanks to increased sales to own brand and selected partner hotels, especially from the UK and Northern Europe. We also made good progress on delivering on our strategy for profitable growth. Our 24-hour hotel satisfaction promise was well received by customers when we launched it in the summer, and we have now extended it to 250 hotels in long-haul destinations for the winter with plans to extend it further for next summer.
Overall, the improvements we are making to the customer experience delivered a further increase in our net promoter score, up by an impressive eight percentage points compared to the first three months of last year. I'm very pleased with the progress we made to strengthen our financial position. We took a big step forward in December with the issuance of a new €750 million bond, extending our debt maturities and lowering our interest costs.
Turning to the current trading, this is in line with our expectations. Winter bookings are up [1%] on last year, while pricing is marginally down, reflecting the competitive environment in the airline sector. Summer bookings are looking quite positive, up 9% at this point in the year.
Demand for Greece is especially strong with bookings up more than 40%, compared to this time last year. As expected, the German airlines market continues to be challenging. However, we have taken clear actions to address the impact of the competitive pressures and, as we said in November, we have to see the benefits come through in the second half.
Let me now hand over to Michael to take you through our financials.
Thank you, Peter. Good morning, everyone. Looking first at an overview of our results for the quarter, as usual, I'll focus on the like-for-like changes, which exclude the impact of foreign exchange and the other distorting factors. Like-for-like revenue grew by £14 million, or 1%, helped, as Peter said, by the effect of a strong end to the summer season on our October numbers.
Gross margin was slightly ahead of last year at 22.1%, as margin growth in our UK and Northern European businesses were partially offset by continued trading pressures in our German airline. Our seasonal underlying EBIT loss reduced by £1 million to £49 million.
Looking first at our topline performance, Slide 6 shows how revenue changed by destination compared to last year, as we've proactively managed capacity in line with shifting customer demand. The effects of this on our business can clearly be seen in this slide. Sales to Turkey and Egypt declined compared to the first quarter last year.
However, this was more than fully offset by increased sales of holidays to Spain and other short and long-haul destinations, along with a strong close to the summer season in Greece. This resulted in overall revenues improving by 1%, or £14 million.
Coming now to Slide 7, which breaks down our EBIT performance by business. You can see here that our tour operating businesses have continued to strengthen. Our UK, Continental Europe and Northern Europe businesses together improved EBIT by £12 million in the quarter.
However, as we anticipated in November, this was offset by ongoing weakness at Condor, our German airline business. Taking into account the slightly improved result for corporate, the Group achieved a seasonal underlying EBIT loss for the first quarter of £49 million, a like-for-like improvement of £1 million versus last year.
Slide 8 shows how each of our businesses has performed in Q1 over the last three years. You can see that the performance of the UK has steadily improved. In the last quarter, the UK improved EBIT by a further £5 million, or 10%, as a result of selling more higher-margin holidays and a better performance in the short season. This has helped the business to achieve a record EBIT margin over the last 12 months of 6.6%.
Continental Europe also at EBIT by £5 million in the last quarter, although this business, particularly Germany has seen last year's weak winter trading continue into this year, it has benefited from a successful cost reduction program.
Northern Europe, like the UK has improved underlying EBIT in each of the last three years. While trading this year, is weaker than the exceptionally strong winter last year, underlying EBIT still grew by further £2 million, as a result of the strong close to the summer season in October.
Turning to Condor, as we've talked about previously, the German airline market has come under increasing competitive pressure, impacted by weak demand and overcapacity. This has led to yield declines to key destinations, and as a result Condor's profit in the last quarter declined by £13 million, which was in line with our expectations.
At our full-year results presentation in November, I set out a number of actions we were taking to improve Condor's profitability, which we expect to deliver EBIT benefits of £35 million on an annualized basis. I'm pleased to say that these are on track. We have rerouted capacity from Turkey to more popular destinations, such as Greece and implemented more flexible flying plans to better match capacity to demand. Condor is also cooperating more closely with our German tour operator in order to retain more flight margin in-house.
We continue to expect a benefit from more competitive fuel prices in the summer, as our hedge price falls relative to the spot price. We're also making good progress with our cost reduction initiatives to achieve a structurally lower cost base. In line with previous guidance, we expect these measures to start to positively impact Condor's profits from the second half of 2017. As a result, we expect Condor to record a small profit over the full-year with the full benefit of these actions being felt in 2018.
As Peter said earlier, our December refinancing was an important step forward for the business, enhancing both our financial and operational flexibility. The proceeds of our new bond enabled us to redeem in full, two of our existing bonds significantly lengthening our debt maturity profile. Our next bond maturity is now not until 2021. I'm also pleased that we're able to issue this bond at a coupon of 6.25%. This is 150 basis points lower than the coupon in the two bonds it replaced.
I'll now hand back to Peter to update you on our current trading.
Thank you, Michael. Trading for winter is in line with our expectations. The season is now 82% sold, level with the same period last year, and bookings are up by 1%. The UK is enjoying a strong winter performance with bookings up by 5% overall. This includes strong growth in both charter risk packages and seat-only sales.
Northern Europe is trading in line with our expectation, against a strong competitive period last year. Pricing is down 3%, reflecting the impact of the strong dollar on demand for long-haul destinations.
In Continental Europe, winter bookings are 3% down, as a result of continued weak demand for Turkey. However, average selling prices are up 2%, thanks to our focus on better quality differentiated holidays. Condor bookings are 1% down on last year, ahead of capacity reductions of 5%. Pricing is also down 1%, as the combination of weak demand and overcapacity in the market continues to impact fares.
Looking ahead to the summer. It is still early in the booking cycle, but we have made a good start to the season so far. Bookings are up 9% for the Group, while pricing is broadly in line with last year. In terms of destinations, the stand-out summer destination, so far, this year is Greece, where, as I said earlier, bookings are up more than 40%. Bookings to other smaller European destinations, including Cyprus, Bulgaria, Croatia and Portugal, are also going really well. This has helped offset further declines to Turkey. Demand for the Spanish islands appears to be levelling off this year, after strong growth last year.
Looking each of our businesses in a bit more detail. In Continental Europe, bookings are well ahead of last year in most markets. We have seen strong demand out of Germany, following recent market weakness. And Russia is also performing well, boosted by good demand for both domestic and outbound holidays. Our non-European business has enjoyed a record start to the summer trading. Bookings have grown at double-digit rate with really strong demand for Greece and smaller European destinations.
In the UK, bookings are up 1% overall, and prices are up 2%, with strong demand for Greece and Cyprus. However, we have also seen competition for holidays to Majorca and the Canary Islands intensify, as a result of increased air capacities and higher hotel bed costs. In this context, we have taken a deliberate decision not to chase volumes, but rather to focus sales on higher quality differentiated holidays, in line with our strategy. As a result, bookings of UK charter risk holidays are slightly behind last year, whilst pricing is up 9%.
This focus on quality has meant our UK business has taken out of its portfolio, around 100 hotels that failed to come up to the required quality standard, as measured by our customer satisfaction scores. This does impact volumes in the short-term, but we are absolutely confident that it will lead to greater customer satisfaction and loyalty over the longer term.
To summarize, we achieved a solid result in the first quarter in what remains an uncertain market environment. The flexibility of our business model means we are well positioned to anticipate and adapt to changes in customer demand. We remain focused on doing all we can do to give our customers the very best experience when they book with Thomas Cook. This means ensuring not only that we offer hotels that come up to our quality standards; but, also, that we work hard to take care of our customers at every stage of their holiday.
The continued improvements to our Net Promotor Score tells us our strategy is working. While the first quarter was slightly ahead of last year, slightly ahead of last year, due to a strong close to summer 2016, we expect the second quarter to be weaker, as a result of the ongoing pressure at Condor. However, as we set out in November, we are confident we'll start to see the benefits from our profit improvement measures at Condor come through in the second half.
Combined with the continued strengthening of our tour operating businesses, this should lead to an improved Group performance in the second half. We continue to approach the remainder of the year with a degree of caution, given the uncertain political and economic outlook. However, based on where we are now, we expect our operating results for the full-year to be in line with current market expectations.
Thank you very much. Michael, Christoph and I would now be happy to take your questions.
Thank you very much Peter. [Operator Instructions] Our first question is from Tim Ramskill from Credit Suisse. Tim, please go ahead.
Thanks. Good morning.
Good morning, Tim.
Good morning. Three questions, please. The first is just in terms of your UK position for the summer, and you obviously talked about intensified competition, but your pricing looks very robust. So can we just spend a bit more time discussing that? Are you feeling well positioned and, therefore, don't want to get dragged into a bit of a price war and you're hoping that if you hold your position that things should come good sort of later in the season? That's the first question.
And then, maybe in terms of the changing mix of destinations. Slide 6, you've shown us what's happened sort of destination by destination for the first quarter, but maybe just in a similar way you could give us some sense, as to what you expect to happen across the key destinations in the summer. So, just to be clear, is Spain still going to be up or down? Do you expect Turkey to be sort of leveling off by then? Just some color around the key markets for the summer.
And then the final question is regarding the Nordics where, obviously, last year you did very, very well; record margins. You guided people not to expect that to recur in 2017, but Q1's better year-over-year. The commentary around summer bookings looks very, very good. So, is there a chance that, actually, margins can be sustained in the Nordics at those record levels, please?
Yes, so we are happy with the position we have in summer. And as you say, the pricing is very robust. So, we feel really well-positioned with our focus on the higher quality hotels and that's why we have taken the decision to take 100 hotels, which are not up to standards, to take them out of our portfolio.
And what we want to avoid is that we are dragged into a price war in Spain and we see an over-capacity to Spain together with higher input costs. That's why we have taken a deliberate decision that we are focusing on higher-quality holidays and we are trimming capacity to Spain; we are even a bit lower in capacity to Spain than we had last year.
We are following very flexible the customer demand into Greece where we see a very strong demand and, as well, in more demand into Egypt. So that is a deliberate decision and we feel very well positioned and we see, as well, that we have the smaller destinations like Croatia, like Bulgaria and Cyprus, that we are very well positioned and we see a good growth there. That is really a decision we took deliberately, and well and cautiously, but in the best interests of our UK business.
Then the changing mix, what we expect to happen. Spain is probably leveling off, because we see a price increase in Spain. It It's still a very popular destination, no doubt. But we see, after a very strong year last year that’s the bed capacity didn't increase overall. We secure more beds in Spain, more quality beds in Spain. That's why we are very happy with our position we have in Spain, but we don't expect a big growth in Spain.
Turkey is now behind last year. But, now, we are coming into a phase where this hole is leveling off, so we are now, for sure, making up the difference and we have a plan that we come back about to the same number of customers like last year. And this first sign is that Turkey is now coming back in the last couple of days, and this is exactly what we expect.
Greece is the runner up. Greece is plus-40%. We will not hold plus-40% for the rest of the season. We have a capacity plan that we are growing between 15% and 20% to Greece. And we are already securing now beds, quality beds, in Greece that we are not running out of capacity on the land side, if we add some of the flights to Greece.
And then, we have a lot of smaller destinations which are profiting from this - somehow leveling off demand in Spain, where we have added as well our own branded hotels, like Croatia. We have a good demand into Bulgaria. We have a new destination what we fly to Sicily where we have as well SENTIDO hotel.
And as I said before, it seems that Egypt is even coming back and not Sharm el-Sheikh, because we cannot fly there, but Hurghada is seeing a very good demand. So overall, we have anticipated well in our flight planning and our capacity planning the demand pattern, and we are really well prepared to do any flexible moves according to what we see now, the customer demand is going.
Nordics, record margin last year. A good winter; so far, it’s going to be probably a bit weaker now in the second quarter, but a record start into the summer. They are just doing everything right and we don't see why they should not reach previous year level, as we see so far.
But it's always, in Nordics, a bit depending, and I hate to say that, but it's a bit depending on the weather. That is if the weather is as it was last year, then we have still a good summer in the late market. If the weather is nicer, then it may be a little bit weaker. But what far, is an absolute record start for summer.
Okay, thank you very much.
Our next question is from Patrick Coffey from Barclays. Patrick, please go ahead.
Yes, hi, just one quick question please on the UK tour operating business. Can you just give us a sense of how the tour operating business in the UK is performing year-on-year perhaps also just some details on the percentage of holidays in the UK that are all-inclusive year-on-year? Thanks.
The all-inclusive part of the UK holidays are around 60% in summer and that is probably even going up a little bit, because the customer feels protected from any currency movements, because we are hedged. So, all-inclusive is having a very good position in the UK. And as I said, we are slightly behind in guests, but we are well ahead in average sales price. This is exactly what we wanted to achieve.
What we see as well is a big move into the online business, so we are above 20% growth on the online business and that is a very confirming thing with our strategy that we say we want to get closer to our customers and we want to get them online. So that is as well going very well in the UK. So overall, we are okay with what we see in UK. We are in a good position in UK.
Okay, thank you.
And you saw the first quarter, the last 12 months we have a record margin of 6.7% achieved in the UK. So we closed the gap to all the competitors we see around.
Okay, thank you.
Our next question is from Jamie Rollo from Morgan Stanley. Jamie, please go ahead.
Yes, thanks. Good morning, everyone. Just continuing with the UK. First question is you're saying the capacity or rather your volume reduction is your decision not to chase volume, but could you talk about the UK demand environment overall? How is the consumer coping with these sharp price increases and how do you see that developing in the late market, when obviously the holidaymaker tends to be less resilient than these early bookers? That's the sort of first question.
Secondly, could you please remind us what percentage of your summer UK business is seat only and what your ASPs are on that business? And presumably your yields are down there as well, because they were down in the winter, and finally what is the margin impact from the airline overcapacity in that seat only business? And do you still think you can achieve last year's record UK margins of around 6.5%? Thanks.
Yes, so that the customer is following broadly. How do I say that? If the destination is going up more than 5% in average sales price, then we see a demand impact and this is what we see now in the Spanish islands. It's still a popular destination, but they are now going into a more favorable and more value for money destination like Greece.
In Greece, the average sales price is below what we see in Spain, and the customer takes profit out of this situation, and then 100% convinced that as well in Turkey, where the price value relation is even more favorable that we will see and this is your question as well on the late market, that we see a later demand into Turkey, which is then leveling off the decline we had so far into Turkey.
And the late market in Spain, I don't think that the late market in Spain is going to be strong, because there are a number of beds and if the number of beds is sold out, then you don't sell holidays any more, then you may sell seat only still, but our beds to seat ratio is very well balanced in Spain and we have secured more beds in Spain than last year. So we should see even a better position for us on the margin side into Spain than we had last year out of the UK.
And the year that headline percentage in the UK is 40% to be precise [indiscernible], the price is down in the seat only between 4% and 9%, but that is also an impact in reduced fuel prices in that lower fares and there we are fine with the margins and we have not a problem on the margin. So we think of what we can see so far that the UK is well on track to achieve what we want them to achieve.
Does that mean overall a similar margin figure to last year was 6.6%?
I would say a similar margin. Our aspiration is that, we get UK better and better. This is not just margin, we are also working very hard as I said that we get the shift in consumer demand that we can follow this shift in consumer demand on all lines and there we are making as well big, big progress and this is then as well having an impact on our efficiency and our cost structure in the UK. So we are pleased with the development in UK.
Okay, thank you very much.
Thank you, Jamie.
Our next question is from Jeffrey Harwood from Stifel. Jeffrey, please go ahead.
Yes, good morning.
And just two things, first of all just to clarify the answer to Jamie's question. On the margins in Spain, is the situation that you are expecting the margins to be better, notwithstanding the competitive activity because of the change in the mix on hotel accommodation? And then secondly France, there is some positive comments on France. Is it possible that we'll reach a breakeven situation in France this year?
I'll start with the last with the last question. We are pleased with the development in France volume wise as well as from the efficiency point of view. They are doing exactly the right thing. They are focusing very much on the Club Jet tours and this is a product, which is extremely well demanded.
So focus on what we do best, differentiate the holidays and we come close to breakeven. If we are not achieving breakeven that is still a little bit early, but we are very pleased with the development in France. Margin better in Spain. That was your question?
What we saw last year is that we were running out of beds, then at the end of the season in the late market and we couldn't sell or we couldn't fulfill all the demand we had. This is a different situation, this year, we are going to have. We have better quality hotels and we have secured more beds. That is all principally good conditions that we can also then in the late market getting better margins for the tour operator.
Okay, thank you.
Our next question is from Jaafar Mestari from JPMorgan. Jaafar, please go ahead.
Hi. Good morning, everyone. In the UK business, please, I think you mentioned your hedging for currency as a competitive advantage and your customers looking at your offer as quite well placed there. Have you run any analysis of where you think your pricing is compared to the spot or self-packaged alternatives?
Another question just on finance costs, referring to your appendix on the pro forma interest. Obviously, the increase in the size of the bond is offsetting the savings from lower rates, so on your pro forma for next year we moved from something like £127 million to £133 million actually higher. But just a question, is it fair to assume that the other finance costs remain in line at about £70 million or can you end up growing less on your bonding facility, on the RCF, et cetera, now that you have more liquidity from the new bond?
Yes, I take the first one; give, then, the second one to Michael. So, we are - as you say, we are hedged on fuel and we are hedged on currency for the whole of the summer. That gives us an advantage towards those who are not hedged and those who are just components - buying components of exactly the spot price between pound and euro, or pound and dollars.
We see no noticeable impact, because of that in other European destinations. We see a bit of a levelling off to the USA, because in the USA customers are more buying in the destinations and then they are of course, offering about - not so favorable dollar/pound exchange rate. But, in the European destinations, we have now clearly an advantage to all those who are selling components, in terms of price. Second question, please, Michael.
Yes, I expect you're referring to Page 20 of the presentation, which sets out a pro forma of our financing costs, that assumes that all bonds are repaid on maturity. Then, within that, we have the other elements of costs which are a range of costs of commitment fees, and letters of credit, and other bonding costs. We've said that we assumed that it should stay about the £70 million level; we don't see any reason, really, to see those changing. Of course, we always look for alternatives to financing those and I guess - but for the purposes of your analysis your models, you should assume they're the same.
All right. Thank you.
We have our last question from Mark Fortescue from Panmure. Mark, please go ahead.
Hi. Good morning, everyone.
Good morning, Mark.
Two questions, please; one on seat-only and one also just following up on the hotel hedging piece. Seat-only, in November, I think last time you said that 40% seat-only versus charter mix was pretty close to optimal, implying limited further dilution from the seat-only business. But clearly, looking to summer now, that pricing gap between charter risk and overall pricing remains pretty high. Is there any change in thinking here? Do you expect further seat-only dilution from here, and maybe even into winter 2017/2018? And the second - go on.
No change here. We think that this mix is perfectly fine, this mix give us the flexibility that we can really adapt to any customer changing in demand. That is, for us - it's a clear route we want to go and we have to make a profit per seat, and this mix makes, for us, the best profit per seat.
And if that mix is now optimal, shouldn't the pricing gap start to taper?
Yes. In our view, that mix is optimal. When we came down, as you remember, when I came to the UK, we came down from 85% or 15% on the other hand, seat-only to 40%. And this seems to us, exactly the right mix to have the flexibility to shift capacity from one channel to the other, according to needs what we have.
Sure, so should we expect the pricing gap, that dilution, to start to taper, to narrow over time?
What pricing gap you mean?
Well, your charter risk pricing is up 9%, but overall pricing is up 2%. So, it's still highly dilutive.
No, that's what I said. We have a seat-only ASP reduction of between 4% and 8%, and this is as well because we give the fuel benefit, we pass on to our customers. And, we are - on the seat-only sector, we are in competition to others, which are as well offering the same destinations. There, we feel very well positioned and what it seems between 4% and 8% that seems a pretty good ASP decline compared to others in the market here in UK.
Okay. Thank you. The second one was just asking the hotel hedging question another way. You call out pricing inflation as one of the reasons, with demand for Spain leveling off. Do you expect to be able to keep any benefit from hedging, the wider euro accommodation versus independents not being hedged? Or do you think some of that buffer will naturally get competed away?
Yes, I can only talk now for summer, because we are now, or we started already, to hedge for winter and then for the next summer. According to our hedging policy, we have an advantage this summer. That doesn't hinder the Spanish hoteliers to increase the price - the input cost price for their hotels, because they sell to a really strong demand to us here. Then they, commercially, adapted the prices upwards, but that has nothing to do with our hedging policy.
That's helpful; thanks very much.
We have run out of time for our Q&A session, so that concludes our call. Thank you for your participation. I will now hand over to the speakers.
Ladies and gentlemen, thank you very much for listening to our first quarter results call. I wish you all a very good day. Thank you very much.
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