Thomas Cook Group Plc. (OTC:TCKGF) Q1 2019 Analyst and Investors Call February 7, 2019 3:30 AM ET
Peter Fankhauser – Chief Executive Officer
Sten Daugaard – Chief Financial Officer
Conference Call Participants
Jamie Rollo – Morgan Stanley
Kathryn Leonard – Numis
Cristian Nedelcu – UBS
Rebecca Lane – Jefferies
Johannes Braun – MainFirst Bank
Stuart Gordon – Berenberg
Hello, and welcome to the Thomas Cook Analyst and Investors Call. My name is Molly, and I’ll be your coordinator for today’s event. [Operator Instructions] Please note that this call is being recorded. [Operator Instructions]
I will now hand you over to your host, Peter Fankhauser, to begin today’s conference. Thank you.
Good morning, everyone, and welcome to the Thomas Cook Analyst and Investors Call. My name is Peter Fankhauser, Chief Executive of Thomas Cook, and I am joined this morning by Sten Daugaard, our Chief Financial Officer. I will give some brief highlights of our performance and say a few words about the strategic review that we have announced today. After that, we will take any questions you may have.
Turning first to trading for the first quarter. We have started the year as expected, with the overall performance behind the strong starts to last year. Customer demand for Winter Sun destinations has been impacted by the knock-on effect of the prolonged summer heatwave last year and higher prices in the Canaries. Against this backdrop, we saw continued strong demand for Turkey and North African destinations, which helps to offset a weaker picture in Spain.
Overall, against the strong competitive period last year, we saw a weaker performance from our Tour Operator businesses in the UK and Northern Europe, partially offset by a good performance in our Continental Tour Operator business. Meanwhile, our Group Airline continued its strong performance of 2018, led by particularly good momentum in Condor, our German airline.
As a result, the group’s seasonal underlying loss from operations increased by GBP 14 million on a like-for-like basis to GBP 60 million. On a reported basis, the loss increased by only GBP 7 million, reflecting fewer separately disclosed items over the period. Net debt at the end of the December, which is roughly the lowest point in our liquidity cycle, was GBP 1.58 billion. This was an increase of just below GBP 300 million from the prior year, as the benefits of reversal of the working capital outflows at the end of September were offset by lower cash inflows as a result of lower bookings.
Despite that increase, we maintained a healthy level of liquidity over the winter, and all banking covenants were met at the end of December. Looking ahead to summer, a 30% of the program sold, bookings to the Tour Operators reflect our decision to reduce capacity across our markets. This is intended to mitigate against the operational risk we saw last year and wider market uncertainty, particularly in the UK.
Group Airline bookings are also below last year. This is, again, in line with the reductions we have made to capacity in short and medium-haul to help reduce our reliance on wet-lease aircraft in the summer. However that was partially offset by good growth in demand for long-haul destinations.
Thomas Cook has undergone significant transformation over the past five years as we have streamlined our operations and pursued clear strategies in both our Airline and Tour Operator business. We have a clear plan for 2019. We have another strong pipeline of hotel openings, including three Casa Cooks and eight Cook’s Clubs, boosted by the additional financing secured by our hotel fund, which we announced earlier this week. We are also taking further measures to digitize our sales channel and streamline our operations.
However, it is clear that we need to move faster to accelerate our strategy to differentiate more of our business in an increasingly competitive environment. That is why we have announced today a strategic review of our Airline with a view to giving us greater financial flexibility and increased resources to execute our core strategy. Our Group Airline is a great business. In the recent years, the team has grown it into one of Europe’s leading leisure airline, with a fleet of just over 100 planes, operating from key airports in the UK, Germany and Scandinavia, flying 20 million customers a year to 120 destinations around the world.
It has a unique and diversified business model. It’s just under half of all seats committed to the Tour Operator. It also has a competitive cost base, which enables it to compete wing-to-wing with the best low-cost carriers. However, we have been clear that Thomas Cook doesn’t need to own an airline outright to be a successful holiday company.
So long as we retain a strong relationship to provide our customers with the high quality and reliable service they need for their journey. Given the progress that we have made, it is right that we consider what options we have with our airline to give us the flexibility to go faster on our core strategy. I know that you will have many questions, however, I should be clear that this review is at an early stage. We will look at all options available to us with the support of our advisers in order to enhance value to shareholders and intensify our strategic focus.
To conclude, we continue to make good progress in transforming our business and the holidays we provide our customers, and I expect the strategic review of the airline will help accelerate that. Finally, in terms of outlook, we are making no changes to the full year expectations set out in November 2018, reflecting the early stage in the year and limited visibility due to wider market uncertainty, particularly in the UK.
Before I hand over to Q&A, I should repeat that there is very little more I can say on the strategic review at this time, as I’m sure, you will understand. With that in mind, I will now hand over for any questions.
Thank you. [Operator Instructions] The first question comes from the line of Jamie Rollo calling from Morgan Stanley. Please go ahead.
Good morning, Jamie.
Good morning, everyone. Three questions, please. First, on just – maybe starting with the outlook for – are you reiterating, I think, progress on underlying EBIT was the phrase you used back in November. Your main competitor, I’m sure you’ve seen, has got into something like a 20% to 30% drop in their Tour Operator profit. So I’m wondering sort of what’s your level of confidence in that profit outlook, please?
Secondly, I’m not expecting you to talk about the review, but it’s quite unusual to have a large UK Tour Operator with no sort of integrated airline. I might think about 90% of your British gas use the airline. So could you talk about the disadvantages strategically of separating the airline, be it access to infantry or control of the capacity? I think we know the advantages, but just the disadvantages. And finally, what do the bonds stipulate for repayment for any cash you might be getting if you were to sell a stake over? Thank you.
Okay. Your first question, about the outlook, we are making no change to the full year expectations set out in November. And reflecting that is market’s uncertainty, and we are early – in an early stage of the year. So there’s nothing to add on that one. The review, we are a large Tour Operator in UK, we are a large Tour Operator in Germany. And what is absolutely clear with all the options we may get on the table, the Airline is built on a really strong relationship between the Tour Operator and the Airline.
So that – and that commercial relationship will – is going to stay for the benefit of both sides of the Tour Operator and the Airline in whatever scenario. And we have already, in every market where we are operating an Airline, a very valid and valuable commercial agreement between the Tour Operator and the Airline, which is reflecting the market, which is really mirroring market condition. And on the debts, since we have separated the airline from the Tour Operators two years ago, also in our reporting, with that view, we are fully confident that this is going to work as well in any scenario.
So across the group, we have about 45% of the seats committed capacity to the Tour Operator, and we have about 36% as seat-only capacity where the Airline was really developing over the last four years, the whole Airline into a really Airline and not just a bus company of the Tour Operator.
So on the last question on the bonds, Sten, what I can add there, when we say we want to get flexibility in our financials, then that means as well that part of what we can get from a really strong airline, we are going to take into repaying debts. Sten?
Yes, good morning, Jamie. as you might remember, our bonds are due in 2022 and in 2023, but we have the option of calling the 2022 bonds earlier if we wish to, so there is a flexibility to reduce debt earlier if that – if any proceeds would facilitate that.
I can just follow up with some of those. The first question was really about your confidence level on profitability this year.
Well, as you know, we came out of the last year with a number of profit warnings through the year. That means that we abstained from making a firm guidance for the year 2019, and I think that we started out with a conscious – cautious view of what could happen in the New Year, so that’s why we are saying we are speaking to what we said back in December that we are making no expectations to what we said after the annual closing and the publication of that statement at this point in time.
And just to clarify on the last question, please. I’m aware of the early repayment, but to ask it another way, would the company expect any net cash that you’ll see after bonds are being repaid?
Well, it’s much too early to speculate about how to use any funds we haven’t gotten yet into the house. So we will get back to that once we have more concrete proposals on what this strategic review would bring us.
Thanks very much.
Thank you, Jamie.
The next question comes from the line of Kathryn Leonard calling from Numis. Please go ahead.
Good morning, everyone. It’s Kathryn Leonard from Numis. I just got three questions, if that’s okay. Just got past the – I mean, clearly, the market environment and beta data around what we have in your pay grade suggest that January has been softening and it’s been a tough year. Can you just comment on what you guys have been trading recently? And [indiscernible] point on confidence for you? How you feel about the summer as the season is progressing?
And secondly, can you just comment on the SDIs and whether or not you’re reiterating your guidance of GBP 70 million to GBP 100 million? And what SDIs did in the quarter perhaps, as an indication year-on-year? And then thirdly, I’m sorry to get back to the airline. Just thinking about it more of a high level. I mean, could you just discuss why you’re taking this decision now? I mean, obviously, you discussed at the prelims that your key focus really was on stabilizing the business and managing the business through a very, very difficult challenging end market, and clearly, we’re still in a very challenging end market, so it seems to be that you’ve accelerated that process.
And is that perhaps a reflection on a bit of concern on the balance sheet going forward? And then the fact that is the generation of cash flow for this year and the next 18 months is going to be poor, and so you need to support – in order to support our growth. And secondly, going back to the timing, and clearly, the market is awash with a number of assets coming to the market, and then we’ve got Germania and that’s obviously filed for insolvency.
On a smaller scale, we’ve got Flybe, and you’ve got others that are teetering on the edge. You’ve also got – deliveries are loosening up. Norwegian and others slowing down deliveries on a key operator. So – I mean, in that context, how do you think that this market environment is for selling? By the way, is it a minority stake or the majority? And that’s a good stuff now.
Okay. So I’ll start with the market environment and – look, we have a strong comparative from 2018, and we have a weaker consumer demand in the UK that this may be down a bit mix of everything, the Brexit for years and the heatwave into October. And then we have as well a weaker demand in Nordics because, as well there, we have somehow the prolonged summer heatwave who may delay a bit at the bookings. What we have done very cautiously at the beginning of the season, so we have taken the lessons what we have said already in November to derisk the business through capacity reductions.
And our capacity reduction for summer is in line with our booking path and what we see. And we have, as well, reduced the capacity in summer for our airlines by taking less summer wet leases planes in, so this cautious approach leaves us definitely in a situation where we have 10 less to sell on this less stock. So that is clearly a learning what we have taken. What we said on that in November, what we are going to do to take cautious stance into a pretty uncertain environment. And that is how we prepare to summer season, that is why we feel pretty confident – that we feel confident that we took the right decision.
So on your last question, the SDI question, I then give to Sten on your last question right now. First of all, I want to really underline that we kept a healthy liquidity during our cash loan points during this December and January. Second, this is a strong business, our Airline business. It is absolutely not to compare with any of what you have mentioned, for example, Germania. We have a strong Airline business. We have grown our revenue last year. We have grown our profits last year with our Airline in a very, very competitive and disrupted environment. We have excellent position in our major airports in Europe.
We are not flying, like, for example, Germania from all the regional and smaller airports in Germany, we have a healthy business and that’s why we feel in a good position to review all options, what we have is this business to give us greater flexibility in our – for the future to invest in our core strategy, which is about differentiation, which is about investing in really good hotels and good hotel concepts, investing in our digital channels and in getting more out of our structure, which is going to be further streamlined. So with this flexibility, we will grow our business and we will make our business – our core business more healthy. That is the intention. Now I’ll give to Sten for the SDIs.
As we have said several times, we are making no change to what we said in the November 2018. That also incorporates the SDIs. We have, for the Q1, GBP 20 million of SDIs that is unplanned. And it is GBP 7 million less SDIs compared with Q1 2018.
Okay. Thank you. Okay. And I’m just following up further on the Airline point, and Jamie’s comment on the debt and you’ve grown the debt. I mean, does that 2020 bond is – is 2024 bond that’s callable? So does that mean that you intend to complete this transaction or complete the strategic review in quite time, for it is less than six months away?
As I said, we are in the very early stage of this process. Sten?
Yes, I think there is nothing more to say to that at this point in time. Let’s get the cash, and then we’ll decide what to do with it. We have no timing on that, and therefore, I cannot answer your question at this point in time.
Okay. Thank you.
The next question comes from the line of Cristian Nedelcu calling from UBS. Please go ahead.
Thanks for taking my question. Good morning. Maybe three questions from my side, please. So first of all, you’re mentioning you’re early stage in the process of the Airline review. My question would be, you talked in the past about incremental headroom for the covenants for Q1 and Q2, and my understanding was that this does not apply to Q3 and Q4. So I guess, what I’m trying to better understand, if the summer will be indeed very tough, are there any other contingencies in place that you could use in that regard?
Secondly, if we look back at 2012 when the market conditions were very challenging, maybe similar to today or to a similar extent, at that stage, the company was taking quite aggressive restructuring measures and selling some assets or selling some aircraft and missing it back. I guess, my question is, why not do more now, if you can provide a bit of color there. And the last one, if I could, please. In terms of the working capital, you did flag the partial reversal in Q1. Could you please, also, share with us what are your expectations in the working capital development in Q2 and for the rest of the year?
Okay. Cristian, thank you. I’ll take the middle question, 2012. We are in a totally different place. And that to underline, again, we maintained a healthy level of liquidity during the low cash period in winter, not to compare with the situation in 2012. And why not do more? This is a logical step what we have always said in the past that we don’t need to own an airline, we have a great business with our airline. But as a holiday company, we don’t need to own an airline as long as we have a strong commercial relationship with the airline. So – and that is quite the big step what we are taking here. And – but I really want to underline, we are absolutely not in the same position as we have been in 2000. Sten.
On your first question, yes, what we communicated around the year-end was that we had a reset of covenants for Q1 and Q2, not for Q3 and Q4 because we didn’t find any necessity to do that. As we also communicated around our annual closing was that we have established a set of contingencies for the second half of about GBP 50 million. And these contingencies have, in the meantime, been identifies and are now in implementation to support our result in the latter part of the year. And as far as I can see, at this point in time, we will achieve these contingencies to partly offset maybe a further weakness in the market.
So based on that, there is, of course, at this point in time, no reason to discuss covenants or cash. On working capital forecasting, as we are saying, we are not changing any guidance or any – we have no change to our full year expectations that we mentioned back in November. So I would prefer, at this point in time, to abstain from talking in detail about future working capital, and we will report on that when we get there.
Understood. Thank you very much.
The next question comes from the line of Rebecca Lane calling from Jefferies. Please go ahead.
Becky Lane from Jefferies. Peter, Sten, I’ve got three questions. The first is just on bookings, especially into the summer, which you talked about the Tour Operator being down 12%. If you just talk a little bit about how closely that aligns to capacity cuts and also the split via source market, that would be helpful. Number two, you talked about pulling back in terms – on kind of summer wet leases given that the capacity cuts in this summer. Can you just talk about the lead time and if you were to change capacity any further either way?
And the third is just around Tour Operator destinations, again, obviously, you cited higher bookings helping top lines to Eastern and North Africa, and again, we’ve had commentary from your peer about margin challenges in Spain. Again, if you could just talk about how that’s looking going forward and how you expect that to hopefully support operating profit margins as well.
Yes. The bookings minus 12, that is broadly in line with our capacity reductions. And this is all over about the same picture. So in all the major markets, we have about the same picture. Why do we not split and why do we not give a trading table? We realized that we are the only one in the market who is giving out details trading tables, and we just feel it’s appropriate to give then to our competitors exactly where we stand on our trading if the others are not doing it neither. So we are changing that on our quarter results, quarter 1 and quarter 3. We are giving a more detailed update on the half year and the full year.
Pulling back the wet leases, we had about 25 wet leases last summer, and we are taking down into 16. So that is the capacity reduction of about 5%. Overall, in the Airline system, and that is as well planned, so we have announced that in November, and we are just now executing that. Our capacity movements then from destination to destination and from Airline to Tour Operator, on a much lower scale, is going to be then an operational matter, how we flex further the risk and how we manage risk then to really get the best margins out of our Tour Operator and Airline system.
The Tour Operator destination and where we see the demand going, so it is really across the group. We have seen a continued shift in demand from Spain to the Eastern Mediterranean in winter but as well in summer, and the Turkey and Egypt are proving particularly popular. Is this because of the value for money proposition. We see that more than in Spain. Yes, probably it is the case because we see or we saw especially in winter resort, still price increases on Canaries, and we see now the shift is going as well in summer more to the Eastern Mediterranean.
If you want to have the top five destinations for next summer, that is still Spain, if you take Canaries and the Balearics together and the Mainland, if you split it. the Balearics and the Canaries, then Greece is the number one and Turkey is number two, and then four and five is Balearics, and what is as well going very well is still USA. So throughout the whole group, we have a strong demand to stay on long haul, which is helping the yields, of course, as well.
Great. Thank you. Just one more point on the wet leases. I understand, obviously, the kind of capacity reductions that you’ve taken already. I guess I’m asking is, if you were to take that 16 pull down from now on, is that still possible? And what’s the lead time in doing that if you were to do that into the summer?
Yes. That – sorry, that is already – the capacity decrease is already done. So that is in our capacity planning worked in and that is a reduction of about 5%. So we really did that proactively and not reactively, so that is as well to help, and we said that last year, we had a lot of disruption in the Airline, and this works as well because we wanted to have more stability with our operation and a better customer service. And that was the reason why we said we want to take less wet leases – summer wet leases, and we were taking a cautious approach because we took the learnings out of last summer in terms of capacity we then have to fill at the very last minute.
The next question comes from the line is Johannes Braun calling from MainFirst Bank. Please go ahead.
Hey, Thanks for taking my question. I have two on the Airline review actually. So firstly, can you clarify if you are looking at the airline unit as a whole or whether a partial spin-off would also be a possibility, so, for example, spin it off Condor only while maintaining the UK. Airline where the model is more integrated? And then secondly, slots at which airport would you regard as most valuable in case of a sale?
So we are putting call options on the day, but we have a great group airline as a whole, but we said we are considering all options, so that I can’t say more. On the slots, look, we have – at Frankfurt, we have about 400 very valuable slots; in Dusseldorf, about 232; in Munich, about 162; and London Gatwick, we have about almost 350 slots – sorry, in Manchester, we have over 350 slots; in Gatwick, we have over 200 slots. So that are all great efforts with great slots. And that makes our airline proposition extremely valuable.
Okay. Thank you.
The next question comes from the line of Stuart Gordon calling from Berenberg. Please go ahead.
Good morning. couple of questions. Just on the covenants that you’ve got moved, could you give us some color on what the liquidity gap would have been without the changes to covenants, so as we can get a feeling for how we should be thinking about the second half of the year, given that you’ve not changed those covenants? Secondly, just to clarify your comments on the reduced disclosure, I think you said you’re the only person that was giving this. I was pretty sure your largest competitor still provide these details on bookings with the first quarter. And third, just on the Airline, how are you thinking about the long haul? I think it’s quite old and will probably need to update it sooner rather than later. How are you thinking about that in terms of the strategic review?
I’ll take question two and three. Look, if we are following our competitor statements very closely, and I think we are, not as a person, but as a company, we are better helped if we are adapting our disclosure to our competitors. And what we say now is not more and not less, but our main competitors who are, as well, are going out with what the statements are saying. Some of them are even less than what we say. So we took this decision deliberately as market sensitive, and we think that this is good enough to give you a picture where we stand. On the long-haul fleet, we know that we are continuously re-fleeting. We have, as well, taken some decisions on medium-haul fleet, and our fleet renewal program is going on as we have planned it. On the covenants, Sten?
Yes. I cannot really add anything to that, except for what we have said so far. We had a healthy liquidity headroom as we have reported over the first quarter, and there is no – in the reset, we talked about, in December, there is no direct connection between cash and the covenant collection – calculation. So more or less, cash is – doesn’t have a direct influence.
Okay. Thank you.
Unfortunately, we have run out of time to take any further questions. I’d like to hand back to your host for any concluding remarks.
Okay. Thank you very much for your questions and your interest in Thomas Cook. I look forward to speaking to you soon. Again, have a good day. Thank you very much for joining this call.
Thank you for joining today’s call. You may now disconnect your lines.