Pro forma financial results

Thomas Cook has reported a strong set of results. This demonstrates the quality of management, the strength of our asset-light business model and our operational and cost flexibility. It was achieved against the background of the merger integration and the continued development of the Group through significant strategic acquisitions.

Group pro forma revenue for the twelve months to 30 September 2008 was £8,809.8m (2007: £7,878.5m), an increase of 11.8% on the prior year period. Excluding the impact of translation and acquisitions, Group revenue was flat year on year. This reflects a decrease in UK and North America revenue, as a result of planned capacity cuts, offset by an increase in Northern Europe. Underlying revenue in Continental Europe and Airlines Germany was broadly flat year on year.

We delivered a 49.8% increase in Group profit from operations to £365.9m (2007: £244.2m). The Group operating profit margin rose 35.5% from 3.1% to 4.2% last year, despite a significant increase in fuel costs. This strong result reflected our ability to adapt to changing demand by reducing capacity, changing our product mix, cost discipline, and fuel and currency hedging, as well as our delivery of significant synergy savings.

Pro forma EBITDA (profit from operations before depreciation and amortisation) increased by 36.5% to £506.0m (2007: £370.8m). Pro forma adjusted earnings per share increased by 40.9% to 24.1p (2007: 17.1p).

The segmental performance is reported in detail in the Operational Review.

Pro forma financial position

Thomas Cook’s financing position is robust. In May 2008, we replaced the existing debt facility with a new credit facility amounting to £1.4bn, of which £1.0bn is available for immediate use for the Group’s general corporate purposes, including acquisitions and the share buy back programme that we have now completed.

In view of the current uncertainties in the credit markets, we took the prudent approach in October 2008, to draw down fully our available facility thus ensuring optimal financial certainty for the Group.

Operating cash flow was £220.2m in the twelve months to 30 September 2008, compared with £215.3m in the previous year. At 30 September 2008, net debt was £292.5m, compared with net funds of £393.6m in the previous year, reflecting the planned expenditure on the share buyback programme and acquisitions.

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Operational flexibility, cost base and hedging

The flexibility within our asset-light business model has been critical during the past period and we have improved our ability to underpin our future performance in more challenging trading conditions.

The resilience we believe we have in the current difficult trading conditions is based on that flexibility, the strength of our businesses post-merger, and capacity rationalisation throughout the industry. Capacity reductions in the UK market, for example, amount to approximately 25% over the last two years through our actions and those of other market participants.

We are taking advantage of our buying power to manage accommodation costs, which represent over 30% of revenue. We are confident that negotiations with our suppliers will result in prices no higher than last year’s levels across the Group this year, despite adverse movements in currency.

The ability to adjust our cost base for potential changes in demand is also important, particularly in the current market conditions. Only 10% of our group-wide hotel capacity is committed for summer 2009, which gives us considerable scope to make further capacity adjustments; and in the UK, around 89% of our tour operator flying requirements are undertaken by our own fleet, allowing us considerable flexibility to cut capacity without impacting our own airline’s operations.

Tight control of all costs is a fundamental part of the Thomas Cook business model.

In addition, we have developed contingency plans to cut our overhead costs further should tougher market conditions prevail.

Hedging

Fuel costs represent approximately 8% of revenue and successful hedging has been an important element of managing this cost. Through a mixture of swaps and options, we avoided the worst of the high crude oil prices in the summer of 2008 as well as realising some benefits when prices fell. We have now locked in our fuel costs for the current financial year.

We are taking a similar cautious approach to future costs and our policy is to hedge fuel and foreign exchange between 12 and 18 months in advance of the expected expenditure. In line with this:

• we have hedged 100% of our fuel requirements for winter 2008/2009 and 95% for summer 2009, ensuring certainty of pricing;
• we have hedged 98% of our dollar and 96% of our euro requirements for winter 2008/2009 and summer 2009.

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Merger synergies

The integration of our operations since the merger between Thomas Cook and MyTravel on 19 June 2007 has been highly successful and we have been operating on a single platform from management, commercial and technological perspectives for over a year.

By accelerating synergy delivery, we realised total savings of £142m in the 2008 pro forma period, of which £139m were additional savings during the period. The majority of the savings came from the UK business.

Looking forward, we now expect to deliver new synergy targets of:

• £185m of annual synergy savings by the end of the 2009 financial year compared with the previous accelerated target of £155m by 2009;
• a total of £215m of savings by 2010 compared with the original target of £155m by 2010.

Strategy

We have made significant progress against our strategy this year, both through actions which have optimised our existing business, and through acquisitions which have allowed us to achieve a step-change in our performance, and these are set out in more detail within Strategy.

Share buyback

In December 2007, we announced plans for a £290m (€375m) share buyback programme and the programme was launched in March 2008, following approval at an EGM held on 12 March 2008. In proposing the programme, the Board believed that the repurchase of shares was the best way to return value to shareholders, while at the same time improving earnings per share and balance sheet efficiency.

At the close of business on 30 September 2008, the Group had purchased a total of 107,124,730 shares for cancellation, at a total cost of £263.5m, excluding commission. Of these shares, 48,595,331 were purchased from Arcandor AG, as a result of which Arcandor’s holding was 52.8% of the Group.

The share buyback programme concluded on 9 October 2008. Up to that date, a total of 120,059,117 shares were purchased for cancellation at a total cost, excluding commission, of £289.9m. Of these shares, 55,426,756 were purchased from Arcandor AG, maintaining its holding of 52.8% in the Group.

Group Executive Board

From left to right:

Standing: Angus Porter, Jürgen Büser, Thomas Döring, Manny Fontenla-Novoa, Ralf Teckentrup, Michael Friisdahl, Mike Cutt and Ian Derbyshire.
Sitting: Peter Fankhauser, Pete Constanti, Alexis Coles-Barrasso, Ludger Heuberg, Sam Weihagen and Derek Woodward.
See Group Executive Board for biographies.

Management team

This year’s impressive performance is the result of the strong management team working together and, in the newly enlarged Thomas Cook business, being more capable than ever of dealing effectively with the challenges we face. Despite the backdrop of integration, our international team has been determined that Thomas Cook should remain resilient, continue to make great progress and put in place strong foundations upon which to build its future. I am incredibly proud of the entire Thomas Cook team for what they have achieved this year and look forward to working with them to go even further in 2009 and beyond.

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Outlook

A range of initiatives within our power underpins our confidence in our prospects for the current financial year. Our business model allows us to flex capacity and product mix well into the summer 2009 booking cycle. In addition to our own capacity management, we have seen capacity rationalisation throughout the industry which gives us further confidence that we can trade successfully through the current conditions. Capacity reductions in the UK market, for example, amount to approximately 25% over the last two years, through our actions and those of other market participants.

We have tight cost discipline throughout the business. We are negotiating with suppliers to ensure that accommodation costs are no higher than 2007/2008 levels despite currency movements. We are also hedging fuel and currency against extreme volatility. In addition, we have developed contingency plans to cut our overhead costs further should tougher market conditions prevail, and have increased synergy targets for 2010 to a total of £215m with £185m expected by the end of the 2009 financial year.

The combination of our management team’s long industry experience, a restructured marketplace, our own initiatives and trading which has been in line with expectations supports our confidence in our prospects for the full year. We are targeting further growth in margins in 2009 and 2010 and operating profit of £480m in 2010.

Manny Fontenla-Novoa

Chief Executive Officer
19 December 2008

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