Income statement highlights
Revenue and profit from operations
Group revenue for the year was £9,268.8m, an increase
of 6% on the pro forma prior year. Excluding the impact of
translation, Group revenue was down 1%, reflecting reduced
capacity in all our major markets, as we actively managed
the business through the global recession, offset by the
year on year increase as a result of acquisitions in this
year and last.
Profit from operations before exceptional items for the year
was £414.9m, an increase on the pro forma prior year
of £49m, or 13%. As noted above, capacity was reduced
in all major markets as we sought to manage the Group through
the global recession. Trading was also adversely impacted
by the swine flu outbreak, increases in fuel prices year
on year, and the weakening of sterling against the euro and
dollar which served to push up accommodation costs, particularly
in our UK business. The adverse impact of the above was more
than offset, however, by strong cost control, a year on year
foreign currency translation benefit, the realisation of
additional merger synergies and contributions from acquisitions
made this year and last. Read more details of the movements in revenue and profit from operations in both the table below and the Operational
Review.
Exceptional operating items
Exceptional items are defined as costs or profits that have
arisen in the period which management do not believe are
a result of normal operating performance and which, if not
separately disclosed, would distort the year on year comparison
of trading performance.
Exceptional operating items amounted to £215.9m (2008
pro forma: £205.3m). £56.6m of these costs relate
to the Thomas Cook and MyTravel merger integration process
which is now largely complete. Cumulative merger synergies
delivered to the end of September 2009 were £205m,
with a further £10m of benefits expected to come through
in the year to September 2010. Total merger integration costs
to be incurred in delivering the annualised savings are expected
to be £274m, of which £268m has been incurred
to date (including £13m of capital costs).
A further £112.8m of exceptional operating costs have
been incurred in the year in relation to the integration
of other acquisitions made last year and this, and other
restructuring projects that we have undertaken across the
Thomas Cook Group. These restructuring projects largely reflect
changes made to underlying business processes and systems
in the UK, Germany, the Western Europe markets and Canada
to improve efficiency and cost leadership across the Group.
These measures have served to not only protect profitability
in the financial year, but will also ensure that the Group
is well-placed going forward as we expect them to deliver
annualised benefits in excess of £50m.
Other exceptional operating items amounted to £46.5m
and include exceptional costs in relation to fuel, impairment
and book losses on the disposal of fixed assets (mainly aircraft
related), aborted acquisition costs and losses resulting
from other exceptional operating events that are not expected
to recur.
Amortisation of business
combination intangibles
During the year we incurred costs of £34.8m in relation
to the amortisation of business combination intangibles (2008
pro forma: £53.5m), of which £25.6m relates to
the merger of Thomas Cook and MyTravel and represents the
amortisation of brand names, customer relationships and computer
software. The remaining £9.2m relates to other acquisitions
made post-merger. Of this amount, £7.8m relates to
the amortisation of brand names, customer relationships and
computer software, and £1.4m to the amortisation of
the order backlog that existed at the time of the respective
acquisitions.
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Associates and joint ventures
Our share of the results of associates and joint ventures
before exceptional items was a loss of £3.8m (2008
pro forma: profit of £0.2m). The increase in losses
year on year largely reflects increased losses from our Barclaycard
joint venture arrangement.
In August 2009, the Group disposed of its 19.99% share in
Aqua Sol Hotels Limited, a quoted hotel group based in Cyprus,
resulting in an exceptional loss on disposal of £2.2m.
Net investment income
Net investment income, which reflects dividends and interest
received from investments, was £1.4m (2008 pro forma: £1.4m).
Net finance costs
Net finance costs (excluding exceptional finance costs) in
the year were £104.3m (2008 pro forma: £58.2m).
The increase year on year reflects the higher net debt throughout
the year which, to a large extent, resulted from the full
year effect of funding the share buyback programme (£295m)
and acquisitions in 2008 and 2009 (£368m).
The net debt position was further exaggerated in the first
quarter of the 2009 financial year as the Group took the
prudent decision, in October 2008, to draw down all available
funds under the bank facility as a protective response to
the uncertainties in the banking market at that time. This
action was taken to limit counterparty risk going into the
Group’s low point but came at a net cost of approximately £8m
in additional interest costs.
The Group also incurred the annualised effect of commitment
fees and amortisation of set-up fees on the Group’s
banking facility, which was put in place in May 2008. In
addition, non-cash costs increased by £11.7m as a result
of movements in the notional interest income and expense
on the Group’s pension schemes. However, this was broadly
offset by income on marking to market the forward points
on our foreign currency hedging instruments.
Net exceptional finance income in the year was £0.8m
(2008 pro forma: cost of £26.8m). The net cost in 2008
included £12.9m relating to the exceptional element
of the phasing effect of marking to market the forward point
on our foreign currency hedging, which arose in September
2008 as a result of the global banking crisis. In 2009, £11.4m
of this unwound, but was offset by £10.6m of additional
revaluation losses on trading securities. The Group has now
disposed of all of its trading securities.
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Tax
The tax charge in the year was £37.8m (2008 pro forma: £13.1m).
Excluding the effect of adjustments to tax provisions made
in respect of exceptional items, this represents an effective
tax rate of 26.9% on the pre-exceptional profit for the year.
The pre-exceptional effective cash tax rate was 20% and is
expected to continue to be considerably lower than the effective
income statement rate as a result of being able to utilise
the losses available in the UK and Germany. Total losses
available for carry forward in the Group at 30 September
2009 are £1.4bn. Deferred tax assets have been recognised
in respect of £0.8bn of this amount.
Earnings per share and dividends
The basic earnings per share before exceptional items (“adjusted
earnings per share”) for the year was 26.4p, an increase
of 10% on the 2008 pro forma figure. The adjusted diluted
earnings per share for the year was 26.2p (2008 pro forma:
24.1p).
The basic and diluted statutory earnings per share was 1.9p
and 1.8p respectively (2008 statutory: basic and diluted
of 4.6p).
The Board is recommending a final dividend of 7.0p per share,
for payment after, and subject to shareholder approval at,
the Annual General Meeting to be held on 25 March 2010. This,
together with the interim dividend of 3.75p per share, brings
the total dividend in respect of the financial year to 10.75p.
Based on the adjusted diluted earnings per share figure noted
above, this equates to a 41.0% payout ratio for the full
year compared with a payout ratio of 40.5% in the prior year.
Cash and liquidity
Net debt (cash less borrowings, overdrafts and finance leases)
at 30 September 2009 was £675.3m (2008: £292.5m).
The balance at 30 September 2009 consisted of £550.2m
of cash, £940.0m of borrowings and overdrafts and £285.5m
of finance lease liabilities. The increase in net debt year
on year is primarily due to the following net cash outflows
in the period:
- £124m on working capital (excluding exceptional
items – see below). The tour operator cash flow
profile is extremely cyclical. The winter months are
traditionally a period of significant cash outflows,
as cash paid to hoteliers often lags the end of the peak
summer season, whereas cash is received from customers
in advance of their holiday departure. In a year with
significant capacity cuts, this resulted in a working
capital outflow which was further exaggerated by the
delay in holiday bookings (and hence lower revenue in
advance) we have experienced as a result of the economic
slowdown;
- £214m cash outflow for exceptional items, of which £140m
relates to exceptional items arising in 2009 and £74m
to prior year exceptional items;
- £69m net cash outflow on acquisitions and disposals
(largely being the £72m payment to Lufthansa in
March 2009 to complete the acquisition of the Condor airline);
- £47m cash outflow to complete the share buyback
programme;
- £17m additional pension funding payments for the
UK defined benefit scheme; and
- £58m impact of foreign exchange translation on
our non-sterling denominated borrowings.
These have been partly offset by the year on year improvement
in the underlying operating profit performance.
Cash and cash equivalents at the balance sheet date were £550.2m
(2008: £761.3m). This balance includes restricted cash
of £60.2m (2008: £127.1m), which is held in escrow
accounts predominantly in the US and Canada, in respect of
local regulatory requirements, in addition to amounts held
in respect of White Horse Insurance Ireland Limited, the
Group’s insurance company.
The Board is satisfied with the Group’s funding and
liquidity position, which remains robust. Fixed charges cover1
and the ratio of gross debt to EBITDAR2 , which are the ratios
used as the basis for the covenants in our credit facilities,
were 3.1x and 2.9x respectively at 30 September 2009.
Our financial position remains robust. Our bank facility of €1.8bn
does not expire until May 2011 and we plan to refinance this
by summer 2010.
Segmental performance review
Segmental performance presented in the segmental performance review table is
based on financial performance before exceptional items and
amortisation of business combination intangibles. It also
compares the 12 months to September 2009 to the pro forma
12 months to September 2008 as the Directors believe that
this provides a more meaningful year on year comparison of
the development of the business. Statutory segmental information
is provided in Note 3 to the Financial Statements.
Treasury policies
The Group is subject to risks related to changes in interest
rates, exchange rates, fuel prices and liquidity within the
framework of its business operations. To manage these risks,
the Board has established treasury policies which are reviewed
regularly to ensure they remain relevant to the business.
The Board approves all the financial instruments used by the
Group to manage these risks. Internal guidelines govern the
hedging activities, responsibilities and controls. The use
of derivative financial instruments for speculative purposes
is not permitted.
The Group’s treasury function has primary responsibility
for treasury activities and these activities are reported
regularly to the Board. The Treasury function is subject
to periodic independent reviews and audits, which are presented
to the Audit Committee.
Management of liquidity risk and financing
The Group’s overall objective is to ensure that it is
able to meet its financial commitments as they fall due.
This involves preparing a prudent cash flow forecast using
its annual budget and three-year plan and identifying an
appropriate amount of headroom to provide against any unexpected
flows. In addition, a 13 week cash flow forecast is used to
manage short-term positions. At the year end, the Group had
undrawn committed debt, guarantee and bonding facilities
available to it of £463m.
The Group deposits surplus cash with approved banks and financial
institutions with strong credit ratings. Each counterparty
has a credit limit authorised by the Board and the credit
risk is reduced by spreading the investments and derivative
contracts across a number of counterparties. At the year
end, the Group had £247m of cash deposits.
In May 2008, the Group entered into a €1.8bn (£1.6bn)
committed bank debt facility with a number of banks, including €0.2bn
(£0.2bn) for bonding requirements. During the year,
the Group repaid €75m (£69m) of the term loan,
in accordance with the terms of the facility. The facility
provides funding to manage the seasonal liquidity requirement
of the Group and for general corporate purposes.
Financial risk management
The Group’s treasury function has primary responsibility
for managing financial risks to which the Group is exposed,
including fuel price risk, currency risk, liquidity risk,
interest rate risk and counterparty risk. Further details
are provided in Note 24 to
the Financial statements.
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