1st Quarter Results

11 February 2014

Interim Management Statement for the three months ended 31 December 2013

DELIVERING MORE VALUE

"I am pleased to report further rapid progress delivering our strategy for sustainable profitable growth. Q1 underlying EBIT improved by £10 million to £(56) million. On a last 12 months basis, to place the quarter in an annual context and reconcile with our targets, underlying EBIT is up 36% to £274 million.

Our Q1 results, new product revenue growth, web integration, cost out and profit improvement programmes combined with an intense business focus and financial discipline, all underpinned by the Thomas Cook Business System, give us confidence of achieving our targets and delivering even more value in the years to come."

Harriet Green, Group Chief Executive

Bookings in line with expectations

· Bookings for Summer 14 are developing in line with our expectations and at similar levels to last year

Further financial improvement

In addition to disclosing results for the three months ended 31 December, we have disclosed results for the 12 months ended 31 December ("LTM"). We consider that this enhanced disclosure will facilitate reconciliation with our targets and KPIs, many of which are calculated on an LTM basis, and to enable the quarter's results, which are impacted by the seasonal nature of our business, to be viewed in their annual context.

· On a last 12 months basis (''LTM'') revenue grew by 2.4% to £9,300 million (LTM ended 31 December 2012: £9,080 million) 

· For the three months ended 31 December 2013, revenue reduced by 0.9%, a decrease of £15 million to £1,656 million (three months ended 31 Dec 2012: £1,671 million), due to lower customer demand for Winter holidays to Egypt which offset improvements in capacity management and new product growth. Excluding Egypt, Q1 revenue grew by 4.1% compared with the same period last year

· On an LTM basis underlying EBIT grew by 36%, an increase of £72 million to £274 million (LTM ended 31 December 2012: £202 million), delivering a Group EBIT margin of 2.9% 

· For the three months ended 31 December 2013, the underlying EBIT loss improved by £10 million to £(56) million (three months ended 31 Dec 2012: £(66) million), reflecting profit improvement and cost out initiatives 

· On an LTM basis free cash flow improved by £42 million to £(64) million (LTM ended 31 December 2012: £(106) million)

· For the three months ended 31 December 2013 free cash flow was £(879) million, £118 million lower than the three months ended 31 December 2012. This reflects the unwinding of short term cash management actions taken in the three months ended 31 December 2012 and the positive impact of an extension of supplier payment terms in 2013 which resulted in a higher proportion of payments for the Summer 2013 season falling in the first quarter of the current financial year. These short term impacts will normalise during FY14, which will include further improvements in working capital performance

· Net debt reduced by £273 million to £1,286 million (31 December 2012: £1,559 million) and liquidity headroom improved by £84 million to £374 million (31 December 2012: £290 million)

Intense business focus

· In line with our strategy, we have continued to divest of non-core businesses and investments to allow us to focus on our core activities, using the proceeds to further reduce debt

· We have announced the sales of Gold Medal to dnata (part of the Emirates Group) and Elegant Resorts to Al Tayyar (a leading Saudi Arabian-based travel group) for £45 million and £14.3 million respectively. Gold Medal will continue as exclusive supplier of long-haul scheduled flights to the Thomas Cook businesses in the UK. This latest strategic partnership with dnata will further enhance the range of flexible options we are able to offer our customers. The sale of Elegant Resorts enables us to realise value from an asset that is not central to our business

· To date, the total amount of gross proceeds raised from our divestitures programme (including anticipated gross proceeds to be received from transactions that remain subject to completion) amounts to £125 million. While our intense business focus continues, upon completion of these remaining transactions, we will have achieved our previously communicated target of £100 million to £150 million in gross proceeds by FY15 eighteen months prior to our target date

· Our progress in improving performance of our businesses in France and Russia remains on track and both are showing an improvement on last year

Further delivery on targets and KPIs

New product growth

· Incremental new product revenue was £131 million on an LTM basis, on track to achieving our FY14 target of more than £300 million

· Summer bookings at our Concept hotels have increased by 42% to 252,518 compared with the same period last year

· Summer city break bookings have increased by 12% to 152,275 compared with the same period last year

· Our exclusive hotel portfolio continues to grow rapidly. Since the end of FY13, we have secured a total of 136 new exclusive hotels, up from 309, an increase of 44%, well on our way to achieving the targeted 640 by FY15

Web penetration

· 36% of holidays booked online (twelve months ended 31 Dec 2012: 34%). Significant progress made to integrate web platforms and enhance content to enable increased online penetration and achieve our target of more than 50% by FY15

- Since the end of 2013, 50% of all web site visits to thomascook.com were from a mobile, tablet or phablet, with total searches up 60% compared with the same period last year

- In January, our UK and Northern European web sites experienced their highest ever traffic in a day

- In the same month, traffic through our new direct to consumer web site in Germany, thomascook.de, rose 43%

· Web transformation is part of a Group-wide IT integration, delivering a single operating system, inventory and "OneWeb" platform

· UK retail store search and book systems are now aligned with the web site under our "OneWeb" strategy to migrate to a common web platform. We expect that most sites will be migrated by the end of this year 

· Supporting our omni-channel "high tech, high touch" distribution, our recently announced "DreamCapture", which enables the in-store discussion to continue digitally once the customer has returned home, has now been successfully implemented in all UK stores

Cost out and profit improvement (Wave 1)

· In Q1 we delivered an additional £38 million of cost out and profit improvement benefits taking the cumulative total to £232 million. We remain confident of achieving our FY14 target of more than £340 million and our FY15 target of more than £440 million

· Increases to the current Wave 1 FY15 target of more than £440 million, as a result of adjustments to the risk weightings on initiatives in progress, will be published at our H1 14 results as previously announced

Cost out and profit improvement (Wave 2)

· The work we are doing on identifying Wave 2 benefits, as part of our internal operating methodology, the Thomas Cook Business System, is progressing well and we continue to expect them to be of a similar magnitude to Wave 1

· Risk weighted benefits and the costs associated with delivering these will be published at H1 14 results announcement, as previously announced

Gross margin improvement

· The LTM underlying gross margin on a like-for-like basis increased by 50 basis points to 22.1% (LTM ended 31 December 2012: 21.6%). For the three months ended 31 December 2013, the underlying gross margin on a like-for-like basis improved by 30 basis points to 22.1% (three months ended 31 December 2012: 21.8%). These improvements reflect the benefits of continued disciplined yield management under the Thomas Cook Business System

UK turnaround

· UK underlying EBIT margin on an LTM basis increased by 190 basis points to 2.3% (LTM ended 31 December 2012: 0.4%)

· UK underlying EBIT for the three months ended 31 December 2013 on a like-for-like basis was £(67) million, remaining stable compared with the same period the previous year as the impact of unrest in Egypt was offset by the benefits of cost out. We remain confident of achieving our target underlying UK EBIT margin of more than 3.5% in FY14 and more than 5% in FY15

· As part of the transformation of our UK and Ireland business, we have successfully refocused our Irish offer which is now available exclusively online through thomascook.ie

Cash conversion

· The cash conversion ratio on an LTM basis of 25% (LTM ended 31 December 2012: 6%), reflecting improved working capital management. This ratio, which is affected by seasonal factors, is expected to normalise over the remainder of the financial year

· We remain confident of achieving our cash conversion targets of more than 55% in FY14 and of more than 70% in FY15. We also remain on track to achieve our target of a £200 million improvement in working capital by FY15

Investing in profitable growth

· We previously announced that we expect discretionary strategic operating investments may increase by up to £50 million in FY14 in support of the delivery of sustainable profitable growth. Of this, we invested £10 million in operating expenses in the three months ended 31 December 2013 

Continued confidence of delivery

· The encouraging trading results, combined with our successful product development and cost out and profit improvement programmes, that are underpinned by the Thomas Cook Business System, make us confident of delivering on our targets as well as sustaining long term profitable growth

Upcoming events

· The Annual General Meeting will be held on 20 February 2014

· A pre-close trading update will be announced on 27 March 2014

· H1 14 results will be announced on 15 May 2014

Note: Throughout this document the abbreviation "LTM" refers to the last 12 months to 31 December. The term 'underlying' refers to trading results after adjusting results on a statutory basis for separately disclosed items that are significant in understanding the on-going results of the Group. Separately disclosed items are included on the face of the income statement and are detailed on p17. The term 'like-for-like' reflects the underlying results after removing identifiable non-recurring items in the prior year and adjusting for exchange rate movements. Like-for-like adjustments are shown on p14 and p15.

Market briefing

Management will present these results on Tuesday, 11 February 2014 at 9.30 a.m. (London time)

Teleconference details

We recommend participants start dialling in 5-10 minutes prior to the start of the presentation. To telephone link-up to the briefing, dial one of the following numbers from 9.20 a.m. (London time):

Webex details

To join the web portion of our meeting, please access the following link: https://btevent.webex.com/btevent/onstage/g.php?t=a&d=848981064

GROUP CHIEF EXECUTIVE'S REVIEW

I am pleased to report further rapid progress delivering our strategy for sustainable profitable growth. Our Q1 results, new product revenue growth, web integration, cost out and profit improvement programmes combined with an intense business focus and financial discipline, all underpinned by the Thomas Cook Business System, give us confidence of achieving our targets and delivering even more value in the years to come.

Further financial improvement

The results demonstrate further financial improvement. On an LTM basis, underlying Group EBIT is up 36% from £202 million to £274 million, representing a margin of 2.9%. On the same basis, revenue is up 2.4% from £9,080 million to £9,300 million and costs are down 1.6% from £1,814 million to £1,786 million, reflecting the impact of our on-going actions to deliver a much-needed step change in the Group's profitability and growth. Similarly, our actions to strengthen the balance sheet are taking effect with net debt £273 million lower at £1,286 million compared with £1,559 million at 31 December 2012.

Further delivery on targets and KPIs

Incremental new product revenue

Having set out our targets and KPIs just eleven months ago, it is pleasing to see rapid results. I have been particularly impressed by the extent to which the team has embraced sharing best practice as we have successfully broken down silos and instilled a collaborative Group culture. This has been most visible in the area of new product development, the results of which are particularly encouraging towards the delivery of our strategy for sustainable profitable growth. While we are still only at the early stages, the new product growth, which is now contributing £131 million in incremental revenue, is gaining momentum. Compared with the same time last year, bookings for our high margin concept hotels are up by 42%, an increase of 74,338 customers to 252,518, and bookings for our new city breaks are up by 12%, an increase of 15,931 customers to 152,275.

Our exclusive hotel portfolio, which is quality assured, continues to grow rapidly. Since the end of FY13, we have secured 136 new exclusive hotels, up from 309, an increase of 44%, well on our way to achieving the targeted 640 by FY15.

Concept hotels have increased by 46 hotels from 93 at the end of FY13 to 139 and partnership hotels have increased by 90 hotels from 216 at the end of FY13 to 306. 

One of the key findings from our in-depth traveller survey was that customers value personalised products that they can trust. We believe that providing quality product that is quality assured is a key competitive advantage. To support this further we have recently strengthened our Quality Assurance function with the addition of 50 people from within the Group.

Web penetration

Our work to digitalise Thomas Cook, including a Group-wide IT integration that will deliver a single operating system, inventory and "OneWeb" platform, continues apace. Representing a big challenge given the approach of the past that treated the web as an isolated after-thought to the traditional retail model, I am pleased to say that our actions to deliver a single integrated web platform and embed a digitally driven omni-channel culture are starting to produce results. While for the purposes of our published web penetration target we only recognise online bookings once our customer has departed for their holiday, which means that current online Summer bookings will not be formally recognised until later in the year, early indications in most segments are encouraging.

In the meantime, we are making a lot of progress building the necessary web infrastructure to support our digital objectives. UK retail store search and booking systems are now aligned with the website under our "OneWeb" strategy and we are also working to significantly enhance our web user experience and to migrate key markets onto a common platform. We expect that most sites will be migrated by the end of this year.

We continue to innovate in line with the development of mobile technologies. Since late December 2013, 50% of all visits to Thomascook.com were from a mobile, tablet or phablet, with total searches up 60% year on year.

We are pleased to announce that in support of our omni-channel "high tech, high touch" distribution strategy, our recent innovation, "DreamCapture", which enables the in-store discussion to continue digitally once the customer has returned home, has now been successfully implemented in all UK stores with encouraging initial results.

We also continue to receive external recognition for our web, having recently been shortlisted at the CIM Marketing Excellence Awards for our innovations in digital marketing and customer engagement.

Cost out and profit improvement

Our internal operating approach, the Thomas Cook Business System, is supporting not only the continued development of trusted personalised product and a "high tech, high touch" digital organisation, but also the continued identification and delivery of opportunities for profit improvement and cost out.

In the three months ended 31 December 2013, our Wave 1 cost out and profit improvement programme delivered an additional £38 million of benefits. This takes the cumulative total to £232 million, well on the way towards our FY14 target of more than £340 million and our FY15 target of more than £440 million.

As we announced at our FY13 results, increases to the current Wave 1 FY15 target of more than £440 million, as a result of adjustments to the risk weightings on initiatives in progress, will be published at our H1 14 results. At these results, we will also provide details on our Wave 2 cost out and profit improvement programme, with risk weighted benefits and the costs associated with delivering them.

Margin improvement

When we set our targets and KPIs in March last year, we said that the key requirement of our growth strategy is that it is delivered profitably. As a result, we set two specific KPIs to ensure gross margin improvement at the Group level and EBIT margin improvement at the UK business segment level. 

On an LTM basis, the Group's underlying gross margin on a like-for-like basis improved by 50 basis points to 22.1% (LTM ended 31 December 2012: 21.6%), reflecting the benefits of continued disciplined yield management as part of the operating methodology of the Thomas Cook Business System.

On the same LTM basis, the UK's underlying EBIT margin improved by 190 basis points to 2.3% (LTM ended 31 December 2012: 0.4%).

UK underlying EBIT for the three months ended 31 December 2013 of £(67) million was stable on a like-for-like basis compared with the same period last year as the unrest in Egypt was offset by the benefits of cost out. However, through further cost out and new trading initiatives, we remain confident of achieving our target underlying EBIT margin of more than 3.5% in FY14 and more than 5% in FY15.

While a lot has been achieved transforming our UK business, there is still significantly more that can be done to unlock its potential. For example, consistent with our drive to increasingly digitalise the business, we have refocused our Irish offer, which is now available exclusively online through our web site, thomascook.ie.

Cash conversion

Our cash conversion ratio on an LTM basis of 25% (LTM ended 31 December 2012: 6%), reflects improved working capital management. This ratio, which is affected by seasonal factors, is expected to normalise over the remainder of the year.

We remain confident of achieving our cash conversion FY14 target of more than 55% and our FY15 target of more than 70%. We also remain on track to achieve our target of a £200 million improvement in working capital by FY15.

Intense business focus

In line with our strategy, we have continued to divest of non-core businesses and investments to allow us to focus on our core activities. 

We have recently announced the sales of Gold Medal to dnata (part of the Emirates Group) and Elegant Resorts to Al Tayyar (the largest Saudi Arabian-based travel group) for £45 million and £14.3 million respectively.

To date, the total amount of gross proceeds raised from our divestitures programme (including anticipated gross proceeds to be received from transactions that remain subject to completion) amounts to £125 million. While our intense business focus continues, upon completion of these remaining transactions, we will have achieved our previously communicated target of £100 million to £150 million in gross proceeds by FY15 eighteen months prior to our target date.

In the three months ended 31 December 2013 we incurred separately disclosed items of £71 million (net), including restructuring costs of £18 million. £44 million of separately disclosed items were non cash, mainly relating to balance sheet write offs associated with disposals of £42 million.

Our progress in improving the performance of our businesses in France and Russia remains on track and both are showing an improvement on last year.

Investing in profitable growth

At our FY13 results, we announced that we expect discretionary strategic operating investments may increase by up to £50 million in FY14 in support of the delivery of sustainable profitable growth.

This investment included costs of increased marketing and rebranding, enhancement of Group procedures and resources and the insourcing of certain operating activities. In addition, increased capital expenditure of £24 million was invested in the business in the three months ended 31 December 2013, mainly on IT to support the transformation and to maintain and upgrade our airline. Capital expenditure on the airline in the three months ended 31 December 2013 included £9 million on the first phase of a cabin refurbishment programme which will improve revenues by increasing seat capacity.

Current trading

Winter 13/14

The Winter season is 86% sold, in line with the booking pattern at the same time last year. Compared to last year Winter bookings have been adversely impacted by social unrest in Egypt and, accordingly, Winter booking data is also stated excluding Egypt to remove the distorting impact of reduced demand to that destination.

In line with our profitable growth strategy, Winter capacity commitments in the UK and Continental Europe have been reduced in order to focus on margin management and to respond to lower demand to Egypt, albeit there has been some recent recovery in that destination. Adjusting for the impact of market disruption in Egypt, bookings from all source markets increased, except for Continental Europe due to strategic reductions in capacity in France and Russia as we continue to transform those businesses in order to return them to profitability.

 Summer 14

Summer is currently approximately 39% sold, in line with last year. Trading performance across the group is in line with expectations against a strong prior year comparative.

Bookings for our UK business are 2% higher than last year compared to a 1% reduction in capacity commitments. Summer capacity is 1% better sold than at this time last year. Headline average selling prices are 2% lower than last year due to a higher proportion of lower priced product and destination sales earlier in the season. We expect average selling prices to increase as we develop and sell a higher proportion of exclusive hotel product to UK customers, consistent with our strategy. Bookings for these products have shown strong growth for Summer 14 but do not yet represent a significant part of the UK business.

Continental Europe is trading strongly with prices up 1% and bookings 3% higher than last year, with volume growth being mainly driven by our German business. Capacity commitments are 2% better sold than last year, due mainly to improved performances by our German and French businesses.

Bookings in Northern Europe are in line with last year with a similar load factor. Average selling price is 4% lower than last year because bookings for peak season months represent a lower proportion of total bookings than last year. In addition, average selling prices have been impacted by changes in Nordic currency rates.

Airlines Germany bookings and average selling prices are in line with last year against a very strong performance last year when bookings and prices had increased by 8% and 3% respectively. Seat load factor is 1% below last year. Long haul prices will improve in future seasons as a result as a result of the introduction of an improved business class proposition following our cabin upgrade programme.

Outlook

Trading for the Winter 13/14 season is satisfactory as improved capacity management has compensated for lower customer demand to Egypt. Our Summer 14 booking performance is developing in line with expectations with solid volumes in our main markets which should facilitate improved capacity management later in the season.

Continued confidence of delivery

Our focus on delivery continues. A lot has been achieved but as our Wave 2 work is revealing, supported by the adoption of the Thomas Cook Business System, there is a significant amount of value left to release. Our confidence of achieving our targets remains. So too does our confidence of delivering a step change in sustainable profitable growth over the long term.

FINANCIAL REVIEW

Basis of preparation

On 1 May 2013 the Group completed the sale of its North American business segment. In accordance with IFRS5 the North American business was classified within 'Discontinued Operations' and is excluded from prior year disclosure in this document.

No adjustments have been made in respect of the other disposals listed on p22 other than to reflect completed transactions.

Like-for-like analysis

In implementing Transformation, the Group has undertaken activities that, combined with the normal translational effect of exchange rate movements, impact upon the comparability of underlying performance. To assist in understanding the impact of these factors and their influence on year on year progression, we consider 'like-for-like' adjusted growth from the period to 31 December 2012 to the period to 31 December 2013 in our analysis below. The 'like-for-like' adjustments and resultant year on year movements considered are:

EBIT

The trading in the three months ended 31 December 2013 has delivered a year on year improvement in underlying EBIT of £10 million on both an underlying and a like-for-like basis. This improvement has been achieved after incorporating the estimated £9 million EBIT impact related to travel disruption arising from political events in Egypt.

On an LTM basis, the underlying EBIT is £274 million, an improvement of £72 million (35.5%) from the 12 months ended 31 December 2012, increasing the Group EBIT margin by 70 basis points to 2.9%. On a like-for-like LTM basis, underlying EBIT has improved by £78 million (39.9%) from the 12 months ended 31 December 2012.

Revenue

Revenue of £1,656 million for the three months ended 31 December 2013 was broadly unchanged (three months ended 31 December 2012: £1,671 million). On a like-for-like basis revenue declined by only £36 million (2.1%) as our profitable growth strategy largely offset the impact of Egypt which we estimate to have been approximately £80 million compared with the three months ended 31 December 2012.

On an LTM basis, revenue is £9,300 million, a 2.4% increase compared to the 12 months ended 31 December 2012. On a like-for-like basis revenue was broadly unchanged and again reflects the positive impact of the profitable growth strategy largely offsetting the impact of Egypt.

Gross margin

In the three months ended 31 December 2013, the gross margin improved by 20 basis points (three months ended 31 December 2012: 21.9%) as we benefited from incremental Wave 1 savings.

On an LTM basis, the gross margin remained broadly flat whereas on a like-for-like LTM basis the gross margin increased by 50 basis points (0.5%) on the LTM ended 31 December 2013 to 22.1%, 0.8% higher than our baseline measure of 21.3%. This shows continued progress to our targeted increase of 1.5% by FY15.

Operating expenses

In the three months ended 31 December 2013, operating expenses reduced by £10 million and on a like-for-like basis reduced by £14 million. This was achieved through the delivery of a further £28 million of Wave 1 cost savings, partially offset by £10 million strategic operating investments and a £4 million increase in costs.

On an LTM basis ended 31 December 2013, operating expenses declined by £28 million and on a like-for-like basis reduced by £36 million or 2% on the prior comparative period.

Strategic operating investments

The Group's strategic operating investments in the three months ended 31 December 2013. comprise:

These strategic operating investments represent specific incremental expenditure focused on the delivery of the Group's strategic objectives and will enable further transformation of the Group through our Wave 2 initiatives.

Separately disclosed items

Separately disclosed items represent charges and benefits that have been recognised in the period which management believes are not the result of normal operating activity and performance. They are, therefore, disclosed separately to give a more comparable view of the year on year underlying trading performance.

The table below summarises separately disclosed items within these categories. 

1 The cash column above represents items that impacted cash in the current period or will impact cash in the future

Restructuring costs

Restructuring costs of £18 million relate to the reorganisation of the Group's activities in the UK, Airlines as well as Group-wide reorganisation activities.

Goodwill impairment and asset valuation reviews

Goodwill impairments of £42 million comprise pre disposal charges in respect of Essential Travel (£15 million) and Gold Medal (£25 million) and Elegant Resorts (£2 million).

Onerous contracts and legal disputes

Provision of £9 million is made in respect of the termination of onerous commercial contracts partly offset by a £1 million over-recovery on the disposal of non-trading assets.

Amortisation of business combination intangibles

The amortisation of business combination intangibles represents the scheduled amortisation of intangibles allocated on the acquisition/merger of businesses.

Pension/other

Income of £5 million comprises IAS39 income of £3 million and an FX gain of £2 million in respect of certain Euro denominated borrowings. 

Finance related charges

The Group has provisions for future liabilities arising from separately disclosed circumstances - primarily deferred acquisition consideration. A notional interest charge of £3 million on the discounted value of such provisions is recognised within separately disclosed finance related charges. In FY13 the Group adopted industry practice of separately disclosing the notional net interest charge arising from its pension scheme assets / liabilities (£3 million). £1 million income has also been recognised in respect of IAS39 allocations of the time value of derivative products.

Renegotiation of a significant contract

The Group recently renegotiated the terms of a significant legacy IT contract, resulting in the acceleration of its end date. As a result, approximately £50 million will be separately disclosed as a non-cash charge over the six quarters from the second quarter of 2014. No charge is reflected within separately disclosed items in the three months ended 31 December 2013.

Net finance costs

Net interest expense for the quarter to 31 December 2013 of £35 million was in line expectation. (Q1 2013: £34 million).

On an LTM basis net interest and finance costs before aircraft financing were £114 million compared with £109 million in the prior comparative period. Following the financing activity completed in June 2013 it is anticipated that net interest before aircraft financing will remain broadly flat until repayment of the Group's 2015 Bonds.

In September 2013 two aircraft operating leases were extended such that under the IAS assessment criteria they are now adjudged to be finance leases. As such aircraft financing interest is likely to be around 10% higher in FY14 than FY13 without any further changes to aircraft financing.

Cash Flow Statement

Net cash flow on a LTM basis of £311 million remained strong despite a £98 million year on year negative variance in working capital in the three months ended 31 December 2013. This movement reflects the impact of extending supplier payment terms during 2013 which has resulted in a higher proportion of payments for the Summer 2013 season falling in the first quarter of the current financial year and the unwinding effect of some short term cash management actions taken in the three months ended 31 December 2012. This short term impact will normalise during FY14.

In the three months ended 31 December 2013 incremental capital expenditure of £24 million relating to aircraft cabin refurbishments and other heavy maintenance was scheduled to coincide with reduced capacity requirements to Egypt.

Cash Conversion

The Group uses a measure of cash conversion reflecting the amount of cash flow retained by the business and which can be used for investment in capital expenditure, debt repayment or payment of dividends.

The Group's cash conversion measure for the LTM ended 31 December 2013 was 25% compared to 6% for the LTM ended 31 December 2012. The reduction from 48% at the end of September 2013 reflects seasonality and short term factors referenced above that will normalise during FY14. We remain confident that the Group will achieve its target of a cash conversion ratio of over 55% at September 2014 and over 70% by September 2015.

Net Debt and liquidity

The Group sources debt and finance facilities from a combination of the international capital markets and its relationship banking group.

The components of the movement in Net Debt over the LTM ended 31 December are:

The trading improvement in Net Debt evident at 31 December 2013 is reduced by the impact of extended payment terms with the Group's suppliers being reduced following the seasonal concentration of supplier payments in the first quarter. The positive impact of extended payment terms will re-emerge as seasonal activity levels increase.

Liquidity headroom consisting of undrawn committed facilities and available cash at 31 December 2013 was £374 million, an increase of £84 million over the prior year. Liquidity headroom was comfortably above £200 million throughout the seasonal low point.

Currency Hedging

Currency hedging for the current and Summer seasons is maintained in line with Group policy.

The Group operates globally and experiences variations in input costs arising from movements in exchange rates and oil prices. The main currency exposures include Euro relating to hotel sourcing and USD for aircraft fuel costs.

Treasury executes hedging transactions on behalf of all business segments in line with policies agreed with local management using a mix of forward contracts and options. Hedging for both foreign exchange and fuel is built up over a period of up to 18 months on a season by season basis so that the business has a substantial amount of price certainty at the time of publishing holiday brochures.

As at 31 December 2013

Exchange Rates

The average and year end exchange rates relevant to the Group were:

Disposals

The Group has announced the disposal of a number of non-core businesses and investments. These divestments form part of the Group's strategy to focus on core activities through the generation of sale proceeds between £100 million to £150 million by FY15. The disposals announced since FY12 comprise:

1 Sale proceeds before completion adjustments for working capital and net debt.

Appendix

Sources of growth in underlying EBIT

The adjustments to reflect year on year growth in like-for-like EBIT, on a segmental basis are summarised as:

Three months ended 31 December 2013

LTM ended 31 December 2013