Interim Management Statement

7 February 2013

Thomas Cook Group plc

Interim Management Statement for the quarter ended 31 December 2012

BUSINESS TRANSFORMATION FIRMLY ON TRACK

UNDERPINNED BY STRONGER OPERATING PERFORMANCE

·; Total Q1 revenue of £1,724m, with gross margin of 21.9%, up 1.3 percentage points over the comparable period last year

·; Business Transformation programme firmly on track to deliver on its three key elements:

- building an effective organisation: high quality executives, bringing a wealth of experience, appointed to the Thomas Cook Leadership Team

- addressing costs and cash management: on track to execute announced £100m of cost reductions with a further £60m identified

- profitable growth strategy: undertaken rigorous, and independently verified, market and customer research, to ensure strategy and future resource allocation is based on extensive and fact based information

·; Higher gross margins and lower overhead costs reflected in the Group's improved underlying operating result of £(70)m (2012: £(93)m)

·; Stronger operating performances in our major markets - the UK, Germany and the Nordics

·; Lower net debt of £1,559m, reduced by £86m year on year

·; Higher liquidity headroom of £290m, up £72m over the prior year due to improved cash management disciplines

·; Winter and Summer bookings are robust, in-line with expectations as our strategy of improved capacity management results in higher sale prices and improved margins

Harriet Green, Group Chief Executive, said:

"As we continue to strengthen Thomas Cook and determine our profitable growth strategy for the future, the power of our brand remains key to the transformation.

"We have seen stronger operating performances in our major markets - the UK, Germany and the Nordics. I am particularly pleased with the improved performance in the UK as the benefits of the turnaround plan are reflected in its operating results. "Our business transformation is firmly on track. We have further strengthened our leadership team and the pace at which we are driving change gives me confidence that together we will achieve our near term objectives and much more."The business has generated higher gross margins than we did last year and this will remain an area of focus for us through the financial year. Our cost-out initiatives and improved cash management will be important contributing factors to the Group's future performance and continue to receive strong focus in all parts of the business. Although global economic conditions and consumer confidence remain challenged, our business transformation is firmly on track."

Business Transformation

Our Business Transformation continues at pace as we focus on delivering the three key elements identified last year: building an effective organisation, addressing costs and cash management, and creating a profitable growth strategy.

Building an effective organisation

Our work on building an effective organisation continues and 36 high quality executives, bringing a wealth of experience, have been appointed to the 100 members of the Thomas Cook Leadership Team. These individuals bring an array of business sector and corporate expertise and, together with our existing leadership, are bringing their skills to bear on the business and the execution of its transformation programme.

At the end of January, the second Thomas Cook Leadership Council took place, as the wider leadership team now assume greater responsibility for the future focused Business Transformation now that the immediate turnaround actions are well underway. The purpose of the meeting was to share the significant progress already made on achieving business efficiency, cost out and cash objectives across the business and to embed the next phase of the Group's transformation to build a sustainable future.

The announcement on 5 February of the management reorganisation of the Group's airline business into a single, cohesive operating structure further illustrates the pace of change and the dynamic thinking being brought to how we organise ourselves.

Addressing costs and cash management

The £100m of previously announced cost savings are now being implemented and Group-wide initiatives have identified further potential savings of £60m, bringing total annualised savings of circa £160m. The potential savings arise mainly from integrating our airlines, from streamlining our organisational structure, particularly in the UK, and from other efficiencies achieved by removing duplication and collaborating more effectively across the Group.These savings are largely expected to be realised in FY14 and FY15 at a cost of circa £75m over the next three years. Work is on-going to quantify further potential savings in other areas of the business.

Progress on the UK turnaround plans are on track, and in addition to the £60m of benefits achieved last year, we are on track to deliver a further £60m of incremental benefits during 2012/13. The UK turnaround benefits are in addition to potential Group cost savings set out above.

Significant progress has been made in changing working capital management processes, from more disciplined cash collection processes to a transformational change in the management of procurement strategies. Process changes will deliver the identified £50m of cash flow benefits in the current year and create a platform for further enhancements in the future.

Creating a profitable growth strategyAs we continue to strengthen Thomas Cook and determine our profitable growth strategy for the future, the power of our brand remains key to the transformation. The customer loyalty that the brand embodies, combined with the dedication and enthusiasm of our 31,000 employees across all our markets, will underpin the successful transformation of the Group and be instrumental in delivering our profitable growth strategy.

We have recently finalised the first phase of one of the largest customer surveys undertaken in the sector, involving nearly 18,000 consumers from the UK, Sweden and Germany. Independently verified, the survey has been combined with data from our existing customer relationship programmes from the 23 million customers we serve each year. The results, along with a profitability analysis of the industry by internal and external experts, will be used to shape our business model and future strategy, as well as accelerating our web transformation to create a web centre of excellence with channel ownership in each of our market segments.

Group Financial Performance

Overall, for the first quarter of 2012/13, the Group generated an underlying operating result which was £23.2m better than the comparable period last year (excluding £1.9m of profit from India in the prior year). In particular, our UK and Continental European businesses have performed well and reported stronger year-on-year improvements in their operating results. Last year's results included a benefit of c.£15m from provision releases where the underlying liability for aircraft related and other costs no longer existed.

A clear focus on capacity management to achieve a better balance with customer demand has improved prices and margins and has, as anticipated, led to lower revenues for the three months to 31 December 2012 of £1,724.4m (2012: £1,861.1m), a reduction of 7% (4% at constant currency). 

Gross profit of £377.0m (2012: £380.5m) represents a gross margin of 21.9% (2012: 20.6%) with higher gross margins and lower overhead costs leading to an improvement in the Group's underlying operating result of £(70)m (2012: £(93)m). Fuel price rises added more than £20m to direct costs for the quarter, partially offset by capacity management, principally in the UK, giving rise to a net impact of £16m.

Operating expenses were £446.8m (2012: £473.5m) reflecting the impact of cost efficiency measures, particularly in the UK.

Consistent with our commitment to provide enhanced disclosures, a summary of the Group's financial performance, analysed by business segment, is set out on page 7.

In the UK, the underlying gross margin percentage increased by 1.2%, despite rising fuel prices. This has been achieved by improved capacity management and an emphasis on pricing and margins. The underlying improvement in gross margin has also been impacted by disposals and the cost of retail branch closures. These actions have removed significant overhead costs.

In Continental Europe, gross margin increased by 1.4%, to 13% for the period. This was achieved through improved capacity management which gave rise to a 9% reduction in overall revenues (4% at constant currency). Overhead costs were reduced by £14m in total across these markets, including a translation benefit of £6m, due to the impact of cost reduction initiatives.

Airlines Germany revenues increased 11% (17% at constant currency) reflecting improved yields and growth in our long-haul business. Gross margin improved to 29.7% (2012: 29.4%), despite higher fuel prices and increased landing and overflying costs. Increased overhead costs compared to the prior year are largely a result of releases of provisions which were no longer required and which improved the prior year result by c.£10m.

Improved prices contributed to the strong gross margin of 25.2% in Northern Europe, on revenues that were marginally lower over the prior year. Operating expenses are in line with the prior year although the prior year comparator benefited from c.£5m from releases of provisions and cost accruals which were no longer required.

In France, capacity management resulted in an improved gross margin of 21.1% (2012: 18.0%). Gross margins in North America were 22%, with overheads 5.0% lower reflecting the benefit of restructuring actions taken in the prior year.

The Group's underlying net finance charge for the quarter was £36.8m (2012: £30.5m), reflecting the increased margin payable under our banking facilities.

Separately disclosed items for the period of £22.5m (2012: £30.4m) principally relate to the restructuring underway in the UK business.

Net debt and liquidity

Net debt at 31 December 2012 was £1,558.5m (2012: £1,644.3m) a reduction of £85.8m on the prior year reflects the improvement in our cash management disciplines. Liquidity headroom consisting of undrawn committed facilities and available cash at 31 December 2012 was £290.2m, an increase of £72.2m over the prior year. Liquidity headroom was maintained at a level above £200m throughout the seasonal low point.

Current trading

Winter and Summer 2012/13

For both the Winter and Summer seasons, committed capacity is being actively managed to achieve a better balance with customer demand and to improve prices and margins, with more flexible options to add capacity should customer demand exceed expectations. This strategy will reduce operating risk in an uncertain consumer environment and will provide a sound foundation for profitable growth.

The improved management of capacity has enabled our businesses to achieve higher selling prices and generate better margins through reduced discounting. The success of this strategy has been demonstrated through improved gross margin performance in the first quarter of the year and is expected to continue throughout the year.

Note: Figures as at 2/3 February 2013 and are presented in accordance with the Group's new reporting structure. In Continental Europe bookings represent all bookings including cars/overland, however capacity represents airline seat capacity only. Northern Europe summer season is April-September.

Board Change

As announced on 31 January 2013, Richard Pennycook, currently Finance Director of Wm. Morrison Supermarkets plc, will join the Board as an independent non-executive Director on 1 April 2013. Richard brings considerable financial skills and consumer sector experience. At Wm. Morrison, he was integral to its transformation following the Safeway acquisition and his specific responsibilities included multi-channel development, a key area of focus for us. Richard's prior roles included Group Finance director at RAC plc, HP Bulmer Holdings plc, Laura Ashley plc and JD Wetherspoon plc; and Chief executive of Welcome Break Holdings plc.

Outlook

We have clear priorities for making the business more effective, addressing our costs and cash management and setting a profitable growth strategy. The business has generated higher gross margins than we did last year and this will remain an area of focus for us through the financial year. Our cost-out initiatives and improved cash management will be important contributing factors to the Group's future performance and continue to receive strong focus in all parts of the business. Although global economic conditions and consumer confidence remain challenged, our business transformation is firmly on track and we look forward to providing a full update on our strategy and additional financial performance metrics in the spring.

Enquiries

Group Income Statement

All revenue and results arose from continuing operations

Notes to financial information

1. Basis of preparation

The financial information included in this report has been prepared using accounting policies consistent with those set out in the Group's Annual Report 2012.

The financial information contained in this report does not comprise statutory accounts within the meaning of Section 435 of the Companies Act 2006. Statutory accounts for the year ended 30 September 2012 were approved by the Board of Directors on 27 November 2012 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

2. Segmental information

3. Exchange rates

The following exchange rates against Sterling for our major functional currencies are the average of those used to translate the results of the current and prior periods.

The following exchange rates against Sterling for our major functional currencies have been used to translate the balance sheet at the current and prior period end.

4. Separately disclosed items