Year 2 Annual Report & Accounts 2014 & Accounts Annual Report Transformation Thomas Cook Group plc Annual Report & Accounts 2014 Transformation Year 2 Transformation: Year 2 Thomas Cook is the oldest and best loved name in travel and, over the last two years, we have been on a journey of Transformation. At the end of Year 2, we are making progress against our targets and KPIs for our Transformation and profitable growth strategy, and becoming a more efficient, more resilient business. We are already delivering greater value with exciting new products, a strong digital offering and improved financial results. www.thomascookgroup.com The Thomas Cook Group website provides news and details of the Group’s activities, plus links to our customer sites and up-to-date information, including: > corporate news > presentations > share price data > historic Annual and sustainability reports > half-year results and interim management statements > news alerts > career opportunities Thomas Cook Group plc Annual Report & Accounts 2014 1 Our year in brief Overview Financial highlights Our business at a glance 04 Our business by region 06 Our investment case 08 Delivering improved financial results Delivering a stronger balance sheet Chairman’s statement 10 Underlying EBIT up by £60 million year‑on‑year Net debt reduced from £421 million in 2013 Strategic report 1 Chief Executive Officer’s Q&A 14 £323m £326m Market overview 23 Value creation 26 Review of strategy 33 Delivering stronger margins Delivering more operational cash flow Our people and key relationships 43 Underlying gross margin 22.3% Cash conversion ratio at 62%, Risk management 48 (up 20 basis points year‑on‑year) on a last 12 months basis Strategic report Financial review 52 Segmental review 60 22.3% 62% Sustainability 67 Delivering more cost-out and profit improvement benefits Governance Chairman’s letter 74 Cumulative total £400 million 2 (FY14 target of £360 million) Board of Directors 76 Corporate governance report 78 Annual statement by Chair of Remuneration Committee 94 Directors’ remuneration policy 96 £400m Governance Annual remuneration report 102 Other disclosures 111 Financial statements Financial summary 3 Independent auditors’ report 115 Group income statement 121 Year ended Year ended 30 September 2014 30 September 2013 Group statement of other comprehensive income 122 £m (unless otherwise stated) Underlying Statutory Underlying Statutory Group cash flow statement 123 Revenue 8,588 8,588 9,315 9,315 Group balance sheet 124 EBIT 323 54 263 13 Group statement of changes in equity 126 EBIT margin (%) 3.8% 0.6% 2.8% 0.1% Notes to the financial Free cash flow 116 116 57 57 Financial statements statements 127 Earnings (loss) per share (p) 11.3p (8.2)p 5.0p (16.7)p Company balance sheet 168 Net debt (326) (326) (421) (421) Company cash flow statement 169 Company statement of changes in equity 170 Notes to the Company financial statements 171 Shareholder information 178 Full financial statements From page 114 The term “underlying” refers to trading results that are adjusted for separately disclosed items that are significant in understanding the ongoing results of the Group. Separately disclosed items are included on the face of the income statement and are detailed in Note 7 to the Group financial statements. Free cash flow and cash conversion ratio are defined on page 57. 2 Thomas Cook Group plc Annual Report & Accounts 2014 Transformation Year 2 Transformation Our people making it happen A Transformation of the scale we are undertaking at Thomas Cook Harriet impacts and involves every person Chief Executive Officer’s Q&A > Go to p14 in the business. Our talented teams across the Group have embraced the challenges and opportunities, as we all work to further professionalise the business, become more efficient and effective and focus on exceeding our customers’ expectations every time they connect with us. The team at Thomas Cook breathe life into our strategy every day and are delivering the Transformation with passion and energy. Throughout this Annual Report Thomas Cook employees share their thoughts on our Transformation and what it means to them. Anna Brian Frank Chairman’s statement To see more on > Go to p10 our Governance > Go to p78 James Dan Thomas Cook Group plc Annual Report & Accounts 2014 3 Kudzi Our people and key relationships > Go to p43 1 Sonja Strategic report Mark To see more on our strategy > Go to p33 Nikki 2 Peter Governance Chief Executive Officer Sharon with effect from 26 November 2014 Michael 3 Financial review > Go to p52 Ha Financial statements Dan 4 Thomas Cook Group plc Annual Report & Accounts 2014 Transformation Year 2 Overview: Our business at a glance Our brand architecture Creating memorable Corporate brand holiday experiences Thomas Cook is becoming a truly omni‑ channel partner for our customers, offering Master brand them the very best support whenever, wherever and however they choose to connect with us – from our leading edge websites, to our talented and well trained contact centre teams. Aligned brands From our excellent retail network, to our dedicated and committed airline and in‑destination teams – our focus is on the customer. With a streamlined portfolio of brands, we are focused again on our core products and on delivering memorable holiday experiences for our customers – through our unique and specialised products to the widest range of exciting holiday Endorsed brands destinations for our traditional sun and beach holidays, as well as our rapidly expanding Winter Sun and City Break product portfolio. These are exciting times for Thomas Cook as we enter the next phase of our Transformation. Standalone brands Our brand strength Page 28 Thomas Cook Group plc Annual Report & Accounts 2014 5 Our in-house resources Where our revenue comes from Retail outlets Revenue by segment £m 1. UK and Ireland £2,585m 2. Continental Europe £3,958m 3. Northern Europe £1,153m 4 3,084 4. Airlines Germany £1,299m 1 1 3 Employees 2 22,672 Strategic report Aircraft Underlying EBIT by segment £m 1. UK and Ireland £89m 2. Continental Europe £102m 3. Northern Europe £101m 4 88 4. Airlines Germany £50m 1 2 3 Departed customers* 2 Governance 22.3m Financial review From page 52 3 Financial statements Financial * Includes 2.6 million in-house customers. 6 Thomas Cook Group plc Annual Report & Accounts 2014 Transformation Year 2 Overview: Our business by region Developing our regional businesses Thomas Cook Group plc is one of the world’s leading leisure travel groups with sales of over £8.5 billion in the year ended 30 September 2014. Thomas Cook is supported by approximately 22,672 employees and operates from 15 source markets; it is number one or two (by revenue) in all its core markets. Thomas Cook Group plc’s shares are listed on the London Stock Exchange (TCG). Employees by segment 1. UK and Ireland† 9,987 Key facts: 2. Continental Europe 6,568 Customers: 6,170,000 4 3. Northern Europe 3,120 Retail outlets: 847 4. Airlines Germany 2,997 Aircraft: 31 3 1 Employees 9,987† 2 UK and Ireland Continental Europe A relentless focus on cost combined with improving revenue quality Improved customer volumes from Germany to key destinations has delivered the UK’s target underlying EBIT margin of 3.5% in FY14, combined with strategic risk capacity reduction in France and Russia up from close to 0% two years ago. have helped grow EBIT to £102 million. 2014 2013 2014 2013 Revenue £2,585m £2,977m Revenue £3,958m £4,195m Gross margin % 26.1% 25.9% Gross margin % 14.2% 13.8% Underlying EBIT £89m £66m Underlying EBIT £102m £78m Underlying EBIT % 3.5% 2.2% Underlying EBIT % 2.6% 1.8% † Includes 267 Corporate employees. Thomas Cook Group plc Annual Report & Accounts 2014 7 Northern Europe Key facts: Customers: 1,511,000 Retail outlets: 10 Aircraft: 11 Employees 1 3,120 Strategic report UK and Ireland Airlines Germany 2 Key facts: Customers: 7,196,000* Continental Europe Aircraft: 40 Employees Governance Key facts: 2,997 Customers: 7,458,000 Retail outlets: 2,227 Aircraft: 6 Employees 6,568 3 Airlines Germany Northern Europe Financial statements Airlines Germany performed well in a difficult market broadly Northern Europe’s robust, defensive model focused heavily maintaining revenues while increasing profit, helped by yield benefits on differentiated product and web sales, has again delivered from recent fleet refurbishments. an industry‑leading EBIT margin. 2014 2013 2014 2013 Revenue £1,299m £1,312m Revenue £1,153m £1,239m Gross margin % 27.8% 28.6% Gross margin % 27.4% 27.4% Underlying EBIT £50m £48m Underlying EBIT £101m £109m Underlying EBIT % 3.8% 3.7% Underlying EBIT % 8.7% 8.8% * Includes 2.6 million in‑house customers. 8 Thomas Cook Group plc Annual Report & Accounts 2014 Transformation Year 2 Overview: Our investment case Why invest? Our value proposition We create value by offering a wide range of travel products and services to suit all customer needs, reaching our customers seamlessly through omni‑channel distribution. Our value proposition is underpinned by the strength of our brand and our high tech, high touch approach, enabling customers to search for and book their travel arrangements through the channel of their choice, while providing a quality assured travel experience backed up by strong customer service. The key aspects of our value proposition are as follows: Brand strength: Thomas Cook is one of the leading brands in the leisure travel market. Building on a 173‑year history in the travel business, the Thomas Cook brand serves as a strong 1 master brand for the Group and is complemented by a range of well‑known regional brands, including Neckermann, Condor, JetTours, Ving, Spies and Tjäreborg, which are joined by our new unifying mark, the Sunny Heart.