Thomas Cook Group's (TCKGF) CEO Peter Fankhauser on Q3 2017 Results - Earnings Call Transcript

Thomas Cook Group Plc. (OTC:TCKGF) Q3 2017 Results Earnings Conference Call July 27, 2017 3:30 AM ET

Executives

Peter Fankhauser - CEO and Executive Director

Michael Healy - Group CFO and Executive Director

Analysts

Patrick Coffey - Barclays

Tim Ramskill - Credit Suisse

Jamie Rollo - Morgan Stanley

Alex Brignall - Redburn

Jeffrey Harwood - Stifel

Mark Fortescue - Panmure

Operator

Good morning, and welcome, ladies and gentlemen, to the Thomas Cook Q3 Results Call. My name is Cindy and I'll be your coordinator for today's event. [Operator Instructions]I'm now handing you over to your host, Peter Fankhauser, to begin today's conference. Thank you.

Peter Fankhauser

Good morning, everybody, and thank you for joining our third quarter 2017 results call. I am joined here this morning by Michael Healy, our Chief Financial Officer. I know that this is a busy morning for many of you, so we will keep our presentation short. I will briefly take you through the highlights. Michael will present the financials, and I will then finish with current trading and the outlook before taking your questions.

We delivered a good performance in the third quarter despite this competitive environment. The increased focus that we have put on customers is paying off with strong growth in revenues, up 14% on a like-for-like basis versus last year. This, in combination with an improved performance from Condor, led to a £10 million increase in down the line operating profit for the quarter.

I believe our customer focus is really starting to set us apart from the competition. We know that customers' experience of our holidays keeps getting better. That in turn, is having a tangible impact on the performance of our business. Our Net Promoter Score increased by 7 points in Q3 compared to the same period last year, and we continue to innovate to drive further improvements.

For this summer, we have expanded our 24 hour satisfaction promise to cover 80% of customers in our core, Sun and Beach Hotels. We've also opened 11 new own-brand hotels ready for peak season, and this includes our second Casa Cook in Kos.

I was there only last week, and for those of you familiar with Casa Cook, Rhodes, I believe you would be even more impressed by Kos. It's stunning, a beautiful location with the same chic design and its own spa and beach club.

We are also working on a new set of initiatives for summer '18. These will include the option to choose your own hotel room before you travel. We have started sales in some of our own-brand hotels with great results so far, and our plan is to launch it in 300 of our most popular hotels in 2018, starting with our own-branded property.

Turning to current trading. We continue to see strong demand with bookings up 11% and pricing up 1%. In line with our last update, we have grown bookings across most destinations. Greece, Cyprus and Bulgaria have all performed particularly strong, and we have seen a continued pick-up in demand for Turkey.

Trading for next winter has also started well with bookings from all of our markets ahead of last year. Let me now hand over to Michael to take you through the financials.

Michael Healy

Thank you, Peter, and good morning, everyone. Slide 5 shows the financial overview of our results for the third quarter. As usual, I'll focus on the like-for-like changes on the right-hand side of the chart, which adjusts for the effects of currency translation and the timing of Easter.

Third quarter revenue at almost £2.3 billion increased £287 million or 14% higher than last year, with significant levels of growth achieved in all of our major served markets.

Gross profit is £47 million higher than last year, with strong revenue growth being partly offset by margin weakness in Spanish destinations as we've previously highlighted.

Underlying EBIT for the third quarter was £19 million, which is £10 million higher than last year, mainly due to the continuing recovery in Condor performance. Together with lower exceptional charges, this has resulted in profit from operations improving by £24 million.

Net debt at the 30th of June of £404 million, represents an underlying improvement of £115 million, which reflects the timing benefits for the improved summer trading cash flows. We expect some of this benefit to reverse in Q4, consistent with the normal working capital pattern, such that net debt at the end of September will be around £50 million, as previously guided.

Let's look at revenue development in more detail. This slide shows how revenue has changed by destination during the third quarter compared to last year. You can see that we significantly increased sales of holidays to Greece in the period and to long-haul destinations, such as the USA.

In addition, revenues for Spain increased, building on the high levels of growth experienced last year. It's also pleasing to see that demand to Turkey and Egypt has improved.

Let's now look at EBIT progression during the quarter. Underlying EBIT grew by £10 million in the third quarter, primarily reflecting the continued recovery in Condor, which improved its profits by £16 million compared to a weak performance last year.

Together, our tour operator businesses delivered an EBIT result broadly in line with last year. While we're seeing some year-on-year variations in the EBIT performance of the individual markets in this quarter, this mainly reflects the relative performance for the prior year. Overall, our tour operator businesses have performed in line with expectations.

Turning to Condor's recovery in more detail. Slide 8 shows Condor's EBIT performance and year-on-year change for the last 4 quarters. As I previously explained, after EBIT declined in the final quarter of last year, we put in place a recovery plan.

We've remixed Condor's capacity towards more profitable destinations, taken steps to optimize yields and improved the operational efficiency of the business. Also taking advantage of a one group airline organization, we switched several aircraft between Germany and the UK which is in Condor's exposure to the German short-haul market and expanding its profitable long-haul offering in the summer.

As a result, we are seeing an improving trend over the past three quarters, with losses reducing by £16 million in the third quarter of this year. We expect Condor to achieve a profit for the full year compared to a loss of £10 million last year, and continue to target annualized benefits of £35 million with the full impact of these benefits expected to land in 2018.

I'll hand back to Peter to take you through the current trading.

Peter Fankhauser

Thank you, Michael. The strong summer trading performance we reported at the interim results has continued. With 82% of the program sold, group bookings are up 11% with average selling prices up 1%.

This booking position is not simply a bounce back from the disruption of last year. When you look back at the numbers, we have grown not only against 2016, but also against 2015 and 2014. This shows me, we are growing the business in absolute terms.

As I said, at the start, we have grown demands to a broad range of destinations. We are particularly encouraged by the continued pick-up in bookings to Turkey and Egypt as customers look for high-quality value for money destinations.

As reflected in our first half results presentation in May, we are managing through a very competitive market for Spain, which is impacting margins in parts of our business.

Looking at each of our business in a bit more detail. In the UK, overall bookings are up 6% and prices are in line with last year. We remain focused on quality and margin rather than volume, as previously highlighted. Therefore, package holiday pricing is up 7% with bookings up 1%. In Continental Europe, bookings are well ahead of last year across most markets. In particular, we are seeing good volume growth out of Germany and Russia.

In Northern Europe, bookings are up 8% and pricing is up 3%, with really strong demand for our own-brand hotels in Greece, Cyprus and Spain. Condor continues to attract customers looking for a high-quality and reliable service following disruption among certain competitors in Germany. This has led bookings to increase by 14%, driven by significant demand for Greece as well as higher demand for North America.

Trading for next winter has started well, and is in line with expectations with around 30% of the programs sold so far. In the UK, bookings are 5% higher against a strong competitive period with pricing up 4%. Northern Europe's bookings are up 7% with pricing up 4%, driven by growth to long-haul winter Sun destinations. And in Continental Europe, bookings are up 8% with pricing broadly in line with last year, reflecting continuing growth from Germany and Russia, in particular.

So to conclude, we have had a good third quarter supported by our focus on quality and customer excellence, demand for our holiday offering is strong, and we are seeing good levels of growth across the whole business.

Looking ahead, I don't think that I'm telling you anything new when I say that this remains a competitive market. We have said since the start of this year that there are a number of big players fighting it out in some key destinations, particularly Spain, and we've heard it from others in recent weeks.

We cannot avoid that Brexit creates some uncertainty for our industry. There's clearly a long way to go, but I hope that politicians on both sides of the channel agree simply to extend the existing agreements for air traffic rights beyond 2019 for as long as it takes to come to a long-term settlement. This has to be in everyone's best interest.

We also cannot control currency movements, which has an impact on our costs of doing business. But what I'm clear about is that we stay focused on those things that we can control. I believe that the most important of these, our increased focus on customers is driving the growth in our business. Customers are responding to the changes we are making to the quality and service we provide, and are having better holidays, as shown with the continued growth in Net Promoter Score.

We also know the importance of ensuring we offer a great choice of holidays to suit every budget. Overall, therefore, we continue to expect our full year underlying operating profit to be in line with current market expectations.

Thank you very much for listening. Michael and I will now be delighted to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from the line of Patrick Coffey from Barclays. Please go ahead.

Patrick Coffey

Good morning, everyone. And two questions for me…

Peter Fankhauser

Morning.

Patrick Coffey

If I may, hi. And just on the Condor performance, there's no change to the overall guidance for the full year. Is there any way to quantify the benefits that you've seen from some challenges, should we say, at some of your rivals in Germany? That's the first question.

Second question on UK margins, just thinking about next year. Obviously, thinking about fuel hedges, FX, bed price inflation in Spain and your focus on margin rather than volume, should we still be thinking that 2018 UK margins sort of start with a 6%? And are you kind of confident you're going to see margin progression in the UK next year?

And then finally, just in terms of the Nordics this year, I think back to Q1, you've suggested that the Nordics would not be able to hold their record high margins of 11% that was delivered last year. Is that still the guidance? Should we still be expecting that margins normalize in Nordics this year or could you deliver another double-digit margin?

Peter Fankhauser

Let's start with the last question. We repeatedly said in Nordics, we are not chasing the percentage margin. We are allowing them to come down with the margin to grow their business and business purpose of what they are doing.

The second, margins in UK for next year, what we see so far is that we have a good demand as well from the UK and that we are really strong in getting our pricing through to our customers. That speaks for a good quality offer, and we don't see in the future and how the Brexit talks until this uncertainty is playing out, that's why we are very cautious in our efficiency measures, what we have taken.

And then we say, we expect the UK to be at least at competitor's level and you mentioned 6%. That is still the target for our UK business. No change there. The Condor performance, as we said, we are going to have annualized improvements of £35 million over the next 2 years, that is what we say still. And of course, it's helping us to disruption of some disruption of some competitors in the service quality that customers want to come, and tour operators want to come more now to really a reliable airline, and that is a tailwind, which we are happily taking, but we are not changing our - because of that any guidance.

And finally, paying out annually next year and then, maybe the following years because tour operators are, in their behaviours, in ordering capacity, quite conservative. But we see a positive impact. That is a welcome tailwind.

Patrick Coffey

And just, yes, in terms of that disruption, surely that suggests there is upside to Condor this year or next year if the consumer has changed the mindset around reliability of Condor versus [indiscernible]?

Peter Fankhauser

All of the things being equal, you are right, yes. But I made discovery up, right, you heard it.

Patrick Coffey

I heard it.

Peter Fankhauser

Thanks.

Operator

The next question is from the line of Tim Ramskill from Credit Suisse. Please go ahead.

Tim Ramskill

Morning, guys.

Peter Fankhauser

Good morning, Tim.

Tim Ramskill

Morning. Three questions from me, please. Obviously, given that you now disclose the profitability at the year-end for the airline, I just wonder if you could sort of give us a sense as to how you expect the non-Condor portion of the airline to perform, particularly in the context of some of those competitive pressures in the UK and the average selling prices for the UK, Cincinnati [ph] business being down.

Second question, obviously, this year you've really kind of put the accelerator down pretty firmly on volume growth, especially across Continental Europe and the Nordics. Any thoughts on 2018 from a kind of volume strategy perspective, what you think you can have in terms of capacity for next year would be helpful.

And then just in terms of your Net Promoter Score, obviously, you've been posting some very substantial improvements. I just wondered if you could frame it for us. Is that a Net Promoter Score that's been recovering after a period of pressure or you're now finding the new strategy around products the most Net Promoter Scores are at a new highs for the business? Just to - I'm just trying to understand recovery or also new territory.

Peter Fankhauser

Yes, I'll look - I'll start it as well with the last one. It is both -- it is -- and this depends a bit on the source markets. We see, in Nordics, they were quite high in the Net Promoter Score. We see as well there important or a really remarkable improvement on the very high level.

We see in Germany that we are remarkably high and here in the UK, it's probably the biggest progress because there we see both. We had not a good product in the past, right?

I repeatedly said that. We changed that and that has an impact now. And then a deliberate focus on really now improving all the different elements of the service chain is now having an impact.

So it is really both, and we hope that we can come out at the year-end with much more testament of how this exactly has an impact on -- positive impact on margins and volumes.

So early thoughts about next summer? We always said we want to grow with the market, and the market we expect grows around 3%. That is what we are planning then as well on the capacity side, well we are going to have the capacity. That is exactly what we are doing different to it.

Compared with years before, we are much more flexible in our capacity planning means. We are withholding a strict capacity plan until we see quite clearly where the customer streams are going and then we fix the capacity into the different regions.

And that is what makes our model much more flexible and much more as well resilient in the future. So we plan overall capacity with the market growth, where we expect about 3%.

And then the profitability of the whole airline segment, that is within expectations. So we can't avoid that we have some pressures on mid-haul destinations, especially to Spain out of UK as well. That is just what we have flagged for the tour operator.

That is exactly the same for the airline, but we are coping with it very well. And the decision we took early January to take -- to train the capacity out of Spain and redirect about 10% of our UK capacity into Turkey played out very well. That seemed to be exactly the right decision for the benefit of our customers but as well for the benefit of the company.

Tim Ramskill

Thank you.

Peter Fankhauser

Thank you, Tim.

Operator

Thank you. The next question is from the line of Jamie Rollo from Morgan Stanley. Please go ahead.

Jamie Rollo

Thanks. Morning, everyone. Two questions, please, and this has been partly answered already, but the first one's just on this tremendous volume growth you've been seeing and the sales conversion on that. If you just take the UK in the Nordics, where you saw about 10% like-for-like sales growth, but your EBIT is down, I guess, what other factors driving that.

Were you expecting that low level of conversion and what - could you sort of elaborate a bit more on exactly the sort of segments and the mix impact driving that weak conversion, please?

And then secondly, just back to Condor again, a very good third quarter result. You're basically back to 2015 roughly on third quarter performance, and yet the full year guidance to make a small profit implies a very big year-on-year reduction or 2 year reduction in the fourth quarter and no sort of further improvement from that sort of £15 million or £16 million improvement in the third quarter, which itself was a big improvement from the last couple of quarters.

So I'm just wondering, will Condor make a much bigger profit than sort of low single-digit, it seems to me, if you could just talk a bit about that, please?

Peter Fankhauser

Yes, I don't want to run the show by myself, so I'll give the questions to Michael, if you don't mind.

Michael Healy

Yes, okay. I'll take the Condor result first. We have seen some -- you've seen on the slide, you've seen continuing improvement in Condor in the year. And you're correct, we continued to see a stronger result as we go through the fourth quarter. But I -- whether we get back to 2015 levels, it's really just, which I think was - in the final quarter was almost about £80 million.

I think that's probably, in this year, just a bit too much. But you'll certainly see some strong improvement in the final quarter and indeed, you'll see that it's Condor that's driving the overall airline performance improvement for the full year. So we're getting there. We're still targeting that we will get back to full year benefits for Condor over by £35 million.

I think that improvement that we see to get us to profitability in the final quarter is in line with the full year benefits of £45 million. The area on sales conversion, well, some of it -- there's quite a lot of factors that play in our sales. We're certainly seeing some huge growth in revenues across each of the markets. In Continental Europe, you can see significant growth. There, there's possibly a mix issue.

The margins in Russia, where you've got significant yields in revenues in Russia, tend to be a bit lower and probably around about 6% or 7%. And Germany, itself, probably margins are more closer to the 10% margins, so you can see that from the Continental European business, high levels of sales don't necessarily involve the -- could actually dilute the sales mix of the overall gross margin.

And the other part at play, those are mix issues really more than anything else. Perhaps the real margin squeeze has been in the UK business, where we've seen, and as we've highlighted, that we expect to see squeeze in margins in going into Spain, in particular, to some extent mitigated by growth in margins in other destinations.

But in the UK it's more of a margin squeeze. In terms of Northern Europe, a little bit of squeezed margins, mainly because of, there, it's more to do with mix of sales towards more dynamically packaged products, which generate lower margins, et cetera.

And I think the other clack to the mix in all of this is the Easter timing as well, which also influenced these margins, exactly when that is it shows in seasons [ph] et cetera. So those are quite a lot of factors at play, but we're -- I think we're quite comfortable with that, we're quite comfortable with where we are and what the outlook is. Hopefully, that's explained it.

Jamie Rollo

Yeah. Very clear. Thank you.

Peter Fankhauser

Thank you, Jamie.

Operator

The next question is from the line of Alex Brignall from Redburn. Please go ahead.

Alex Brignall

Good morning. Thank you for taking the questions. Just two to break. On the hotel portfolio, I guess you now have a better view into 2018, so could you give us a view on how that's going versus your expectations and versus the moves that you've been doing into the differentiated products?

And then in terms of the markets, clearly, you were ahead of some others in moving out of Spain. Could you just tell us, just looking at the summer program, where you are in terms of the percentage, which is ex-Spain, where that has been last year, where it started this year and maybe where you would hope for it to go, because clearly the better growth is coming outside of that market?

Peter Fankhauser

Yes. So hotel portfolio, we announced -- we have opened 11 this year, and we are going to open 12, and this is exactly in line with the expectation. I think we even said 11 in May, and we have now one more in Ras Al Khaimah, and we are working. We still have a bit of time for '18, so we are working to further improve that.

Now the mix, you said we are moving out of Spain. So just to make that clear, Spain is still as well from the UK, the biggest destination. So we are moving out of Spain. So don't get that wrong. Spain is really still important, but -- and that's why I use the words training capacity and not moving capacity, so we were just adapting the capacity.

And the destinations, which were really taking profits out of this move was out of the UK, definitely Turkey, where we are still not yet on the level of 2015, but where we still -- where we see a major recovery and then the other destinations are Cyprus and Bulgaria where we have a substantial growth, 14% in Cyprus, 19% in Bulgaria.

And what is coming up as well is Croatia. And Egypt, on a admittedly still low pace, far away from the levels we have seen before the Arabian Spring is coming up over 100%, so nice development, but on a still low base that we see as a sharp and decent economy.

Now yesterday, we got the change of the travel advise sent to Tunisia, that is -- it's a further opportunity for us. We are now not rushing into the program from the UK. We are planning to open Tunisia in the second half of winter to fly from 10 onwards and we are really wanting to carefully put together another program that we can have from the beginning an excellent program served to Tunisia. So it is a further opportunity what we see then for next summer, especially.

Alex Brignall

Great. Thank you very much.

Peter Fankhauser

Thank you.

Operator

The next question is from the line of Jeffrey Harwood from Stifel. Please go ahead.

Jeffrey Harwood

Yes, good morning. Just two questions. First of all, the pressure on margins in Spain. Looking ahead, do we think it's realistic to expect the situation to improve as some of these other markets recover, Turkey, Egypt and even Tunisia? And then secondly, on the winter bookings, are there any particular trends there that's worth highlighting?

Peter Fankhauser

Yes, so you are perfectly right, Jeffrey. The pressures on margins in Spain, at a certain level, are going to be less because as you say, the more Turkey is normalizing, the more Tunisia is coming up as a fully-fledged destination, the more Egypt is coming up, especially during winter, the less we have cost pressure on Spain. And this situation is going to normalize. What we see as well, and then I have to really - I have to somehow praise the Spanish hoteliers.

It's not just price increase because they want to earn more money. They have earned more money in the past since the turmoil in the Eastern Mediterranean, and they reinvested a lot of their profits into the property. So we are going to see as well a better portfolio, and generate the hotel portfolio in Spain, but then the customer is also willing to pay more and where we hope to have as well a decent margin.

So that is something, which will normalize the Spanish hoteliers. If you talk to them privately, they know that. For winter, what is coming up in winter is really strong in Egypt. And in Egypt, we have put flights into Marsa Alam. I mentioned that last time, which is going very well.

We have extended the power of the program to Hurghada, you still cannot fly to Sharm el-Sheikh and -- but British people want - British customers really value as well all of the sub Hurghada and what we see as well from Germany.

And then we have a strong demand for the long-haul destinations, and we have a strong demand as well for a new destination, Cape Verde, which is a little further down, further south of the Canary Islands, where we have as well our own-branded hotels going to open, and that is driving demand because it's a good option.

Jeffrey Harwood

Okay. Great. Thank you.

Peter Fankhauser

Thank you.

Operator

The next question is from the line of Mark Fortescue from Panmure. Please go ahead with your question.

Mark Fortescue

Hello, morning. Hi. Just one question, please. Also on Condor, but more in the context of the wider airline trading environment. Beyond Q4 into winter and start to think about FY '18, other airline peers are coming out pretty cautious regarding the yield environment, given fuel and capacity dynamics. Europe, not just Germany.

Is it fair to say - I think that rhetoric has surprised people a little bit. It's certainly more cautious than some had expected, hoping that the nadir of negative yields have been passed through.

So the question is as we approach the second year of recovery at Condor, what's your working assumption for yields and the pricing environment given the current trading environment as it kind of looks now?

Peter Fankhauser

We don't think that the environment is going to be any easier. That is not our expectations and that is maybe the cautiousness we have anywhere in our business, and that means that we'll go for further efficiency in our airlines systems. And that is almost in the DNA. And we are, as Michael said, we are taking profits of being One Airline group.

That means that we can as well shift within the One Airline group the capacities to where we need it and where we see the strongest demand and then also the highest deals.

And the second point is, we really profit from a situation in Germany, which is, yes, a bit disruptive, at least - the least to say. And there that's a tailwind for, especially for Condor. And the third one is, our model is not just an airline model. Our model is a tour operator model for an airline, which is very strong and backed by tour operator.

Still an airline, still a fully-fledged airline, with its own sales, with its own seat-only sales, with its own GDS connections, with steeper flights, but we have about 30% to 50% to 80%, depending on the different markets, a back up -- for a backup, a capacity taken by the tour operator.

That gives a much more relaxed position for the airline in terms of yielding because you don't start with an empty airplane. You start with already a partly-full plane because the tour operator is going to take the seat. So we are, on my view, a bit in a better position than just a single stand-alone airline.

Mark Fortescue

Peter, if the wider pricing environment remains negative rather than say, flat, do you think you can still achieve your £35 million of targeted benefit?

Peter Fankhauser

Yes, definitely, definitely. Yes, that is our plan and then so far, we exactly fulfil what we have said. And there is no reason to change that expectation.

Mark Fortescue

That's helpful. Thank you.

Peter Fankhauser

Thank you.

Operator

We have now run out of time for any more questions. I'll hand back to your host Peter, for any concluding remarks.

Peter Fankhauser

Yes, the only concluding remark is that I want to thank you very much for listening to our Q3 results call, and I wish you a very good day. I know it's very busy day for you guys. So thank you very much for joining the call and good day.

Michael Healy

Thank you.

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Source: Thomas Cook Group's (TCKGF) CEO Peter Fankhauser on Q3 2017 Results - Earnings Call Transcript