Thomas Cook set for another challenging year - UPDATE

14th Dec 2011 07:19

The delayed full-year results from struggling package tour operator Thomas Cook are out and reveal the company fell into the red as a result of a reappraisal of the value of its UK and Canadian businesses, while the new trading year has got off to a slow start.The company made an underlying profit before tax of £175m in the year to the end of September, down from £248m the year before. The market had been expecting profits of £168.5m. Exceptional charges of £573m resulted in a statutory loss before tax of £398m, versus last year's profit of £42m. The bulk of the exceptional charges related to a £428.1m write-down in the carrying value of goodwill and certain other assets and are largely of a non-cash nature.The underlying operating profit margin declined to 3.1% from 4.1% the year before. Revenue rose 10% to £9.8bn, versus market forecasts of £9.2bn, from £8.9bn last year. On a constant currency basis, revenue was up 8% year-on-year. Free cash flow, meanwhile, was positive this time round at £18m, versus negative cash flow of £32m the year before. The company remains in cost-saving mode, however, and, as previously announced, has suspended dividend payments until the balance sheet is looking a lot healthier.Net debt at the end of the reporting period stood at £890.9m, versus net debt of £803.6m a year earlier.The company said good performances in Central Europe, Northern Europe and Airlines Germany offset by a fall in UK profit and the impact of political turmoil and civil unrest in the Middle East and North Africa (MENA); the MENA disruption had a particularly noticeable effect on bookings from France, where North African destinations typically comprise 40% of holiday bookings.Crucially, the company claimed that, despite its well-publicised problems with its refinancing, customers are continuing to book holidays with the company. "Bookings outside the UK were broadly unaffected by news of our refinancing and in the UK bookings have recovered well," said Sam Weihagen, interim group chief executive of Thomas Cook. Nevertheless, the company conceded that performance in the UK and France fell well below its expectations.A full strategic review is under way, while a "significant turnaround plan" for the UK business, designed to deliver £110m of "fully annualised improvement to profitability" over the next three years, is in progress.The turnaround plan is intended to optimise the UK airline, refocus product strategy, improve yield management, rationalise distribution and improve operational efficiency. In addition, the business will take action to deliver higher growth and better returns from its independent operations which accounted for 26% of UK revenues.Though the company recently boosted its portfolio of High Street travel agents through a retail joint venture with the Co-Operative Society, the company has decided to close down around 200 under-performing shops where leases expire within the next two years. Other shops may get the chop as their leases come up for renewal.Current trading offers little solace for long-suffering shareholders. News that "the first quarter has got off to a slow start" and and an admission that the current financial year should be another challenging one sent the shares tumbling as low as 13.28p in early trading, down from 14.825p the night before the results announcement."The first half of the current financial year and in particular the first quarter, is expected to be adversely impacted by the uncertain economic environment across Europe, input cost inflation and the ongoing disruption in MENA. In addition, the acquisition of the Co-op and Intourist will add to seasonal losses in the first half given that these businesses earn all their profit over the summer months," the company said.In the UK, the summer 2012 programme is now 24% booked, with bookings currently 8% ahead of last year and average selling prices up 5%. Notwithstanding these increases, the group is taking a cautious stance and planning for an 8% capacity cut at this point, reducing across all haul lengths as a counterpoint to continued uncertainty in the economic outlook. In Northern Europe, the summer 2012 programme was launched in September and is 10% sold, broadly in line with last year, with average selling prices up 8%. The search for a new chief executive officer continues; in the meantime, Sam Weihagen will continue as interim head honcho until a permanent replacement is found.According to analyst Tim Ramskill from Credit Suisse: "Visibility remains low and equity volatility will likely remain high. With the cash low point now only weeks away we believe the key to share price performance from here is disposal progress during 2012 that materially improves the balance sheet coupled with signs of trading stability although visibility on both remains low."--jh