Kuoni Group Report
The International Monetary Fund (IMF) forecasts global growth of 3.1% for 2015 (source: IMF World Economic Outlook Update, January 2016). This corresponds to a year-on-year fall in global growth by 0.3 percentage points. Despite contracting growth, the major growth drivers were again emerging markets, led by China (6.9%) and India (7.3%). Developed markets posted an economic expansion increase of 0.1 percentage points thanks to the modest recovery in the Eurozone and Japan.
Economic growth was subdued in 2015. Growth in developing countries was down for the fifth consecutive year. Industrialised nations recovered on the previous year and posted a slight increase in economic growth. Three key transitions dominated the economic environment in 2015. First, the continuous slowdown of economic growth in China as the result of an unexpectedly strong contraction of exports and imports and the growing uncertainty over the future performance of the Chinese market weighed on the economic environment. Second, the second six months of 2015 were characterised by a strong fall in the price of commodities. Third, the US Federal Reserve’s interest rate hike impacted on global financial markets (source: IMF World Economic Outlook, January 2016).
The economic performance in Kuoni Group’s key source markets was mixed in 2015. Whereas Japan posted a slightly positive trend on the previous year in the Asian market, China saw a fresh fall in economic growth. In Europe, the Eurozone recovered slightly, while Great Britain posted a contraction in growth. (source: IMF World Economic Outlook, January 2016).
The World Tourism Organization (UNWTO) reported the following growth rates in international arrivals per region in 2015 (source: UNWTO, World Tourism Barometer, January 2016):
The Middle East: +3% Worldwide: +4%
International tourism again saw a positive performance in 2015. According to the World Tourism Organization, international trips abroad expanded by 4.4%. This is about 50 million in additional foreign tourists year-on-year. The performance varies by destination and was influenced by strong exchange rate fluctuations, oil prices, natural disasters and terrorist attacks. Growth in advanced economies exceeded that of emerging markets. The regions posting the strongest growth were Europe, America and Asia/Pacific at 5%. Africa was the sole destination to see negative growth. This is largely due to the drop in demand in North Africa. (Source: UNWTO, World Tourism Barometer, January 2016).
Effects of the strategic realignment on reporting
The realignment of Kuoni Group announced at the start of the year resulted in major changes to all financial key performance indicators at Group level. The IFRS accounting standards applied require that the income statement present retroactively and the balance sheet prospectively the continuing operations separately from the discontinued operations. Accordingly, the Kuoni Group Report focuses on the continuing operations and presents separately targeted information on discontinued operations.
Kuoni Group generates organic turnover growth of 6.9%
Kuoni Group generated turnover from continuing operations of CHF 3,348.7 million in the 2015 financial year, compared to CHF 3,372.0 million in the previous year. Strong organic growth of 6.9% was posted. The strengthening of the Swiss franc had an impact of –7.6% on the conversion from the functional currencies of the subsidiaries to the presentation currency Swiss francs. In nominal terms, a net turnover decline of 0.7% was therefore the result. Acquisitions and divestments had no impact on organic growth in 2015 and 2014. The strongly growing divisions of GTD (Global Travel Distribution) and VFS Global, which organically grew by 9.8% and 23.3%, respectively, made an emphatic contribution to the organic turnover incline performance. Earnings before interest, taxes and amortisation (EBITA) stood at CHF 124.0 million (2014: CHF 105.7 million) and the earnings before interest and taxes (EBIT) came to CHF 81.2 million (2014: CHF 76.4 million). Earnings before interest and taxes (EBIT) were therefore above prior-year’s level, but were strongly influenced by one-off effects, such as the sale of the “Neue Hard” property in Zurich (+CHF 52.6 million), the impairment of other intangible assets (–CHF 16.5 million) as well as the costs of the initiated restructuring programme of the GTS Division and the support and Group functions (–CHF 25.2 million). However, the prior-year result included a CHF 10.1 million proceed, which originated from the sale of the Geroldstrasse property, Zurich. Adjusted EBITA therefore amounted to CHF 96.6 million in line with previous year (2014: CHF 95.6 million).
Earnings before interest, taxes and amortisation (EBITA) for the full year was driven by Global Travel Distribution (GTD) and VFS Global which both posted record years with CHF 66.7 million and CHF 53.9 million, respecitvely, despite the Swiss franc strengthening on a nominal basis. In addition, Corporate – impacted by the sale of the “Neue Hard” property in Zurich – contributed a positive CHF 28.1 million to the group EBITA. On the other side Global Travel Services (GTS) posted a negative EBITA of CHF –24.7 million, driven by CHF 18.0 million of restructuring expenses.
Net result from continuing operations amounted to CHF 57.9 million and was in line with prior year’s result (CHF 58.2 million).
The sale of the tour operating activities resulted in a loss of CHF –132.4 million before reclassification of over the years accumulated currency translation losses (CTA) of CHF –219.7 million. This accounting effect had no impact on equity and cash funds. Net result from discontinued operations, net of taxes, therefore added up to CHF –352.1 million (2014: CHF 9.2 million).
Net result of the Group amounted to CHF –294.2 million compared to CHF 67.4 million in 2014. At CHF 120.3 million, the free cash flow was strongly above prior year (CHF 55.1 million) mainly due to the sale of the property.
The Visa Processing Services share of the overall turnover went up during the year under review from 8.0% to 10.0%. This, on the one hand, was due to the strong organic growth posted by VFS Global, but on the other hand because of a material decline of 9.8% in Global Travel Services’ Group Travel and Destination Management Services.
Global Travel Distribution reports strong growth particularly in Asian source markets
Global Travel Distribution
The segment generated turnover of CHF 1,979 million in 2015 (2014: CHF 1,934 million). Organic growth came to 9.8%.
The Global Travel Distribution (GTD) segment increased turnover in the 2015 financial year further to CHF 1,979.3 million (2014: CHF 1,933.6 million). In nominal terms, this represented a growth of 2.4%, but considering the significant currency influences of –7.4% organic growth posted was 9.8% (2014: 8.8%). The source markets in Asia and the Middle East and Africa (MEA) made the strongest contribution to the increase. The gross profit margin remained at prior-year level (2015: 11.4%; 2014: 11.4%). Overall, the growth strategy resulted in personnel costs rising by CHF 2.5 million driven by a 7.8% higher number of average full-time equivalents. Earnings before interest, taxes and amortisation (EBITA) stood at CHF 66.7 million (2014: CHF 63.2 million) and the earnings before interest and taxes (EBIT) came to CHF 48.0 million (2014: CHF 42.0 million).
The key source market for the GTD Division was again Europe with a turnover share of 40% (2014: 43%). Asia’s share rose from 29% in 2014 to 31% in 2015. The key travel destination was again Europe – in particular France, Great Britain and Italy – at 48% (2014: 51%) as well as the US.
Global Travel Services launches restructuring programme and focuses on profitable business areas
Global Travel Services
GTS Division posted turnover of CHF 1,055 million (2014: CHF 1,170 million). Organic growth came to –1.3%.
The Global Travel Services (GTS) Division, which consists of the Group Travel business and Destination Management Specialists, posted a further decline in turnover in nominal terms by –9.8% to CHF 1,054.8 million in 2015 (2014: CHF 1,169.6 million), driven in particular by the strong appreciation of the Swiss franc compared to the functional currencies of the corresponding subsidiaries (–8.5%). In organic terms, turnover decreased only slightly (–1.3%). The Group Travel business enjoyed particularly strong growth in China and Taiwan, but continued to suffer from weak demand in Japan. The Destination Management Specialists business dropped further and continued to suffer from a lack of demand from Russia. By contrast, the business in America and Asia/Pacific posted positive growth. To respond to the continued decrease in turnover in certain regions and the narrowing gross profit margin, GTS launched a significant restructuring programme of its Group Travel business in the fourth quarter, which weighed on the 2015 result by CHF 15.0 million. The future cost base is to be reduced by more than CHF 30.0 million over the next two years with this restructuring programme. Furthermore, following a strategic review of the existing IT infrastructure and the abandoning of the targeted IT solution had a negative impact on the Division’s operating result in the amount of CHF 19.5 million (impairment of other intangible assets of CHF 16.5 million and related restructuring expenses of CHF 3.0 million). Earnings before interest, taxes and amortisation (EBITA) adjusted for the restructuring costs of the GTS segment dropped to CHF –6.7 million (2014: CHF 1.2 million). The unadjusted earnings before interest and taxes (EBIT) amounted to CHF –48.8 million (2014: CHF –6.9 million), with the negative result mainly due to one-off restructuring costs of CHF 18.0 million and impairment of other intangible assets in connection with IT structure changes of CHF 16.5 million.
Region Asia/Pacific was the key source market for the GTS Division with a turnover share of 67%. Europe was the second-largest source market at 24% of turnover. The key travel destination was again Europe, leading at considerable distance with a share of 72% in turnover. The highest overnight stays were posted by destinations in France, Italy, Switzerland, Germany and Great Britain. In regards of source market Russia’s share continued to contract compared to 2014, which was caused by the ongoing geopolitical tensions with Ukraine and the economic slowdown.
VFS Global with continuous strong growth
VFS Global achieved turnover of CHF 317 million (2014: CHF 271 million). Organic growth came to 23.3%.
The visa services provider VFS Global generated turnover in the amount of CHF 316.5 million in 2015 (2014: CHF 270.8 million). At 10.1%, the number of visa applications processed rose strongly on 2014 to more than 20 million applications. This growth was generated above all in the source markets in Asia/Pacific, India, Middle East and Africa. Visa applications in India and China for the destinations of Britain and the US rose in particular. The difficult political and economic situation in Russia, by contrast, resulted in a marked reduction of applications in this source market. Nominal and organic turnover growth compared to 2014 was 16.9% and 23.3%, respecitvely. The currency-related effects stood at –6.4%. The earnings before interest and taxes (EBIT) rose to CHF 53.9 million (2014: CHF 52.5 million). Under the joint venture agreement on the provision of visa services for the Kingdom of Saudi Arabia, the network of application offices was expanded further in 2015. The late roll-out of biometric visas continued to result in delays to business expansion. As a consequence, the result was lower than expected at CHF –1.9 million (2014: CHF –2.0 million).
Region Asia/Pacific remained the key source market for VFS Global with a net proceeds share of 71% (2014: 67%). Europe was again main destination with 50% of turnover compared to 56% in 2014.
Stable gross profit margin in a challenging 2015
Kuoni Group generated a gross profit of CHF 609.7 million in the year under review (2014: CHF 612.2 million). This corresponded to a nominal decrease of 0.4% on 2014. Organic gross profit growth was 7.1% and currency-related effects therefore amounted to –7.5%. GTD and VFS Global posted strong increases in their organic gross profit performance with 10.0% and 15.3%, respectively, whereas GTS posted negative organic gross profit growth of 5.6%. The reduction in the gross profit of GTS was mainly caused by the currency-related fall in turnover, but also by a decline of the gross profit margin.
Overall, Kuoni Group’s gross profit margin was at prior-year’s level with 18.2% (2014: 18.2%). Owing to the different volume mix, with VFS Global having a higher contribution in 2015, contracting gross profit margins of the three segments were nearly offset. In the GTD Division, the gross profit margin was retained at prior-year level (2015: 11.4%; 2014: 11.4%). In the GTS Division, the gross profit margin fell to 15.1% compared to 15.7% in the previous year. The lower gross profit margin in the Group Travel business was largely caused by the growth markets of China and Taiwan, whereas the Destination Management Specialists business substantially improved. VFS Global strongly increased its gross profit in absolute terms, the change of the business model for the Malaysian mission for India resulted in higher sales, but also led to a lower gross margin (2015: 71.2%; 2014: 76.7%).
Higher operating result before amortisations (EBITA)
EBITA 2015 adjusted
EBITA without restructuring costs and the one-time effect from the gain on the sale of the property in Zurich amounted to CHF 96.6 million.
Kuoni Group generated earnings before interest, taxes and amortisation (EBITA) of CHF 124.0 million (2014: CHF 105.7 million). The increase in EBITA was driven by the results of the Divisions GTD and VFS Global, which showed significant organic growth, and by the sale of the “Neue Hard” property in Zurich, Switzerland, which made a positive contribution to the result of CHF 52.6 million. By contrast, one-off restructuring costs of CHF 18.0 million of the GTS Division and additional costs in connection with the restructuring of support and Group functions amounting to CHF 7.2 million reduced earnings before interest, taxes and amortisation. Earnings before interest, taxes and amortisation (EBITA) 2014 also included a one-off special effect in the amount of CHF 10.1 million from the partial sale of an office building at Geroldstrasse, Zurich, Switzerland.
Headcount at end-2015 (FTE) was 8,117 (end 2014: 7,609).
The average number of employees (full-time equivalents) rose by 6.9% on the previous year to 7,968 employees (2014: 7,455). The increase in the average number of employees was caused, in particular, by the high organic sales growth of 6.9%. Personnel costs increased disproportionately by only 0.2%. Other operating costs were within the range of the previous year.
The Divisions of Kuoni Group saw a mixed performance in 2015. At EBITA level, GTD (CHF 66.7 million) strongly outperformed the prior-year result (CHF 63.2 million) despite the substantial currency influences. VFS was slightly above the previous year at CHF 53.9 million (CHF 52.5 million). GTS, by contrast, failed to offset the decline in volume and narrowing margin despite cost savings and reported a considerable contraction of its earnings before interest, taxes and amortisation (2015: CHF –24.7 million; 2014: CHF 1.2 million). The Corporate’s EBITA was, as described above, strongly influenced by the contribution from the sale of the “Neue Hard” property in Zurich and the restructuring costs. Adjusted for these effects and considering the prior-year effect from the sale of the property at Geroldstrasse in Zurich, the negative EBITA from the Corporate segment amounted to CHF –17.3 million compared to CHF –21.3 million in the previous year.
After deducting the lower amortisations of CHF 26.3 million (2014: CHF 29.3 million) and the impairment on other intangible assets of CHF 16.5 million (2014: CHF 0.0 million), the earnings before interest and taxes (EBIT) came to CHF 81.2 million (2014: CHF 76.4 million). The EBIT margin was therefore 2.4% and slightly increased compared to previous year (2014: 2.3%). The impairment on other intangible assets was caused by one-off costs as part of the IT structure adjustments of the GTS Division.
2: Impact of gross profit margin development
3: Impact of increase in operating costs
4: Impact of sale of Neue Hard and Uberlandstrasse
Net result from continuing activities at prior-year’s level
Kuoni Group generated a financial result of CHF –2.3 million (2014: CHF 0.7 million). This included borrowing costs of CHF –9.0 million compared to CHF –6.0 million in 2014. The borrowing costs increased considerably in absolute terms due to higher utilisation of the syndicated credit facility as well as one-off costs due to the amortisation of capitalised costs in connection with the early refinancing of the previous credit facility.
Tax expense amounted to CHF –21.0 million in the 2015 financial year (2014: CHF –18.9 million). The effective tax rate increased from 24.5% to 26.6%.
Net result from continuing operations amounted to CHF 57.9 million (2014: CHF 58.2 million). This result included a positive effect from the sale of the “Neue Hard” property in Zurich, Switzerland, as well as the negative effects from the restructuring programmes of GTS, support and Group functions and the costs from the IT structure adjustment at GTS. Net result from continuing operations per registered share B amounted to CHF 14.59 (2014: CHF 14.86).
Following the completion of the sale of European tour operating activities in the third quarter the sale of the Asian tour operating activities (India/Hong Kong) was completed on 16 December 2015. The net result from discontinued operations, net of taxes, resulting from these transactions of CHF –352.1 million (2014: CHF 9.2 million) was largely influenced by the impairment on goodwill of CHF –106.4 million in connection with the sale of the European tour operating business as well as the reclassification of over the years accumulated currency translation losses (CTA) in the amount of CHF –219.7 million. This accounting effect had no impact on equity and cash and cash equivalents. For further details on discontinued activities, see note 2 to the consolidated financial statements.
Net result consisting of continuing and discontinued operations amounted to CHF –294.2 million in 2015 compared to CHF 67.4 million in 2014.
As communicated in the public offer of private equity company EQT on 29 February 2016, a dividend payment would be deducted from the offered share purchase price. The Board of Directors is therefore recommending to the forthcoming Annual General Meeting to waive the dividend in the form of withholding tax-free distribution against reserves from capital contributions.
The statement of comprehensive income contains consolidated net income and all additional value adjustments entered in the balance sheet, which are presented in the income statement in accordance with IFRS. They contain market value adjustments of financial instruments (CHF 10.7 million). The effect consists of the outstanding derivative financial instruments, which are used to hedge the foreign currency risk of the operating business. Valuation losses on defined benefit plans amounted to CHF –30.3 million and foreign exchange differences to CHF –105.8 million, mainly related to the translation of balances held in functional currency EUR to Swiss franc.
Comprehensive income came to CHF –221.0 million (2014: CHF 26.4 million) and contained in addition to the net result currency translation losses of CHF 105.8 million (2014: CHF 27.8 million), remeasurement losses of defined benefit plans, net of taxes, of CHF 30.3 million (2014: CHF 24.0 million), and fair value losses, net of taxes, transferred to equity of CHF 10.7 million (2014: gains of CHF 10.8 million).
Free cash flow at CHF 120.3 million
Net cash flow from operating activities – continuing operations amounted to CHF 74.1 million (2014: CHF 91.6 million). The working capital decreased slightly by CHF 0.8 million (2014: Decrease by CHF 2.3 million), in particular as a result of higher accounts receivable and prepaid expenses. The taxes paid were materially below prior year at CHF 30.5 million (2014: CHF 38.6 million) mainly due to high prepayments made in 2014. Net cash flow from operating activities – discontinued operations amounted to CHF 38.8 million compared to an outflow of CHF 27.6 million in 2014.
Net cash used in investing activities – continuing operations amounted to CHF –117.1 million (2014: CHF –28.0 million). In particular the net cash outflow from the sale of the tour operating business resulted in this strong reduction in cash funds. By contrast, the sale of the properties in Zurich resulted in a net cash inflow of CHF 84.4 million. Investments in property, plant and equipment and intangible assets amounted to CHF 38.2 million in 2015 (2014: CHF 50.1 million) and were therefore significantly below the previous year and strongly below depreciation and amortisations. CHF 20.1 million of investments were made in property, plant and equipment, which was mainly associated with the expansion of VFS Global. CHF 18.1 million was invested in intangible assets, mainly in the IT area, where GTD continued to rely on the integration of a new e-commerce platform with enhanced customer-driven functions. Net cash used in investing activities – discontinued operations amounted to CHF –5.5 million compared to an inflow of CHF 3.6 million in 2014.
Net cash used in financing activities – continuing operations amounted to CHF –29.1 million (2014: outflow of CHF –3.9 million). In particular the profit distribution of a withholding tax-free distribution against reserves from capital contributions of CHF 29.4 million to the shareholders of Kuoni Travel Holding Ltd. (2014: CHF 29.0 million) was authoritative.
Free cash flow improved materially in the year under review from CHF 55.1 million to CHF 120.3 million. Overall, the cash and cash equivalents decreased by CHF 68.2 million compared to a decrease of CHF 5.9 million in 2014.
Stable equity ratio of 32.5%
The balance sheet sum fell in the 2015 financial year by 32.6% to CHF 1,629.4 million (2014: CHF 2,419.2 million). This reduction was caused by the sale of the tour operating activities and had an impact on all key balance sheet items. Kuoni Group’s goodwill thereby dropped from CHF 911.1 million to CHF 592.6 million. The second key impact on the balance sheet was the significant appreciation of the reporting currency, the Swiss franc, which shrank the balance sheet sum by CHF 105.8 million (2014: CHF 27.8 million). As at the end of 2015, total equity amounted to CHF 530.3 million (2014: CHF 779.2 million). This corresponds to an equity ratio of 32.5% compared to 32.2% as at the end of 2014.
Net debt was reduced in 2015 from CHF 273.8 million to CHF 54.5 million by selling the tour operating business and the “Neue Hard” property.
Kuoni Economic Profit at CHF 16.2 million
KEP is calculated from net operating profit after tax (NOPAT) less the cost of capital invested in operations. Group-level capital costs have been set at a sustainable rate weighted average cost of capital (WACC) of 7.5%.
The value-driven management approach of Kuoni Group aims to align the management of the company towards long-term value creation. The Kuoni Economic Profit (KEP) serves as the management key indicator. Kuoni Economic Profit improved from CHF –8.5 million to CHF 16.2 million in the reporting year. This was predominantly caused by the improvement in the operating performance. The average invested capital fell in 2015 due to the sale of the tour operating business and the sale of the “Neue Hard” property in Zurich from CHF 958 million in 2014 to CHF 655 million.
The return on invested capital (ROIC) in 2015 was 10.0% compared to 6.6% in 2014.