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A difficult first half-year for the Kuoni Group – recovery expected in the second six months

The Kuoni<.> Group experienced a difficult first half of 2002 in business terms. With booking trends…

The Kuoni<.> Group experienced a difficult first half of 2002 in business terms. With booking trends still modest compared to their prior-year equivalents and capacity reductions in Scandinavia and Italy, total turnover suffered a (15.8% decline to CHF 1.659 billion, down from the CHF 1.972 billion recorded for the first half of 2001. Despite the turnover decline, however, the Group raised its gross profit margin from 24.6% to 25.8% over the same period. The increase is due to successful negotiations with business partners and the higher yields generated in certain markets. The decline in operating costs stems from substantial cost economies and the non-recurrence of exceptional expense items incurred in the prior year. This resulted in earnings before interest, taxes and amortisation of goodwill (EBITA) of CHF -11.8 million (which compares with an EBITA of CHF -2.5 million for the first half of 2001).



In its home Swiss market, which generally saw a reduction in business volumes, the Group sustained a turnover decline of -8.7%. Kuoni UK and the Business Travel division posted first-half results which were in line with expectations, despite difficult market environments. Kuoni Scandinavia and the Europe division improved their EBITA results compared to the first half of 2001, and thereby substantially diminished their overall net losses. The Group result amounted to CHF -47.5 million. The decline on the CHF 2.9 million profit recorded for the first half of 2001 is primarily due to the non-recurrence of last year`s exceptional income items.



The Kuoni Group expects to see an improvement on its prior-year turnover for the second half of 2002. The last quarter in particular offers potential for recovering lost ground on its 2001 performance.



In view of the shortfall on prior-year results sustained in the first half-year, the Kuoni Group expects to post turnover for 2002 as a whole which is some 5% below 2001 levels. The Group`s EBITA for 2002, however, will be a substantial improvement on its prior-year equivalent, thanks to higher gross profit margins, continuing cost economies and the non-recurrence of exceptional expense items. In view of its favourable EBITA results for July, the Kuoni Group expects to achieve an EBITA margin amounting to 3% of turnover for the year.



With a first-time net financial expense in the double-digit millions and tax expense still above the average, the Group result for the 2002 business year will fall short of satisfactory levels.



The balance sheet at June 30, 2002 shows shareholders` equity of CHF 511.8 million. The reduction on year-end 2001 levels is due to seasonal business losses and currency trends. With the traditionally stronger second six months ahead, shareholders` equity is expected broadly to return to its level at December 31, 2001 by the end of the year.



With free cash flow of CHF 121.5 million generated in the first six months, the Group`s liquid funds stood at CHF 630 million on June 30, 2002.



Group turnover



Total Group turnover for the first half of 2002 amounted to CHF 1.659 billion, a CHF 313 million or (15.8% decline on the CHF 1.972 billion recorded for the prior-year period. The internal decline in Group turnover amounted to (15%, while the net impact of currency movements reduced total turnover by (2.5%. The acquisition of Allied Tours in the USA added 1.7% to total turnover volume.



Group EBITA



The reduction in operating costs was achieved through substantial cost economies and the absence of exceptional expense items incurred in 2001. Group EBITA (earnings before interest, taxes and amortisation of goodwill) declined CHF 9.3 million from its prior-year level of CHF -2.5 million to CHF -11.8 million. Kuoni UK and the Business Travel division made positive contributions to the overall EBITA result, albeit to a lesser degree than in 2001. Kuoni Scandinavia and the Europe division both enhanced their profitability and lowered their losses compared to prior-year levels. The Kuoni Switzerland and Incoming & Asia units sustained EBITA declines.



The Group result



The overall Group result for the first half-year stood at CHF -47.5 million, a CHF (50.4 million decline on the CHF 2.9 million profit recorded for the first half of 2001. The fall is attributable primarily to the impact on last year`s result of the net earnings of some CHF 45 million derived from the disposal of N-U-R Neckermann of Austria. Prior-year results were also positively influenced by financial profits from the sale of securities: the Kuoni Group now has virtually no securities among its assets. The 2002 first-half financial result – and thus the overall Group result – was also adversely affected by the Group`s share in the losses at TUI Suisse, in which it holds a 49% minority stake.



Results by business area



The Kuoni Group compiles results and reports for its five strategic business divisions. Separate reports are produced for Kuoni Switzerland and Kuoni Scandinavia within the Switzerland & Scandinavia division, in view of the importance of these strategic business units.



SBU Switzerland: Turnover relatively strong in a tough market environment



Kuoni Switzerland recorded a -8.7% fall in turnover, from CHF 461 million to CHF 421 million, in a home market that saw overall business declines. Railtour Suisse, the rail travel specialist, reported positive trends, despite unfavourable market conditions.



The decline in the unit`s turnover for the traditionally weaker first half-year had its impact on EBITA, which fell from CHF -7.2 million to CHF -12.6 million. EBITA results were also depressed by the higher pressure on margins felt in a market which saw a strong trend towards short-notice bookings in the first six months.



In view of the current booking situation, Kuoni Switzerland expects to see an improvement in turnover compared to 2001 in the second six months, which are traditionally stronger in demand, turnover and profit terms. In view of this, the unit expects to post annual turnover which is slightly below prior-year levels and, as a result, a year-on-year EBITA decline.



SBU Scandinavia: A substantial improvement in results



First-half turnover for the Kuoni Group`s Scandinavian operations amounted to CHF 250 million, -20.1% down on the CHF 313 million recorded in 2001. The majority of the decline can be ascribed to a reduction in capacity, though the turnover result was also depressed by an extremely difficult first-half market environment. Kuoni Scandinavia is active in Sweden, Norway and Denmark and has its own charter airline, Novair.



Despite the turnover decline and margins which still fell short of expectations, Kuoni Scandinavia achieved a 25.0% improvement in its first-half earnings results, largely through cost economies and process enhancements. The EBITA loss for the period amounted to CHF -22.5 million, which compares to a CHF -30.0 million EBITA result for the first half of 2001.



Kuoni Scandinavia expects to see an improvement in both turnover and margins, and thus a further substantial improvement in EBITA results, for 2002 as a whole.



SBD Europe: Earnings results in line with projections



The Europe division embraces the Group`s tour operators in France, Italy, the Netherlands and Spain, which are largely active on the long-haul travel front, and the Group`s Austrian retail organisation. Business at the division`s various companies again showed strong variations in the first half-year. The Dutch subsidiary delivered a strong performance. The Austrian retail organisation also performed well, and maintained its results at prior-year levels. The Spanish and French subsidiaries showed substantial improvements after a slow start. But the Italian subsidiary suffered from the fact that the Italian market is taking longer to recover than most other European markets. Italian operations also saw a sizable reduction in charter capacity.



Total turnover for the division amounted to CHF 191 million, a -31.3% decline on the CHF 278 million recorded in 2001.



The division`s first-half EBITA loss was diminished by 17.1%, from CHF -7.6 million to CHF -6.3 million. Most of this loss stems from the Italian subsidiary, which, while substantially improving on 2001, failed to prevent the sizable turnover decline from having its adverse impact on EBITA results.

With further improvements in booking levels and a number of internal reorganisation measures under way, Kuoni France is confident of posting a strong second-half performance. The companies in Spain, the Netherlands and Austria should also see positive developments in the second six months. In Italy, however, market conditions are likely to remain difficult for the rest of the year. But with cost economies continuing, the division expects to post a black-ink EBITA result for 2002 as a whole.



SBD United Kingdom and North America: Favourable results depressed by strong currency trends



Turnover for the division, which comprises Kuoni UK, the Group`s Intrav US subsidiary and its Caribbean hotel operations, totalled CHF 411 million, a -20.3% decline from the CHF 516 million recorded in 2001. The result was considerably eroded (by -3.2%) by UK pound and US dollar currency movements.



Against a background of negative market trends, Kuoni UK maintained its turnover at favourable levels in local-currency terms. Business at the Group`s Intrav US subsidiary reflected both the difficult situation in the US market and the impact of currency movements. But the company still posted a encouraging performance, thanks to its domestic cruise products.



The division recorded an EBITA of CHF 30.4 million for the first six months, a -26.4% drop on the CHF 41.3 million of 2001. Kuoni UK achieved a further improvement in its EBITA margin. But the cost economies initiated at Intrav failed to fully offset its turnover declines, and the company sustained a substantially higher loss for the period than the previous year. Intrav expects to post a tangible improvement on its prior-year result, however, for 2002 as a whole.



The division expects to see an improvement in its performance in the second six months, and thus to record substantially lower turnover and (above all) EBITA declines for 2002 as a whole than those experienced in the first half-year.



SBD Incoming & Asia: Margins under pressure



First-half turnover for the Incoming & Asia division suffered a slight (7.6% decline ((4.2% of which is attributable to currency movements) from CHF 329 million to CHF 304 million. The purchase of Allied Tours, the US-based incoming specialist which has since been merged with the Group`s TPRO US subsidiary to form AlliedTPro, added 9.8% to the turnover result. Positive performances – under the circumstances – were posted by the division`s Incoming Europe operations, and also by its India and Kenya-based companies, which actually increased their turnover volumes.



Margins came under substantial pressure throughout the division over the first six months. EBITA declined accordingly, from last year`s CHF 0.6 million to CHF -3.9 million. The highly profitable Indian incoming business also suffered from the political unrest in areas close to the Pakistan border.

The division expects to see an improvement in turnover for the traditionally stronger second half-year, and an EBITA result which is in line with prior-year levels.



SBD Business Travel: A positive first-half performance



The Group`s Business Travel division can look back on a strong first six months. The division embraces the Group`s business travel units in Germany, Austria, Switzerland, Liechtenstein and Hungary, which all trade under the BTI (Business Travel International) brand in association with the alliance of the same name. The division also includes TRX Central Europe, the service centre established in 2001 to promote online ticketing services.



The business travel sector has recovered faster than its leisure travel equivalent. The division`s first-half turnover – which is the equivalent of gross profit – rose 2.0% from CHF 98 million to CHF 100 million. The majority of the increase can be ascribed to the rapidly-expanding TRX Central Europe operation.

EBITA suffered a slight -3.4% decline from CHF 11.8 million to CHF 11.4 million, largely through the investment in TRX Central Europe. The division expects to see a substantial increase in turnover and a further improvement in profitability for 2002 as a whole.



Corporate:Lower costs



Group management costs, which are included at the Corporate level, declined -27.2% from CHF (11.4 million to CHF (8.3 million. The decrease is due to the non-recurrence of exceptional costs incurred in 2001.



Outlook: The 2002 business year



The Kuoni Group expects business to return to normal levels in the second half of 2002. As a result, the Group expects to post higher second-half turnover than that recorded in 2001.



Following the collapse of business in the fourth quarter of 2001, demand slowly recovered in the first six months of the current year, and has stabilised at these new levels since May, when the Kuoni Group last reported on its general business performance. Booking volumes had continued to develop in line with expectations up to the end of July.



In view of the shortfalls sustained in the first half-year, Group turnover for 2002 as a whole is unlikely to reach prior-year levels, and is currently expected to fall some 5% short of these 2001 results. The Group`s EBITA for 2002, however, will be a substantial improvement on its prior-year equivalent, thanks to higher gross profit margins, continuing cost economies and the non-recurrence of exceptional expense items. In view of the favourable EBITA results recorded for July, the Kuoni Group expects to record an EBITA margin that amounts to some 3% of turnover for the year as a whole.



Kuoni will, however, for the first time ever, record a net financial expense which is in the double-digit millions for 2002. In view of this, and of the above-average tax expense expected, the Group will post a less-than-satisfactory bottom-line result for the 2002 business year.



Balance sheet



The consolidated balance sheet showed shareholders` equity of CHF 511.8 million at June 30, 2002. The reduction in shareholders` equity since the end of 2001 is due partly to the seasonal losses traditionally associated with the first half-year and partly to the rise in the Swiss franc`s strength. With the traditionally stronger second six months ahead, shareholders` equity is expected broadly to return to its December 31, 2001 level by the end of the year.



Cash flow



First-half cash flow from operating activities rose from the CHF 26.6 million recorded for the first six months of 2001 to CHF 133.9 million. The increase is primarily attributable to the substantial rise in net working capital. In view of the CHF 121.5 million free cash flow generated in the first half-year, liquid funds had risen to CHF 630 million by June 30, 2002.



Accounting principles



The unaudited interim consolidated financial statements at June 30, 2002 were compiled using the same accounting principles as the 2001 full-year financial statements and in compliance with International Accounting Standard (IAS) 34, Interim Financial Reporting.



The scope of consolidation was increased in the first six months of 2002 by the addition of Allied Tours LLC, New York.

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