TUI AG: Annual Financial Report - Part 2
TUI AG (TUI)
TUI AG: Annual Financial Report - Part 2 13-Dec-2017 / 08:00 CET/CEST
Dissemination of a Regulatory Announcement, transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
Financial highlights
EUR million
2017
2016restated
Var. %
Var. % at constant currency
Turnover
18,535.0
17,153.9
+ 8.1
+ 11.7
Underlying EBITA1
Hotels & Resorts
356.5
303.8
+ 17.3
+ 19.2
Cruises
255.6
190.9
+ 33.9
+ 38.0
Source Markets
526.5
554.3
- 5.0
- 4.0
Northern Region
345.8
383.1
- 9.7
- 8.4
Central Region
71.5
85.1
- 16.0
- 15.8
Western Region
109.2
86.1
+ 26.8
+ 27.0
Other Tourism
13.4
7.9
+ 69.6
+ 124.6
Tourism
1,152.0
1,056.9
+ 9.0
+ 11.2
All other segments
- 49.9
- 56.4
+ 11.5
+ 3.4
TUI Group
1,102.1
1,000.5
+ 10.2
+ 12.0
Discontinued operations
- 1.2
92.9
n. a.
Total
1,100.9
1,093.4
+ 0.7
EBITA2, 4
1,026.5
898.1
+ 14.3
Underlying EBITDA4
1,541.7
1,379.6
+ 11.7
EBITDA4
1,490.9
1,305.1
+ 14.2
Net profit for the period
910.9
464.9
+ 95.9
Earnings per share4EUR
1.36
0.61
+ 123.0
Equity ratio (30 Sept.)3%
24.9
22.5
+ 2.4
Net capex and investments (30 Sept.)
1,071.9
634.8
+ 68.9
Net cash (30 Sept.)4
583.0
31.8
n. a.
Net cash (30 Sept.) 5
-
318.0
n. a.
Employees (30 Sept.)
66,577
66,779
- 0.3
Differences may occur due to rounding
This Annual Report of the TUI Group was prepared for the financial year from 1 October 2016 to 30 September 2017. The terms for previous years were renamed accordingly.
Due to the following changes to segmental reporting the prior year's reference figures were restated accordingly:
The main part of the Specialist Group (Travelopia), carried under discontinued operations in previous year, was sold June 2017. Prior to that Crystal Ski and Thomson Lakes & Mountains, previously part of the Specialist Group, were transferred to the segment Northern Region. Blue Diamond Hotels & Resorts lnc., former part of Northern Region was reclassified to the Hotels & Resorts segment. Marella Cruises (former Thomson Cruises, Northern Region) was transferred to the Cruises segment.
1 In order to explain and evaluate the operating performance by the segments, EBITA adjusted for one-off effects (underlying EBITA) is presented. Underlying EBITA has been adjusted for gains/losses on disposal of investments, restructuring costs according to IAS 37, ancillary acquisition costs and conditional purchase price payments under purchase price allocations and other expenses for and income from one-off items.
2 Our definition of EBITA is earnings before net interest result, income tax and impairment of goodwill and excluding the result from the measurement of interest hedges.
3 Equity divided by balance sheet total in %, variance is given in percentage points.
4 Continuing operations
5 Discontinuing operations
Letter to our Shareholders
Dear shareholders,
2017 was another very good year! We were able to continue our success story. With underlying EBITA up by 12 per cent, TUI Group increased its operating result by more than ten per cent for the third time in a row. We are keeping our promise. Above all, the strategic alignment for the new TUI is clearly correct. Our focus on hotels and our investment in cruise liners is reaping rewards. We owe the Group's positive economic performance to our customers, to our 67,000 employees in over 100 countries and to your loyalty as shareholders of TUI AG. This year too, we want you to share in TUI's success with a very attractive dividend. We have therefore proposed to the Annual General Meeting to increase the dividend to 65 cents per share for the completed financial year.
We operate in a growth industry. People want to travel, regardless of global political events. With the exception of 2009 at the peak of the financial crisis, our sector has grown faster than gross domestic product every year. These are favourable conditions for picking up further market share and continuing to build on our position as the world's leading tourism group. That is our goal, and we are devoting our full energy to achieving it.
How are we framing this growth? In this financial year alone, we opened ten new hotels, while our cruise fleet acquired two more vessels to make 16. Our own hotels and cruise ships now account for 56 per cent of our earnings. Attaching greater weight to these operations in our earnings portfolio brings definite advantages. These businesses generates stronger margins and are is much less seasonal. Whereas the earnings contributions from our tour operators are posted almost entirely in the last three months, the inflow from our hotel and cruise business is more evenly spread over the year and every quarter is positive. This trend has strengthened TUI and makes us more attractive to investors and the capital market.
We enhanced our leeway for growth even further during the last financial year by selling our specialist travel brands. The disposal of Travelopia to the private equity company KKR generated an enterprise value of around 370 million euros. We also spun off our remaining stake in Hapag-Lloyd AG. This final exit from container shipping and the sale of non-core businesses complete the transformation. TUI is now a pure play tourism group. Our vision 'Think Travel. Think TUI.' aptly reflects our aspirations. And our strategic positioning ensures that we can provide every module in the tourism value chain from advice and booking to travel, accommodation and destination services. The TUI brand symbolises quality and trust. Differentiated product is above all secured by our own hotels, clubs and ships. Brands like TUI Blue, Robinson, Riu and TUI Magic Life, Hapag-Lloyd Cruises with the MS Europa and TUI Cruises with the 'Mein Schiff' fleet guarantee TUI quality for holidaymakers all over the world. We don't just sell this travel experience; we are setting standards, because TUI is at once developer, investor and operator.
So we want to build on the success of our traditional markets and activities. And we want to expand our business into regions and countries of the globe where we do not yet have a presence. That includes a number of countries in Southern Europe. In Italy and Portugal, the TUI brand is familiar because they are important destinations and many of our customers travel there. As a holiday provider, however, we have so far had almost no market visibility. Emerging economies like Brazil and China are also shifting further into our focus. Their new middle classes are growing fast and increasingly discovering the joys of travel for themselves. We want to profit from that, but in those markets we do not intend to create a dense network of travel agencies. Instead, we will rely exclusively on our online presence and on strong local partners. Our goal is ambitious, but we believe in these markets. As part of our strategy programme 'TUI 2022', the target for this expansion over the next five years is to win one million new customers and generate an additional one billion in turnover. This expansion entails big opportunities for our hotel investments in those parts of the world, because the demand for capacity will no longer come solely from Europe like now, but also from the surrounding region. The Caribbean has set a shining example: our hotels there enjoy excellent occupancy rates - thanks to long-haul tourists from Europe combined with guests from the United States and Canada. We can achieve the same in South-East Asia. For our new hotels and investments, the occupancy risk is tangibly reduced because our target groups are broader, more diverse and increasingly international.
I also believe there are major opportunities for TUI in our clear strategy for digitalisation. This digitalisation will not only help us tap into new markets like China. It is happening throughout the company. Data enable us to reach out to our customers in a better, more personal manner and to market new services. For me, more digital means more service - and better service - for the customer, and more efficiency for the company. TUI's use of blockchain has attracted a lot of attention. Ever more so because we aren't just talking about the potential, but actually began placing it in the service of our hotels in summer 2017. As an integrated tourism group, we accompany our customers right along the value chain, from the moment they seek advice and book a holiday to the services they require at the destination and their accommodation in the hotel or on board the liner. This teaches us about their likes and preferences, enabling us to offer personalised add-ons. Personalised means relevant - products and services that offer these customers genuine added value. In recent months, we have rolled out a centralised, efficient ITinfrastructure across the Group. It provides the technical basis for TUI to gain a single view of the customer and the customer experience. Our investments in IT are easily summed up: more service for our customers and more value for us as a company. It is my firm conviction that in this field we are setting the standards for our industry.
TUI is in bouncing good health, and TUI is ready for more growth. Those two factors will enable us to continue to outperform the market in the coming years. That is why we are so confident that we can increase underlying EBITA by at least 10 per cent a year until 2020. Those are bright prospects for you as shareholders. Thank you for your interest and support over the last year. Your trust and encouragement are important to us. Let's take the next steps together.
Kind regards,
Friedrich JoussenCEO of TUI AG
KeyFigures
Outlook 2017 1
OutlookAchievement
Actual 2017
out-look
2018
Turnover in EUR bn
in excess of
3 % 2, 4
19.2 + 11.7 % 2
approximately
+ 3 % 2, 3
EBITA (underlying) in EUR m
at least
+ 10 % 2
1,121 + 12.0 % 2
at least
+ 10 % 2
Adjustments in EUR m
100 4
costs
76
costs
~ 80
costs
Net capex and investments in EUR bn
1.0 5
0.9 5
~ 1.2 6
Net debt in EUR bn
broadly
neutral 4
0.6
net cash
slightly negative
1 As published on 8 December 2016, unless otherwise stated
2 Variance year-on-year assuming constant foreign exchange rates are applied to the result in the current and prior period and based on the current group structure
3 Excluding cost inflation relating to currency movements
4 Target adjusted
5 Excluding aircraft orderbook finance
6 Assuming acquisition of Mein Schiff 1 for Marella Cruises
Report of the Supervisory Board
Ladies and Gentlemen,
TUI AG has delivered on its promise! With the completion of financial year 2017, your Company has delivered the considerable year-on-year increase in earnings promised in the wake of the merger in 2014 for the third consecutive year. This success is the result of major, joint efforts by the Executive Board, employees and Supervisory Board - and we are proud of it! In a geopolitical situation characterised by continued uncertainty and risks, TUI AG has sent an important signal of reliability to you, its owners, but also to its employees. The trust you placed in the merger between TUI AG and TUI Travel PLC was justified.
Today, we can regard the merger and the integration of the two companies and cultures as completed. The Executive Board has fully delivered and in some key areas even outperformed the synergies promised in the wake of the merger. As the global employee survey carried out for the third consecutive year has shown, TUI's executives and employees show far above-average engagement. They trust the work performed by the Executive Board and the strategy, which focuses on the transformation from a conventional trading company and tour operator to a vertically integrated content provider. We thus continue to be on track.
In financial year 2017, the Supervisory Board supported in particular the further development of key issues of relevance to the Company. We intensively discussed the Group's future strategic orientation with the Executive Board. Apart from the influence of blockchain technology on today's business model, the situation at TUI fly and the ultimately failed negotiations about a European aviation joint venture, we also discussed the Group's strategy in Asia and held in-depth discussions about the impact of Brexit on the Company. In order to prepare the strategic debates of the Supervisory Board, the Strategy Committee formed in 2016 again proved to be a valuable, focused platform. The Committee also discussed, inter alia, TUI Group's airline strategy and its platform strategy (e. g. IT, brand, marketing) and the associated Group-wide systems.
Corporate Governance issues were another focus of our work. Apart from features derived from the further development of the German and the UK Corporate Governance Codes, we also dealt with a review of the remuneration system for the Executive Board. Following the merger, we had deliberately placed the focus on continuity. We merely shifted the remuneration for Supervisory Board members to a system of purely fixed remuneration two years ago. Nevertheless, we recognise that our shareholders regard the remuneration system applied for a number of years as being in need of revision. Following careful review and analysis, we managed, taking into account and weighing up the interests of many stakeholders - including cross-border stakeholders - and following intense debates about numerous alternatives, we finally succeeded in adopting a remuneration system meeting all legal requirements and manifold recommendations. It will be applied with retroactive effect from 1 October 2017, as all Executive Board members have agreed. The new system will increase the transparency of the exercise of discretion by the Supervisory Board in individual performance assessment through alignment with a target system. Moreover, we have abandoned the possibility of paying discretionary bonuses for good. The payment hurdles for the variable remuneration have become significantly more ambitious following your legitimate comments, and they offer the Executive Board new opportunities. My colleagues on the Supervisory Board and I are convinced that the new, unanimously adopted compensation system for the Executive Board members harmonises the sometimes diverging interests of shareholders, employees and Executive Board members in the best possible manner. Based on this conviction, we will submit the remuneration system, described concerning its major elements and amendments on page 116 of the Annual Report, to the Annual General Meeting 2018 for its approval.
We have also repeatedly dealt with the future composition of the Supervisory Board and its chair, after Peter Long announced that he was no longer seeking to assume the role as chairman of the Supervisory Board. Peter Long will remain Chairman of the Strategy Committee and successfully continue its work in cooperation with the members. The Supervisory Board also plans to elect Mr Long as its second Deputy Chairman when Sir Mike Hodgkinson leaves the Supervisory Board at the Annual General Meeting 2018.
Although I have been elected for a term of office that will expire at the Annual General Meeting 2021, I had already announced at my re-election in 2016 that I was going to exercise my functions for an appropriate period of time. I intend to step down from my offices as at 30 September 2018. Against this backdrop, my activities but also those of the Nomination Committee, Presiding Committee and Supervisory Board were devoted in part to the search for a successor. I am delighted that the Supervisory Board, at its meeting on 12 December 2017, proposed Dr Dieter Zetsche as a candidate for election by the Annual General Meeting 2018 and has announced its intention to elect Dr Zetsche as Chairman of the Supervisory Board upon my departure should he be elected by the shareholders. I am convinced that TUI AG has gained a high-calibre, experienced entrepreneur with extensive international experience and a far-reaching understanding of strategically important issues with Dr Zetsche.
Cooperation between the Executive Board and the Supervisory Board
In a stock corporation under German law, there is a mandatory strict separation of the executive board and the supervisory board. While the management of the company is the exclusive task of the executive board, the supervisory board is in charge of advising and overseeing the executive board. As the oversight body, the Supervisory Board provided on-going advice and supervision for the Executive Board in managing the Company in financial year 2017, as required by the law, the articles of association and our own terms of reference.
Its actions were guided by the principles of good and responsible corporate governance. Our monitoring activities essentially served to ensure that the management of business operations and the management of the Group were lawful, orderly, fit for purpose and commercially robust. The individual advisory and oversight tasks of the Supervisory Board are set out in terms of reference. Accordingly, the Supervisory Board is, for instance, closely involved in entrepreneurial planning processes and the discussion of strategic projects and issues. Moreover, there is a defined list of specific Executive Board decisions requiring the consent of the Supervisory Board, some of which call for detailed review in advance and require the analysis of complex facts and circumstances from a supervisory and consultant perspective (own business judgement).
TUI AG falls within the scope of the German Industrial Co-Determination Act (MitbestG). Its Supervisory Board is therefore composed of an equal number of shareholder representatives and employee representatives. Employee representatives within the meaning of the Act include a senior manager (section 5 (3) of the German Works Council Constitution Act) and three trade union representatives. All Supervisory Board members have the same rights and obligations and they all have one vote in voting processes. In the event of a tie, a second round of voting can take place according to the terms of reference for the Supervisory Board, in which case I as Chairman of the Supervisory Board have the casting vote.
In written and verbal reports, the Executive Board provided us with regular, timely and comprehensive information at our meetings and outside our meetings. The reports encompassed all relevant facts about strategic development, planning, business performance and the position of the Group in the course of the year, the risk situation, risk management and compliance, but also reports from the capital markets (e. g. from analysts), media reports and reports on current events (e. g. crises). The Executive Board discussed with us all key transactions of relevance to the Company and the further development of the Group. Any deviations in business performance from the approved plans were explained in detail. The Supervisory Board was involved in all decisions of fundamental relevance to the Company in good time. We fully discussed and adopted all resolutions in accordance with the law, the Articles of Association and our terms of reference. We were comprehensively and speedily informed about specific and particularly urgent plans and projects, including those arising between the regular meetings. As Chairman of the Supervisory Board, I was also regularly informed about current business developments and key transactions in the Company between Supervisory Board meetings.
Deliberations in the Supervisory Board and its Committees
Prior to Supervisory Board meetings, the shareholder representatives on the Supervisory Board and the employees' representatives met in separate meetings, which were regularly also attended by Executive Board members.
Apart from the full Supervisory Board, a total of five committees were in place in the completed financial year: the Presiding Committee, Audit Committee, Strategy Committee, Nomination Committee and Integration Committee. The Mediation Committee formed pursuant to section 27 (3) of the Co-Determination Act did not have to meet. The Chairman of each Committee provides regular and comprehensive reports about the work performed by the Committee at the ordinary Supervisory Board meetings.
In financial year 2017, we again recorded a gratifyingly high meeting attendance, as we have done for several years. Average attendance was 93.8 % (previous year 96.6 %) at plenary meetings and 97.6 % (previous year 90.7 %) at Committee meetings. No Supervisory Board member attended fewer than half of the Supervisory Board meetings in financial year 2017. Members unable to attend a meeting usually participated in the voting through proxies. Preparation of all Supervisory Board members was greatly facilitated by the practice of distributing documents in advance in the run-up to the meetings and largely dispensing with handouts at meetings.
Attendance at meetings of the Supervisory Board in financial year 2017
Attendance at meetings of the Supervisory Board 2017
Name
Supervisory Board
Presiding Committee
Audit Committee
Nomination Committee
Strategy Committee
Integration Committee
Prof. Klaus Mangold (Chairman)
8 (8)
8 (8)1
8 (8)
2 (2)1
6 (6)
1 (1)1
Frank Jakobi (Deputy Chairman)
8 (8)
8 (8)
6 (6)
1 (1)
Sir Michael Hodgkinson (Deputy Chairman)
8 (8)
7 (8)
2 (2)
1 (1) 2
Andreas Barczewski
8 (8)
8 (8)
Peter Bremme
7 (8)
7 (8)
Prof. Edgar Ernst
8 (8)
8 (8)1
1 (1)
Wolfgang Flintermann
8 (8)
Angelika Gifford
7 (8)
6 (6)
Valerie Frances Gooding
7 (8)
5 (6)
1 (1)
Dr. Dierk Hirschel
7 (8)
8 (8)
Janis Carol Kong
8 (8)
7 (8)
Peter Long
7 (8)
6 (6)1
Coline Lucille McConville
7 (8)
7 (8)
1 (1)
Alexey A. Mordashov
6 (8)
6 (8)
2 (2)
6 (6)
Michael Pönipp
8 (8)
8 (8)
Carmen Riu Güell
7 (8)
8 (8)
2 (2)
Carola Schwirn
8 (8)
Anette Strempel
8 (8)
8 (8)
Ortwin Strubelt
8 (8)
8 (8)
8 (8)
Stefan Weinhofer
7 (8)
Attendance at meetings in %
93.8
93.8
96.9
100.0
97.2
100.0
Attendance at Committee meetings in %
97.6
(In brackets: number of meetings held)1 Chairman of Committee
2 Deputy Chairman of Committee
Key topics discussed by the Supervisory Board
The Supervisory Board held nine meetings focusing on the following issues:
1. At its meeting on 26 October 2016, the Supervisory Board discussed the current business performance. The discussions also focused on strategic options for the German TUI fly. In that context, we intensively deliberated on a potential joint venture with Etihad. The debate also related to the stake in Hapag-Lloyd AG (HLAG) and the status of the divestment process for Specialist Group. The Supervisory Board furthermore approved the budget for financial year 2017 and the acquisition of a stake in Peakwork Software.
2. At its extraordinary meeting on 23 November 2016, the Supervisory Board intensively discussed the status of negotiations and approval for the conclusion of a (non-binding) memorandum of understanding to form a joint venture between TUI fly and Etihad. These extensive deliberations focused on essential framework parameters and the future alignment of the planned joint venture.
3. At the extraordinary Supervisory Board meting on 1 December 2016, held in the form of a conference call, we adopted the personal performance factors for the annual performance bonuses for members of the Executive Board for financial year 2016 after due deliberation. Following an in-depth review, we also established the appropriateness of the remuneration and pensions for Executive Board members.
4. At its meeting on 7 December 2016, the Supervisory Board discussed in detail the annual financial statements of TUI Group and TUI AG, each having received an unqualified audit opinion from the auditors, the combined management report for TUI Group and TUI AG, the Report by the Supervisory Board, the Corporate Governance Report and the Remuneration Report. The discussions were also attended by representatives of the auditors. Following comprehensive debate of these reports and its own review carried out on the previous day by the Audit Committee, the Supervisory Board endorsed the findings of the auditors and approved the financial statements prepared by the Executive Board and the combined management report for TUI AG and the Group. The annual financial statements for 2016 were thereby adopted. Moreover, the Supervisory Board approved the Report by the Supervisory Board, the Corporate Governance Report and the Remuneration Report. It also adopted the invitation to the ordinary AGM 2017 and the proposals for resolutions to be submitted to the AGM. The Supervisory Board discussed various options relating to aircraft funding and the future approach to be adopted by the Group. We also resolved the 2016 declaration of compliance with the German Corporate Governance Code and the Corporate Governance Declaration required by the UK's Corporate Governance Code. We moreover decided to adjust our targets for the composition of the Supervisory Board (see Corporate Governance Report) and considered various reports, including a report on the results of our 2016 TUIgether employee survey, the implementation of the female and gender quotas in Germany, the IT strategy and security. In the framework of Executive Board matters, Frank Rosenberger was appointed as member of the Executive Board with effect from 1 January 2017 and a new business allocation plan reflecting the changes in the allocation of responsibilities to Board members was adopted. The Supervisory Board was also given a status report on l'tur and updates on the sales process for Travelopia and the joint venture between TUI fly and Etihad.
5. On 13 February 2017, the Supervisory Board mainly discussed TUI AG's interim statement and report for the quarter ended 31 December 2016 and prepared the 2017 Annual General Meeting. The Supervisory Board also discussed the structure of Executive Board remuneration. We dealt with the sales process for Hotelbeds Group, the business performance and future strategy for source market Germany and approved the final initiation of the sales process for Travelopia. The Supervisory Board also discussed the expansion of capacity at TUI Cruises GmbH and was given reports about the activities of the TUI Foundation and TUI Care Foundation. We were given a comprehensive update on the status of negotiations regarding the planned joint venture between TUI fly and Etihad (e. g. economic framework, open issues). We also adopted resolutions on transactions requiring the Supervisory Board's consent, including the issue of employee shares for financial year 2017 and the further sale of shares in HLAG. We were furthermore given a report on the status of the proceedings Erzberger versus TUI AG before the ECJ.
6. On 12 May 2017, we debated TUI AG's interim report for the second quarter ended on 31 March 2017 and the half-year financial report. We also resolved to extend the appointment of Sebastian Ebel as an Executive Board member and his service contract by a further three years. The Supervisory Board moreover discussed the initial approaches for a reform of the Executive Board remuneration system and we were given another status report on the negotiations regarding the planned joint venture between TUI fly and Etihad. The Supervisory Board was then given another update on a potential capacity expansion at TUI Cruises GmbH and the status of the sale of shares in HLAG. We also discussed on-going activities to strengthen IT security and various aspects related to the internal and external security structure. The Supervisory Board considered various Corporate Governance issues and was given a report on the state of pay regarding TUI Group's key litigation cases. The Supervisory Board was also informed about the current business performance and market in Turkey. We debated and deliberated on the impact of the Brexit referendum on the Group. Moreover, the Supervisory Board approved a number of transactions requiring its consent (including the issue of employee shares in financial year 2018, the extension of the revolving credit facility ahead of its due date and the sale of Travelopia subject to certain conditions).
7. At its extraordinary meeting on 29 June 2017, the Supervisory Board discussed the termination of the negotiations on the joint venture between TUI fly and Etihad and engaged in comprehensive and extensive debates with the Executive Board on the resulting options for a repositioning of TUI fly.
8. On 30 August 2017 (by written circulation), the Supervisory Board approved the increase in the Company's capital stock for the issue of employee shares under the oneShare employee share programme for financial year 2017.
9. During a two-day strategy offsite meeting on 13 and 14 September 2017, we intensively debated the key challenges surrounding the business model, growth opportunities, IT trends (e. g. blockchain technology), the Group-wide customer value and customer relationship management platform, uniform branding (oneBrand) and the cruise strategy.
We then comprehensively debated the consolidated five-year plan. The discussions also focused on the insolvency of Air Berlin. We furthermore deliberated on Executive Board matters and adopted the fundamental structure of the new remuneration system for the Executive Board. We were also given reports on crisis management, the Security, Health & Safety structure and the security of our customers and employees. We heard a report on the effects of the Transparency of Remuneration Act and the implementation of the Act and dealt with succession planning for the Executive Board and professional development at the top management level. We also discussed the new CSR reporting (see Management Report) and adopted diversity concepts for the composition of the Executive Board and Supervisory Board. We moreover adopted the overall competence profile for the full Supervisory Board. We then adopted resolutions regarding transactions requiring our consent (including the granting of a guarantee as collateral for a loan).
Meetings of the Presiding Committee
The Presiding Committee takes the lead on various Executive Board issues (including succession planning, new appointments, terms and conditions of service contracts, proposals for the remuneration system). It also prepares the meetings of the Supervisory Board. In the period under review, the Presiding Committee held nine meetings.
Members of the Presiding Committee:
Prof. Klaus Mangold (Chairman)
Peter Bremme
Carmen Riu Güell
Sir Michael Hodginson
Frank Jakobi
Alexey Mordashov
Anette Strempel
Ortwin Strubelt
1. At its extraordinary meeting on 12 October 2016, the Presiding Committee intensively discussed the business interruption of the German TUI fly against the background of efforts undertaken by the Executive Board to find cooperation partners for the airline, which had become public. The Presiding Committee was given a presentation on the measures initiated by the Executive Board and the status and timeframe of negotiations relating to the cooperation partner project.
2. At its meeting on 26 October 2016, the Presiding Committee discussed Executive Board issues, including deliberations on the creation of a new Executive Board function with a focus on IT and new markets. The Committee also discussed various topics relating to Executive Board remuneration for the completed financial year and the current financial year.
3. At its extraordinary meeting on 23 November 2016, the Presiding Committee discussed the status of the negotiations about the joint venture between TUI fly and Etihad. We also deliberated on various Executive Board issues and adopted resolutions regarding the variable annual remuneration for financial year 2016. We then reviewed the appropriateness of Executive Board remuneration and pensions and discussed the terms and conditions of the service contract for Frank Rosenberger.
4. At its meeting on 6 December 2016, after due deliberation, the Presiding Committee recommended the appointment of Frank Rosenberger as an Executive Board member to the Supervisory Board and discussed further Executive Board issues.
5. On 13 February 2017, the Presiding Committee again discussed the status of negotiations on the joint venture between TUI fly and Etihad as well as the Group's major litigation cases and the divestment process for Travelopia. We then formulated approaches for a fundamental revision of the compensation system for the Executive Board.
6. At its meeting on 12 May 2017, the Presiding Committee discussed renewing the appointment of Sebastian Ebel and the status of the reform of the remuneration system for the Executive Board. Following the abolition of the Integration Committee in December 2016, we were given a report on the merger-related synergies and intercultural integration.
7. At an extraordinary meeting on 13 June 2017, by written circulation, the Presiding Committee granted approval to Friedrich Joussen to join the Supervisory Board of Sixt SE / Pullach.
8. At an extraordinary meeting on 30 August 2017, the Presiding Committee intensively discussed the status of the reform of the remuneration system for the Executive Board.
9. On 13 September 2017, we discussed Executive Board issues. We were also informed about the remuneration structure for the management level below the Executive Board as well as HR development topics.
Audit Committee
Members of the Audit Committee:
Prof. Edgar Ernst (Chairman)
Andreas Barczewski
Dr Dierk Hirschel
Janis Kong
Prof. Klaus Mangold
Coline McConville
Michael Pönipp
Ortwin Strubelt
The Audit Committee held eight ordinary meetings in the financial year under review. For the tasks and the advisory and resolution-related issues discussed by the Audit Committee, we refer to the comprehensive report on page 15.
Nomination Committee
The Nomination Committee proposes suitable shareholder candidates to the Supervisory Board for its election proposals to the Annual General Meeting or appointment by the district court.
Members of the Nomination Committee, which held two meetings:
Prof. Klaus Mangold (Chairman)
Carmen Riu Güell
Sir Michael Hodgkinson
Alexey Mordashov
1. At its meeting on 11 May 2017, the Nomination Committee discussed the future composition of the shareholder side of the Supervisory Board and its committees.
2. At its meeting on 12 September 2017, the Nomination Committee again discussed the future composition of the shareholder side of the Supervisory Board.
Strategy Committee
The Strategy Committee was established on 9 February 2016 by resolution of the Supervisory Board. Its task is to advise the Executive Board in developing and implementing the corporate strategy. The Committee met six times in the financial year under review. Apart from Committee members, the meetings of the Strategy Committee are regularly attended by Sir Michael Hodgkinson.
The members of the Strategy Committee, which met six times, are:
Peter Long (Chairman)
Angelika Gifford
Val Gooding
Frank Jakobi
Prof. Klaus Mangold
Alexey Mordashov
1. At its meeting on 25 October 2016, the Supervisory Board extensively dealt with the Group's aviation strategy and the future positioning of TUI fly. We also discussed various aspects related to Customer Relationship Management (CRM) and IT investments.
2. At its meeting on 5 December 2016, the Committee discussed marketing topics, the divestment process for Travelopia and the aviation strategy.
3. On 17 February 2017, we deliberated on the growth of the Mein Schiff fleet and discussed the situation in source market Germany and the marketing strategy pursued in that market.
4. At its meeting on 11 May 2017, the Committee discussed the growth strategy for new markets with a special focus on Asia, in particular China. In that context, we intensively debated the expansion of cooperation schemes as well as TUI's own initiatives.
5. At the meeting on 15 August 2017, we again comprehensively debated the aviation strategy following the termination of the talks with Etihad on the creation of a joint venture.
6. At its meeting on 12 September 2017, the Strategy Committee discussed the impact of the insolvency of Air Berlin on our current business and future implications for our aviation strategy.
Integration Committee
The Integration Committee was established by the Supervisory Board for a period of two years after the completion of the merger between TUI Travel PLC and TUI AG (until December 2016). Its task was to advise and oversee the Executive Board during the integration process required after the merger.
Members of the Integration Committee:
Prof. Klaus Mangold (Chairman)
Sir Michael Hodgkinson (Deputy Chairman)
Prof. Edgar Ernst
Valerie Gooding
Frank Jakobi
Coline McConville
At its only meeting in the period under review, which was also its last, held on 6 December 2016, the Committee discussed the final report on the integration process and the post-merger synergies. Overall, the Committee has rendered a valuable contribution to the delivery of the synergies and the success of cultural integration.
Corporate Governance
Due to the primary quotation of the TUI AG share on the London Stock Exchange and the constitution of the Company as a German stock corporation, the Supervisory Board naturally also regularly and comprehensively deals with the recommendations of German and British corporate governance. Apart from the mandatory observance of the rules of the German Stock Corporation Act (AktG), German Industrial Co-Determination Act (MitbestG), the Listing Rules and the Disclosure and Transparency Rules, TUI AG had announced in the framework of the merger that the Company was going to observe both the German Corporate Governance Code (DCGK) and - as far as practicable - the UK Corporate Governance Code (UK GCG).
For the DCGK - conceptually founded, inter alia, on the German Stock Corporation Act - we issued an unqualified declaration of compliance for 2017 pursuant to section 161 of the German Stock Corporation Act, together with the Executive Board. By contrast, there are some deviations from the UK CGC due for the most part to the different concepts underlying a one-tier management system for a public listed company in the UK (one-tier board) and the two-tier management system comprised of Executive Board and Supervisory Board in a stock corporation based on German law.
More detailed information on corporate governance, the declaration of compliance for 2017 pursuant to section 161 of the German Stock Corporation Act and the declaration on the UK CGC is provided in the Corporate Governance Report in the present Annual Report, prepared by the Executive Board and the Supervisory Board (page 99), as well as on TUI AG's website.
Conflicts of interest
In the period under review, the Supervisory Board continuously monitored the occurrence of conflicts of interest. In the framework of the transactions requiring its consent, the Supervisory Board approved, at its meeting on 12 May 2017, the granting of a guarantee by TUI AG as third-party security for Togebi Holdings Limited ('TUI Russia') before a court in Turkey to initiate a lawsuit. TUI Russia is indirectly controlled by Alexey Mordashov. Mr Mordashov is a member of the Supervisory Board and abstained from voting in order to avoid a conflict of interest.
Audit of the annual and consolidated financial statements of TUI AG and the Group
Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Hanover, audited the annual financial statements of TUI AG prepared in accordance with the provisions of the German Commercial Code (HGB), as well as the joint management report of TUI AG and TUI Group, and the consolidatedfinancial statements for the 2017 financial year prepared in accordance with the provisions of the International Financial Reporting Standards (IFRS), and issued their unqualified audit certificate. The above documents, the Executive Board's proposal for the use of the net profit available for distribution and the audit reports by the auditors had been submitted in good time to all members of the Supervisory Board. They were discussed in detail at the Audit Committee meeting of 11 December 2017 and the Supervisory Board meeting of 12 December 2017, convened to discuss the annual financial statements, where the Executive Board provided comprehensive explanations of these statements. At those meetings, the Chairman of the Audit Committee and the auditors reported on the audit findings, having determined the key audit areas for the financial year under review beforehand with the Audit Committee. Neither the auditors nor the Audit Committee identified any weaknesses in the early risk detection and internal control system. On the basis of our own review of the annual financial statements of TUI AG and TUI Group and the joint management report, we did not have any grounds for objections and therefore concur with the Executive Board's evaluation of the situation of TUI AG and TUI Group. Upon the recommendation of the Audit Committee, we approve the annual financial statements for financial year 2017; the annual financial statements of TUI AG are thereby adopted. We comprehensively discussed the proposal for the appropriation of profits with the Executive Board and approved the proposal in the light of the current and expected future financial position of the Group.
Executive Board, Supervisory Board and committee membership
The composition of the Executive Board and Supervisory Board as at 30 September 2017 is presented in the tables on pages 100 - 101 for the Supervisory Board and page 102 for the Executive Board.
In financial year 2017, the composition of the boards did not change.
At the meeting on 7 December 2016, Frank Rosenberger was appointed to the Executive Board with effect from 1 January 2017 for a period of three years.
At the meeting on 12 May 2017, the appointment of Sebastian Ebel as an Executive Board member was extended by three years to 30 November 2020.
In addition, the Supervisory Board extended the appointments of David Burling and Dr Elke Eller. After the extensions became effective on 12 December 2017, David Burling is now appointed until 31 May 2021 and Dr Elke Eller is appointed until 14 October 2021.
Word of thanks
The Supervisory Board warmly thanks the Executive Board, the managers and all employees for their contribution to the very successful financial year 2017.
Hanover, 12 December 2017
On behalf of the Supervisory Board
Prof. Klaus Mangold
Chairman of the Supervisory Board
Audit Committee Report
Dear Shareholders,
as the Audit Committee, it is our job to assist the Supervisory Board in carrying out its monitoring function during the financial year, particularly in relation to accounting and financial reporting for the TUI Group, as required by legal provisions, the German Corporate Governance Code and the Supervisory Board Terms of Reference.
In addition to these core functions, we are responsible in particular for monitoring the effectiveness and proper functioning of internal controls, the risk management system, the Group Auditing department and the legal compliance system.
Furthermore, the Audit Committee is responsible for selecting external auditors. The selected auditors are then required to be put forward by the Supervisory Board to the Annual General Meeting for appointment. Following the appointment by the Annual General Meeting, the Supervisory Board formally commissions the external auditors with the task of auditing the annual financial statements and consolidated financial statements and reviewing the quarterly interim reports.
The Audit Committee was elected by the Supervisory Board directly after the Annual General Meeting 2016 and consists currently of the following eight Supervisory Board members:
Prof. Edgar Ernst (Chairman)
Andreas Barczewski
Dr Dierk Hirschel
Janis Kong
Prof. Klaus Mangold
Coline McConville
Michael Pönipp
Ortwin Strubelt
The membership of the Audit Committee members corresponds to the duration of their appointment to the Supervisory Board. There are no personnel changes to report in the composition of this committee since the last election.
Both the Chairman of the Audit Committee and the remaining members of the Audit Committee are seen by the Supervisory Board as meeting the criterion of being independent. In addition to the Chairman of the Audit Committee, at least one other member is required to have expertise in the field of accounting and experience in the use of accounting principles and internal control systems.
The Audit Committee has six regular meetings a year, and additional topic-specific meetings may also be convened. From this financial year onwards, these topic-specific meetings have included two meetings in which the Executive Board explains to the Audit Committee the key content of the pre-close trading updates published shortly before the reporting date of the annual and six-monthly financial statements. The remaining meeting dates and agendas are geared in particular towards the Group's reporting cycle and the agendas of the Supervisory Board.
The Chairman of the Audit Committee reports on the work of the Audit Committee and the proposals it has to make in the Supervisory Board meeting that follows each Audit Committee meeting.
Apart from the Audit Committee members, the meetings have been attended by the Chairman of the Executive Board, the CFO and the following management members, based on the topics covered:
Director of Group Financial Accounting
Director of Group Audit
Director of Group Compliance & Risk
Director of Group Treasury & Insurance
The external auditors have also been invited to meetings on relevant topics. Wherever required, additional members of TUI Group senior management and operational management have been asked to attend Audit Committee meetings, as have external consultants.
Where it was deemed necessary to go into further detail on specific topics or cases, the Chairman of the Audit Committee held - in addition to Audit Committee meetings - individual meetings with the relevant Executive Board, senior management or auditor representatives. The Chairman of the Audit Committee reported on the key findings and conclusions from these meetings in the next Audit Committee meeting.
The members took part in the Audit Committee meetings as shown in the table on page 10.
Transfer of the audit mandate for TUI AG and the TUI Group
By way of a resolution of the Annual General Meeting of TUI AG dated 14 February 2017, Deloitte GmbH Wirtschaftsprüfungsgesellschaft (Deloitte) was elected as the auditor of TUI AG and the TUI Group. We were regularly notified about the transfer process of the audit mandate to Deloitte at our meetings during the financial year.
Up to the point of the Annual General Meeting, the mandate was granted to PriceWaterhouseCoopers AG, who were thus responsible for the audit of the first quarterly financial statements. This responsibility passed to Deloitte from the second quarter onwards.
The transfer process proceeded professionally and smoothly during the financial year. The experience gathered thus far with Deloitte as an auditor also confirms that we have gained a reliable partner for the audit in Deloitte.
Reliability of financial reporting and monitoring of accounting process
The Executive Board of a German stock corporation (Aktiengesellschaft) is solely responsible for preparing its Annual Report & Accounts (ARA). Section 243(2) of the German Commercial Code (HGB) requires the ARA to be clearly structured and to give a realistic overview of the company's financial situation. This is equivalent to the requirement of the UK Code for the ARA to be fair, balanced and understandable. Even though the evaluation of this requirement has not been transferred to the Audit Committee, the Executive Board is comfortable that the submitted ARA satisfies the requirements of both legal systems.
In order to be sure ourselves of the reliability of both the annual financial statements and interim (quarterly) reporting, we have requested that the Executive Board inform us in detail about the Group's business performance and its financial situation. This was done in the four Audit Committee meetings that took place directly before the financial statements in question were published. In these meetings, the relevant reports were discussed and the auditors also reported in detail on key aspects of the financial statements and on the findings of their audit or review.
In order to monitor accounting, we examined individual aspects in great detail. In addition, the accounting treatment of key balance sheet items were reviewed, in particular goodwill, advance payments for tourism services and other provisions. In consultation with the auditors, we made certain that the assumptions and estimates underlying the balance sheet were appropriate. In addition, any material legal disputes and key accounting issues arising from the operating businesses were assessed by the Audit Committee.
In the period under review, we concerned ourselves above all with the following individual subjects:
Owing to the existing geopolitical risks, we stipulated that each of the quarterly financial statements be accompanied by a report on the effects on earnings, the risks from guarantee and advance payment mechanisms related to Group and third-party hotels in Turkey and North Africa and about the countermeasures being undertaken.
The potential exit of the United Kingdom from the European Union was repeatedly an agenda item at our meetings. In particular, we listened to reports about the risks connected to the exit. For instance, effects are expected on the British airlines regarding flight rights within the European Union, not to mention the impact of a sustained weakness of sterling on the cost structure of the British tour operators.
After the announcement of the plan to set up a European charter airline with the involvement of TUI fly, huge flight cancellations resulted due to sickness notifications from pilots and cabin staff. We obtained extensive information on the reasons and above all the economic effects of this incident.
Similarly, we gathered information about the large corporate transactions of the financial year. This included not only the acquisition of the French Transat Group but also the sale of the Travelopia Group and the shares in Hapag-Lloyd AG. Furthermore, we also examined TUI's investing activity in the following areas: Airlines, Hotels & Resorts, Cruises and IT. We had the key investments within the Group divisions and the contributions to earnings from these investments explained to us.
The Audit Committee also discussed the going concern and viability statement analysis prepared by the company to support the statements made in the half-year report and the ARA.
Starting with financial year 2018, the management report must contain information on corporate social responsibility (CSR). The management decided to publish the respective information already for this financial year. We had the management tell us about the state of implementation and the content of the report as the responsibility for the review of the content lies with the Supervisory Board.
In addition, the consistency of the reconciliation from profit before tax to the key figure 'underlying earnings' and the material adjustments were discussed for all quarterly reports and for the annual financial statements.
Our evaluation of all discussed aspects of accounting and financial reporting has been in line with that of both management and the Group auditors.
Effectiveness of internal controls and the risk management system
The Audit Committee recognises that a robust and effective system of internal control is critical to achieving reliable and consistent business performance. To fulfil its legal obligation to examine the effectiveness of internal controls and the risk management system, the Audit Committee is informed regularly about their current status and also about the further development of them.
The Group has continued to evolve its internal control framework which is underpinned by the COSO concept. Regular testing by management of the key financial controls is now a matter of routine in the larger businesses, and in our two largest Source Markets (UK and Germany) more widespread testing of internal controls is conducted.
Within the Group, the compliance function is further broken down into three areas: Finance, Legal and IT. These teams play a crucial role in improving controls across the Group and identifying areas where more focus is required. The Group auditors also report to us on any weaknesses they find in the internal control system of individual Group companies, and management tracks these items to ensure that they are addressed on a timely basis.
As stated on page 30 of the risk report, the Audit Committee receives regular reports on the performance and effectiveness of the risk management system. The Risk Oversight Committee is an important management committee within the Group and we are satisfied that there is appropriate, active management of risk throughout the Group.
The Group Audit department ensures the independent monitoring of implemented processes and systems as well as of core projects and reports directly to the Audit Committee in each regular meeting. In the period under review, the Audit Committee was not provided with any audit findings indicating material weaknesses in internal controls or the risk management system. As well as this, talks are held regularly between the Chairman of the Audit Committee and the Director of Group Audit for the purposes of closer consultation.
The audits planned by the Group Audit department for the following year were presented to the Audit Committee in detail, discussed and approved. The Audit Committee feels that the effectiveness of the Group Audit department is ensured through this regular consultation.
The legal compliance system was examined by third-party experts which confirmed the suitability of the compliance approach. The Groupwide, uniformly implemented system was presented to us and we received a report about the conducted risk analysis and the measures derived from it. In addition to the core elements of the internal control and risk management system, the Group's hedging policy was part of the reporting to us during the year.
Whistleblower systems for employees in the event of compliance breaches
Whistleblower systems have been set up across the Group to enable employees to draw attention to potential breaches of compliance guidelines.
Reporting on the legal compliance system included information about the groupwide standardisation of these whistleblower systems and we were also shown the main findings during the current financial year from this system.
Examination of auditor independence and objectivity
After finalisation of the tender process in the financial year 2016, the Audit Committee recommended to the Supervisory Board that it propose Deloitte to the Annual General Meeting as auditors for financial year 2017 as well. Following the commissioning of Deloitte as auditors by the Annual General Meeting in February 2017, the Supervisory Board appointed Deloitte with the task of auditing the 2017 annual financial statements and reviewing the half-year financial statements as per 31 March 2017.
The Chairman of the Audit Committee discussed with Deloitte in advance the audit plan for the annual financial statements as at 30 September 2017, including the key areas of focus for the audit and the main companies to be audited from the Group's perspective. Based on this, the Audit Committee firmly believes that the audit has taken into account the main financial risks to an appropriate degree and is satisfied that the auditors are independent and objective in how they conduct their work.
The audit fees were explained in the context of this selection process and we are convinced that the amount of these costs is reasonable. Based on the regular reporting by the auditors, we have every confidence in the effectiveness of the external audit.
In order to ensure the independence of the auditors, any non-audit services to be performed by the auditors must be submitted to the Audit Committee for approval before commissioning. Depending on the amount involved, the Audit Committee makes use of the option of delegating the approval to the company. The Audit Committee Chairman is only involved in the decision once a specified cost limit has been reached. Insofar as the auditor has performed services that do not fall under the Group audit, the nature and extent of these have been explained to the Audit Committee. This process complies with the company's existing guideline regarding the approval of non-audit services and it takes into account the requirements from the AReG regulations on prohibited non-audit services and on limitations of the scope of non-audit services. In financial year 2017, these non-audit services accounted for 7 % of the auditor's overall fee of EUR 9.1 million.
I would like to take this opportunity to thank the Audit Committee members, the auditors and the management for their hard work over the past financial year.
Hanover, 11 December 2017
Prof. Edgar Ernst
Chairman of the Audit Committee
Business modeland strategy
Our Business Model
TUI is the world's leading tourism group - an integrated business that operates in all stages of the customer's holiday journey.
We deliver the full customer experience from inspiration and booking through the travel journey to the experience in the destination. We fulfil this through our own hotel and cruise brands, third party committed and non-committed accommodation as well as destination services, such as transfers and excursions. Hence, we set ourselves apart from component-only players as we are able to enhance the customer experience throughout the holiday.
Our integrated model allows us to leverage the distribution power of our source markets and to optimise customer volumes for our own assets. At the same time, offering differentiated and controlled products, we drive demand in our source markets and create entry barriers. Thus, we maximise yields while minimising risk with our integrated approach.
Our Segment Strategy
Sales & Marketing: Market demand, digitalisation and diversification
Across three regions (Northern, Central and Western) we use our distribution and fulfilment power to serve 20 m customers. Our business model allows our source markets to act with maximum flexibility, allowing them to create personalised packages for our customers while optimising yield and minimising risks through combining both owned as well as 3rd party aviation, hotel and cruise capacity.
Our in-house aviation with around 150 aircraft allows us to utilise own flight capacity in conjunction with own hotel capacity in order to build high profile destinations, such as Cape Verde. In these destinations, we provide unique experiences to our customers and create high barriers of entry by managing both hotel capacity and flight availability. In addition, our airline allows for flexibility in destination planning, as we are in the position to shift capacities and change routes according to our business needs.
Destination Services, our own incoming agency, provides fulfilment services to our customers such as hotel transfers but also offers experiences in the destinations such as excursions.
Our Sales and Marketing business is well positioned to benefit from continued tourism market growth. In 2017 we have accelerated our digitalisation efforts and inter alia launched two important IT-initiatives: One CRM and One Inventory Base & One Purchasing.
Customer knowledge is key to provide outstanding holiday experiences that result in satisfied and loyal customers. One CRM, building on a shared customer data base drives our knowledge of our customers and therefore enables us to build direct and personalised relationships. Using automated machine learning and analytical capabilities, we share our customer insights with the wider business and enable personalised marketing, sales and services. We are now able to provide individualised experiences, which in turn are expected to lead to cross- and up-selling opportunities. Last but not least, we develop retention propositions based on our enhanced knowledge, thereby driving emotional loyalty and engagement with our brand.
Building on the Blockchain technology, we are striving to centralise our inventory on one database, namely, One Inventory / One Purchasing. Own and third party hotel bed capacity is being incorporated in the data base, which is accessible for all source markets. An Artificial Intelligence system creates suggestions on the respective bed capacity allocation and / or bed swap to the source mar