On the Beach Group
Annual Report 2019

Plain-text annual report

TOTAL FINANCIAL P R O T E C T I O N TOTAL FINANCIAL P R O T E C T I O N Your package holiday is ATOL and ABTA protected 1 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Welcome to On the Beach With over 20% share of online sales in the short haul beach holiday market, we are one of the UK’s largest online beach holiday retailers. With significant opportunities for growth, we’re on a long- term mission to become Europe’s leading online retailer of beach holidays, so our story’s only really just begun. Here at On the Beach we’re providing a structural challenge to legacy tour operators as we continue our journey to disrupt the online retail of beach holidays with our scalable, flexible, innovative technology, a strong customer-value proposition and a low-cost base. Our model is customer-centric, asset light, profitable and cash generative. Visit us online at: www.onthebeachgroupplc.com (Corporate) www.onthebeach.co.uk (UK) www.ebeach.se (Sweden) www.ebeach.no (Norway) www.ebeach.dk (Denmark) www.sunshine.co.uk (UK) www.classiccollection.co.uk (UK B2B) www.classic-package.co.uk (UK B2B) 2 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Contents Strategic Report Governance Financial Statements 06 Our History Timeline 07 At a Glance 09 Business Model 10 Report from the Chair of the Board 13 OTB Growth Strategy 14 Chief Executive’s Report 17 Key Performance Indicators 18 Financial Review 24 Principal Risks and Uncertainties 31 Viability Statement 33 Corporate Social Responsibility 42 Our Values 43 Stakeholders 47 Chair’s Introduction 48 Directors’ Biographies 51 Corporate Governance Statement 58 Report of the Nomination Committee 60 Report of the Audit Committee 66 Directors’ Remuneration Report 84 Other Statutory and Regulatory Disclosures 88 Statutory Auditor’s Report to the Members of On the Beach Group plc 95 Statement of Directors’ Responsibilities in Respect of the Annual Report and the Financial Statements 97 Consolidated Income Statement and Statement of Comprehensive Income 98 Consolidated Balance Sheet 99 Consolidated Statement of Cash Flows 100 Consolidated Statement of Changes in Equity 101 Notes to the Consolidated Financial Statements 138 Company Balance Sheet 139 Company Statement of Changes in Equity 140 Notes to the Company Financial Statements 142 Glossary of Alternative Performance Measures (APMs) 145 Shareholder Information 3 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 4 44 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019I S T R A T E G C R E P O R T G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Strategic Report 06 Our History Timeline 07 At a Glance 09 Business Model 10 Report from the Chair of the Board 13 OTB Growth Strategy 14 Chief Executive’s Report 17 Key Performance Indicators 18 Financial Review 24 Principal Risks and Uncertainties 31 Viability Statement 33 Corporate Social Responsibility 42 Our Values 43 Stakeholders ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 5 5 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Strategic Report Our History Timeline 2 0 1 6 On the Beach achieves outstanding profit growth against a challenging market backdrop. 2 0 1 7 On 9 May 2017, On the Beach completed the acquisition of Sunshine.co.uk Limited, an online travel agent based in the UK, for a net consideration of £12m. Launched its second international platform in Norway under the "ebeach.no" domain name. On the Beach Group plc was part of the FTSE 250 from March 2018 until December 2018. Acquired Classic Collection Holidays for a net consideration of £20m in August 2018. The business extended its international platform with the soft launch of eBeach.dk in Denmark. 2 0 1 8 The business launched Classic Package Holidays, an agent-only online booking portal, extending On the Beach product into the offline market. 2019 also saw the opening of a brand new Digital HQ in Manchester, with complete renovations of its Operational HQ in Cheadle. Long haul carriers were integrated supporting the Group’s long haul ambitions. 2 0 1 9 2 0 1 4 On the Beach continued to optimise its technology platform, grew its direct contracting and invested in TV advertising. 2015 Launched its first international platform in Sweden under the “ebeach.se” domain name. On 28 September 2015, On the Beach listed on the London Stock Exchange. 013 2 Inflexion Equity Partners acquired a majority stake in the Group from Livingbridge. 79% of the Group’s bookings were made online. On the Beach launched its own proprietary technology platform. Livingbridge acquired a majority stake in the Group for £36 million. 1 1 0 2 7 0 0 2 Established by CEO, Simon Cooper; On the Beach launched its first website. 4 0 0 2 6 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019At a Glance Group Overview 2019 2018 (restated)(2) Change Adjusted(1) GAAP Adjusted(1) GAAP Adjusted(1) GAAP Group revenue £147.5m £140.4m £104.3m £104.3m Revenue as agent £92.5m £85.4m £90.9m £90.9m 41% 2% 35% (6%) Revenue as principal £55.0m £55.0m £13.4m £13.4m 310% 310% Group gross profit £99.1m £92.0m £92.6m £92.6m Gross profit as agent £92.0m £84.9m £90.9m £90.9m 7% 1% Gross profit as principal £7.1m £7.1m £1.7m £1.7m 318% Group profit before tax £34.6m £19.4m £33.6m £26.1m Basic earnings per share 21.4p Total dividend payable 3.3p 12.0p 3.3p 21.2p 3.3p 16.5p 3.3p 3% 1% - (1%) (7%) 318% (26)% (27)% - (1) Denotes a non-GAAP measure. An explanation of this measure and reconciliation to the closest GAAP measure is included in the APM Glossary on page 142 (2) Restated for adoption of IFRS 15. Refer to note 2c to the Consolidated Financial Statements on page 101. Thomas Cook Group plc Impact On 23 September 2019, Thomas Cook Group plc (“TCG”) announced that it had ceased trading and had entered compulsory liquidation. There was a one-off exceptional cost associated with helping customers to organise alternative travel arrangements and lost margin on cancelled bookings. A summary of the adjustments between Adjusted and GAAP measures, split between the TCG impact and other costs, is shown below: Revenue as agent Revenue as principal Group revenue Share based payments Acquired intangibles amortisation TCG (£7.1m) - (£7.1m) - - 2019 Other - - - Total (£7.1m) - (£7.1m) (£0.7m) (£0.7m) (£5.5m) (£5.5m) Other exceptional operating costs (£0.6m) (£1.3m) (£1.9m) 2018 Total - - - (£1.4m) (£4.6m) (£1.5m) Group overheads (£0.6m) (£7.5m) (£8.1m) (£7.5m) Group profit before tax (£7.7m) (£7.5m) (£15.2m) (£7.5m) 7 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSAt a Glance The adjustment of £7.1m to revenue represents the lost revenue associated with providing refunds and the costs associated with organising alternative travel arrangements for customers. This totalled £25.6m and is stated net of a chargeback claim of £18.5m. The £0.6m of other exceptional operating costs relates to the incremental operational costs of managing the process and the loss of monies held by TCG agents. Group revenue was up 35%, as a result of the full year contribution of Classic Collection (where revenue is reported gross, as Principal). Group profit before tax was down (26%) reflecting the impact of the failure of TCG. As shown above, the impact of the failure of TCG impacted revenue by £(7.1)m and profit before tax by £(7.7)m, with an adjusted Group revenue increase of 41% and an adjusted Group profit before tax increase of 3%. The exceptional impact of the TCG failure has been excluded from performance measures in this report. A full reconciliation of all non-GAAP measures to the closest equivalent GAAP measure is included in the APM glossary on page 142. The Directors believe that adjusting the income statement for the impact of the TCG failure provides a fair, balanced and understandable view of the Group’s underlying performance in the year. The Group organised package holidays for affected customers which included TCG flights. Had these flights not been available at the time of booking, customers would have booked the package with an alternative flight. Financial Highlights Group Strategic Highlights Group › Launched Classic Package Holidays (“CPH”) in March 2019. › Continued to expand long haul offering and more than doubled revenues in the year. › Key management appointments including Stefan Nordin as CTO, Adam Hansen in the newly formed role of Corporate Development Director and Oliver Garner as CEO of Classic and CPH. › Opened new Digital HQ in central Manchester and refurbished operational HQ in Cheadle › Group gross profit decreased 1% and Group profit before tax reduced by 26% reflecting the impact of the failure of TCG. › Adjusted Group gross profit(1) increased 7% to £99.1m (FY18: £92.6m) reflecting revenue growth of 1% for Onthebeach.co.uk and Sunshine.co.uk (“OTB”) and a full year contribution from Classic Collection Holidays (“Classic”). › Group adjusted profit before tax(1) up 3% to £34.6m (FY18 : £33.6m). › Cash conversion(1) of 89% (FY18: 95%). › Cash at Bank at year end of £54.8m (FY18: £47.3m). Excluding the impact of refunds and costs of replacement flights paid in relation to the TCG failure, Cash at Bank would have been £62.0m. › Proposed final dividend of 2.0p per share, dividend maintained at 3.3p per share for the year (FY18: 3.3p per share). (1) Denotes a non-GAAP measure. An explanation of this measure and reconciliation to the closest GAAP measure is included in the APM Glossary on page 142. 8 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Business Model STRUCTURAL MARKET GROWTH & MARKET SHARE GROWTH PERSONALISE CUSTOMER PROPOSITION & LEVERAGE £ REVENUE DRIVE EFFICIENT SHARE GROWTH & STRENGTHEN BRAND ADDRESSABLE MARKET Short haul beach holidays dynamically packaged X Online penetration X OTB share of market traffic = Unique visitors X £ Revenue per booking X Conversion = Revenue per unique visitor = Revenue - Unique visitors X Marketing spend per unique visitor = Marketing investment - Fixed and Variable Costs SCALE DRIVES OPERATIONAL LEVERAGE OTB’s business model is centred on driving efficient growth in market share while maintaining and improving both conversion and £ revenue per booking Our strategic initiatives are focused on driving the performance of all of these levers = PBT Profit growth is the cumulative effect of improvements in performance of all of the levers individually 9 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSReport from the Chair of the Board “ On the Beach is a dynamic and evolving business that has huge opportunities for growth and I am delighted to have joined at this exciting time in the Group’s journey. Richard Pennycook Chair of the Board, On the Beach Group plc ” Group gross profit £m £92.0m (1)% Group profit before tax £m £19.4m (26)% FY18: £92.6m FY18: £26.1m Adjusted Group gross profit £m Adjusted profit before tax £m £99.1m + 7% £34.6m + 3% FY18: £92.6m FY18: £33.6m I am pleased to present the annual report and accounts of the Group for the year ended 30 September 2019. Since my appointment as Chair of the Board on 1 April 2019, I have enjoyed getting to know the business and spending time with Simon Cooper and his senior management team. Their passion and dedication is evident and I thank them for providing me with a thorough and enthusiastic induction. On the Beach is a dynamic and evolving business that has huge opportunities for growth and I am delighted to have joined at this exciting time in the Group’s journey. A Challenging Environment and a Significant Growth Opportunity The last year has presented a challenging environment with multiple failures (most notably the collapse of Thomas Cook Group (“TCG”) towards the end of the financial year), continuing uncertainty over the timing and nature of the UK’s departure from the EU, and a devaluation of Sterling against the Euro. The collapse of TCG creates an unprecedented opportunity for the Group to take market share at an increased rate. The Group has therefore started to strategically increase its marketing investment both online and offline to attract new customers. 10 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Strategic Progress The Group has made significant progress against its strategic objectives during the year. Simon Cooper, CEO, covers this in greater detail in his report on pages 14 to 16. During the year, On the Beach has continued to invest in areas that will support long-term sustainable and scalable growth. Highlights include: › The appointment of Stefan Nordin as CTO in October 2018 and the subsequent reorganisation of the tech and product functions. The new structure better enables the Group to scale and increase the pace of evolution of its platform to support its strategic objectives. › The opening of a new Digital HQ in central Manchester and the refurbishment of the operational HQ in Cheadle to underpin the objective to recruit and retain the very best talent. It is clear that this move has enabled the Group to accelerate the pace at which it is growing digital headcount. › Following the acquisition of Classic in August 2018, the Group launched CPH in March 2019. This launch enables the Group to offer competitively priced beach holidays to a wide range of intermediaries through an online portal, and the progress made to date is encouraging, with c.1,500 agents now live. › The appointment of Adam Hansen as Corporate Development Director in August 2019, which will support our growth strategy as we continue to actively explore acquisition opportunities. › Significant investment in our People function, and the execution of a new people strategy to align with strategic objectives (see page 15). For the first time, the Group has run an all-employee culture survey. This will support the development of a cultural framework that ensures the link between strategy, values and culture, which is critical to ensure long-term sustainability for stakeholders (see pages 15 to 16). › The Group has continued to directly integrate scheduled long haul carriers onto its platform, with most of the key long haul airline partners now directly integrated and the Group continues to build its portfolio of directly contracted hotels. In FY19 we have grown long haul revenues by more than 100% and are excited about the medium term opportunities that these new destinations offer. › Continued investment in online and offline marketing and our brand continues to strengthen with a 14% growth year-on-year in prompted brand awareness. We have selected a new creative agency and our new advert will launch in December 2019, with the aim of making the On the Beach brand famous offline. Board Changes We have seen a number of Board changes during the year, all of which were overseen by the Nomination Committee. Lee Ginsberg stepped down as Chair of the Board on 30 November 2018 and resigned as a Director on 6 February 2019 in order to focus on other time commitments. Lee made a valuable contribution to the Company since his appointment ahead of the Group’s IPO in 2015 and on behalf of the Board, I express my thanks and best wishes to him. David Kelly acted as Interim Chair of the Board from 30 November 2018 until my appointment on 1 April 2019, during which time, as Interim Chair of the Nomination Committee, he oversaw the Committee’s search for a permanent Chair. On 1 April 2019, David resumed his position as Senior Independent Director and Chair of the Remuneration Committee. I would like to thank David for fulfilling this interim role and for his continuing guidance and support to the Board. On the recommendation of the Nomination Committee, the Board appointed me to the role of Chair of the Board with effect from 1 April 2019. The Report of the Nomination Committee on pages 58 to 59 outlines the recruitment process in further detail. Under the supervision of the Nomination Committee, we have undertaken an evaluation of the Board and its Committees and the balance of skills and experience on the Board. As a result of this exercise, the Committee concluded that it would be beneficial to recruit a further Non-Executive Director to complement the skills and experience of the current Directors and the Committee is in the process of recruiting for the vacancy. Further details are set out on page 59. Change of Statutory Auditor Last year, the Audit Committee made the decision to undertake a tender of the external audit, given KPMG’s 11-year tenure. The Audit Committee ran the tender process during early 2019 which concluded with the appointment of Ernst & Young LLP (“EY”) on 7 March 2019. I express my thanks to Elaine O’Donnell, Chair of the Audit Committee, and Paul Meehan, CFO, for running such a rigorous and efficient tender process. Corporate Governance Code The Board is committed to the highest standards of corporate governance, as outlined in detail in our Governance Report on pages 46 to 95. The 2018 UK Corporate Governance Code applies to the company with effect from 1 October 2019, and we have undertaken significant amounts of work and planning to ensure we are ready to comply with the new Code. In particular, the Group has undertaken a culture survey, to enable us to understand and assess the Group’s culture, and to ensure that this is aligned with the Company’s purpose, values and strategy. More details about this, as well as our employee and wider stakeholder engagement, are on pages 33 to 43. Final Dividend The Board is pleased to recommend a final dividend of 2.0p per share, totalling 3.3p per share for the year (2018: 3.3p). AGM Our AGM will be held at 11am on 6 February 2020 at the Group’s digital headquarters at Aeroworks, 5 Adair Street, Manchester, M1 2NQ. We look forward to welcoming shareholders. Richard Pennycook Chair of the Board 27 November 2019 11 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS “ Nicola Contact Centre Manager We aim to provide fantastic customer service but also go beyond that to ensure that the whole customer experience is great from start to finish, making it as simple as possible to book and enjoy a holiday.” Favourite Beach: St Paul’s Bay, Rhodes 12 12 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019OTB Growth Strategy Our vision is to build Europe’s leading online beach holiday retailer via a single platform, multi brand strategy UK To reach the widest possible audience of beach holidaymakers V E S IN T I N T A L E N T AND TEC H N O L O G Y BRAND DIFFERENTIATE LONG SHORT HAUL HAUL B2C B2B INSPIRE PERSONALISE EUROPE T O E X TEND CORE C A P A B I L I T IE S To support the integration and revenue expansion of beach focused brands 13 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Chief Executive Officer’s Report “ In what has been a difficult economic climate, I am pleased with the Group’s performance against strategic objectives while delivering a 3% increase in Group adjusted profit before tax. Simon Cooper Chief Executive Officer ” On the Beach continues to be a dynamic, entrepreneurial and ambitious business. We deliver value-for-money personalised beach holidays to our customers and maintain a daily focus to improve the quality of our customer proposition and the value that we provide to our growing customer base. Our continued growth has been delivered by executing a simple strategy, to personalise our customer proposition to increase conversion and improve margin while driving an efficient increase in our market traffic share. This underpins our ability to gain market share from traditional tour operators and other online travel agents (“OTAs”). Growth The Group has delivered a solid performance in the year with significant progress made against strategic objectives. Key highlights include: › Driving an efficient increase in our share of market, while investment into our brand has also increased awareness with branded share of traffic at its highest ever level of 70% of overall traffic (FY18: 64%). › Smartphone traffic is now 69% of total traffic and smartphone bookings have increased 31% year on year. Increasing the directness of our relationships with end suppliers to achieve in excess of 70% of hotels sourced directly. › › Continuing to provide the highest possible level of customer service by investing in our service staff and function to increase repeat purchase volumes by 7% year on year. › Driving an increasing proportion of sales into exclusive product while maintaining our lean cost base. › Building and launching Classic Package Holidays (“CPH”), which supports our strategic goal to gain share of the offline market by providing third party agencies with an online portal which allows access to a wide range of value for money beach holiday product. Market We believe that overall demand in the year for short haul beach holidays was affected by Brexit uncertainty and general consumer confidence. We have observed the following market trends: › A continued return in appetite for customers to travel to destinations in the Eastern Mediterranean, most notably Turkey; › Tour operator discounting in the lates market to fill risk capacity, which became more aggressive in the eight weeks prior to the collapse of TCG; › A weakening of Sterling leading to a slowdown in bookings; and › A strong finish to the year with a strengthening of Sterling and early sales for summer 2020. 14 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Investment in Brand We have continued to invest in an efficient multi-channel approach supported by our sophisticated bid management capability and have enhanced our cross-device attribution capability, giving us greater clarity on the return on marketing investment of multi-device traffic. The auction dynamics have remained relatively benign throughout FY19 with transient periods of aggressive spending by a range of competitors. The increasing strength of our brand and efficiency in our online marketing activity has allowed us to increase investment into offline marketing and FY19 saw our largest ever offline campaign. We have continued to optimise our in-house econometric modelling to monitor the effectiveness of our offline marketing spend and are delighted that prompted and unprompted brand awareness are at their highest levels. We are well advanced with creative and media plans for the FY20 campaign, which we expect to be our largest ever. In the four years since launching iPhone, iPad and Android apps, we have achieved more than two million downloads and an increasing percentage of traffic and bookings comes via our mobile apps. We have also invested to build booking management capabilities and reminder functionality into our apps so that customers can interact with us via the app before, during and after their holidays. Against the backdrop of the TCG collapse at the end of the financial year, we have increased our investment in brand marketing activity to ensure that we are well positioned to offer holidays to all of those affected by the failure of TCG. Investment in People The Group moved into its digital headquarters in the centre of Manchester in November 2018 and we have continued to accelerate the pace at which we add digital talent. The contact centre teams continue to be based in our Operational HQ in Cheadle, which was refurbished in early 2019 and fitted with 50% more desk space to support growth. We will shortly invest to refurbish the Classic office in Worthing. In October, we welcomed our new Chief Technology Officer, Stefan Nordin, into the business and we believe his prior experience as CTO of Betsson Group will greatly assist us in our ambition to double our digital capability over the next 3-5 years. Stefan has overseen a reorganisation of the Tech and Product resource, growing the teams by approximately 50% through FY19 and providing the foundations for us to add further talent in FY20. We have continued to invest in multi-skilling our customer- facing staff and ensure that we can provide an even higher level of customer support for all of our valued customers across all brands. We are delighted that complaint ratios continue to fall, Net Promoter Scores continue to improve and our repeat purchase rates have increased significantly through FY19. We have built a team of multi-skilled agent-facing staff to support the launch and growth of the CPH brand. We have also invested to broaden the senior management team in Worthing to ensure that Classic is able to evolve its product and sales strategies. Following the failure of TCG, all teams across our business responded exceptionally to ensure that customers were either re-booked or refunded in the shortest possible time while maintaining high quality customer care. Investment in Supply Despite the increasing proportion of sales into Eastern Mediterranean and longer haul destinations, the investments we have made into our supply resource and technologies has helped us to deliver more than 70% of total hotel buying through direct contracting in FY19. The increasing proportion of directly contracted product has continued to support the improved customer satisfaction scores as complaint ratios on directly contracted product are significantly lower than third party sourced product. Our continued focus to strengthen our relationships with key overseas suppliers is giving us increased access to exclusive rates, ring-fenced capacity and OTA exclusivity while maintaining our no risk, lightweight business model. We have continued to add resource to build our portfolio of directly contracted hotel product in existing destinations, such as Greece, and in support of our long haul expansion in the Caribbean, the Middle East and Indian Ocean. We have also added talent to the hotel platform technology team to ensure that we are well placed to deliver our longer term strategic objectives. In H2 2019, almost 35% of our hotel product was contracted with some form of exclusivity with us delivering significant incremental volume for our key partners and our focus will be to continue to build on this base throughout 2020 and to convert our differentiated supply position into incremental margin. The collapse of TCG has created numerous opportunities to expand our hotel portfolio and our team of contractors are working hard to forge new partnerships with former TCG exclusives. We continue to explore opportunities to contract with partner airlines on a more strategic basis to deliver incremental revenue. We have also continued to invest significantly in our search technologies to support our strategic objective. This drives an increasing proportion of differentiated flight and hotel product via our Holiday Finder booking path and allows us to build innovative search tools for customers who are destination agnostic. In the aftermath of the failure of TCG, we continue to explore innovative ways to backfill the lost flight capacity to destinations where TCG had a substantial share. 15 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Chief Executive Officer’s Report International After the failure of Primera airlines at the start of H1, and the subsequent weakness in performance in H1, we are pleased to have delivered strong growth in Sweden and Norway in H2 (+43% YOY). This growth was achieved with increasing efficiency delivering a breakeven performance in revenue post marketing spend. With a stable supply of seats across the coming year, we are confident that the progress we have made in H2 will allow us to drive significant and efficient growth in Sweden while we continue to invest in Norway. We continue to evaluate opportunities to enter further markets outside of Scandinavia. Strategy and Growth The Group’s vision is to build Europe’s leading online beach holiday retailer via a single platform multi brand strategy. On the Beach continues to grow market share by evolving a strategy based on the following strategic pillars: 1. Investing in talent and technology to extend core capabilities › Continuing to invest in our people and our platform to allow us to innovate at an increasing pace Investing in our People function to ensure that we drive optimum performance from a growing talent base Evolving platform capabilities to simplify the integration of further brands Refreshing company-wide values 2. Driving an efficient increase in traffic through branded and direct channels › Investing in an efficient multi-channel approach supported by our sophisticated bid management capability Increasing investment offline in conjunction with econometric modelling capability to strengthen brand awareness and to ensure marketing investment is efficient Driving performance improvements across all brands 3. Personalising our customer experience › › › › Driving an increasingly simplified customer experience Showing the most relevant product to all site visitors on all devices at the earliest possible opportunity Enhancing personalisation logic through data science and machine learning Optimising our multifunctional app to increase customer engagement 16 › › › › › 4. Leveraging increased revenue through direct and differentiated supply › Building a programme of direct and differentiated supply to leverage margin and gain market share Building our in-house capability to increase visibility of differentiated product Leveraging our multi-brand capability to offer a range of distribution options to preferred partners 5. Inspiring holidaymakers with destination agnostic search technologies › › Optimising destination agnostic search technologies Leveraging capabilities to retail a wider range of product from a wider range of suppliers 6. Reaching an ever wider audience of beach holidaymakers through product, channel and geographic extension › Expanding our long haul offering to monetise existing search volumes Growing share of B2B sales through the CPH online agent-facing portal Evolving the product portfolio of the Classic luxury B2B brand Leveraging our core capabilities to grow market share in Scandinavia Seeking value-enhancing M&A opportunities › › › › › › Current Trading and Outlook The first quarter of our financial year (calendar Q4) has historically been the quietest trading period for the Group. The failure of TCG has led to a material shift in market dynamics as TCG had a 20% share of beach holiday passengers and approximately 20% of the seat capacity to beach holiday destinations. This has created a significant short-term lack of seat capacity as well as an unprecedented opportunity in the medium term to gain share. Search demand has therefore been strong throughout the period following the failure albeit the loss of seat capacity has led to a supply/demand imbalance with a significant increase in flight pricing, particularly for winter 19/20 departures and for travel to Eastern Mediterranean destinations. The Board strongly believes the correct course of action to ensure that On the Beach is best-positioned to capture market share, is to focus on price competitiveness and to increase the visibility of all of the Group’s brands, with the expectation that seat supply will normalise during FY20. Whilst the consumer environment will continue to be challenging, we remain confident in the ability of our resilient and flexible business model to significantly increase our market share in the medium term. The Board will provide a further update on trading at our AGM on 6 February 2020. Simon Cooper Chief Executive Officer 27 November 2019 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Key Performance Indicators OTB Segment: Adjusted Revenue(1) Marketing Spend as a Percentage of Adjusted Revenue(1) Revenue is continuing to grow at 1.1% Marketing % of adjusted revenue decreased to 33% (2018: 37%) excluding offline and to 39% (2018: 42%) including offline £89.3 £90.3(2) £81.9 £70.2 £62.5 s n o i l l i M £100 £90 £80 £70 £60 £50 £40 £30 £20 £20 - £45.6 £37.5 £30.9 60% 50% 40% 30% 20% 10% 0% 52.8% 50.7% 49.9% 45.9% 51.3% 48.6% 48.7% 44.6% 45.2% 40.9% 41.7% 37.1% 38.9% 33.0% £40.0 £35.0 £30.0 £25.0 £20.0 £15.0 £10.0 £5.0 - 2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2018 2019 (2) Revenue before adjustment for the TCG failure was £83.3m Online marketing spend (£m) Offline marketing spend (£m) Online spend as % of adjusted revenue Total spend as % of adjusted revenue International Segment: Revenue Adjusted profit before tax(1) Decrease in revenue of 13% in FY19 Adjusted profit before tax grows by 3% to £34.6m (FY18: £33.6m) s n o i l l i M 2.0 1.5 1.0 0.5 - (0.5) (1.0) (1.5) (2.0) (2.5) 1.7 1.6 1.4 1.1 0.7 (0.6) (1.8) (1.8) (2.0) (2.2) s n o i l l i M £40 £35 £30 £25 £20 £15 £10 £5 £0 33.6 34.6 28.5 21.3 14.5 10.5 9.9 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019 Revenue EBITDA (1) Denotes a non-GAAP measure. An explanation of this measure and reconciliation to the closest GAAP measure is included in the APM Glossary on page 142 17 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSFinancial Review “ Despite the impact of the TCG failure, the Directors are pleased to recommend a final dividend of 2.0p, and therefore a total dividend in line with last year, demonstrating the Directors’ confidence in the business model and strength of the balance sheet. Paul Meehan Chief Financial Officer ” The Group organises its operations into four principal financial reporting segments, being OTB (onthebeach.co.uk and sunshine.co.uk), International (ebeach.se, ebeach.no and ebeach.dk), Classic (Classic Collection Holidays) and CPH (Classic Package Holidays). As a principal, Classic and its subsidiaries account for revenue on a “travelled” basis and therefore report revenue on a gross basis. In each of the OTB, International and CPH Segments, the Group offers dynamically packaged holidays acting as an agent rather than a principal. The exceptional impact of the TCG failure has been excluded from performance measures in this Report as the Directors consider this necessary to provide a true, balanced and understandable view of the performance of the Group. A full reconciliation of all non-GAAP measures to the closest equivalent GAAP measure is included in the APM glossary on page 142. The Directors believe that adjusting the income statement for the impact of the TCG failure provides a clearer reflection of the Group’s underlying performance in the year. The Group organised package holidays for affected customers which included TCG flights. Had these flights not been available at the time of booking, customers would have booked the package with an alternative flight. In addition, the proximity of the TCG failure to the year end means that customers did not have the opportunity to replace package holidays that were impacted. 18 OTB Financial Performance OTB Revenue £m OTB Adjusted Revenue £m £83.3m (7)% FY18: £89.3m £90.3m +1% FY18: £89.3m OTB Adjusted Revenue after marketing costs £m OTB Operating Profit £m £55.1m +6% FY18: £52.0m £20.9m (25)% FY18: £27.7m OTB Adjusted EBITDA(1) £m OTB EBITDA % of revenue £38.2m +1% FY18: £37.9m 42% FY18: 42% (1) Denotes a non-GAAP measure. An explanation of this measure and reconciliation to the closest GAAP measure is included in the APM Glossary on page 142 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Financial Review OTB Performance 2019 Adjusted £m 2019 GAAP £m 2018 Adjusted £m 2018(1) GAAP £m Revenue Revenue after marketing costs Variable costs Fixed costs Depreciation and amortisation Exceptional(2) operating costs Share based payments Amortisation of acquired Intangibles 90.3 55.1 (7.2) (9.7) (4.0) - - - Operating profit EBITDA EBITDA % 34.2 38.2 42% 83.3 48.1 (7.2) (9.7) (4.0) (1.2) (0.7) (4.4) 20.9 29.3 35% 89.3 52.0 (6.6) (7.5) (3.0) - - - 34.9 37.9 42% 89.3 52.0 (6.6) (7.5) (3.0) (1.5) (1.4) (4.3) 27.7 35.0 39% (1) Restated for adoption of IFRS 15. Refer to note 2c to the Consolidated Financial Statements on page 101. (2) Exceptional operating costs comprise the costs of dealing with the failure of TCG and re-organisation costs. An explanation of the adjusted and non-GAAP measures, and a reconciliation to the closest GAAP measure, is included in the APM Glossary on page 142. Performance Summary Following the TCG collapse, OTB revenue for the year was down 7% and operating profit was down 25%. The failure of TCG impacted revenue by £(7.0)m and operating profit by £(7.2)m. Excluding the impact of TCG detailed above, and despite the challenging market and the weakening of Sterling between May and September 2019, OTB delivered an adjusted revenue growth of 1% to £90.3m (FY18: £89.3m). Adjusted revenue after marketing costs grew by 6% to £55.1m. Online marketing expenses as a percentage of adjusted revenue decreased to 33% (FY18: 37%) with total spend of £29.8m (FY18: £33.2m). This reflects further optimisation of our online spend together with a continued increase in the share of branded and direct traffic. We have again increased spending in the year on offline advertising campaigns to £5.4m (FY18: £4.1m). This increased investment continues to drive greater brand awareness. Improvements to the customer journey, including the Holiday Finder path, have been rolled out further during the year. Package holiday bookings grew by 10% YOY and now account for 88% of all bookings made on onthebeach.co.uk and sunshine. co.uk. We have also made significant progress with expanding our long haul proposition. Long haul package holiday bookings doubled this year and we expect to continue to see expansion in this area as we integrate with more airlines and hotels in long haul destinations. EBITDA Overhead as % of adjusted revenue 2019 Adjusted % 2019 GAAP % 2018 Adjusted % 2018 GAAP % 8% 9% 8% 8% 11% 11% 8% 8% 19% 20% 16% 16% Variable costs % adjusted revenue Fixed costs % adjusted revenue Overheads % adjusted revenue An explanation of the adjusted and non-GAAP measures, and a reconciliation to the closest GAAP measure, is included in the APM Glossary on page 142. In spite of the market conditions leading to low revenue growth, the Group has continued to invest in areas that will support the long-term prospects of the Company. As a result, overheads increased to 19% of adjusted revenue. This reflects investment in our Digital HQ, talent acquisition & retention, and additional costs incurred as a result of the implementation of the Package Travel Regulations. A bonus will also be paid to eligible employees based on achievement of the non-financial targets. Adjusted EBITDA of £38.2m (FY18: £37.9m) increased by 1% and adjusted EBITDA as a percentage of adjusted revenue remained at 42% (FY18: 42%). The closest GAAP equivalent measure to Adjusted EBITDA is operating profit which decreased to £20.9m (FY18: £27.7m). This decrease is attributable to exceptional costs paid in the year of £8.2m relating to the TCG failure and internal restructuring. International Performance Revenue Revenue after marketing costs Variable costs Fixed costs 2019 £m 2018 £m Change % 1.4 - 1.6 (1.4) (13)% (0.2) (0.3) (0.4) (0.5) Depreciation and amortisation (0.1) (0.2) Operating loss International EBITDA (0.7) (2.4) (0.6) (2.2) 19 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Financial Review Performance Summary › Revenue in H2 has grown 43% YOY. H1 revenues were › adversely affected by the failure of Primera in October 2018 resulting in a FY reduction in revenue of (13)% to £1.4m. In H2 there was a significant recovery in booking volumes, as capacity returned to the market. › Revenue after marketing is now break-even. › EBITDA losses for the year have reduced from (£2.2m) to (£0.6m) › The closest GAAP equivalent measure to International EBITDA is operating loss which decreased to (£0.7m) (2018: (£2.4m)) The International segment comprises websites in Sweden, Norway, and Denmark operating under the ‘www.ebeach.se’, ‘www.ebeach. no’, and ‘www.ebeach.dk domains’. Classic Performance 2019 Adjusted £m 2019 GAAP £m 2018 Adjusted £m 2018(2) GAAP £m Pro- forma(3) £m Revenue 55.0 55.0 13.4 13.4 59.0 Revenue after marketing costs Variable costs Fixed costs Depreciation and amortisation Amortisation of acquired Intangibles Exceptional(1) operating costs Operating profit Classic EBITDA 6.3 6.3 1.6 1.6 6.7 (1.2) (2.9) (1.2) (2.9) (0.1) (0.4) (0.1) (0.4) (1.3) (3.0) (0.2) (0.2) - - (1.1) (0.7) - - - 2.0 0.2 1.1 2.2 1.5 1.1 - (0.2) (0.2) - 0.9 1.1 - - 2.2 2.4 (1) Exceptional operating costs comprise the costs of dealing with the failure of TCG and re-organisation costs (2) Restated for adoption of IFRS 15. Refer to note 2c to the Consolidated Financial Statements on Page 101. (3) Numbers are unaudited and taken from management accounts. FY18 Proforma has been included to show performance on a full-year basis. The Directors believe this provides a useful comparison and makes the results more understandable. An explanation of the adjusted and non-GAAP measures, and a reconciliation to the closest GAAP measure, is included in the APM Glossary on page 142 Classic was acquired on 15 August 2018. Classic has provided On the Beach with a “business to business” channel through which we are starting to access the five million short haul beach holidays that are booked offline each year. 20 As a principal (rather than an agent) Classic accounts for revenue on a “travelled” basis and reports revenue on a gross basis. Revenue decreased by 7% to £55.0m while the new senior management team transitioned the business towards more luxury and tailor made travel. The performance in the year also reflects the continuing challenges of high street retail more generally. CPH Performance Revenue Gross Profit after marketing Variable costs Fixed costs Operating profit CPH EBITDA 2019 Adjusted £m 2019 GAAP £m 0.8 0.1 (0.2) (1.0) (1.1) (1.1) 0.7 - (0.2) (1.0) (1.2) (1.2) CPH provides an online B2B platform that enables high street travel agents to sell dynamically packaged holidays to their customers. Since launch in March 2019, CPH has established a distribution network of c.1,500 travel agents. The primary focus in FY20 is to further increase the numbers of agents and the volume of bookings per agent. Group Gross Profit Group gross profit now comprises OTB, International, Classic and CPH revenues and has fallen to £92.0m (FY18: £92.6m) as a result of the failure of TCG. The adjusted group gross profit has increased by 7% to £99.1m. This is a result of growth in the OTB revenues of 1% and the increased contribution from the Classic and CPH segments of £5.8m. Group profit before taxation £m Adjusted profit before tax £m £19.4m (26)% FY18: £26.1m £34.6m 3% FY18: £33.6m Profit for the year £m Adjusted profit for the year £m £15.7m (27)% FY18: £21.5m £28.0m 1% FY18: £27.7m Basic EPS pence Adjusted proforma EPS pence 12.0p (27)% FY18: 16.5p 21.4p 1% FY18: 21.2p ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Profit Before Tax Group profit before tax decreased by 26% to £19.4m (FY18: £26.1m). The current year was impacted by the exceptional costs relating to the TCG failure and an internal restructure program. The Group reports adjusted profit before tax to highlight the impact of these one-off and other discrete items and to allow better interpretation of the underlying performance of the business. Group profit before taxation Amortisation of acquired intangibles 2019 £m 19.4 5.5 2018 £m 26.1 4.6 Change % (26)% Share based payments Exceptional operating costs(1) 0.7 9.0 1.4 1.5 Adjusted profit before tax 34.6 33.6 3% (1) Exceptional operating costs comprise the costs of dealing with the failure of TCG, re-organisation costs and one-off property costs (FY18: Acquisition costs and one-off property costs) Finance Costs The finance cost for the year was £0.3m (FY18: £0.3m). With strong cash management, the maximum revolving credit facility drawdown during the year was £19m. During the year, the Group extended the revolving credit facility to 31 December 2022 and increased the facility from £28.5 million to £50 million to cover seasonal working capital requirements and expansion plans. Share-Based Payments The Group makes annual awards under a long term incentive plan (“LTIP”). In accordance with IFRS2, the Group has recognised a non-cash charge of £0.7m (FY18: £1.4m). Exceptional Operating Costs Exceptional operating costs for the year were £9.0m (FY18: £1.5m). These costs relate to: › £1.3m relates to double property costs and an internal restructuring program to ensure that we have the best structure in place to deliver our strategic goals; and › The net cost associated with the recent failure of TCG of £7.7m (£7.1m revenue and £0.6m operating costs), which represents the expected one-off costs associated with helping customers to organise alternative travel arrangements or providing refunds following the failure of the airline and is stated net of a chargeback claim of £18.5m. Cash generated from operating activities £m Operating cash conversion % £26.5m (21)% 89% FY18: £33.4m FY18: 95% Dividend per share pence Net external cash(3) £m 3.3p £54.8m FY18: 3.3p FY18: £47.3m Taxation The Group tax charge of £3.7m represents an effective tax rate of 19% (FY18: 18%) which was in line with the standard UK rate of 19% (FY18: 19%). Earnings per share Basic earnings per share, calculated for the current and comparative period, is based on the weighted average number of shares in issue and has decreased by (27)% to 12.0 pence in FY19 (FY18: 16.5 pence). The adjusted earnings per share based on adjusted earnings increased 1% to 21.4 pence (FY18: 21.2 pence). The table below shows the adjustment from actual earnings: Profit for the year Add backs: 2019 £m 2018 £m Change % 15.7 21.5 (27)% Share based payments (net of tax) Exceptional and non-underlying costs (net of tax) Amortisation of acquired intangibles 0.6 1.2 7.2 1.2 4.5 3.8 Adjusted profit for the year 28.0 27.7 1% Number of ordinary shares in issue at year end; assumed to be outstanding for the full year and comparative period (millions) Adjusted earnings per share (pence) 131.2 131.0 - 21.4 21.2 1% An explanation of the adjusted and non-GAAP measures, and a reconciliation to the closest GAAP measure, is included in the APM Glossary on page 142 21 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Closing Cash was £54.8m (FY18: £47.3m). Excluding the impact of refunds and costs of replacement flights paid in relation to the TCG failure, Cash at Bank would have been £62.0m. Cash generated from operating activities was £26.5m (FY18: £33.4m) and operating cash conversion was 89% (FY18: 95%) reflecting changes to the trust rules and supplier mix. Dividend The Directors recommend a final dividend of 2.0p per share, totalling 3.3p per share for the year (FY18: 3.3p per share). Subject to shareholders’ approval at the Annual General Meeting (‘AGM’) on 6 February 2020, the dividend will be paid on 13 February 2020 to those shareholders who appear on the register of members at the close of business on 10 January 2020. Paul Meehan Chief Finance Officer 27 November 2019 Financial Review Cash Flow and Net Debt The Group continues to see strong cash conversion at 89% (FY18: 95%). 2019 £m 2018 £m Change Profit before taxation 19.4 26.1 (26)% Depreciation Amortisation Net finance (income)/costs Share based payment charges 1.1 8.7 (0.2) 0.7 0.5 7.2 0.1 1.4 EBITDA excluding share based payment charges 29.7 35.3 (16)% Movement in working capital Movement in trust account 2.4 (5.6) (1.7) (0.2) Cash generated from operating activities 26.5 33.4 (21)% Operating cash conversion % 89% 95% Other Cash Flows Corporation tax paid (3.8) (7.1) Capitalised development expenditure Capital expenditure net of proceeds (5.1) (3.8) (3.0) (2.2) Contingent consideration (2.7) (3.0) Acquisition of subsidiary net of cash acquired Net finance income/(costs) Dividends paid Net cash flows Closing cash at bank Closing trust account balance Total - 0.2 (4.6) 7.5 54.8 44.0 98.8 1.0 (0.1) (3.9) 14.3 47.3 38.4 85.7 (48)% 15% 22 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019I S T R A T E G C R E P O R T G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Dan Head of Performance Marketing culture here promotes a test and trial mind-set, which allows us to experiment with new technologies and platforms that “The autonomy that you get at On the Beach is fantastic. The have the potential to revolutionise the business” Favourite Beach: Agios Stefanos Beach, Mykonos ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 23 23 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Principal Risks and Uncertainties The Board believes that effective risk management is critical to ensure that the Group can deliver on its strategic objectives and to ensure long-term sustainable growth. As such, the Directors have carried out a robust assessment of the principal risks and uncertainties facing the company, including those which could threaten its business model, growth, future performance, solvency or liquidity. The principal risks and uncertainties identified are detailed in this section. This is not exhaustive, and additional risks and uncertainties may prove to have a material effect on the Group. Link with Strategy For each risk highlighted, we have specified the strategic pillars (as outlined in the CEO’s report) that these risks impact. These are: 1 Investing in talent and technology to extend core capabilities. 2 Driving an efficient increase in traffic through branded and direct channels. 3 Personalising our customer experience. 4 Leveraging increased revenue through direct and differentiated supply. 5 Inspiring holidaymakers with destination agnostic search technologies. 6 Reaching an ever-wider audience of beach holidaymakers through product, channel and geographic expansion. Consumer Demand Impact A recession or reduced economic growth can lead to reduced job security and a reduction in consumer leisure spending. A weak pound makes holidays and consumer spending abroad more expensive. High-profile corporate failures reduces consumer confidence to make ‘big ticket’ purchases, particularly well in advance. Terrorist attacks, war/acts of force and civil unrest undermine consumer confidence and cause consumer behaviour to shift suddenly (e.g. by choosing not to book a holiday, delaying booking or booking a different destination or a ‘staycation’). Continued uncertainty over the Brexit outcome and the resulting economic position could lead to a material reduction in consumer demand for holidays. Emerging Risks / Change in the Year Brexit uncertainty / the political turmoil in the UK and high-profile failures of household names such as Thomas Cook, have heightened this risk considerably. Key Mitigations The Group’s flexible payment arrangements enable customers to spread the cost of their holiday. The Group’s ATOL and ABTA bonding, together with its consumer trust account arrangements (where customer monies are held safely in a trust until they travel), provide compelling reasons for customers to trust in the Group over other competitors. In an environment of rapidly shifting consumer demand, the Group’s flexible and asset-light business model means it is well placed to respond to sudden shifts in consumer demand. Strategic pillars impacted Direction of travel 1 2 4 6  24 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Flight Supply Impact As is the case with all online travel agents (“OTA”), a lack of flight supply/capacity impacts the Group’s ability to fulfil consumer demand for holidays. For a number of low-cost airlines, the Group does not have agreements in place and instead acts as the customer’s agent. Certain airlines may not wish to accept bookings from the Group’s customers and might seek to impede the Group’s access to flight data and bookability. Certain airlines may use technological and other means to prevent the Group’s bookings or to apply a price difference to make the Group’s bookings more expensive. This could make the Group’s offering less extensive or more expensive which could have a material adverse effect on the Group. The Group is one of several online travel agents involved in litigation with Ryanair in connection with Ryanair’s efforts to prevent OTAs from booking and selling its flights. The legal process is ongoing but remains at an early stage. There have been no developments since the last annual report, so this has caused a delay to the anticipated timescales set out in the prospectus. Other airlines could seek to emulate Ryanair’s claim against OTAs. Litigation is unpredictable and if Ryanair were to prevail, this could have a material impact on the Group’s business. In order to mitigate flight supply risk, the Group may take allocations of seats on certain key routes, which may involve some limited risk. If the Group cannot sell the seats profitably or the programme is cancelled, this could lead to material costs for the Group. Emerging Risks / Change in the Year Thomas Cook’s collapse led to a reduction in flight capacity which will take time to be replaced. When replaced, there may be fewer seats available to OTAs on a seat-only basis to dynamically package. Key mitigations The Group is successfully building relationships with a wider range of airlines, including preferential commercial terms and rates. The Group’s focus on beach holidays means its customers are concentrated on certain routes and its scale means that it can easily fill seats on these routes. This is attractive to airlines looking to fill seats on new routes (including those replacing Thomas Cook capacity) and the Group is in commercial discussions with a number of airlines. The Group’s proprietary technology is industry leading and enables it to ensure that its operations are robust. Where allocations of flight seats are taken, this will be on routes where there is strong demand, and the Group will seek to build flexibility into the contract to enable cancellation when demand is lower than expected. Strategic pillars impacted Direction of travel 1 4 6  25 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Principal Risks and Uncertainties Supplier Failure Impact In the event of a major airline failure, the Group must replace the customer’s flight arrangements, or refund the customer in full for the holiday, with no ability to claim back the costs from the failed airline or any bond or effective insurance or the ATOL scheme/CAA (which protects consumers, not package organisers). This leads to loss of margin on cancelled bookings, and incremental costs to arrange alternative flights. The Group must refund customers within 14 days of cancellation, but it may take some weeks to recover monies via chargeback claim, creating a cash flow impact. Failure of a major bedbank or key hotel partner would cause operational disruption. Emerging Risks / Change in the Year Thomas Cook’s collapse crystallised this key risk for the Group, although it is possible that there will be further failures of smaller airlines. Key Mitigations The Group has detailed and well-rehearsed plans in place to deal with a major airline failure, having dealt with many airline failures, including Monarch and Thomas Cook failures. See pages 44 to 45 for a case study on how the Group planned for and executed its major airline failure plan. The Group has a working capital facility in place to ensure it has sufficient funds to refund/replace customer bookings. The Group pays for flights using credit/debit cards which include chargeback rights, which enable the Group to recover the cost. Strategic pillars impacted Direction of travel 1 2 4 6  Competition Risk Impact The Group operates in a very competitive market. If competitors offer a more compelling proposition, this could have a material adverse effect on the Group’s financial position and prospects. New entrants to the market increase competition. Emerging Risks / Change in the Year The collapse of Thomas Cook led to the loss of a key competitor. Key Mitigations The Group has a strong brand and offers a great value proposition to customers as well as flexible payment options. The Group’s investment in marketing, talent and its infrastructure means it can compete to attract and convert customers. Strategic pillars impacted Direction of travel 1 2 4 6  26 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Package Organiser Liability Impact For all holiday bookings made after 1 July 2018, these are treated as “packages” and OTB/Sunshine/Classic/CPH (as applicable) is the “package organiser” which means the Group is responsible for the proper performance of the package. The Group can therefore be held liable for death/personal injury or illness suffered by customers that are the fault of any of the suppliers. In the event of a catastrophic injury/fatality, or multiple injuries, the cost could run into millions of pounds. Package organiser status brings with it other onerous responsibilities including finding replacements/providing refunds where flights are cancelled (through airline insolvency or otherwise) or there is a major change to the customer’s holiday and providing accommodation where customers are stranded. For holiday bookings made prior to 1 July 2018, OTB and Sunshine did not act as package organiser and do not have legal liability for claims for injury/illness arising out of these bookings. However, certain claimant solicitors will try to argue that these were packages in any event. Emerging Risks / Change in the Year As OTB and Sunshine only became package organisers in July 2018, almost all of the claims we received in FY18 did not relate to packages. By the end of FY19, almost all claims we have received are packages so our liability has naturally increased, as expected. Key Mitigations For bookings made prior to 1 July 2018, OTB and Sunshine acted only as travel agent and not as principal or package organiser and our processes, practices and paperwork firmly support this. The Group has public liability insurance in place to cover its risks as a package organiser as well as thorough claims reporting, investigation and handling processes. The Group has indemnities in place with most suppliers, to enable recovery. The Group has a health and safety management system in place and works with its suppliers to ensure that customers’ health and safety is monitored throughout the supply chain. Strategic pillars impacted Direction of travel 1 2 6  27 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Principal Risks and Uncertainties Regulatory Breach Impact The Group’s business is highly regulated and is subject to a complex regime of laws, rules and regulations concerning travel and aviation, online commerce, financial services, consumer rights and data protection. A breach of these laws could have serious financial and reputational implications for the Group. Unfavourable changes to or interpretation of existing laws could adversely affect the Group’s business and financial performance. Emerging Risks / Change in the Year The CMA’s investigation into online hotel booking platforms concluded in 2019 and the CMA issued new guidelines to be followed which the Group has complied with. Key Mitigations The Group has an internal legal team and external legal advisers to advise the Group on current and forthcoming legal requirements and to manage legal and regulatory issues as they arise. The Group reviews draft proposals for law reform and participates in industry steering, policy groups and advisory committees, through which it is able to lobby on legislative change. Strategic pillars impacted Direction of travel 1 2 3 4 5 6  No change Damage to Brand/Reputation Impact The Group is one of the UK’s largest online beach holiday retailers and relies on the strength of its brand to attract customers to its website and to secure bookings. Failure to maintain and protect our brand, or any events or circumstances which give rise to adverse publicity, could cause brand/reputation damage, lead to a loss of goodwill and reduced customer demand to book with the Group, impacting traffic and revenue. Emerging Risks / Change in the Year Our prompted brand awareness reached 50% in February 2019 and we have invested the most we ever have in our offline campaign to drive our brand. Key Mitigations We invest heavily in our brand, through a broad variety of online and offline marketing and PR campaigns, to build brand awareness and consideration. We have internal and external PR advisers to support us to manage any PR incidents. Strategic pillars impacted Direction of travel 1 2 3 4 5 6  No change 28 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Exchange Rate Fluctuations Impact The Group’s costs of sale are incurred in a different currency to that in which it sells. If the currency in which the Group is buying changes unfavourably, this means the margin is uncertain/volatile or the booking could fall into a loss. A weak pound makes holidays and consumer spending abroad more expensive. If the pound weakens, tour operators have a competitive advantage over OTAs. Emerging Risks / Change in the Year The prospect of a no-deal Brexit has destablised currency markets, with a material weakening of Sterling against the Euro over the summer 2019 period. Key Mitigations The Group sets prices at prevailing spot rates and places forward contracts based on orders. Hedge effectiveness and stability of Euro rates is monitored regularly. Where the pound strengthens, online travel agents have a competitive advantage over tour operators as their pricing will be more competitive. Strategic pillars impacted Direction of travel 2 4 6  IT Systems and Data Security Impact The Group is exposed to risks of security breaches. A data security breach, in which a third party illegally gained access to our customers’ or employees’ personal data, could result in damage to brand, material fines and litigation, which would impact traffic, revenue and profit. The Group’s growth strategy is to build Europe’s leading online beach holiday retailer via a single platform, multi-brand strategy. Our IT platforms must be scalable, robust and reliable. If our systems can’t keep up with growing demand, this could affect our ability to deliver growth. The enactment of GDPR in May 2018 significantly increased the size of the fines that would be levied in the event of a data breach. Emerging Risks / Change in the Year As M&A is part of our future strategy, the need for a scalable platform is even more critical. Key Mitigations We have stringent security in place which is regularly tested and audited. The Group is PCI DSS compliant and uses an external quality security assessor to maintain best practice. The scalability of our platform is a priority for our tech and product teams and we invest heavily in talent and technology in this area. Strategic pillars impacted Direction of travel 1 2 3 4 5 6  29 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Principal Risks and Uncertainties Business Interruption Impact A significant business interruption could impact on the Group’s ability to trade and/or manage the business, for example, an event preventing head office access, website or systems downtime or restrictions on taking or making payments. Emerging Risks / Change in the Year Failure to comply with the new Strong Consumer Authentication (SCA) rules under the new PSD2 regulations could restrict the Group’s ability to accept online payments. Key Mitigations The Group’s payment teams worked very closely with payment providers to ensure that the work required to adjust to the implementation of SCA was scoped out and completed. The Group has a business continuity and disaster recovery plan and robust back up and failover facilities. Strategic pillars impacted Direction of travel 2 3 55  No change People Risk Impact The Group’s ability to achieve its strategic objectives is dependent on certain key personnel, plus its ability to attract and retain skilled staff. The North West, where the Group’s Digital HQ is located, is an area where there is a high degree of competition for digital talent. The Group relies on key personnel and if those key personnel were unable to carry out their role, this could have a material effect on the Group’s business. Emerging Risks / Change in the Year In FY19, we opened our new Digital HQ in central Manchester and refurbished our Operational HQ in Cheadle. This has enabled us to much more easily attract and retain talent. Brexit poses a risk as, if there is a restriction on the free movement of people, this will impact on the Group’s ability to attract and retain EU staff which could in turn have a negative effect on the diversity of our staff. Key Mitigations We provide an excellent working environment for our employees, and a very positive, informal and open culture, which contributes to our ability to recruit and retain staff. The Group has various remuneration tools to recruit and retain employees, including base salary, bonus and share schemes including a HMRC-approved Share Incentive Plan and a Long-Term Incentive Plan. We have a succession plan in place and invest in leadership development to ensure we have a strong and diverse talent pipeline. On the Beach has a Tier 2 Sponsorship Licence to broaden our pool of talent and this would mitigate the risk if EU rules on freedom of movement change. Strategic pillars impacted Direction of travel 1 2 3 4 5 6  30 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Viability Statement Viability In accordance with the provision of C.2.2. of the 2016 revision of the UK Corporate Governance Code (the “Code”), the Directors have assessed the prospects and viability of the Group over a period significantly longer than 12 months from the approval of the financial statements. Assessment of Prospects The Board has determined that a period of three years to 30 September 2022 is the most appropriate period to provide its viability statement. The Group prepares rolling three- year strategic plans and cash flows, so setting the viability statement period at three years enables the assessment to be made based on reasonable expectations in terms of the reliability and accuracy of forecasts. The Directors believe that projections which extend beyond three years become significantly less meaningful given the dynamic and volatile nature of the industry in which the Group operates. The Group’s overall business model (illustrated on page 9) and its strategy (as outlined in the CEO report) are central to assessing its future prospects. As such, key factors likely to affect the future development, performance and position of the Group are: › Technology platform & personalisation: continuous investment is made in developing platform technologies and personalisation techniques which lead to improvements for consumers, suppliers and employees; › Brand and marketing: our strong brand and efficient marketing tools enables us to continue to take share of market traffic; › Differentiated supply: the Group can leverage increased revenue through direct and differentiated supply; and › People: the Group’s continued success and growth are dependent on the ability to attract, retain and motivate a highly skilled workforce, with a particular focus on digital talent. The Group’s prospects are assessed primarily through its strategic planning process. The planning process is based on three limbs which are: › The preparation of cash flow forecasts to cover the period for which we are assessing the potential impact of events on the Group’s viability. The forecasts will be initially based on previously approved financial statements and then extrapolated to cover the period we are reviewing; › A review of the specific sensitivities on those cash flow forecasts relevant to the Group, with a view to highlighting potential areas of stress for the business; and › A review designed to estimate the impact of specific events and or circumstances which could be reasonably expected to occur, that have the potential to affect the viability of the Group. Once those scenarios have been identified, the Group then considers the most effective means of mitigating the risks they pose. This is achieved through reviewing the existing procedures and controls already in practice that serve as key mitigations to those risks, and also considering where those controls and procedures could be revised or improved upon to better protect the Group as a going concern. Assessment of Viability The output of the Group’s strategic and financial planning process reflects the Board’s best estimate of the future prospects of the business. To make the assessment of viability, however, additional scenarios have been modelled over and above those in the ongoing plan, based upon a number of the Group’s principal risks and uncertainties which are documented on pages 24 to 30. These scenarios were overlaid into the plan to quantify the potential impact of one or more of these crystallising over the assessment period. While each of the Group’s principal risks has a potential impact and has therefore been considered as part of the assessment, only those that represent severe but plausible scenarios have been modelled. These were: Scenario 1: Airline failure Link to risk - supplier failure Although the Group does not expect another airline failure in the immediate future, the possibility remains that another supplier could fail leading to a large exceptional cost to cover the necessary refunds to customers and any other related costs. This model has been thoroughly tested this year whilst dealing with the TCG failure and the Group remains confident that the short-term cash impact, before our chargeback claim is processed, can be covered by existing cash reserves or if necessary, utilising the Group’s banking facility. The Group has reviewed the list of its airline suppliers and does not consider any major airlines to be notable failure risks. In any event the Group remains prepared for such a failure through the combination of this hypothetical planning process and its recent experience of dealing with actual airline failures. Scenario 2: GDPR fine or other major one-off cost. Link to risk - regulatory breach A serious GDPR breach can attract a fine of €20m or 4% of turnover, whichever is greater. For the Company, this would be €20m (£17m). The Group takes data protection very seriously and a series of controls and monitoring is in place to ensure compliance, the impact of such a fine has been considered. The Group has considered the cash headroom over the next three years, and is comfortable that such a fine would not jeopardise the viability of the Group. 31 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Viability Statement The above scenarios are designed to allow the Group to review the maximum impact that such situations could have, for instance the maximum fine or the failure of a major supplier, in order to consider situations which could threaten its viability should they arise. However, as described above and in our key mitigations sections, there are controls and monitoring processes in place to allow us to observe the likelihood of these scenarios occurring and also to ensure we are best prepared to mitigate the impact on the business. The planning process has indicated that through a mix of the available reserves, the Group’s banking facility and real world experience of dealing with similar situations in the past that it would be capable of absorbing the potential impact on the business and remain a viable going concern. Viability Statement Based on their assessment of prospects and viability above, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period ending 30 September 2022. Going Concern The Directors also considered it appropriate to prepare the financial statements on the going concern basis, as explained in the Accounting Policies paragraph in note 2(b) to the Financial Statements. 32 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Corporate Social Responsibility I S T R A T E G C R E P O R T G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Everything’s Better On the Beach 34 Our Customer 36 Our People 39 Our Community 40 Our Sustainability 42 Values 43 Stakeholders ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 33 33 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Corporate Social Responsibility Everything’s Better On the Beach We take great pride in our business and brand, and believe that everything’s better On the Beach. Making this mantra a reality for our customers and meaningful for our colleagues is a top priority and we apply this belief to all that we do. We adhere to the highest standards of corporate social responsibility, from the working environment that we create and the way that we treat our people, to our contribution within the community, and in operating responsibly and with long-term sustainability and value in mind. Our Key Areas of Focus › Our Customer › Our People › Our Community › Our Sustainability OUR CUSTOMER Our purpose is to make it easy for people to find, book and enjoy their perfect beach holiday, and to deliver a great customer experience. What Our Customers Say About On the Beach Charlotte Follow  @OntheBeachUK thank you so much for all your help. You have been amazing would definitely recommend you! Your customer service has been outstanding 3.33 am - 20 Mar 2019 I’ve just got to write to say “thank you” so much to On the Beach for help they gave me with a problem I had. A lovely lady called Kara helped me and couldn’t have been more willing to assist with my query - I used to work in the travel industry so I am aware that some problems can’t be sorted - but with this, she was a star. Thank you Kara A Great Customer Experience We are relentless in our focus on providing customers with the very best care throughout their journey with us. We’re incredibly proud of our industry-leading 4* customer review scores on Trust Pilot. This year we further increased our focus on providing excellent customer service by including Net Promoter Score (“NPS”) - along with our employee engagement score – as a key strategic measure, forming part of the management bonus scheme performance criteria and thereby giving this even greater prominence throughout the business. In the past year our NPS has increased and we continue to find new ways to give our customers the very best On the Beach experience. Our customer service agents are dedicated to providing a great customer care and this year we introduced a new recognition scheme, whereby agents build time off in lieu for going above and beyond, to encourage and reward this even further. 34 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Getting the Nation Swimming We look to provide added value for our customers wherever possible. This summer, after our research found that fewer than half of British parents are confident swimmers and 68% are reluctant to swim with their children on holiday, we set out to help increase confidence in the water. Working with aquatics experts, we created bespoke family swim sessions, available at 150 locations around the UK, to help our holidaymakers create lasting memories in the pool or sea with our #AllSwimclusive campaign. Combining water safety tips, swimming confidence activities and games to play as a family, we gave access to the sessions – which were completely free of charge – to 500 families. Promoting Body Confidence to our Customers We recognise that beach holidays can sometimes be positioned in the media and society alongside a myth of ‘beach body readiness’, promoting unrealistic and unhealthy expectations of flawlessness. We believe that all bodies are beach ready and that we have a responsibility to our customers not to contribute to these damaging ideals. After finding that low body confidence prevents a third of women and a quarter of men in the UK from enjoying their holiday to the fullest, we launched body positivity campaigns - #ThisBikiniCan and #TheManBod - to celebrate the differences that make our bodies unique and beautiful in different ways, working with a series of high profile and diverse influencers to help spread our message. 35 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCorporate Social Responsibility OUR PEOPLE Our teams grew by 20% this year and by the end of September there were 551 employees in the Group. Our workforce is composed of our customer-facing colleagues based in our Cheadle Operational HQ, our development and central business functions in our Digital HQ in Manchester and Classic in Worthing. These colleagues are behind our success: from designing, developing and maintaining our websites and apps, to providing outstanding customer service, building our brands and ensuring that everything within the business runs like clockwork. This year we have brought in colleagues with the specific technical skillsets required to fulfill our strategic business aims, these have included data architecture, technical architecture, business intelligence and UX research roles. Our redesigned and expanded graduate programme launched in September, when 16 software engineering graduates joined the Product Development team at our Digital HQ. The graduates are a key part of our talent pipeline and will be receiving a mix of technical and general business skills training throughout the two-year programme, to develop them into fully -rounded technology leaders of the future. The programme kicks off with six weeks of training provided by Manchester- based Coding School, Northcoders. Colleague turnover has remained stable and in line with our expectations over the year with a combined annualised attrition rate for OTB of 30.6% and for Classic of 14.6%. Working Environment A cornerstone of our people strategy is providing a working environment that motivates our teams and allows them to do their best work, along with helping to attract the very best talent. This year, in order to provide the space needed to fulfil our growth plans in the coming years, On the Beach opened a brand new Digital HQ in Manchester’s city centre, and carried out a complete renovation of our Operational HQ in Cheadle. Following extensive engagement with colleagues, these offices were designed specifically with their feedback and input in mind, creating spaces that allow us to get together, support greater collaboration and innovation, and provide modern working environments that we’re proud to work in each day. Within the Digital HQ at Manchester’s Aeroworks building, features such as an auditorium, bar and extensive open-plan collaborative space have also allowed us to open the business up to the community to host a range of events, as well as communicate openly with colleagues. Employee retention rates increased by  26% this year 36 Our Development team has grown by  26% since the opening of our Digital HQ. Development In the past 12 months we’ve invested significantly in our People team, which has doubled in size. A Head of People was appointed in May to lead this area of the business and implement and deliver our people strategy - which will create long-term value for our colleagues and the Group as a whole and is focused on: › Optimising our organisational design › › Building an inclusive, high-performance culture › Delivering a high-quality and scalable people service Investing in diverse talent 2019 saw us launch a programme designed to support our people managers and invest in all of those responsible for leading and developing others within the business. Introduced in August through Dive In, an off-site event attended by 60 managers from across the business, this programme includes formal management training along with networking opportunities to build a peer support community. As strong and effective leadership is so integral to our success, we have also invested in the development of our senior leadership team. This year we kicked off a development programme for them starting with a 360° feedback exercise to build their awareness of their impact and perception within the business. Company Culture Ensuring the link between strategy, values and culture is critical in creating long-term sustainability in our working approach. In anticipation of the 2018 Corporate Governance Code – which applies to the Company from 1 October 2019 – we have been especially focused on defining what a successful culture at On the Beach looks like, and implementing a framework to embed this within the business. This work began with a Group-wide culture survey during June. With excellent response rates across the board, the overall results were very positive with lower cultural stress levels than average. The results have informed a refresh of our company values and we are now building on these with competency frameworks and a new approach to managing performance to drive the values and behaviours that support our strategic aims and that we want to see more of. The approach will empower people managers to have meaningful development conversations with their teams by providing a structured system of values led objective setting, supported by quarterly check-ins and monthly one to ones. ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Colleague Engagement and Feedback Engaging colleagues and bringing them along on our journey is key to achieving our vision of building Europe’s leading online beach holiday retailer. Pier Group, our employee engagement committee, is made up of colleagues from every department, and is chaired by our CEO. With meetings taking place every six weeks, they provide a forum for colleagues to share feedback and ideas, and for company news and initiatives to be communicated. To measure engagement, we run Hive, our annual employee survey which captures feedback on a range of topics, as well as gauging overall engagement levels. Engagement scores increased by 4% this year on 2018, and colleagues that would recommend On the Beach as a place to work increased by 5% on the prior year, with an average score of 8/10. Acting on this feedback is vital in demonstrating to colleagues that when they talk to us, we listen. In response, improving our benefits offering, investing in management training and introducing more social events between our offices are just some of the things we’ve implemented this year. Several new benefits have been introduced, including Death in Service, Cycle2Work Scheme and the Simplyhealth Optimise Health Plan. This provides colleagues with a range of healthcare benefits including cashback on everyday healthcare costs, access to a GP 24 hours a day, free face-to- face counselling, plus an Employee Assistance Line offering confidential specialist advice 24 hours a day so our employees feel well supported no matter where they are or what time it is. In 2019 we also introduced the flu jab, offered free of charge and on site to all colleagues. Colleague Communications This is an area of expertise that the business has invested in over the past 18 months and a range of channels are in place to support a communicative and collaborative culture, which not only informs but promotes two-way dialogue and encourages colleagues to share their thoughts, ideas and feedback. This year we have extended our internal communications capabilities, including hiring an additional Communications Officer, allowing us to focus on providing yet more ways to keep colleagues informed, engaged and listened to. The Board has determined that the most effective way of ensuring the employee voice is heard by the Board, is to have one or more designated Non-Executive Director(s) responsible for employee engagement. In the coming year, we will implement this into our employee engagement structure. Our quarterly magazine, Beach Life, is created by colleagues for colleagues and shares the latest news and updates from around the business and its brands, as well as features focused on our teams to help bring us all closer together. It also celebrates business triumphs to support our drive to succeed. Encouraging Innovation As a disruptive, tech-driven business, innovation is part of our heritage and critical in our day to day work. We strive to seek out new approaches, solutions and creative ideas. To support this, for the past three years we have held an annual ‘hack week’, in which our Development teams explore new projects, try out creative approaches, and test new tools. It’s just one of the ways that we foster creativity and support teams in expanding their knowledge. Investing in our Systems This year we saw the successful launch of a new HR management system, People HR, which provides leading- edge and mobile-enabled technology to manage our HR data, along with recruitment management, absence planning and monitoring, and more. The tool has automated previously manual processes, and provides improved workforce insights and analytics that allow us to deliver our People strategy in a way that our previous systems couldn’t support. The system will also provide the technology to support our new performance management approach from this autumn. Wellbeing We care deeply about our colleagues’ wellbeing, which is key in not only retaining and attracting the very best talent, but is also central to supporting the long-term sustainability of the business and its people. As a result, our colleague benefits and wellbeing package is something which we have invested in significantly this year. A regular all-company e-newsletter has launched to share timely business news and updates, as well as introduce our new starters to help keep us all working as a team and collaborating effectively. We hold quarterly, all-company, business updates, bringing our teams together for face-to-face sessions with the senior leadership team to hear about the latest Company performance. Throughout our office move and renovation, a range of communications channels were introduced to keep everyone informed throughout the process, as well as gather feedback from colleagues and maintain engagement. This included a dedicated microsite sharing video and photo content, news updates and a calendar with key dates. A working group, made up of departmental representatives, was also established to provide an open and two-way communication channel between teams within the business and this group met regularly before, during and after the move. Job Evaluation This year we embarked on a job evaluation programme across the Group in partnership with Willis Towers Watson, to create a job banding system. Measuring all roles within the business, this programme will support the business in transparent decision making, ensuring a fair pay structure and providing a clear career development path for colleagues. It will also be used to underpin a planned review of our employment terms and conditions in 2020. 37 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Corporate Social Responsibility “It’s been phenomenal to see the response from On the Beach, and so rewarding to see the 500,000th person join the donor register in the very office that Andy worked in for so many years.” Louise Clague, Andy Clague’s wife 38 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019OUR COMMUNITY From providing opportunities for young people to supporting charitable initiatives, making a meaningful contribution to the communities in which we operate is something which we are passionate about. Here are just a few of the community- focused activities that we were involved in this year: Charity The business has a policy in place to support colleague fundraising initiatives and events and we’ve been involved in everything from bike rides to bake sales and golf tournaments this year. A key focus for us over the past 12 months though has been the Stem Cell Donor Register, in memory of a much-loved colleague, Andy Clague, who passed away after a two-year battle with blood cancer in 2017. For people diagnosed with this type of illness, a blood stem cell donation is their best – and often only – chance of survival. As a result, this year we have been working with blood cancer charity DKMS to help encourage more people to join the Stem Cell Donor Register. Donor registration events, held at both our Operational and Digital Headquarters, saw an incredible response from colleagues, with more than 160 (over 40% of our workforce at the time) signing up to join the Stem Cell Donor Register and helping DKMS to surpass the half a million registered donor mark. Andy’s wife, Louise Clague, said “It’s been phenomenal to see the response from On the Beach, and so rewarding to see the 500,000th person join the donor register in the very office that Andy worked for so many years.“ We continue to support DKMS through PR activity and in providing support and advice to other businesses in the Northwest to run their own registration events. Getting Manchester On the Beach Having moved to the city centre in November, we set about bringing the beach to Manchester to help create a must-visit – and free – space for families to enjoy the summer, complete with a giant sandpit, picnic areas, deckchairs and playhouse. The space played host to a full season of family-friendly activities between May and September, helping to build brand relations and visibility in the city. A Part of the Digital Community We host regular events at our Aeroworks office; from the Northwest Ruby User Group and CRAP (Conversion Rate, Analytics, Product) Talks, to Digital Her events to support women in technology, user experience meet ups, and blogger get-togethers which have raised our profile in the region’s digital community as well as supported our recruitment aims. 39 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSCorporate Social Responsibility Supporting Women in Tech As a tech business, we are part of an industry which faces its own unique issues regarding gender and the shortage of women embarking on further education and careers in the fields of science, technology, engineering and mathematics (STEM). We are working closely with local community groups, including Manchester Digital on their Digital Her campaign, which focuses on inspiring and empowering girls to engage with STEM – related subjects at GCSE and A-level and giving them the confidence to explore careers in digital and technology roles. A number of our female colleagues are acting as ‘real role models’ for the campaign, sharing their route into the industry and insight into their roles, and working with young girls to make the tech industry more accessible and appealing. On the Beach has played host to the campaign’s Real Role Model Meetups, as well as running sessions at Digital Her’s Inspire and Empower Roadshow at Manchester’s Etihad Stadium. OUR SUSTAINABILITY Reducing our Environmental Impact We take our responsibility regarding the environment seriously and are committed to reducing our impact wherever possible. This year we have reduced our paper output by moving to ‘follow me’ printers, paperless payslips and making our colleague magazine available online. As part of a series of new benefits, we’ve focused on encouraging the use of more sustainable public transport with colleagues. This has included the introduction of the Cycle2Work Scheme, as well as interest-free loans on tram and train season tickets, making these options more affordable for our teams. Gender Pay Gap Report The benefits of a diverse and inclusive leadership and workforce are clear – both in terms of creating a thriving company culture and long-term sustainability. In March 2019, the Company published its second annual Gender Pay Gap Report, looking at the difference in average pay between all men and women within the Company as at April 2018. The report found on average, hourly pay for a woman to be 26.1% less than a man. There continue to be two main contributing factors to the Gender Pay Gap at On the Beach: the lower proportion of women within the most senior roles and the higher numbers of men within higher paid technology roles. It is our aim going forwards to promote and recruit more women into both senior and technology roles across the business, which we believe will help lessen the gender pay imbalance at On the Beach in the future. 40 Diversity and Inclusion Creating a diverse and inclusive workplace - and a company culture which supports this - is crucial for us as a business. To build a successful strategy to achieve this, we first sought to understand the make-up of our business by asking all colleagues to provide ‘Equality & Diversity Data’ within their personal People HR records. Collecting this information is considered to be best practice because it gives employers a powerful tool to measure success in creating a diverse and inclusive workplace by giving us a clear picture and understanding of the composition of our workforce. Over 80% of colleagues provided their data and we have now set up a new governance structure to shape and implement our diversity and inclusion strategy and associated action plan in line with this. Our Diversity and Inclusion Steering Group, chaired by Bill Allen, our Chief Supply Officer, meets on a monthly basis and is responsible for delivering the Diversity & Inclusion Action Plan in line with business requirements and feedback. The Steering Group is fed into by our Diversity and Inclusion Forum, a colleague engagement group focused entirely on this topic, made up of 10 self-nominated colleagues from across the business. Priority initiatives planned for this autumn include the roll-out of Unconscious Bias training to all colleagues and the introduction of Colleague Inclusion Networks. On the Beach has been granted a Tier 2 visa sponsorship licence which gives us access to a truly global talent pool and will contribute to the diversity of our colleagues. Employment of Disabled Persons The Group’s policies and procedures and Company Handbook contain policies in relation to the employment of disabled persons which are carefully adhered to. Selection for employment, promotion, training and development (as well as other benefits and awards) are made on the basis of merit, aptitude and ability and the Group does not tolerate discrimination in any form, including in relation to disabled candidates. The Group puts in place an Employee Wellbeing Plan (‘EWP’) with any employees who need support with any health conditions, physical or mental. Each EWP is designed to ensure the Group is meeting all the needs of the relevant employee, for example risk assessments, and details of all adjustments which need to be made to accommodate the additional needs of the relevant employees, e.g. disabled parking space, step-free access and specific workstation needs. Moreover, if any employees should become disabled during the course of their employment there are policies in place to oversee the continuation of their employment and to arrange training for these employees. ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Anti-Corruption and Bribery On the Beach is committed to operating ethically and employees do not actively seek gifts or favours from any of our suppliers, or from other persons or organisations that we associate with. We have top-level commitment to anti-bribery and corruption, and ensure all employees behave professionally, fairly and with integrity in all our business dealings and relationships wherever we operate, and implement and enforce effective systems to counter bribery. We are set up to fully support our employees, should they need to raise concerns about unethical, criminal or dangerous activities within the Group, and as such provide a confidential whistleblowing telephone line, through an independent and impartial organisation. Modern Slavery Act ‘Modern Slavery’ is a crime which encompasses slavery, servitude, forced or compulsory labour and human trafficking. The Group has a zero tolerance approach to any form of modern slavery. We are committed to acting with integrity and transparency to help eradicate any modern slavery in our business and supply chain. In accordance with the Modern Slavery Act 2015, the Group has a modern slavery statement which can be found on our website www.onthebeachgroupplc.com/responsibility. Greenhouse Gas Emissions Because the Group’s business is primarily online, with no retail footprint, our carbon emmissions are small, as demonstrated by the table below. The Group’s footprint has grown relative to last year as we now have three offices. Digital HQ in Manchester, Operational HQ in Cheadle and Classic in Worthing. We have calculated our Scope 1 and 2 greenhouse gas emissions in accordance with the mandatory reporting requirements set out in the Companies Act 2006 (Strategic Report and Director’s Reports) Regulations 2013 Greenhouse gas emissions by Scope Scope 1 Gas consumption Scope 2 Electricity consumption Total emissions Relative emissions, by Group revenue Unit 2019 Quantity1 2018 Quantity2 Tonnes CO2e 128.06 88.18 Tonnes CO2e Tonnes CO2e Tonnes CO2e/£m Group revenue 585.88 713.94 422.95 511.13 4.8 4.9 1 These figures include the combined CO2e totals for our Digital HQ, Operational HQ and Worthing office. The figure for our Operational HQ is based on information from 1 June 2018 to 31 May 2019 but we consider that the actual energy consumption during the reported period would not be materially different from the stated period. 2 These figures for our Operational HQ were based on information from 1 June 2017 to 31 May 2018 so did not correspond exactly to the FY18 reporting period, but we consider that the actual energy consumption during the reporting period would not be materially different from the stated period. 41 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Our Values We have a clear vision: We have a clear vision: To build Europe’s leading online beach To build Europe’s leading online beach holiday retailer via a single platform, holiday retailer via a single platform, multi-brand strategy. multi-brand strategy. Nurturing a culture which supports us in achieving this vision is Nurturing a culture which supports us in achieving this vision is essential, and our company values provide the framework essential, and our company values provide the framework around which that culture is built and thrives. around which that culture is built and thrives. In the years since our company values were first established the In the years since our company values were first established the business has grown and changed: our teams have expanded, business has grown and changed: our teams have expanded, our product has extended and our strategy has evolved. To our product has extended and our strategy has evolved. To ensure that our company values reflect the business that On ensure that our company values reflect the business that On the Beach has become and aspires to be – and support us in the Beach has become and aspires to be – and support us in achieving our vision - in 2019 we embarked on an exercise to achieving our vision - in 2019 we embarked on an exercise to review and refresh those values. review and refresh those values. Taking into account feedback from our employee engagement Taking into account feedback from our employee engagement and culture surveys - along with conducting workshops with and culture surveys - along with conducting workshops with the Leadership team and consulting colleagues - our previous the Leadership team and consulting colleagues - our previous company values were evolved into a new, memorable and company values were evolved into a new, memorable and meaningful set. Launching with colleagues in December 2019, meaningful set. Launching with colleagues in December 2019, these are now being embedded across the business and these are now being embedded across the business and throughout every stage of the colleague lifecycle. throughout every stage of the colleague lifecycle. We are proud to have the following values at the heart of the business: We are proud to have the following values at the heart of the business: We’reBold We’reBold We set our sights high and we We set our sights high and we deliver. That means that we seek deliver. That means that we seek out new adventures near and far, out new adventures near and far, do things differently and have the do things differently and have the confidence to make bold choices. confidence to make bold choices. And we like to stand out from the And we like to stand out from the crowd too. crowd too. We’reOpen We’reOpen We pride ourselves on being great We pride ourselves on being great hosts: warm and welcoming, a bit like hosts: warm and welcoming, a bit like your favourite beach. We’re a down your favourite beach. We’re a down to earth and friendly bunch who work to earth and friendly bunch who work together with a shared sense of together with a shared sense of purpose - and a purposefully open purpose - and a purposefully open and inclusive attitude. and inclusive attitude. We’reDynamic We’reDynamic Travel is part of who we are and Travel is part of who we are and embedded in everything we do. embedded in everything we do. We don’t sit still and are always We don’t sit still and are always moving to stay ahead, learn moving to stay ahead, learn quickly and find creative ways of quickly and find creative ways of doing things. Fast, flexible and doing things. Fast, flexible and full of energy; that’s us. full of energy; that’s us. 42 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Stakeholders Stakeholder Engagement in 2019 The Board recognises its responsibility to take into consideration the needs and concerns of our stakeholders as part of its discussion and decision-making process. Set out below are examples of how the Company has engaged with its various different stakeholders during the year. 43 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSStakeholder Case Study - Thomas Cook Collapse Handling the Thomas Cook Collapse: Supporting Stakeholders in a Crisis As an online travel agent, the failure of a key supplier has an impact on the business itself, as well as on our key stakeholders, requiring robust crisis management and intricate contingency planning to be in place. On 23 September 2019, the compulsory liquidation of Thomas Cook Group (“TCG”) - a significant airline partner of the Group – required a swift and effective response in order to minimise any such impact. Having previously been identified by the business as a potential risk, an in-depth planning process had been undertaken in advance to ensure that the potential impacts on all stakeholders – as well as the financial and operational impacts on the business – had been fully considered. When the risk became a reality, this meant that we were able to react quickly, helping to mitigate those risks. Key Stakeholder Impacts Investors Financial impact from company costs incurred and impact on share price Customers Unable to take holiday, changes to return travel plans or difficulty in re-booking a future holiday due to wider industry impact, financial losses Actions Taken Stakeholder Actions Taken Key stakeholder impacts Suppliers Incurring direct losses themselves, as well as through On the Beach bookings Colleagues Additional work and pressure, along with the need to be kept informed and provide accurate information to customers Investors An RNS was issued to the London Stock Exchange at 7am on the morning of the failure announcing that TCG was to enter into compulsory liquidation, including the news that there would be a one-off exceptional cost as a result of helping customers organise alternative travel arrangements. A conference call for analysts was held that same morning. Management spoke to each of the nine covering sell side equity analysts separately on this day, providing context and details as to how this will impact the Group both in the short and long-term. The collapse of the tour operator also sparked key investor interest in the weeks following the failure. Conversations with the top shareholders were held, with added context and detail as to how this will not only impact the Group, but sector as a whole. On the day and during the weeks following the collapse, management spoke to the key business leisure journalists at the national, investment and trade publications to outline the business’ position within such an unprecedented situation. This resulted in a positive array of media coverage which was supplemented by the commentary produced from the analysts as part of their research notes and forecasts. Furthermore, on the back of this market change, the Group recognised that there was the opportunity to take additional market share at an increased rate. As part of the Pre Close Trading Update on 22 October 2019, it was announced that the Group has started to strategically increase its marketing investment both online and offline to attract new customers to onthebeach. co.uk, sunshine.co.uk, Classic Collection and Classic Package Holidays. 44 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Stakeholder Actions Taken Suppliers Customers Colleagues What our customers had to say All suppliers and regulators were communicated with promptly early in the morning of the collapse, and regularly thereafter, to outline actions being taken by the business and to provide updates. Policies and customer communications were prepared and agreed in advance, enabling us to communicate with customers quickly the same morning of the collapse across a broad spectrum of channels - from SMS messaging, email, social media, IVR and an on-site Q&A page. Development work was carried out in advance to ensure that the technical capabilities were in place to process and issue refunds promptly should a failure occur. On average, customers were able to collect these refunds on the same day, accessible in their bank accounts within three to five days. Our operations teams worked around the clock to maximise the opportunity for customers to continue to take their holiday, to re-book holidays and issue refunds when this wasn’t possible. We provided support to customers in a host of ways – including repatriating those not covered by the CAA repatriation programme, offering refunds on flight only TCG bookings and providing all those with cancelled bookings with a goodwill On the Beach voucher. Social media played an important part in our customer service response, with all messages received via these channels – more than 10,000 in total – being responded to directly by a member of the team. Fantastic feedback was received in response to the service provided across the board. A core crisis response team was established in advance to set up processes and carry out any preparatory work needed. This team was brought together immediately following the failure announcement and a series of regular video conferences, which took place several times daily, allowed for regular ‘face to face’ meetings between our Digital HQ, Operational HQ and our Worthing office. A communication was issued first thing in the morning of the failure to notify all colleagues of the news, the steps being taken by the business and how we would be looking after customers during this time, with regular updates following. Prior preparation meant that plans were in place for colleagues when the collapse took place and they were able to take actions immediately, and have answers ready to respond to customers, reducing associated stress and pressure. Recognising the extraordinary efforts of our teams and maintaining morale was incredibly important, with thanks given in colleague communications, as well as a range of activities designed to maintain spirits, including company breakfasts and lunches, to give recognition to the outstanding work being put in by teams. I’m absolutely amazed at the response from On the Beach. Absolutely FANTASTIC. Had a full refund by this afternoon and that was without me contacting them. I take my hat off to all the staff, you’ve done amazing in a very difficult situation with no stress to your customers. I won’t consider ever booking with another company again. And thank you for the £75 voucher, a lovely kind gesture. Honestly, I’m so impressed. 45 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSGovernance 47 Chairman’s Introduction 48 Directors’ Biographies 51 Corporate Governance Statement 58 Report of the Nomination Committee 60 Report of the Audit Committee 66 Directors’ Remuneration Report 84 Other Statutory and Regulatory Disclosures 88 Statutory Auditor’s Report to the Members of On the Beach Group plc 95 Statement of Directors’ Responsibilities in Respect of the Annual Report and the Financial Statements 46 46 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Chair’s Introduction I am pleased to present our corporate governance report, which outlines the details of our corporate governance arrangements and reports on the activities of the Nomination, Remuneration and Audit Committees during the year. as a Non-Executive Director on 6 February 2019. I took on the role of Chair of the Board from 1 April 2019 and David resumed his role as Senior Independent Director and continues to chair the Remuneration Committee. Compliance with UK Corporate Governance Code This year the Company was subject to the 2016 edition of the Financial Reporting Council UK Corporate Governance Code (‘Code’). I am pleased to confirm that the Company complied with the Code except for a small number of provisions that are explained in more detail on page 51. The areas of non- compliance relate to Board and Committee composition and largely stem from the fact that the Board was a Director down for a short period of time following Lee Ginsberg’s resignation on 6 February 2019. The areas of non-compliance were either remedied upon my appointment as Chair or will be remedied once an additional Non-Executive Director has been appointed, the search for which is underway. The Board has spent time considering the changes brought in by the 2018 UK Corporate Governance Code which will apply to the Company for the financial year ending 30 September 2020. The new Code puts more emphasis on stakeholder engagement, diversity and corporate culture, and we are confident that next year we will be able to report that the Company is compliant with this version of the Code. As mentioned earlier, we intend to appoint a further non- executive director to the Board and you can read more about this in the Nomination Committee report on pages 58 to 59. Board Evaluation We have carried out a full, thorough and tailored internal Board evaluation exercise this year. This covered the Board itself, each of the Committees, and an evaluation of each individual Director’s performance. Details are provided on pages 55 to 56. An external Board evaluation exercise is currently being planned and will be reported on next year. Future Priorities During the coming year, the Board will continue to focus on the progress made against our strategic priorities and performance. In addition, we will oversee the implementation of the new Code, and ensure that the Company’s purpose, values and strategy are aligned with the Company’s culture. The report which follows this introduction will set out in detail how the Company ensures compliance with the provisions of the 2016 Code and its progress to preparing for compliance with the 2018 Code. Richard Pennycook Chair of the Board On the Beach Group plc 27 November 2019 Board Composition and Diversity Through the Nomination Committee, we keep the composition of the Board under review to ensure it is refreshed to reflect the skills, experience and diversity required to remain effective. Over the last 12 months there have been some changes to the Board. Lee Ginsberg stepped down as Chair of the Board on 30 November 2018 to focus on other commitments and David Kelly was appointed interim Chair from this date. Lee resigned 47 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORT Board of Directors* Simon Cooper CHIEF EXECUTIVE OFFICER Paul Meehan CHIEF FINANCIAL OFFICER Richard Pennycook NON-EXECUTIVE CHAIR OF THE BOARD AND CHAIR OF NOMINATION COMMITTEE Appointed to Board: 17 August 2015 Independent: No Listed Company Appointments: None Committee Memberships: Disclosure (Chair) Appointed to Board: 16 January 2017 Independent: No Listed Company Appointments: None Committee Memberships: Disclosure Appointed to Board: 1 April 2019 Independent: Yes Listed Company Appointments: Howden Joinery Group plc Committee Memberships: Nomination (Chair), Remuneration, Audit and Disclosure Simon Cooper is the founder and Chief Executive Officer of On the Beach. Simon began his career in the travel industry while attending university when he founded ski holiday company ‘On the Piste’ in 1996, which went on to be purchased by Thomson (now TUI) in 2008. Simon has extensive travel experience, with over 20 years in the industry, and as the founder of On the Beach he has a detailed understanding of the business and all operations. He led the company through both its IPO process in 2015 and the acquisitions of Sunshine.co.uk and Classic Collection Holidays. As a seasoned entrepreneur Simon brings key expertise in strategy development and execution to the Company. Simon is also a Non-Executive Director of CurrentBody.com Limited. Prior to joining On the Beach, Paul was a Director at Gala Coral Interactive (Gibraltar) Ltd. (now part of GVC Holdings plc). Paul joined Gala Interactive as Finance Director in April 2012, where the new management team successfully relaunched the online gaming businesses in Gibraltar. Richard Pennycook joined On the Beach as Chair of the Board and Chair of the Nomination Committee on 1st April 2019. Richard brings extensive experience in both private and public retail and consumer businesses, including fast-growing online businesses. Paul was the Director responsible for the online aspects of the merger between Gala Coral Group Limited and Ladbrokes plc. He previously held CFO positions in a number of businesses in the UK, within the online retail, gaming and technology industries. Paul brings both financial and commercial expertise within the B2C and B2B environments, especially in business transformation, mergers and acquisitions. As a certified Accountant, Paul’s previous experience means he brings knowledge of both the online and technology industries to the Company. Richard is also Non-Executive Chairman of Howden Joinery Group plc, a position he has held since 2016, having joined the Board as a Non-Executive Director in 2013. He was previously Non-Executive Chairman of The Hut Group from 2012 to 2018, having worked with this fast- growing technology unicorn in an advisory capacity since 2008. Prior to his Non-Executive career, Richard was CEO of The Co-operative Group from 2013 to 2017, and before this held main Board roles at a number of public companies, including Wm Morrison Supermarkets plc, RAC plc, HP Bulmer Holdings plc, Laura Ashley Holdings plc and J D Wetherspoon plc. 48 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Elaine O’Donnell NON-EXECUTIVE DIRECTOR AND CHAIR OF AUDIT COMMITTEE David Kelly NON-EXECUTIVE DIRECTOR, CHAIR OF REMUNERATION COMMITTEE AND SENIOR INDEPENDENT DIRECTOR Appointed to Board: 3 July 2018 Independent: Yes Listed Company Appointments: Games Workshop Group PLC Studio Retail Group plc Committee Memberships: Audit (Chair), Nomination, Remuneration Appointed to Board: 28 August 2015 Independent: Yes Listed Company Appointments: The Gym Group plc Reach PLC Committee Memberships: Audit, Nomination, Remuneration (Chair) Through her other appointments Elaine brings to the Board extensive experience as a Non-Executive Director and Chair of not only Audit, Nomination and Remuneration committees but also as Chair of the Board of the wholly owned subsidiary Alliance Fund Managers (AFM). Elaine is a Chartered Accountant and brings online retail industry experience to the Company, as well as experience in regulated industries. Elaine was previously a Partner at Ernst & Young LLP where she specialised in Corporate Finance, Mergers and Acquisitions. David joined On the Beach in August 2015 as Non-Executive Director and Chair of the Remuneration Committee. His previous experience spans a variety of complementary sectors, and he brings online travel industry knowledge from positions at Lastminute.com, Holiday Extras and Love Home Swap, along with a broad ecommerce background having held senior roles at Amazon, eBay and Qliro. His current appointments also align with his position at On the Beach as they afford him extensive knowledge of both Non-Executive Directorships and Chair of Committee Roles. Specifically at On the Beach, David has in-depth knowledge of the business, being the Group’s longest serving Non-Executive Director and the Company’s Senior Independent Director. Chair Executive Directors Non-executive Directors 40% 40% 20% 20% 40% 40% Simon Cooper 15 Paul Meehan 2 Richard Pennycook 1 Elaine O’Donnell 1 David Kelly 4 Tenure in years * Lee Ginsberg was a Director during the year but resigned on 6 February 2019. 49 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE“ Hannaan Junior UX Designer There’s a real energy and curiosity that thrives within the User Experience team and wider business – we’re focused on finding innovative ways to make the experience of booking beach holidays exciting and seamless for our customers.” Favourite Beach: Mitjaneta Beach, Spain 50 50 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Corporate Governance Statement Details and explanations of the application of the principles of corporate governance are set out in the following sections of this Corporate Governance Statement. Role of the Board The Board is responsible for leading and controlling the Group and has overall authority for the management and conduct of the Group’s business, strategy and development. The Board is also responsible for ensuring the maintenance of a sound system of internal control and risk management (including financial, operational and compliance controls and for reviewing the overall effectiveness of systems in place) and for the approval of any changes to the capital, corporate and/or management structure of the Group. The Executive Directors are supported by an Executive team to whom the Board delegates the detailed implementation of matters approved by the Board and the day-to-day operational aspects of the business, who cascade this responsibility throughout the Group. The Board has close contact with the wider Executive team, who are regularly invited to attend meetings of the Board to provide functional presentations in relation to strategic matters of interest to the Board. Matters Reserved to the Board The Board has reserved certain specific matters to itself for decision. The full schedule of matters reserved to the Board is available in the Corporate Governance section of the Company’s website, or from the Company Secretary upon request, but the key matters include: › Approval of (and changes to) annual operating and capital expenditure budgets; › Extension of the Group’s activities into new business or geographic areas; › Changes to the Group’s capital or corporate structure, including acquisitions and disposals; › Financial reporting and controls; › Internal controls, including maintenance of a sound system of internal control and risk management; › Approval of major contracts and commitments; › Communication with shareholders; › Board membership and senior appointments; › Remuneration; › Delegation of authority to committees and below Board level; › Corporate governance matters; and › Approval of policies adopted by the Group. Introduction This section explains key features of the Company’s governance structure and how it complies with the UK Corporate Governance Code published in 2016 by the Financial Reporting Council (Code). This section also includes items required by the Listing Rules and the Disclosure Guidance and Transparency Rules. The Code is available on the Financial Reporting Council website at www.frc.org.uk. Compliance with the 2016 Code The Company is committed to achieving and maintaining the highest standards of corporate governance. During the financial year ending 30 September 2019, the Company was compliant with the Code except for: › Provision B.1.2. For part of the year, the Company did not comply with the requirement that at least half of the Board, excluding the Chair, should compromise of independent Non-Executive Directors. This non-compliance arose when Lee Ginsberg stepped down as a Non-Executive Director on 6 February 2019 and was remedied upon Richard Pennycook’s appointment as Chair on 1 April 2019. › Provision C.3.1. The Company did not comply with the requirement for the Audit Committee to have at least three independent Non-Executive Directors (or two in the case of smaller companies). Whilst the Audit Committee currently has three independent Non-Executive Directors, one of those is the Chair. Under the Code, the Chair may only be a member of the Audit Committee in smaller companies. Whilst the Company is not currently a constituent of the FTSE 350, it was a constituent from March 2018 to December 2018 and therefore is technically not classed as a smaller company for this financial year. We are also mindful that under the 2018 version of the UK Corporate Governance Code, the Chair should not be a member of the Audit Committee (regardless of whether the company is a smaller company or not). Accordingly, the search for an additional Non-Executive Director is underway (as explained in more detail in the Nomination Committee Report on page 58) and Richard Pennycook will accordingly step down as a member of the Audit Committee once the new Non-Executive Director has been appointed. › Provision D.2.1. The Company did not comply with the requirement for the Remuneration Committee to have at least three independent members. The Chair can be a member of the Remuneration Committee but is not permitted to chair it. Following Lee Ginsberg’s resignation on 6 February 2019, there were only two independent members of the Remuneration Committee and David Kelly, who is Chair of the Remuneration Committee, was appointed interim Chair of the Board. Accordingly, from the date that David Kelly was appointed interim Chair of the Board (22 November 2018) until Richard Pennycook’s appointment on 1 April 2019, the Company was not in compliance with this provision of the Code. 51 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE Corporate Governance Statement BOARD OF DIRECTORS Executive Directors Nomination Committee Remuneration Committee Audit Committee Disclosure Committee Executive Team Board Committees The Board has delegated certain responsibilities to four Board Committees to assist it with discharging its duties. A summary of the terms of reference for each Committee is set out below but the full terms of reference are available on the Company’s website and from the Company Secretary upon request. Committee Role and terms of reference Members Report on page Audit Committee Reviews and reports to the Board on the Group’s financial reporting, internal control and risk management systems, whistleblowing, internal audit and the independence and effectiveness of the Statutory Auditor. Elaine O’Donnell (Chair) David Kelly Richard Pennycook (from 1 April 2019) Lee Ginsberg (until 6 February 2019) Remuneration Committee Responsible for all elements of the remuneration of the Executive Directors and the Chair, and other members of senior management. David Kelly (Chair) Elaine O’Donnell Richard Pennycook (from 1 April 2019) Lee Ginsberg (until 6 February 2019) Nomination Committee Reviews structure, size and composition of the Board and makes appropriate recommendations to the Board Richard Pennycook (Chair & member from 1 April 2019) David Kelly Elaine O’Donnell Lee Ginsberg (Chair until 30 November 2018, member until 6 February 2019) Responsible for overseeing the Company’s compliance with the Market Abuse Regulation and making decisions (with support of advisers) on when information must be disclosed to the market. Simon Cooper (Chair) Paul Meehan Richard Pennycook (from 1 April 2019) Lee Ginsberg (until 30 November 2018) David Kelly (1 December 2018 until 31 March 2019) Disclosure Committee 52 60 66 58 N/A ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Board and Committee Meetings Board meetings (and Audit Committee meetings, where appropriate) are scheduled to coincide with the Company’s financial reporting calendar, including the announcement of full and half year-results, and the AGM. The Company has a Board and Committee calendar, which is updated regularly and which sets out all matters to be covered by the Board and Committees over a rolling twelve-month period, including strategy, standard business, matters directly linked with financial reporting and results, corporate governance requirements and ongoing training for the Board. Nine scheduled Board meetings were planned and held during the financial year. A number of other Board meetings, Committee meetings and telephone conferences were also held during the year, as the need arose. The table below shows the actual number of meetings attended and the maximum number of scheduled meetings the Directors could have attended. Director Board meetings Audit Committee Remuneration Committee Nomination Committee Richard Pennycook1 Simon Cooper Paul Meehan David Kelly Elaine O’Donnell Lee Ginsberg2 4/4 9/9 9/9 9/9 9/9 3/3 1 Richard Pennycook was appointed on 1 April 2019 2 Lee Ginsberg resigned on 6 February 2019 3/3 - - 6/6 6/6 2/2 Division of Responsibilities The roles of Chair and Chief Executive Officer are exercised by different individuals. The division of responsibilities between the Chair and the Chief Executive Officer has been defined, formalised in writing, and approved by the Board. Non-Executive Chairman Richard Pennycook, as Non Executive Chair is responsible for: › The leadership and effectiveness of the Board and setting its agenda and ensuring sufficient time is available for discussion of agenda items, in particular strategic issues; › Ensuring that all Directors receive accurate, timely and clear information on financial, business and corporate matters to make sound Board decisions; › Facilitating the effective contribution of Non-Executive Directors; › Ensuring constructive relations between Executive and Non-Executive Directors; › Ensuring effective communication with shareholders; › Ensuring that the performance of individual Directors, the Board as a whole and its Committees is evaluated at least once a year. 2/2 - - 6/6 6/6 2/2 1/1 - - 5/5 5/5 3/3 Chief Executive Officer Simon Cooper, as the Chief Executive Officer, is responsible for managing the business and driving it forward, including the responsibility for: › The operations of the Group. › Developing Group objectives and strategy, having regard to the Group’s responsibilities to its shareholders, customers, employees and other stakeholders; › Following presentation to, and approval by, the Board, for the successful implementation and achievement of those strategies and objectives; › Ensuring that the Group’s businesses are managed in line with strategy and approved business plans, and comply with applicable legislation and Group policy; › Ensuring effective communication with shareholders; and › Setting Group human resource policies, including management development and succession planning for the senior executive team. Senior Independent Director David Kelly was appointed as the Senior Independent Director on 3 September 2018. The following additional responsibilities fall within the remit of the Senior Independent Director: acting as a sounding board for the Non-Executive › Chair and supporting him in ensuring the Board is › effective and that constructive relations are maintained; acting as an intermediary for the other Directors when necessary; › being available to shareholders in order to understand their issues and concerns in order to relay to the Board. 53 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE Corporate Governance Statement Non-Executive Directors In addition to the Chair, the Company has two independent Non-Executive Directors, who are appointed to bring independence, impartiality, wide experience, special knowledge and personal qualities to the Board. The Non-Executive Directors provide a strong independent element on the Board and are well placed to constructively challenge and help develop proposals on strategy and succession planning. Regularly, following the end of Board meetings the Chair and Non-Executive Directors meet formally without the Executive Directors present in order to provide evaluation on the Executive Directors. Similarly, the Non-Executive Directors meet to evaluate and appraise the Chair’s performance. These regular appraisals are important to evaluate the knowledge and skills of members of the Board. Where Directors have a concern which cannot be resolved about the Company or a proposed action, their concern would be minuted by the Company Secretary following the relevant Board or Committee meeting. No such concerns arose during the financial year. Company Secretary The Company Secretary acts as secretary to the Board and its Committees and her appointment and removal is a matter for the Board as a whole. The Company Secretary is a member of the senior leadership team and all Directors have access to her advice and services. In certain circumstances, Board Committees and individual Directors may wish to take independent professional advice in connection with their responsibilities and duties, and, in this regard, the Company will meet the reasonable costs and expenses incurred and the Company Secretary will assist in arranging such advice. Insurance Cover The Company has made arrangements for appropriate insurance cover to be put in place in respect of legal action against its Directors. Board Composition and Independence During the year the Board reviewed the overall balance of skills, experience, independence and knowledge of the Board and Committee members. Further details of this review are set out in the Nomination Committee report on pages 58 to 59. As required by the Code, at least 50% of the Board, excluding the Chair, are independent Non-Executive Directors. The Board is currently comprised of five members: the Non-Executive Chair of the Board, two Executive Directors and two Non- Executive Directors. Details of the skills and expertise of each member of the Board is set out in the profiles on pages 48 and 49. Non-Executive Directors are required to be independent in character and judgement. The Board has determined that all the Non-Executive Directors who served during the year were independent and that, before and upon appointment as Chair, Richard Pennycook met the criteria of independence as outlined in the Code. 54 The Board also believes that each of the Non-Executives has retained independence of character and judgement and has not formed associations with management or others that may compromise their ability to exercise independent judgement or act in the best interests of the Group. Appointments to the Board The Nomination Committee, which is chaired by the Chair of the Board and comprises all Non-Executive Directors, leads the process for Board appointments, which are made on merit, against objective criteria, and makes recommendations to the Board. The Board can appoint any person to be a Director, either to fill a vacancy or as an addition to the existing Board. Any Director so appointed shall hold office only until the next AGM and shall then be eligible for election by the shareholders. Non-Executive Directors are typically expected to serve two three-year terms, although the Board may invite the Director to serve for an additional period. Any term beyond six years is subject to a rigorous review, taking into account the need for progressive refreshment of the Board. For further details of the work of the Nomination Committee, including the appointment of Richard Pennycook as Chair of the Board, please see the report of the Nomination Committee on pages 58 to 59. Diversity The Group is committed to creating a diverse and inclusive workplace. Please refer to page 40 for more details on our diversity and inclusion strategy. For any Board vacancies that arise, the recruitment process will be led by the Nomination Committee who will ensure that diversity, in all forms, is taken into consideration. See the report of the Nomination Committee on page 59 for further details. As at 30 September 2019, the average age of our employees was 33 years old and the gender split between employees was as follows: Other employees 40% 60% Senior Management 78% 22% Directors of the Group 80% 20% 0% 20% 40% 60% 80% 100% Male Female ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 AGM Our Annual General Meeting will be held at 11am on 6 February 2020 at Aeroworks, 5 Adair Street, Manchester M1 2NQ. All shareholders will have the opportunity to attend and vote, in person or by proxy, at the AGM. The notice of the AGM is available on our corporate website and sets out the business of the meeting and an explanatory note. Separate resolutions are proposed in respect of each substantive issue. All members of the Board will be present at the AGM and will be able to answer any questions from shareholders. Commitment and External Directorships The Board is satisfied that all the Non-Executive Directors are able to devote sufficient time to the Company’s business. Non-Executive Directors are advised when appointed of the time required to fulfil the role and asked to confirm that they can make the required commitment. Each individual’s commitment to their role is reviewed annually and any external appointments or other significant commitments of the Directors require the prior approval of the Board. Letters of appointment for the Non-Executive Directors are available for inspection at the AGM. The Chair and the Non-Executive Directors hold external directorship of listed businesses, and these are disclosed within their profiles on pages 48 and 49. The CEO is a Non-Executive Director of CurrentBody.com Limited. The Board is comfortable that the external directorships do not impact on the time that any director devotes to the Company and in the Board’s view, these external directorships enhance the collective experience of the Board. Directors’ Conflicts of Interests Directors have a statutory duty to avoid situations in which they have or may have interests that conflict with those of the Company, unless that conflict is first authorised by the Board. This includes potential conflicts that may arise when a Director takes up a position with another Company. The Company’s Articles of Association enable the Board to authorise potential conflicts of interest which may arise and to impose limits or conditions, as appropriate, when giving any authorisation. Any decision of the Board to authorise a conflict of interest is only effective if it is agreed without the conflicted Director(s) voting or without their vote(s) being counted. In making such a decision, the Directors must act in a way that they consider is in good faith, and will be the most likely to promote the success of the Company. The Company maintains a register of related parties and register of Directors’ interests, which is reviewed by the Board on a regular basis. Development of Directors The Company has an induction programme for all new Directors joining the Board which was completed by Richard Pennycook during the year. Each induction is tailored to the relevant Director’s experience and background with the aim of enhancing their understanding of the Group’s strategy, business, operating divisions, employees, customers, suppliers and advisers and the role of the Board in setting the tone of our culture and the governance standards. All Directors are kept informed of changes in relevant legislation and regulations and of changing financial and commercial risks, and the Chair continually reviews the training needs of Directors according to their individual needs. This review is ongoing and forms part of the annual appraisal process. The Directors attend development days during the year where they are provided with updates on developments and training on certain areas in order to deepen and develop their understanding of particular areas of the business. These development days are in addition to the regular training arranged by the Company Secretary. Directors also undertake individual training which gives them the opportunity to undertake a ‘deep dive’ into certain areas of the business. Information and Support All Directors have access to the Company Secretary, who advises them on governance matters. Directors receive and access their Board papers via an electronic portal. The Chair and the Company Secretary work together to ensure that Board papers are clear, accurate and of sufficient quality to ensure the Board can discharge its duties. Specific business-related presentations are given by senior management as part of Board meetings where appropriate. As well as the support of the Company Secretary, Directors have access to the Company’s professional advisers where considered necessary. Board Evaluation The Board is committed to, and understands the value and importance of, the evaluation and appraisal of the performance of the Board, its Committees, and of the individual Directors and the Chair. The Board has carried out an internal evaluation to review the composition, experience and skills to ensure that the Board and its Committees continue to work effectively and that the Directors are demonstrating a commitment to their roles. As part of the evaluation process, questionnaires were completed by each Board member in order to compare performance against the Code. The questionnaire covered leadership, effectiveness, accountability, shareholder relations, meetings and administration. The Board approved the agreed questionnaires and then these were completed electronically. Results were analysed and the Company Secretary prepared a report for the Chair. This was tabled for discussion at a Board meeting. 55 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCECorporate Governance Statement The evaluation established that the Board and its Committees were operating effectively and efficiently, with good leadership and accountability. The Board dynamic works well, with great dedication and commitment of each of the Board members, and with the appropriate level of support and challenge from Non-Executive Directors. No major issues arose but the evaluation identified some actions to be taken to further improve Board effectiveness. During the year, the Senior Independent Director evaluated the performance of the Chair and the Chair evaluated the performance of each Director. In addition, the Non-Executive Directors met independently from the Executive Directors to discuss with the Chair the overall functioning of the Board and the Chair’s contribution in making it effective. The Executive Directors, along with the senior leadership team, were appraised through an externally facilitated 360o review process. Following the above evaluations, the Directors concluded that the Board and its Committees operate effectively and that each Director continues to contribute and demonstrates commitment to the role. Investor Relations The Company is committed to engaging and maintaining an active dialogue with all of its shareholders. The Company has rolled out an investor relations programme enabling dialogue and meetings between the Executive Directors and institutional investors, fund managers and analysts. At these meetings, a wide range of relevant issues including strategy, performance, management and governance are discussed within the constraints of information which has already been made public. The Board is aware that institutional shareholders may be in more regular contact with the Company than other shareholders, but care is exercised to ensure that any price-sensitive information is released to all shareholders, institutional and private, at the same time, in accordance with legal requirements. Questions from individual shareholders are generally dealt with by the Executive Directors. All shareholders can access announcements, investor presentations and the Annual Report on the Company’s corporate website (www.onthebeachgroupplc.com). The Chair of the Board, Richard Pennycook, is available to shareholders if they have concerns which cannot be raised through the normal channels or if such concerns have not been resolved. Arrangements can be made to meet with him through the Company Secretary. Approved by the Board and signed on its behalf: K Vickerstaff Company Secretary 27 November 2019 56 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019I S T R A T E G C R E P O R T G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Ezgi Talent Manager “ As the business grows, it’s essential that we’re able to attract the right people to help us realise our goals, whilst maintaining our unique culture at the same time. The Talent team is involved at all stages of the recruitment process, which means we can really take the opportunity to showcase exactly what On the Beach has to offer and tailor the experience for each candidate throughout the journey.” Favourite Beach: Agios Stefanos ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 57 57 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE Report of the Nomination Committee Richard Pennycook Chairman, Nomination Committee I am pleased to introduce the report of the Nomination Committee for the year ended 30 September 2019. Committee Membership › The members of the Committee are as set out below. › Lee Ginsberg was Chair of the Committee until November 2018. Lee was succeeded by David Kelly who acted as interim Chair of the Committee until my appointment in April 2019. Lee stepped down as a member of the Committee in February 2019. › All members of the Committee are considered to be independent. Committee Meetings › The Committee meets at least twice annually and at such other times as are necessary to discharge its duties. › Committee Members do not participate in discussion or vote on matters on which they are conflicted. › Meetings are attended by the Chief Financial Officer, Chief Executive, Company Secretary and other relevant attendees by invitation. › The Committee met five times during the year and member attendance is shown below: Richard Pennycook (Chair) David Kelly Elaine O’Donnell Lee Ginsberg Members from April 2019 August 2015 July 2018 August 2015(1) Meetings attended 1/1 5/5 5/5 3/3 (1) Lee Ginsberg stepped down on 6 February 2019. Role of the Committee › The Committee’s responsibilities are set out in its terms of reference which are reviewed annually and were recently updated in line with the 2018 Code. The terms of reference can be found at the Company’s website at www.onthebeachgroupplc.com. The Committee’s main responsibilities are: › Keeping under review the size, balance and composition (evaluating the balance of skills, knowledge, experience and diversity) of the Board and its Committees, and making recommendations to the Board on any desired changes; › Overseeing the succession planning for the Board and executive team, including the identification and assessment of potential candidates and making recommendations to the Board; › Leading the process for Board appointments by identifying and nominating, for the approval of the Board, candidates to fill Board vacancies as and when they arise and ensuring there is a formal and transparent procedure for any such appointment; › Reviewing the time commitment required from the Non-Executive Directors; and › Keeping under review the leadership needs of the Group in respect of both its Executive Directors and other senior management, including an assessment of the time commitment expected and recognising the need for availability in the event of crises. 58 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Nomination Committee activities in 2019 Appointment of New Chair of the Board Lee Ginsberg announced his intention to step down as Chair of the Board in November 2018. David Kelly, as the Senior Independent Director, was appointed interim Chair of the Board and interim Chair of the Committee pending appointment of a permanent Chair of the Board. The Nomination Committee led the search for the new Chair of the Board, beginning with preparation of a description of the role and the capabilities required for it. The Company appointed an external agency, The Up Group, to assist in the search. The Up Group had previously been engaged in relation to the search for a senior management role but they have no connection otherwise with the Company. A detailed search and selection process then followed. A wide range of candidates were assessed against the agreed criteria for the role, with a thorough process resulting in a shortlist of preferred candidates, which was given final consideration by the Committee. The Committee subsequently made a recommendation to the Board, culminating with the announcement of my appointment as Chair of the Board with effect from 1 April 2019, on 26 March 2019, subject to approval by shareholders at the forthcoming AGM. Board Composition and Skills The Board currently consists of the Non-Executive Chair, two Executive Directors and two Non-Executive Directors. During the year, a new skills matrix was created to highlight the skills and experience of the Board members and to identify where there were opportunities to further grow the Board’s collective knowledge and to inform the Committee of those skills it may wish to prioritise when preparing future Non-Executive Director role briefs. Having conducted the above skills exercise and looking at the knowledge, experience, background and diversity currently represented by the Board, the Committee considers that the Board has a good blend of commercial and governance experience and that the diverse range of skills and backgrounds of the Directors prevents any undue individual or collective influence. The Committee however is mindful that the Chair of the Board should not be a member of the Audit Committee under the Code and the Committee believes that appointing an additional Non-Executive Director will ensure the Board continues to have the skills and experience required to support the development and delivery of the Company’s strategy. Taking into consideration the output of the skills matrix exercise, the Committee has drawn up a candidate brief and a search is currently underway to appoint a new Non-Executive Director. The Committee also reviewed the length of service of its Non-Executive Directors, all of whom have a tenure of less than three years other than David Kelly, who was initially appointed as a director in August 2015. In September 2018, after careful consideration, the Board agreed (following the Committee’s recommendation) to re-appoint David as Non- Executive Director for an additional three-year term. Succession Planning Throughout the reporting period the Committee continued to review the leadership talent pipeline and succession plans for the Board, and senior management, and the designated short and long-term caretakers for each Board and senior role, focusing on resolving key areas of vulnerability. The Committee takes an active interest in the quality and development of talent and capabilities within the Group, ensuring that appropriate opportunities are in place to develop high-performing individuals. Diversity The Company fully recognises the benefit of diversity, including gender and ethnic diversity, when the Committee is searching for candidates for Board appointments. Diversity (in all respects including in terms of socio-economic background, race, ethnicity, gender, sexual orientation, age, physical abilities, religious and political beliefs) is critical to the future success of the business and the Committee fully appreciates the benefit of a diverse Board in ensuring the broadest range of views, constructive debate, challenge and good decision making. The Nomination Committee have again considered the diversity of the Board during the year, noting that in order to bring the widest range of perspectives to the Company, which would in turn lead to increased creativity, innovation, debate, understanding and ultimately better decision making as a whole, diversity should remain a key factor in determining appropriate nominations. The Board agrees with the recommendations of the Women on Boards Davies Review (published October 2015), the FTSE Women Leaders Hampton-Alexander Review (published November 2016) and the Report into Ethnic Diversity of UK Boards Parker Review (published October 2017) and is committed to diversity on the Board. Whilst noting the recommendations of the Reviews, the Company’s policy is to appoint the best possible candidate considered on merit and against objective criteria, rather than set objectives on gender that may deflect from achieving this fundamental target on each occasion. Subject to these requirements the Committee has an ongoing commitment to seek a more diverse representation at Board level and continued monitoring of all aspects of diversity across the Board, Committees and Company have and will continue to form part of the Committee’s function. Further details on diversity and inclusion are set out in the CSR section of this report from page 40. Board Evaluation & Re-election of Directors Having considered the results of the Board evaluation and the Director appraisal process as described on pages 55 to 56 and after evaluating the balance of skills, knowledge, independence and experience of each Director, the Committee has recommended that all Directors not appointed since the last AGM stand for re-election at the 2020 AGM. As I was appointed after the last AGM, I will seek election at the forthcoming AGM. Richard Pennycook Chairman, Nomination Committee 27 November 2019 59 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEReport of the Audit Committee Elaine O’Donnell Chair of the Audit Committee I am pleased to present the Audit Committee Report for 2019. This report is intended to provide shareholders with an insight into how key topics were considered during the year, together with how the Committee discharged its responsibilities. This year the Committee has overseen a competitive tender process for a new Statutory Auditor. As announced on 7 March 2019, Ernst and Young LLP (“EY”) have been identified as the new Statutory Auditor. The appointment of EY as Statutory Auditor is a matter which requires shareholder approval, and I would like to recommend that you support this appointment at the forthcoming AGM. With the assistance of management and EY, the Committee has considered the main financial reporting issues, estimates and judgements, and we believe that the information in the Annual Report is fair, balanced, and understandable and clearly explains progress against our strategic and operating objectives. There has been no correspondence from the Financial Reporting Council during the financial year. We believe that rigorous internal controls and robust risk management processes are an essential part of delivering shareholder value. The Committee has assisted the Board in performing a review of effectiveness of the processes and systems in place. Elaine O’Donnell Chair of the Audit Committee Committee Membership › The Committee is chaired by Elaine O’Donnell. The other members are David Kelly and Richard Pennycook. Lee Ginsberg also served as a member of the Committee until he stepped down on 6 February 2019. › Summary biographies of each member of the Committee are included on pages 48 to 49. All members of the Committee are considered to be independent. › The Board is satisfied that Elaine O’Donnell has extensive recent and relevant financial experience and that the Committee as a whole has competence relevant to the Company’s sector. › Whilst the Board believes the Committee to have the appropriate composition, skills and experience to discharge its responsibilities, it is mindful that the Chair should not be a member of the Audit Committee under the Code. Accordingly, the search for an additional Non-Executive Director is underway (as explained in more detail in the Nomination Committee Report on page 59) and Richard Pennycook will accordingly step down from being a member of the Committee once the new Non-Executive Director has been appointed. 60 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Committee Meetings › Only members of the Committee are entitled to attend meetings; however, standing invitations are extended to the Chief Financial Officer, Chief Executive, Company Secretary, Director of Finance and Statutory Auditor. In addition, the Committee also invites other senior finance and business managers to attend certain meetings. This allows the Committee to be given a deeper level of insight on certain business matters. › During the year the Committee met with the Statutory Auditor without the Executive Directors being present. › The agenda for each meeting reflected the annual reporting cycle of the Group and particular matters for the Committee’s consideration. › The attendance of individual Committee members at Committee meetings is shown in the table below. Elaine O’Donnell (Chair) David Kelly Richard Pennycook Lee Ginsberg Member Meetings from attended July 2018 6/6 August 2015 6/6 3/3 April 2019 August 2015(1) 2/2 (1) Lee Ginsberg stepped down on 6 February 2019. Main Responsibilities of the Committee The main roles and responsibility of the Committee are set out in its terms of reference. The terms of reference are reviewed annually by the Committee and proposed changes made to the Board. The current terms of reference can be found at the Company’s website at www.onthebeachgroupplc.com. The Committee’s main responsibilities are: Financial Reporting To review the reporting of financial and other information to the shareholders of the Company and monitor the integrity of the financial statements, including the application of key judgements in determining reported outcomes to ensure that they are fair, balanced and understandable. External Audit To review the effectiveness and objectivity of the external audit process, assess the independence of the Statutory Auditor and ensure appropriate policies and procedures are in place to protect such independence. Internal Audit To review regularly the need for an internal audit function and to evaluate the effectiveness and robustness of the current internal control systems. Risk Management, Internal Controls and Compliance To review and assess the adequacy of the systems of internal control and risk management and monitor the risk profile of the business. Review the Group’s procedures for raising concerns. 61 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE Report of the Audit Committee How the Committee Discharged its Responsibilities in 2019 Financial Reporting Accounting Judgements and Significant Accounting Matters As part of the process of monitoring the integrity of the financial information presented in the half-year results and the Annual Report and Accounts, the Committee reviewed the key accounting policies and judgements adopted by management to ensure that they were appropriate. The significant areas of judgement identified by the Committee, in conjunction with management and the Statutory Auditor, together with a number of areas that the Committee deemed significant in the context of the financial statements are set out below: Description of Focus Area Audit Committee Action Capitalised Website Development Costs The Group incurs significant internal costs in respect of the development of the Group’s websites. The accounting for these costs, as either development costs which are capitalised as intangible assets (for enhancement of the website) or expensed as incurred (in respect of maintenance), involves judgement. The Audit Committee has reviewed management’s application of the accounting policy adopted and the assessment of whether current projects meet the criteria required for costs to be capitalised and consider the approach and application of this policy to be appropriate. New Accounting Standards IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’ have become effective for the year ended 30 September 2019. In addition, IFRS 16 ‘Leases’ will be effective for the year ending 30 September 2020. During the financial year, the Committee received reports from management in relation to the adoption of IFRS 9 and IFRS 15 and also the implementation programme for the adoption of IFRS 16, including the proposed disclosures in relation to these matters in this Annual Report. Failure of Thomas Cook Group – Recognition of Cost and Reimbursement Asset. The accounting for the failure of Thomas Cook Group on 23 September 2019 involves judgement to estimate the value of the potential liability in relation to the Group’s obligations under the ATOL regulations and Package Travel Regulations. In addition, the recognition and recoverability of a chargeback asset is an area of judgement. Following discussions with management and the Statutory Auditor, the Committee approved the disclosures of the accounting policies which include details of the impacts of adopting IFRS 9, IFRS 15 and IFRS 16. The Committee have reviewed the accounting and are satisfied with the approach of management. The Committee are satisfied with the accuracy of the potential liability and the recognition of a chargeback asset. Valuation of Goodwill, Intangibles and Investments The estimated recoverable value is subjective due to inherent uncertainty involved in forecasting and discounting future cash flows. The Committee have reviewed the accounting and are satisfied with the approach of management. The Committee are satisfied with the key assumptions used in the forecast, including the use of sensitivities growth rates and discount rates. 62 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Fair, Balanced and Understandable The Committee considered whether the half-year results and the Annual Report and Accounts were fair, balanced and understandable and whether the information provided was sufficient for a reader of the statements to understand the Group’s position and performance, business model and strategy. In arriving at its assessment the Committee has: › Reviewed the Annual Report at several levels within the Group ensuring overall balance and consistency; › Received an early review of the Annual Report to enable sufficient time for comment and review; › Satisfied itself that there is a robust process in place to support the fair, balanced and understandable assessment; and › Considered the Statutory Auditor’s review of the Annual Report. The Directors’ statement on a fair, balanced and understandable Annual Report and Accounts is set out on page 95 of this Report. Statutory Auditor The Committee oversees the Group’s relationship with the Statutory Auditor. The Committee holds meetings with the Statutory Auditor without management present with the purpose of understanding the Statutory Auditor’s views on the control and governance environment and management’s effectiveness within it. KPMG was appointed as Statutory Auditor to the Group in 2007. The Mandatory Firm Rotation (MFR) rules in the UK introduced requirements that all EU Public Interest Entities (PIEs) must tender their audit contract at least every ten years and change or rotate their auditor at least every twenty years. Audit tenure is measured from the point at which the Group became a PIE, being 28 September 2015, the date on which the Group became listed. The Group would therefore have been required to run a tender process by 2025. However, due to the length of time that KPMG had been auditors to the Group (11 years), the Committee announced in the Annual Report and Accounts for the year ended 30 September 2018 that it felt it would be in the best interests of the Group to undertake a tender of the external audit. Based on the output of a robust external audit tender process the Committee recommended, and the Board confirmed, the appointment of EY as the new Statutory Auditor for the year ended 30 September 2019. The appointment of EY requires shareholder approval and will be proposed to shareholders at the forthcoming AGM. The tender process was led by a selection panel comprising of the Chair of the Audit Committee, the Chief Financial Officer, Group Finance Director, Group Financial Controller and the Company Secretary. EY reviewed KPMG’s audit files and met with key members of the Company’s senior management team to ensure a smooth transition. Following their appointment, EY completed their review of the half-year results and then went on to complete the audit for this financial year. Effectiveness On behalf of the Board, the Committee reviews the effectiveness of the Statutory Auditor on an ongoing basis to ensure the quality, rigour and challenge of the external audit process is maintained. During the year, the Committee reviewed the following: › The quality of audit planning covering the approach, scope, and level of fees for the audit; › Delivery and execution of the agreed external audit process for the 2019 financial year; › Quality, knowledge and expertise of the EY audit engagement team; › The competence with which EY handled and communicated the key accounting and audit judgements; and › The communication and engagement between management, EY and the Committee. The Committee confirmed the external audit process provided by EY had been delivered effectively. In particular, this was aided by robust testing as part of the interim review. Independence and Objectivity In addition to the annual review of effectiveness, the Committee considered the independence and objectivity of EY through a combination of: › › oversight of the non-audit services policy and fees paid; and › oversight of policy on employing former auditors. assurances provided by EY on the safeguards in place to maintain independence; 63 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEReport of the Audit Committee Non-Audit Services The Company’s Statutory Auditor may also be used to provide specialist advice where, as a result of their position as auditors, they either must, or are, best placed to, perform the work in question. A formal policy is in place in relation to the provision of non-audit services by the Statutory Auditor to ensure that there is adequate protection of their independence and objectivity. The Company’s policy is that, except in exceptional circumstances, non-audit fees to the audit firm should not exceed 70% of the amount of the audit fee for the current financial year (audit fee £185,000). In addition, all non-audit work in excess of £15,000 should be the subject of a competitive tender. Non-audit fees are monitored by the Committee and the Committee is satisfied that all non-audit work undertaken this year was in line with our policy and did not detract from the objectivity and independence of the Statutory Auditors. The fees paid to EY in respect of non-audit services during the year related to the review of interim Financial Statements and ATOL return and totalled £55,000, representing 29.7% of the total audit fee. Internal Audit The Committee has again reviewed the need for an internal audit function during the year and considers that having no internal audit function is appropriate on the grounds that: › Procedures and routines are well established across the business; and › There is a significant degree of senior oversight, particularly in respect of ongoing business performance, involving both the CEO and CFO. The Committee will, as part of its remit, continue to evaluate the effectiveness and robustness of the current system of control as the Group grows as to whether an independent Internal Audit Department would be more appropriate and to set down the guidelines for the operation of such a department. Risk Management and Internal Control The primary role of the Audit Committee in relation to risk management and internal controls is to review the effectiveness of risk management systems and related internal controls to ensure that any issues that have arisen are properly dealt with, and that going forward the systems are fit for purpose. The Committee performs its duties by: › Reviewing annually the Group’s system of internal control; and › Reviewing reports from the Statutory Auditor on any issues identified in the course of their work, including an internal control report on control weaknesses, and ensuring that there is an appropriate response from management. During the year, the Committee reviewed in detail the mitigation in place for the Group’s key risks and agreed a rolling programme to give assurance to the Committee that effective mitigations were in place. Specific reviews included GDPR/data security compliance, supplier failure planning, and a VAT review. The Group has in place internal controls and risk management systems in relation to its financial reporting process and preparation of consolidated accounts. These systems include policies and procedures to ensure that adequate accounting records are maintained and transactions are recorded accurately and fairly to permit the preparation of financial statements in accordance with IFRS. 64 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 The internal control systems include: Component Approach Basis for Assurance Risk Management Financial Reporting Budgeting and Reforecasting Monitoring of Controls Risks are highlighted through a number of different reviews and culminate in a risk register. The register identifies the risk area, the probability of the risk occurring, the impact if it does occur and the actions being taken to manage the risk to the desired level. Consolidated Group management accounts are produced monthly and provide relevant, reliable and up- to-date financial and non-financial information to management and the Board including an income statement, balance sheet and cash flow statement. The Group produces an annual budget and quarterly reforecast against which management monitor the key business and financial activities towards achieving the financial objectives each month. There are policies and procedures in place to ensure the integrity and accuracy of the accounting records and to safeguard the Group’s assets. The review by the Audit Committee highlighted that effective risk management and internal controls are in place. Updated by executive team twice a year and reviewed and approved by the Board annually. Results are reviewed each month by management, the executive team and the Board. Results are compared against expectations and significant variances are explained by management. Performed using a bottom-up approach with reviews performed by the executive team and the Board. The Committee has performed a rigorous and robust review of internal controls during the year including: › Review of risk registers › Assessment of compliance with corporate governance code › Basis and monitoring of capitalised website development costs Whistleblowing A whistleblowing policy has been adopted which includes access to a whistleblowing telephone service run by an independent organisation, allowing employees to raise concerns on an entirely confidential basis. The Committee receives regular reports on the use of the service, any significant reports that have been received, the investigations carried out and any actions arising as a result. Committee Effectiveness Review The Committee has reviewed and considered the effectiveness of its performance during the year. The review included views of members of the Committee and of regular attendees at the various meetings (including the Executive Directors). The review indicated that the Committee continues to perform well. Elaine O’Donnell Chair of the Audit Committee 27 November 2019 65 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCERemuneration report Annual Statement of the Chairman of the Remuneration Committee David Kelly Chair, Remuneration Committee Dear Shareholder, As Chairman of the Remuneration Committee, I am pleased to present the Company’s Remuneration Report for the year to 30 September 2019. During the year, we operated within the Remuneration Policy that was approved by shareholders at the 2019 AGM, a summary of which can be found in the next section of this report. The Committee remains satisfied that the policy continues to support the Company’s strategy for the forthcoming year: to retain and motivate our management team, to drive strong returns for our shareholders and to promote the long-term success of the Company. Shareholders will not therefore be asked to approve any revisions to the policy at the 2020 AGM. Performance and Reward for FY19 Notwithstanding that the last year has presented an extremely challenging trading environment, the Company has delivered a solid performance, with an increase in Group adjusted gross profit of 7%, an increase in adjusted proforma EPS of 1% and significant progress towards achieving strategic objectives. The FY19 annual bonus for the Executive Directors was based on both financial and non-financial targets that linked directly to strategic and operational initiatives of the Company. Despite the strong performance of the Company over the year, due to the stretching nature of the threshold PBT target, no bonus in respect of the financial target (70% weighting) is payable. The achievement of performance conditions in relation to the non- financial targets relating to customer satisfaction (net promoter score) and employee engagement (as detailed on page 75) resulted in an overall payment of 30% of base salary for both the Chief Executive Officer and the Chief Financial Officer. Simon Cooper has waived his entitlement to a bonus this year in view of his considerable shareholding in the Company. The LTIP awards granted in May 2017 were based on two performance metrics: EPS (70% weighting) and absolute total shareholder return (TSR) (30% weighting), measured over the three-year period to 30 September 2019. Adjusted EPS performance in 2019 was 21.4 pence and therefore 0% of this element of the award vested. Exceptional value was created for shareholders over the three-year performance period with an annualised TSR of 21.8%. As a result, 76.3% of the TSR element of the LTIP awards vested, meaning overall 22.9% of the LTIP awards vested. The Committee is satisfied that the FY19 bonus and the 2017 LTIP targets were sufficiently stretching and that the resulting outcomes are appropriate in light of the Company’s performance. Therefore, the Committee decided not to apply any discretion to the incentive outcomes. FY20 Remuneration Approach Key decisions by the Remuneration Committee in respect of FY20 include: › Simon Cooper and Paul Meehan will both receive a salary increase of 1.5% with effective from 1 January 2020. These increases align directly with the general increase that will be made to our broader UK employee population. › The maximum bonus opportunity remains unchanged at 100% of salary and the bonus will continue to be based on Group adjusted PBT (70% weighting), and non-financial targets (30% weighting). The forward-looking targets are deemed to be commercially sensitive but full details will be disclosed on a retrospective basis in next year’s Annual Report and Accounts. › It is intended that LTIP awards will be granted during the year up to a maximum of 200% of salary in line with the current policy. The performance conditions will be based 70% on EPS performance and 30% on absolute TSR measured over a three-year period. 66 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Corporate Governance Developments The Committee has considered the new UK Corporate Governance Code 2018 (the “Code”), which will apply to the Company for the FY20 reporting year. The Committee already oversees the remuneration arrangements for senior management and pay and employment conditions throughout the Group, and we have now formalised this practice in the Committee’s amended Terms of Reference. We will continue to ensure that share awards are subject to a total vesting and holding period of five years. The Committee will apply the post-vesting holding period for LTIP awards irrespective of employment status and will further consider the appropriateness of extending the application of the shareholding requirement for a period post termination of employment, as well as continuing to review compliance with the new Code in all other areas, and will report accordingly in the FY20 Remuneration Report. Pension provision for future incoming Executive Directors will be aligned with the wider workforce in line with the Code. The Committee will oversee the Group’s plan to align Executive Director’s pensions with the majority of the workforce, and will provide an update in the FY20 Remuneration Report. We are also committed to the disclosure of the CEO pay ratio in the FY20 Annual Report, in line with the Companies (Miscellaneous Reporting) Regulations 2018. Key Activities of the Remuneration Committee › Agreeing the performance against the targets and payments for the FY18 annual bonus awards. › Agreeing the performance against the targets and vesting of the 2016 LTIP awards. › Setting the performance targets for the Executive Directors FY19 annual bonus. › Agreeing the population, award levels and performance targets for the FY19 LTIP awards. Shareholder engagement Last year we engaged with a significant proportion of shareholders to discuss the changes we were proposing to make to remuneration arrangements ahead of the publication of the Annual Report. Although major shareholders supported these changes, the Committee is mindful that there was a significant minority vote (just over 20%) against the approval of the Directors’ Remuneration Report at the 2019 AGM, primarily due to the salary increase of the Chief Financial Officer. The increase was awarded to reflect Paul Meehan’s strong performance and the expansion of his role since his initial appointment in 2017. The Remuneration Committee however notes the concerns raised by some of the shareholders and proxy organisations about the level of increase. The Committee has reflected on this feedback when considering remuneration arrangements for the Executive Directors for the forthcoming financial year, and the salary increase for both Executive Directors will be in line with that awarded to the broader UK employee population in FY20. We remain committed to ongoing engagement with our shareholders to ensure an open and transparent dialogue around executive remuneration arrangements. Remuneration Report This report has been prepared in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, the UKLA Listing Rules and the UK Corporate Governance Code. The report is split into three parts: › This Annual Statement. › A summary of The Directors’ Remuneration Policy which was approved by shareholders at the 2019 AGM and which will continue to apply without amendment for the › Agreeing the population and award levels for restricted forthcoming year. share awards. › Approving new management incentive scheme for Executive team (below Board). › Approving the Directors’ Remuneration Report and the Remuneration Policy for the FY18 Annual Report. › Planning and executing a shareholder engagement exercise in relation to the new remuneration policy put to shareholders at the AGM in February 2019. › Reviewing and responding to feedback from shareholders and shareholder organisations on remuneration. › Reviewing Group-wide pay and conditions and share plans. › Reviewing base salaries of Executive Directors. › Reviewing base salaries for Executive team. › Reviewing feedback from 2019 AGM. › Review performance of independent advisers and fees over the year. › Reviewing Gender Pay Gap calculations and reviewing disclosures. › Reviewing the various changes to the regulatory environment, including the new Code. › Reviewing and updating the Committee Terms of Reference. › The Annual Report on Remuneration which sets out payments made to the Directors and details the link between Company performance and remuneration for the 2019 financial year. The Annual Report on Remuneration together with this statement is subject to an advisory shareholder vote at the 2020 AGM. In summary, the Committee is committed to ensuring that we are responsive to developments in best practice, as well as a transparent approach in respect of executive pay. Should you have any queries or comments on this Report, or more generally in relation to the Company’s remuneration, then please do not hesitate to contact me via the Company Secretary. I hope that you find the information in this report helpful and informative, and I look forward to your continued support at the Company’s Annual General Meeting David Kelly Chair of the Remuneration Committee 27 November 2019 67 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE Summary of Remuneration Policy Introduction The Directors’ Remuneration Policy (the ‘Policy’) was approved by shareholders at the AGM on 7 February 2019 (81.80% of votes cast being in favour) and became effective from that date. There are no proposals to amend the Directors’ Remuneration Policy at the 2020 AGM. A summary of the policy (with updated references, where relevant) is included for reference to assist with the understanding of the contents of this report. The full policy is detailed in our 2018 Annual Report, which can be found in the ‘Investors centre’ section under ‘Reports and presentations’ on the Company’s corporate website (www.onthebeachgroupplc.com). The following tables summarise each element of remuneration and how it supports the Company’s short and long-term strategic objectives. Base Salary Short and Long-Term Strategic Objectives Provides a base level of remuneration to support recruitment and retention of Executive Directors with the necessary experience and expertise to deliver the Company’s strategy. Opportunity Base salaries will be set at an appropriate level within a comparator group of listed companies of comparable size and will normally increase in line with increases made to the wider employee workforce. The Committee recognises that Simon Cooper’s current base salary is below the market level, but it has given regard to Simon’s considerable shareholding in the Company, and the desire to focus the remuneration structure on a long-term strategy. Benefits Short and Long-Term Strategic Objectives Provides a competitive level of benefits. Operation Salaries are reviewed annually and any changes are normally effective from 1 January in the financial year. The Committee considers a number of factors when determining an appropriate level of salary such as remuneration practices within the Company and the economic environment. Performance Metrics Used, Weighting and Time Period Applicable None. Operation The Executive Directors receive benefits which include family private health cover. The Remuneration Committee recognises the need to maintain suitable flexibility in the determination of benefits to ensure it is able to support the objective of attracting and retaining personnel. Opportunity The maximum will be set at the cost of providing the benefits described. Performance Metrics Used, Weighting and Time Period Applicable None. 68 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Pensions Short and Long-Term Strategic Objectives Paul Meehan currently receives an employer’s contribution equal to 15% of his base salary. Due to his considerable shareholding, Simon Cooper is not provided with pension funding. Operation On recruitment, the Committee maintains the ability to provide pension funding in the form of a salary supplement, which would not form part of the salary for the purposes of determining the extent of participation in the Company’s incentive arrangements. Opportunity 15% of base salary p.a. for existing Executive Directors. The Committee intends to align the pension contribution with the wider workforce for any Executive Directors recruited in the future. Performance Metrics Used, Weighting and Time Period Applicable None. Annual Bonus Plan Short and Long-Term Strategic Objectives The Annual Bonus Plan provides a significant incentive to the Executive Directors linked to achievement in delivering goals that are closely aligned with the Company’s strategy and the creation of value for shareholders. Operation Malus will apply up to the date of the bonus determination and clawback will apply for two years from the date of bonus determination. Opportunity The maximum bonus opportunity is 100% of base salary. Performance Metrics Used, Weighting and Time Period Applicable Performance is measured over the financial year. The majority of the annual bonus will be based on performance against stretching PBT targets, with the balance based on non-financial metrics which are aligned to the business strategy. The Remuneration Committee is of the opinion that given the commercial sensitivity arising in relation to the detailed financial targets used for the annual bonus, disclosing precise targets in advance would not be in shareholder interests. Actual targets, performance achieved and awards made will be published at the end of the performance periods so shareholders can fully assess the basis for any pay-outs under the annual bonus. The Remuneration Committee retains discretion in exceptional circumstances to change performance measures and targets and the weightings attached to performance measures part-way through a performance year if there is a significant and material event which causes the Committee to believe the original measures, weightings and targets are no longer appropriate. Discretion may also be exercised in cases where the Remuneration Committee believe that the bonus outcome is not a fair and accurate reflection of business performance. 69 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESummary of Remuneration Policy Long-Term Incentive Plan (LTIP) Short and Long-Term Strategic Objectives Awards are designed to incentivise the Executive Directors to maximise total shareholder returns by successfully delivering the Company’s objectives and to share in the resulting increase in total shareholder value. The use of: › EPS ensures Executive Directors are focused on ensuring the annual profit performance targeted by the Annual Bonus Plan flows through to long-term sustainable EPS growth. › Absolute TSR measures the success of the implementation of the Company’s strategy in delivering a minimum level of return. Operation Awards are granted annually to Executive Directors in the form of nil cost options. These will vest at the end of a three year period subject to: › The Executive Director’s continued employment at the date of vesting; and › Satisfaction of the performance conditions. The Remuneration Committee may award dividend equivalents on awards to the extent that these vest. A further two-year holding period post vesting will apply. Malus will apply for the period from grant to vesting with clawback applying for the two-year period post vesting. Opportunity Maximum award of 200% of base salary. 25% of the award will vest for threshold performance. 100% of the award will vest for maximum performance. Straight line vesting between these points. Performance Metrics Used, Weighting and Time Period Applicable The performance conditions for awards are currently split between EPS growth (70%) and TSR (30%). The Remuneration Committee may change the balance of the measures, or use different measures for subsequent awards, as appropriate. No material change will be made to the type of performance conditions without prior shareholder consultation. The Remuneration Committee retains discretion in exceptional circumstances to change performance measures and targets and the weightings attached to performance measures part- way through a performance period if there is a significant and material event which causes the Committee to believe the original measures, weightings and targets are no longer appropriate. Discretion may also be exercised in cases where the Remuneration Committee believe that the vesting outcome is not a fair and accurate reflection of business performance. HMRC Share Incentive Plan Short and Long-Term Strategic Objectives To encourage wide employee share ownership and thereby align employees’ interests with shareholders. Operation The Company has a share incentive plan in which the Executive Directors are eligible to participate (which is HMRC registered and is open to all eligible staff). Opportunity UK scheme in line with HMRC limits as amended from time to time. Performance Metrics Used, Weighting and Time Period Applicable None. 70 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Shareholding Requirement Short and Long-Term Strategic Objectives To support long-term commitment to the Company and the alignment of Executive Director interests with those of shareholders. Opportunity 200% of salary. Non-Executive Director Fees Operation The Remuneration Committee has adopted formal shareholding guidelines that will encourage the Executive Directors to build up over a five-year period and then subsequently hold a shareholding equivalent to a percentage of base salary. Adherence to these guidelines is a condition of continued participation in the equity incentive arrangements. Performance Metrics Used, Weighting and Time Period Applicable None. Short and Long-Term Strategic Objectives Provides a level of fees to support recruitment and retention of Non-Executive Directors with the necessary experience to advise and assist with establishing and monitoring the Company’s strategic objectives. Operation The Board as a whole is responsible for setting the remuneration of the Non-Executive Directors, other than the Chair whose remuneration is considered by the Remuneration Committee and recommended to the Board. Non-Executive Directors are paid a base fee and additional fees for acting as Chair of Committees. The Chair of the Board does not receive any additional fees for membership of committees. Fees are typically reviewed every three years based on equivalent roles in an appropriate comparator group used to review salaries paid to the Executive Directors. Fees may be reviewed more regularly than this in exceptional circumstances, such as a significant increase in the size or complexity of the business. Non-Executive Directors do not participate in any variable remuneration or benefits arrangements. Performance Metrics Used, Weighting and Time Period Applicable None. Opportunity The base fees for Non-Executive Directors are set at a market rate. In general, the level of fee increase for the Non- Executive Directors will be set taking account of any change in responsibility and will take into account the general rise in salaries across the UK workforce. The Company will pay reasonable expenses incurred by the Chair and Non-Executive Directors. 71 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE Annual Report on Remuneration The Remuneration Committee’s Annual Report on remuneration for the year ended 30 September 2019 is set out below. The Statutory Auditor is required to report on the following information up to and including the Statement of Director’s Shareholdings requirement and Share Interests. How Remuneration Links with Strategy It is essential that a fair, competitive and attractive remuneration policy is in place in order to ensure the future success of the Company. Our remuneration policy is designed to be fair and competitive, support the strategic objectives of the Company and motivate the Executive Directors to deliver the short and long-term strategy as set out in the CEO’s report on pages 14 to 16. In the diagram below, we summarise how the Company’s strategic priorities are aligned with the remuneration policy. Strategic priority 1. Investing in talent and technology to extend core capabilities. 2. Driving an efficient increase in traffic through branded and direct channels. 3. Personalising our customer experience. 4. Leveraging increased revenue through direct and differentiated supply. 5. Inspiring holidaymakers with destination agnostic search technologies. 6. Reaching an ever-wider audience of beach holidaymakers through product, channel and geographic expansion. Metric Scheme Measurement period Link with strategy Profit Before Tax (PBT) Annual bonus 1 year Progress towards the following strategic priorities drive an increase in profit: 1 2 3 4 5 6 Employee Engagement Score (EES) Annual bonus 1 year Employee satisfaction is impacted by the following strategic priorities: 1 Customer Satisfaction/ Net Promoter Score (NPS) Annual bonus 1 year Customer satisfaction will be positively impacted by the following strategic priorities: 1 3 5 6 Earnings Per Share (EPS) LTIP scheme 3 years Progress towards the following strategic priorities drive an increase in earnings over the longer term: Absolute Total Shareholder Return (TSR) LTIP scheme 3 years 1 2 3 4 5 6 Progress towards the following strategic priorities drive earnings growth, and in turn should provide returns for shareholders in the long-term through share price growth and dividends: 1 2 3 4 5 6 72 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Single Total Figure of Remuneration The tables below sets out the single total figure of remuneration and breakdown for each Executive and Non-Executive Director in respect of the 2019 financial year. Comparative figures for the 2018 financial year have also been provided. Figures provided have been calculated in accordance with the new UK disclosure requirements: the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (Schedule 8 to the Regulations). Single total figure of remuneration for Executive Directors Simon Cooper Paul Meehan 2019 (£’000) 2018 (£’000) 2019 (£’000) 2018 (£’000) Fixed Pay Base Salary(1) 204 203 Benefits(2) Pension Total Fixed Pay Bonus(3) LTIP(4), (5) Variable Pay Total Variable Pay Total Single Figure of Remuneration 1 1 206 - 99 99 305 2 - 205 - 111 111 316 310 2 45 357 93 185 278 635 253 3 42 298 - - - 298 Notes: (1) Paul Meehan’s salary was increased to £310,000 with effect from 1 October 2018. Simon Cooper’s salary was not increased during FY19. (2) Taxable benefits received were family medical insurance. (3) Annual bonus payments for performance in the relevant financial year. (4) The value of the LTIP for 2019 relates to the 2017 award, which had a three-year performance period ending 30 September 2019. Based on performance over this period, the Remuneration Committee determined that 22.9% of the maximum award vested on 26 November 2019, equivalent to 22,776 nil-cost options in the case of Simon Cooper and 42,705 nil-cost options in the case of Paul Meehan. The value of the award included above is therefore £98,847.84 in the case of Simon Cooper and £185,339.70 in the case of Paul Meehan, based on the closing share price of 434 pence at the vesting date. In the case of Simon Cooper £56,068.08 of the £98,847.84 and in the case of Paul Meehan £99,502.65 of the £185,339.70 is attributable to share price appreciation over the period to the vesting date based on the original share price of 201 pence used to determine the original number of awards on grant. (5) The value of the LTIP for 2018 relates to the 2016 award, which had a three-year performance period ending 30 September 2018. Based on performance over this period, the Remuneration Committee determined that 30% of the maximum award vested on 27 November 2018, equivalent to 27,522 nil-cost options for Simon Cooper. The value of the award included above is therefore £110,638.44 based on the closing share price of 402 pence at the vesting date. £50,640.48 of this is attributable to share price appreciation over the period to the vesting date based on the original share price of 218 pence used to determine the original number of awards on grant. 73 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE Annual Report on Remuneration Single total figure of remuneration for Non-Executive Directors Richard Pennycook(1) David Kelly(2) Elaine O’Donnell Lee Ginsberg(3) 2019 (£’000) 2018 (£’000) 2019 (£’000) 2018 (£’000) 2019 (£’000) 2018 (£’000) 2019 (£’000) 2018 (£’000) Fixed Pay Fees Benefits Pension 67 - - Total Fixed Pay 67 Variable Pay Bonus LTIP Total Variable Pay Total Single Figure of Remuneration - - - 67 - - - - - - - - 95 - - 95 - - - 50 57 12 65 61 - - - - - - - - - - 50 57 12 65 61 - - - - - - - - - - - - - - - 95 50 57 12 65 61 Notes: (1) From 1 April 2019, Richard Pennycook was appointed Non-Executive Chair of the Board and Chair of the Nomination Committee. (2) From 1 December 2018 until 31 March 2019, David Kelly acted as interim Chair of the Board and interim Chair of the Nomination Committee, for which role he received an additional fee of £32,667. David Kelly resumed his role as Senior Independent Director from 1 April 2019 and continued to Chair the Remuneration Committee following Richard Pennycook’s appointment as Chair of the Board. (3) Lee Ginsberg stepped down as Chair of the Board and Chair of the Nomination Committee on 1 December 2018 and stepped down from the Board on 6 February 2019. 74 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 Additional Information Regarding Single Figure Table (audited) The Remuneration Committee considers that performance conditions for all incentives are suitably demanding, having regard to the business strategy, shareholder expectations, the markets in which the Group operates and external advice. To the extent that any performance condition is not met, the relevant part of the award will lapse. There is no retesting of performance. Bonus Awards (audited) 2019 annual bonus awards and performance targets For the year ended 30 September 2019, the maximum potential bonus opportunity for both Executive Directors was 100% of salary. The actual bonus payable to Simon Cooper was £61,200 and to Paul Meehan was £93,000 based on achievement of the performance conditions set out below. However, Simon Cooper has waived his bonus this year in view of his considerable shareholding in the Company. The Committee decided that, in view of the low-level payout of the bonus, and the fact that no bonus has been paid since FY16, it was appropriate not to defer any of the bonus award into shares. The performance measures and targets are set out below: Performance metric Weighting Performance level Actual bonus paid Threshold Target Maximum Actual % of maximum % of salary Profit Before Tax 70% £35.5m £37.4m £41.1m £34.6 0% Employee Engagement Score 15% Net Promoter Score 15% Total 100% 6.3 40 6.6 48 7.0 55 7.1 58 100% 100% 0% 15% 15% 30% The Committee concluded that the bonus outcomes appropriately reflected the broader performance context and, as a result, no discretion was applied to the bonus outcome. Long-Term Incentives Awarded in 2019 (audited) The table below sets out the details of the Long-Term Incentive Plan awards granted in the 2019 financial year to Executive Directors. Vesting will be determined according to the achievement of performance conditions as outlined below. Director LTIP Value of award Face value of award (£’000) Number of shares awarded Exercise price (£) Percentage of award vesting at threshold performance Performance period end date Performance conditions Simon Cooper LTIP – nil cost option 100% of salary £204 41,087 Nil 25% Paul Meehan LTIP – nil cost option 200% of salary £620 124,874 Nil 25% 30 September 2021 EPS (70%) 11 February 2022 Absolute TSR (30%) 30 September 2021 EPS (70%) 11 February 2022 Absolute TSR (30%) 75 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEAnnual Report on Remuneration The awards were granted on 12 February 2019. The number of shares awarded was calculated using the closing share price on 28 September 2019, which was 496.5 pence. The EPS condition applying to 70% of the awards is provided in the table below: Performance tier Cumulative EPS over the three financial years FY19, FY20 and FY21(1) % of EPS element capable of vesting Below threshold Less than 77.3 pence Threshold Maximum 77.3 pence 94.5 pence 0% 25% 100% Between threshold and maximum Between 77.3 and 94.5 pence 25% - 100% pro-rata on a straight line basis (1) Cumulative EPS means the sum of the actual adjusted earnings per share for FY19, FY20 and FY21. The Absolute TSR condition applying to 30% of the awards is provided in the table below: Performance tier Below threshold Threshold Maximum Annualised TSR over the three-year performance period to 12 February 2022 % of TSR element capable of vesting Less than 8% 8% 15% or above 0% 25% 100% Between threshold and maximum Between 8% and 15% 25% - 100% pro-rata on a straight line basis Absolute TSR is averaged over a one month period prior to the beginning and end of the performance period or such shorter period as is available. Long-Term Incentives Awarded in 2017 with Performance Period Ending in 2019 Simon Cooper and Paul Meehan were both granted awards on 26 May 2017 with a three-year performance period commencing on 1 October 2016 and ending on 30 September 2019. The awards vested on 26 November 2019. Performance under the awards was based on EPS (70% weighting) and annualised TSR (30% weighting), as set out below. The EPS condition applying to 70% of the awards is provided in the table below: EPS for year ending 30 September 2019 Less than 24.48p 24.48p 29.92p or above Vesting 0% 25% 100% Between 24.48p and 29.92p Straight line vesting between 25% and 100% Actual EPS: 21.4p 0% 76 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019The Absolute TSR condition applying to 30% of the awards is provided in the table below: Annualised TSR of the Company over the three-year period to 30 September 2019 Less than 15% 15% 25% or above Vesting 0% 25% 100% Between 15% and 25% Straight line vesting between 25% and 100% Actual TSR: 21.8% 76.3% Based on the above performance outcomes, 22.9% of the awards vested on 26 November 2019 as detailed in the table below: Executive Maximum number of shares under award Number of shares vested Value on vesting date(1) Face value of awards vesting (2) Impact of share price on vesting(3) Simon Cooper 99,502 Paul Meehan 186,567 22,776 42,705 £98,847.84 £45,779.76 £53,068.08 £185,339.70 £85,837.05 £99,502.65 No discretion was applied to the final vesting outcome shown above. (1) Based on closing share price of 434 pence on the vesting date. (2) Based on the number of shares vesting multiplied by the share price at the date of grant (201 pence) (3) Based on the value at vesting less the face value of awards on vesting. Statement of Directors’ Shareholdings and Share Interests (audited) Director Simon Cooper Paul Meehan Share plan awards subject to performance conditions(1) Share plan awards subject to continued employment Share plan interests vested but unexercised Shares held outright(2) 191,030 406,019 - - 27,522(3) 11,330,950 - 22,222 No changes in the above Directors’ interests have taken place between 30 September 2019 and the date of this report. Notes: (1) Including the 2017 LTIP award for which the performance period ended on 30 September 2019. (2) This information includes holdings of any connected persons. (3) Simon Cooper’s 2016 LTIP award vested on 27 November 2018. Performance was based on EPS (70% weighting) and annualised TSR (30% weighting) over the three-year period to 30 September 2018. 30% of the award vested, equivalent to 27,522 nil-cost options. 77 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE Annual Report on Remuneration The table below sets out details of the share options exercised by Executive Directors during the year: Director Share plan interests exercised during the year to 30 September 2019 Number of options exercised Share price on date of exercise Simon Cooper Paul Meehan - - N/A N/A The following information is unaudited. The table below sets out the current shareholding and includes the shareholding requirement for the Executive Directors: Director Shareholding requirement Shares held for purpose of shareholding requirement(1) Number of shares % of salary(2) Simon Cooper 200% of salary 11,358,472 21,236% Paul Meehan(3) 200% of salary 22,222 27% Shareholding requirement met? Yes No Notes: (1) Shares included for the purposes of measuring the shareholding requirement include shares owned outright (including those by connected persons), vested but unexercised share options and unvested shares subject to continued employment only (on a net of tax basis). (2) The share price of 381.4 pence as at 30 September 2019 (the last business day of the financial year ending 30 September 2019) has been taken for the purpose of calculating the current shareholding as a percentage of salary. (3) Paul Meehan joined the Company as CFO on 16 January 2017 and has five years from this date to build up his shareholding requirement. His shareholding requirement will be 150% from 16 January 2022 until 6 February 2024. This will rise to 200% on 7 February 2024 (the date falling five years after the 2019 policy change). 78 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019 E-,.+&C"2$#& 8.D& F.%".G+$&8.D& "94=$! ! ! >?@8! E-,.+&F.%".G+$& 8.D& 1! 1! 1! 1! E-,.+&(")*+$&C"*0%$&-/& !$10)$%.,"-)& HIIJ& 1! 1! 1! 1! <& 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! 1! HIIJ& U<& HIIJ& ';& HIIJ& L'& Non-Executive Directors are not subject to a shareholding requirement. Details of their interests in shares are set out below (including shares held by their persons closely associated): ! B97%$C! *\,! *Y,! *<,! ! ! Director R(9K!+!VP(6'!01+;A!Z6HE#(I!8%44)H99]!G#$!#PP9647%I!B94X^T%H=76U%!OE#6(!95!7E%!"9#(I!#4I!OE#6(!95!7E%!B9K64#7694!O9KK677%%N!! R(9K!+!_%H%KM%(!01+%%!a64$M%(Q!$7%PP%I!I9G4!#$!OE#6(!95!7E%!"9#(I!#4I!OE#6(!95!7E%!B9K64#7694!O9KK677%%!94!+!_%H%KM%(!01+30 days £ 0.5 0.3 0.4 0.1 Total £ 64.7 58.8 In line with IFRS 9, the Group applies the simplified approach for the impairment of trade receivables and therefore does not track changes in credit risk. The Group uses a provision matrix to measure expected credit losses based on historical cancellation rates and considers forward-looking factors. There has been £0.4m impairment charged to trade receivables in the current year (2018: £0.3m). 134 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Financial Instruments and Cash Deposits As part of credit risk, the Group is subject to counterparty risk in respect of the cash and cash equivalents held on deposit with banks and foreign currency financial instruments. The Group generally deposits cash and undertakes currency transactions with highly rated banks, the Group considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties. No collateral or credit enhancements are held in respect of any financial derivatives. The maximum exposure to credit risk at each reporting date is the fair value of financial assets and trade receivables. Liquidity Risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. It is Group policy to maintain a balance of funds, borrowing, committed bank loans and other facilities sufficient to meet anticipated short-term and long-term financial requirements. In applying the policy the Group continuously monitors forecast and actual cash flows against the maturity profiles of financial assets and liabilities. It is Group policy to ensure that a specific level of committed facilities is always available based on forecast working capital requirements. Cash forecasts identifying the Group’s liquidity requirements are produced and are sensitised for different scenarios including, but not limited to, decreases in profit margins and weakening of Sterling against other functional currencies. The following are the contractual maturities of financial liabilities: Financial liabilities at amortised cost Sep-19 Trade payables Other payables Sep-18 Trade payables Other payables Contingent consideration Carrying amount £’m Contractual cash flows £’m 121.6 15.0 136.6 108.9 15.6 2.7 127.2 121.6 15.0 136.6 108.9 15.6 2.7 127.2 Within 1 year £’m 121.6 15.0 136.6 108.9 15.6 2.7 127.2 Capital Management It is the Group’s policy to maintain an appropriate equity capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business. The capital structure of the Group consists of the net cash (borrowings disclosed in note 20) and equity of the Group as disclosed in note 22. The Group is not subject to any externally-imposed capital requirements. 25. Share-Based Payments The following table illustrates the number of, and movements in, share options granted by the group Outstanding at the beginning of the year Granted during the year Lapsed during the year Vested during the year Forfeited during the year Outstanding at the year end LTIP No. of share options (000’s) CSOP & RSA No. of share options (000’s) Total No. of share options (000’s) 1,481 1,248 (766) (116) (102) 1,745 292 195 - - (28) 459 1,773 1,443 (766) (116) (130) 2,204 135 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCENotes to the Consolidated Financial Statements LTIP The LTIP scheme started on 26 May 2016 and the Group has awarded nil-cost options under the scheme each year since then. The vesting of 30% of the award will be dependent on a relative Total Shareholder Return (“TSR”) performance condition measure over the performance period and the vesting of 70% of the award will be dependent on the satisfaction of an Earnings per Share (“EPS”) target measured at the end of the performance period. For each award, there is a three-year performance period commencing on the first day of the financial period in which they are awarded in. During the year, the Group awarded nil-cost options to certain key management within the business. The vesting of these awards will be dependent on EBITDA over a three-year performance period. Exercise price Expected volatility Option life Risk free rate Dividend yield Non- vesting conditions (%) (years) (%) (%) (%) No. of options awarded Share price at grant date (£) 189,985 2.595 443,297 2.595 180,728 4.120 421,698 4.120 61,400 3.910 143,268 3.910 (£) Nil Nil Nil Nil Nil Nil 30% 3.0 0.44% 2.00% - 3.0 0.44% 2.00% 30% 3.0 0.07% 0.75% - 3.0 0.07% 0.75% 30% 3.0 0.07% 0.79% - 3.0 0.07% 0.79% 127,113 4.500 Nil 30% 3.0 0.54% 0.62% 296,596 4.500 Nil - 3.0 0.54% 0.62% 132,923 4.440 Nil 42% 3.0 0.73% 0.73% 310,153 4.440 Nil 805,000 4.630 Nil - - 3.0 0.73% 0.73% 3.0 0.73% 0.73% Fair value at grant date (£) 0.806 2.470 2.890 4.050 2.590 3.840 1.880 4.420 4.341 1.810 4.520 - - - - - - - - - - - Award Date 26 May 2016 (TSR dependent) 26 May 2016 (EPS dependent) 26 May 2017 (TSR dependent) 26 May 2017 (EPS dependent) 31 May 2017 (TSR dependent) 31 May 2017 (EPS dependent) 20 December 2017 (TSR dependent) 20 December 2017 (EPS dependent) 12 February 2019 (TSR dependent) 12 February 2019 (EPS dependent) 9 July 2019 (EBITDA dependent) Expected volatility is estimated by considering historic average share price volatility at the grant date. 136 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Restricted Share Award (nil-cost option) and CSOP The RSA scheme started on 27 October 2017, the Group awarded nil-cost options to key employees excluding Executive Directors. The awards will vest on 27 October 2020 subject to continued employment, but with no other performance conditions. A further award was made during the year. The awards will vest on 15 October 2021 subject to continued employment but no other performance conditions. The number of shares subject to the CSOP Awards has been determined by reference to the mid-market price of a share on date of award. In order to optimise the post-tax value of the LTIP for participants, the Company has granted market-value options as defined under UK tax legislation (“CSOP Options”) to the participants. Type Award year No. of shares RSA 2018 185,888 CSOP 2018 138,924 RSA 2019 86,873 CSOP 2019 108,110 Share price at grant date (£) 4.273 4.273 4.265 4.265 Exercise price Expected volatility Option life Risk free rate Dividend yield (£) Nil 4.273 Nil 4.265 (%) N/A N/A N/A N/A (years) (%) (%) 3.0 3.0 3.0 3.0 0.55% 0.73% 0.55% 0.73% 0.50% 0.70% 0.50% 0.70% The following has been recognised in the income statement during the year: LTIP RSA Total share scheme charge 26. Commitments and Contingencies a) Capital Commitments No capital commitments during the year. b) Operating Lease Commitments One year Two to five years Over five years Non- vesting conditions (%) Fair value at grant date (£) Nil Nil Nil Nil 2019 £’m 0.1 0.6 0.7 4.200 Nil 4.170 Nil 2018 £’m 1.2 0.2 1.4 2019 Land & buildings £’m 2018 Land & buildings £’m 0.7 3.6 2.3 6.6 0.5 2.4 2.9 5.8 c) Contingencies In September 2010, proceedings were initiated against On the Beach Limited by Ryanair alleging infringement of, inter alia, its intellectual property rights. Proceedings remain at an early stage and there have been no material developments. Therefore the amount of the claim by Ryanair is unquantified as at the date of this document. The Group expects that final resolution of the dispute might take some time. 27. Related Party Transactions No related party transactions have been entered into during the year. Transactions with key management personnel have been disclosed in note 8(d). 137 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCECompany Balance Sheet Year ended 30 September 2019 Fixed assets Investments Current assets Debtors Cash at bank Creditors: amounts falling due within one year Corporation tax Net assets Equity Share capital Share premium Capital contribution reserve Retained earnings Total equity Note 2019 £’m 2018 £’m 4 5 6 7 132.6 132.6 68.0 0.2 68.2 (1.0) (0.1) (1.1) 199.7 1.3 2.6 0.5 195.3 199.7 73.9 - 73.9 (2.5) - (2.5) 204.0 1.3 2.6 0.5 199.6 204.0 The loss for the year ended 30 September 2019 dealt with in the financial statements of the parent company is £0.4m (2018: £0.4m). The financial statements were approved by the Board of Directors and authorised for issue. Paul Meehan Chief Financial Officer 27 November 2019 On the Beach Group plc. Reg no 09736592 138 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Company Statement of Changes in Equity Year ended 30 September 2019 Balance at 30 September 2017 Shares issued during the year Share-based payment charges Dividends paid during the year Total comprehensive profit/(loss) for the year Share capital £’m 1.3 - - - - Merger reserve £’m Capital contribution £’m - 2.6 - - - 0.5 - - - - Retained earnings £’m 201.9 - 1.2 (3.9) 0.4 Total £’m 203.7 2.6 1.2 (3.9) 0.4 Balance at 30 September 2018 1.3 2.6 0.5 199.6 204.0 Shares issued during the year Share-based payment charges Dividends paid during the year Total comprehensive profit/(loss) for the year - - - - - - - - - - - - - 0.7 (4.6) (0.4) - 0.7 (4.6) (0.4) Balance at 30 September 2019 1.3 2.6 0.5 195.3 199.7 The notes on pages 140 and 141 form part of these financial statements. 139 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCENotes to the Company Financial Statements 1. Accounting Policies On the Beach Group plc is a public limited company which is listed on the London Stock Exchange and is domiciled and incorporated in the United Kingdom under the Companies Act 2006. Basis of Preparation These financial statements were prepared in accordance with Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”) as issued in August 2014. The presentation currency of these financial statements is Sterling. All amounts in the financial statements have been rounded to the nearest £1,000,000. The financial information presented is at and for the years ended 30 September 2019 and 30 September 2018. As permitted by Section 408 of the Companies Act 2006, an entity profit and loss account is not included as part of the published consolidated financial statements of On the Beach Group plc. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. The financial statements are prepared on the historical cost basis. Under the provisions of FRS 102.1.12B, the company is exempt from preparing a company statement of cash flows. The Directors have used the going concern principle on the basis that the current financial projections and facilities of the consolidated Group will continue operating for the foreseeable future. Related Party Transactions Under the provisions of FRS 102.33.1A, the company is exempt from disclosing the details of related party transactions on the basis that they are wholly owned subsidiaries. Accounting Estimates and Judgements Investment in Subsidiaries Investments in subsidiaries are held at cost, less any provision for impairment. Annually, the Directors consider whether any events or circumstances have occurred that could indicate that the carrying amount of fixed asset investments may not be recoverable, if such circumstances do exist, a full impairment review is undertaken to establish whether the carrying amount exceeds the higher of net realisable value or value in use. If this is the case, an impairment charge is recorded to reduce the carrying value of the related investment. Details of the subsidiaries are listed in note 15 to the consolidated financial statements. 2. Directors’ Emoluments The Company has no employees other than the Directors. Full detail of the Directors’ remuneration and interests are set out in the Directors’ Remuneration Report on pages 66 to 83. 3. Share-Based Payments The Company recognised total expenses of £0.7m (2018: £1.4m) in the year in relation to the Long Term Incentive Plan. Details of this scheme are described in note 25 to the consolidated financial statements. Investments 4. The balance relates to investment in subsidiary undertakings, there has been no movement in the current year (refer to note 15). 140 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 20195. Debtors Amounts falling due within one year: Amounts owed by group undertakings 6. Creditors Due Within One Year Current Amounts owed to group undertakings Bank overdraft Other taxes and social security Accruals 7. Called-Up Share Capital Allotted, called up and fully paid 131,154,058 ordinary shares @ £0.01 each (2018:131,042,510 @ £0.01 each) 2019 £’m 68.0 68.0 2018 £’m 73.9 73.9 2019 £’m 2018 £’m - - 0.2 0.8 1.0 - 2.1 0.1 0.3 2.5 2019 £’m 2018 £’m 1.3 1.3 1.3 1.3 During the year, the Group issued 111,548 shares. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Group. 8. Contingent Liabilities and Guarantees The Company is a guarantor to a borrowing facility relating to a rolling credit facility provided to the Group. The amount borrowed under this agreement at 30 September 2019 was £nil (2018: £nil). 141 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEGlossary of Alternative Performance Measures (APMs) APM Definition Reconciliation to closest GAAP measure Adjusted OTB EBIT Adjusted OTB EBIT is based on OTB operating profit before the impact of certain costs / income that derive from events or transactions that fall outside of the normal activities of the Group. This also includes the non-cash cost of the share based payment schemes. These costs / income are excluded by virtue of their size and in order to reflect management’s view of the performance of the Segment. Adjusted OTB operating profit (£m) 2019 2018 OTB Operating Profit 20.9 27.7 Exceptional costs Share Based Payments Amortisation of acquired intangibles 8.2 0.7 4.4 1.5 1.4 4.3 Adjusted OTB EBIT 34.2 34.9 Adjusted OTB EBITDA Adjusted OTB EBITDA is based on OTB operating profit before depreciation, amortisation and the impact of certain costs / income that derive from events or transactions that fall outside of the normal activities of the Group. This also includes the non-cash cost of the share based payment schemes. These costs / income are excluded by virtue of their size and in order to reflect management’s view of the performance of the Segment. Adjusted OTB EBITDA (£m) OTB Operating Profit Exceptional costs Share Based Payments Depreciation and amortisation Amortisation of acquired intangibles 2019 20.9 8.2 0.7 4.0 4.4 2018 27.7 1.5 1.4 3.0 4.3 Adjusted OTB EBITDA 38.2 37.9 International EBITDA International EBITDA is based on International operating profit before depreciation and amortisation. Classic EBITDA Classic EBITDA is based on Classic operating profit before depreciation and amortisation. International EBITDA (£m) 2019 2018 International Operating Profit Depreciation and amortisation International EBITDA (0.7) 0.1 (0.6) (2.4) 0.2 (2.2) Classic EBITDA (£m) 2019 2018 Classic Operating Profit Depreciation and amortisation Classic EBITDA 0.2 1.3 1.5 0.9 0.2 1.1 Adjusted Classic EBITDA Adjusted Classic EBITDA is based on Classic operating profit before depreciation, amortisation and the impact of certain costs / income that derive from events or transactions that fall outside of the normal activities of the Group. These costs / income are excluded by virtue of their size and in order to reflect management’s view of the performance of the Segment. Adjusted Classic EBITDA 2019 2018 Classic Operating Profit Exceptional costs Depreciation and amortisation Amortisation of acquired intangibles Adjusted Classic EBITDA 0.2 0.7 0.2 1.1 2.2 0.9 - - 0.2 1.1 142 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019APM Definition Reconciliation to closest GAAP measure Adjusted Profit before Tax Adjusted profit before tax is based on profit before tax adjusted for amortisation of acquired intangibles, and the impact of certain costs / income that derive from events or transactions that fall outside of the normal activities of the Group. This also includes the non-cash cost of the share based payment schemes. These costs / income are excluded by virtue of their size and in order to reflect management’s view of the performance of the Group. Adjusted Profit before Tax (£m) 2019 2018 Profit before Tax 19.4 26.1 Amortisation of acquired intangibles Share Based Payments Exceptional costs 5.5 0.7 9.0 4.6 1.4 1.5 Adjusted Profit before Tax 34.6 33.6 Adjusted Profit after Tax Adjusted profit after tax is based on profit after tax adjusted for amortisation of acquired intangibles, and the impact of certain costs / income that derive from events or transactions that fall outside of the normal activities of the Group. This also includes the non-cash cost of the share based payment schemes. These costs / income are excluded by virtue of their size and in order to reflect management’s view of the performance of the Group. Adjusted Profit after Tax Profit for the year Share based payments (net of tax) Exceptional costs (net of tax) Amortisation of acquired intangibles (net of tax) 2019 15.7 0.6 7.2 4.5 2018 21.5 1.2 1.2 3.8 Adjusted Profit after Tax 28.0 27.7 Adjusted EPS Adjusted EPS is calculated on the weighted average number of Ordinary share in issue, using the adjusted profit after tax. Adjusted EPS Adjusted Profit after Tax Basic weighted average number of Ordinary Shares (m) 2019 28.0 2018 27.7 131.1 130.5 Exceptional costs Exceptional costs are certain costs / income that derive from events or transactions that fall outside of the normal activities of the Group. These costs / income are excluded from various performance measures by virtue of their size and in order to better reflect management’s view of the performance of the Group. OTB EBITDA as a percentage of adjusted revenue OTB EBITDA as a percentage of adjusted revenue is based on the adjusted OTB EBITDA divided by the revenue generated in the OTB business. Adjusted EPS (p) 21.4 21.2 Exceptional costs (£m) 2019 2018 Thomas Cook failure Exceptional acquisition costs Exceptional property costs Organisational restructure Other exceptional costs Exceptional costs 7.7 - 0.3 0.8 0.2 9.0 - 0.6 0.5 - 0.4 1.5 OTB EBITDA as a percentage of revenue Adjusted Revenue Adjusted OTB EBITDA OTB EBITDA as a percentage of revenue 2019 2018 90.3 38.2 42% 89.3 37.9 42% 143 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCEGlossary of Alternative Performance Measures (APMs) APM Definition Reconciliation to closest GAAP measure Operating cash conversion Operating cash converstion is operating cash flows divided by operating profit. These cash flows are excluded from various performance measures by virtue of their size and in order to better reflect management’s view of the performance of the Group. OTB adjusted revenue after marketing cost OTB adjusted revenue after marketing cost is adjusted revenue after “OTB” online and offline marketing costs. Operating profit before amortisation and exceptional costs Operating profit before amortisation and exceptional costs is based on Group operating profit, adjusting for amortisation of acquired intangibles and the impact of certain costs that derive from events or transactions that fall outside of the normal activities of the Group. Operating cash conversion (£m) 2019 2018 Profit before taxation Net finance income Share-based payments Depreciation Amortisation 19.4 (0.2) 0.7 1.1 8.7 26.1 0.1 1.4 0.5 7.2 EBITDA excluding share-based payment charges 29.7 35.3 Movement in working capital Movement in trust account Cash generated from operating activities Operating cash conversion % OTB adjusted revenue after marketing cost (£m) OTB adjusted revenue OTB online marketing costs OTB offline marketing costs Total OTB marketing 2.4 (5.6) 26.5 89% (1.7) (0.2) 33.4 95% 2019 2018 90.3 89.3 (29.8) (33.2) (5.4) (4.1) (35.2) (37.3) OTB adjusted revenue after marketing costs 55.1 52.0 Operating profit before amortisation and exceptional costs (£m) Operating profit Exceptional costs Amortisation of intangibles 2019 2018 19.2 26.2 9.0 8.7 1.5 7.2 Operating profit before amortisation and exceptional costs (£m) 36.9 34.9 International revenue after marketing costs International revenue after marketing costs is based on International revenue after all marketing costs International revenue after marketing costs 2019 2018 Revenue Marketing costs 1.4 (1.4) International revenue after marketing costs - 1.6 (3.0) (1.4) OTB EBITDA OTB EBITDA is based on OTB operating profit before depreciation and amortisation. OTB EBITDA (£m) OTB Operating Profit Depreciation and amortisation OTB EBITDA 2019 2018 20.9 8.4 29.3 27.7 7.3 35.0 144 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019Shareholder Information Registered Office 5 Adair Street, Manchester M1 2NQ United Kingdom Tel: c/o FTI Consulting on 020 3727 1000 Web: www.onthebeachgroupplc.com (Corporate) Web: www.onthebeach.co.uk (UK) Web: www.ebeach.se (Sweden) Web: www.ebeach.no (Norway) Web: www.ebeach.dk (Denmark) Web: www.sunshine.co.uk (UK) Web: www.classic-collection.co.uk (UK) Investor relations: corporate@onthebeach.co.uk Cautionary statement The purpose of this Annual Report is to provide information to the members of the Company. The Company and its Directors accept no liability to third parties in respect of this Annual Report save as would arise under English law. This Annual Report contains certain forward-looking statements with respect to the financial condition, results, operations and businesses of the Company. Forward looking statements are sometimes, but not always, identified by their use of a date in the future or such words as ‘anticipates’, ‘aims’, ‘due’, ‘will’, ‘could’, ‘may’, ‘should’, ‘expects’, ‘believes’, ‘intends’, ‘plans’, ‘targets’, ‘goal’ or ‘estimates’. These forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements, including factors outside the Company’s control. The forward-looking statements reflect the knowledge and information available at the date of preparation of this Annual Report and will not be updated during the year. Nothing in this Annual Report should be construed as a profit forecast. Company Secretary Kirsteen Vickerstaff 5 Adair Street, Manchester M1 2NQ United Kingdom Corporate Brokers Peel Hunt LLP Moor House 120 London Wall EC2Y 5ET Numis Securities Limited 10 Paternoster Row London EC4M 7LT Statutory Auditors Ernst & Young LLP 2 St Peter’s Square Manchester M2 3DF Registrar Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Corporate solicitors Addleshaw Goddard LLP One Peter’s Square Manchester M2 3DE Corporate PR advisers FTI Consulting 200 Aldersgate Aldersgate Street London EC1A 4HD 145 ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCETOTAL FINANCIAL P R O T E C T I O N TOTAL FINANCIAL P R O T E C T I O N 146 Your package holiday is ATOL and ABTA protected ON THE BEACH GROUP PLC | ANNUAL REPORT & ACCOUNTS 2019STRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCE

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