Consolidated Financial Statements and Consolidated Management ...

CONSOLIDATED
MANAGEMENT REPORT
FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2011
EVOLUTION OF BUSINESS AND THE GROUP’S SITUATION
The year 2011 has been a year of changes at NH Hoteles. On one hand, growth in the markets where NH Group operates began to slow down resulting in a
slightly lower rate of increase than in the previous year, contrary to what had been forecast until summer 2011. Although the euro zone recorded a growth rate
of 1.9% in 2010, it is estimated that growth in 2011 will eventually be 1.6%. At the same time, activity in the four European areas where NH Group operates
Germany Central Europe, Benelux, Italy and Spain was more consistent than in the previous year. In 2010 growth in Germany stood at 3.6%, in Italy and the
Netherlands it was 1.5% and 1.7% respectively, as opposed to stagnation in Spain (0.1%). On the other hand, Spanish economy is expected to grow by 0.7%
in 2011, as against 0.4% in Italy. Growth rate in Germany and the Netherlands will be slightly below 3%.
This weak economic growth in Spain, Italy, United Kingdom and Portugal did not prevent NH Hoteles’ results from improving on the figures for 2010 as a
consequence of the rise in hotel activity in these countries being substantially higher than overall economic growth, coupled with better occupation data and
prices in our hotels.
Tourist activity around the world in 2011 maintained the same vigorous pace of growth seen in 2010. A 3.2% world-wide rise is forecast, compared to 3.3% in
the preceding year. The long term growth rate for 2011-2021 has maintained an average of 4%. Europe and Asia Pacific were the regions which performed
best in 2011. Growth in the countries located in these areas was 4.5%, based on data up to October. According to figures for the entire year, the number of
tourists in Spain increased, reaching 56.7 million, 7.6% more than in 2010.
In order to adapt to a changing economic environment, NH Hoteles modified its organisational structure to bring it in line with needs and targets, as well as
to provide it with technical and business capacity to develop its future strategy. Thus, the Board of Directors approved a new organisation chart for the Group
in September by creating new Strategy and Business Development, Means, and Organisation and Systems divisions. It also adopted a new, more integrated
organisational model to manage business units based in different countries where the Group operates, as other multinational companies in the industry
already did. To this end, the “German” and the “Central and Eastern European” business units were merged to become “Central Europe”.
During the year, the Company launched an efficiency improvement plan affecting all its processes and aimed at reducing costs by 10% over the next two years.
The results of this plan have begun to emerge this year.
Within a context of increased occupation levels and higher prices without compromising quality, NH Hoteles launched an Efficiency Plan 2011. The plan was
approved by the Board of Directors in September and introduces new rationalisation measures. To sum up, the measures with the greatest impact on Group’s
results and cash flow generation are the following ones:
Freezing of investments: Reduction of CAPEX, which limits new expansion projects to variable income or management projects, thus minimising
NH Hoteles’ investment commitment. Other investments are focussed on maintenance and expenditure required by legal undertakings made to public
bodies. By reducing the previous items, this year the Group has been able to focus part of its investment on modernising and improving facilities of the
main hotels, given their high levels of profitability in terms of revenue and profit per room. Total investment in 2011 amounted to 55.9 million euros, 37.4%
less than in the previous year.
Sale of non-strategic assets. NH Hoteles completed its undertaking to sell non-strategic assets with the sale of the Hotel Lotti in October 2011.
The plan, which had begun in February 2010 with the sale of several Mexican hotels for 57 million euros, was concluded 18 months later and totalized
345 million euros, 115% of the 300 million euro target that had initially been set. Income amounting to 170 million euros was obtained from these sales in
2011, as opposed to 175 million euros in 2010. Nevertheless, the transactions made reached 21.8 times EBITDA, compared to an average ratio of 16 times
EBITDA in the previous year. Anyhow, this figure exceeds the average ratio obtained through comparable transactions. The sale price for the hotels sold
reveals their importance due to their location in major European and Latin American cities. All the sale transactions involved receipt of the sale price at
the moment of conveyance. Lastly, their impact on the year’s accounts amounted to a net pre-tax profit of 53.8 million euros before minority interests.
Workforce flexibility, adjusting the number of employees to the real level of activity recorded. This has enabled the Company to reduce the
average number of employees per room from 0.31 to 0.29 in 2011, against a background of rising occupation levels.
Reduction of operating costs: Implementation of the Efficiency Plan this year has led to an additional saving of 27 million euros through a
reduction of budgeted costs, particularly the 7 million euro reduction in personnel expenses.
Writing off unprofitable hotels: Termination of lease agreements and the sale of hotels with negative EBITDA and showing no signs of recovery.
As part of the rationalisation policy, three hotels under management have been removed from the portfolio of NH Hoteles: the Hesperia Centurión, the
Hesperia Chalet del Golf, both in Spain, and the NH Capo Dei Greci in Sicily (Italy), along with two leased hotels, the NH Gottingen Hotel in Germany and
the NH Fuenlabrada Hotel in Spain, which together accounted for 690 rooms. The two leased hotels no longer contribute 0.4 million euros of negative
EBITDA from NH Hoteles’ results. The NH Venus Sea Garden Hotel in Siracusa, Sicily has gone from being a rental agreement to a franchise agreement.
The removal of these hotels and their rooms from the portfolio has been balanced by the inclusion of other hotels, most of which are under management
and few under lease agreements. These new hotels contributed with 1,370 rooms.
Negotiating and refinancing hotel rental agreements through reductions in rental instalments and freezing rent rises. In the above
mentioned Efficiency Plan, the savings obtained by renegotiating or terminating these agreements totalized 5 million euros in 2011.
Raising awareness among employees through the “We All Form Part of Sales” programme. This programme is aimed at raising all employees’
awareness that generating business and helping increase income through their commercial tasks are part of their responsibilities. At NH Hoteles Group
all employees are also meant to be sales representatives.
8 CONSOLIDATED MANAGEMENT REPORT