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CONSOLIDATED MANAGEMENT REPORT For the financial year ending 31 december 2012 EVOLUTION OF BUSINESS AND GROUP’S SITUATION The 2012 financial year saw the world economy grow slightly slower (3.2%) than in 2011 (3.9%). Economic growth rates also remained at similar levels, slightly lower than in on the previous year in the euro area, the United States, the United Kingdom and the Latin American countries in which the Group operates its 391 hotels. However, comparing the year-on-year economic growth rates for the four countries that account for the largest proportion of the Group’s sales and income: Germany (0.9% compared to 3.1%), the Netherlands (-0.9 vs 2.2%), Spain (0.4 vs -1.4%) and Italy (0.4 compared to -2.1%), we see that these economies have fallen by around 2 to 3 percentage points. With the exception of Germany, all of these economies moved from growth to contraction. The same is true if we compare the latest reports of the World Travel & Tourism Council, which include the 2012 growth estimates in travel and tourism GDP for all world regions. Asia and Latin America present growth of 6% in 2012 compared to a contraction of 0.5% in Europe. The move towards negative growth has also occurred in the hotel sector in Europe, but not in air traffic or transport. According to data as of November, occupancy (-0.1%) and prices (-4.5%) fell only in European hotels. As such, the growth of the Group’s sales in 2011 has been interrupted, even in a macroeconomic context of weak growth. In 2012, despite the decreasing demand, the Group managed to maintain occupancy at similar levels to 2011 (-0.3%), with a slight fall in average prices (-1.0%). In 2012, commercial initiatives were designed to reinforce web sales channels, as well as certain local offices. Efforts to render the Group more efficient reduced operating expenses by -0.3% in absolute terms, thereby offsetting inflation. As announced in the last report, the Group will continue to focus its attention on both personnel expenses in Spain and Italy (where personnel costs compared to sales are much higher than in other business units) and on leases in the same business units. This year, a number of measures aimed at reducing operating losses and their resultant impact on cash remain in force: Freezing of investments: The bulk of investments are focused on maintenance and on expenditure required by legal undertakings made to public bodies. This year, some investment has been allocated to modernising and improving the services of some of our main company-owned hotels, given their high returns in terms of revenue and profit per room. In accordance with our strategy of moving towards an “asset-light” model involving management/franchise contracts that do not require investment commitments, all hotels opened and new contracts signed in 2012 were under a management arrangement. Total investment in 2012 amounted to €47 million, 16.3% less than in 2011. Staff flexibility: Thanks to the cost containment measures applied in 2012, personnel expenses have fallen by -2.9% in spite of activity levels similar to the previous year, reinforcing the sales teams, and the effect of inflation. Reduction of operating costs: Maintaining savings and cost-control plans has allowed us to cut costs for the third year in succession, including cutting personnel expenses by €14.1 million. Withdrawal from unprofitable hotels: Termination of lease agreements and franchises with negative EBITDA, showing no signs of recovery. As part of our streamlining policy, 10 hotels with a total of 1,105 rooms have been removed from the NH Hoteles portfolio. Seven of these were located in Spain and Italy. The withdrawal of these hotels was offset by the addition of 5 new management contracts, contributing with 906 rooms in the Czech Republic, the Netherlands, Haiti, Spain and the Dominican Republic. Of these, those in Prague, Punta Cana and Ourense were already in operation in 2012, and along with the three management contracts signed in 2011, provided NH Group with a total of 992 operational rooms. Negotiating and refinancing hotel rental agreements through reductions in rental installments and freezing rent rises. The Group has managed to stabilise lease expenditure in 2012 (down by 0.6%), offsetting the opening of hotels, increases resulting from negotiations in previous years, and CPI revisions. Between 2011 and 2012, 84 actions were carried out at leased hotels with negative EBITDA, and 8 agreements were terminated early. Rent reductions are planned for 2013 in addition to those already obtained. End customers, who are even more demanding in tourist destinations with an oversupply of hotel rooms, did not report any negative effect on quality as a result of direct action taken on operating costs. In 2012, NH Group focused its efforts on providing the Group with a system for measuring and monitoring customer satisfaction, which has enabled it to make decisions, respond and implement prompt action plans wherever necessary. NH has managed to include more than 200,000 customer assessments and more than 130,000 comments from all its hotels in a single tool known as “Quality Focus On Line”. This tool analyses results either for individual hotels or from an aggregate perspective, and allows the Group to closely monitor its direct competitors. Likewise, the Board of Directors of the Parent Company decided that NH employees would have 15% of their variable target directly linked to the satisfaction results obtained in 2012, reinforcing the idea that quality is one of the mainstays of NH Hoteles. The outcome of these policies is reflected in an improvement in overall customer assessment of NH during 2012, from 8.0 out of 10 in 2011, to 8.1 in 2012. According to these results, the most appreciated aspects of the chain, in addition to location, are service and cleanliness, which scored above 8.3; both aspects are directly related to the work of employees, showing the importance of customer-centred approach for NH Hoteles Group. 8 CONSOLIDATED MANAGEMENT REPORT
The consolidation of the Spanish hotel industry’s first procurement platform, Coperama (in which NH Hoteles holds a 75% stake), continues to bear fruit. During 2012, it reasserted its position as the leading procurement network for the Spanish hospitality industry. With an average growth of three new establishments per week, and an increase of 42% compared to 2011, it ended 2012 with a total of 596 clients. With a portfolio of more than 300 suppliers, it manages annual purchases worth around €250 million for its members. This year, Coperama presented its customers with an “Electronic Catalogue”, a tool that enables product searches to be turned into purchase orders, facilitating the procurement process and using technology to optimise communication between customers and suppliers. It also launched “Electronic Billing”, a free-of-charge service that will allow suppliers to send electronic invoices to all establishments, eliminating the use of paper. In 2012, NH Hoteles Group received a TripAdvisor Certificate of Excellence for quality and a Goethe Frankfurt and Die Welt Award for the Best Mid-range Chain in Germany, as well as recognition by Top Companies as one of the Best Companies to Work for in the Americas. It also received the Club de Gourmets Award for the Best Hotel Chain 2012, the Dintel Foundation Award for the best customer service and contact-centre project, a Gold Award for the Best Legal Department in Spain, an Excellence Award from Trademark Italia for the Director of the Italy Business Unit, and recognition from Service- Champions for the Central Europe BU as the Best Mid-range Hotel Chain. Individual awards conferred on our hotels include the TripAdvisor Certificate of Excellence for NH Liberdade and NH Castellar, the Conde Nast Traveller Award for the best international non-urban hotel and an R&D Hospitality Award for an innovative project at the Gran Hotel Convento di Amalfi. The MICE Report rated Hesperia Tower as the Best Conference Hotel in the Southern Europe, and NH Berlin received the Top Hotel Opening Award in the “Exceptional” category, as well as the MICE Report Award for the best conference hotel in Germany. The Mexico City Airport hotel was listed among the 10 best hotels in Mexico City by the magazine Latin Trade. Since early March, the Group has been listed in the prestigious FTSE4Good sustainability index. This index includes listed companies from around the world, and is designed to help investors include factors such as the environment, shareholder relations, human rights and labour rights, in their investments. The Group is the only Spanish company included in the latest edition of the FTSE4Good index. This time, FTSE announced the inclusion of 20 new companies in the index, which seeks to recognise the responsible conduct of such companies, while excluding four companies. Most of the companies included as part of this update are from the United States, with six companies. Asia-Pacific countries continue to increase their presence in the index, with three new firms from Japan, two from South Korea and one from Hong Kong. The Norwegian Government Pension Fund, meanwhile, (an investment vehicle that invests the country’s oil revenues according to ethical, social and environmental criteria, so that future generations can also benefit from petroleum production) increased its stake in the Group from 2.24% to 2.40% in late 2012, a movement that highlights the responsible commitments undertaken by the Group. CONSOLIDATED MANAGEMENT REPORT 9
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1.2 Existence of the following elem
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In order to ensure the reliability
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CONSOLIDATED BALANCE SHEETS AT 31 D
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CONSOLIDATED STATEMENTS OF CHANGES
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REPORT ON THE CONSOLIDATED FINANCIA
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The Directors have assessed the pot
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The fair value of Resco Sotogrande,
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Intangible assets with an indefinit
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4.7.4 Equity instruments An equity
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year-end are likewise charged to th
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The basic hypotheses used to estima
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In Italy, the most significant addi
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11. NON-CURRENT FINANCIAL INVESTMEN
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As a general rule, these receivable
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iii) Other non-available reserves
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Mortgage guarantee loans, whether s
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On 26 October 2012, the Court of Ar
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20. SHARE-BASED REMUNERATION SCHEME
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Provisions for pensions and similar
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Total Corporate Tax Income or Expen
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Year of origin Amount Offsetting De
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Contingent assets and liabilities T
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27.3 Personnel expenses This item i
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27.6 Financial expenses and changes
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FUNDING AGREEMENTS € Thousand 201
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29.1 Information on main segments
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Holder Investee company Activity Nu
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After the capital increase, the sha
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Similarly, the owners’ associatio
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ANNEX I: SUBSIDIARIES Data on the C
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Investee company Registered address
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ANNUAL REPORT OF THE AUDIT COMMITTE
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websites OF INTEREST: ITP INTERNATI
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