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1 DANUBIUS HOTELS GROUP ANNUAL REPORT2 Contents Statement by the Chairman 2 Quality in focus The Board of Directors 7 Th...
DANUBIUS HOTELS GROUP ANNUAL REPORT 2010
Contents
Statement by the Chairman
2
Quality in focus -2010
5
The Board of Directors
7
The Supervisory Board
8
Tourism in 2010
9
Report of the Board of Directors
12
Report of the Supervisory Board
29
Independent Auditors’ Report
30
Consolidated statement of financial position
32
Consolidated income statement
33
Consolidated Statement of Comprehensive Income
34
Consolidated Statement of Changes in Equity
35
Consolidated Statement of Cash Flows
36
Notes to the Consolidated Financial Statements
37
Report on the 2011 business targets
69
1
ANNUAL REPORT 2010 Draft Statement by the Chairman for AGM/Annual Report 2010
Dear Shareholders, I am pleased to report that, during 2010, Danubius Group continued to respond purposefully to the challenges presented by the ongoing economic difficulties in most of Europe and an extremely tough market for tourism, particularly in Hungary. As we move into 2011, we can take some encouragement from the recovery in Germany and the forecasts for a return to growth in most other European countries. Nevertheless, many uncertainties remain, which can influence the behaviour of tourists and business travellers. These include questions about the future of the Eurozone, the effects of the unstable situation in the Middle East, including on energy costs, the unquantifiable implications on Japanese business from the earthquake and tsunami and the extent to which cost-cutting programmes in several countries might affect the rate of economic recovery. Turning to the financial results for 2010, your Company proved resilient to extremely testing business conditions and I would highlight the following aspects: õ Revenues expressed in Euro slightly exceeded those of 2009, despite the negative effect of the volcanic ash problem in the spring. As a result of the stronger Hungarian currency compared to 2009, revenues reduced by 1% when translated into HUF. õ Group occupancy increased by just over 1% compared to 2009, whilst in Hungary the occupancy increase was 1.7% despite an increasingly competitive market. õ The operating profits and cashflow of the subsidiaries in Czech Republic, Slovakia and Romania held up well and helped to offset difficult trading conditions in Hungary. õ The overall level of Group borrowings did not change from the beginning of the year and interest costs reduced. Management exercised tight control over liquidity. The net cash provided by our operating activities increased from HUF 3.8 billion in 2009 to HUF 4.3 billion in 2010, due largely to effective management of working capital. Our loss after tax slightly increased from HUF 756m in 2009 to HUF 882m, but, despite this, shareholders’ equity grew by just over 1%, due to translation gains on subsidiary investments. The continuing imbalance of supply and demand in Budapest, due to huge new investments in hotel facilities not being matched by rising demand, has remained a problem for all operators in the market. We expect it will take several years for this imbalance to correct itself and so all our efforts are directed at making our activity more competitive. Tight cost control has been a key goal for the last two years and this will continue. In addition, we have invested substantially in our websites, central reservation system and e-commerce activities to assert our own strengths in the marketplace. Whilst many new hotels have been opened in Budapest, many of Danubius’ properties are unique and have a special appeal to guests seeking to experience Hungary’s history and traditions. We are constantly seeking out new initiatives to capitalise on these attributes and to provide the best value. It is encouraging that the new Government in Hungary is adopting a more positive approach towards tourism, not least by allocating increased funding for tourism marketing in the 2011 budget. In recent years, Hungary has slipped in its attractiveness as an international destination, whether for leisure or corporate
2
Draft Statement by the Chairman for AGM/Annual Report 2010
guests, and the Government’s new initiatives, on the back of Hungary’s presidency of the EU in the first half of 2011, are to be welcomed. A boost for tourism will definitely contribute to economic growth and create more much needed jobs in Hungary. Danubius is willing to pay its full part in this process. In my report last year, I mentioned the importance of the Company’s strategy over the last decade of expanding its health spa business into other countries in the region. Once again, this strategy proved important to Group results as increasing numbers of guests from Russia and former Soviet countries helped maintain our Czech business, whilst Slovakia recorded an upturn of guests from Israel and Arab countries. In Romania, the business proved resilient, despite the wider problems of the Romanian economy. Apart from the continued roll out of the new operating software in Hungary, bringing access to cutting edge management information systems, significant investments have been made in our subsidiaries. In Marienbad, the Maria Spa Project will be completed in Spring 2011 and the fully refurbished balneotherapy facilities in Piestany are now open. In Romania, a programme of refurbishing hotel rooms was completed and work on the wellness and pool area will be concluded later in 2011. We expect 2011 to be another challenging year, not least as, at least for the time being, the Hungarian and Czech currencies are at stronger levels than the rates included in our budgets. Hence, there can be no let up in the tight control of our business costs and cashflow, as well continued innovation in sales and marketing, particularly e-commerce, social media and the enhancement of margins through improved channel management. Danubius will also continue its adjustment to the very different business conditions from those of three or four years ago. We are currently exploring new opportunities, both for investments and management contracts, which are slowly emerging from the shake out of the recession. Such investments must be rigorously justified in the light of the present economic conditions and the availability of finance. However, following the substantial reduction in its cost base over recent years, Danubius should be well placed to take advantage of such opportunities and to improve its profits as revenues start to grow again. During the last year, I can inform you that CP Holdings increased its direct interest in the Company from 80.03% of shares entitled to a voting right to 81.40% today. Given the 2010 results and the exacting business conditions which continue to face the Group, the Board is not proposing the payment of a dividend this year. I would particularly like to thank our managers and employees for their understanding, loyalty and commitment during these difficult times. Only with the full co-operation of all our people, at every level in the organisation, can we maintain service quality which is so essential to our future success. CP Holdings has been a major investor in Danubius Group for over 15 years and I want to assure you that we are not fair weather friends. It is a particular pleasure to me that two further generations of the Schreier family are now involved in our business and this underpins our commitment to Danubius and to all our other business in the region. Whilst I am optimistic by nature, the uncertainties which exist in the world mean we must be realistic in assessing the outlook for 2011. The continuing trend towards later booking and increasing energy and commodity prices are examples of factors which make forecasting difficult. We must hope that improved economic growth forecasts are delivered, especially in Hungary, and that our customers feel sufficiently secure to travel more whether for business or leisure. The frustrating events of the last two or three years must not be allowed to obscure the long term strengths of Danubius – our unique and historical hotel assets, our health spas with signature treatments based on local natural resources and our great reputation for hospi-
3
ANNUAL REPORT 2010 Draft Statement by the Chairman for AGM/Annual Report 2010
tality. These strengths, together with the tenacity and dedication of our people, will hold us in good stead as we turn the corner from recession to recovery. April 2011
Sir Bernard Schreier Chairman of the Board
4
Quality in focus
˝
Mission Statement õ Our mission at Danubius Hotels Group, through listening to our guests, is to meet and exceed constantly their expectations. õ Quality is put at the heart of everything we do, whether at Health Spa Resorts or City Hotels. õ We give our associates the utmost of attention, knowledge and training.
ANNUAL REPORT 2010
Quality in focus Mission Statement õ We build and strengthen our leadership in operating Health Spa Resorts in European destinations. õ We create value through innovative international investments and management with social responsibility, efficient and environment friendly operations.
The Board of Directors
Sir Bernard Schreier
Alexei Schreier
Chairman of the Board; Chairman of CP Holdings Limited and subsidiaries; Vice President of Bank Leumi Plc.
Director of CP Holdings Limited
Iris Gibbor
John Smith
Robert Levy
Director of CP Holdings Limited
Deputy Chairman of Danubius Hotels Group from 2007; Director of CP Holdings Limited and subsidiaries
Chief Executive Officer of CP Holdings Limited from 2007; Director of subsidiaries
Sándor Betegh
Dr. Imre Deák
János Tóbiás
Chief Executive Officer of Danubius from 1990 till 2006
Senior Vice President of Danubius from 1990, Chief Executive Officer from 2006
Vice President, Finance of Danubius as of 1991
Ing. Lev Novobilsky
József László
Dr. István Fluck
General Manager of ˇ a.s. ˇ Lécebné Lázne
Manager of SAS Skandinavian Airlines in Budapest until 1998; honorary docent
General Vice President of FEMTEC, Medical Director and Chief Physician of Budapest Spa Zrt.
7
ANNUAL REPORT 2010 The Supervisory Board
8
Tibor Antalpéter
Dr. Gábor Boér
Chairman of the Supervisory Board from 2002; Ambassador of the Republic of Hungary to London from 1990 to 1995
Chief Executive Officer of Investor Holding Zrt. and Interag Holding Zrt.
László Polgár
Dr. András Gálszécsy
Auditor, forensic auditor in taxation and accounting
Retired minister
Tourism in 2010
In 2010, in public accommodation establishments, the numbers of both guests and tourist nights were 2% higher than those recorded a year earlier. The numbers of domestic guests do not changed, the numbers of guest nights rised 2%.The numbers of foreign guests were 5% higher, the numbers of guest nights were 1% higer than in 2009. Accommodation establishments showed a 4% increase in revenue at current prices. Increase of the number of hotel rooms in the period 2000-2010 2000
Increase of the number of hotel rooms in the period 2000-2010
New rooms built between 2001–2010
2000
New rooms built between 2001–2010
2 534 20 000
2172 0
2538 5-star
19 402
10 000
19%
8174
12 418
81%
4-star
3-star
In 2010, 3.4 million foreign guests spent 9.4 million nights in public accommodation establishments. Concerning major source markets (Germany, United Kingdom, Poland) fewer tourists arrived, there was a small increase in case of Austria, Italy, Czech Republic, and USA. In the course of this period, public accommodation establishments recorded 3.9 million domestic guests and 9.7 million domestic tourism nights, the numbers of tourist arrivals do not changed, the numbers of tourist nights increased by 2%. In hotels accounting for two-thirds of domestic arrivals, the number of tourism nights increased by 6% compared with a year earlier. In case of boarding houses a 9% decrease was recorded. Both of the numbers of tourist arrivals and tourist nights significantly increased in the wellness hotels in 2010. Distribution of guestnights in commercial accommodations in 2010
11% 4% 51%
Domestic 2%
26%
3%
2%
Gernany 1%
Austria Great-Britain USA Italy Spain Other foreign countries
In 2010, room occupancy in hotels was 45% on average, within this, 5 star units reached occupancy rates of 60%, 4 star units of 50%. In 2010 the occupancy rate in spa hotels was 56%. In the reference period, the numbers of tourist nights spent at Lake Balaton in spite of foreigns were lower by 8, and in spite of domestics were lower by 5% than a year earlier. In Budapest – in contrast to Balaton – because of foreign guests the numbers of guest nights increased by 5%.
9
ANNUAL REPORT 2010 Tourism in 2010
In 2010 Pécs was the Cultural Capital of Europe and therfore the numbers of guests and guest nights increased by 26% and by 28%. Change of guestnights in hotels (2009/2010) 15% 10%
12,7% 4,5% 2,6%
5%
4,1%
1,8%
0% -3,8%
–5%
-4,9%
–10% –15%
-15,5%
–20% Domestic Germany Austria -25%
Great-
USA
-21,0% Italy
Spain
Other
Összesen
foreign
Britain
countries
In the observed period, public accommodation establishments had gross revenues of HUF 234 billion. Within this, accommodation revenues amounted to HUF 127 billion. Total revenue increased by 4% according to 2009. The gross average room rate was HUF 14,223, the revenue per available room in hotels (gross REVPAR) was HUF 6,375. In the last year the forint was weaker by 2% than in 2009. In the high season (July), the number of accommodation establishments operating in our country was 2,813, the number of available bed places was same than in 2009, at the same time in the 4 star category increased by 4 thousand beds. Cost and balance of tourism-according to the current account balance (EUR million) 5000 4000
Balance Cost: 4 083
Cost: 4 051
3000 2000
Balance: 1 808 Balance: 1 473
1000 0
Hungarian Central Statistical Office
10
2009
2010
Cost
Tourism in 2010
Tourism in 2010, Czech Republic The Czech Statistical Office reported that during the whole year 2010, a decrease of occupancy stopped for the first time since the year 2008; collective accommodation establishments reported a higher number of overnight stays by 0.4% and the number of guest increased by 1.9% too. Foreign guests arrived by 5.0% more and their number of overnight stays went up by 3.5%; in contrast there were less domestic guests in collective accommodation establishments (by 1.3%) and their number of overnight stays decreased too (by 2.5%). An average number of overnight stays goes in the long term down, which became evident also in the year 2010 both as a whole and in the case of residents; only for non-residents the average number of overnight stays remained at the same level as in the year 2009. Those arriving from Germany represents the greatest proportion among the foreign guests here (11%), but at the same time US, Russian, Ukrainian and Turkish demand indicates an increase in 2010. The Czech Spa hotels indicated more then 675.000 visitors, which is the highest number of guest since year 2000. From regional point of view, the number of guest in observed establishments went up the most in Prague (by 8.9%), where there were more domestic guests by 16.6% and non-residents by 7.8%; on contrary the highest drop in guest's arrivals was recorded in Ustecky region by 12.8%. Similar development was shown in the number of overnight stays – the highest year-on-year growth was in Prague (by 7.8%) and the deepest decrease was in Ustecky region (by 9.3%). Czech Statistical Office Tourism in 2010, Slovakia According to data by the Slovakian statistical office revenues from the tourism sector went up by 0,6% in 2010. The number of accommodation facilities has dropped by 5% and the capacity of accommodation went down by 2% at national level. The number of guests visiting the commercial accommodation places was up by 0,3% (last year it a decrease by -17,2%). The domestic demand shows a small subcidence (-0,8%) but the foreign one indicates an increase by 2,2%. In Slovakia the majority (61%) of guestsis domestic similary to the the previous years. The number of guestnights in 2010 (both from the side of foreign and domestic) stagnated. The number of Spa hotels in Slovakia has not changed since 2007, but the number of health spa visitors was up by 7,5%, which is the first increase since the year 2007. The revenue (+17,5%), and the number of guestnights (+4,1%) of this hotel sector also increased. The average price paid for the spa accommodation went up from EUR 20 to EUR 23, while the occupancy of the available spa hotel beds was 60,8% int he year 2010 (+5% since 2009). Those arriving from the neighbouring countries (54,3% ) represents the greatest proportion among the foreign guests here (the Czech Republic is still on the top of the foreign guests’ list by 33%), and this figure showed a small increase in 2010. The German demand stagnates in Slovakia, but at the same time US, Chinese, Russian and South Korean demand indicates an increase in 2010.
11
ANNUAL REPORT 2010 Report of the Board of Directors ON THE YEAR 2010 PERFORMANCE OF DANUBIUS GROUP This report contains consolidated financial statements for the period ended 31 December 2010 as prepared by the management in accordance with International Financial Reporting Standards (IFRS). Continuing difficult trading conditions in Hungary offset by resilient profit contribution by subsidiaries.
HIGHLIGHTS Danubius Hotels Group (IFRS) Net sales revenues EBITDA Operating profit/(loss)
EUR million1
HUF million FY 2010
FY 2009
Ch %
FY 2010
FY 2009
Ch %
42,921
43,485
(1)
155.8
155.0
1
4,853
5,741
(15)
17.6
20.5
(14)
356
1,122
(68)
1.3
4.0
(68)
Financial results
(1,309)
(1,529)
(14)
(4.8)
(5.4)
(12)
Loss before tax
(953)
(407)
134
(3.5)
(1.5)
139
Operating cash flow
4,269
3,816
12
15.5
13.7
14
CAPEX
2,514
2,148
17
9.1
7.7
20
HUF/EUR
275.4
280.6
(2)
n.a.
1 The presentation currency of the Group is HUF. The EUR amounts are provided as a convenience translation using average f/x rates of the
respective periods.
õ In the financial year of 2010 total net sales revenues were HUF 42.9 billion, down by 1% compared to last year. The movements in HUF/EUR FX rate and the net lost revenue caused by the volcanic ash together had a considerable negative effect on Hungarian segment revenue in 2010 compared to 2009, while in EUR terms we were able to increase revenue compared to last year. Group occupancy in 2010 was 60.0% compared to 58.9% in 2009 due to the significant occupancy increase in the third quarter, that is regularly the strongest quarter of the group. õ EBITDA in FY 2010 is down by 15% to HUF 4.9 billion from HUF 5.7 billion due to the following: õ Hungarian segment’s revenue for FY 2010 decreased by 2% to HUF 25.2 billion mainly due to lower revenue recognised from room and F&B services (significantly less banqueting) and from Gundel banqueting services, however the occupancy of hotels increased by 1.7% from 55.5% to 57.2%, while the operating result amounted to a loss of HUF 0.6 billion compared to HUF 0.1 billion loss as savings on payroll and other operating expenses partly compensated the negative effect of lower revenues. õ Czech hotels contributed an operating profit of HUF 574 million in FY 2010 compared to a profit of HUF 623 million in FY 2009, in spite of the revenue increase of 3% to HUF 7.3 billion due to higher cost of more guest nights. õ Slovakian segment’s operating profit was HUF 134 million in FY 2010 compared to a profit of HUF 356 million in FY 2009. Revenue in HUF terms decreased by 2% to HUF 9.0 billion, partly thanks to the strengthening of HUF against EUR. Costs were kept tightly under control. õ In FY 2010 the total revenue of Romanian segment decreased by 2% to HUF 1.5 billion, therefore operating result decreased by HUF 25 million to a profit of HUF 203 million.
12
Report of the Board of Directors
õ The Financial result in 2010 was a loss of HUF 1.3 billion, compared to a loss of HUF 1.5 billion in 2009. In 2010 interest expenses decreased by HUF 589 million compared to 2009 as the EURIBOR prime rate was extremely low (around 0.8% in average) and last year the fair value of our Collar&Cap options adversely changed by HUF 97 million increasing the interest expenses by this amount. In 2010 weaker HUF caused HUF 0.5 billion unrealised FX loss while it was HUF 0.3 billion in 2009. õ Loss before tax in 2010 was HUF 1.0 billion, compared to a loss of HUF 0.4 billion in 2009. õ Net cash provided by operating activities in 2010 was HUF 4.3 billion, a 12% improvement compared to HUF 3.8 billion net cash provided in 2009. õ Capital expenditure and investments during 2010 amounted to HUF 2.5 billion compared to HUF 2.1 billion spending in 2009. õ Group level average headcount decreased by 5% in 2010, it was 4,646 compared to 4,876.
13
ANNUAL REPORT 2010 Report of the Board of Directors
FIGURES AND RATIOS IN HOTEL BUSINESS – 2010 Distribution of hotel revenues
Distribution of the number of rooms available Hungary
Hungary 57%
67% Czech Republic 18%
Czech Republic 10%
Slovakia 22%
Slovakia 18%
Romania 3%
Romania 5%
Magyarországi szállodák Number of rooms
Csehországi szállodák
5,327
Occupancy Average rate (HUF) Number of staff
Szlovákiai szállodák 810
Romániai szállodák
1,306
400
57.2%
77.0%
62.2%
56.7%
12,628
19, 231
11,496
6,888
2,364
602
1,187
243
Average number of staff / rooms
0.44
0.74
0.91
0.61
Profit of rooms department (HUF million)
9,780
3,443
2,816
483
Profit of F&B (HUF million)
1,595
162
490
278
425
831
1,854
108
33
111
132
121
11,833
4,547
5,292
990
51.3%
62.9%
58.8%
68.0%
Profit of spa department (HUF million) Profit of other minor departments (HUF million) Departmental profit Profit margin
FINANCIAL OVERVIEW Hungarian Segment HUF million
EUR million
HUNGARY FY 2010 Net sales revenues
FY 2009
Ch %
FY 2010
FY 2009
Ch %
25,189
25,742
(2)
91.46
91.75
(0)
(553)
(86)
541
(2.01)
(0.31)
552
Financial results
(1,232)
(1,339)
(8)
(4.47)
(4.77)
(6)
Loss before tax
(1,785)
(1,426)
25
(6.48)
(5.08)
28
778
1,273
(39)
2.85
4.54
(37)
Operating loss
CAPEX
Total sales revenue and other operating income of 2010 decreased by 2% to HUF 25.2 billion, mainly due to lower revenue recognised from room and F&B services and from Gundel banqueting services. The combination of the strengthening of HUF against EUR and the net lost revenue caused by the volcanic ash together still had a negative effect on total 2010 revenue compared to 2009, that is estimated to be app. HUF 0.4 billion.
14
Report of the Board of Directors
Hotel occupancy in FY 2010 was 57.2% compared to 55.5% in FY 2009, thanks to the impressive increase in Q3’s occupancy by 4%, and in Q4 by almost 1%.The occupancy of Budapest hotels increased by 0.9 percentage point at year-to-date level. In spite of the occupancy increase room revenue of Hungarian hotels in 2010 decreased by 3% to HUF 12.9 billion compared to 2009 due to the significant decrease of average room rate achieved (ARR) to HUF 12,628, lower by HUF 910 than the comparative figure. The average length of stay was 2.8 days in 2010 remained at the same level of last year. The number of guest-nights during financial year of 2010 increased to 1,699,016 from 1,657,734 out of which domestic guest-nights represent 19.8%, compared to FY 2009 level of 21.5%. In financial year guests from Spain, Great Britain and China decreased the most, but more guests arrived from Ukraine, Russia, USA and Germany. Due to the revenue drop room departmental profit margin decreased from 77.6% to 75.5%.
Distribution of guestnights in our Hungarian hotels Hungary
Other
20%
9%
Germany
Other Europian
15%
35%
Great-Britain Italy
4%
6% Austria 6%
USA 5%
Food and beverage revenue of hotels and restaurants for financial year of 2010 was HUF 7.5 billion, lower by 2% than the comparative figure, as a direct result of lower banqueting. Full year 2010 F&B departmental profit of our hotels fell by HUF 176 million mainly as the result of lower revenue which could not be compensated by the decrease of payroll and cost of sale. Gundel’s F&B revenue in FY 2010 decreased by 6% to HUF 984 million. Operational expenses include a net loss of HUF 145 million in respect of selling and impairing wine inventories. In FY 2010 Spa revenue was HUF 1,222 million, remained at the same level of last year, being the combined effect of an increase in the number of treatments sold and a decrease in average price. Spa departmental profit decreased by 5% due to the higher personnel costs associated with more treatments sold. Revenue from security ser vices decreased by 7% in 2010 to HUF 774 million. Due to the combined effect of inflation on materials and the effect of cost saving measures full year raw material expenses decreased by 6% to HUF 5.4 billion, however – due to more guest nights - the value of services used in FY 2010 increased by 5% to HUF 6.4 billion, within this energy cost felt by 12% to HUF 2,289 million while the amount spent on maintenance work at the hotels and restaurants increased by 5% to HUF 623 million. Personnel expenses of operation in FY 2010 were HUF 10.7 billion, no material change compared to 2009 in spite of the increased occupancy of our hotels, in addition the comparison with the prior years was negatively impacted by the movements in accruals. Due to the combined effect of the decrease of 3 months EURIBOR, the decrease of average borrowings over the period and the change in the fair value of interest swap derivatives interest expenses decreased to HUF 688 million from HUF 1,191 million in financial year of 2010. Primarily as the result of depreciation of HUF in FY 2010 against EUR, in which the majority of our long-term borrowings are denominated, a HUF 0.6 billion foreign exchange loss (mostly unrealised) was recognised in profit and loss, compared to a loss of HUF 0.3 billion in FY 2009.
15
ANNUAL REPORT 2010 Report of the Board of Directors
Capital expenditure during FY 2010 was HUF 778 million compared to HUF 1,273 million spent in FY 2009, including expenditure on the new operational software. Overall the loss before tax of Hungarian segment was HUF 1.8 billion in FY 2010, compared to a loss of HUF 1.4 billion in FY 2009. Czech Segment HUF million
CZECH
FY 2010
Total revenue and income
FY 2009
Ch %
7,273
7,067
Operating profit
574
623
(8)
Financial results
4
-29
n.a.
578
595
(3)
Profit before tax CAPEX
3
853
532
60
HUF/CZK average
10.90
10.61
3
CZK/EUR average
25.27
26.45
(4)
Total sales revenue and other operating income in HUF terms grew by 3% to HUF 7.3 billion in financial year of 2010, mainly due to the strengthening of Czech crown against forint. Room revenue of FY 2010 was HUF 4.0 billion, up by 4% as in FY 2010 Marienbad hotels’ occupancy was 77.0% compared to 75.8%, in addition the average room rate achieved (ARR) in CZK term improved to 1,766 from 1,706. The average length of stay was 9.6 days in FY 2010 while it was 9.0 days in FY 2009. As the result of temporary closures the number of guestnights in FY 2010 was 338,797 compared to 346,842 and the drop in German and domestic guests was partly compensated by increasing number of guests arriving from Israel and certain former Soviet Union countries. The amount of material expenses and services used in FY 2010 increased by 5% to HUF 3.2 billion, within this energy costs increased by 8% to HUF 647 million, while maintenance expenses decreased by 5% to HUF 442 million. Total personnel expenses in financial year were HUF 2.1 billion, up by 2% compared to last year. Distribution of guestnights in our Czech hotels Other Kazakhstan 2%
Ukraine
1%
Other Europian 3%
Israel 3% Germany
2%
38% Czech Republic 23%
Italy 28%
Due to the decrease of 3 months EURIBOR and the lower amount of borrowings interest expense for FY 2010 was HUF 46 million compared to HUF 73 million. As the result of the strengthening of CZK in FY 2010 against EUR in which all of LLML’s long-term borrowings are denominated, a HUF 49 million foreign exchange gain was recognised in profit and loss, compared to a gain of HUF 43 million in FY 2009.
16
Report of the Board of Directors
Capital expenditure in FY 2010 amounted to HUF 853 million, up by 60% compared to previous year, including spending on Maria Spa and Vltava Spa House. Overall, the profit before tax of Czech operations for FY 2010 was HUF 578 million compared to HUF 595 million achieved in 2009. Slovakian Segment HUF million
SLOVAKIA
FY 2010
Total revenue and income
FY 2009
Ch %
9,003
9,187
(2)
Operating profit
134
356
(62)
Financial results
(96)
(146)
(34)
37
210
(82)
Profit before tax CAPEX HUF/EUR
458
293
56
275.41
280.58
(2)
The functional currency of the Slovakian subsidiary is Euro as of 1 January 2009. Total sales revenue and other operating income in FY 2010 decreased by 2% to HUF 9.0 billion, mainly due to the stronger forint against euro. Room revenue in EUR increased by 2% in 2009 as the average room rate (ARR) increased to EUR 41.8 from EUR 40.3 while the occupancy decreased from 62.7% to 62.2%. The number of rooms sold decreased from 299,336 to 296,203 in FY 2010. The number of guestnights in FY 2010 was 480,045 compared to 477,515 in FY 2009, the average length of stay in financial year of 2010 was 10,0 days, the same level of last year. The number of German guests decreased by 15% compared to FY 2009, together with the decrease of guests from neighbouring countries like Austria and Czech Republic, however the number of guests arriving from Israel and Kuwait increased considerably by 23% and 26%, respectively. Comparative FY 2009 revenue included HUF 94 million (EUR 0.3 million) one-off gain on the sale of a land, while there was no sale of fixes assets in financial year of 2010. The amount of material expenses and services used in FY 2010 was HUF 3.3 billion, down by 1%, within this, energy cost decreased by 12% to HUF 709 million, mainly due to the implementation of energy savings systems and maintenance expenses were HUF 217 million compared to HUF 212 million in FY 2009. Personnel expenses for FY 2010 were HUF 3.4 billion, a decrease of 3% in HUF terms, reflecting partly the stronger HUF and headcount reduction measures.
Distribution of guestnights in our Slovakian hotels Austria 2% Other Asian countries
Israel 10%
6% Other
Slovakia
8% Czech Republic
44%
8%
Germany 22%
17
ANNUAL REPORT 2010 Report of the Board of Directors
Due to the decrease of 3 months EURIBOR and the lower average level of borrowings the interest expenses for FY 2010 amounted to HUF 100 million, compared to HUF 152 million in FY 2009. Capital expenditure during financial year of 2010 was HUF 458 million compared to the HUF 293 million in FY 2009. Overall, the profit before tax of Slovakian operations for FY 2010 was HUF 37 million compared to a profit of HUF 210 million in FY 2009. Romanian Segment HUF million
ROMANIA
FY 2010
Total revenue and income
FY 2009 1,456
Ch % 1,489
(2)
Operating profit
203
228
(11)
Financial results
15
(16)
n.a.
Profit before tax
217
212
2
CAPEX
425
50
749
HUF/RON average rate
65.41
66.33
(1)
RON/EUR average rate
4.21
4.24
(1)
Total sales revenue and other operating income for FY 2010 decreased by 2% in HUF terms compared to financial year of 2009, in spite of the FY 2010 slight occupancy increase to 56.7% as average room rate (ARR) decreased from RON 107.3 to RON 105.3. Room departmental profitability in RON terms decreased by 2% in FY 2010. The number of guests during financial year of 2010 increased to 36,754 from 35,592. In spite of the combined effect of inflation and extensive refurbishment works total material expenses and services used in FY 2010 was HUF 606 million compared to HUF 605 million last year. Within this, energy cost was HUF 147 million, up by 5% compared to FY 2009, while maintenance expenses were HUF 50 million in 2010, up by 71% compared to 2009. Due to the decrease in 3 months EURIBOR and the lower average level of borrowings the interest expenses for FY 2010 amounted to HUF 17 million compared to HUF 23 million in FY 2009. Distribution of guestnights in our Romanian hotels Germany Moldavia Hungary
1%
Other 1%
8%
8% Romania 82%
Capital expenditure during financial year of 2010 was HUF 425 million compared to HUF 50 million in FY 2009, the majority of which relates to the reconstruction of new spa pools and the refurbishment of hotel rooms.
18
Report of the Board of Directors
Being the result of the above the profit before tax of Romanian operations for FY 2010 was HUF 217 million compared to a profit of HUF 212 million in FY 2009. Consolidated Balance Sheet Total consolidated asset value amounted to HUF 87.3 billion as of 31 December 2010, no material change compared to the period end of year 2009. Current assets include assets held for sale which comprises the net carrying value, less cost of sale, of a hotel and hospitality property in Hungary. The Group expects to sell these assets within the next twelve months. The amount of trade receivables grew by 6% from HUF 1.37 billion to HUF 1.44 billion. The amount of property, plant and equipment was HUF 76.4 billion at the end of year 2010, that is a HUF 0.3 billion decrease over the last 12 months as the amount of capital expenditures are lower than the amount of amortisation accounted for. From August 2009 the 50% investment in Egészségsziget Kft., our associate established to utilise the land acquired near Hotel Gellért became a fully consolidated subsidiary (before this date it was treated as an associate). CP Holdings purchased the remaining 50% shareholding in August 2009 and Danubius simultaneously entered into a put and call option agreement with a view to purchase this shareholding. The underlying purchase price paid by CP Holdings and the amount to be paid by Danubius under the option agreement is the same (EUR 1.7m). The option agreements provide for an option fee of EUR 100,000 and interest from August 2010. Total liabilities at the end of the fourth quarter 2010 was HUF 34.2 billion, a 1% decrease compared to 31 December 2009. The Group had EUR 91.0 million long-term loans, including short-term portion as of 31 December 2010. The value of shareholders’ equity increased by 1% compared to 31 December 2009 being the combined effect of the after tax loss of HUF 1.0 billion of previous 12 months, the significant, HUF 1.4 billion increase of translation reserve and HUF 0.1 billion increase in non-controlling interest.
Cash flow Net cash provided by operating activities in financial year of 2010 was HUF 4.3 billion, a considerable improvement compared to HUF 3.8 billion net cash provided in FY 2009, due to the positive result of working capital changes and lower amount of interest paid. Capital expenditure in FY 2010 was HUF 2.5 billion, a 18% increase compared to FY 2009, still reflecting our tight cash management program. During financial year of 2010 EUR 12.0 million loan has been drawn down and EUR 11.5 million repayment of borrowings has taken place.
19
ANNUAL REPORT 2010 Report of the Board of Directors
APPENDIX I - AUDITED CONSOLIDATED BALANCE SHEET PREPARED IN ACCORDANCE WITH IFRS (HUF million) At 31 December 2010
At 31 December 2009
Assets Cash and cash equivalents
4,186
3,537
Trade and other receivables
2,415
2,222
620
824
73
78
Inventory Long-term assets classified as held for sale Current income tax receivables
4
134
Total current assets
7,298
6,795
Property, plant and equipment
76,448
76,795
3,238
3,208
24
72
Intangible assets Other investments Deferred tax assets
317
201
Total non-current assets
80,027
80,276
Total assets
87,325
87,071
Liabilities and Shareholders' Equity Trade accounts payable
2,205
1,995
Advance payments from guests
616
672
Current income tax payables
234
6
Other payables and accruals, including derivatives
3,151
2,901
Interest-bearing loans and borrowings
6,130
5,290
Provisions Total current liabilities Interest-bearing loans and borrowings Deferred tax liabilities Provisions
317
344
12,653
11,208
19,602
21,005
1,077
1,332
897
1,033
Total non-current liabilities
21,576
23,370
Total liabilities
34,229
34,578
8,285
8,285
Shareholders' Equity Share capital Capital reserve
7,435
7,435
Treasury shares
(1,162)
(1,162)
Translation reserve
7,817
6,354
Retained earnings
28,203
29,152
50,578
50,064
Attributable to equity holders of the parent Non-controlling interest
2,518
2,429
Total shareholders’ equity
53,096
52,493
Total liabilities and shareholders' equity
87,325
87,071
20
Report of the Board of Directors
APPENDIX II - AUDITED CONSOLIDATED STATEMENT OF INCOME PREPARED IN ACCORDANCE WITH IFRS (HUF million) Year ended 31 2010
Year ended 31 2009
Room revenue
20,914
21,215
Food and beverage revenue
12,719
13,020
Spa revenue
5,801
5,841
Other departmental revenue
2,056
1,777
Revenue from wineries
132
155
Revenue from security services
774
835
Other income
525
642
42,921
43,485
447
432
8,965
9,291
Total operating revenue and other income Cost of goods purchased for resale Material costs Services used Material expenses and services used Wages and salaries Other personnel expenses Taxes and contributions
9,612
9,246
19,024
18,969
11,704
11,407
1,197
1,393
3,595
3,771
16,496
16,571
Depreciation and amortisation
4,497
4,619
Other expenses
2,522
2,293
74
(4)
Personnel expenses
Changes in inventories of finished goods and w.i.p. Work performed and capitalised
(48)
(85)
42,565
42,363
356
1,122
77
200
Interest expense
(850)
(1,439)
Foreign currency loss
(536)
(290)
(1,309)
(1,529)
(953)
(407)
338
54
Total operating expenses Profit from operations Interest income
Financial loss Loss before tax Current tax expense Deferred tax expense / (benefit)
(409)
295
Loss for the year
(882)
(756)
(933)
(801)
Attributable to: Owners of the Company Non-controlling interest Basic and diluted earnings per share (HUF per share):
51
45
(118)
(101)
21
ANNUAL REPORT 2010 Report of the Board of Directors
APPENDIX III – AUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (HUF million) Year ended 31 2010 Loss for the year
Year ended 31 2009
(882)
(756)
1,501
394
Other comprehensive income Foreign currency translation differencies for foreign operations Income tax on other comprehensive income
-
-
1,501
394
619
(362)
Owners of the Company
530
(479)
Non-controlling interest
89
117
619
(362)
Total other comprehensive income Total comprehensive income for the period Attributable to:
Total comprehensive income for the period
22
Report of the Board of Directors
APPENDIX IV - AUDITED CONSOLIDATED STATEMENT OF CASH FLOWS PREPARED IN ACCORDANCE WITH IFRS (HUF million) Notes Profit from operations Depreciation and amortisation
7,8
Gain/on sale of property, plant and equipment and intangibles Change of provisions
12
Impairment of receivables and write-off of inventories
Year ended 31 2010
Year ended 31 2009
356
1,122
4,497
4,619
-
(90)
(163)
(303)
130
6
(377)
1,064
89
43
882
(1,148)
(1,076)
(1,301)
Changes in working capital (Increase)/ decrease of accounts receivable and other current assets (Increase)/ decrease of inventory Increase / (decrease) of accounts payable and other current liabilities Interest paid Income tax paid Net cash provided by operating activities Purchase of property, plant and equipment and intangibles Interest received Proceeds on sale of property, plant and equipment and intangibles Net cash paid on acquisition
9
Net cash used in investing activities Receipt of long-term bank loans Repayment of long-term bank loans Net cash provided by financing activities
(69)
(196)
4,269
3,816
(2,514)
(2,148)
82
192
-
125
-
(1,268)
(2,432)
(3,099)
3,282
1,369
(3,200)
3,285
82
(1,916)
Net increase (decrease) in cash held
1,919
(1,199)
Cash and cash equivalents at the beginning of the period, net
1,981
3,171
65
9
3,965
1,981
Effect of exchange rate fluctuations on cash held Cash and cash equivalents at the end of the period, net
3
APPENDIX V SUBSEQUENT EVENTS There has not been any matter or circumstance occurring subsequent to the end of the reporting period that has significantly affected, or may significantly affect, the operations of the Group, the result of those operations or the state of affairs of the Group in future periods.
23
ANNUAL REPORT 2010 Report of the Board of Directors
APPENDIX VI SHAREHOLDER STRUCTURES AND CHANGES IN ORGANISATION In FY 2010 there were no significant organisational changes within the Group.
Shareholder1 CP Holdings and its investments2
Period end of Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
76.41%
77.61%
77.61%
77.61%
77.72%
CP Holdings Ltd.
37.94%
37.94%
37.94%
37.94%
37.94%
Interag Zrt.3
31.45%
31.45%
31.45%
31.45%
31.45%
Israel Tractors
6.12%
6.12%
6.12%
6.12%
6.12%
Of which:
Foreign financial investors
11.74%
9.43%
9.02%
8.95%
9.33%
Domestic financial investors
4.45%
5.34%
5.78%
5.75%
5.45%
Domestic individuals
2.70%
2.92%
2.90%
2.99%
2.80%
Employees
0.18%
0.18%
0.18%
0.18%
0.18%
Treasury shares
4.52%
4.52%
4.52%
4.52%
4.52%
100.00%
100.00%
100.00%
100.00%
100.00%
Total
1 The table shows shareholders separately if their shareholding reaches or exceeds 5%, according to the Book of Shares. 2 The 77.72% ownership of CP Holdings and its investments results an 81.40% combined direct interest in Danubius Hotels Nyrt. and includes the shares held by Sir Bernard Schreier, the Chairman of CP Holdings. 3 The Danubius shares previously held by Agrimill-Agrimpex Zrt. are currently owned by Interag Zrt. as the result of their merge in 2009
APPENDIX VII DECLARATION Danubius Hotels Nyrt. hereby declares that the audited consolidated IFRS Financial Statements – as adopted by the EU – presented in this report follow the same accounting standards, procedures and estimations of and therefore can be compared with previous year-end and interim IFRS financial statements. The financial statements give a true and fair view on the assets, liabilities, financial position, net income and loss for the period of the Issuer Company and the consolidated subsidiaries. In addition, this report also gives true and fair view on the position, development, performance and risks of the Issuer Company and the consolidated subsidiaries. The financial statements do not conceal any fact or information that would be substantial in the judgement of the issuer's position. As issuer, Danubius Hotels Nyrt. assumes liability for the contents of the reports. Danubius Hotels Nyrt. declares that it is liable as issuer for the reimbursement of losses caused by the omission and/or the misleading contents of regular and extraordinary announcements.
Dr. Imre Deák Member of the Board of Directors
24
János Tóbiás Member of the Board of Directors
Report of the Board of Directors
APPENDIX VIII BALANCE SHEET OF DANUBIUS HOTELS NYRT. PREPARED IN ACCORDANCE WITH HUNGARIAN ACCOUNTING ACT - Audited in HUF thousand ID
31 december 2009
01.
NON-CURRENT ASSETS
02.
INTANGIBLE ASSETS
03.
Capitalised cost of foundation and restructuring
04.
Capitalised research and development costs
05.
Rights and titles
06.
Intellectual property
07.
Goodwill
08.
Advance payment on intangible assets
09. 10.
31 december 2010
53,753,364
53,885,874
72,472
28,219
72,472
28,219
Revaluation of intangible assets PROPERTY, PLANT AND EQUIPMENT (TANGIBLE ASSETS)
6,370,081
6,051,306
11.
Real estates and relating rights
6,219,467
5,912,725
12.
Equipments, machines, vehicles
11,689
1,700
13.
Other equipments, fixtures, vehicles
8,977
6,229
14.
Livestock 129,948
130,652
47,310,811
47,806,349
43,728,969
44,509,016
3,565,112
3,295,518
15,217
1,230
1,513
585
2,444,089
2,678,072
15.
Capital investments and refurbishments
16.
Advance payments on capital investments
17. 18.
Revaluation of tangible assets NON-CURRENT FINANCIAL INVESTMENTS
19.
Long-term investments
20.
Long-term loan to related parties
21.
Other long-term investments
22.
Long-term loan to other investments
23.
Other long term loans
24.
Long term securities
25.
Revaluation of non-current financial assets
26.
CURRENT ASSETS
27.
INVENTORIES
28.
Raw materials
29.
Work in progress and semifinished goods
30.
Grown, fattened and other livestock
31.
Finished products
32.
Goods, Commodities
33.
Advance payments on stocks
34.
RECEIVABLES
35.
Receivables from supply of goods and services (customers)
36.
Receivables from related parties
37.
Receivables from other investment
38.
Bills of exchange
39. 40. 41.
Other receivables SECURITIES Other investments
43.
Treasury shares
44.
Short term securities TOTAL CASH AND CASH EQUIVALENTS
46.
Cash at hand, cheques
47.
Bank deposits
48.
ACCRUALS AND PREPAYMENTS
49.
Accrued income
50.
Prepaid costs and expenses
51.
Deferred expenses
52.
2,041 1,199,232
610,015
1,715
250 596,179
1,171,800
25,717
13,586
1,161,021
1,161,021
1,161,021
1,161,021
83,836
904,995
Investment in related parties
42.
45.
2,041
TOTAL ASSETS
268
318
83,568
904,677
21,165
27,196
14,511
24,205
6,654
2,991
56,218,618
56,591,142
25
ANNUAL REPORT 2010 Report of the Board of Directors
31 december 2009
ID 53.
SHAREHOLDERS' EQUITY
54.
SHARE CAPITAL
31 december 2010
41,339,062
42,127,882
8,285,437
8,285,437
374,523
374,523
55.
REGISTERED BUT UNPAID CAPITAL
56.
Treasury shares at face value
57.
SHARE PREMIUM (CAPITAL RESERVE)
7,138,139
7,138,139
58.
RETAINED EARNINGS
24,463,833
24,538,671
59.
COMMITED RESERVES
1,376,815
1,376,815
60.
REVALUATION RESERVE
61. 62.
NET PROFIT FOR THE PERIOD PROVISIONS
63.
Provisions for expected liabilities
64.
Provisions for future expenses
65. 66.
BACKLISTED LIABILITIES
68.
Backlisted liabilities to related parties
69.
Backlisted liabilities to other investment
70.
Backlisted liabilities to third parties
71.
LONG TERM LIABILITIES
72.
Long term loans
73.
Convertible bonds
74.
Liability from bond issue
75.
Capital investment and development loans
76.
Other long term loans
77.
Long term liabilities to related parties
78.
Long term liabilities to other investments
79.
Other long term liability
80.
SHORT TERM LIABILITIES
81.
Short term credits Short term loans
84.
Advance payments from customers
85.
Creditors, Suppliers
86.
Bills of exchange
87.
Short term liabilities to related parties
88.
Short term liabilities to other investments
90.
Other short term liabilities DEFERRALS
91.
Deferred revenues
92.
Deferred costs and expenses
93.
Deferred income
94.
26
75,419
110,180
14,723,604
14,207,110
11,741,641
10,068,005
11,741,641
10,068,005
2,981,963
4,139,105
2,739,164
3,905,500
from which: convertible bonds
83.
89.
788,820 110,180
Other provisions LIABILITIES
67.
82.
74,838 75,419
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
3,643 10,257
22,434
101,909
124,283
126,990
86,888
80,533
145,970
79,781
145,970
752 56,218,618
56,591,142
Report of the Board of Directors
INCOME STATEMENT OF DANUBIUS HOTELS NYRT. ACCOUNTING ACT - Audited ID
PREPARED IN ACCORDANCE WITH HUNGARIAN
2009
01.
Net domestic sales revenue
02.
Export sales revenue
i.
Total net sales revenue
03.
Change in the stock of own prod.
04.
Cap. value of assets of own prod.
ii.
Cap. value of own production
iii.
Other income
05.
Raw material costs
06.
Value of services used
07.
Other services
08.
Purchase price of goods sold
09.
Value of sold services
IV.
Material expenditures
10.
Salaries and wages
11.
Other personnel payments
12.
Taxes and contributions
V. VI.
2010 2,727,456
2,765,069
2,727,456
2,765,069
36,844
38,241
8,407
7,911
741,652
702,796
30,260
31,224
55,913
49,773
836,232
791,704
413,471
486,919
71,179
63,304
144,162
146,432
Total payroll & related costs
628,812
696,655
Depreciation
425,085
393,034
VII.
Other expenditures
220,084
239,563
A.
Operating profit
654,087
682,354
13.
Dividend received
100,509
84,630
out of which received from related party 14.
Capital gain on the sale of shares
15.
Exchange gain of inv. fin. assets
16.
Other interests received
100,509
84,541 127,923
out of which received from related party
127,923
out of which received from related party out of which received from related party 17.
Other financial income
VIII.
Rev. from financial transact.
18.
Exchange loss of inv. fin. assets
325,828
150,214
208,881
138,600
95,312
549,075
521,649
911,842 4,468
out of which given to related party
4,468
19.
Interests payable
20.
Loss of value -securities, deposits
21.
Other financial expenses
143,275
73,480
IX.
Expenditures of fin. transact.
1,088,067
804,876
B.
Financial profit or loss
(566,418)
106,966
C.
Profit from ordinary activities
87,669
789,320
X.
Extraordinary income
XI.
Extraordinary loss
D.
Extraordinary profit or loss
E.
Profit before tax
XII.
Corporate tax payable
F.
Profit after tax
22.
Dividend paid from profit reserve
23.
Dividend payable/ Minority
G.
NET PROFIT FOR THE PERIOD
out of which given to related party
944,792
726,928
5,583
6,588 12,831
7,088
(12,831)
(500)
74,838
788,820
74,838
788,820
74,838
788,820
27
ANNUAL REPORT 2010 Report of the Board of Directors
Shareholders’ structure Shareholders' structure on 31st December 2010 0.18%
4.52%
2.80%
CP Holdings and its investments
5.45%
Foreign financial investors
9.33%
Domestic financial investors 77.72%
Domestic individuals Employees Treasury shares
Trading on the Budapest Stock Exchange 2007 Number of trading days
2008
2009
2010
245
251
251
254
8,838
3,496
3,278
4,758
1,851,100
840,001
401,807
681,848
17,610
5,550
1,,506
2,481
Average price (HUF)
9,513
6,607
3,747
3,,638
Minimum price (HUF)
6,770
3,995
3,370
3,100
Maximum price (HUF)
11,000
9,150
4,590
4,740
9,200
4,440
3,540
4,500
Number of deals Number of securities traded Value of securities traded (HUF million)
Closing price (HUF)
28
Report of the Supervisory Board
Report of the Supervisory Board of Danubius Hotels Nyrt. about the 2010 B/S of the Company and the report of the Board of Directors The Supervisory Board submits its report before the AGM based on the report of the Board of Directors, the report of the independent Auditor, and the Audit Committee and the regular interim control of the operation of the company as well as its own work. The Supervisory Board of Danubius pursued its activities set own in the annual work plan according to the prevailing provisions. The Supervisory Board held five meetings in the course of the year together with the Audit committee and the Supervisory Board of Danubius Zrt. The quarter year flash reports of the Board about the operation of the company, the financial position and the forecast figures were listed regularly among the items of the agenda. The participation of the chairman of the Supervisory Board at the meetings held by the Board of Directors as well as the attendance of the President, the Senior Vice President, the auditor and the company’s internal auditors at the meetings of the Supervisory Board ensured profound access to information of the members. Special focus was put on the follow up of measures made based on the experience gathered via the audits. In addition to this, the Supervisory Board paid special attention to outstandings, the activities of the IT division reorganised with the aim of more efficiency, the marketing and PR activities enhancing sales and the results of the recently introduced central room reservation system. The Supervisory Board established that the 2010 report of the Board of Directors is reliable and shows a realistic picture about the operations and financial position of the Company, therefore it agrees and proposes it for approval by the AGM and supports the 2011 plans and concepts. The Supervisory Board discussed the 2010 annual report prepared by Danubius Hotels Nyrt. in line with the Hungarian Accounting Act with 56 billion 591 million 142 thousand HUF total assets and 788 million 820 thousand HUF net profit for the period, as well as the 2010 consolidated report prepared by the Danubius group in line with the International Financial Reporting Standard with 87 billion 325 million HUF total assets and 882 million HUF loss after tax and proposes it to the AGM for approval. The Supervisory Board agrees with the proposal of the Board of Directors regarding the allocation of the achieved profit. The Supervisory Board reviewed and submitted for approval to the AGM the report on Corporate Governance. Budapest, 23 March 2011
Tibor Antalpéter Chairman of the Supervisory Board
29
ANNUAL REPORT 2010 Independent Auditors’ Report
KPMG Hungária Kft. Váci út 99. Telefon: +36 (1) 887 7100 e-mail:
[email protected] H–1139 Budapest Telefon: +36 (1) 270 7100 internet: www.kpmg.hu Hungary Telefax: +36 (1) 887 7101 Telefax: +36 (1) 270 7101
To the shareholders of Danubius Hotel and Spa Nyrt.
Report on the Consolidated Financial Statements We have audited the accompanying 2010 consolidated financial statements of Danubius Hotel and Spa Nyrt. (hereinafter referred to as “the Company”), which comprise the consolidated statement of financial position as at 31 December 2010, which shows total assets of HUF 87,325 million, and the consolidated income statement and consolidated statement of comprehensive income, which show loss for the year of HUF 882 million, and the consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, as adopted by the EU and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the Hungarian National Standards on Auditing and applicable laws and regulations in Hungary. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
30
Independent Auditors’ Report
Opinion We have audited the consolidated financial statements of Danubius Hotel and Spa Nyrt., its components and elements and their documentary support in accordance with Hungarian National Standards on Auditing and gained sufficient and appropriate evidence that the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU. In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of Danubius Hotel and Spa Nyrt. and its consolidated subsidiaries as of 31 December 2010, and of their consolidated financial performance and of the consolidated result of their operations for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU.
Report on the Consolidated Business Report We have audited the accompanying 2010 consolidated business report of Danubius Hotel and Spa Nyrt. Management is responsible for the preparation of the consolidated business report in accordance with the provisions of the Act on Accounting and accounting principles generally accepted in Hungary. Our responsibility is to assess whether this consolidated business report is consistent with the 2010 consolidated annual report. Our work with respect to the consolidated business report was limited to the assessment of the consistency of the consolidated business report with the consolidated annual report, and did not include a review of any information other than that drawn from the audited accounting records of the Company. In our opinion, the 2010 consolidated business report of Danubius Hotel and Spa Nyrt. is consistent with the data included in the 2010 consolidated annual report of Danubius Hotel and Spa Nyrt. Budapest, 23 March 2011
KPMG Hungária Kft. Registration number: 000202
Péter Szabó Partner, Professional Accountant Registration number: 005301
KPMG Hungária Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firm affiliated with KPMG International, a Swiss cooperative. Company registration: Budapest, no. 01-09-063183
This is an English translation of the Independent Auditors’ Report on the 2010 IFRS Consolidated Financial Statements of Danubius Hotel and Spa Nyrt. issued in Hungarian. If there are any differences, the Hungarian language original prevails. This report should be read in conjunction with the complete IFRS Consolidated Financial Statements it refers to
31
ANNUAL REPORT 2010 Consolidated Statement of Financial Position
Danubius Hotel and Spa Nyrt. and Subsidiaries Consolidated Statement of Financial Position
(All amounts in million HUF)
Notes
At 31 December 2010
At 31 December 2009
Assets Cash and cash equivalents
3
4,186
3,537
Trade and other receivables
4
2,415
2,222
Inventory
5
620
824
Long-term assets classified as held for sale
6
73
78
4
134
Current income tax receivables Total current assets
7,298
6,795
Property, plant and equipment
7
76,448
76,795
Intangible assets
8
3,238
3,208
Other investments
24
72
317
201
Total non-current assets
80,027
80,276
Total assets
87,325
87,071
Deferred tax assets
19
Liabilities and Shareholders' Equity Trade accounts payable
2,205
1,995
Advance payments from guests
616
672
Current income tax payables
234
6
Other payables and accruals, including derivatives
10
3,151
2,901
Interest-bearing loans and borrowings
11
6,130
5,290
Provisions
12
317
344
12,653
11,208
Total current liabilities Interest-bearing loans and borrowings
11
19,602
21,005
Deferred tax liabilities
19
1,077
1,332
Provisions
12
897
1,033
Total non-current liabilities
21,576
23,370
Total liabilities
34,229
34,578
8,285
8,285
Shareholders' Equity Share capital
13
Capital reserve Treasury shares
14
7,435
7,435
(1,162)
(1,162)
Translation reserve
7,817
6,354
Retained earnings
28,203
29,152
50,578
50,064
Attributable to equity holders of the parent Minority interest
15
2,518
2,429
Total shareholders’ equity
53,096
52,493
Total liabilities and shareholders' equity
87,325
87,071
Budapest, 23 March 2011
Dr. Imre Deák Member of Board of Directors
János Tóbiás Member of Board of Directors
The notes set out on pages 37 to 68 are an integral part of the consolidated financial statements.
32
Consolidated Income Statement
Danubius Hotel and Spa Nyrt. and Subsidiaries Consolidated Income Statement
(All amounts in million HUF)
Notes
Year ended 31 December Year ended 31 December 2010 2009
Room revenue
20,914
21,215
Food and beverage revenue
12,719
13,020
Spa revenue
5,801
5,841
Other departmental revenue
2,056
1,777
Revenue from wineries
132
155
Revenue from security services
774
835
Other income
525
642
42,921
43,485
Total operating revenue and other income Cost of goods purchased for resale Material costs
16
Services used
17
Material expenses and services used Wages and salaries
447
432
8,965
9,291
9,612
9,246
19,024
18,969
11,704
11,407
Other personnel expenses
1,197
1,393
Taxes and contributions
3,595
3,771
16,496
16,571
4,497
4,619
2,522
2,293
Personnel expenses Depreciation and amortisation Other expenses
18
Changes in inventories of finished goods and w.i.p. Work performed and capitalised Total operating expenses Profit from operations Interest income Interest expense Foreign currency loss Financial loss Loss before tax
74
(4)
(48)
(85)
42,565
42,363
356
1,122
77
200
(850)
(1,439)
(536)
(290)
(1,309)
(1,529)
(953)
8407)
Current tax expense
19
338
54
Deferred tax expense / (benefit)
19
(409)
295
(882)
(756)
Owners of the Company
(933)
(801)
Non-controlling interest
51
45
(118)
(101)
Loss for the year Attributable to:
Basic and diluted earnings per share (HUF per share):
20
The notes set out on pages 37 to 68 are an integral part of the consolidated financial statements.
33
ANNUAL REPORT 2010 Consolidated Statement of Comprehensive Income
Danubius Hotel and Spa Nyrt. and Subsidiaries Consolidated Statement of Comprehensive Income
(All amounts in million HUF) Year ended 31 December 2010
Loss for the year
Year ended 31 December 2009
(882)
(756)
1,501
394
Other comprehensive income Foreign currency translation differencies for foreign operations Income tax on other comprehensive income Total other comprehensive income Total comprehensive income for the period
-
-
1,501
394
619
(362)
530
(479)
Attributable to: Owners of the Company Minority interest Total comprehensive income for the period
89
117
619
(362)
The notes set out on pages 37 to 68 are an integral part of the consolidated financial statements.
34
Consolidated Statement of Changes in Equity
Danubius Hotel and Spa Nyrt. and Subsidiaries Consolidated Statement of Changes in Equity
(All amounts in million HUF) Attributable to equity holders of the parent
Share Capital
Total Equity
Treasury Shares
8,285
7,435
(1,162)
30,023
6,032
50,613
2,317
52,930
-
-
-
(801)
-
(801)
45
(756)
Foreign currency translation differencies for foreign operations
-
-
-
-
322
322
72
394
Total other comprehensive income
-
-
-
-
322
322
72
394
Total comprehensive income for the period
-
-
-
(801)
322
(479)
117
(362)
First consolidation of Egészségsziget Kft.
-
-
-
(70)
-
(70)
-
(70)
Dividend to Non-controlling interests
-
-
-
-
-
-
(5)
(5)
Total transaction with owners
-
-
-
(70)
-
(70)
(5)
(75)
8,285
7,435
(1,162)
29,152
6,354
50,064
2,429
52,493
-
-
-
(933)
-
(933)
51
(882)
Foreign currency translation differencies for foreign operations
-
-
-
-
1,463
1,463
38
1,501
Total other comprehensive income
-
-
-
-
1,463
1,463
38
1,501
Total comprehensive income for the period
-
-
-
(933)
1,463
530
89
619
1 January 2009
Retained Translation Earnings Reserve
Noncontrolling Interest
Capital Reserve
Total
Total comprehensive income for the period Loss for the period Other comprehensive income
Transaction with owners, recorded directly in equity
31 December 2009 Total comprehensive income for the period Loss for the period Other comprehensive income
Transaction with owners, recorded directly in equity Dividend to Non-controlling interests
-
-
-
(16)
-
(16)
-
(16)
Total transaction with owners
-
-
-
(16)
-
(16)
-
(16)
8,285
7,435
(1,162)
28,203
7,817
50,578
2,518
53,096
31 December 2010
The notes set out on pages 37 to 68 are an integral part of the consolidated financial statements.
35
ANNUAL REPORT 2010 Consolidated Statement of Cash Flows
Danubius Hotel and Spa Nyrt. and Subsidiaries Consolidated Statement of Cash Flows
(All amounts in million HUF)
Notes
Year ended 31 December 2010
Profit from operations Depreciation and amortisation
356
1,122
7,8
4,497
4,619
-
(90)
12
(163)
(303)
130
6
(377)
1,064
89
43
Gain/on sale of property, plant and equipment and intangibles Change of provisions
Year ended 31 December 2009
Impairment of receivables and write-off of inventories Changes in working capital (Increase)/ decrease of accounts receivable and other current assets (Increase)/ decrease of inventory Increase / (decrease) of accounts payable and other current liabilities Interest paid Income tax paid Net cash provided by operating activities Purchase of property, plant and equipment and intangibles
7,8
Interest received Proceeds on sale of property, plant and equipment and intangibles Net cash paid on acquisition
9
Net cash used in investing activities
882
(1,148)
(1,076)
(1,301)
(69)
(196)
4,269
3,816
(2,514)
(2,148)
82
192
-
125
-
(1,268)
(2,432)
(3,099)
Receipt of long-term bank loans Repayment of long-term bank loans Net cash provided by financing activities
3,282
1,369
(3,200)
3,285
82
(1,916)
Net increase (decrease) in cash held
1,919
81,199)
Cash and cash equivalents at the beginning of the period, net
1,981
3,171
65
9
3,965
1,981
Effect of exchange rate fluctuations on cash held Cash and cash equivalents at the end of the period, net
3
The notes set out on pages 37 to 68 are an integral part of the consolidated financial statements.
36
Notes to the Consolidated Financial Statements (All amounts in million HUF)
1. The Company and its subsidiaries Danubius Hotel and Spa Nyrt. ("Danubius" or "the Company") is a company limited by shares which is domiciled in, and incorporated under the laws of the Republic of Hungary. The registered office address of the Company is 1051, Szent István tér 11., Budapest, Hungary. The Company and its subsidiaries (the "Group") provide hospitality services in Hungary, Czech Republic, Slovakia and Romania, with an emphasis on 3, 4 and 5 star spa and city hotels. The Company’s shares are listed on the Budapest Stock Exchange. At 31 December 2010, 77.72% of the Company’s shares were owned by CP Holdings Limited, a UK private company, and companies controlled by CP Holdings Limited other than the Company itself and Sir Bernard Schreier, the Chairman of CP Holdings. The ultimate controlling party of the Group is the Schreier family, having an 81.40% combined direct interest considering the treasury shares held by the Company. The consolidated financial statements of the Company as at and for the year ended 31 December 2010 comprise the Company and its subsidiaries (together referred to as the “Group”). The Company's principal subsidiary companies are as follows:
Name
Principal Activity
Country of Incorporation
Group interest held at December 31, 2010
Group interest held at December 31, 2009
Danubius Szállodaüzemeltető és Szolgáltató Zrt.
Hotel operator
Hungary
100%
100%
Gundel Kft.
Restaurant operator
Hungary
100%
100%
Preventív-Security ZRt
Security
Hungary
78.60%
78.60%
Léčebné Lázneˇ a.s.
Hotel operator
Czech Republic
95.36%
95.36%
Gama 45 s.r.o
Hotel owner
Czech Republic
-
100%
Slovenské Liečebné Kúpele Piestany a.s.
Hotel operator
Slovakia
88.85%
88.85%
SC Salina Invest SA
Holding company
Romania
99.94%
99.94%
SC Balneoclimaterica SA
Hotel operator
Romania
97.97%
97.97%
Egészségsziget Kft.
Project company
Hungary
50%
50%
In August 2009, based on the original agreement made on 7th July 2004, Danubius purchased the remaining 33.33% non-controlling shareholding in Gundel Kft. from LL Partners, L.P. Considering this share purchase transaction, Danubius Hotels Nyrt. became the sole owner of Gundel Kft. In 2009 Egészségsziget Kft. became a fully consolidated subsidiary, for further information see Note 9. In 2010 the Company sold its 100% shareholding in Gama 45 s.r.o to its subsidiary, Léčebné Láznĕ a.s. Following the purchase the two companies started their merger process, LLML being a successor company, which was officially recorded in the Czech Commercial Register on 23 November 2010.
2. Significant accounting policies Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”).
37
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
Basis of preparation The consolidated financial statements are presented in millions of Hungarian Forints (HUF), which is the functional currency of the Company. The consolidated financial statements are prepared under the historical cost convention except for derivative financial instruments, which are measured at fair value (see Note 24). The significant accounting policies did not change compared to previous period and have been consistently applied by the Group enterprises,. The financial statements were authorised for issue by the Board of Directors on 23 March 2011 and by the Supervisory Board on 23 March 2011. Use of estimates and assumptions The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of IFRS that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in Note 26. Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are taken into account. The consolidated financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The consolidated financial statements include the financial statements of the Company and its subsidiaries after elimination of all inter-company transactions and balances, including any unrealised gains and losses. Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Associates are accounted for using the equity method and are initially recognised at cost. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group’s share of the total recognised gains and losses and equity movements of associates after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent
38
Notes to the Consolidated Financial Statements (All amounts in million HUF)
of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Investments Investments in which the Group has less than 20% ownership are classified as available for sale financial assets and carried at cost, less provision for impairment, where such investments are unquoted and fair value cannot be reasonably estimated. Otherwise they are measured at fair value using the quoted bid price of the investment. Financial statements of foreign operations The functional currencies of the Group’s foreign operations differ from the functional currency of the Company. Assets and liabilities of foreign operations including goodwill and fair value adjustments arising on acquisitions on or after 1 January 2005 (the effective date of revised IAS 21), are translated to HUF at foreign exchange rates effective at the reporting date. Goodwill and any fair value adjustments arising on acquisitions prior to 1 January 2005, the effective date of revised IAS 21, are treated as assets and liabilities of the acquiring entity and therefore are not retranslated. The income and expenses of foreign operations are translated to HUF at the exchange rate that approximates the rate at the date of the transaction. Foreign exchange differences arising on translation of foreign operations are recognised directly in equity. When a foreign operation is disposed of, in part or in full, the relevant amount in the translation reserve is transferred to profit or loss. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency of the relevant Group company at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Nonmonetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the measurement currency at foreign exchange rates ruling at the dates the fair value was determined. Foreign exchange differences arising on translation are recognised in the statement of income. Non-derivative financial instruments Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available for sale financial assets, as appropriate. When financial assets and liabilities are recognized initially, they are measured at fair value, plus, in the case of financial assets and liabilities not at fair value through profit or loss, directly attributable transaction costs. The Group considers whether a contract contains an embedded derivative when the entity first becomes a party to it. The Group determines the classification of its financial assets and liabilities on initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year end. Purchases and sales of investments are recognized on settlement date which is the date when the asset is delivered to the counterparty Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit and loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated
39
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments or a financial guarantee contract. Gains or losses on investments held for trading are recognised in the income statement. Financial assets may be designated at initial recognition as at fair value through profit or loss if the following criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or recognising gains or losses on them on a different basis; or (ii) the assets are part of a group of financial assets which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management strategy. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets which carry fixed or determinable payments and fixed maturities and which the Group has the positive intention and ability to hold to maturity. After initial measurement, held to maturity investments are measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount, less allowance for impairment. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. Gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the amortisation process Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, loans and receivables are subsequently carried at amortised cost using the effective interest method less any allowance for impairment. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Available-for-sale financial investments Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for- sale or are not classified in any of the three preceding categories. After initial measurement, available for sale financial assets are measured at fair value with unrealised gains or losses, other than impairment losses and foreign currency differences on available-for-sale monetary items, being recognised directly in equity. When the investment is disposed of, the cumulative gain or loss previously recorded in equity is recognised in the income statement.
40
Notes to the Consolidated Financial Statements (All amounts in million HUF)
Fair value The fair value of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets is determined by reference to their quoted closing bid price at the reporting date. When there is no quoted market price, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net asset base of the investment. Classification and derecognition of financial instruments Financial assets and financial liabilities carried on the consolidated statement of financial position include cash and cash equivalents, marketable securities, trade and other accounts receivable and payable, long-term receivables, loans, borrowings, and investments. The accounting policies on recognition and measurement of these items are disclosed in the respective accounting policies found in this Note. Financial instruments (including compound financial instruments) are classified as assets, liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains, and losses relating to a financial instrument classified as a liability, are reported as expense or income as incurred. Distributions to holders of financial instruments classified as equity are charged directly to equity. In case of compound financial instruments the liability component is valued first, with the equity component being determined as a residual value. Financial instruments are offset when the Company has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously. The derecognition of a financial instrument takes place when the Group no longer controls the contractual rights that comprise the financial instrument, which is normally the case when the instrument is sold, or all the cash flows attributable to the instrument are passed through to an independent third party. Derivative financial instruments The Group holds derivative financial instruments to hedge its interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Cash flow hedges Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs, or became ineffective. When the hedged item is a non-financial asset or liability, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to profit or loss in the same period that the hedged item affects profit or loss.
41
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
Property, plant and equipment Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset, including borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads directly attributable to bringing the asset to a working condition for its intended use. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount and are recognised net within “other income” in profit or loss. Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is provided using the straight-line method over the estimated useful lives of each part of an item of property, plant and equipment. The depreciation rates used by the Group are from 2% to 5% for buildings and leasehold improvements and 14.5% to 33% for machinery and equipment. Land and construction in progress are not depreciated. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Depreciation methods, useful lives and residual values are reassessed at each reporting date. Leased assets Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Plant and equipment acquired by way of finance lease is measured upon initial recognition at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Intangible assets Goodwill Business combinations are accounted for by applying the purchase method and are allocated to cash-generating units upon initial recognition. Acquisitions prior to 31 March 2004, the date that IFRS 3 became effective The Group applied IFRS 3 to business combinations that occurred on or after 31 March 2004. In respect of business combinations that occurred before that date goodwill represents the amount recorded previously by the Group in accordance with IAS 22 (original cost less accumulated amortisation to 31 December 2005) less accumulated impairments (if any).
42
Notes to the Consolidated Financial Statements (All amounts in million HUF)
Acquisitions between 31 March 2004, the date that IFRS 3 became effective and 1 January 2010 when the revised IFRS 3 became effective For acquisitions on or after 31 March 2004, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Goodwill is stated at cost less any accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment. Acquisitions of non-controlling interests, prior to 1 January 2010, the date the revised IFRS 3 – Business combination became effective No goodwill was recognised when acquiring the non-controlling interest in a subsidiary. The difference between the acquisition price and the carrying value of the non-controlling interest was recorded directly in equity. Other Intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses (see below). Where the Group has the legal right to use a particular property the value of these rights is amortised over the term for which the Group holds the rights. These include property rights on Margaret Island, Budapest which are being amortised over 100 years. Software is amortised on a straight line basis over its expected useful life of 3-4 years. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. Inventory Inventory is stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated selling expenses. The cost of inventory is determined on the weighted average cost basis and includes expenditure incurred in acquiring the inventory and bringing it to its existing location and condition.
43
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
Cash and cash equivalents Cash equivalents are liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Trade and other receivables Trade and other receivables are stated initially at their fair value and subsequently at their amortised cost less impairment losses (see below). Impairment Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised directly in other comprehensive income. Non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, recoverable amount is estimated at each reporting date. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro-rata basis.
44
Notes to the Consolidated Financial Statements (All amounts in million HUF)
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Imparment loss on property, plant and equipment is included in depreciation and amortisation, while impairment on trade and other receivables is included in other expenses. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Non-current assets held for sale Non-current assets (or disposal groups comprising assets and liabilities) that are expected to be recovered primary through sale rather than through continuing use are classified as held for sale. Immediately before classification as held for sale, the assets (or components of a disposal group) are remeasured in accordance with the Group’s accounting policies. Thereafter generally the asset (or disposal group) is measured at the lower of carrying amount and fair value less costs to sell. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on a pro-rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, which continue to be measured in accordance with the Group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. Provisions A provision is recognised in the statement of financial position when, as a result of a past event, the Group has a legal or constructive obligation that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Trade and other payables Trade and other payables are initially measured at fair value and then subsequently at amortised cost. Interest-bearing loans Interest bearing loans are recognised initially at fair value of the proceeds received, less attributable transaction costs. In subsequent periods, they are measured at amortised cost using the effective interest method. Any difference between proceeds received (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings on an effective interest basis.
45
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a change in equity. Repurchased shares are classified as treasury shares and presented as a deduction from total equity. Revenue recognition Goods sold and services rendered Room revenue (based on completed guest nights), food and beverage, spa revenue, winery, security and other departmental revenues are each recognised as the service is provided. Government grants Grants that compensate for expenses incurred are recognised in profit or loss as other income on a systematic basis in the same periods in which the expenses are recognised. Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Financial Income and expenses Financial income comprises interest income on funds invested, dividend income, gains on the disposal of available-for-sale financial assets, and gains on hedging instruments that are recognised in profit or loss. Interest income is recognised as it accrues, using the effective interest method. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, impairment and losses on hedging instruments that are recognised in profit or loss. All borrowing costs are recognised in profit or loss using the effective interest method, except for borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. Foreign currency gains and losses are reported on a net basis. Income taxes Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity or other comprehensive income, in which case it is recognised in equity or other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
46
Notes to the Consolidated Financial Statements (All amounts in million HUF)
Deferred tax is provided using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Employee benefits Defined contribution plan The Company operates a defined contribution pension plan for Hungarian employees. Pension costs are charged against profit or loss as other personnel expenses in the period in which the contributions are payable. The assets of the fund are held in a separate trustee administered fund and the Group has no legal or constructive obligation with regard to the plan assets outside of its defined contributions. Defined benefit plans and other long-term employee benefits A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group operates defined post-employment benefit programmes for retirement and provides jubilee benefits. None of these programmes require contributions to be made to separately administered funds. The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The principal actuarial assumptions are the discount rate used to determine the net present value of cash outflows and the average salary increase. The average discount rate used was 7% for both 2010 and 2009, while the average salary increase was 5% at 31 December 2010 and 0% at 31 December 2009, respectively. Assumptions regarding future mortality and job leavers are based on published statistics and mortality tables. In Hungary the jubilee benefit scheme will cease by the end of 2011, therefore neither time value of money nor actuarial assumptions were considered in determining the estimated value of liability at the end of 2010. The cost of providing benefits is determined separately for each programme using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised as income or expense immediately in case of jubilee programs while gains and losses only outside the corridor of 10% are recognised as income or expense immediately in case of retirement plans. Past service costs, resulting from the introduction of, or changes to the defined benefit scheme are recognised as an expense immediately.
47
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
Termination benefits Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to pay additional termination benefits to certain retirees. Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. Segment reporting Group operations are presented in respect of geographical areas identified by location of assets and operational segments that are separately evaluated for management reporting purposes. Management considers that the Group operates primarily in the hotel and hospitality segment. In Hungary the Group also has a security segment through its Preventív Security Zrt. subsidiary. A segment is a distinguishable component of the Group that is engaged either in providing related products or services (operational segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and returns that are different from those of other segments. Segment information is presented in respect of the Group’s operational and geographical segments. The Group’s primary format for segment reporting is based on geographic segments identified by location of assets. The operational segments are determined based on the Group’s management and internal reporting structure. Inter-segment pricing is determined on an arm’s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. New standards and interpretations not yet adopted as at 31 December 2010 A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2010, and have not been applied in preparing these consolidated financial statements: Revised IAS 24 Related Party Disclosure (effective for annual periods beginning on or after 1 January 2011). The amendment exempts government-related entity from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, with (a) a government that has control, joint control or significant influence over the reporting entity; and (b) another entity that is a related party because the same government has control, joint control or significant influence over both the reporting entity and the other entity. The revised Standard requires specific disclosures to be provided if a reporting entity takes advantage of this exemption. The revised Standard also amends the definition of a related party which resulted in new relations being included in the definition, such as, associates of the controlling shareholder and entities controlled, or jointly controlled, by key management personnel.
48
Notes to the Consolidated Financial Statements (All amounts in million HUF)
Revised IAS 24 is not relevant to the Group’s financial statements as the Group is not a government-related entity and the revised definition of a related party is not expected to result in new relations requiring disclosure in the financial statements. Amendment to IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2011). The amendment of IFRIC 14 addresses the accounting treatment for prepayments made when there is also a minimum funding requirements (MFR). Under the amendments, an entity is required to recognize certain prepayments as an asset on the basis that the entity has a future economic benefit from the prepayment in the form of reduced cash outflows in future years in which MFR payments would otherwise be required. The amendments to IFRIC 14 is not relevant to the Group’s financial statements as the Group does not have any defined benefit plans with minimum funding requirements. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010) The Interpretation clarifies that equity instruments issued to a creditor to extinguish all or part of a financial liability in a ‘debt for equity swap’ are consideration paid in accordance with IAS 39.41. The initial measurement of equity instruments issued to extinguish a financial liability is at the fair value of those equity instruments, unless that fair value cannot be reliably measured, in which case the equity instrument should be measured to reflect the fair value of the financial liability extinguished. The difference between the carrying amount of the financial liability (or part of the financial liability) extinguished and the initial measurement amount of equity instruments issued should be recognized in profit or loss. The Group did not issue equity to extinguish any financial liability during the current period. Therefore, the Interpretation will have no impact on the comparative amounts in the Group’s financial statements for the year ending 31 December 2010. Further, since the Interpretation can relate only to transactions that will occur in the future, it is not possible to determine in advance the effects the application of the Interpretation will have. Amendment to IAS 32 Financial Instruments: Presentation – Classification of Rights Issues (effective for annual periods beginning on or after 1 February 2010) The amendment requires that rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. The amendments to IAS 32 are not relevant to the Group’s financial statements as the Group has not issued such instruments at any time in the past.
3. Cash and cash equivalents 31 December 2010
2009
Bank balances
1,856
2,340
Call deposits
2,330
1,197
Cash and cash equivalents
4,186
3,537
Overdraft (see Note 11)
(221)
(1,556)
3,965
1,981
Cash and cash equivalents, net (per cash flow statement)
49
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
4. Trade and other receivables 31 December 2010 Trade receivables, net
2009
1,441
1,372
240
301
Advance payments to suppliers
56
110
Receivables from employees
26
33
652
406
2,415
2,222
Recoverable taxes and duties, except for income taxes
Other receivables
The ageing of trade receivables at the reporting date was: 31 December 2009
31 December 2010 Gross Not past due
Impairment
Gross
Net
Impairment
Net
1,058
-
1,058
861
-
861
Past due 0-60 days
356
-
356
484
-
484
Past due 61-90 days
30
(3)
27
30
(3)
27 -
Past due 91-120 days
17
(17)
-
40
(40)
More than 121 days
119
(119)
-
180
(180)
-
1,580
(139)
1,441
1,595
(223)
1,372
Reconciliation of allowance for doubtful receivables: Opening balance, 1 January 2009
217
Impairment loss recognised
6
Write-offs
-
Closing balance, 31 December 2009
223
Impairment loss recognised
15
Write-offs
(99)
Closing balance, 31 December 2010
139
5. Inventory 31 December 2010
2009
Food and beverages
282
270
Wine in barrels
106
317
Materials
148
157
Goods for resale
84
80
620
824
The net carrying amount of wine in barrels as at 31 December 2010 reflect a write down to the net realisable value in the amount of HUF 115 million recognised in respect of Gundel wine.
6. Long-term assets classified as held for sale Long-term assets classified as held for sale comprises the lower of the net carrying value and the fair value less cost to sell, of a hotel and hospitality property in Hungary, called Hotel Hullám that has been advertised for sale and which the Group expects to sell within the next twelve months.
50
Notes to the Consolidated Financial Statements (All amounts in million HUF)
7. Property, plant and equipment Buildings and improvements
Land
Furniture, fittings and equipment
Constructions in progress
Total
At 1 January 2009 Gross book value Accumulated depreciation and impairment Net book value
10,797
88,203
23,051
3,247
-
29,315
19,636
-
125,298 48,951
10,797
58,888
3,415
3,247
76,347
10
1,296
1,785
(1,181)
1,910
1,441
801
-
1
2,243
For year ended 31 December 2009 - Additions and capitalisations - Acquisition - Effect of movements in exchange rates - Depreciation charge for the year - Disposals - Other Closing net book value
139
509
31
40
719
-
(2,905)
(1,475)
-
(4,380)
(5)
(2)
(9)
(36)
(52)
-
5
33
(30)
8
12,382
58,592
3,780
2,041
76,795
12,382
91,104
23,970
2,041
129,497
-
32,512
20,190
-
52,702
12,382
58,592
3,780
2,041
76,795 2,338
At 31 December 2009 Gross book value Accumulated depreciation and impairment Net book value For year ended 31 December 2010 - Additions and capitalisations
20
773
958
587
250
1,289
101
31
1,646
- Depreciation charge for the year
-
(2,774)
(1,459)
(44)
(4,277)
- Disposals
-
-
(9)
-
(9)
- Other
-
(66)
19
2
(45)
12,627
57?814
3,390
2,617
76,448
12,627
94,330
24,990
2,673
134,620
-
36,516
21,600
56
58,172
12,627
57,814
3,390
2,617
76,448
- Effect of movements in exchange rates
Closing net book value At 31 December 2010 Gross book value Accumulated depreciation and impairment Net book value
The net book value of property, plant and equipment pledged as loan security was HUF 28,815 million as of 31 December 2010 and HUF 28,378 million as of 31 December 2009. The amount of borrowing cost capitalised in 2010 was HUF 44 million (2009: HUF 86 million), the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation was 3.4% in 2010 (2009: 4.4%).
51
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
8. Intangible assets Goodwill
Land usage rights
Software and other intangibles
Total
At 1 January 2009 Gross book value Accumulated depreciation and impairment Net book value
1,626
595
1,965
4,186
-
171
1,312
1,483
1,626
424
653
2,703
-
-
238
238
549
-
-
549
Year ended 31 December 2009 - Additions and capitalisations - Acquisition - Effect of movements in exchange rates
-
-
3
3
- Depreciation charge for the year
-
(19)
(220)
(239)
- Disposals
-
-
(40)
(40)
- Other
-
-
(6)
(6)
2,175
405
628
3,208
2,175
595
2,116
4,886
-
190
1,488
1,678
2,175
405
628
3,208
- Additions and capitalisations
-
-
176
176
- Effect of movements in exchange rates
-
-
2
2
- Amortisation charge for the year
-
(18)
(202)
(202)
- Other
-
-
72
72
2,175
387
676
3,238
2,175
595
2,333
5,103
-
208
1,657
1,865
2,175
387
676
3,238
Closing net book value At 31 December 2009 Gross book value Accumulated depreciation and impairment Net book value Year ended 31 December 2010
Closing net book value At 31 December 2010 Gross book value Accumulated amortisation and impairment Net book value
At 31 December 2010 intangible assets include HUF 387 million, net of amortisation (2009: HUF 405 million) for land usage rights relating to two hotels on Margaret Island held under licenses given by the Municipality of Budapest. Goodwill relates to the following acquisitions: 31 December 2010
2009
Léčebné Lázneˇ a.s.
565
565
Gundel Kft.
944
944
Egészségsziget Kft.
549
549
Preventív-Security Zrt. Total goodwill
52
117
117
2,175
2,175
Notes to the Consolidated Financial Statements (All amounts in million HUF)
The Group determines whether goodwill is impaired on an annual basis or when there is an indication that it might be impaired. This requires an estimation of the recoverable value of the cash-generating units (CGUs) to which the goodwill is allocated. The higher of fair value, loss cost to sell or value in use is the base of any impairment. Value in use was determined by discounting the future cash flows generated from the continuing use of the unit and was based on the following key assumptions: - Cash flows were projected based on actual operating results and the 5-year business plan, which includes an annual 3 percent growth rate on average. Cash flows for a further indefinite period were extrapolated using a constant growth rate of 3 percent, which does not exceed the long-term average growth rate for the industry. Management believes that this indefinite forecast period was justified due to the long-term nature of the Group’s hospitality business. - An average weighted average cost of capital (WACC) of 9.4 percent (2009: 9.8%) was applied in determining the net present value of future cash flows of cash generating units located in Hungary, while 8.9% was used in case of CGUs located in Czech Republic (2009: 9.1%). The discount rate was estimated based on the risk free interest rate, market risk premium, industry beta and company’s leverage. In 2010 and 2009 no impairment loss was recognised in respect of goodwill as the estimated recoverable amount of each CGU the goodwill relates to exceed its carrying amount. Management has identified the key assumptions for which there could be a reasonably possible change that could cause the carrying amount to exceed the recoverable amount. The table below shows the amount that these assumptions are required to change individually in order for the estimated recoverable amount to be equal to the carrying amount.
In percentage CGU
Change required for carrying amount to equal the recoverable amount 2010
2009
Léčebné Lázne a.s. - change of after-tax discount rate - change of EBITDA
6.2
5.4
(8.1)
(7.4)
Gundel Kft. - change of after-tax discount rate - change of Revenue
2.5
1.0
(2.2)
(0.7)
(12.5)
(12.5)
5.9
5.3
(4.8)
(3.6)
Egészségsziget Kft. - change of market value of the land Preventív-Security Zrt. - change of after-tax discount rate - change of EBITDA
The values assigned to the key assumptions represent management’s assessment of future trends and are based on both external sources and internal sources (historical data).
53
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
9. Investments in associates, Business combinations Egészségsziget Kft. From August 2009 the 50% investment in Egészségsziget Kft., our established associate to utilise the land acquired near Hotel Gellért became a fully consolidated subsidiary (before this date it was treated as an associate). In August 2009 CP Holdings purchased Kemenes Invest Kft. that holds the remaining 50% shareholding in Egészségsziget Kft. and Danubius simultaneously entered into a put and call option agreement with CP Holdings to purchase this shareholding in Kemenes Invest Kft. The Group consolidates Kemenes Invest Kft. in 100%. The amount to be paid by Danubius under the option agreement is EUR 1.7 million. The option agreements provide for an option fee of EUR 100,000 and 3 month EURIBOR + 1% interest from August 2010. Since the Company has the right to delay the exercise of the put option for up to a further two years and the option is not expected to be exercised in 2011 the obligation is considered non-current. The carrying and fair values of the assets and liabilities as of 31 August 2009 were as follows: Fair values Property, Plant and Equipment Current assets Liabilities Fair value of net assets
Carrying values 2,243
2,243
7
7
(2,334)
(2,334)
(84)
Goodwill arising on acquisition
549
Total consideration
465
Total cash consideration
-
Net cash acquired
6
Net cash inflow
6
Gundel Kft. ˇ
Danubius purchased a 66,67% interest in Gundel Kft. (formerly Lángastronomia Kft) from LL Partners on 7 July 2004. Based on an agreement with LL Partners, dated 7 July 2004, LL Partners had an option to sell to Danubius the remaining 33.33% shareholding in Gundel Kft between 7 July 2009 and 7 July 2011. The option was exercised in July 2009 and Danubius became the sole owner of Gundel Kft. The exercise price was USD 5 million plus compound annual interest at a rate of 7%, accumulated from 7 July 2004. In August 2009, based on the original agreement made on 7th July 2004, Danubius purchased the remaining 33.33% non-controlling shareholding in Gundel Kft. from LL Partners, L.P for cash consideration of HUF 1,274 million. Considering this share purchase transaction, Danubius Hotels Nyrt. became the sole owner of Gundel Kft. The net cash outflow in respect of the acquisitions in 2009 consisted of the following: Net cash acquired with Egészségsziget Kft. Cash paid for the non-controlling shareholding in Gundel Kft. Net cash outflow
54
6 (1,274) (1,268)
Notes to the Consolidated Financial Statements (All amounts in million HUF)
10. Other payables and accruals, including derivatives 31 December 2010 Wages and salaries
2009
1,036
840
Social security
429
368
Taxes payable
318
407
Accrued expenses
865
799
Derivatives
12
158
491
329
3,151
2,901
Other
11. Interest-bearing loans and borrowings Non-current liabilities Secured bank loans
31 December 2010
Obligation due to written put option to acquire the remaining 50% shareholding in Egészségsziget Kft. (see Note 9)
Current liabilities Current portion of secured bank loans
2009
19,100
20,533
502
472
19,602
21,005
31 December 2010
2009
5,909
Bank overdrafts
3,734
221
1,556
6,130
5,290
As of 31 December 2010 the Group’s secured bank loans are denominated in Euro (EUR), total EUR 91.0 million (2009: EUR 90.0 million) and fall due for repayment, as follows: 31 December 2010 Within 1 year
6,130
2009 5,290
1 to 2 years
11,056
4,248
2 to 5 years
6,731
13,613
over 5 years
1,313
2,672
Total debt
25,230
25,823
Less total current debt
(6,130)
(5,290)
Total non-current debt
19,100
20,533
The interest rates for all bank borrowings are floating and determined by 3 months EURIBOR + margin between 0.6% to 3.5% in Czech Republic and Slovakia, 0.75% to 4.25% in Hungary and 4.5% in Romania. The weighted average margin is 2.22% at 31 December 2010 (2009: 2.06%), while the average rate of interest is 3.2% (2009: 2.8%).
55
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
12. Provisions Acquisition of Piestany Balance at 31 December 2008
Employee benefits
Restructuring
Other
Total
641
699
311
29
Provision made during the year
-
-
217
-
217
Provision used during the year
-
(175)
(311)
-
(486)
Provision reclassified
-
(74)
-
-
(74)
Actuarial (gains) and losses
-
-
-
(24)
(24)
23
2
-
-
25
-
39
-
-
39
664
491
217
5
1,377
Effect of movements in exchange rates Unwinding of discounts Balance at 31 December 2009
1,680
Provision made during the year
-
4
22
-
26
Provision used during the year
-
(155)
(62)
(5)
(222)
19
3
-
-
22
-
11
-
-
11
683
354
177
-
1,214
Effect of movements in exchange rates Unwinding of discounts Balance at 31 December 2010 Current portion 2009 Non-current portion 2009 Current portion 2010 Non-current portion 2010
-
127
217
-
344
664
364
-
5
1,033
-
140
177
-
317
683
214
-
-
897
Acquisition of Piestany In 2002 a provision for legal cases of HUF 621 million was initially recognised at the acquisition of Piestany from which HUF 11 million was utilized in 2003 as a result of a lost legal case. At the end of 2006 HUF 163 million of the provision was released as it was no longer considered probable that an outflow of resources embodying economic benefits will be required to settle certain cases. The timing of the resolution of the remaining cases is uncertain. The increase in the amount of provision in HUF terms is only due to foreign exchange translation effect. Employee benefits Group companies in Hungary, the Czech Republic and Slovakia operate benefit programmes that provide lump sum benefits to employees after every five years’ employment and upon retirement. The amount of the benefits is determined by the base and average monthly salary and the length of service period. None of these programmes have separately administered funds. As of 31 December 2010 the Group has recognised a provision of HUF 354 million to cover its estimated obligation regarding future retirement and jubilee benefits payable to current employees. Being effective from 1 July 2008 the relevant part of Hungarian Collective Agreement was changed in order to provide more incentives for better performance instead of honour every 5 year employment without evaluating the actual performance. In 2010 HUF 155 million employee benefit payment, mainly jubilee benefit, was made against which the same amount of provision was used. Restructuring As part of the efficiency improvement project initiated in 2008 Danubius decided to further optimize its workforce. As the management is committed to these changes and the restructuring plan was communicated in detail to parties involved, the Group recognized a provision of HUF 217 million as of 31 December 2009 for future redundancy payments and related tax and contribution, out of which HUF 62 million was used during year 2010. Together with the HUF 22 million provision made at year end HUF 177 million was recognised as of 31 December 2010 to cover the estimated cost of restructuring in 2011.
56
Notes to the Consolidated Financial Statements (All amounts in million HUF)
13. Share Capital The registered share capital at December 31, 2010 and 2009 consists of 8,285,437 authorised, issued and fully paid ordinary shares, each of par value of HUF 1,000. 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 general meetings of the Company.
14. Reserves Capital reserve The capital reserve was established in 1991, when the company was privatized and transformed to a public limited company. Treasury shares The reserve for treasury shares comprises the cost of the Company’s shares held by the Group. As 31 December 2010 and 2009 the Group held 374,523 of the Company’s shares, purchased at a cost of HUF 1,162 million. Translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. Retained Earnings Dividends are available for distribution from the Company’s retained earnings calculated according to Hungarian Accounting Law. The amount available for distribution as dividends at December 31, 2010 is HUF 25,327 million (2009: HUF 24,576 million). If dividends are paid to non-resident shareholders, a withholding tax of up to 20% must be paid. The rate applicable is dependent on the country of residence of the shareholder, the period in which the dividend is paid and the number of shares held. The withholding tax is also payable by individual shareholders who are resident in Hungary (resident legal entities are exempt).
15. Non-controlling interest 31 December 2010 Preventív-Security Zrt.
55
666
669
1,781
1,698
Léčebné Lázne a.s. Slovenské Liečebné Kúpele Piestany a.s.
2009 61
SC Salina Invest SA and SC Balneoclimaterica SA
10
7
2,518
2,429
16. Material costs 2010
2009
Materials used in providing guest services
4,797
4,605
Utility costs (gas, electricity, fuel and water consumption)
3,110
3,612
Other materials used
1,058
1,074
8,965
9,291
57
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
17. Services used 2010
2009
Washing, cleaning services
1,322
1,369
Maintenance services
1,359
1,356
Safety services
828
826
Professional and membership fees
484
404
Hospitality services
643
695
Marketing, PR services
835
806
Rental of buildings, equipment and vehicles
616
584
Travel agency and other commissions
668
664
Bank and insurance charges
447
435
Hire of temporary personnel
225
281
Telecommunications services
291
263
Software, IT support
305
311
Delivery and transport fees
190
183
Training
145
81
1,254
988
9,612
9,246
Other
18. Other expenses 2010 Taxes and contributions, except for income taxes
2009
1,933
Write-off of inventories Damages Impairment of trade receivables Other
1,863
115
-
14
12
15
6
445
412
2,522
2,293
19. Income tax The tax charge / (benefit) for the year comprises: 2010 Current tax Deferred tax
58
2009 338
54
(409)
295
(71)
349
Notes to the Consolidated Financial Statements (All amounts in million HUF)
A reconciliation of the difference between the income tax expense and taxation at the statutory tax rate, is shown in the following table: 2010 Loss before tax
2009 (953)
Income tax using the Hungarian corporation tax rate
10%
(407)
(95)
Effect of different tax rates in foreign jurisdictions
16%
(65)
112
35
-
224
Effect of change of Romanian corporate tax law Non-deductible expenses
103
272
Tax exempt revenues
(76)
(235)
Tax exempt expenses
-
(15)
(52)
75
Current year losses for which no deferred tax asset was recognised
50
54
Tax loss utilised
(3)
-
(105)
-
Effect of other tax rate changes, net
Change in unrecognised differences Tax allowances Other
(6)
-
1
4
(71)
349
In 2009 mid year the Hungarian government changed the corporate tax rate from 16% to 19% effective from 1 January 2010 together with the withdrawal of 4% solidarity surplus tax. In 2010 the Hungarian government changed the corporate tax rate from 19% to 10%, to be applied only to taxable profit under HUF 500 million, and effective from 2013 to be applied to all taxable profit. In 2007 S.C. Balneoclimaterica S.A. recognised a deferred tax gain of HUF 251 million due to the revaluation of hotel properties for Romanian tax purposes. In 2009 HUF 224 million deferred tax asset had to be reversed, due to the change of statutory corporate income tax law as the revaluation of properties made in years following 2004 cannot be treated as tax written down allowances. Deferred tax assets and liabilities Deferred tax assets and liabilities as at 31 December 2010 and 31 December 2009 are attributable to the following: Assets 2010 Property, plant and equipment
Liabilities 2009
2010
Net
2009
2010
2009
44
-
1,281
1,611
(1,237)
(1,611)
-
-
211
195
(211)
(195)
130
126
-
-
130
126
Provision for doubtful debts
13
35
-
-
13
35
Provision for employee benefits
44
87
-
-
44
87
Loan revaluation
97
-
-
-
97
-
401
426
-
-
401
426
Repairs and maintenance provision Legal provisions
Tax loss carry forwards Other Offset of assets and liabilities within individual legal entities
16
19
13
18
3
1
745
693
1,505
1,824
(760)
(1,131)
(428)
(492)
(428)
(492)
-
-
317
201
1,077
1,332
(760)
(1,131)
59
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
Movement in temporary differences during the year:
Balance 1 January 2009 Property, plant and equipment
Recognised in Recognised in other comprestatement of hensive inincome come
Balance 31 December 2009
Recognised in profit or loss
Recognised in otherco prehensive income
Balance 31 December 2010
(1,299)
(304)
(8)
(1,611)
399
(25)
(1,237)
Repairs and maintenance provision
(99)
(92)
(4)
(195)
1
(17)
(211)
Legal provisions
123
-
3
126
-
4
130
35
-
-
35
(22)
-
13
109
(22)
-
87
(43)
-
44
-
-
-
-
97
-
97
291
135
-
426
(25)
-
401
Provision for doubtful debts Provision for employee benefits Loan revaluation Tax loss carry forwards Other
13
(12)
-
1
2
-
3
(827)
(295)
(9)
(1,131)
409
(38)
(760)
Léčebné Lázne ˇ a.s. records a provision for repairs and maintenance in its Czech statutory accounts related to the future repair expenses of its premises, which is a deductible expense in Czech tax legislation. This provision is not included in these IFRS financial statements and a deferred tax liability of HUF 211 million is set up for this temporary difference. As at 31 December 2010 HUF 1,237 million deferred tax liabilities are recognised in respect of temporary differences between the tax base of Property, plant and equipment (primarily land and hotel buildings) and their carrying amount recorded in these financial statements. At 31 December 2010 tax loss carry forwards of HUF 401 million can be utilised over indefinite period of time.
20. Earnings per share The calculation of basic earnings per share is based on the net loss attributable to ordinary shareholders of HUF 945 million in 2010 (2009: a net loss of HUF 801 million) and the weighted average number of qualifying ordinary shares outstanding was 7,910,914 during 2010 and 2009. 31 December 2010
2009
Weighted average number of issued ordinary shares
8,285,437
Weighted average number of treasury shares
(374,523)
8,285,437 (374,523)
Weighted average number of qualifying ordinary shares
7,910,914
7,910,914
Net profit/(loss) for the year in million HUF
(933)
(801)
Basic earnings per share (HUF/share)
(118)
(101)
There are no dilutive factors to earnings per share disclosed above.
21. Commitments and contingencies As of 31 December 2010 and 31 December 2009 there were no material contractual commitments for the acquisition of property, plant and equipment. The Group did not have any significant contingent liabilities as at 31 December 2010 and 31 December 2009. As at 31 December 2010 and 31 December 2009 the Group had no lease obligation that is due over a year, leasing agreements can be abandoned at any time without significant penalty suffered.
60
Notes to the Consolidated Financial Statements (All amounts in million HUF)
22. Pension Plans and other post-employment benefits The Group’s employees participate in state pension plans to which employers and employees are required by law to pay contributions based on a percentage of each employee’s employment earnings. The pension liability resides with the state in Hungary, the Czech Republic, Slovakia and Romania. The Group has a defined contribution pension plan in addition to the state plan, which is available for all Hungarian employees after six months employment. The Group pays contributions equal to 5% of the salary of employees who are members of the fund (2009: 5%). The contribution expense in 2010 was HUF 260 million (2009: HUF 268 million). The assets of the fund are held in separate trustee administered funds and are not included in these financial statements. The Group also has a Health Fund, which is available for all Hungarian employees after six months employment. The Group pays contributions equal to 1% of the salary plus HUF 4,000 per month for employees who are members of the fund. The total contribution expense was HUF 166 million in 2010 (2009: HUF 174 million). The assets of the fund are held in separate trustee administered funds and are not included in these financial statements. There are no Group pension or health plans for employees of the Czech, Slovak and Romanian subsidiaries. See employee benefit section of Note 12 for further details of other post-employment benefits.
23. Related Party Transactions Transactions with related parties are summarised as follows: Expenses / (revenues)
2010
Management fee to CP Holdings Limited
2009 331
Interest to CP Holdings
319
14
-
Management support fee from CP Regents Park Two Limited.
(77)
(63)
Rental fee to Interag Zrt.
155
165
Services provided by Interag Zrt. (merged with Investor Zrt. in 2009) Service provided to Interag Zrt.
17
19
(23)
(25)
Related party receivables and payables, except for the HUF 502 million put option liability (see Note 9) were not significant as at 31 December 2010 and 2009. Interag Zrt. and CP Regents Park Two Limited. are each subsidiary companies of CP Holdings Limited. The pricing of all transactions with related parties is at arm’s length. Transactions with key management personnel Total remuneration is included in personal expenses: 2010 Short-term employee benefits Post employment benefits Total
2009 352
272
8
10
360
282
61
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
24. Financial instruments and financial risk management A) Categories of financial instruments The following table sets out the financial instruments as at the reporting date: 2010
2009
Financial Asset Loans and receivables 1
6,361
5,332
30,341
30,494
-
158
Financial Liability measured at Amortised cost3 Fair value through profit and loss2 1
Includes the total amount of cash and cash equivalents and trade and other receivables in the statement of financial position, except for recoverable taxes and duties. Includes the fair value of derivatives 3 Includes the total amount of trade accounts payable, other payables and accruals, interest bearing loans and borrowings recognised in the statement of financial position, except for taxes payable. 2
Carrying value and fair value for all of the Group’s financial assets at 31 December 2010 and 2009 are deemed to be equal. The carrying amount of cash and cash equivalents, trade and other current receivables and payables and other liabilities approximates their relative fair values due to the relatively short-term maturity. Derivative assets and liabilities are carried at fair value. All non-current borrowings have floating interest rates, so their fair values are not significantly different from their amortised cost and consequently carrying value is deemed to approximate fair value. B) Financial risk management The Group has documented its financial risk management policy. This policy sets out the Group’s overall business strategies and its risk management philosophy. The Group’s overall financial risk management programme seeks to minimise potential adverse effects on the Group’s financial assets and liabilities. The Board of Directors provides written principles for overall financial risk management and written policies covering specific areas, such as market risk (including foreign exchange risk, interest rate risk), credit risk, liquidity risk, use of derivative financial instruments and investing excess cash. Such written policies are reviewed annually by the Board of Directors and periodic reviews are undertaken to ensure that the Group’s policy guidelines are complied with. Risk management is carried out by the Finance Departments under the policies approved by the Board of Directors. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. I) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of giving credit to counterparties with good payment history and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The expense of individual hotels’ exposure and the credit ratings of their counterparties are continuously monitored. Credit exposure is controlled by the counterparty limits that are continuously reviewed by credit managers. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of customers and advance payment is encouraged and enforced.
62
Notes to the Consolidated Financial Statements (All amounts in million HUF)
The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The Group defines counterparties as having similar characteristics if they are related entities. At the end of 2010 HUF 432 million (2009: HUF 506 million), or approximately 30 percent of the Group’s total trade receivables, is attributable to sales transactions with the top 30 customers. However, geographically there is no concentration of credit risk. The carrying amount of trade receivables and other financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk without taking into account of the value of any collateral obtained. II) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group has yearly, monthly and weekly cash flow forecasts and continuously monitors liquidity. For cash flow optimisation purposes at the end of 2009 and early 2010 the repayment of approximately half of the borrowings has been rescheduled, the original amount of instalments in 2011 will be reduced by half. At the reporting date the Group has the following unused loan facilities: 31 December 2010 Overdraft Long-term loan
2009
2,962
1,653
558
-
The following are the contractual maturities of financial liabilities, including estimated interest payments:
31 December 2010
Carrying amount
Contractual cash flows
6 months or less
6-12 months
1-2 years
2-5 years
More than 5 years 1,343
Financial liabilities Interest bearing loans and borrowings
25,009
26,483
2,123
4,486
11,473
7,058
Liability due to put option (see note 9)
502
517
-
-
517
-
-
Bank overdrafts
221
221
221
-
-
-
-
Trade payables
2,205
2,205
2,205
-
-
-
-
Other payables and accruals
2,833
2,833
2,833
-
-
-
-
30,341
31,830
6,953
4,486
11,990
7,058
1,343
Carrying amount
Contractual cash flows
6 months or less
6-12 months
1-2 years
2-5 years
More than 5 years
24,267
25,807
1,382
2,876
4,762
14,062
2,725
472
493
-
-
-
493
-
Bank overdrafts
1,556
1,556
1,556
-
-
-
-
Trade payables
1,995
1,995
1,995
-
-
-
-
Other payables and accruals
2,204
2,204
2,204
-
-
-
-
30,494
32,055
7,137
2,876
4,762
14,555
2,725
Total
31 December 2009 Financial liabilities Interest bearing loans and borrowings Liability due to put option (see note 9)
Total
63
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts, however negotiations are currently in progress with financial institutions to modify the current loan repayment scehdule in order to postpone part of the repayable amounts due within 2 years.
III) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. i) Currency risk The Group is exposed to currency risk on sales and borrowings that are denominated in a currency other than the respective functional currencies of Group entities, primarily the Euro, but also Pound Sterling (GBP). At the reporting date, the carrying amounts of financial assets and financial liabilities denominated in currencies other than the respective group entities’ functional currencies are as follows:
HUF million
Financial liabilities 2010
Euros
Financial assets
2009
2010
Net asset/(liability)
2009
2010
2009
26,088
25,779
1,024
1,002
(25,064 )
(24,777)
Sterling
-
89
-
-
-
(89)
USA dollars
-
-
4
11
4
11
Financial instruments denominated in foreign currency
26,088
25,868
1,024
1,013
(25,060)
(24,855)
Total financial instruments
30,341
30,652
6,361
5,332
(23,980)
(25,320)
The Group's sales prices are primarily quoted in Euro and income is received in foreign currency or local currency. This provides a natural hedge against foreign exchange movements for the interest and capital installments of loans and borrowings the majority of which are denominated in EUR. Management periodically reviews the merits of entering into foreign currency hedging contracts or other derivative products. Based on the approval of Board of Directors the Group may use forward exchange contracts to hedge its currency risk in respect of sales revenues, with a maturity of less than one year from the reporting date. The effect of such hedges is not material in 2010 and 2009. Foreign currency sensitivity The following strengthening of the Euro against each of the following currencies at 31 December would have increased (decreased) profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates and margins, remain constant. When analysing foreign currency sensitivity the changes of functional currencies of operational segments against the euro are monitored, as the euro has the highest possible exposure on the Company’s operational performance.
64
Notes to the Consolidated Financial Statements (All amounts in million HUF)
Strengthening
Profit and Loss effect
Effect on translation reserve
31 December 2010 Hungarian forint (HUF)
11%
( 2,129)
(1,570)
Czech Crown (CZK)
5%
(53)
-
Romanian Lei (RON)
5%
(10)
-
Hungarian forint (HUF)
16%
(2,790)
(2,246)
Czech Crown (CZK)
11%
(170)
-
Romanian Lei (RON)
7%
(20)
-
31 December 2009
The weakening of the Euro against the above currencies by the above shifts at 31 December would have had the equal but opposite effect, on the basis that all other variables remain constant. ii) Interest rate risk The interest rates for all bank borrowings are floating and determined by 3 months EURIBOR + margin between 0.6% to 3.5% in Czech Republic and Slovakia, 0.75% to 4.25% in Hungary and 4.5% in Romania. The weighted average margin is 2.22% at 31 December 2010 (2009:2.06%), while the average rate of interest is 3.2% (2009: 2.8%). Since June 2006 the Company has used an interest rate swap to manage the relative level of its exposure to cash flow interest rate risk associated with floating interest-bearing borrowings. The Company’s interest rate swap (Collar) agreement expired on 31 December 2010. The agreement in effect as of 31 December 2009 had a notional amount of EUR 27.8 million and had a 3 months EURIBOR floor of 3.35% and cap of 4.75%. Having this instrument meant that the Company did not have to pay more than 4.75% interest + margin for the covered amount, but cannot pay less than 3.35% interest + margin. As the underlying loan facilities have been rescheduled and the collar agreement was not modified accordingly, the collar was not amortising in line with the underlying loan facilities, therefore, starting from year 2008 no hedge accounting was applied, any change in its fair value was included in the profit or loss. The Collar agreement was gross settled, the fair value of this Collar agreement was a liability of HUF 158 million as of 31 December 2009. Interest rate sensitivity 3 months EURIBOR was 1.013% as of 31 December 2010 and 0.700% as of 31 December 2009. A change of 11 basis points in interest rates at the reporting date would have increased (decreased) profit and loss by the amounts shown below. Starting from year 2008 the Collar agreement is considered not effective for IFRS reporting purposes, hence the change in the fair value of the Collar agreement affects the Company’s profit and loss. This analysis assumes that all other variables, in particular foreign currency rates and interest margins, remain constant. The changes of interest rates effect only the profit and loss of the Company and have no effect on equity. Profit and Loss 31 December 2010 11 basis points increase
(27)
11 basis points decrease
27
31 December 2009 11 basis points increase
(17)
11 basis points decrease
17
65
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
C) Capital Management The Group’s policy is to maintain a capital base which is sufficient to maintain investor and creditor confidence and to sustain future development of the business. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. There were no changes in the Group’s approach and processes to capital management during the year. The Corporate Act requires that the equity of the Company has to be higher than two third of the share capital, otherwise the share capital should be decreased or transformation of the Company into other legal form should be undertaken.
25. Segment reporting Hungarian operations 2010
Hotel & HosSecurity segpitality segment ment
Total
Czech operations
Slovakian operations
Romanian operations
Inter-segment transfers
Total
Revenue Sales to external customers Inter segment sales Total operating expenses of which Depreciation and amortisation of which impairment of receivables and writeoff of inventories Operating profit Financial results Profit/(loss) before tax
24,415
774
25,189
7,273
9,003
1,456
-
720
356
1,076
-
-
-
(1,076)
42,921 -
25,717
1,102
26,819
6,699
8,869
1,254
(1,076)
42,565
1,986
16
2,002
934
1,322
239
-
4,497
130
-
130
-
-
-
-
130
(582)
28
(554)
574
134
203
-
356
(1,232)
1
(-1,231)
4
(97)
15
-
(1,309)
(1,814)
29
(1,785)
578
37
217
-
(953)
38,672
63
38,735
14,767
21,105
1,841
-
76,448
1,803
100
1,903
1,167
671
445
-
4,186
691
93
784
314
311
32
-
1,441
Assets and liabilities Property, plant and equipment Cash and cash equivalents Accounts receivables Inventories
303
4
307
105
196
12
-
620
Intangibles
2,478
121
2,599
587
51
1
-
3,238
73
-
73
-
-
-
-
73
-
-
-
-
-
-
-
1,319
44,020
381
44,401
16,940
22,334
2,331
-
87,325
1,184
103
1,287
399
462
57
-
2,205
232
-
232
197
153
34
-
616
19,998
16
20,014
1,215
4,296
207
-
25,732
472
-
472
-
742
-
-
1,214
-
-
-
-
-
-
-
4,462
21,886
119
22,005
1,811
5,653
298
-
34,229
778
-
778
853
458
425
-
2,514
Assets held for sale Other non-allocated assets Total assets Trade accounts payable Advance payments from guests Interest bearing loans and borrowings Provisions Other non-allocated liabilities Total liabilities Capital expenditure
66
Notes to the Consolidated Financial Statements (All amounts in million HUF)
25. Segment reporting (continued) Hungarian operations 2009
Hotel & HosSecurity segpitality segment ment
Czech operations
Total
Slovakian operations
Romanian operations
Inter-segment transfers
Total
Revenue Sales to external customers
24,877
865
25,742
7,067
9,187
1,489
-
43,485
523
356
879
-
-
-
(879)
-
25,541
1,166
26,707
6,443
8,831
1,261
(879)
42,363
of which Depreciation and amortisation
2,007
15
2,022
959
1,372
266
-
4,619
of which impairment of receivables and write-off of inventories
6
-
6
-
-
-
-
6
Inter segment sales Total operating expenses
Operating profit
(141)
55
(86)
624
356
228
-
1,122
(1,340)
2
(1,338)
(29)
(146)
(16)
-
(1,529)
(1 ,481)
57
(1,424)
595
210
212
-
(407)
39,889
58
39,947
13,813
21,455
1,580
-
76,795
1,376
93
1,469
1,068
427
573
-
3,537
Accounts receivables
678
115
793
267
259
52
-
1,371
Inventories
540
7
547
89
176
12
-
824
Intangibles
2,423
122
2,545
639
22
2
-
3,208
78
-
78
-
-
-
-
78
-
-
-
-
-
-
-
1,258
44,984
395
45,379
15,876
22,339
2,219
-
87,071
1,203
154
1,357
330
251
57
-
1,995
381
-
381
144
112
35
-
672
19,214
8
19,222
1,917
5,032
283
(159)
26,295
607
-
607
-
768
2
-
1,377
-
-
-
-
-
-
-
4,239
21,405
162
21,567
2,391
6,163
377
(159)
34,578
1,274
-
1,274
532
293
49
-
2,148
Financial results Profit/(loss) before tax Assets and liabilities Property, plant and equipment Cash and cash equivalents
Assets held for sale Other non-allocated assets Total assets Trade accounts payable Advance payments from guests Interest bearing loans and borrowings Provisions Other non-allocated liabilities Total liabilities Capital expenditure
Eliminations principally comprise the equity consolidation and inter group loans. Inter-segment pricing is determined on an arm’s length basis. Other non-allocated assets and liabilities include deferred tax assets and liabilities and many, individually not material items that were not allocated to segments in this presentation.
67
ANNUAL REPORT 2010 Notes to the Consolidated Financial Statements (All amounts in million HUF)
26. Key sources of estimation uncertainty The Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are described below. Deferred tax assets The Group recognizes deferred tax assets in its statement of financial position relating to tax loss carry forwards. The recognition of such deferred tax assets is subject to the future utilization of tax loss carry forwards. The utilization of certain amounts of such tax loss carry forwards might be subject to statutory limitations and is dependent on the amount of future taxable income. If the future taxable income is significantly less than the amount estimated the deferred tax asset may need to be written down (see Note 19). Impairment of property, plant and equipment and intangible assets The carrying amounts of the Group’s property, plant and equipment and intangible assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. Such value is measured based on discounted projected cash flows. The most significant variables in determining cash flows are discount rates, terminal values and the period for which cash flow projections are made, as well as the assumptions and estimates used to determine the cash inflows and outflows. For property, plant and equipment the recoverable amount is determined to be the fair value rather than the value in use. The estimated fair value of the Group’s assets or group of assets significantly exceeds its net carrying amount. The Group considers that the accounting estimate related to asset impairment is significant due to the need to make assumptions when estimating the recoverable amount and the material impact that recognising impairment could have on the results of the Group. See Notes 7 and 8 for more information. Depreciation Property, plant and equipment and intangible assets are recorded at cost and are depreciated or amortised on a straight-line basis over their estimated useful lives. The determination of the useful lives of assets is based on historical experience with similar assets. The appropriateness of the estimated useful lives is reviewed annually. Due to the significance of property, plant and equipment in the asset base of the Group, the impact of any changes in these assumptions could be material to the results of operations (see Note 7 and 8). Provisions The Group establishes provisions where management considers that it is probable that an outflow of economic benefits will be required to settle obligations arising from past events. The estimated amounts of provisions are reviewed on an ongoing basis. Changes in estimates are recognised in the income statement and such changes could be material to the net results reported in a particular year. See Note 12 for more information.
27. Post Balance Sheet events No event occurred after the balance sheet date that would have material effect on the financial statements presented.
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Report on the 2011 business targets
Report on the 2011 business targets The hotel industry remains in a challenging situation in year 2011. Hotel industry investments carried out in the past decade significantly increased hotel capacity in the Central-East European region and demand is only expected to adjust after several years. Hotels are experiencing fierce competition for retaining market share and beside a rates war, increasing efficiency, cutting and streamlining costs play a major role. Danubius’ plans for 2011 fully reflect its strong response to these tough market conditions. Retaining the effect of the cost cutting measures undertaken in 2009 as a reaction to the crisis and a further increase in cost efficiency whilst continuing to provide our guests with our usual high quality is a key goal for the Danubius group in the year 2011. The operating performance of the Group is at all times influenced by the strengthening and weakening of the forint and other national currencies compared to the euro. When preparing the 2011 budget, management calculated with a 275 HUF/EUR rate. The Company has forecast a wage increase that is lower than the rate of inflation. Generally, 4.0% inflation and at the time of preparing the budget a low 1% increase of Gross Domestic Product (GDP) were prognosticated, however current forecasts now suggest a GDP growth of 3% in 2011 which, if achieved, would be a positive sign of economic recovery. In our Hungarian hotels, demand from the major guest segments did not change significantly in 2010, however there was a considerable drop in the main segments in the year 2009. Budapest saw the largest drop in business and meeting tourism and groups of leisure tourists. We are not expecting a further decrease in these segments in 2011. On the contrary, we are starting to rebuild lost turnover this year, mainly from volume increase. The number of guests arriving from the German markets has been dropping for the past years. We trust that as a result of the renewal of the market representation in Germany we will be able to reach out to wellness and business guests too. The majority of British guests arrive to Budapest for leisure and business purposes, and their number is largely dependent on the air traffic between the two countries. Hungary has become a member of the Schengen group, which has a positive effect on West-European demand; in addition customers from former Soviet Union countries are expected to increase further in 2011. Alongside the expected slight increase in foreign demand, a further expansion of domestic guests can be expected, although the rate of increase will somewhat slow down as, due to changes in the tax law, less holiday vouchers are expected to be available for employees. All these factors are expected to lead to a moderate 1.2% increase of occupancy from 57.2% in 2010 to 58.4%. The implementation of new operating software will continue in 2011 and 2012 with the aim of providing greater efficiency in the fields of operations, sales, guest relations and the economic and financial area. In addition, the company is focusing on increasing the turnover through electronic sales channels, especially through our website, which showed an impressive improvement in 2010 with the highest average daily rate (ADR) achieved. A further goal is to achieve an adequate ratio of leisure and business guests in the city hotels while in the hotels of the Danubius Health Spa Resort brand we plan to achieve better results by introducing new products and new concepts like family friendly hotel programs. In spite of the current strong competition on the market, our objective is slightly to raise prices in euro. Besides monitoring the competition, our rates are flexibly adjusted to the requirements of market demand. Special attention is paid in our sales strategy to driving cross selling to keep as much business as possible within the Company and the Group. This is strengthened by the application of the Central Reservation System (CSR) in more and more hotels.
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ANNUAL REPORT 2010 Report on the 2011 business targets
In addition to maximising revenues, minimizing costs will continue to have a special role in 2011. Seasonality is of great importance in both our Budapest and country hotels, and so we have adjusted the constant hotel headcount to the staff requirement in the low occupancy months and at times when the number of guests goes up, we provide the expected high quality services by employing temporary manpower. Due to the significant headcount reduction and cut back of personnel expenses in previous years, Danubius management plans to increase wages by 2% on average and will compensate the majority of employees for the loss caused by new personnel tax legislation. Considering the 1.2% increase in occupancy and a moderate increase of average rates in HUF terms, we plan approx. 2.5% revenue increase on the Hungarian market in 2011, which alongside the increase of personnel expenses and strict control of other fixed costs will result in the slight increase of departmental profit as opposed to 2010. In Czech Republic we expect that the drop in German market will bottom out and a slow recovery will start in 2011, due to the significant, 4% growth of the German economy in previous year. However the number of insurance paid German guests will be lower by approximately 10-15%. The Czech subsidiary also expects an increasing number of guests via electronic channels, including the new Danubius web site. The potential future markets for the Czech hotels are guests from the domestic market, the surrounding countries, Israel and the former Soviet states, although visa obligations could make sales difficult. Considering all factors in the market, the number of sold rooms is expected to decrease by almost 2%, while the average room rate is expected to be on 2010 level. The lower amount of revenues cannot be fully compensated by cost reductions, therefore operating performance is expected to decrease slightly, however our Czech subsidiary will still be the biggest contributor to Group’s operational profit in 2011. The impact of quality enhancing developments completed in the hotels in Slovakia and Piestany is reflected in the 2011 budget expectations of the hotels. The number of domestic guests financed by social insurance companies is expected to decline further, at the same time, shorter leisure stays by Slovakian guests will become more popular and the number of guests from the Arabic and Russian markets are expected to go up. However, the current Arabian political difficulties can easily erode our positive expectations. Alongside a 4% increase in average occupancy, we expect average rates to go up by 1.5% in 2011. As a result of more revenues, the budget indicates an improvement of both gross and net operating profit. In Romania the significant lagging behind in the number of business and conference guests in 2009 and 2010 is likely to recover partly in 2011. The spa and leisure guests still give a stable revenue and profit contribution to the company. In 2010 the weather conditions and the implementation of new entrance system contributed highly to the revenue increase of the spa lake operations and we expect these revenues to increase slightly in 2011 Despite the fact that the Romanian economy is still facing very serious difficulties and domestic tourism will not receive enough incentives from the government, we expect the competitiveness of the hotels in Sovata will allow our profit level to be maintained, even taking account of the minimum wage increase required by the government. In view of the above mentioned, we plan to increase slightly the 2010 Group level operating revenues and operating profits in 2011, which means maintaining the reduced rate cost base from 2009. The financing opportunities limited by the economic crises, the extended return period and the difficult business climate have forced the management of Danubius Nyrt. to distribute investment sources carefully. Among planned investments the implementation of the new operating software is a significant element. In Hungary, the Company does not plan any significant reconstructions in the hotels and restaurants other than the necessary maintenance and certain important quality improving works in 2011.
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Report on the 2011 business targets
However, in Czech Republic the Maria Spa Project will be completed to provide 20 new rooms, spa facilities and linking corridors. In Piestany, the entire reconstruction of the balneotherapy section will be completed. The management of the Group aims to support developments to minimise energy use and provide extra services required by the customers that generate revenues. The size of such investment programs will depend on business performance and financing sources. The Group’s liquidity position in the continuing testing market will be kept under strict control. Our 2011 budget is subject to the market and economic environment not deteriorating significantly during the entire year, despite the uncertain economic and international political outlook. Certain factors e.g. increasing energy prices are mounting up further difficulties to retaining profitability. Besides the planned change in operating profit, interest costs are expected to grow owing to the increasing EURIBOR rates, but the amount of outstanding loans is expected to remain around the level of the previous year. Through the loan translations, the recent extreme changes in the forint/euro rate may considerably affect the financial profit and thus the profit before tax. The overall cost base of Danubius has been considerably reduced thanks to the actions made as a reaction to the challenges of the economic crisis. This also gives a profit opportunity to the Company when revenues start to grow again. However, it should be emphasized that the outlook for 2011 remains extremely uncertain due, on the one hand, to the increasing trend of late booking and unpredictable developments in the international and domestic economies, together with the political situation of Arabic countries. On the other hand, the continued recovery of the German economy and the predicted pick up in Hungary, would be positive features for tourism and our business.
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ANNUAL REPORT 2010 Danubius Hotels Group
Contact persons:
Dr. Imre Deák President & CEO Phone: (+36-1) 889 4001 Fax: (+36-1) 889 4005
János Tóbiás Vice President for Finance Phone: (+36-1) 889 4004 Fax: (+36-1) 889 4005
Panni Rozsnyai Investors’ Relations Phone: (+36-1) 889 4007 Fax: (+36-1) 889 4005
E-mail:
[email protected]
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DANUBIUS HOTELS NYRT. danubiushotels.com 1051 Budapest, Szent István tér 11. Telefon: (+36-1) 889-4000 Fax: (+36-1) 889-4005
