2017 INTEGRATED ANNUAL REPORT AND CORPORATE SOCIAL RESPONSIBILITY EU Ecolabel : SE/011/05 In accordance with Valamar Riviera's mission, core values and strategic initiatives, this report has been printed on EU Ecolabel, FSC™ and PEFC certified wood-free Munken Lynx paper. 2017 INTEGRATED ANNUAL REPORT AND CORPORATE SOCIAL RESPONSIBILITY Valamar riViera d.d. 4 [G4-1] Message froM the ChairMan For the third consecutive year, it is my great expanded strategic partnerships, we continued pleasure to present Valamar Riviera's integrated upgrading our service quality and developing our annual report in which we encompassed business destinations and we focused especially on our reporting and sustainability reporting, thus employees. As the leading company in tourism, we presenting non-financial information on the continually work on initiatives aimed at human company’s environmental and social impacts by resource development in order to be recognized as using the Global Reporting Initiative G4 standard as the most desirable employer in Croatia’s tourism. a general guideline in order to manage our business in a sustainable way. When looking back on 2017, I am very proud to say that Valamar Riviera delivered excellent results that The principles of sustainability and social exceeded our expectations in all operating responsibility are a fundamental part of our vision, indicators and increased further the value of our GustaV Wurmböck, our mission, our values, our business model and enterprise and share. We grew revenues and Supervisory Board our daily practices. Valamar Riviera achieved operating profit in spite of the VAT rate growth in Chairman exceptional results in all key financial indicators in hospitality and a very unfavorable foreign exchange 2017 and continued its strategic path to growth and rate. Valamar’s large investments in the portfolio, development built on sustainability and corporate new partnerships, acquisitions, guest experiences social responsibility. This comprehensive report and numerous recognitions for initiatives in the renders a detailed presentation of the relationships field of corporate social responsibility give us the that the company builds with its key stakeholders, confidence to move forward and develop our including all our shareholders, employees, partners, company guided by our strategic goals. guests and the community. The investment in the development of our In 2017 we became the leading company in leisure employees remains our top priority and is as tourism and also one of the 10 most important important as our investments in hotels and companies in Croatia. campsites. High guest satisfaction and our outstanding service culture, where the smile of We achieve double-digit EBITDA growth and our each of our employees counts, were recognized by ambitious 2017/ 2018 cycle of investments in the the numerous awards that we received from portfolio is worth HRK 1.6 billion. Our successful professional organizations and the public. Therefore, acquisitions of Imperial on Rab Island and Hoteli I would like to thank our management and all our Baška on Krk Island show excellent results. We employees for their outstanding contribution to the focused on improving our guest relations, we excellent results achieved in 2017. [G4-1] 5 This was a great year for the shareholders of Valamar Riviera d.d. on the Zagreb Stock Exchange, as they benefited from the 25% increase in market cap in 2017. In 2017 the company paid out a dividend that is sustainable in the long term and enables Valamar to continue investing in the portfolio and achieve its strategic goals. The current global conditions and trends which have resulted in the increased demand for certain Mediterranean destinations including Croatia, combined with historically low interest rates and our healthy balance sheet present a very good springboard for Valamar. Therefore, we will continue our large investments in the portfolio and consider growth opportunities in Croatia and abroad, while focusing on innovation and service excellence as key competitive advantages. We will continue developing our destinations and local communities where we operate, and strengthen our relations with key stakeholders, while focusing especially on sustainable development and environmental protection. We aim to be recognized as the leading Croatian company in the field of corporate social responsibility and the most desirable employer in tourism. As Supervisory Board Chairman, I am therefore proud to present our 2017 Integrated Report. 6 [G4-1] Message froM the Ceo The year 2017 was an outstanding year for combined with stable net debt and a favorable Valamar Riviera: we confirmed that double-digit average financing cost of 2.3% underline further growth is not the result of favorable external potential and growth through acquisitions and factors, but the outcome of hard work and the investments in the portfolio. successful implementation of Valamar’s strategy for the period up to 2020. In spite of the VAT rate Last year we confirmed our status as leading increase in hospitality and an unfavorable foreign investor in Croatia’s tourism. Valamar invested exchange rate, we achieved a significant growth in over HRK 4 billion in the previous period in operating profit as the result of increased developing its business operations, and in 2017 operating efficiency, investments in product the company realized its largest annual repositioning and the successful acquisitions and investment cycle worth HRK 906 million. It strategic partnerships. Today, Valamar is not only primarily focused on the largest investment in Željko kukurin, the leading company in tourism, but also a very Croatian tourism in 2017, through which we Management Board important company in Croatia that employs a created 400 new jobs in Rabac with the President and CEO large number of people and invests in the construction of the new resorts, Valamar development of Croatia’s tourism. The results Girandella Resort 4*/5* and TUI Family Life achieved in 2017 prove that our simultaneous Bellevue Resort 4* that engaged more than 130 investments in employees, quality, products and contractors and suppliers. It took only 18 months destinations in a sustainable and socially for us to prepare and realize this large project responsible way represent the only true formula with the support of the Town of Labin and the for achieving double-digit growth in business and Istrian County who recognized the importance of enterprise value. this investment for the local community. This investment will be completed with the opening of We achieved significant growth by all indicators in Valamar Girandella Maro Suites 5* in 2018, thus 2017. Total revenues were HRK 1.84 billion and finalizing the repositioning of Rabac as leading grew by 17%, while operating profit was HRK 623 holiday destination on the Adriatic coast. million and grew by 20% over 2016 results. Thanks to our investments, quality improvement and Guest satisfaction grew further to 87% while as change in the distribution policy, we increased much as 58% of guests rated our service as sales revenues by 20.6% over prior year results. “Unbelievable” thanks to the company’s The number of overnights grew by 20% in 2017 commitment to constantly improve quality and and totaled 6.2 million, while the average rate our service excellence. Moreover, we have grew by 6%. The strong business growth significantly increased the share of direct sales to [G4-1] 7 43% and the number of guest with whom we the 2018 season. We continually work on communicate directly was over 1 million. Our increasing employment and salaries and employees’ commitment and high guest improving our employees’ skills and working satisfaction confirm the strategical importance of conditions. We will pursue with this policy because our focus on the guests and employees. we believe that human resource management is the greatest challenge in the forthcoming period. Besides our large investments in the portfolio, a This is why, besides focusing on our guests, we significant business event that marked last year also focused on our employees in one of our key was the reorganization and restructuring of strategic initiatives. The average gross 1 salary in business operations at Imperial d.d. on Rab Island. 2017 at Valamar Riviera was HRK 8,470 or 27% This acquisition was justified in the first full year of more than the average in this industry. We will business under Valamar’s management as continue providing adequate remuneration and Imperial achieved strong operating results and harmonize company growth with salary growth. value growth. Moreover, we firmly believe that We will also persist in employing locally because forming partnerships with pension funds to invest we believe that it represents a great value that in tourism projects will prove to be a Croatian contributes to the authenticity of our hospitality. model for tourism investments that will be We have started a number of initiatives aimed at successful in the long term. In line with this, we maintaining a high share of local employment and started our acquisition projects in Makarska and strengthening further employee loyalty. on Hvar Island and we expect to realize them in the course of 2018. We have competent managers and outstanding employees and I am convinced that with the We are aware that our being among the 10 leading support of the investment community and other companies in Croatia’s economy entails a great stakeholders, we will strengthen our leading deal of responsibility