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Valamar Riviera d.d.

Annual Report Jun 8, 2017

2085_rns_2017-06-08_0009d708-eab6-4ab5-bee8-8db60b68d5f3.pdf

Annual Report

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INTEGRATED COMPANY ANNUAL REPORT AND CORPORATE SOCIAL RESPONSIBILITY 2016

Message from the Chairman

4

GUSTAV WURMBÖCK, Supervisory Board Chairman

It is my great pleasure to present the second Valamar Riviera Integrated Annual Report that is also the first annual report prepared in accordance with Global Reporting Initiative standards for non-financial reporting that help business organizations understand, communicate and manage the sustainability of their business model and their practices.

The integration of business reporting and sustainability reporting was not merely a presentation choice for Valamar. Many sustainability and social responsibility principles have always been a fundamental part of our vision, our values, our business model and our daily practices.

Driven by our belief in the value of transparent and open communication, the objective of the second integrated report is to present a comprehensive, strategic and longterm view of the company's relations with key stakeholders, including our shareholders, employees, partners, guests and the wider community.

The year 2016 was an exceptionally successful year for Valamar Riviera: we achieved record results in all key financial indicators while embarking on a new strategic path to future growth and development. The vision of Valamar Riviera to be the leader in leisure tourism and a partner to destinations in creating authentic guest experiences, together with a redefined mission and core values began to take shape. Last year we defined and communicated our strategic goals until 2020 which include achieving a double-digit growth of our EBITDA, reaching an EBITDA margin between 35-38%, and completing an ambitious investment cycle in our portfolio worth up to 2 billion HRK while maintaining a moderate debt level. We focused on the guest and building guest relationships, we expanded strategic partnerships and enabled the organization and our employees in order to be recognized as the most desirable employer in Croatia. We ensured that our business model and our practices promote sustainability and create new value.

When looking back on 2016 and considering our strategic goals and initiatives, I am very proud to say that Valamar Riviera delivered excellent results, which you can read about in much detail in this report. The growing success of our revenues, EBITDA, EBITDA margin, investments in the portfolio, partnerships, acquisitions, guest experiences, and many new strategic programs and initiatives are a confirmation of our strategic choices and give us the confidence to move forward as planned.

I would like to thank our management and all our employees for these excellent results. I very much appreciate all their efforts. Their smile and our outstanding service culture have resulted in high guest satisfaction and consequently, numerous awards for our hotels. The investment in education and training remains a top priority

for Valamar and is as important as our investments in hotels and campsites.

Shareholders of Valamar Riviera d.d. also had a record year on the Zagreb Stock Exchange as they benefited from the 45% increase in market cap in 2016. As promised, in 2016 the company paid out a dividend that is sustainable in the long-term and enables Valamar to continue investing in future growth.

Current global conditions and trends which have resulted in 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. They enable us to accelerate investments in the portfolio, consider growth opportunities in Croatia and abroad through partnerships and acquisitions, and focus the organization on investment, innovation and service excellence as a longterm competitive advantage.

As a true partner to our destinations and communities, in this report we also communicate and promote numerous Valamar activities that are focused on protecting natural resources, lowering our impact on the environment, educating our employees, developing our communities and strengthening our relations with all stakeholders with the aim of being recognized as the leading Croatian company in social, human and environmental responsibility.

As a representative of the largest shareholder and Supervisory Board Chairman, I am therefore proud to present you our 2016 Integrated Report.

Gustav Wurmböck, Supervisory Board Chairman

Message from the CEO

ŽELJKO KUKURIN, Management Board President and CEO

The year 2016 was marked by record results that confirmed Valamar Riviera's status as leading tourism company in Croatia by capacities and number of destinations, revenues and operating profit, investments, number of guests and employees. Valamar is a hospitality company that operates in five Croatian tourist destinations-Poreč, Rabac, the islands of Krk and Rab and Dubrovnik. The company can welcome 56,000 guests, which represents 12% of categorized accommodation in its 30 hotels and resorts and 15 camping resorts. Furthermore, in the year 2016 we set a solid foundation for future growth and development by adopting a new development strategy, reorganizing the company, investing in human resources, developing products, establishing strategic partnerships and completing acquisitions.

We achieved record results by all indicators in 2016. Valamar Riviera reported 1.58 billion kunas in total revenues, which represents an 18% increase on 2015 results. Operating profit totaled 519 million kunas, which represents an 18% growth. Sales revenues grew by 15%, due to product repositioning, improved sales and changed distribution policy, while overnights grew by 8.3% and the average rate grew by 4.6%. The continued optimization of business processes and increased average rates resulted in higher operating efficiency. Hence, the EBITDA margin grew by one percentage point to 34.9% (33.9% in 2015). Business growth combined with stable net debt and favorable financing costs of 2.4% underline further investment potential and further growth.

In the past year, we redefined the portfolio and implemented a new strategy for developing products and service concepts. We opened the first 5* campsite on the island of Krk and made significant progress in the premium camping segment. Valamar Isabella Island Resort achieved remarkable results by all indicators in its second year of operation. It now represents a prime example of success and operation of excellence of Valamar resorts. Two hotels, the Valamar Dubrovnik President and the Valamar Lacroma reported excellent preseason performance. Furthermore, the company's commitment to continual quality improvements and the excellent work of operating management resulted in 86% satisfaction, and a remarkably high number of guests (46%) who rated our services as "unbelievable". Excellent financial results in leading products and high customer satisfaction validate key strategic initiatives which focus on our guests and our employees.

Besides adopting the new company strategy until 2020, the acquisition of Imperial d.d. on the island of Rab in partnership with AZ pension fund was another important event that marked last year. By investing HRK 285 million we acquired 54.71% of the company while AZ acquired 34.22%. We believe that the island of Rab is a destination with strong growth potential and that the strategic partnership between Valamar Riviera and AZ pension fund will prove to be a long-term successful Croatian model for investments in tourism. Two more strategic partnerships with major tour operators, TUI and REWE group, were established in the course of the year, covering the development projects in Rabac.

In 2016 we confirmed our status as leading investor in Croatian tourism. Valamar invested over HRK 3 billion in developing its business operations. Moreover, we embarked on the largest annual investment cycle in Croatian tourism worth HRK 873 million and encompassing over 32 development projects. Rabac became the largest construction site in Croatian tourism, spread over 15 ha, where we constructed two resorts offering a total of 2,700 beds. More than 130 construction companies and suppliers were engaged in this project.

As the leading tourism company in Croatia, we have identified our key stakeholders: guests, employees, shareholders and the local community. We are aware of the importance of our collaboration with all our stakeholders. Moreover, we are aware that our being a leading tourism company in Croatia entails a great deal of responsibility for developing corporate social responsibility and sustainability. Our role is to manage proactively our business by taking into consideration all our stakeholders. As leisure tourism leader, we are focused on setting and promoting new business standards in Croatian tourism and hospitality.

Valamar Riviera is the largest employer in Croatian tourism employing more than 4,400 people in peak season. We continually work on increasing the employment rate and improving our employees' salaries, working conditions and skills. We will pursue this policy because we believe that human resource management is the greatest challenge in the forthcoming period. This is why we focused on our employees in one of our key strategic goals. The average gross I remuneration at Valamar Riviera in 2016 was HRK 8,192 or 29% above the sector average. We will continue providing competitive remuneration and harmonizing company growth with salary growth. We will also persist in employing locally because we believe that it contributes to the authenticity of our hospitality. Therefore, we have initiated a number of initiatives to maintain a high share of local employment and strengthen employee loyalty.

I am convinced that with the help of the investment community and other shareholders we will strengthen our leading position in leisure hospitality in Croatia and the Mediterranean region. The business model of Valamar Riviera is based on the idea of the simultaneous management of hospitality properties and destinations. This model, which aims at developing the local economy by respecting the principles of sustainability, has excellent long-term prospects. Valamar is on the right path – we can and want to take responsibility for the future development of Croatian tourism.

Sincerely,

Željko Kukurin, President and Chief Executive Officer for Valamar Riviera

Table of Contents

1 INTRODUCTION
About This Integrated Report
11
11
2 ABOUT VALAMAR RIVIERA
Valamar at a Glance
History of Valamar Riviera
Valamar Riviera's Business Model
13
13
16
18
3 THE HOSPITALITY INDUSTRY
Market Analysis and Trends in Croatia's Hospitality Industry
23
25
4 ENGAGEMENT OF KEY STAKEHOLDERS AND MATERIAL ASPECTS
Identification of Material Aspects and Boundaries
29
34
5 VALAMAR'S CORPORATE STRATEGY
Vision, Mission and Core Values
Strategic Goals 2016-2020
Our Strategic Initiatives
36
37
38
39
5.1
FOCUS ON THE GUEST
40
5.2
EMPLOYEES AND ORGANIZATION
52
5.3
GROWTH STRATEGY
72
5.4
INNOVATION AND DIGITALIZATION
86
5.5
DESTINATION DEVELOPMENT AND RESPONSIBILITY TO THE LOCAL COMMUNITY
5.6
COMMITMENT TO ENVIRONMENTAL SUSTAINABILITY
94
114
6 INVESTOR RELATIONS 123
7 AWARDS AND RECOGNITIONS 128
8 CORPORATE GOVERNANCE
Corporate Structure
Organizational Structure of Valamar Riviera
Members of the Supervisory Board
Management Board
Division Vice Presidents at Valamar Riviera
Internal Audits and Controls within Valamar Riviera
Company and Group Risks
Ethics and Integrity
133
133
137
138
141
142
144
147
154
9 2016 BUSINESS RESULTS
Results of the Group
157
158
GRI INDEX OPINION OF THE MANAGEMENT BOARD COMMITTEE OF THE CROATIAN BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT 168
170

INTRODUCT ION 1

About This Integrated Report

This integrated report refers to the reporting period from 1 January to 31 December 2016. It is based on the Annual Report of the Valamar Riviera Group* published on 27 February 2017.

For the second consecutive year, Valamar has integrated business reporting with sustainability reporting i.e. non-financial information on the company's environmental and social impacts, in accordance with the Global Reporting Initiative G4 guidelines (core option).

The aim of this report is to render a transparent and thorough presentation of Valamar Riviera's development strategy, business results, company culture and the overall approach to corporate social responsibility in relation to key stakeholders. This report was prepared with the expert support and guidance of the Croatian Business Council for Sustainable Development. Corporate social responsibility at Valamar represents the integration of the company's development strategy and Valamar's responsibility to the environment and society. These commitments create the preconditions for the sustainable development of the whole society. With this report, Valamar Riviera also sets out strategic business objectives and sustainable development goals for the forthcoming reporting periods. Our specific objectives include long-term profitability, investment in the development of human resources, sustainable development of destinations and support for the local community. Special focus is given to environmental protection, energy saving and the use of renewable

energy sources. Information on our economic, social and environmental impact and their management is integrated into the presentation of our strategic initiatives and the corporate responsibility programs. The report is available at www.valamar-riviera.com. We invite all stakeholders to submit their comments and suggestions at [email protected].

In order to make the presented data more relevant, the end of the report contains the opinion and recommendations for future reporting given by the Director of the Croatian Business Council for Sustainable Development (HRPSOR).

* The Valamar Riviera Group (hereinafter: the company, group, Valamar Group, Valamar, Valamar Riviera) in 2016 included the following entities: Valamar Riviera d.d., Mirta Bašćanska d.o.o. (merged to Hoteli Baška d.d. on 13/1/ 2016), Vala Bašćanska d.o.o.(merged to Hoteli Baška d.d. on 13/1/2016), Baškaturist d.o.o. (merged to Hoteli Baška d.d. on 13/1/2016), Hoteli Baška d.d. (merged to Valamar Riviera d.d. on 31/3/2016), Bastion upravljanje d.o.o. (merged to Valamar Riviera d.d. on 30/6/2016), Valamar hotels & resorts GmbH, Elafiti Babin kuk d.o.o., Magične stijene d.o.o., Palme turizam d.o.o., Pogača Babin Kuk d.o.o., Bugenvilia d.o.o., Puntižela d.o.o. and the balance sheet of Imperial d.d. (the income statement is not included).

ABOUT VALAMAR RIVIERA 2

Valamar at a Glance

Valamar Riviera is one of the largest tourism investors with more than HRK 3 billion invested in Croatian tourism.

MICROFACTS

Valamar operates in Poreč, Rabac, on the islands of Krk and Rab and in Dubrovnik.

Valamar Riviera is the leading tourism company in Croatia. The company's vision is to be the leader in leisure tourism and a partner to its destinations. For over six decades, the company has been offering excellent service, while continually investing in the upgrade of its portfolio properties and the development of talents and destinations.

Valamar creates unforgettable guest experiences by using innovative services in leisure tourism. It develops a stimulating corporate culture where guests and employees come first and delivers new value for shareholders through corporate responsibility by promoting sustainable development and supporting local communities. The skills, professionalism and hard work of over 4,400 people employed by Valamar during peak season in 2016 represent the foundation of our service excellence and the company's success. After acquiring a 54.7% stake in Imperial d.d. on the island of Rab by the end of 2016, Valamar Riviera is today present in five attractive destinations– from Istria and Kvarner to Dubrovnik. It operates about 12% of the categorized tourist accommodation in Croatia.

Valamar's 30 hotels and resorts and 15 camping resorts located along the Adriatic coast can welcome more than 56,000 guests daily.

14 [GRI G4-4, G4-5, G4-6, G4-9]

VALAMAR RIVIERA D.D. KEY INDICATORS

Stancija Kaligari 1, 52440 Poreč, Croatia

Business activity:

Hospitality and tourism (core activities) and other associated activities related to the performance of core activities

Primary Brands: Valamar Hotels & Resorts and Camping Adriatic by Valamar

Portfolio: 30 hotels and resorts and 15 camping resorts*

Land surface:

579 hectares, 46% owned and 54% under concession*

Maritime domain: 36 km*

* Imperial d.d. included in the financial information on assets as of 31/12/2016.

SOURCE MARKETS

28% 14% 8% 8% 6% 5% 5% 26%
Germany Austria Italy Slovenia Netherlands Croatia Great Britain Other
2015 2016 2016/2015
Total revenues
(bn HRK)
1.33 1.58 19%
EBITDA
(mn HRK)
423 513 21%
Net debt* / EBITDA 2.56 2.73 7%
Employees
(peak season)
4,112 4,429 18%
Investments
(mn HRK)
310 428 38%
Guests 810,434 888,573 10%
Beds 46,848 48,524 4%
Overnights 4,750,823 5,144,328 8%
Keys 17,783 18,072** 1%
Book value of long-term assets*
(bn HRK)
3.19 4.10 29%
Market capitalization as of 31/12
(bn HRK)
2.97 4.30 45%
Shareholders (31/12) 21,243 21,235 0%

** Excluding Imperial d.d.'s accommodation units (2,759).

Poreč 9,930 2015 2016 2016/ 2015 Hotels and resorts 993 1,119 13% Camping resorts 251 303 21% Other* 32 45 41%

* Leasing, sport, laundry facility and other operating revenues included.

REVENUES** (mn Hrk)

History of Valamar Riviera

ComPany bEginnings

Rivera Poreč was established, the company-predecessor of

Management of hotels, bungalows and restaurants in Poreč and on

1953

Valamar Riviera

Sveti Nikola Island

RIVIERA POREč: The beginning of organized tourism and hospitality in Croatia

tHE bEginning of toURism anD HosPitality in PoREč

1895 First public bathing area on Sveti Nikola Island - Bagno Parentino

1910

The Riviera hotel opened (the company was named after it)

1913 and 1923 The Venezia and the Parentino opened (hotels owned by the company to this day)

HISTORY OF CROATIAN TOURISM: 120 years of tourism and hospitality

PERioD of intEnsiVE ConstRUCtion

1967 Luna Hotels and Apartments

1968 Neptun hotel and Lanterna tourist village

1971

Kristal hotel, Rubin hotel, Camping Lanterna and Solaris

1976 Diamant hotel, Zagreb hotel, Solaris pavilion, Camping Istra

1979 Pical hotel (the first high-category hotel in Poreč)

1986 Fortuna hotel (Sv. Nikola Island)

1895-1950 1950-1965 1965-1990

DEVELOPMENT OF CROATIAN TOURISM: Dynamic business growth and intensive construction of properties

1999 EstablisHmEnt of Dom fonD

Establishment of the largest privatization investment fund during the voucher privatization period in Croatia

1990-2000

PRIVATIZATION AND OWNER SHIP TRANSFORMATION:

The economic processes of privatization and ownership transformation in the war's aftermath

THE COMPANY VALAMAR HOTELI I LJETOVALIŠTA STARTS MANAGING HOSPITALITY OPERATIONS

Introduction of the first brands for hotels and campsites, Valamar Hotels & Resorts and Camping on the Adriatic

2010-2014 CONSOLIDATION OF THE MANAGEMENT AND THE PORTFOLIO

Zlatni otok d.d., Rabac and Dubrovnik-Babin Kuk were merged to Riviera Adria d.d., which later on integrated Valamar grupa d.d. and Valamar Adria holding d.d. The consolidated company started operating under the name Valamar Riviera d.d. and was listed on the Official Market of the Zagreb Stock Exchange in December 2014

2015

INVESTMENTS IN PREMIUM SERVICES AND 4* AND 5* PROPERTIES

The Valamar Dubrovnik President 5* starts its hotel operations

Opening of the Premium Valamar Isabella Island Resort 4*/5*

Takeover and merger of Hoteli Baška d.d. (est. 1949)

2016

By the end of 2016, Valamar Riviera established a strategic partnership with AZ pension fund successfully taking over Imperial d.d. Valamar Riviera acquired 54.71% of Imperial's share capital and AZ pension fund acquired 34.22%

Camping Resort Krk became the first 5* campsite in Croatia

Camping resort Lanterna 4* services upgraded after a large investment cycle

Preparation of Valamar's largest annual investment cycle worth HRK 873 mn

Record business results

Redefined vision, mission and strategic goals for the period up to 2020

2000-2010

BUSINESS GROWTH AND PORTFOLIO INVESTMENTS: Improving the quality of properties and services

2010-2014

CONSOLIDATION OF THE MANAGEMENT AND THE PORTFOLIO

2015-2016

NEW STAGE IN GROWTH AND ACQUISITIONS

MERGERS AND ACQUISITIONS

2011 Zlatni otok d.d. (est. 1956), Rabac d.d. (est. 1961)

2013 Dubrovnik – Babin Kuk d.d. (est. 1971)

2014 Valamar Adria holding d.d. (est. 2003), Valamar grupa d.d. (est. 2005)

Valamar Riviera's Business Model

Valamar manages the complete guest experience. It includes the development and maintenance of our hospitality assets, operating management of hotels, campsites and resorts and the improvement of the tourism offering in a destination.

We manage the entire destination value chain; our business excellence and destination partnerships produce high quality service, optimize operations and secure a high return on investment.

ASSET MANAGEMENT AND OWNERSHIP OF HRK 4.1 BILLION IN LONG-TERM ASSET BOOK VALUE

We have a truly enviable tradition in hospitality and a unique asset portfolio structure thanks to our company tradition spanning 60 years. Our portfolio's book value is HRK 4.1 billion and it represents the key factor of our success.

We operate properties on more than 579 ha of land in prime locations along the Adriatic coast, which include 36 km of seaside. Our locations represent our major strength and an excellent opportunity for future development. Over the years, we have developed the organization and knowledge to develop tourism products and efficiently maintain the value of our assets. Our policy is to invest annually 5% of our total revenues in investment maintenance and FF&E in order to enhance the value of our properties.

LONG-TERM ASSETS OF THE VALAMAR RIVIERA GROUP
(Including Imperial d.d.)
MARITIME
DOMAIN
Hotels and resorts 67%
Campsites 20%
Other1 13% 36 km
TOTAL HRK 4.1 bn

LAND SURFACE2 INVESTMENT MAINTENANCE AND FF&E3

1 Including the HQ building and non-core assets. 2 In relation to 2015 Imperial d.d. included. 3 Our policy is to invest annually 5% of our revenues in investment maintenance and FF&E (Furniture, Fixtures & Equipment).

PORTFOLIO SEGMENTS
2016 2017
Keys % of total
capacity
Keys % of total
capacity
2017/
2016
Premium 1,538 9% 4,735 23% 208%
Upscale 5,869 32% 3,414 16% -42%
Midscale 6,499 36% 8,643 41% 33%
Economy 4,166 23% 4,060 20% -3%
TOTAL 18,072 100% 20,852 100% 15%
Keys % of total
capacity
Valamar Dubrovnik President Hotel ★★★★★ Dubrovnik 292 6%
Valamar Isabella Island Resort ★★★★★
(4/5)
Poreč 334 7%
Valamar Lacroma Dubrovnik Hotel ★★★★+ Dubrovnik 401 8%
Valamar Girandella Resort ★★★★ Rabac 242 5%
Camping Resort Krk ★★★★★ Krk Island 500 11%
Camping Resort Lanterna ★★★★ Poreč 2,966 63%

UPSCALE

PREMIUM

Keys % of total
capacity
Valamar Club Tamaris ★★★★ Poreč 507 15%
Valamar Riviera Hotel & Residence ★★★★ Poreč 146 4%
Valamar Zagreb Hotel ★★★★ Poreč 230 7%
Hotel & Casa Valamar Sanifor ★★★★ Rabac 242 7%
Bellevue Resort ★★★★ Rabac 372 11%
Valamar Argosy Hotel ★★★★ Dubrovnik 308 9%
Padova Hotel ★★★★ Rab Island 175 5%
Camping Ježevac ★★★★ Krk Island 712 21%
Camping Marina ★★★★ Rabac 314 9%
Naturist Camping Bunculuka ★★★★ Krk Island 408 12%

In 2017 Camping Resort Lanterna 5* went from Upscale to Premium. Valamar Girandella Resort 4*/5* went from Economy to Premium.

MIDSCALE

Keys % of total
capacity
Poreč 372 4%
Poreč 223 3%
Poreč 266 3%
Poreč 253 3%
Rabac 245 3%
Rabac 178 2%
Krk Island 456 5%
Krk Island
(4&5)
177 2%
Krk Island 240 3%
Dubrovnik 338 4%
Rab Island 136 1%
Rab Island 152 2%
Rab Island 457 5%
Poreč 594 7%
Poreč 1,503 17%
Krk Island 740 9%
Krk Island 344 4%
Dubrovnik 414 5%
Rab Island 1,070 12%
Rab Island 485 6%
★★★★★
Keys % of total
capacity
Naturist Resort Solaris ★★★ Poreč 284 7%
Pical Hotel ★★★ Poreč 359 9%
Tirena Hotel ★★★ Dubrovnik 208 5%
Lanterna Apartments ★★ Poreč 887 22%
Marina Hotel ★★ Rabac 218 5%
Eva Hotel & Residence ★★ Rab Island 284 7%
Naturist Camping Istra ★★ Poreč 1,006 25%
Camping Brioni ★★ Pula – Puntižela 654 16%
Camping Tunarica ★★ Rabac 160 4%

MANAGEMENT OF DESTINATION SERVICES

Besides operating our portfolio accommodation, together with our partners we also manage over 300 catering establishments and outlets and provide a whole range of tourist services related to beaches, transport, excursions, sports centers, catering etc.

In this segment, Valamar Rivera operates as a destination management company with extensive local knowledge, expertise and resources. The company specializes in creating, managing and supporting various events and activities and represents an excellent localized service provider with in-depth knowledge of a destination.

THE HOSPITALITY INDUSTRY 3

Travel and Tourism is one of the largest global economic sectors. Its contribution to the global GDP is continually growing and is currently almost 10%.

Europe is still the dominant travel destination, accounting for 50% of all arrivals, with the sub-region of Southern Europe and the Mediterranean (Croatia included) being the destination of 18.6% of travel made around the world.

Travel is growing at a rapid pace and the UNWTO forecasts arrivals to reach two billion per year by 2035. Nonetheless, for years now the traditionally leading tourist macro-regions of Europe and North America have been growing at rates below the global average, while tourism growth in the regions of Asia/Pacific, Africa and South America is accelerating. It is expected that, over the coming decades, the ranking of the regions will not change significantly but the share of today's leading regions will drop considerably.

Tourism is undergoing changes not only in terms of quantitative trends but also in terms of supply and demand, so much so that various sources have announced "the end of tourism as we know it". Firstly, the dominant consumer generation is changing and the baby boomers, which had for decades dictated the growth (and the characteristics of the supply) is taking leave, while the millennials are entering the stage as the next dominant market segment for the coming decades. The economy of sharing is also significantly changing the relations within the hospitality industry, prompting most of

the hotel products to re-examine their concepts, innovate faster and introduce completely new practices in both marketing and sales.

The said trends are a sufficient indicator of the major changes, alongside the dynamics of technological changes putting forward great demands on the improvement of accommodation products, and even greater ones on their efficient marketing and sales. Finally, it is becoming more evident that over the next few decades we are going to witness significant changes in the global economic order over declining demands for human labor (despite the fact that there is a lack of skilled workforce in the sector in Croatia and parts of Europe), as a result of technological changes, as well as possible negative consequences of the global climate changes. Therefore, the longterm prospects of tourism and the accommodation industry, as the strongest link in the tourism and hospitality value chain in terms of revenues, indicate that the ability of destinations and companies to change and adapt will be critical in the near future.

These are the most important trends in the tourism and hospitality market in the near future:

  • 1. Arrival of a new market The baby boomer generation, which has dominated the tourism and hospitality market for decades, is taking its leave. It is predicted that they will be surpassed by the millenials in 2017 already when considering travel. Having grown up in a technologically more advanced environment, and being socially aware and eager to have an authentic local experience, the millennials will set new standards for the structure and the delivery of tourism products as well as for tourism marketing. Moreover, the share of the urban population in the overall travelling population will continue to grow, and the members of the middle class in the heavily populated Asian countries will make up the growing share of the global demand.
  • 2. The economy of sharing is changing the competitive environment - Platforms such as Airbnb and Uber continue to grow at a rather fast pace and gradually increase the quality of what they offer. Together with the new generations of visitors, they are slowly blurring the once clear lines between the preferences of different market segments for certain accommodation products (for instance, Airbnb is now becoming desirable even to business travelers). Experiencing the authenticity of a tourist destination is becoming the most important criterion. In the future, the lines between tourists and locals will be blurred even more with tourists seeking to experience destinations from the locals' perspective.
  • 3. Personalized data for a personalized service – Today, most of the bookings are made online. The amount of bookings and information searched for via smartphones is growing at an increasing speed. Platforms such as Booking.com are already announcing that they will stop sending their users' personal information (such as e-mail addresses) to end providers. Modern marketing trends (and even trends in political marketing) are indicating that the patterns of users' behavior online are becoming the main tool and key factor of success. Moreover, in such an environment, the demands of the users regarding digital and software services from the providers of tourism and hospitality services are becoming more frequent and more complex.
  • 4. New product-related trends

Globally, adventure tourism has been the fastest growing tourism product for the second consecutive year, and the demand for gastronomy-based tourism products is also on the rise. In the hospitality industry, designer interiors are no longer an added value but are becoming the norm for lower categories as well, while the concepts of minimally furnished open spaces are becoming prevalent. With the lines gradually disappearing between business and leisure travel, a product with completely new characteristics is emerging and is known as bleisure. The sustainability of a tourist destination continues to grow as one of the factors of destination selection and visitor satisfaction.

MARKET ANALYSIS AND TRENDS IN CROATIA'S TOURISM INDUSTRY

ARRIVALS, OVERNIGHTS AND FOREIGN EXCHANGE REVENUE FROM CROATIA'S TOURISM, 2011 – 2016

Sources: Croatian Bureau of Statistics, Croatian National Bank.

TOP GEOGRAPHICAL MARKETS IN CROATIA'S TOURISM INDUSTRY IN 2016

Top markets Share Annual
growth
Germany 23.7% 8.3%
Slovenia 9.9% 6.9%
Austria 9.0% 10.3%
Poland 6.9% 14.8%
Italy 6.9% 3.3%
Fastest
growing markets*
2016
overnights
growth
2016
share
UK 25.1% 4.2%
Scandinavia
(Sweden, Norway and Finland)
27.0% 3.8%
Hungary 11.5% 3.5%
Bosnia and Herzegovina 13.9% 2.1%

* Fastest growing markets in 2016 with over 1% share. Source: Croatian Bureau of Statistics.

MAIN TOURISM INDICATORS IN CROATIA IN 2016

2016 Average annual growth for 2016 compared to 2011
Beds 993,339 2.2%
Arrivals 15,594,157 6.4%
Overnights 78,049,852 5.3%
Foreign exchange revenues EUR 8.635 bn 5.5%

ACCOMMODATION CATEGORIES IN CROATIA FOR 2016 / 2010

2010 2016
Accommodation share Overnights in mn Occupancy Accommodation share Overnights in mn Occupancy
Collective accommodation* 45.9% 35.0 25.1% 42.1% 44.9 29.4%
Private accommodation 52.7% 19.4 13.3% 57.3% 31.2 15.9%
Other 1.4% 1.8 14.8% 0.6% 2.0 14.5%

* Campsites, hotels and similar accommodation. Source: Croatian Bureau of Statistics.

  • → Tourism in Croatia continues to significantly grow above the region's average (Southern Europe and the Mediterranean) with a 9% arrivals growth in 2016 (compared to the region's average 1.4% growth);
  • → Tourism in the Republic of Croatia is nearing investment cycle culminationaccording to preliminary data (Ministry of Tourism) it is expected that the total investments in this sector could exceed EUR 600 mn and the record year 2007;
  • → However, the structural problems of Croatian tourism still persist-private accommodation grows much faster than other accommodation types (+40,000 beds in 2016 only) by share and overnights, while the share of collective accommodation (hotels, campsites etc.) is below 50%, although it carries most of the investments, season prolongation and development;

  • → Economic effects of tourism-related activities are also on the rise; however, it needs to be noted that the foreign exchange revenue is increasing at a somewhat slower pace than overnights and arrivals, indicating that the unit rent is going down;

  • → Average hotel bed occupancy rate is nearly 45% and one of the highest in Europe. Campsites are nearing a solid 20%, while private accommodation has a mere 15% annual occupancy rate;
  • → Split-Dalmatia, Istria and Dubrovnik-Neretva counties have increased their shares in the realized arrivals and overnights, and boast destinations with the highest growth of turnover in 2016;
  • → The latest development in the structure of the top markets is the Czech Republic's drop from the top five

markets, with Poland rising to fourth place with the same share as the fifth-ranked Italy;

  • → For the third year in a row, both the UK and Scandinavia have posted doubledigit growth rates; moreover, in 2016, out of the major markets, Hungary, Denmark and Bosnia and Herzegovina reported high growth rates, while the Netherlands had a slightly lower growth rate;
  • → Despite an increase in the share of private accommodation in the accommodation structure, there have been some rather slow but positive developments in the seasonality of Croatian tourism. In 2015, after many years, the share of the four summer months in the total number of overnights finally dropped below 86%, and in 2016, it fell by an additional 0.1%;

  • → In the period between 2011 and 2015, the employment rate in tourism and hospitality (based on the data of the Financial Agency, which monitors entrepreneurs) went up by 6.1% a year to 56,170 employees;

  • → Over the past five years, there has been a significant increase in investments; it is expected that by this particular criterion, the year 2016 could be a recordbreaking year for Croatian tourism. Over 90% of investment was focused on accommodation, catering establishments and other amenities;
  • → In the period between 2013 and 2016, cumulative investments amounted to EUR 1.6 billion, and the national tourism strategy projects EUR 7 billion for the 2013 – 2020 period. Effectively, this means that by 2020, EUR 1.3 billion on average should be invested each year to reach the strategy's goals, which is an

EMPLOYMENT TRENDS IN TOURISM – AREA OF ACTIVITY 2011 - 2016 INVESTMENTS IN TOURISM (EUR mn)

400 200 0 2011 2012 2013 AVERAGE ANNUAL GROWTH RATE = 21.8% 2014 2015 2016

data for 2016 are estimates of the Ministry of Tourism based on an investment survey.

Source: Croatian Bureau of Statistics;

unrealistic expectation, even though the investments are structurally going in the right direction;

  • → The strategy also predicts that in the period between 2013 and 2020, another 20,000 to 22,000 new jobs will be opened in the tourism industry; however, these figures will depend on the realization of the planned investments, and we should also take into account the VAT hike in the catering industry that will surely slow down the investments and employment growth in tourism;
  • → Still, we can predict that by 2020 the investment cycle will make room for around 10,000 new employments in the hospitality industry, including a high share of skilled and highly skilled workers. For the time being, the educational system is partly or entirely not able to deliver this number of workers or ensure adequate skills. Given the short period, the educational system will not be able to change in order to meet the challenging needs of the market. Consequently, the largest companies and investors alike will have to tackle this issue independently or in partnership with other employers and/or the government as soon as possible.

In addition to the trends mentioned above, the following development processes should be noted as well:

→ There have been some positive developments in the Croatian National Tourist Board's main office and several regional offices of the leading counties

regarding their reorientation to online marketing as well as continued market research. The processes of product development are being intensified; however, for the time being they are mostly limited to the leading coastal tourist regions / destinations and the City of Zagreb;

  • → As of January 1 2017, the VAT on catering services has gone up from 13% to 25%, thus increasing the risk of the possible negative effects on total investments, development, quality and innovation of services, particularly catering, and consequently the placement of local agricultural products;
  • → As of 1 January 2017 the income tax rate went down from 20% to 18% and tax incentives on investments were introduced;
  • → Most airports in the country have been posting significant growth rates but are also the subjects of capital projects and/or ambitious growth plans for the coming period. Further growth of the air travel market is to be expected, particularly in countries that are already recording high growth rates (the UK and Scandinavia);
  • → The real estate market is still recovering (in terms of prices and number of transactions); the rental real estate market is still far more intensive than the buying real estate market;
  • → After years of growth induced by price increase, revenues in the hospitality indu-

stry for the past two years have been going up predominantly through occupancy growth, while investments and quality upgrades are becoming the exclusive preconditions for increasing prices;

  • → In conclusion, over the next five years, we can expect further growth in Croatian tourism and hospitality and a change in the market structure (in favor of northern and western Europe, and the air travel markets). The peak season will also reach its growth limits. However, the major competitive weakness of Croatia's tourism and hospitality sector is its management at the level of destinations and regions.
  • → Bearing in mind the trends and the considerable changes that are expected in the global tourism industry over the next five to ten years, the competitiveness of hotel and tourism companies will largely depend on the following:
  • → Innovating, managing and utilizing internal databases, primarily databases on visitors, their habits and needs, and optimal advertising channels. Apart from the data itself, it will also be necessary to research and implement sophisticated market segmentation methods based on the growing number of demographic

characteristics so as to shape both products and marketing according to the resulting segments;

  • → Developing online sales and marketing channels with emphasis on social networks, continued monitoring and application of new solutions for online marketing and corporate image management as well as management of the image of certain products and destinations;
  • → Ability to create innovative offerings and stories with focus on video content, which will unsurprisingly become the dominant advertising content over the next ten years, regarding both marketing and delivery of products;
  • → Timely adaptation of the products in line with the trends that will change increasingly quickly. Imagination and the ability to create stories will be more important for success than material investments in the product and the equipment;
  • → Since users wil stop perceiving accommodation facilities and destinations as two separate ideas, the influence of companies on destination management and development will prove critical for their success.

Sources: The end of tourism as we know it – Copenhagen tourism strategy 2020, PwC, Global Entertainment and Media Outlook 2016 – 2020., European Parliamentary Research Service, Global Trendometer: Essays on medium- and long-term global trends, 2016., European Strategy and Policy Analysis System, Shaping the Future, 2016, OECD, Tourism Trends and Policies 2016., Airbus, Global Market Forecast 2016-2035., Harvard Business Review, Labels like "Millennial" and "Boomer" Are Obsolete, Nov 2016, SKIFT, The Megatrends Defining Travel in 2016, SKIFT, The Traveler Manifesto – What Super Travelers Want From the Travel Industry, 2016., Destination Think! Insights & News.

ENGAGEMENT OF KEY STAKEHOLDERS AND MATERIAL ASPECTS 4

We have been building partnerships and fostering open communication with all our stakeholders for many years, because we believe that our business success depends on how well we understand their needs.

This report was created with the expert support of the Croatian Business Council for Sustainable Development. Continuous dialogue with stakeholders is an important part of our corporate social responsibility efforts integrated in Valamar's business strategy.

We have established policies at company level that represent our commitment to be the hospitality market leader in Croatia in terms of service quality, guest and user satisfaction, caring for the interests of our employees, company and local community, environmental protection and resource management. Hence, Valamar Riviera has adopted the Quality and

Sustainable Business Policy that focuses especially on the following aspects:

  • → compliance with legal and other requirements
  • → protection and rational use of resources
  • → pollution prevention as the foundation of our management of environmental aspects
  • → reduction of waste and adequate waste management
  • → improvement of energy efficiency
  • → purchase of energy-saving products and services

  • → availability of information and resources related to the achievement of general and specific goals in the field of quality, safety, environment and energy

  • → employees' training
  • → labor law compliance and caring for our employees
  • → support for the local community and interests
  • → protection of children.

Valamar's key stakeholders are guests, employees, shareholders, the local community and destinations as well as other related stakeholders such as trade unions, professional associations, suppliers, the investment community, public administration bodies and the general public.

COMMUNICATION WITH KEY STAKEHOLDERS

GUESTS

  • → surveys/ guest opinion research
  • → raising awareness about environmental issues
  • → involvement in charity events
  • → newsletters

EMPLOYEES

  • → surveys/ corporate culture and climate research
  • → communication through the monthly ViV corporate magazine (printed edition) and ViV blog (web edition)
  • → daily, weekly and monthly department meetings
  • → workers' meetings
  • → annual party

SHAREHOLDERS

  • → annual Shareholder's General Assembly
  • → financial reports
  • → corporate web site
  • → VIV magazine

LOCAL COMMUNITY AND DESTINATIONS

  • → Valamar's participation in the work of tourist boards
  • → collaboration in the organization of destination events and investment projects
  • → Valamar's active participation in charity activities

COMMUNICATION WITH RELATED STAKEHOLDERS

TRADE UNIONS

  • → collective agreement signed
  • → collaboration with the Works council on all key issues related to employees' rights

PROFESSIONAL ASSOCIATIONS

→ promoting professional interests as member of various professional organizations (Association of Employers in Croatian Hospitality, Croatian Employers' Association, Croatian Chamber of Economy, Croatian Business Council for Sustainable Development, American Chamber of Commerce in Croatia and others)

SUPPLIERS

  • → 95% Croatian suppliers
  • → long-term collaboration and partnership

INVESTMENT COMMUNITY

  • → transparent communication with all investors in the capital market (non-deal road shows, meetings and conferences, Investors Day, corporate web site)
  • → collaboration with development banks and commercial banks and creditors, proactive communication with analysts

PUBLIC ADMINISTRATION BODIES

→ collaboration on the development of investment projects, student scholarships and dialogue related to legislative initiatives

GENERAL PUBLIC

  • → press releases
  • → corporate website
  • → VIV magazine

VALAMAR RIVIERA'S CONTRIBUTION TO ECONOMIC DEVELOPMENT IN 2016

DIRECT ECONOMIC VALUE GENERATED

n Guests HRK 1,455 mn net sales revenues

n Other revenues HRK 124 mn

financial and operating revenues that, among other, include insurance revenues, interest rate revenues, foreign exchange gains, revenues form shares and stakes sold etc.

ECONOMIC VALUE DISTRIBUTED

n Employees HRK 265 mn

all net receipts by employees including salaries, rewards, incentive payments and other increments

n Suppliers HRK 473 mn

costs paid to suppliers related to food and beverage, energy sources, communication, transport, promotion, maintenance, intellectual services and other

n Shareholders HRK 74 mn

dividends paid to shareholders

n Banks and creditors HRK 66 mn interest rates and other costs related to financing

n Public administration HRK 541 mn

VAT and other taxes, contributions on salaries, other payments to the public administration and institutions, income tax excluded

n Community HRK 1 mn donations and philantrophy

INVESTMENTS

n 9 CSR umbrella programs HRK 50 mn total investments and projects included in the CSR programs

n Investments in the portfolio HRK 397 mn capital investments in hospitality properties, equipment and services

n Acquisitions HRK 285 mn expanding the portfolio through acquisitions of hospitality companies

Direct economic value generated HRK 1,579 mn
Economic value distributed HRK 1,424 mn
Economic value retained
(The difference between the direct economic value generated and distributed)
HRK 155 mn
Total investments HRK 732 mn

Identification of Material Aspects and Boundaries

By identifying and quantifying the impact our business operations have on the environment, the local community, our employees and the society, we are able to thoroughly consider our operations in order to achieve long-term efficiency and a socially responsible business.

In 2015 and early 2016, in cooperation with external consultants, we carried out a months-long analysis of our corporate strategy and determined the new corporate vision, mission and key values for the company. Through joint workshops and selective in-depth interviews with the company's key internal stakeholders (in HR, environmental protection, technical maintenance of investments, legal affairs, investor relations, controlling, quality management and corporate affairs) and its top management, we carried out a joint determination of the material aspects within the organization that are not only critical for the company but also a part of our corporate strategy.

Members of the Management Board of Valamar Riviera actively participated in the process of determining materiality together with the Board's vice presidents, and the entire process was managed by Valamar's Business Experience Committee (Željko Kukurin, President of

the Committee, Ivana Budin Arhanić, Vice President of the Committee, and Committee Members David Poropat, Davor Brenko and Alen Benković). In the said process, Valamar also consulted with Nikolina Markota Vukić, PhD, of the Croatian Institute for Corporate Social Responsibility (IDOP). The inner operational team comprised representatives of different sectors within the company, including Investor Relations, Legal Affairs, HR, Technical Sector, Audit and Standardization Department, Strategic Planning and Controlling, Sales, Marketing, Purchasing, Quality and Corporate Communications, with coordination by the Corporate Affairs Department. The final conclusions were confirmed by the Management Board of Valamar Riviera.

In 2016, following separate workshops and sectoral meetings, KPIs at Valamar Riviera level were established for each division and sector individually. The identified KPIs are in line with the company's defined strategy and objectives as well as the measurable monitoring indicators for the coming periods of time. When determining the company's key material aspects, we were guided by the principles of sustainability and took into consideration the effect our business operations have on the environment, the local community, our employees and the society. Using the defined key material aspects of the business, the Management Board then identified the priorities that are also the company's strategic goals.

LIST OF MATERIAL ASPECTS

  • → Economic effect
  • → Market presence
  • → Contribution to the community (economic and social contribution and employment opportunities)
  • → Increase in the local employment rate focus on permanent seasonal workforce
  • → Employee training and education
  • → Creating competitive working conditions
  • → Dialogue with the employee representatives
  • → Local community
  • → Improving energy efficiency and using renewable energy sources
  • → Energy
  • → Continued GHG reduction
  • → Using recycled water
  • → Water
  • → Wastewater and waste
  • → Ethical commitment and transparency
  • → Responsible development of tourism

PROCESS OF DETERMINING SIGNIFICANT ASPECTS (CONTENT OF THE REPORT) AND ASPECT BOUNDARIES

An in-depth analysis of the effects of the economic, environmental and social aspects of our business operations was carried out, followed by the identification and prioritization of the material aspects within the organization, in adherence to the G4 GRI guidelines. We divided the process of identifying and prioritizing material aspects into three separate steps:

  • 1. Materiality identification: significant environmental, social and economic aspects were identified.
  • 2. Aspect prioritization: the identified significant environmental, social and economic material aspects were prioritized with regard to the perception of the key stakeholders and effects on the business strategy.
  • 3. Materiality verification: internal key stakeholders verified the prioritized and identified significant environmental, social and economic material aspects with regard to the perception of the key stakeholders and effects on the business strategy

MATERIALITY MATRIX

In accordance with the process of identifying and prioritizing material aspects within the organization, a materiality matrix was defined at the level of all of Valamar Riviera's organizational units. With the materiality matrix, the environmental, social and material aspects were identified and prioritized with regard to their effect on the company's operations and the importance for the identified key stakeholders.

IMPACT ON STAKEHOLDERS

ENVIRONMENTAL ASPECTS

  • Inspiring guests, employees and destination to environmental preservation
  • Biodiversity
  • Using recycled water
  • Transport
  • Emissions
  • Improving energy efficiency and using renewable energy sources
  • Energy
  • Continued GHG reduction
  • Using environmentally friendly materials
  • Waste reduction and adequate waste management
  • Wastewater and waste
  • Water

ECONOMIC ASPECTS

  • Indirect economic impact
  • Economic performance
  • Market presence
RESPONSIBILITY TO PRODUCT
AND SERVICE
  • Raising awareness and including buyers with ethical obligations (environment)
  • Buyers' health and safety
  • Service excellence
  • Innovative products and services
  • Guest-oriented services

RELATIONS TO EMPLOYEES

  • Contribution to the community (economic and social contribution and employment opportunities)
  • Dialogue with the employee representatives
  • Workplace health and safety
  • Increase in the local employment rate focus on permanent seasonal workforce
  • Employee training and education
  • Creating competitive working conditions

HUMAN RIGHTS

  • Ethical commitment and transparency
  • Responsible tourism development
  • Innovations and transparency with suppliers
  • Dialogue with the stakeholders
  • Development of the destination tourism supply

SOCIAL ASPECTS

Local communities

VALAMAR'S CORPORATE STRATEGY 5

Vision, Mission and Core Values

To be the leader in leisure tourism and create authentic guest experiences in partnership with our destinations

using innovative services in leisure tourism. To develop a stimulating corporate culture where guests and employees come first.

To create unforgettable guest experiences by

To deliver new value for shareholders through corporate responsibility by promoting sustainable development and supporting local communities.

OUR VISION OUR MISSION OUR CORE VALUES

RESPONSIBLE

We are a responsible business partner, a caring employer, supportive towards the community and committed to preserving the environment.

WELCOMING

We make our guests feel very welcome and highly appreciated.

AMBITIOUS

We set challenging goals and strive for excellence in everything we do.

INNOVATIVE

We engage in collaborative innovation to improve our performance, stay alert and open to change.

PROUD

We take pride in our destinations and being part of the Valamar family.

Strategic Goals 2016-2020

GROW SIGNIFICANTLY

by retaining the market-leading position in Croatia, with double-digit EBITDA-CAGR in the next five years, through acquisitions and strategic partnerships in selected European leisure travel destinations.

INVEST HRK1.5-2 BILLION IN

THE PORTFOLIO while maintaining a solid balance sheet; generate premium returns by steadily growing the EBITDA margin to 35-38% with a sustainable net debt/ EBITDA ratio.

|--|

STRENGTHEN DIRECT RELATIONSHIPS WITH GUESTS

by achieving 50% of revenues from direct bookings and 30% of returning guests.

EXPAND STRATEGIC PARTNERSHIPS

with well-known international companies and key partners in order to prolong the season, diversify the customer base and optimize business.

CREATE NEW VALUE FOR SHAREHOLDERS

by significantly increasing our market capitalization.

STEER A SUSTAINABLE AND SOCIALLY RESPONSIBLE DEVELOPMENT OF DESTINATIONS

by investing up to 2.5% of our revenues in corporate social responsibility, training and development projects in destinations.

OFFER ATTRACTIVE AND LONG-TERM SUSTAINABLE DIVIDENDS

to our shareholders.

BE RECOGNIZED AS THE MOST DESIRABLE EMPLOYER IN TOURISM

because we offer salaries above the Croatian average and hire locally, in order to achieve a 70% rate of returning seasonal workers and develop more than 80% of our management internally.

Our Strategic Initiatives

FOCUS ON THE GUEST

Provide excellent service in each contact with our guests to create unforgettable experiences and exceed expectations. Build long-term, personalized relationships with our guests while taking in consideration their individual needs.

CARING FOR OUR EMPLOYEES

Develop a stimulating corporate culture where the organization can learn and grow and where employees and guests come first.

GROWTH STRATEGY

Improve business operations and sales, develop the portfolio and expand through strategic partnerships and acquisitions in order to continually achieve strong revenue and profit growth.

INNOVATION AND DIGITALIZATION

Be an innovative hotel company in the leisure hospitality market and leverage the opportunities provided by digital technologies in order to fully meet and anticipate our guests' needs.

DEVELOPMENT OF OUR DESTINATIONS AND RESPONSIBILITY TO THE LOCAL COMMUNITY

Steer a sustainable and socially responsible development of destinations and improve social conditions in the local community.

COMMITMENT TO ENVIRONMENTAL SUSTAINABILITY

Employ a proactive approach to environmental preservation and sustainability by efficiently using natural resources, protecting the sea and the environment, saving energy, adequately managing waste and raising awareness about environmental issues among guests, employees and suppliers. In this way, we protect the natural beauty of the environment where we work and live.

5.1 FOCUS ON THE GUEST

Focus on the guest is seen in our commitment to provide our guests with top-quality service, so as to create positive moments and lasting memories during their entire stay. Besides, we want to build a lasting relationship with guests and create direct communication throughout the year.

VALAMAR MARKET SEGMENTS

Development of Tailored Products and Service Concepts Based on Guests' Needs and Desires

Guests' expectations are rising, especially in the Premium segment, and we respond to this trend by developing tailored products and service concepts. Meeting our target guest groups' needs more successfully increases their satisfaction and secures new sources of revenue.

Service Concepts

The product development strategy defines ambitious plans for innovative improvements of service concepts, focusing on the Upscale and Premium portfolio segments, in hotels and resorts and camping resorts.

The goal is to improve our offering, exceed guest expectations, and define every single service concept. It is extremely important to clearly tie individual service concepts to the core values of the Valamar brand, where the guest always comes first. In this sense, the development of tailor-made service concepts for each target guest segment plays a key role.

In 2016, we successfully started implementing key service concepts, setting very high demands for quality and the consistence of their application throughout our properties. Such an approach will enable consistence in market communication as well, and subsequently contribute to the development of service concepts as familiar brands. At the same time, their development is a continual, ongoing process where we respond to the latest market demands, but primarily by considering the demands and expectations of guests.

V LEVEL

The premium concept consists of a series of exclusive privileges and personalized services at guests' disposal at selected properties in the Valamar Premium and Upscale portfolio. The personalized guest welcome and check-in, selection of the best rooms and suites, private concierge service during the guest' stay, exclusive beaches and poolside services, premium gourmet and fine-dining culinary services, and the unique tailormade destination experience allow guests to enjoy premium-level services and products from the moment they arrive to the moment they depart.

PREMIUM FAMILY AND FAMILY

Providing a wealth of entertainment and programs for children and teenagers, Valamar offers the complete experience of an ideal family vacation at two service concept levels– Premium Family and Family. Family-friendly accommodation units, swimming pools and family beaches with activities and products for children, the kids' corner with a special menu and Animation team members at the hotel buffet restaurants, children's Maro Club and Maro Baby Club, and the parents-free Teen Zone, as well as day and evening programs allow parents to have a carefree vacation with a chance to try out one of the Stay Fit activities intended just for them.

ADULTS ONLY / FRIENDLY

Adults Only is a service concept that provides a special selection of accommodation units, gourmet and entertainment experiences to meet all the needs and wishes of 16+ guests, whether couples or groups. Special attention is directed toward creating an oasis of peace, privacy and relaxation through special adults-only or adultspreferred features such as beaches and pools, recreation and evening entertainment, and there is an unavoidable breath of exclusivity and luxury in the wide selection of finedining and adults-only restaurants, and the lavish romantic adventures for couples.

FOOD&BEVERAGE SERVICE CONCEPTS

The Food&Beverage concept encompasses a series of branded, theme-based a la carte restaurants, buffet restaurants, bars and clubs. They all allow Valamar's guests to enjoy special meals, tasting menus and a long wine list selected by the best Croatian sommeliers. The Dine Around service gives the possibility to exchange a standard buffet dinner with a dinner at one of the theme-based a la carte restaurants, while some restaurants also offer an unforgettable late-night entertainment and clubbing option. In 2016, Valamar implemented the following concepts: Premium Buffet Restaurant, Wine Bar & Restaurant, Craft Beer & Grill, Tuna Bay Grill and The Beat Club.

PERFECT EXPERIENCE CREATOR

In 2016 we launched the Perfect Experience Creator – an interactive program that allows guests to easily organize their vacations and destination experience.

This program has been implemented at all the destinations, offering information and advice on various destination services and experiences, including local attractions, places to eat, events, outdoor activities, and transport services.

When using the Perfect Experience Creator, guests can simply and easily book and purchase all services and tickets to numerous events, as well as local souvenirs.

INFORMATION ON THE DESTINATION

DESTINATION EXPERIENCES The Perfect Experience Creator won the 2016 Zlatna Koza – Capra D'oro award from the Istria Tourist Board in the Innovative Product category.

  • → Experience-creator.com website
  • → Sales management platform
  • → 18 destination info points
  • → 200 selected experiences
  • → 65 local partners

HOW TO REACH THE DESTINATION

  • → More than 100 souvenirs under the brands Valamar, Camping Adriatic by Valamar and original local souvenirs
  • → 12,000 sold experiences in 2016

TRANSPORT SYSTEM AT A DESTINATION

MERCHANDISE AND SOUVENIRS SALES

LOYALTY PROGRAM

HOTEL AND RESORT INFO

PERSONALIZED SERVICES

Direct Relationships and Increased Guest Loyalty

Creating returning loyal guests increases our revenues and allows us to increase the share of direct bookings. In 2016, Valamar Riviera reported HRK 467.5 million achieved via Valamar's direct distribution system: call center, direct online booking, loyalty program and front offices.

We are going to continue developing the loyalty strategy in order to create even more added value for our clients. At the same, time we will continue developing our websites, e-marketing and technology, so that we can increase the number of visits to our sites and increase the number of unique web users (2016: 3.9 million), phone and email inquiries (2016: 305,401) and bookings (2016: 68,932).

By 2020, our goal is to reach a 50% share of direct bookings in revenues, and increase the share of loyal guests to 30%. In 2016 the share of direct bookings was 41% and the share of loyal guests was 24%.

DIRECT BOOKING SHARE (by revenues*)

DIRECT SALES AND MARKETING

2015 2016
Board revenues (direct booking, HRK mn) 372.5 467.5
Number of bookings 50,600 68,932
Number of web sessions** 5,512,420 6,121,367
Number of unique web users** 3,635,520 3,885,591
Number of phone and email inquiries 242,000 305,401

** www.valamar.com and www.camping-adriatic.com.

Building Long-lasting and Direct Relationships with Our Guests

We have to know our guests if we want to provide the best services tailored according to their needs. We believe we can improve our focus on the guest through our customer relationship management (CRM) and by systematically collecting and analysing guest preferences.

This information helps us addressing our guests' needs directly before, during and after their stay, thus establishing year-long communication. Our CRM is additionally supported by our loyalty programs Valamar Plus Club for hotels and resorts and Camping Adriatic Plus Club for camping resorts. The programs are designed as an attractive platform since the first day of membership. Our efforts have already produced good results: in 2016 the rate of returning guests was 24%. We believe that after some additional improvements to our loyalty program, we will understand our guests and their loyalty better and reach the targeted 30% of returning guests.

Unbelievable Service

Dedication to raising the service to the highest level is an approach implemented back in 2013, with the aim of getting extremely satisfied and loyal guests. In relation to 2015, the Unbelievable index grew by 4.5% in 2016.

Valamar always strives to provide pleasant surprises to its guests through an unexpected service, by knowing a specific situation and anticipating guests' specific needs and wishes. This is achieved by creating an organization-wide culture focused on the service.

Through prior staff education and development, employees are encouraged to direct their potential at providing top-grade services in each situation, and there is a system of improvement that does not end until service excellence is achieved. At Valamar, such service level is called Unbelievable; in 2016, as many as 46% of the guests gave our staff the greatest possible rating – Unbelievable.

Up!Lifting Service

Up!Lifting service at Valamar, or the excellence of service, is achieved by raising the service to both guests and colleagues to a higher level, and by implementing our core values daily, since service is our key product. Service excellence is the basis for a lasting and sustainable business success.

The focus is on the employees: they lead the joint creation of service excellence in order to fulfill our vision and provide authentic hospitality. At Valamar, we reach service excellence through daily training to perfect our professional skills, and the weekly Up!Lifting trainings by certified Up!Lifting trainers, general managers, department heads and all other employees.

All our employees are ValamArtists who contribute to our top-rate service culture and our combination of proactivity, creativity, hospitality, team spirit and homely atmosphere, and they all treat their colleagues and guests in accordance with Valamar's service culture.

Each ValamArtist follows these 10 ValamArtist principles:

    1. Reliable
    1. Cordial
    1. Courageous
    1. Understanding
    1. Generous
    1. Welcoming
    1. Smiling
    1. Friendly
    1. Interested in learning
    1. Proactive

46%

The percentage of guests that rated Valamar staff as Unbelievable in 2016

Measuring Guest Satisfaction and Online Reputation

By using various tools to assess the guests' experience and perception of our service quality, Valamar is able to get to know its guests better and provide them with the most excellent service possible.

Valamar measures its guests' satisfaction through print and digital questionnaires during their stay, and through questionnaires we send them after they have left.

Valamar does this through the TrustYou system for measuring on-line reputation, in order to efficiently

manage all sources of information on guest satisfaction, and further improve its reputation on social networks. Valamar has a strong presence on the internet, online booking channels, and social networks, as well as in blogging communities, which is a great way of maintaining two-way communication with the guests before, after and during their stay.

In our two-way, personalized guest communication model, feedback is a crucial starting point. With this in mind, Valamar's quality department processes praises, comments, complaints and suggestions guests leave during their stay at our properties in direct communication with our staff, via tablets or questionnaires in their rooms, and those collected via questionnaires after departure or posted on social networks.

Such a model allows Valamar to constantly improve service quality and manage it skillfully in various fields of activity, with a response time of under 48 hours from inquiry.

In this way we reinforce our connection with the clients and foster the trust they have in the company.

GUEST SATISFACTION IN 2016

GUEST SATISFACTION BY TYPE AND CATEGORIZATION OF ACCOMMODATION

2016 2015
Hotels and Resorts Campsites TOTAL Hotels and Resorts Campsites TOTAL
Upscale Premium & Midscale &
Economy
Upscale Premium & Midscale &
Economy
Upscale Premium & Midscale &
Economy
Upscale Premium & Midscale &
Economy
Guest Satisfaction Index 89% 84% 87% 84% 86% 88% 82% 84% 83% 84%
Unbelievable Index 50% 48% 41% 43% 46% 48% 43% 35% 38% 44%
Uplifted Index 94% 93% 92% 93% 93% 95% 94% 90% 90% 92%
Guests who would recommend us 98% 96% 97% 95% 97% 98% 96% 97% 95% 97%
Online Reputation Index 89% 83% 86% 84% 85% 88% 81% 84% 83% 84%
Tripadvisor rating (average) 4.3 3.8 4.1 3.5 3.9 4.3 3.9 4.4 3.5 4.1
Booking.com rating (average) 9 8 8.5 8.3 8.5 9 7.9 8.3 8.2 8.3

Caring for Our Guests' Wellbeing

In order to meet the expectations of our guests, Valamar's services meet the highest standards regarding their impact on the health and safety of our guests and employees.

This has been confirmed by a number of certificates, including the following:

  • → HACCP
  • → ISO 9001
  • → ISO 14001
  • → ISO 50001
  • → "Q" quality mark by the Ministry of Tourism
  • → FEE (Foundation for Environment Education) Blue Flag
  • → Sustainable Hotels
  • → Travelife Gold Award
  • → TUI Environmental Champions

Complying to regulations and voluntary codes is the company's priority when communicating with guests, including marketing communication such as advertising, promotion and sponsorships. Valamar has not registered a single instance of violation regarding regulations or voluntary codes.

Travelife Gold Award

As of 2016, two more of Valamar's hotels carry the Travelife Gold Award certificate – the Tirena and the Valamar Club Dubrovnik have joined other world-famous hotels that hold this accolade.

Travelife is an international certification system that promotes sustainability in tourism and helps tour operators, hotels and other accommodation capacities to manage and monitor their social and environmental impact, and to inform guests and partners of their achievements. Travelife Gold Award is an award for hotels that meet the strict sustainability criteria in the highest degree possible. The certification project's strategic goal is to introduce the practice of green business, achieving a balance in economic progress, care for the environment in the most general sense, and social involvement in the community.

HOTELS WITH THE TRAVELIFE GOLD AWARD CERTIFICATE

Allegro Hotel ★★★ Rabac
Hotel & Casa Valamar Sanifor ★★★★ Rabac
Miramar Hotel ★★★ Rabac
Valamar Argosy Hotel ★★★★ Dubrovnik
Valamar Bellevue Hotel ★★★★ Rabac
Valamar Club Tamaris ★★★★ Poreč
Valamar Crystal Hotel ★★★★ Poreč
Valamar Diamant Hotel & Residence ★★★★ Poreč
Valamar Dubrovnik President Hotel ★★★★★ Dubrovnik
Valamar Isabella Island Resort ★★★★★ Poreč
Valamar Koralj Romantic Hotel ★★★ Krk Island
Valamar Lacroma Dubrovnik Hotel ★★★★+ Dubrovnik
Valamar Pinia Hotel & Residence ★★★ Poreč
Valamar Riviera Hotel & Residence ★★★★ Poreč
Valamar Rubin Hotel ★★★ Poreč
Valamar Zagreb Hotel ★★★★ Poreč
Valamar Club Dubrovnik ★★★ Dubrovnik
Tirena Hotel ★★★ Dubrovnik

By number of accommodation units, 79.4% of our camping resorts and 62% of our hotels and resorts hold the ISO 14001 certificate, while 63.8% of our accommodation units in hotels and resorts also hold the Travelife certificate.

5.2 EMPLOYEES AND ORGANIZATION

Develop a stimulating corporate culture where the organization can learn and grow and where employees and guests come first.

Responsible Management of Human Resources

Valamar Riviera's success relies on its employees, which is why the company continually invests efforts to develop highly trained, strongly motivated and satisfied employees.

Only with such employees is it possible to achieve strategic goals and provide excellent service. For the eleventh year in a row, Valamar Riviera has received the Employer Partner certificate, with Valamar being the only tourism company to be among the first five Employers Partners in Croatia. This status builds on the continual development of the many tailored programs for full-time and seasonal employees, a complete policy for salaries and other remunerations for employees,

improvement of all working conditions, specialized training programs, and individual approach to career development.

The key strategic activities of human resources focus on creating competitive working conditions, securing employee loyalty, increasing employment in local communities and internal development of professional talents. This is a foundation for a stimulative corporate culture that Valamar continually develops by

always putting people first. The focus of human resource management directly leans on Valamar Riviera's strategic goals, defined for the period until 2020. Firstly, there is the focus on the guest, the employees and the organization, through which we want to develop, empower and award the employees, who are the heart of the organization, with the guests in focus, and create long-term employee relations based on trust.

Valamar Riviera's development is not possible without good-quality human resource management. With the opening and expansion of the labor market, we have detected risks related to high-demand positions, development of new knowledge, and specific skills. Recognizing global trends in tourism and hospitality helps us define the needs for new knowledge and skills, and define ways to successfully address these challenges. Through a continual dialogue with social partners we have secured a high level of employee rights, in terms of salary competitiveness, motivation and reward systems, career development, healthcare and cooperation with educational institutions across Croatia.

The level of diversity in the organization gives a transparent insight into the organization's human capital. Valamar Riviera offers equal opportunities regardless of sex, age group and other differences among employees.

Permanent and year-long employment

In the past ten years, Valamar Riviera has strategically planned all new employment, actively looking for talents in all business areas. Following a number of investments, the number of employees keeps growing year to year.

Between 2012 and 2016, the average number of employees based on full-time equivalent grew by as much as 38%. During the same period, and measured at peak employment times (31 Aug) the total number of employees (pupils and students included) grew by 28%.

The employee structure reflects very high seasonal employment at Valamar Riviera, with a high share of seasonal employees, so as of 31 August 2016, their share totaled 76% of the total number of peak-season employees.

Since the Croatian labor market has been depleted in recent years due to high emigration and low attractiveness of jobs in hospitality and tourism, Valamar Riviera has been investing enormous efforts and continually carrying out an active policy of attracting and employing staff through cooperation with the local community and educational institutions, and the development of specific programs aimed at various employee groups.

We put special focus on increasing the number of permanent seasonal workers, increasing employee loyalty, local employment and staff development.

AVERAGE NUMBER OF EMPLOYEES BASED ON FULL-TIME EQUIVALENT

EMPLOYEE STRUCTURE BY TYPE OF CONTRACT

YEAR-LONG EMPLOYMENT INDEX

Year-long employment index is the sum of categories "permanent work" and "year-long work" divided by the total number of employees

INCREASE IN THE NUMBER OF EMPLOYEES (2012 – 2016)

EMPLOYEE TURNOVER RATE

Valamar Riviera monitors employee turnover for all its destinations: in comparison to 2015, the number of permanent empolyees who left the company fell by 31%, and the turnover rate fell from 12% to 8%.

PERMANENT EMPLOYEES WHO LEFT IN THE PERIOD FROM 1/1/15 TO 31/12/15

Men Women Total Turnover rate
Baška 1 1 2 3%
Dubrovnik 14 21 35 13%
Krk 2 4 6 15%
Poreč 25 38 63 12%
Rabac 7 11 18 11%
Total 49 75 124 12%

PERMANENT EMPLOYEES WHO LEFT IN THE PERIOD FROM 1/1/16 TO 31/12/16

Men Women Total Turnover rate
Baška 7 6 13 18%
Dubrovnik 14 19 33 14%
Krk 1 1 3%
Poreč 16 20 36 7%
Rabac 2 1 3 2%
Total 39 47 86 8%

PERMANENT SEASONAL WORKERS AT VALAMAR RIVIERA AND THE VALAMAR +3 PROGRAM

In 2016, the company contracted 621 permanent seasonal jobs, a 70% increase compared to 2015, when there had been only 364 such contracts. This points to a considerable interest among our employees for this particular measure, and the improvement of the measure through our Valamar +3 program.

The Valamar +3 program is the development of the Permanent Seasonal Worker measure. At Valamar Riviera, permanent seasonal employment guarantees employment for a period of at least 9 to 12 months a year for the next three years. For the employee, this means receiving a stable and good salary throughout the year. Throughout the three-year contract period, a permanent seasonal worker has the status of a permanent employee and extended pension and health insurance for the whole period.

With guaranteed employment duration, permanent seasonal workers are also guaranteed financial aid in the period they might not be working. Also, permanent seasonal workers have an opportunity to make extra earnings in the period they are not working, and Valamar Riviera offers remuneration for such engagement.

The new Valamar +3 program also offers a number of additional benefits for our permanent seasonal workers, and their terms are closely matched to those of the permanent full-time workers.

  • → Possibility of professional and specialist career development via many targeted education and training programs
  • → Participation in some of the 17 reward programs
  • → Valamar's employee healthcare program offers permanent seasonal workers free health check-ups
  • → Due to a more stable employment, permanent seasonal workers are offered better loan terms at Valamar Riviera's partner banks
  • → Priority for permanent employment

VALAMAR +3 PROGRAM*

*Included: Valamar Riviera (Poreč, Dubrovnik, Rabac, Krk) and Baška.

Seasonal Employment

Seasonal employees hold a significant share in the overall number of employees at Valamar Riviera. The need to hire more seasonal employees keeps growing year to year.

One of the key strategic guidelines at Valamar Riviera is to increase loyalty among seasonal workers, with the aim of increasing the overall seasonal worker satisfaction, increasing the share of local employees and the return rates of seasonal workers season to season. In 2015, there were 2,516 seasonal employees, and 63% of them returned

to Valamar Riviera in the 2016 season for employment. In the ongoing effort to increase the share of returning employees, Valamar Riviera has implemented several activities, the most crucial being our focus on processes aimed at increasing the percentage of the employee returns.

PERCENTAGE OF RETURNING SEASONAL WORKERS BY REGION IN 2016 COMPARED TO 2015

LOYALTY COMMUNICATION WITH EMPLOYEES

All seasonal workers, even when they are not working, are regularly informed about the situation at Valamar Riviera via personal contact with their colleagues and direct superiors, the internal monthly magazine VIV (Vijesti iz Valamara – News from Valamar) that all employees receive at their home address, and various social networks.

In this way we increase the sense of belonging to Valamar Riviera and the sense of involvement in all the important aspects of the company.

When they are employed, all seasonal workers get the opportunity to familiarize themselves with Valamar Riviera in detail, through structured orientation

and job induction programs. They can continue doing so after they have started working, through regular daily internal trainings organized at all Valamar Riviera's properties.

For all new employees, there is a halfday orientation workshop that offers various information – about the team of people they will be working with, basic information on Valamar Riviera and key business processes, information on accommodation, meals, transport, salary policy and other forms of remuneration. In 2016, the orientation process was further developed and structured, with special attention to new employees at hotel operations (95% of all new employees).

Also, in the employment period, focus is given to regular communication with workers; they receive timely feedback on work quality, and at the end of the season they have the chance to arrange the exact date of the start of work in the next season.

To improve the authenticity of service and support to the local community's economy, special attention is given to hiring workers from that particular destination, and the average share of local workers is 74%.

SHARE OF LOCAL EMPLOYEES IN TOTAL NUMBER OF EMPLOYEES AS OF 31 AUGUST 2106

Total number of employees Number of local employees Number of other employees Share of local employees Share of other employees
Dubrovnik 814 551 263 68% 32%
Krk 205 122 83 60% 40%
Poreč 1,980 1,505 475 76% 24%
Rabac 611 576 35 94% 6%
Baška 274 139 135 51% 49%
Total 3,884* 2,893 991 74% 26%

* Pupils, students and Puntižela's employees are not included in the data.

VALAMAR HOUSE – HOME AWAY FROM HOME FOR SEASONAL EMPLOYEES

Valamar Riviera, one of the most desirable employers in Croatia, continually invests in its employees and recognizes their value as the principal potential and mover of the company. Valamar House is another step in our efforts to provide the best living quality to seasonal workers.

In its new, modernly furnished facilities, Valamar offers free lodging and board to all the seasonal workers who come to work in our destinations. Employees can use single and double bedrooms, with

en-suite bathroom and toilet, new and comfortable furniture, a TV set and a refrigerator. We have given special attention to the common garden with wooden benches and a grill, while fitness enthusiasts and athletes will be happy to use our outdoor fitness equipment.

As of season 2017, this home away from home will be available to seasonal workers in Rabac and Krk, and as of 2018, the comfort of the Valamar House will be available to employees in Dubrovnik as well.

VALAMAR HOUSE BENEFITS

  • → Modernly furnished accommodation that offers maximum comfort in single or double bedrooms with en-suite bathrooms and toilets
  • → Rooms furnished with comfortable furniture, TVs and refrigerators
  • → Common rooms with all the household appliances, new and comfortable furniture, and technical equipment supplies that provide a feeling of home: a furnished kitchen, a dining room, a laundry, and a room for relaxation and socializing
  • → Free WiFi internet connection
  • → PlayStation in the common recreation room
  • → Garden with a grill and exercise equipment

Remuneration and Employment

BASE SALARY

One of Valamar Riviera's strategic guidelines is to offer competitive salaries to employees in relation to the industry and the surroundings, as well as other material and nonmaterial working conditions.

Through a dialogue with social partners, and as a result of a proactive analysis of the competition and the labor market, over the recent years, the average salary at Valamar Riviera has been significantly above the industry average. In 2016, salaries at Valamar Riviera were 6% higher than the Croatian average and 29% higher than the industry average.

COMPARISON OF AVERAGE GROSS 1 SALARIES FOR 2016 (HRK)

So, the average gross 1 salary for 2016 at Valamar Riviera totaled HRK 8,192, while the average salary for Croatia was at HRK 7,752, and the industry average totaled HRK 6,339, a clear indicator of the path Valamar Riviera has chosen in its salary policy.

Average salaries have gone up significantly at Valamar Riviera over the past four years. Compared to 2012, salaries went up by almost 16%.

AVERAGE NET INCOME AT VALAMAR RIVIERA FOR 2016

16% GROWTH OF AVERAGE GROSS 1 SALARY AT VALAMAR RIVIERA IN THE PERIOD 2012 – 2016 (HRK)

REVISIONS OF POSITIONS AND SALARIES

With an active salary policy, each year Valamar Riviera carries out a regular revision of job complexity for all key positions, introduces new jobs following industry trends, and uses findings to revise salaries for certain jobs.

In this way, the company maintains competitiveness for jobs of special importance to the company and the industry.

EMPLOYEE BENEFITS

Valamar Riviera shows continuous care for its employees, grounded on the genuine belief that employees are the heart of our organization. Our care for employees starts with the implementation of all legal obligations and compliance with the collective agreement.

Valamar Riviera has a collective agreement that guarantees not only the basic salary, but additional material benefits as well. So all Valamar Riviera employees have a guaranteed vacation allowance of HRK 52 net per day of vacation, child bonus, and other increments (shift work, Sunday and holiday work, night shift work, performance incentives etc.).

In addition to the employee rights agreed on in the collective agreement, Valamar Riviera offers its employees many other benefits. In 2016, the company paid out the Christmas bonus to all the employees who had at least 750 total hours of work in that year; more than 3,600 employees received the bonus, and there was also a holiday reward in kind for more than 2,800 employees.

HRK 430.000

Valamar Riviera additionally covers the expenses of health checkups for all permanent employees and permanent seasonal employees. Feedback shows a high response to participating in health checkups, and employees see this benefit as an extremely positive one. They appreciate and respect the employer's care for the employees' health. One of the initiatives our

employees especially appreciate is the use of lower, preferential prices of accommodation in all of our destinations, family members included; our employees often use this option for vacations, getting to know our other destinations and spending some time with their colleagues.

There are no differences between salaries for women and men at Valamar Riviera. health checkups

REWARDING OF EMPLOYEES

One of the most important improvements to the overall policy on salaries and other material employee benefits, is a continual development of the employee rewards program at Valamar Riviera.

In 2016, we continued improving our employee rewards program by introducing new programs. There were a total of 17 rewarding programs in force in 2016. All the programs are defined by the Regulation on Rewards, presented in detail and available to all employees via various communication channels, from Management Board decision memos, presentations at employee

meetings and VIV (company magazine), and the orientation program.

In 2016, as many as 3,737 employees were rewarded through various programs. The findings of the annual employee satisfaction survey clearly show that the new rewarding programs lead to greater employee satisfaction with the overall salary and reward policy in 2016.

Employee satisfaction with salaries and overall rewards increased by 3% in 2016 as compared to 2015.

2016 KEY REWARDING PROGRAMS

  • → My idea for Valamar
  • → Monthly salary increment
  • → Up! rewards and recognitions for employees
  • → Upselling for reception workers at hotels
  • → Loyalty programs
  • → Upselling for F&B employees in outlets
  • → Rewards for mentors and trainers at Valamar Academy
  • → Rewards for competition results
  • → Monthly rewards for Reservation center employees
  • → Annual rewards for corporate service workers
  • → Periodic rewards for sales, marketing and revenue management employees
  • → Annual management rewards
  • → Employee rewards for event participation
  • → Employee rewards for complex facility work
  • → Annual corporate rewards
  • → Best results in several categories
  • → Best teams in several categories
  • → Best employees in several categories

NUMBER OF REWARDED EMPLOYEES IN 2015 AND 2106

Social Partnership And Transparent Communication With Employees

Freedom of association is a basic human right defined by international declarations and conventions, and collective bargaining is an important form of including stakeholders that help form institutional frameworks. The collective agreement covers all employees.

For all significant changes in business operations that reflect on employees, there is the legal regulation that defines times to inform, gain consent from the Works council, trade unions etc.

Valamar Riviera is committed to continuous improvement of the social dialogue through cooperation with social partners, consisting of regular meetings with employer's and social partners' representatives, and negotiations on employees' material rights.

There are two trade unions at Valamar Riviera: Trade Union of Tourism and Services of Croatia, and the Trade Union of Istria, Kvarner and Dalmatia.

The employer maintains regular dialogue with the Works council, which includes 11 employee representatives, discussing the areas of consulting, presenting the company's business plans, and participation in employee gatherings organized by the Works council.

Notifying workers about changes in business operations is done by consulting with the Works council on each decision that could affect the workers. The employer considers the Works council's replies, and accepts proactive suggestions and amendments.

Employee gatherings are the basis for improving relations between the workers and the management, and their goal is to inform workers about the company's strategy, as well as strategies of individual organizational units, and the tasks and goals set before them. In 2016, there were eight workers' gatherings at Valamar that attracted a lot of participants.

CONTINUOUS COMMUNICATION WITH EMPLOYEES

At Valamar Riviera, special attention is given to regular communication with employees, with the goal of unambiguous, transparent and fast exchange of all key information. In 2016, Valamar Riviera received confirmation of the quality of this communication through the Employer Partner certificate, scoring a 100% result for the criterion of internal communication.

Employees' satisfaction with internal communication is measured through several channels: the regular corporate climate and culture survey poses questions that measure satisfaction with communication. The communication satisfaction index for 2016 totals 82%.

Furthermore, communication satisfaction is measured by assessing the satisfaction of internal users with the quality of cooperation with all supporting services at the company, and as of 2016 the company has been measuring employees' communication satisfaction via the internal monthly VIV (Vijesti iz Valamara – News from Valamar). The findings of a series of external and internal studies into the perception of our company, and continued work on developing new communication channels have resulted in a stronger employer brand, or a better image of Valamar Riviera as an employer, but also as a business in all the areas where we hold active presence.

Together with our employees, Valamar Riviera is building a vision and creating positive atmosphere, guided by our corporate values:

  • → Hospitality integrated into human resource processes via Uplifting projects for employees – ValamArtist competence promotion, organization of Family Day, care for pensioners
  • → Ambition integrated in all the activities related to recruitment, selection, internal employee training, rewards, Valamar Academy program
  • → Responsibility integrated in the activities related to employee care, health protection, various forms of aid and support, flexible working arrangements
  • → Innovativeness integrated in the activities and criteria for employee rewards, organization of a company that encourages employee innovation
  • → Pride integrated through the Employer Partner certificate, a sense of belonging to the company, employee loyalty, employee well-being, focus and commitment to internal promotion

For the coming period, Valamar Riviera plans to implement a survey of employee satisfaction with their accommodation and meals, and employee satisfaction with the orientation program. We believe that this too will contribute to the quality of our communication with the employees.

Life-long Learning And Training

With continued investments in the development of key employee competences and internal programs of expert and management training, in 2016 we introduced a model of life-long learning and development as a new corporate value.

EMPLOYEE DEVELOPMENT, TRAINING AND EDUCATION

The education planning process always begins by identifying training needs and wishes, and that involves more than 3,000 employees. The company continues carrying out training programs.

All employees at Valamar Riviera have the option to receive additional training, depending on job requirements, and in 2016 almost 100% of employees received some form of training, while the number of training hours grew by 37% compared to 2015.

Employees can take various forms of expert programs and professional training organized in Croatia and abroad as well. With the option of one-day and longer courses, employees can take part in professional conferences, fairs, expos and meetings. There is also an option to organize graduate studies and internship, and foreign language courses, in accordance with the business needs and employees' potentials.

NUMBER OF TRAINING HOURS PER EMPLOYEE1

VALAMAR ACADEMY

Valamar Riviera gives special attention to the continual development of Valamar Academy programs.

The Valamar Academy education program has helped train a large portion of the company's current management team. Currently, more than 66% of general managers, department heads and assistant managers have completed the Valamar Academy program lasting 12 to 24 months, and they have successfully assumed more demanding positions and responsibilities.

Considering Valamar Riviera's business priorities, developing internal talents has so far been focused on general managers and assistant managers at Valamar's properties, department heads at hotel operations, and specialists and department heads in the sales and marketing sector. In the coming period, the Valamar Academy program will expand to include talents, skills and knowledge of other corporate functions.

Furthermore, we have realized contemporary needs to develop new

1 Includes: Valamar Riviera (Dubrovnik, Rabac, Krk, Poreč) Valamar hoteli i ljetovališta.

Over the past several years, more focus was given to internal training by

employees / internal trainers, in the areas

With its practice of innovative services, quality mentors and trainers, Valamar Riviera is becoming a partner to the institutional education sector in the creation of specialist programs.

All key employees are involved in the training project via mentoring young employees, as well as new employees, with the goal of helping develop skills needed to advance professionally.

The employee mentorship program is formalized through the mentor program and status. All Valamar managers are involved as internal educators in the Valamar Academy program.

of professional training for some departments, in line with the Train the Trainer program. At company level, there are more than 200 internal trainers.

2 Calculated according to the average number of employees in that year (2016: 2,953; 2015: 2,555; 2014:2,365 employees). All employees have the possibility to participate in training programs.

[GRI G4-LA10] 67

concepts and services in sports, pools and beaches by designing a new Valamar Academy program intended for expert training of managers of sports facilities and services. We have chosen the first 10 candidates who are starting the program in 2017.

The many training and education programs for hotel operations' employees will be strategically managed, and the programs will be aligned with the all-encompassing human resource strategy. Such an approach will allow us to additionally improve and standardize all training and education programs, resulting in higher work quality among employees, the key element of every organization focused on guests. With the successful development of employees' key competences, the Valamar Academy program has a strong motivating effect on the nominated and involved students and their perception of acknowledgement, recognition and pride.

Recognition of human potentials and their development through the Valamar Academy program greatly contributes to growing employee satisfaction with the corporate culture and climate, and on their loyalty to the company. Their success stories, word of mouth among colleagues and good practice of internal career development by further promotions and management statuses, successfully recruit new candidates whose numbers keep growing, and are to double in 2017.

Finally, the Valamar Academy program has a positive effect on Valamar's image as an employer, resulting in more frequent job applications, as well as applications for internships and scholarships.

Valamar's Management

Valamar Riviera strongly promotes a culture of competence development for all the key employees in the company's management. From year to year, considering new investments and increase in work complexity, the number of managers at the company keeps growing. In 2016, there were 426 of them; that is a 10% increase compared to 2015.

Compared to the overall number of employees during peak season, the share of management is a high 11%, so one of the key goals and priorities at Valamar Riviera is to develop and build up competent management that has all the needed knowledge, skills and abilities to lead people towards the realization of the company's strategic goals.

One of the key factors in management development is the company's commitment to internal promotion, so the largest number of current managers (more than 60%) grew and developed in the ranks at Valamar Riviera. All employees are made aware of the options to advance during annual evaluation talks with their direct superiors, and they

receive timely feedback on their performance and career development plan, which includes a plan of education and additional employee training.

In this way the company has secured a long-term, comprehensive and integrated approach to strengthening the company's management competences and a structured process of identification, selection, development and retention of key employees for current and future needs at the company.

At the same time, by developing a sustainable management succession plan, Valamar Riviera creates flexibility of organization and fast reactions to changed working conditions, and strongly motivates and retains its best employees. In line with the salary and reward policy at Valamar Riviera, key employees in management positions at the company, who realize clearly defined key performance indicators and achieve precisely determined individual goals, have the chance to participate in annual management rewards according to the reward rules. Annual rewards – bonuses to management are expressed as a percentage of annual salaries and paid in accordance with realized goals after the balance sheet is done.

The total number of employees with special rights and responsibilities at the company in 2016 amounted to 432, with 167 women and 265 men.

SHARE OF MANAGERS IN TOTAL NUMBER OF EMPLOYEES IN 2016

Employee Satisfaction and Improvement of Working Conditions

Valamar surveys employee satisfaction among all employees as part of the annual corporate culture and climate survey (the 3C project), which collects employee feedback in seven distinct areas: work organization, management, education and training, attitude toward the employer, career opportunities, salary and work/life balance.

(average rating between 0 and 5)

For several years, we have had a stable level of employee satisfaction, graded 3.8 out of 5. In order to get the "real" picture, questionnaires are distributed during peak season, in August. In 2016, 88% of the questionnaires were completed and handed in, and this is a representative sample for the interpretation of results and development of a corrective activity plan.

After the employee satisfaction survey, results are communicated at all levels, from presentations for the Works council, at workers' gatherings, to the monthly magazine VIV, followed by a definition and implementation of the plan of activities resulting from gathered employee suggestions.

Managers get insight into their own ratings, which are used in their evaluation and rewarding system.

Valamar Riviera is extremely proud of the results of the corporate climate and culture survey that the company is achieving in the work organization (4.0) and management (4.1) criteria, as these are much higher than the average. They are key elements in corporate management that secure long-term stable and top-quality employee effort.

In 2013, Valamar introduced the Uplifting Service project into its operations. The project's aim was to increase the level of excellence by transforming the culture of hospitality, so that the company and our employees would be recognized as the best hosts on the Adriatic. It is a simple approach that uses communication, motivation, education and common employee tools to create an atmosphere completely focused on the guests. This awardwinning project encourages employees to acknowledge one another, and strengthen their sense of community and team spirit.

Since we recognize the value of our employees taking part in business decision and we want to promote the importance of their participation in the company's development and success, we launched a program called My Idea for Valamar. The purpose of this program is to encourage all employees to propose ideas to improve business and ultimately reward the implemented solutions that improve or introduce new, better business practices. The valuation criteria include overall business operations of the company, from lowering costs / raising revenues, improving work processes, service and product quality, to guest satisfaction.

Work organization Management Training Attitude toward employer Career opportunities Salary

Average rating

RESULTS OF THE CORPORATE CLIMATE AND CULTURE SURVEY FOR 2016

Investment In Future Employees And Promoting Jobs In Hospitality and Tourism

An especially important project focusing on investments in promoting jobs in hospitality across the country was realized in the school year 2016/2017 in collaboration with the Ministry of Tourism. It refers to the cofinancing of 217 scholarships: with this initiative Valamar Riviera becomes the largest individual scholarship provider in Croatia's hospitality and tourism (Croatia's total: 245, Valamar Riviera: 89%) with a total investment worth HRK 1,085,000.00.

Valamar Riviera's promotion at 24 vocational schools throughout Croatia, where we informed the students about opportunities of scholarships and later employment, has resulted in considerable interest among the students. In 2016, the scholarship program included 217 students from 31 Croatian schools, mostly from

continental Croatia and schools outside the destinations where Valamar Riviera operates (71%).

89 high school graduates are going to get their first job and first work experience in July 2017 at all our destinations. The employer will secure free lodging for the 70 students coming form other parts of Croatia, their first 6-month employment contract and skills development in a stimulating work environment offering excellent services and working conditions. 41 students from local schools will be included in summer internships at our properties with the expert guidance by our licensed mentors, together with 25 students (scholarship holders) who will arrive with their teachers from high schools in Požega, Nova Gradiška and Slavonski Brod.

OVERALL NUMBER AND STRUCTURE OF NEW SCHOLARSHIP HOLDERS FOR 2016/2017

Valamar's international partner institution is the Kaposvar's vocational school in Hungary through an Erasmus project called "Professional mobility from the Alps to the Adriatic" that promotes cross-border mobility of vocational school students in Hungary, Croatia and Austria. Pursuant to the agreement, Valamar will offer summer internship opportunities to 45 students in the period between 25/06/2017 to 27/8/2017 in Poreč (Lanterna) and will collaborate with their 6 teachers.

We have also continued our successful collaboration with the Faculty of Tourism and Hospitality mangement in Opatija (University of Rijeka): from our experts' participation in Career Days, promotion of jobs in hospitality and tourism, trends in the development of human resources and new jobs and careers at Valamar Riviera as well as the 300-hour internship of 15 students at Valamar Riviera.

We have also continued organizing Open Days, aiming to present operations and employment opportunities at Valamar to the local community. This is a part of our continued cooperation with vocational schools and colleges in order to develop knowledge, skills and competences of potential employees, and to promote vocations in tourism, a prerequisite for a long-term sustainable tourism operation.

All our previous initiatives related to investments in future employees have had a tremendous effect on the general social influence that Valamar Riviera strives for:

  • → Encouragement and support for youths to enroll and complete their education in the field of hospitality and tourism
  • → Stronger ties between Valamar Riviera and vocational and hospitality schools across Croatia
  • → Raising the overall quality of Croatian tourism and the quality of personnel in hospitality and tourism.

SCHOLARSHIP PROGRAM AT VALAMAR

Valamar Riviera is the largest single scholarship provider in the tourism and hospitality sector in the Republic of Croatia:

HRK 1,085,000

An important program related to investments in vocational jobs in collaboration with the Ministry of Tourism covers:

217 scholarships

Valamar Riviera's promotion across the country during autumn 2016 included:

24 vocational schools

5.3 GROWTH STRATEGY

In 2016, we achieved an exceptional increase in both revenue and profit by improving our business processes, developing our own portfolio, increasing the focus on our guests, and developing our business through strategic partnerships and acquisitions.

At the same time, we identified the key factors that will support our aspiration towards the further growth of our revenue and profit. They are:

  • → Portfolio capital investments and asset development
  • → Sales and distribution strategy
  • → Management of the Valamar brand
  • → Segmentation and selection of target markets
  • → Increase in direct bookings and guest loyalty
  • → Strategic partnerships and supplier relations
  • → New programs and offerings in collaboration with strategic partners and destinations to prolong the season
  • → Growth through acquisitions, mergers and partnerships in leisure destinations
  • → Optimization of prices, occupancy and distribution to increase revenues
  • → Focus on operating efficiency
  • → Active participation in associations and institutions to develop and promote tourism

PORTFOLIO CAPITAL INVESTMENTS AND ASSET DEVELOPMENT

Since 2012, Valamar Riviera has invested around HRK 1.4 billion in the development of its portfolio, thus increasing the share of Premium and Upscale accommodation from 29% to 40%.

In 2016 began the preparation for Valamar's largest investment cycle planned for 2017, worth HRK 873 million. The value of the single largest investment in this particular cycle is HRK 562 million and it is focused on Rabac, where in October 2016 began the construction of two luxury resorts – Valamar Girandella Resort 4*/5* and Valamar Bellevue Resort 4*. The said investment will reposition Rabac as the leading leisure destination for high-end guests. Moreover, the investment is important for the overall economic development of the local community and will secure more than 350 new jobs. Finally, a number of new features will become available to local residents and visitors alike – from beaches, promenades and playgrounds to new catering establishments and sports activities and venues.

In 2016, on the island of Krk, Croatia's first ever five-star campsite was opened, Camping Resort Krk 5*, while Camping Resort Lanterna 4* received its fourth star and now offers brand new premium camping services and features.

In the period up to 2020, investments in the portfolio will reach HRK 1.5-2 billion, the EBITDA margin will steadily grow to 35-38% and generate premium returns while maintaining a stable balance sheet and a sustainable net debt/ EBITDA ratio.

INVESTMENT CYCLE (capitalized investments, HRK mn)

*In this total of HRK 428 mn, HRK 167 mn represent the 2016-2017 investment cycle.

SALES AND DISTRIBUTION STRATEGY

In 2016, Valamar Riviera achieved significant 26% growth in direct sales, its most lucrative channel. The average daily rate grew by 4.6% at company level. As regards overnights, campsites saw an increase of as much as 10%, while hotels reported a 6.6% increase compared to 2015.

Valamar has seen a continued growth in revenues from direct bookings and continues to work on initiatives directed at increasing loyalty. Furthermore, the company is working on establishing cooperations with key tour operators to diversify its portfolio and prolong the tourist season. In 2016, Valamar hosted a number of large-scale events, including the Daimler Mercedes-Benz Global Training Experience in Dubrovnik, as well as the WinDays

conference and the first Poreč Open Air festival in Poreč.

The continual ARR growth in the Premium and Upscale segment in all our destinations validates our orientation to investments in higher category properties. The said ARR and revenue growth is accompanied by an increase in overnights, thus reaffirming the business growth stability of our key productshotels, resorts and campsites.

AVERAGE RATE GROWTH AND OVER -

AVERAGE RATE GROWTH AND OVER - NIGHTS – PREMIUM PROPERTIES1

10%

The average rate increase in Premium and Upscale properties was 8% , with an increase in the number of overnights for the Premium (10%) and Upscale (9%) products.

Valamar's occupancy grew by 2.9 percentage points. Premium buildings have the highest occupancy (53%). Two destinations, Krk and Dubrovnik, report the highest growth (6 p.p. and 3 p.p., respectively).

Valamar Riviera's goal is to have one property working year-round for each destination. By additionally boosting preseason and postseason segments, two hotels, Valamar Diamant in Poreč and Valamar Lacroma in Dubrovnik, stayed opened throughout 2016. The Valamar Sanfior's preparations for year-long operations have begun as well.

In 2016, the Valamar Lacroma had the longest operating period with a total of 349 operating days, followed by the Valamar Diamant with 345 operating days.

1 Hotels, resorts and campsites included.

2 Baška included as of 1 July to 31 December 2015.

3 The average daily rate has been calculated as board revenue/ accommodation units sold.

2015 2016 Ix (2016/2015)
PREMIUM 45.6% 53.0% 107.4
UPSCALE 42.9% 43.4% 100.5
MIDSCALE 40.5% 43.5% 103.1
ECONOMY 35.7% 38.0% 102.3
TOTAL 40.2% 43.1% 102.9

DISTRIBUTION CHANNELS IN 2016 (by revenues)

MANAGEMENT OF THE VALAMAR BRAND

In 2016, we began the process of redefining the existing brand strategy, based on the Valamar Riviera corporate brand and two key product brands: Valamar Hotels & Resorts and Camping Adriatic by Valamar.

This strategic project aims at improving the efficiency and strength of the

umbrella brand and the overall structure of the corporate, product and service sub-brands in order to harmonize the communication strategy at all levels with the ambitious plans of the company. The new brand strategy is expected to be completed in 2017, while its full implementation in properties and in communication will be achieved in 2018 and 2019.

SEGMENTATION AND SELECTION OF TARGET MARKETS

In 2016, Valamar Riviera was determined to position the portfolio to efficiently address the target groups.

Apart from optimal portfolio differentiation, it is also necessary to have a clear strategy for brands and service concepts, designed to meet the specific needs and desires of particular market segments. This will increase the market reach, improve the compatibility of the products and services with the specific market segments, increase guest loyalty and, ultimately, facilitate a considerable and sustainable growth of all the key performance indicators.

In 2016, this strategy was best reflected in the development of Valamar Isabella Island Resort, where a special family offer was created, alongside Adults Only and V Level services and facilities. A similar strategy will be implemented at Valamar Girandella Resort, scheduled for opening in 2017. As regards the camping segment of the portfolio, we have developed specific products for luxury camping such as the premium mobile home village and glamping, which resulted in the 18% share of that particular segment, up by 5 percentage points from the previous year.

MICROFACTS

The intention behind Valamar's logo is to evoke the memory of the sea and vacations. It emulates the shape of a paper nautilus, small creature that inhabits the Adriatic, as well as other world seas. This cephalopod, whose Latin name is Argonauta argo, is a rare species in our sea, the female of which has a beautiful white shell of a wavy surface.

INCREASE IN DIRECT BOOKINGS AND GUEST LOYALTY

Valamar Riviera's loyalty program aims at providing added value for returning guests, and consequently increase revenues through direct bookings.

In 2016, the share of direct bookings in revenues was 41% . They were made through our direct distribution systems: call center, direct web bookings, mobile platform bookings and loyalty program. The share of returning guests was 24%.

We will continue developing our loyalty program in order to create more added value for our clients. Simultaneously, we will develop our web pages, e-marketing and technologies in order to reach a 50% share of direct bookings in revenues and 30% loyal guests by 2020.

RETURNING GUESTS*

* The CRM data base was restructured in 2016.

STRATEGIC PARTNERSHIPS

Valamar continually works on establishing strategic partnerships. This effort has generated an increase in the number of guests from air travel markets, a more uniform segmentation of source markets, and season prolongation.

There are two segments that we have been building in particular – the specialist segment and the tour operating segment.

  • → We focus our specialist partners on the existing and new products, through which we generate growth, particularly in the preseason and postseason period. The products on which we focus our activities are cycling, tennis, gastronomy, destination events , and large-scale international conferences.
  • → In the tour operating segment, we find additional room for growth through new investment projects and focusing our partners on individual projects, thus enabling both product and service optimization and, eventually, greater efficiency.

TUI Group is the world's largest tourism company, with a chain of strong tour operators, 1,500 agencies, six airlines with more than 150 airplanes, 300 hotels with over 214,000 beds, and 14 cruise ships. More than 20 million guests use their services annually.

We are nearing a successful completion of the agreement and implementation of the most complex (in terms of product specification) family concept hotel with TUI; in the 2017 season, we will open the first TUI Family Life concept in Croatia. Based on our agreement with TUI, over the next three years, the Family Life Bellevue Resort in Rabac can expect 76,000 new guests from air travel markets in the UK and Scandinavia.

DER Touristik is a tourism division belonging to the REWE group, among the leading global tourism groups and the second largest German tourism company which provides services to around 8 million guests every year.

DER Touristik contributes to the successful positioning and sale of new, differentiated "Adults only" and "Family" facilities at Valamar Girandella Resort. DER Touristik consolidates the DACH market (Germany, Austria, Switzerland) and significantly focuses its sales and promotion through this project in Istria and Rabac. In the next three years covered by the agreement, Rabac expects 25,000 guests.

Such cooperation will result in the repositioning of Rabac ( from 2*-3* to 4*),

SHARE OF GUESTS BY MANNER OF ARRIVAL AT DESTINATION HOTELS AND RESORTS IN RABAC - TOUR OPERATOR SEGMENT

SHARE OF GUESTS BY MANNER OF ARRIVAL AT DESTINATION HOTELS AND RESORTS IN RABAC - ALL SALES CHANNELS

the introduction of new hotel concepts (TUI Family Life, Adults Only), thus generating Valamar's knowledge base and improving the entire chain of destination services.

Jet2holidays is UK's third largest tour operator and a sister company to Jet2.com, UK's fourth largest airline company. Each year, Jet2.com flies approximately 7 million passengers.

Jet2holidays grew by 30% by number of occupied units in hotels and resorts in Istrian destinations, while in Dubrovinik it reports a 94% growth when comparing 2015 and 2016. This represents the highest increase in the tour operator segment and these positive trends are continued in the plans for 2017.

Due to the excellent position of Istrian destinations (Poreč and Rabac) and their transport connection with the main source markets, the conventional manner of travelling to the destinations was by car.

Accordingly, in 2016 air travel guests represented only 21% of the entire tour operator segment in hotels and resorts. In comparison, in Dubrovnik the main manner of travelling to the destination is by plane and air travel guests represented 90% in the same year.

Our strategic component is boosting air travel arrivals to Istria through which we will connect with more distant markets and open up towards new ones. The effect of intensifying cooperation with strategic partners can be seen in the increase from 21% of air travel guests in 2016 to more than 35% planned for 2017 for destinations in Istria in the tour operator segment for hotels and resorts.

NEW PROGRAMS AND OFFERINGS IN COLLABORATION WITH STRATEGIC PARTNERS AND DESTINATIONS TO PROLONG THE SEASON

Close relations with strategic partners and destinations where Valamar Riviera operates, such as TUI and Der Touristik, Jet2Holidays, tennis specialists Zischka and Wagner and ID Riva contribute considerably to the development of the offering in destinations and season prolongation.

One of the key focuses is the expansion of strategic partnerships in order to prolong the season and attract new source markets.

The 2016 event calendar that Valamar is involved in, either as organizer or sponsor was richer than ever. The most important events included the Poreč Open Air festival with MTV Summerblast Music festival, Swatch Beach Volleyball Major, Offshore World Challenge big game fishing competition, Valamar Trail, Baška Four Islands Race and many others. A large number of events took place in

either the preseason or the postseason period, which helped generate tourist arrivals in low-demand periods. The key to the events' successful realization was the synergy between towns, municipalities, tourist boards, hotel companies, catering businesses and other stakeholders of the destination tourism. Eventually, it all contributed considerably to our destinations being included among the most desirable destinations in Croatia.

Over the past years, Valamar's strategic focus has also been on the development of specific products and programs, particularly cycling and outdoor sports. Together with the other key destination advantages and opportunities, including its gourmet offer, the family-based offer at our properties, and interesting trips, they constitute a number of attractive sales packages directed at specific guest segments in our key markets in the region. In 2016, special focus was put on Germany and Austria, where we realized our promotion and sales through special cooperations with tour operators and Valamar's direct channel.

OUR STRATEGIC PARTNERSHIPS

GROWTH THROUGH ACQUISITIONS, MERGERS AND PARTNERSHIPS IN LEISURE DESTINATIONS

ACQUISITION OF IMPERIAL D.D.

In 2016, Valamar Riviera successfully expanded its business operations to another top-quality tourist destination on the Adriatic Sea by acquiring the majority stake in Imperial d.d. on the island of Rab through a strategic partnership with Allianz ZB d.o.o. a mandatory pension fund management company. Following the conclusion of the takeover bid by the end of 2016, Valamar Riviera and Allianz ZB jointly acquired 88.93% of Imperial's shares. Valamar Riviera purchased 54.71% of shares for HRK 285 million, which meant that, as a company,

Imperial d.d. was valued at HRK 697* million in total.

Allianz ZB and Valamar Riviera acquired the controlling ownership stake in Imperial d.d. in stages, the most significant of which had been the purchase of the company's shares from the Restructuring and Sale Center that concluded the privatization of Imperial d.d.

Today, Imperial's offer of accommodation units accounts for 77% of the categorized, organized tourist accommodation of the island of Rab, with

KEY INDICATORS FOR THE IMPERIAL D.D. ACQUISITION

Acquisition Value HRK 285 mn
(54.71% of shares)
Enterprise value* HRK 697 mn
Acquired enterprise value HRK 381 mn
Total revenues HRK 142 mn
EBITDA HRK 40 mn

* Enterprise value calculated as market capitalization based on acquisition share price+net debt on 31/12/2016.

properties in the Town of Rab, alongside Rajska Beach in Lopar, and on the Suha Punta peninsula in Kampor, which posted 678,013 overnights in 2016. The accommodation capacity of Imperial d.d. accounts for 15% of Valamar's total capacity. In 2016, Imperial d.d. posted total revenues of HRK 142 million and operating profit of HRK 40 million.

Croatia's leading tourism company and top institutional investor see a great synergy potential in the future joint development of the portfolio of Imperial d.d. and Rab as a destination through a new model of a strategic partnership between a pension fund and a tourism company.

In line with the agreement on the management of the hotel and tourist facilities and amenities, between Valamar Riviera and Imperial d.d. and in effect since January 4, 2017, the two companies began joint work on the development of the tourism portfolio of not only Rab but also the entire destination, which has been recognized as a destination with considerable potential for further development.

DEVELOPMENT OF A DIFFUSED HOTEL IN POREČ

In 2016, Valamar Riviera launched a project to develop a diffused hotel in Poreč by inviting private accommodation owners to express their interest for such a form of cooperation.

The development of a diffused hotel is in line with the strategy for Valamar's growth and development. One of the key goals is the revitalization of the old town of Poreč. Accommodation in households accounts for a major portion of the total accommodation capacities, and their merger into a diffused hotel will increase

the overall quality of the service and, consequently, the competitiveness. Developing diffused hotels as a new form of accommodation is also one of the priorities of the private accommodation development, as defined in the strategy for the development of Croatian tourism by 2020. In a diffused hotel, accommodation units can include rooms, hotel suites, family rooms, studio apartments and apartments, and the first accommodation units of Valamar's diffused hotel opened in 2016 in the former Kompas building in Poreč.

OPTIMIZATION OF PRICES, OCCUPANCY AND DISTRIBUTION TO INCREASE REVENUES

For years now, Valamar Riviera has focused on revenues. A few years ago, the company implemented a revenue management function and trained the necessary professionals.

Valamar defines excellence in revenue management as selling the right room to the right client, at the right moment, at the right price, through the distribution channel with the best efficiency. The achieved continuous growth in revenues per available room over the last five years as well as the 10.8% increase in revenue per available room (RevPAR) in 2016 was

largely the result of a 4.6% increase of the average rate per unit (as compared to 2015) with an efficient increase of overnights through the strategic choice of distribution channels.

OPTIMIZATION OF PRICE, OCCUPANCY AND DISTRIBUTION CHANNEL REVPAR INCREASE BY PRODUCTS (HRK)

FOCUS ON OPERATING EFFICIENCY

Over the past years, significant efforts have been invested in the optimization of the cost structure and modernization of Valamar's processes.

Since 2009, we have improved our EBITDA margin from 15.4% to 34.4% (adjusted 34.9%) . The company's business model of operating a cluster of properties in a destination helps centralize operational services such as laundry, horticulture,

maintenance or energy management, and to increase efficiency. Furthermore, due to its size on the Croatian market, the company is able to utilize economies of scale in its business operations and realize purchasing advantages. A high standard of professionalism helps the company to efficiently implement the best practices across the orga nization. Valamar Riviera intends to continue to use these advantages to reach its profitability targets.

* Financial information until 2014 are from the consolidated financial reports of Valamar grupa d.d., and as of 2014 from the consolidated financial reports of Valamar Riviera d.d.

ACTIVE PARTICIPATION IN ASSOCIATIONS AND INSTITUTIONS TO DEVELOP AND PROMOTE TOURISM

As the leading tourism company, Valamar Riviera is an active member of a number of associations and institutions, through which it contributes to the development of destinations, standards and offering, all in the interest of developing tourism and hospitality in Croatia.

Valamar considers its memberships in associations, in which it has a seat on the managing board, to be strategic, and participates in projects and various board activities, thus actively representing the interests of the profession. Valamar Riviera has its representatives in all the assemblies, tourist councils and/or supervisory boards of the various tourist boards:

    1. CROATIAN NATIONAL TOURIST BOARD
    1. ISTRIA TOURIST BOARD
    1. KVARNER TOURIST BOARD
    1. POREČ TOURIST BOARD
    1. VRSAR TOURIST BOARD
    1. FUNTANA TOURIST BOARD
    1. TAR-VABRIGA TOURIST BOARD
    1. LABIN TOURIST BOARD
    1. RAŠA TOURIST BOARD
    1. KRK TOURIST BOARD
    1. DUBROVNIK TOURIST BOARD
    1. BAŠKA TOURIST BOARD

The company also has its representatives in the following associations:

  • → CROATIAN EMPLOYERS' ASSOCIATION (HUP)
  • → CROATIAN CAMPING UNION (KUH)
  • → ASSOCIATION OF EMPLOYERS IN CROATIAN HOSPITALITY (UPUH)
  • → CROATIAN CHAMBER OF ECONOMY (HGK) – including regional chambers in Pula and Dubrovnik
  • → ASSOCIATION OF CROATIAN TRAVEL AGENCIES (UHPA)
  • → CROATIAN MEETING PROFESSIONALS ASSOCIATION (HUPKT)
  • → ALUMNI ASSOCIATION OF THE FACULTY OF TOURISM AND HOSPITALITY MANAGEMENT
  • → CROATIAN ASSOCIATION OF CORPORATE TREASURERS (HUKR)
  • → CROATIAN ASSOCIATION OF FINANCIAL ANALYSTS (HUFA)

5.4 INNOVATION AND DIGITALIZATION

By leveraging the opportunities provided by new technologies and digitalization processes we aim to fully meet and anticipate our guests' needs and become a leader in innovation of products and services in the European leisure hospitality market.

CONTINUOUS INNOVATION AS ONE OF VALAMAR'S CORE VALUES

Innovations represent one of Valamar's core values and have always been a part of Valamar's identity. They are also one of the key ways Valamar is recognized by our guests and partners. Therefore, at Valamar we continuously innovate and improve our products, services, processes and capabilities to achieve superior customer experiences and operational efficiency.

Innovation at Valamar can be found in all areas of business activity, from daily operations to large investment projects. Many examples of Valamar's innovative culture over the last year are included throughout this report in our focus on the guest and guest relationship building, service excellence approach, new service concepts launched across the portfolio, human resource and corporate culture development, corporate social responsibility and commitment to the environment.

The company actively tracks and fosters innovation across the company, mainly through a central project management organization (PMO) which tracks, oversees and manages strategic cross-functional projects in the organization.

We are especially proud of our Perfect Experience Creator program that curates the guest experience of the entire destination to their individual needs and desires. The program is aimed at increasing guest engagement with local experiences and services which not only meets our guests´ quest for authentic experience, but also supports communities and entrepreneurs in our destinations.

Innovation should also be aimed at sustainability and managing environmental impact. For example, in several locations we are installing new e-chargers for electric vehicles. Our aim is to position ourselves on the e-charger maps and GPS navigation systems, in turn increasing our attractiveness as an e-destination.

CAMPING RESORT LANTERNA

  • → Camping Resort Lanterna received the INOVACAMP 2016 recognition for its innovative glamping concept.
  • → For camping in style and luxury, Camping Resort Lanterna offers 14 luxury tents in the glamping village located in one of the most beautiful zones of the campsite.

CAMPING RESORT KRK

  • → Camping Resort Krk received the INOVACAMP 2016 recognition for its innovative concept of providing high-quality personalized service. In 2016 Camping Resort Krk became the first Croatian 5* campsite on the Adriatic.
  • → This unique eco-friendly family camping resort is the only campsite in Croatia with its own small spa center, and one of the few where occupancy does not depend on weather.

E-BIKE

  • → Protection of the environment and energy efficiency are among Valamar's strategic initiatives, and sustainability principles are included in the goal of every investment project's approach.
  • → In cooperation with the Istrian Tourist Board we opened the first e-bike charging station in Istria. Four of them were opened in 2016 in the following locations: Valamar Sanfior Hotel, Valamar Club Tamaris, Valamar Diamant Hotel and Camping Resort Lanterna. The project plan for 2017 includes five new e-bike charging stations.

MOBILE HOMES FROM CAMPING RESORT LANTERNA AND KRK

  • → In order to provide superior accommodation experience to our guests, we are working closely with partners who support our goal to be creative and innovative.
  • → 67 mobile homes in Camping Resort Lanterna and 63 mobile homes in Camping Resort Krk offer interior design specially created by Valamar in cooperation with its supplier partner.

LA PENTOLA, CRAFT, THE BEAT

  • → In 2016 Valamar Riviera opened three reconstructed facilities at the former location of Slavija in Rabac.
  • → Trattoria La Pentola, The Beat and Craft offer rich and innovative gastronomic and entertainment experience, all in one place. For exceptional Italian cuisine experience, guests and visitors enjoy our La Pentola with modern and innovative interior design, as well as a unique gastronomic experience.

PERFECT EXPERIENCE CREATOR

→ Perfect Experience Creator platform won the 2016 Golden Goat – Capra d'oro award in the category of innovative product.

Digitalization at Valamar

We recognize the global process of digitalization as a key enabler as well as a disruptor in the travel and hospitality industry. As one of the early movers in digitalization in the hospitality industry in Croatia, Valamar is today the Croatian market leader in revenue from direct bookings and breadth of digital customer journey touchpoints available to our guests, while they plan their travel or stay in a destination, ranging from our website, the newly developed mobile app*, loyalty program, newsletters, and CRM campaigns, to social media, online marketing, online travel partners, guest feedback and online reputation tools, et cetera. When planning a travel experience, the primary information sources are digital while the paths to bookings are becoming more and more complex.

Through our presence in of all the relevant channels and touchpoints, and proper management of marketing campaigns, we convert target audiences into guests. We believe we need to continue digitalizing our services to ensure high guest satisfaction and market presence.

Valamar is also an early adopter of numerous IT systems, applications and technologies and has invested heavily in developing best-in-class IT systems and infrastructure that are the backbone of our daily business operations and enable us to grow and scale our revenues and services. All our properties are operating on Micros Fidelio Opera PMS (property

ACTIVITIES IN 2016

digitalization projects identified in the PMO in 2016

management system). Our revenue management, loyalty program and CRM databases are enabled for smart data management and fully integrated with our PMS and booking systems. We also continue to invest considerably in our websites as a key driver of direct sales. We therefore believe that Valamar is wellpositioned to quickly embrace digital products and services and benefit from the process of digitalization going forward.

As we continue to upgrade our portfolio and our services, we also plan to upgrade the guests' digital experience in a highly tailored way in key service areas to enable a better guest experience and ensure the right balance between personal touch and digital excellence.

All strategic digital projects and initiatives are coordinated by the central project management organization (PMO) and steered by the executive leadership through the Project Committee in order to ensure a strategic focus of the organization on the key value drivers and digitalization implementation. 21 strategic

* June 2017.

OUR DIGITALIZATION ROADMAP

Valamar has identified the key strategic objectives, value drivers, business process, IT capabilities and organizational principles to guide our activities in the field of digitalization.

STRATEGIC OBJECTIVES & VALUE DRIVERS

Improve guest experience throughout the customer journey & grow direct sales revenues.

  • → Increase guest loyalty and life-time value for customers
  • → Improve CRM capabilities targeted marketing, relationship building, personalization, sales, etc…
  • → Enable and improve destination discovery and authentic destination experiences
  • → Optimize processes and costs

BUSINESS PROCESSES & IT CAPABILITIES

Enable and improve IT infrastructure and automate processes .

  • → Wifi strength, quality and capacity as a basic service
  • → Business systems integration
  • → Process automation operation focused (housekeeping, reception, F&B, ordering, etc…)
  • → Ease of integration of new digital technologies into existing and legacy systems

ORGANIZATION & DIGITAL TRANSFORMATION

Create an innovative culture open and ready for digital transformation.

  • → Centralized responsibility for digital strategy and coordination
  • → Valamar as an open platform for collaboration and agile project management
  • → Focus on speed and empowerment to innovate quickly, iterate, evaluate, modify and anticipate digital trends

DIGITALIZATION PROJECTS IN 2016 AND 2017

There were 20 strategic digital projects in 2016, out of which 5 were completed, and 6 were initiated in 2017.

The projects are either external or guest experience and service quality focused, or internal or business processes focused. Valamar also tracks the level of innovation delivered by each project as ranging from basic to highly innovative.

INTERNAL VS. EXTERNAL ORIENTATION

EXAMPLES OF DIGITAL PROJECTS IN 2016

ONLINE CHECK-IN & SELF CHECK-IN

  • → The development of a system that would allow a self check-in, in the hotels and the camping, for those guests who desire this kind of service, with the objective of achieving shorter waiting time for registration in the campsites, increase of customer satisfaction with front desk services and improved data collection about guests and thereby improvement of the CRM base
  • → Guest have the possibility to check in online even before their arrival

PROJECT "TABLET"

→ Creation of a software solution that enables delivering digital information and content to the guests in the comfort of their hotel rooms, which is underway as part of the development of a new family 5* property in 2018.

VALAMAR MOBILE APPLICATION

  • → Offers the possibility of booking, provides useful information for guests before their arrival, on-line check-in and the possibility to use the digital room key, as well as other useful features during the stay
  • → Real-time communication with the hotel staff and continual guest feedback (surveys and recommendations)
  • → Developed in order to provide guest assistance throughout the whole stay

COMPLAINT MANAGEMENT SOFTWARE

→ An application used by property management, housekeeping, maintenance and front desk for reporting guest needs, guest complaints, and maintenance issues through a smart phone and can be acted on immediately by other members of staff to improve guest experience, shorten the time for repairing malfunctions and track key indicators in housekeeping performance per property.

Booking engine & CRS

  • Credit Card Payment Solution 2
  • Liquidation Process Improvement 3
  • Special events live picture 4
  • Camping Adriatic new website launch 5
  • Valamar.com relaunch & improvements 6
  • Corporate web 7
  • Broadband Strategy & Wi-Fi Implementation 8
  • Facilities Management software 9
  • RFID towel control 10
  • Valamar Riviera Corporate Intranet 11
  • Portable terminal app for Sport centers 12
  • Portable terminal app for controllers in camps 13
  • E-Invoice 14
  • Advanced Planning and Forecasting 15
  • Project Management Portal 16
  • In-House Marketing 17
  • Board Revenues reporting 18
  • Cash Free Card 19
  • Guest App Valamar Hotels & Resorts 20
  • Valamar Plus Club loyalty program 21
  • E-chargers 22
  • Campsite Online check-in + Self check-in 23
  • Project "Tablet" 24
  • Perfect Experience Creator 25

5.5 DESTINATION DEVELOPMENT AND RESPONSIBILITY TO THE LOCAL COMMUNITY

Corporate social responsibility is an integral part of Valamar Riviera's business tradition spanning six decades in tourism and hospitality, rooted in the belief that sustainable business should be a strategic goal and key driver of new value. Corporate social responsibility guides all of Valamar Riviera's strategic initiatives, including employee development and training, destination development, investments in the local community and care for those in need, a systematic approach to the preservation of the environment and the quality of the Adriatic Sea as well as corporate transparency and responsibility to its stakeholders, shareholders and the investment community.

The success of Valamar's hotels, resorts and campsites greatly depends on the further development of the destinations where the company operates.

That is why Valamar takes an active role in destination development through various strategic projects and long-term partnerships with local governments and public authorities, tourist boards, service

and event providers, sports clubs and non-profit organizations.

By promoting and improving a destination's tradition, through learning and innovation, Valamar actively contributes to social development and is able to offer its guests more intensive and more authentic experiences in destinations that have an exceptionally rich cultural heritage.

Valamar's Nine Corporate Social Responsibility Programs

Considering its impact on the local community, environment and society as a whole, Valamar Riviera has organized its CSR efforts into nine umbrella programs and have committed at least 2.5% of annual revenues to investments in these programs. In 2016, as much as 3.37% (HRK 49.5 million) of the revenues was invested in the programs.

In 2016, we invested HRK 12.5 million more in corporate social responsibility programs than in 2015.

MICROFACTS

In 2015, Valamar Riviera won the CSR Index Award for responsible policies and practices of environmental management.

enriching the Destination

The program for enriching the destination experience supports cultural, culinary, educational and entertainment events, projects and initiatives that improve the attractiveness and competitiveness of a destination, contribute to the prolongation of the tourist season, and cultivate the local communities' cultural identity and values. Aside from supporting destination projects through partnerships, Valamar riviera independently organizes projects that are enjoyed by numerous tourists and local population alike.

in 2016, more than HrK 3.3 million were invested in expanding the destination events.

In 2016, we continued organizing and supporting a series of destination events, including the traditional Giostra, Labin Republic, Labin Carnival, Oktoberfest by Valamar, Tunalicious Street Food Festival, Valamar Terra Magica and Valamar Trail in Rabac, Poreč Major, Istrian Riviera, SUPer Surfers Challenge in Poreč, 4 Islands in Baška, Dubrovnik Summer Festival, Dubrovnik Symphony Orchestra, Sentimento Festival, and large-scale performances by Maksim Mrvica, The Frajle and Klapa Intrade in Dubrovnik.

Especially important for 2016 was the Poreč Open Air festival, which lasted three months and featured more than 250 events that brought life to the streets and squares of Poreč, to the delight of tourists and locals alike. The festival is the product of a cooperation between Valamar Riviera as the event's initiator and chief partner, and MPG, the company in charge of organizing the festival, with financial and communication support from the Town of Poreč, Poreč Tourist Board, Istria County Tourist Board, and the Croatian National Tourist Board, as well as numerous sponsors, who have all recognized the value of this unique festival.

During the tourist season, in the period between mid-June and mid-September, Poreč Open Air's varied program for all

Poreč oPen Air

ages and tastes brought new life to Poreč, with the festival's many daily events making the destination even more attractive. As confirmation, Poreč received the coveted Tourist Flower Award as the best summer vacation destination. The award is presented by the Croatian National Tourist Board, the country's Ministry of Tourism and the Croatian Chamber of Commerce. Poreč Open Air also received the Golden Goat Award for outstanding contribution in the field of marketing in Istrian tourism, particularly for improving products as well as promoting activities, products and projects in Istria.

The festival featured more than 250 music, cultural, film and children's events, enjoyed by more than 50,000 visitors. The festival also involved the local community – from catering establishments to local suppliers and entertainers.

The Poreč Open Air festival also featured the MTV Europe Summerblast, with many international DJ stars who drew numerous young people as well as domestic and foreign electronic and pop enthusiasts to Poreč. The extraordinary success of the first Poreč Open Air festival guarantees the event's 2017 edition. Moreover, Valamar intends to apply a similar concept to its other destinations as well.

More than 40 events

ACTIVITIES IN 2016

Tour of Croatia 600 WinDays 2016 1,700 Wine Nights 2,500 Lighthouse Festival 3,400 Poreč Open Air festival & MTV Summerblast 50,000 Beach Volleyball Major series - Poreč Major 75,000 Offshore World Challenge & Tunalicious Street Food 3,500 Oktoberfest by Valamar 5,000 Advent Poreč & New Year's Eve celebration 40,000 Valamar Terra Magica 300 Valamar Trail 550 Dimensions Festival 6,500 Outlook Festival 13,000 4 Islands 600 Baška Outdoor Festival 1,000 Du Motion 4,600 Sentimento Festival 1,000 Summer at Valamar 9,500 Dubrovnik Summer Festival 60,000 International Late Summer Music Festival Dubrovnik 4,000 Around 310,000 guests, participants and visitors

NUMBER OF GUESTS, VISITORS AND PARTICIPANTS IN KEY DESTINATION EVENTS IN 2016

KEY DESTINATION EVENTS IN 2016

POREČ
04/03 - 13/03 Poreč, Valamar Diamant, Pical Istrian Riviera
14/04 - 17/04 Poreč, Valamar Pinia SportAktiv & IstriaBike Training Camp
19/04 - 24/04 Poreč Tour of Croatia
26/04 - 29/04 Poreč, Valamar Isabella WinDays 2016
28/04 - 01/05 Poreč, Lanterna Collegium Spring Break Festival
12/05 - 15/05 Poreč Wine Nights
13/05 - 16/05 Poreč, Lanterna Spring Break Europe
25/05 - 29/05 Poreč, Lanterna Lighthouse Festival
09/06 - 10/09 Poreč Poreč Open Air festival & MTV Summerblast
09/06 - 12/06 Poreč, Lanterna/Brulo Veteran Handball Championship
15/06 - 15/09 Poreč Artist on Vacation
18/06 - 19/06 Poreč/ Lanterna SUPer Surfers Challenge Poreč – Lanterna
28/06 - 03/07 Poreč Beach Volleyball Major Series – Poreč Major
07/09 - 10/09 Poreč Offshore World Challenge & Tunalicious Street Food
16/09 - 24/09 Poreč, Lanterna Oktoberfest by Valamar
06/12 - 08/01 Poreč Advent Poreč & New Year's Eve Celebration
RABAC & LABIN
21/05 - 22/05 Rabac, Valamar Sanfior Valamar Terra Magica
01/10 - 01/10 Rabac, Valamar Sanfior Valamar Trail
22/12 - 24/12 Labin Christmas in Labin & Parni Valjak concert
PULA
24/08 - 29/08 Puntižela, Camping Brioni Dimensions Festival
01/09 - 04/09 Puntižela, Camping Brioni Outlook Festival
KRK ISLAND
13/04 - 16/04 Baška 4 Islands
29/04 - 01/05 Baška Baška Rožica Flower Festival
29/04 - 01/05 Baška Photo & Hike Weekend
06/05 - 08/05 Baška Baška Trekking & Trail Camp
20/05 - 22/05 Krk Krk Spring Bike Adventure
15/8 - 15/8 Krk Krk Sails
17/08 - 20/08 Baška Baška International Guitar Festival
14/10 - 16/10 Baška Baška Outdoor Festival
DUBROVNIK
30/3 - 3/4 Dubrovnik Tomo Udovičić Memorial water polo tournament
8/4 - 10/4 Dubrovnik Aklapela
29/4 - 30/4 Dubrovnik Du
Motion
15/5 Dubrovnik, Babin kuk Family Day
20/6 - 3/7 Dubrovnik, Babin kuk Libertas Basketball Camp
21/6 Dubrovnik Sentimento Festival
7/7 - 4/11 Dubrovnik, Babin kuk Summer at Valamar
10/7 - 25/8 Dubrovnik Dubrovnik Summer Festival
26/8 - 23/9 Dubrovnik International Late Summer Music Festival Dubrovnik
7/10 - 9/10 Dubrovnik Valamar Junior Open
20/10 - 23/10 Dubrovnik Good Food Festival
20/10 - 23/10 Dubrovnik Dubrovnik Film Festival for the Children and the
Youth of the Mediterranean Countries

Building Tourism Infrastructure

As part of this particular program, Valamar Riviera systematically invests in beaches, walking and biking trails, access paths, playgrounds and other forms of improvement to the tourism infrastructure. Moreover, the company directly contributes to the development of the local community and the creation of the prerequisites for a sustainable development of the tourism business in the general, social interest of all the destinations where it operates.

In 2016, various tourism infrastructure projects of improvement and construction received more than HRK 16.1 million in investments.

More than HRK 10.3 million were invested in the construction and outfitting of children's playgrounds and sports grounds; over HRK 2.8 million were invested in beach improvements; and more than HRK 3 million were invested in walking and biking trails, promenades and access paths.

INVESTMENTS IN 2016

Construction and outfitting of children's playgrounds and sports grounds

HRK 10.3 million HRK 2.8 million HRK 3 million

Beach improvements

Contruction of promenades, walking and biking trails, and access paths

Excellence Through Knowledge

A rather important project was carried out in 2016 in cooperation with the Ministry of Tourism, awarding 198 scholarships for students pursuing careers in tourism and catering across Croatia. Valamar will also provide them with internships and employment once their education is completed.

In 2016, a total of 217 students were involved in the scholarship program. Furthermore, in 2016, we established cooperation with the Znanje na Djelu Foundation for the program called "Exploring the World of Work", with the goal of familiarizing high school students with the possibilities of career development in tourism nad hospitality. In 2016, we also continued organizing our Open Days, aimed at presenting operations and employment opportunities at Valamar to the local community. This is a part of our continued cooperation with vocational schools and colleges in order to develop the knowledge, skills and competences of potential employees, and to promote vocations in tourism and hospitality, a prerequisite for a long-term sustainable tourism business.

SCHOLARSHIP PROGRAM

INVESTMENTS IN 2016

Internal training and employee development, including the Valamar Academy program

Promotion of vocations, scholarships and cooperation with educational institutions

ValamART

Valamar Riviera continuously supports the creativity of national and world's artists, as well as numerous cultural initiatives and projects that have yielded many works of art. In 2016, Valamar supported projects in arts and culture that gathered a number of renowned national and foreign artists, as well as attractive artsand-culture events, with over HRK 260,000.

In 2016, the company continued supporting the Artist on Vacation project, which was set up for the fourth year in a row with collector Marinko Sudac and the Institute for the Research of the Avant-Garde. Valamar's hotels hosted world renowned avant-garde artists, and the project included exclusive exhibitions presenting the audiences with some of the most important figures in European avant-garde art. Furthermore, for the 33rd year in a row, Valamar hosted the

international Art Colony, during which artists stayed at Valamar and created works of art, many of which now adorn our hotels and form a valuable collection bolstered by a long tradition of partnership with artists.

We also continued our cooperation with Poreč Open University; numerous national and foreign artists, whose creations enriched Poreč's cultural scene, were guests at Valamar.

In Dubrovnik, Valamar Riviera regularly cooperates with the Dubrovnik Symphony Orchestra, organizing a number of music evenings.

There was also a donation to help organize the Industrial Art Biennial in Labin, one of the most important art

ACTIVITIES

The Art Colony has so far hosted more than 218 artists

events in Istria and beyond. This is also a continuation of the cooperation between Valamar and the City of Labin, partners in this important art festival project that was initiated and organized by the Labin Art Express XXII artistic collective. The Industrial Art Biennial and its attractive program undoubtedly enrich regional culture and the offering, and contribute to the strengthening of the identity and recognition of Istria's rich and significant industrial heritage, motivating Valamar to support this valuable event.

The works of art and elements of the interior from Valamar's hotels in Rabac and Poreč were included in the exhibition titled Enjoying the Fruits of Yugoslavia's Third Way, which was set up in late March 2016 at the Gebhart Blazek Gallery in Graz, Austria.

The Artist on Vacation project has so far hosted more than 58 artists

Promoting Sports

Valamar Riviera directly organizes or sponsors a number of sports events. In 2016, the company invested around HRK 2.6 million in these sports events, organized in all of Valamar's destinations with the aim of developing the localities, and promoting sports and active lifestyle. Most of the sports events are held in both pre-season and post-season, with an exceedingly positive effect on guest arrivals outside peak season.

There were a number of sports events in 2016, but we should single out our sponsorship of the Poreč Major sports and tourism event at Poreč, which gathered over 74,000 beach volleyball fans, the 3rd Valamar Terra Magica bicycle race in Rabac that attracted 169 contestants from seven different countries, the SUPer Surfers Challenge Poreč that gathered the world's best stand-up paddlers, the Krk Spring Break Adventure (a three-day bicycle event), the third edition of the Valamar Trail in Rabac (international trail race) with

contestants from 18 countries and 4 continents, the Istrian Riviera tennis tournament that took place for the 44th year, being one of the most important European competitions for young tennis players worldwide, the 4 Islands MTB race where all participants stayed in Valamar's hotels, and the Tour of Croatia, the biggest annual event in Croatia, during which Valamar provided accommodation for the participants and the organizers of the race's fifth stage that started in Poreč. In Dubrovnik, Valamar Riviera actively supports Du

Motion (the Dubrovnik half-marathon), especially attractive to athletes and recreational runners from Croatia, its neighboring countries, and even faraway countries such as Brazil, the USA, Canada, Russia and South Africa. In October, Dubrovnik will be the venue for the Valamar Junior Open, Croatia's open juniors' championship graded for the world junior rankings. In 2016, 98 both male and female juniors from 15 countries participated in the event. Valamar Riviera is also the sponsor of the Jug Water Polo Club, the Dubrovnik

Basketball Club, the Libertas Basketball Camp, and the Tomo Udovičić international memorial water polo tournament for children.

In addition to all these events, Dubrovnik's Maslinata Park, located between Valamar's hotels, now houses an open-air training ground with 10 different exercise equipment for a fun workout suitable for all generations. Finally, a new 500-meter training track connecting all the existing tracks at the Valamar resort, was built.

Green Valamar

The umbrella program called "Green Valamar" includes energy efficiency projects and various environmental protection initiatives, in the context of everyday operations and awareness-raising activities among guests, employees and the local community about the importance of preserving the Adriatic coast and sea.

Overall, in 2016, around HRK 16.6 million were invested in projetcs included in this program.

In 2016, all Valamar Riviera's properties introduced the ISO 50001 certified energy management system. Following the introduction of the ZelEn project in 2016, 100% of electrical energy is now secured from renewable sources. Together with other energy management measures, this has resulted in reduced greenhouse gas emissions by more than 70%. Furthermore, through an agreement with the Poreč-based company Odvodnja d.o.o., Valamar has joined the project of using treated waste water from the future municipal water

treatment system. In 2016, as many as 18 Valamar Riviera hotels received or confirmed their Travelife Gold Award, the international certification system that promotes sustainability in the tourism sector, while our beaches sport 12 Blue Flags. Last year, Valamar Riviera opened two EV charging stations in Poreč and the first e-bike charging station in Istria, in cooperation with the Istria Tourist Board. By the end of the year, there were four newly opened e-bike charging stations.

For the third year in a row, Valamar Riviera successfully implemented the donation program called We Love the Adriatic Sea that actively includes the

INVESTMENTS IN 2016

local community in cleaning up beaches and the seabed in all of Valamar's destinations. Many associations and sports clubs participated in the cleanup action in 2016, together with Valamar Riviera employees and many locals. The biggest coast and seabed cleanup activities involved the Dubrovnik Scuba Diving Club, the Adriatic Maritime Institute, Horizont Sailing Club from Poreč, Štinjan Pula Saltwater Sport Fishing Club, Rudar Football Club from Labin, Mladi Rudar Handball Club, Rabac Underwater Activity Society, and Bioteka, an association that promotes biology and related sciences, as well as the Submania Diving And Fishing Club from Zagreb. At the initiative of and participation by the employees of Camping Orsera, there was a voluntary seabed cleanup eco-action in cooperation with the Triton Diving Club and other diving centers, including CPA Pula, RC Poreč, Sport Orsera, and guests of the campsite. In Dubrovnik, a hundred divers and volunteers of all ages, headed by Abyss Diving Club from Dubrovnik, cleaned up the seabed in front of Valamar's hotels and Camping Solitudo, as well as Cava and Importanne resort beaches. The cleanup involved divers from Croatia, Bosnia and Herzegovina, and Macedonia, as well as EUFOR members stationed in Trebinje.

Our Retired Colleagues

This program fosters long-term relations with the retired employees, primarily as a gesture of gratitude for all they did during their years of service, but also with the intent to include former colleagues and exchange experiences that could contribute to Valamar's growth and development.

In 2016, Valamar's pensioners were offered free day-long trips to the island of Krk, and to the Valamar Isabella Island Resort on the island of Sveti Nikola near Poreč. We keep in touch with the retired Riviera's employees in Poreč, and there are plans for establishing such cooperations in other destinations as well.

ACTIVITIES IN 2016

We gather more than 100 pensioners for various events: dinners, trips and other events

Little Tourism

In 2016, as part of this program, we organized visits by kindergarten groups from Valamar's destinations, so that the children could learn their first facts about vocations in the hospitality industry, but in a playful and entertaining way, suited to their age.

In 2016, during these educational visits, 440 kindergarten children visited Valamar's hotels, resorts and campsites from Poreč and Rabac, to the island of Krk and Dubrovnik.

Valamar was visited by 440 kindergarten children in 2016

Valamar's Big Heart

Valamar's Big Heart is a framework for fundraisers and charity initiatives and projects intended to help those in need. In 2016, Valamar continued helping the many associations and initiatives in the local community aimed at helping vulnerable groups of society. Over the year 2016, as part of this program, more than HRK 390,000 were distributed through donations.

In 2016, for the first time ever, this program included a fundraiser bearing the same name, involving employees, guests and the local community. During the fundraiser, reception desks at all Valamar hotels, resorts and campsites had donation boxes to collect funds for those in need in the local communities where Valamar operates. The collected funds were directed to a family from Funtana that lost their home in a fire, as well as the Liče Faraguna Center, which provides care for children with special needs. Among many other initiatives, the program also featured a donation of funds for the construction and outfitting of the children's playground in a park near the Ivo Lola Ribar Elementary School in the Labin Municipality. By supporting projects by local communities via initiatives such as this one, Valamar creates added value and makes a positive impact on the environment where it operates.

For the third year in a row, Valamar's Big Heart program included the donation initiative A Thousand Days on the Adriatic Sea. With this initiative, Valamar provides free summer vacations for children without adequate parental care, children from low-income families, and children with special needs and health problems.

All associations, schools and other institutions are invited to apply for a donation. Over the past three years, Valamar has donated a total of 3,500 free room and board overnights and provided summer vacations to more than 1,000 children and their accompaning carers from all parts of Croatia.

For most children, this was their first encounter with the sea, and their first summer vacation ever. In 2016 alone, Valamar Riviera provided free summer vacations for more than 390 children and their carers and supervisors from 28 associations and schools. In 2016, Valamar Riviera received the prestigious Pride of Croatia Award for this particular initiative.

ACTIVITIES

More than 1,000 children have spent their summer vacations at Valamar in the past three years

5.6 COMMITMENT TO ENVIRONMENTAL SUSTAINABILITY

As the leading tourism company in Croatia, Valamar Riviera is fully aware of its environmental responsibility and involvement in the lives of the local communities in its destinations. The company employs a systematic approach to protect the key resource in tourism - the environment.

Furthermore, the company is oriented towards achieving sustainability goals, and devotes special attention to regulatory compliance, prevention of pollution as the fundamental approach to managing environmental aspects, rational use of resources, waste reduction and disposal, and staff training to handle any potential incidents.

Valamar Riviera approaches environmental protection comprehensively. The company applies and certifies management systems promoting green business practices in order to achieve a balance between the economic progress, care for the environment and social involvement in the local community. In this way each aspect is approached proactively and systematically.

Valamar's properties have implemented the ISO 14001 Environmental Management System, ISO 9001 Quality Management System and ISO 50001 Energy Management System, as well as the Food Safety Management System (HACCP) based on Codex Alimentarius.

MICROFACTS

All the electricity that was used by Valamar Riviera in 2016 came from renewable sources.

Key Achievements in Environmental Protection and Sustainable Tourism

Valamar Riviera's 2016 achievements in the field of environmental protection and sustainable tourism are numerous.

  • → 100% of Valamar Riviera's properties introduced the certified energy management system according to ISO 50001.
  • → 100% of electrical energy is secured from renewable sources: it is provided by the power company HEP's hydroelectric power plants as part of the ZelEn project. With the implementation of ZelEn and other energy management measures, in 2016, the company saw a decrease of over 70% in both direct and indirect greenhouse gas (GHG) emissions (Scope 1 and 2).
  • → With the agreement between Valamar Riviera and Odvodnja d.o.o.from Poreč, the company joined the project of utilizing treated wastewater from the future municipal water treatment system.

The treated water will be used as service water in campsites' sanitary facilities and for irrigating green areas. It is expected that the usage of water from the public water supply system will drop by 65,000 m3 annually.

  • → In 2016, Valamar Riviera opened two EV charging stations in Poreč, and the first e-bike charging station in Istria in cooperation with the Istria Tourist Board.
  • → The company continues to invest in the purchase of electric vehicles; in 2016, there were 43 electric vehicles, worth HRK 2.5 million in total.
  • → In 2016, as many as 18 Valamar Riviera hotels received or extended the Travelife Gold Award certificate. Travelife is an international certification system promoting sustainability in the tourism sector.
  • → Five of our hotels have received a special recognition for sustainability in the hotel industry, the Sustainable

Hotel Certificate: Hotel & Casa Valamar Sanfior 4*, Valamar Koralj 3*, Valamar Dubrovnik President 5*, Valamar Zagreb 4* and Valamar Bellevue 4*.

→ 12 of our beaches hold the Blue Flag certification, an international symbol of quality for preserved environment, clean water and beaches, well-managed beaches and high-quality services.

  • → For the third year in a row, Valamar Riviera has successfully implemented the We Love the Adriatic Sea project as part of the Green Valamar umbrella program. In 2016, the focus was on cleaning up beaches and the seabed, in cooperation with a number of associations and locals; nearly HRK 100,000 were invested in the project.
  • → In 2016, a total of 16 heat pumps were installed for the preparation of hot water with the total heat output of 2,559 kW. The goal was to reduce the heating oil consumption to under 5% of the total kilowatt-hours consumption over the course of five years, and in the long run, fully replace the heating oil with environmentally friendly energy sources.
  • → In 2016, the photovoltaic cells of the power plant located inside the Atrium Hotel in Baška generated around 37,000 kWh of electrical energy.

  • → The company has begun working on a pilot project – a photovoltaic power plant for the headquarters of Valamar Riviera in Poreč. Upon its completion in 2017, the power plant will be used for the purposes of that particular building only. The plan is to build one such facility annually over a five-year period.

  • → Over the past five years the company has been working intensively on installing solar panels or photovoltaic cells: so far, 1,800 panels (around 3,600 m2) have been installed. In 2016 alone, a total of 295 panels (around 590 m2) were installed. The plan is to exceed 2,000 installed solar panels over the next five years.
  • → Campsite Krk has a constructed wetland, which treats and recycles wastewater, and then uses it for horticultural irrigation.
  • → In mid-2016, a water treatment system was installed at the

central laundry facility in Poreč to enable the treating and reusing of up to 70% of the total wastewater from the washing process.

  • → A UV disinfection system was introduced at the Valamar Crystal Hotel to reduce the use of chlorine.
  • → The company has been gradually switching to electric vehicles for the internal transportation of guests and goods in order to reduce the use of diesel fuel or other motor fuel in cars, thus also decreasing the GHG emissions. The goal is to reduce the use of fossil-fueled cars

for internal transportation as much as possible.

→ As measured by keys, in 2016, 100% of Valamar Riviera's properties had a certified energy management system according to ISO 50001; 79% of campsites and 62% of hotels and resorts had certified environmental management systems; while 64% accommodation units in hotels and resorts had the Travelife certificate, thus confirming the company's plan to manage sustainably, in accordance with the highest international standards.

Protection of the Sea and the Environment

Valamar has always considered its environmental impact with long term in mind. As a result, the company applies the highest environmental protection standards in its management and investment practices, with the aim of maintaining a sustainable business.

The CSR umbrella program called Green Valamar comprises environmental protection initiatives and projects, which Valamar has been systematically working on.

Special attention is devoted to the GHG emission reduction, water consumption reduction, waste generation reduction, recycling, wastewater treatment and reuse for irrigation and in laundries,

improvement of solar energy use, and purchase of environmentally friendly materials, particularly in relation to the company's key investments; raising awareness among guests, employees and local population about the importance of preserving the Adriatic Sea and the coast; and the organization of beach and seabed cleanups.

GREENHOUSE GAS EMISSIONS – COMPARISON BETWEEN 2015 AND 2016* (GROUPED DATA)

(t) kg/overnight
2015 18,511 3.9
2016 6,008 1.2
Decrease in emissions in 2016 as compared to 2015 70.5% 72.8%

* The calculation includes joint services and central kitchen.

In 2016, Valamar Riviera posted a significant drop in direct and indirect Scope 1 and 2 CO2 emissions, primarily as a result of introducing ZelEn, i.e. contracting green electrical energy supply, and replacing a large portion of the boiler room running on heating oil in Rabac with a total of 14 heat pumps, and installing one heat pump in Poreč and one one the island of Krk.

RAISING ENVIRONMENTAL AWARENESS AMONG EMPLOYEES AND GUESTS

Valamar has involved both its employees and its guests in various environmental protection projects.

The employees are regularly educated on how to behave and what to do to preserve the environment. There are notices for both the employees and guests in several key places across the facilities reminding them how they can contribute to environmental protection – from different ways to conserve water and energy, to ways to reduce chemical use and waste generation, and properly dispose waste for the purpose of recycling.

Energy Efficiency

As regards energy efficiency, the company is focused on reducing the consumption of fossil fuels (heating oil in particular), drinking water and electrical energy. Valamar's first investments in green technologies were made back in the 1980s: the company invested in the early solar collectors in its campsites. Nowadays, there are around 1,800 solar collectors across Valamar's properties, covering an area of 3,600 m2.

The environmental protection aspect is especially evident in Valamar's investment projects: the company installs energy-saving appliances and replaces conventional light fixtures with highly efficient lighting solutions (LED lights), while solar energy and heat pumps are used to heat water in campsites and resorts.

Valamar also carries out regular energy audits with the aim of increasing energy efficiency. There is a number of applied measures for saving energy and water, and the most significant are:

  • → Systems for monitoring the consumption of energy and water, as well as systems for managing the peak-load engaged electric power
  • → System for remote lighting control and hot water preparation
  • → Gradual introduction of the hotel room controls and monitoring system (intelligent rooms) in hotels and resorts; the system enables better electrical energy consumption management and cost cuts
  • → Company-adopted purchase policy acording to which sustainability has to be considered when purchasing goods and services for our operations
  • → Centralization of the irrigation system, which calculates and distributes optimum amounts of water based on weather conditions.

CONSUMPTION OF ENERGY PRODUCTS IN 2016

Consumption in unit of measurement kWh kWh/overnight
Electricity
(kWh)
54,978,106 54,978,106 10.69
Heating oil
(l)
1,146,398 11,463,985 2.23
Diesel fuel
(l)
218,190 2,160,084 0.42
Natural gas
(kWh)
10,408,564 10,408,564 2.02
LPG
(kg)
228,994 2,931,127 0.57
Total 81,941,866 15.93

CONSUMPTION OF ENERGY PRODUCTS – COMPARISON BETWEEN 2015 AND 2016 (GWh)

ENERGY AND ENERGY INTENSITY

1. ENERGY CONSUMPTION, AS SHOWN BY THE FOLLOWING ITEMS:

  • a) Total consumption of energy from unrenewable sources: in 2016, of the total of 81,941,866 kWh of energy consumed at company level, 26,963,760 kWh came from unrenewable sources
  • b) Total consumption of energy from renewable sources: 54,978,105 kWh (all the electrical energy we use comes from renewable sources)
  • c) Total consumption of electrical energy: 54,978,105 kWh
  • d) Total consumption of energy in joules or their derived units: 294,990,718 MJ
  • 2. ENERGY INTENSITY, AS SHOWN BY THE FOLLOWING ITEMS:
  • a) Energy intensity ratio (total energy in kWh/overnight): 15.93 kWh/overnight
  • b) Types of energy included in the ratio: Electrical energy, heating oil, motor fuel, natural gas, and LPG

ENERGY DELIVERED TO THE SYSTEM VIA QSOL SOLAR COLLECTORS IN 2016 (kWh)

IN 2016, VALAMAR HAD

WATER CONSUMPTION - COMPARISON BETWEEN 2015 AND 2016 (m3/overnight)

WATER RECYCLING IN 2016

2016
Total water consumption
(m3)
1,209,792
Amount of recycled water for irrigation (m3) 2,800
Amount of recycled water for the Poreč Laundry Facility
(m3)
15,533
% of used recycled water
(out of total consumption)
1.52%

GROUNDWATER AND WATER FROM LOCAL OR OTHER WATER SUPPLY SYSTEMS

2014 2015 2016
Groundwater supply system
(m3)
5,242 28,379 26,980
Local or other water supply systems
(m3)
915,314 1,130,993 1,209,792

DISCHARGE OF WATER BY DESTINATION

2014 2015 2016
Public sewage system
(m3)
796,323 848,841 998,593
Sea
(m3)
28,048 30,241 33,669
Discharge of water to surrounding terrain
(m3)
5,675 8,153 7,486

→ Total volume of wastewater is based on an estimate of delivered water, minus the percentage used for irrigation and watering of sports fields. There are no wastewater flow meters.

→ Wastewater is tested 2-4 times a year for every profit center; tests are carried out by authorized laboratories (public health institutes). Before being discharged, all wastewater is treated: mechanically (FOG separators – all the hotels and campsites) and biologically (Krk and Marina campistes).

Waste Disposal

The company has adopted Policies on quality and sustainable business operations, dedicating special attention to the reduction of waste generation and waste management.

TOTAL WEIGHT OF HAZARDOUS AND NON-HAZARDOUS WASTE BY DISPOSAL METHODS (t)

20151 20162
Surrendered to an authorized waste removal service –
hazardous waste3
21 20
Surrendered to an authorized waste removal service –
non-hazardous waste
1,321 2,280*
Composting4 180 639
Disposal5 3,619 3,670

* Data for 2016 include the destination of Baška (362 t) and construction sites in Rabac (650 t).

1 Properties in Baška not included in 2015.

2 Properties in Baška included in 2016.

3 Hazardous and non-hazardous waste, collected separately and surrendered to the authorized waste removal service.

4 Biodegradable waste from gardens and parks as well as kitchens and cafeterias.

5 Mixed municipal waste.

Removal services decide on the method of biodegradable and mixed municipal waste disposal.

Focus in the Forthcoming Period

Valamar Riviera plans to invest around HRK 30 million directly in projects related to energy efficiency over a period of three years.

INVESTOR RE LAT IONS 6

The high transparency and quality of business and financial communication with investors represents the foundation of investor relations in promoting Valamar Riviera as the leading share in Croatian tourism. In this way, we aim to provide active support to liquidity, share value growth and the involvement of investors who can contribute to the further growth of Valamar Riviera's value for all stakeholders.

We strive to contribute directly to increasing the transparency of Valamar Riviera's business as well as the quality of communication with analysts and investors through regular corporate presentations both in Croatia and abroad, group and individual meetings, conference calls as well as comprehensive, publicly available financial and business reports.

The objectives of Investor Relations:

  • → Increasing investor demand
  • → Facilitating investment decisions
  • → Expanding opportunities for growth and profitability
  • → Increasing share value
  • → Reducing the cost of capital
  • → Boosting the potential for growth and/or acquisition financing

After integrating Valamar Riviera's management, portfolio and shareholders' structure in October 2014, we created the leading share on the Croatian capital market, offering significant exposure to the growing tourism sector.

On 17 November 2014, the General Assembly of Valamar Riviera decided to list Valamar Riviera's shares on the Official market of the Zagreb Stock Exchange. The first day of trading was 17 December 2014. The quotation on the demanding official listing of the Zagreb Stock exchange and an increased level of transparency were

aimed at attracting institutional investors who, until then, had limited access to the growing Croatian tourism sector. As investors' interest grew (foreign investors in particular), this approach proved to be justified.

As the leading Croatian tourism share and company with about 21,000

shareholders, on 9 June 2016, Valamar Riviera organized its first Investors Day, making a step forward towards not only its present and future investors, but also the wider public. On that occasion the company presented its new growth strategy and goals for the period up to 2020 which promote a sustainable and responsible development of destinations and include: i) a total investment of HRK 1.5-2 billion in the portfolio, ii) EBITDA margin growth to 35-38% and iii) attractive and long-term dividends to shareholders. The first Valamar Riviera's Investors Day received great interest from the media and the investing community, including over 30 funds, banks, analytics companies, brokerage

PERFORMANCE OF VALAMAR RIVIERA'S SHARE, CROBEX AND CROBEX 10 INDICES

* Indexed according to the average share price for RIVP-R-A as of 4 Jan 2016.

firms and insurance companies, as well as a number of private investors.

Sustainable and socially responsible development of destinations combined with investments of up to 2.5% of revenues in corporate social responsibility, education, and destination development projects

INVESTMENT PROPOSITION

represent an integral part of Valamar Riviera's business operations.

In the period from 1 January 2016 to 31 December 2016, the highest recorded share price on the regulated market was HRK 36.25, while the lowest was HRK 22.30. In the reporting period the Company's share price increased by

44.5%, exceeding both CROBEX and CROBEX 10 indices trends, which recorded a growth of 19.6%, and 18.4% respectively. With a regular trading turnover of HRK 931 thousand a day and free float of over 50%, Valamar Riviera's share is among the 3 most liquid Croatian shares listed on the Zagreb Stock Exchange. It is also among the top ten shares by market capitalization. The recent HRK 5.3 billion market capitalization accounts for 3.4% of the total market capitalization of shares traded on the Zagreb Stock Exchange. In addition to the Zagreb Stock Exchange indices, the share is also listed in Vienna Stock Exchange indices (CROX and SETX indices).

VALAMAR RIVIERA CROATIAN TOURISM 12% of Croatian categorized accommodation capacity Key tourist destinations (Istria, Krk Island, Rab Island and Dubrovnik The largest Croatian tourism company and the first Croatian hotel brand Increasing profitability and further growth potential High share liquidity, large free float and excellent IR standards Sustainable dividend potential Attractive geographic position in the Mediterranean region Continual growth in overnights and arrivals in Croatia Stable growth of hospitality revenues Small share of hotel accommodation

Valamar Riviera's shares are the most monitored Croatian shares by financial analysts. Analysts specify a target value for shares based on their assessments of the future performance by applying various financial models such as discounted cash flow, peer group and comparables approach, market valuation, etc.

The key prerequisite for a good assessment of future performance is high transparency and open business comunication by the management.

Valamar Riviera's analyst coverage is provided by:

    1. Addiko bank d.d., Zagreb
    1. Alta invest d.d., Ljubljana
    1. ERSTE bank d.d., Zagreb
    1. Fima vrijednosnice bank d.o.o., Varaždin
    1. Interkapital vrijednosni papiri d.o.o., Zagreb
    1. Raiffeisenbank Austria d.d., Zagreb
    1. UniCredit Group Zagrebačka banka d.d., Zagreb.

AWARDS IN 2016

Share of the Year by public choice for the fifth consecutive time

COMMUNICATION WITH SHAREHOLDERS AND THE INVESTING COMMUNITY IN 2016

AWARDS AND RECOGNITIONS 7

Valamar Riviera's hotels, resorts and camping resorts operate in accordance with the highest quality standards for services and accommodation. Our efforts are continually recognized by hospitality professionals and our guests. Their awards, recognitions and high ratings from leading travel web sites and organizations, contribute to Valamar's top position in Croatian tourism.

2016 INTERNATIONAL AWARDS AND RECOGNITIONS

Le monde du plein air Caravane - Camping Les plus beax campings d'Europe Camping Resort Lanterna
ADAC Best Camping 2016 Camping Resort Lanterna, Camping Resort Krk
ANWB Best Campsite Camping Resort Lanterna, Camping Resort Krk
Camping2be.com Camping2be 2016 Award Camping Resort Lanterna
DCC Europa-Preis Camping Award 2016 Camping Resort Krk
HolidayCheck HolidayCheck Quality selection 2016 Valamar Club Dubrovnik
Hotels.com 2016 Certificate of Excellence Valamar Lacroma Dubrovnik, Valamar Dubrovnik President,
Valamar Argosy, Tirena, Valamar Club Dubrovnik
IHAC IHAC reward Valamar Argosy, Tirena
Kongres magazine TOP 10 Premium Resorts Meeting Hotels Valamar Lacroma Dubrovnik
TripAdvisor 2016 Travelers' Choice winner Valamar Club Tamaris
2016 Travelers' Choice award Valamar Riviera Hotel
2016 Travelers' Choice award Valamar Isabella Hotel
2016 Travelers' Choice award Valamar Dubrovnik President
2016 Certificate of Excellence Valamar Argosy Hotel
World Travel Awards Leading resort in Croatia Valamar Club Tamaris
Leading boutique hotel in Croatia Valamar Riviera Hotel
Leading business hotel in Croatia Valamar Lacroma Dubrovnik
Leading hotel in Croatia Valamar Lacroma Dubrovnik
Travelife Travelife Gold Award 18 Valamar Riviera's properties
World Luxury Hotel Awards Luxury Beach Resort Valamar Dubrovnik President,
Valamar Isabella Island Resort
avtokamp.si Best campsite 2016 - Award for lifetime achievement Josipa Cvelić Bonifačić
avtokamp.si Best campsite Adria Camping Resort Lanterna, Camping Resort Krk,
Naturist Camping Solaris
Leading Campings of Europe Leading Campings of Europe Camping Resort Lanterna, Camping Resort Krk
Greenovation Green Mark Camping Resort Lanterna

2016 NATIONAL AWARDS AND RECOGNITIONS

Croatian Congress Industry Forum Ambassador of Croatian Conference Tourism Dorja Horvat
Croatian National Tourist Board,
Croatian Chamber of Economy
Tourism Flower-Quality for Croatia Valamar Lacroma Dubrovnik, Valamar Dubrovnik President,
Valamar Argosy, Valamar Isabella Island Resort,
Valamar Koralj Romantic, Camping Resort Krk,
Camping Resort Lanterna
Croatian National Tourist Board People- the Key to Success in Tourism- Employee of the Year Mateo Gverović, Ilija Kmet
Zagreb Stock Exchange Share of the Year Valamar Riviera
Istrian Tourist Board Golden Goat Perfect Experience Creator and Poreč Open Air
Croatian Chamber of Economy-County Chamber in Pula Golden Kuna Valamar Riviera
Banka.hr and Deloitte CFO of the Year Marko Čižmek
Croatian National Tourist Board Award for Lifetime Achievement in Hospitality Kazimir Bažon
Contact Center Akademija Best Contact Center Valamar Reservation Center
Croatian Camping Union Village for All Zablaće, Naturist Camping Solaris
INOVACAMP 2016 Camping Resort Krk, Camping Resort Lanterna
Croatia's Best Campsite Naturist Resort Solaris, Camping Resort Lanterna,
Camping Resort Krk, Camping Orsera, Camping Marina,
Naturist Camping Istra, Camping Ježevac,
Naturist Camping Bunculuka, Camping Zablaće
Association of Employers in Croatian Hospitality
(UPUHH)
Sustainable Hotel Hotel & Casa Valamar Sanfior, Valamar Koralj Romantic,
Valamar Dubrovnik President, Valamar Zagreb,
Valamar Bellevue

2016 CERTIFICATES AND STANDARDS

HACCP Codex Alimentarius Valamar Diamant Hotel and Residence, Valamar Crystal, Valamar Rubin, Valamar Pinia Hotel & Pinia Residence,
Valamar Club Tamaris & Valamar Tamaris Residence, Pical/CK, Valamar Riviera Hotel & Villa Parentino, Naturist Resort Solaris,
Hotel&Casa Valamar Sanfior, Girandella /CK, Albona, Valamar Bellevue, Valamar Koralj Romantic, Valamar Lacroma Dubrovnik,
Valamar Dubrovnik President, Valamar Zagreb, Valamar Isabella Island Resort
ISO ISO 14001 Valamar Diamant Hotel and Residence, Valamar Crystal, Valamar Rubin, Valamar Pinia Hotel & Pinia Residence,
Valamar Club Tamaris & Valamar Tamaris Residence, Valamar Riviera Hotel & Villa Parentino, Naturist Resort Solaris,
Camping Resort Lanterna, Naturist Camping Istra, Camping Orsera, Hotel&Casa Valamar Sanfior, Valamar Bellevue,
Valamar Koralj Romantic, Camping Resort Krk, Camping Ježevac, Valamar Lacroma Dubrovnik, Valamar Dubrovnik President,
Camping Solitudo, Valamar Zagreb, Valamar Argosy, Valamar Isabella Island Resort, North Laundry Facility, Camping Marina,
Tirena,
Valamar Club Dubrovnik, South Laundry Facility
ISO 9001 Valamar Diamant Hotel and Residence, Valamar Crystal, Valamar Rubin, Valamar Pinia Hotel & Pinia Residence, Valamar Club Tamaris &
Valamar Tamaris Residence, Valamar Riviera Hotel & Villa Parentino, Hotel&Casa Valamar Sanfior, Valamar Bellevue,
Allegro, Miramar, Valamar Koralj Romantic, Valamar Lacroma Dubrovnik, Valamar Dubrovnik President, Valamar Zagreb, Valamar Argosy,
Valamar Isabella Island Resort, North Laundry Facility, Tirena, Valamar Club Dubrovnik, South Laundry Facility
FEE (Foundation for Environmental Educational) Blue Flag Brulo, Borik, Oliva, Galeb, Valeta, Istra, Vala, Crnika, Camping Ježevac,
Camping Resort Krk, Valamar Dubrovnik President, Cava
Ministry of Tourism "Q" Quality Label Valamar Riviera Hotel & Villa Parentino
Croatian Islamic Community - Halal Quality Certification Center Halal Corinthia Hotel
Healthy Meal Standard Healthy Meal Standard Valamar Diamant Hotel

CORPORATE GOVERNANCE 8

Corporate Structure GENERAL ASSEMBLY

As a joint - stock company with more than 21,000 shareholders, Valamar Riviera is committed to the highest principles of good corporate governance and regulatory compliance.

A well-defined and clear corporate structure is the foundation for the effective strategic and operational management of the Company. The key governing bodies of Valamar Riviera d.d. are the Shareholders' General

Assembly, the Supervisory Board with its corresponding delegate committees and the Management Board led by the President of the Management Board or CEO of Valamar Riviera.

The specific governance authorities and responsibilities of these governing bodies are regulated by the relevant Croatian legislation, Company Statute and other corporate governance codes, regulations or prescribed procedures.

The Supervisory Board consists of 7 members, of whom 2 are independent and one is an employee representative.

The Supervisory Board meets at least four times per year. The Supervisory Board is actively engaged in key management decisions through corresponding delegate committees that meet more often to manage key strategic initiatives and support the Supervisory Board in the decision-making process.

  • → Presidium of the Supervisory Board
  • → Audit Committee
  • → Investment Committee

SUPERVISORY BOARD MANAGEMENT BOARD

The Management Board consists of two members:

  • → President of the Management Board: Željko Kukurin
  • → Member of the Management Board: Marko Čižmek.

The President of the Management Board is primarily responsible for formulating and managing the company's strategic, operating and financial activities. In addition, the President individually leads the following areas: hotel operations, marketing & sales, human resources, destination management, purchasing, investment and asset development, external affairs and public relations, quality management, internal audit and project management, controlling, legal and general affairs.

Marko Čižmek, Member of the Management Board, is primarily and individually responsible for finance, accounting, treasury, IT and institutional investor relations.

Term
of office
Supervisory
Board
Board
m of the
Supervisory
Presidiu
mittee
Audit
m
Co
ment
mittee
Invest
m
Co
Gustav Wurmböck Chairman 07/2017 Proprietary n n n
Franz Lanschützer Deputy Chairman 07/2017 Proprietary n n n n
Mladen Markoč Deputy Chairman 07/2017 Independent n n n
Georg Eltz Vukovarski Member 07/2017 Proprietary n n n
Vicko Ferić Member 07/2017 Proprietary n n n
Hans Turnovszky Member 07/2017 Independent n n
Mariza Jugovac Member 07/2017 Employee Representative n
Dubravko Kušeta exterior independent member n

Meetings held in 2016 10x 9x 3x 3x

SENIOR MANAGEMENT

The strategic corporate business functions are organized in 4 divisions that are led by four Vice Presidents:

  • → Sales & Marketing, VP Davor Brenko
  • → Operations, VP David Poropat
  • → Asset Development, Maintenance & Technical Services, VP Alen Benković
  • → Business Development and Corporate Affairs, VP Ivana Budin Arhanić.

The senior management team or division vice presidents are responsible for managing specific functional business areas and activities. In addition, the senior management team is tasked with cross-functional steering and leadership, implementing the corporate strategy and providing management support to the CEO.

Hence, the senior management team works closely with the Management Board and relevant corporate functions through business committees that are focused on those strategic activities in the Company that require a high degree of cross-functional involvement:

  • → CAPEX Committee (capital investment projects)
  • → Project Committee (steering the project management organization)
  • → Business Experience Committee (business expansion, loyalty and CRM, quality management & service excellence, corporate social responsibility)
  • → Purchasing Committee (strategic partnerships and purchasing agreements)
Position mittee
X
APE
m
Co
C
mittee
Project
m
Co
Business Experience
mittee
m
Co
Purchasing
mittee
m
Co
Željko Kukurin Management Board President n n n n
Marko Čižmek Management Board Member n
Alen Benković Vice President n n n n
David Poropat Vice President n n n n
Davor Brenko Vice President n n n
Ivana Budin Arhanić Vice President n n n
Sebastian Palma Director of the Strategic Planning and Controlling Sector n
Andrea Štifanić Director of Asset Management and General Affairs n
Marko Vusić Director of Internal Audit and Project Management n
Dragan Vlahović Director of the Purchasing Sector n

CAPEX COMMITTEE

Željko Kukurin, President of the Committee

Alen Benković, Vice President of the Committee

David Poropat, Member

Davor Brenko, Member

Ivana Budin Arhanić, Member

  • Andrea Štifanić, Member
  • Sebastian Palma, Member

Tasks of the Committee:

  • → Preparing the concept, analyzing the cost-effectiveness, and assessing the risks of investing in certain projects,
  • → Outlining proposals for choosing projects and preparing the annual investment plan,
  • → Monitoring the investment process: planning, choosing contractors and materials, implementations, pre-opening and post-opening,
  • → Analyzing the success of the investment.

BUSINESS EXPERIENCE COMMITTEE

Željko Kukurin, President of the Committee

Ivana Budin Arhanić, Vice President of the Committee

David Poropat, Member

Davor Brenko, Member

Alen Benković, Member

Tasks of the Committee:

the Valamar experience,

→ Analyzing the reports on quality and formulating proposals for improving

→ Monitoring the CRM, managing the client database, loyalty and direct communication with the guests, → Analyzing possible acquisitions, strategic partnerships and mergers, analyzing the cost-effectiveness and assessing the risks of acquisitions and/or partnerships or investments, → Analyzing activities and monitoring the development of destination marketing and destination products, → Analyzing other activities and projects of strategic importance for the company.

PURCHASING COMMITTEE

Željko Kukurin, President of the Committee

David Poropat, Vice President of the Committee

Dragan Vlahović, Member

Alen Benković, Member

Tasks of the Committee:

recommendations.

→ Analyzing tender results and selection of key suppliers, → Analyzing the purchasing process and preparing improvement

policies,

→ Preparing purchasing guidelines and

PROJECT COMMITTEE

Željko Kukurin, President of the Committee

Ivana Budin Arhanić, Vice President of the Committee

Marko Čižmek, Member

Marko Vusić, Member

David Poropat, Member

Davor Brenko, Member

Alen Benković, Member

Tasks of the Committee:

  • → Analyzing and formulating proposals for selecting development projects that are of importance for the company,
  • → Outlining proposals for projects and necessary resources,
  • → Monitoring project implementation,
  • → Outlining proposals for project ending and monitoring of the results.

Organizational Structure of Valamar Riviera

→ Central kitchen facility

Members of the Supervisory Board

GUSTAV WURMBÖCK, Supervisory Board Chairman

Gustav Wurmböck graduated from the Universities of Vienna and Innsbruck in Business and Finance. Before founding EPIC in 1991, Mr. Wurmböck has held various positions in prestigious companies such as IFC in Washingotn D.C (International Finance Corporation - World Bank Group), DEG (Deutsche Investitions und Entwicklungsgesellschaft) in Cologne, Germany, and was Director of the International Department of Länderbank in Vienna (today's Bank Austria).

Mr. Wurmböck is one of the co-founders and Managing Partners of EPIC in Vienna, which is one of the leading investment and advisory firms in CEE. At EPIC he has led many large privatization and corporate finance transactions in the areas of energy, telecommunications, brewing and the hotel industry. Mr. Wurmböck was also Member of the Management Board of Valamar poslovni razvoj d.o.o. (2005 – 2011) and President of the Management Board of Valamar Group d.d. (2005 – 2010). He has held several positions in the Supervisory boards of Valamar Adria holding d.d., Valamar Group d.d., Puntižela d.o.o., and Valamar turistički projekti d.o.o., while he continues to act as Chairman of the Supervisory Board of Valamar Riviera d.d.

FRANZ LANSCHÜTZER, Supervisory Board Deputy Chairman

Franz Lanschützer received his MBA from the Vienna University of Economics and his PHD from the University of Budapest. He has gained extensive experience in the areas of corporate finance and asset management in Central and Eastern Europe. Mr. Lanschützer is a managing partner in EPIC Goldscheider und Wurmböck Unternehmensberatungsgesellschaft m.b.H. from Vienna. For the last twenty five years, Mr. Lanschützer has been working in the field of mergers, acquisitions and corporate finance, as well as providing consulting services in Austria, the Czech Republic, Poland, Croatia, and some other countries of the former Yugoslavia. He has also set up and run investment privatization funds in the Czech Republic and Croatia.

Mr. Lanschützer held executive positions at major financial advisory and auditing companies such as Ernst&Young and Price Waterhouse before joining EPIC. He has also held executive positions at Valamar Group since 1999, including President of the Management Board of Valamar Grupa d.d. and has also been Member of the Supervisory Board of Valamar Adria holding d.d. and Riviera Adria d.d. (currently Valamar Riviera d.d.). He has also been a Member of the Management Board of Valamar poslovni razvoj d.o.o. (2005 - 2011) and Vela Kluda d.o.o. (1997 -2013). Mr. Lanschützer was President of the Management Board of Valamar Riviera d.d. in 2014 and 2015 and he has been Deputy Chairman of the Supervisory Board of Valamar Riviera d.d. since June 2015.

Mladen Markoč, Supervisory Board Deputy Chairman

Mladen Markoč graduated from the Faculty of Law of the University of Zagreb. He specialises in company law, securities law, and commercial law. Mr. Markoč has been a consultant in numerous important transactions in the Croatian and foreign capital markets and has been a regular speaker at conferences organised by the Zagreb Stock Exchange Academy and the Judicial Academy. He started his career in law in 1988 as legal apprentice with attorney Zvonimir Raić. He was Corporate Secretary of the pharmaceutical company PLIVA d.d. from 1990 to 1997, partner at the law firm Bogdanović, Dolički & Partners from 1997 to 2007, and Board Member at ICF Group d.o.o. in 2008.

He served as attorney at the Mladen Markoč law office from 2010 to 2013 and has been working as an attorney at law for the joint law office of Mladen Markoč and Ivan-Krešimir Tomić since 2013. He is Vice President of the Association of Business Lawyers of Zagreb. He was also Member of the Supervisory Board of Valamar Adria holding d.d. (2011 – 2014), and is currently Member of the Supervisory Board of Valamar Riviera d.d., Proficio d.d., and Hotel Laguna d.d.

GeorG eltz VukoVarski, Supervisory Board Member

Georg Eltz Vukovarski was educated in Switzerland and Germany where he majored in economics, history and philosophy. He graduated from the University of St. Gallen with a degree in Business Administration. Before moving to Croatia in 1994, he was management board member & sr. vp marketing of a major Swiss corporation, as well as CEO of its Canadian subsidiary. He co-founded Valamar Adria holding (as PIF Dom fond d.d.) in 1998 and served as President of its management board before it was merged to Valamar Riviera d.d. in 2014.

In the years between, he served as president and member of management boards and supervisory boards of a number of affiliated companies. Currently, he is managing director of SATIS d.o.o. and of its parent company ELADCO Invest GmbH, as well as a member of Valamar Riviera's supervisory board. He is a member of the management boards of both the German-Croatian Chamber of Industry & Commerce, and the Croatian-Austrian Chamber of Commerce. As co-founder of "Zaklada znanje na djelu - Stiftung Wissen am Werk" he is also a member of its supervisory board.

vicko Ferić, Supervisory Board Member

Vicko Ferić graduated from the Faculty of Economics and Business at the University of Zagreb in 1974. He started his professional career working for the Organic Petrochemical Company (currently Dioki d.d.), and then he joined INA d.d. where he held management positions in the finance department and later became Assistant Financial Director until 1998. By the end of 1998, he joined Epic. From 2003 until 2005 he was appointed President of the Management Board of SN holding d.d. From 2005 until 2011 he was President of the Management Board of Valamar Adria holding d.d. (former Dom holding d.d.), as well as Executive Director of Epic Zagreb d.o.o.

From 2011 until 2014 he is Member of the Management Board of Valamar Grupa d.d. He has also been involved in numerous important investment projects in the oil and tourism industries, the gasification process in Croatia, privatizations of Croatian Telecom d.d., Croatia osiguranje d.d., Dresdner Bank Croatia d.d., and the restructuring and sale of several companies from the Dom Fond d.d portfolio. He has been involved in the operation of numerous companies, such as Petrokemija d.d., Poljoopskrba d.d., Svetice građenje d.d., Instrumentaria d.d., Rabac d.d., Vrboska d.d., Koestlin d.d., Belvedere d.d., Brodospas d.d., etc., either as Member or President of the Supervisory Board and is also member of the Croatian Association of Certified Members of Supervisory and Management Boards. He is currently Member of the Supervisory Boards of Končar - Elektroindustrija d.d. and Valamar Riviera d.d.

Hans DoMinik Turnovszky, Supervisory Board Member

Hans Dominik Turnovszky was educated in Austria and Germany and has a degree from the renowned Cornell School of Hotel Administration. He has built a long and successful career as a manager in the hotel industry with more than forty years of experience in the operational, development, and administrative sectors. He has gained basic professional knowledge and experience in his home country as well as Great Britain, Ireland, Africa, Asia, and the United States. He has held executive positions in various companies, such as Kempinski, Regent, Rafael Hotels, Mandarin Oriental, Austria Hotels International, ANA Grand Hotel in Vienna, the Lodge at Vail in Colorado and The Phoenician Resort in Scottsdale Arizona.

Mr. Turnovszky was Member of the Management Board and several committees of the Austrian Hotel Association. He currently serves as Chairman of the Hotel Classification Commission in Vienna and is Member of the five-star Certification Committee of the Austrian Federal Chamber of Commerce. He was Member of the Supervisory Boards of Valamar Grupa d.d. and Valamar Adria holding d.d. and is currently Member of the Supervisory Board of Valamar Riviera d.d.

Mariza Jugovac, Supervisory Board Member

Mariza Jugovac graduated from Pula's vocational school in 1975. She has been an employee of Valamar Riviera d.d since April 20, 1979. She became an employee of the hotel company "Riviera" in Poreč, where she spent her first two years working in the IT department. She became a payroll accountant in 1981 and has been the company's Senior Payroll Accountant since 2002.

As an active union member, she has been elected as employee representative to the Supervisory Board of Valamar Riviera.

Management Board

željko kukurin, President and CEO

Željko Kukurin was born in 1974 in Zagreb. He graduated in 1999 from the Faculty of Economics and Business in Zagreb where he received his Master of Science degree in Marketing in 2003. In 2010 he received his EMBA degree in International Management from the Bocconi University in Milan.

In 2000 he began his career as an intern in Riviera Poreč, a member of the Valamar Group, as Assistant Director on Sveti Nikola Island. From 2003 to 2009, he held various managing positions in Valamar's Sales and Marketing, and he was responsible for a number of strategic projects within the Group. From 2010 to 2014 he was Management Board President of Istraturist d.d., owned by the Zaba Unicredit Group, and cooperated with Meliá Hotels International in managing the hospitality portfolio in Umag.

In 2015, Mr. Kukurin joined Valamar Riviera again and was appointed President of the Management Board of Valamar Riviera's consolidated portfolio in June of the same year. He also serves as Supervisory Board Chairman of Imperial d.d. Rab, a company that was successfully taken over at year-end 2016 by Valamar Riviera and its strategic partner, AZ pension fund.

Mr. Kukurin holds a number of important positions in Croatian tourism; he serves as Chairman of the Hospitality and Tourism branch of the Croatian Employers' Association, he is member of the Croatian National Tourist Board Council and the Istrian Tourist Board Council. In addition, he is involved in various national professional associations.

Marko ČižMek, Management Board Member

Marko Čižmek graduated from the Faculty of Economics and Business in Zagreb. He has qualified as broker and investment advisor. In 1996, he started his career at the Croatian National Bank. He spent several years working in corporate finance at Investmentbank Austria and ICF. In the period from 2001 to 2004, he was member of the Management Board at EURO Invest, an investment fund management company.

Mr. Čižmek has held numerous managing positions in companies that have been merged to the present Valamar Riviera: he was Management Board Member of Rabac d.d. (2004-2011), Management Board Member of Dubrovnik Babin kuk d.d. (2009-2013) and Management Board Member of Valamar Adria holding d.d. (2008-2013), Director at Epima d.o.o. (2008-2014), Supervisory Board member of Zlatni otok d.d. (2002-2011) and Rabac d.d. (1999-2011).

Mr. Čižmek started serving as Management Board Member of Valamar Riviera in 2011. He is also Member of the Management Boards of the Croatian Association of Financial Analysts and the Croatian Association of Corporate Treasurers.

Division Vice Presidents at Valamar Riviera

DAVOR BRENKO, Vice President of Sales and Marketing

Davor Brenko graduated from the Faculty of Economics in Rijeka, and began his professional career in 2000 at Valamar hoteli i ljetovališta, in Sales and Marketing. In 2002 he became Project Manager for research into guest satisfaction and guest relations management, while in 2004 he was in charge of Direct Sales, which quickly became the strongest sales channel in Valamar. In 2009, Mr. Brenko was promoted to the position of Valamar's Director of Direct Sales and Marketing, where he participated in the creation of a series of developmental projects resulting in improved sales, marketing and operational growth.

At the beginning of 2010, he joined Istraturist Umag d.d., where as Director of Business Development he implemented a series of successful projects in the field of strategic marketing and destination management, aimed at raising the quality and competitiveness of the company and its destination.

As from 2015, Davor Brenko has been Vice President of Sales and Marketing at Valamar Riviera d.d., where he has been working intensively on corporate development and growth within this business segment, and numerous projects aiming at improving the offering, destination management and the attractiveness of Valamar's destinations.

DAVID POROPAT, Vice President of Operations

David Poropat graduated in 1993 from the University of Rijeka's Hotel Management Faculty in Opatija. In 2007, he completed his graduate study at the Faculty of Tourism and Hotel Management in Opatija, where he successfully completed a doctoral course in 2013. He started his career in 1993 as a Sales and Marketing intern at the former Jadran turist d.d. in Rovinj, where he continued his career in charge of the western market in Sales, and then as planner and analyst in the Controlling Department. From 1996 to 2002, he was the director of Sol Park, one of Jadran turist's hotels, managed at the time by the Spanish company Sol Meliá.

In March 2002, he joined the former company Riviera Holding d.d. in Poreč as Director of Operations and until 2006 he was in charge of all Valamar's facilities. From 2007 to 2011, he was Management Board Member at Valamar hoteli i ljetovališta d.o.o., and from 2012 to 2014 at Valamar poslovni razvoj d.o.o. At year-end 2014, he became Vice President of Operations for Valamar Riviera d.d., the leading tourism company in Croatia. Mr. Poropat has also held various important positions in trade associations, and actively participated in dozens of business projects that particularly broadened his business experience. He has also written a number of scientific and professional papers.

alen BenkovIć, Vice President of Asset Development, Maintenance & Technical Services

After graduating from the Faculty of Economics in Pula, Alen Benković began his career in 1999 as an intern in today's Riviera, where he worked at several important positions as Assistant Director of the Funtana campsite, Assistant Director of the Lanterna campsite and Director of the Neptun Hotel – today's Valamar Riviera 4* in Poreč. He continued his career as the director of the Lanterna cluster, and then in the municipal company Parentium, which handles investments for the town of Poreč. In 2011, he joined Istraturist in Umag, as Director of Development, Facilities Maintenance and Technical Services.

In 2015, he joined Valamar Riviera d.d. as Vice President of Asset Development, Maintenance and Technical Services, where he oversees major investment projects and the planning of the company's further growth.

Ivana BudIn arhanIć, Vice President of Business Development and Corporate Affairs

Ivana Budin Arhanić graduated with a degree in Economics from Middleburry College in the USA in 1999. After finishing her studies, she spent three years as a strategy management consultant in Boston and in New York. In 2003, she joined Lura d.d., where she led the acquisition and restructuring of Somboled d.d. into the Lura group and held the position of Vice President on Somboled d.d. Supervisory Board.

In 2007 she received her MBA from Harvard Business School and joined Valamar. Until 2015, she served on the Management Boards of Valamar grupa d.d., Valamar Adria holding d.d., and Valamar Riviera d.d. as a member.

As of June 2015, Ms. Budin Arhanić has served the position of Vice President of Business Development and Corporate Affairs and is in charge of acquisitions and business expansion, strategic partnerships and projects, digitalization, corporate social responsibility, quality management, corporate communication and relations with industry associations and public institutions, as well as strategy and sale of non-core assets.

Internal Audits and Controls within Valamar Riviera

Valamar Riviera d.d. and its Audit committee is devoted to maintaining the highest standards of integrity and corporate governance practices, in order to maintain excellence in its operations and promote confidence in its governance systems. In addition, the Company will conduct its business in an open, honest and ethical manner, recognizing the importance of protecting its entire human, financial, physical, informational, social, environmental and reputational assets.

The purpose of the Committee is to assist the Board's oversight of the:

  • → Adequacy and integrity of the Company's financial reporting processes and procedures,
  • → Integrity of the Company's financial statements,
  • → Company's compliance with legal and regulatory requirements and the Company's enterprise risk management program,
  • → Appointment of independent auditors, qualifications, independence, work and retention, and
  • → Scope, approach, performance and results of the independent auditors and the Company's internal audit function.

Valamar's Internal Audit Committee is an independent, internal body that ensures that the internal controls are put in place and are appropriate for mitigating risks, the checking procedures are proper and efficient and that the established rules and procedures are complied.

Independence is ensured by the organizational structure and the allocated reporting lines. The Committee also monitors and reviews the appointment of Valamar's external Auditor (including the nature and scope of the audit), the Auditor's independence and effectiveness, audit fees and the provision of non-audit services.

The Audit Committee meets at least four times per year or more frequently if circumstances dictate. The Committee will also meet separately on a periodic basis with the Management, the internal auditors and the independent auditors to discuss any matters that the Committee or any of these persons or firms believes should be discussed privately. The Committee may invite observers, including any independent advisers to attend its meetings from time to time, as it deems appropriate. The Audit committee shall keep such records of its meetings, as it deems appropriate.

In addition, the Internal Audit function at Valamar Riviera d.d. features a diverse collection of skills.

The scope of the work of Internal Audits focuses on the following areas:

  • → Regulations, processes and procedures,
  • → Finance and operations,
  • → Contracts with third parties,
  • → Changes in hotel management,
  • → Regulatory compliance,
  • → Internal Control System.

Although every audit project is unique, the Audit process is similar for most engagements and usually consists of four stages:

  • → Planning,
  • → Audit Work (Initial interview, Fieldwork, Exit interview),
  • → Audit Report,
  • → Follow-up Review.

The internal audit plan of engagement is based on a documented risk assessment, conducted, at least, annually. The Annual audit plan translates the Company strategic plan into Audit assignments.

[GRI G4-2] 145

Within Valamar Riviera d.d. the internal audit process has not been completed by compiling, signing, and distributing the final internal audit report.

Follow-up is a process where internal auditors evaluate the appropriateness, efficiency and timeliness of the actions taken by management in terms of communicated remarks and recommendations and therefore the cooperation of the Internal Audit

Department and the Director / Head of organizational units is of utmost importance.

It is important to mention the synergy and joint efforts with the Internal control department and day-to-day work on preventing any misconduct and wrongdoing within a field operation, small inventory, cash transactions, tax compliance, bill issuance, etc.

RISK BASED AUDIT PLANNING FRAMEWORK WITHIN 5 STAGES

RISK CLASSIFICATION

Risks are classified as high, medium and low.

The Risk Management model applies to the entire Company. In 2016, a total of 11 key executives were involved in the process of drawing up the "Risk register".

A total of 37 risk events were identified, spread over the following categories, while in 2017 special emphasis will be put on the category of IT and related risks.

37 ASSESSED RISKS KEY AUDITED AREAS IN 2016

POLICY AND RULES

Internal audit activities are performed within the organization that vary in purpose, size, complexity, and structure and by persons within or outside the organization. While differences may affect the practice of internal auditing in each environment, compliance with the International Standards for the Professional Practice of Internal Auditing (Standards) are essential.

Key documents, regulating the area of the Internal Audit within Valamar are the following:

  • → Internal Audit Department Charter,
  • → Standards for Internal Auditing,
  • → Code of Ethics,
  • → Audit Committee Charter.

The respect and ethical behavior of the members of the organization is the result of the application of the rules and standards adopted by the Company, but also the manner in which these rules are communicated and accepted in practice among the individuals and members of the organization.

Company and Group Risks

Tourism is a global industry, closely connected with the real and financial economy, geopolitical position and environmental sustainability. The way this industry functions as a whole will determine its future growth.

Due to the industry's relevance and economic and social impact, the Company and Group monitor and assess risks at micro and macro levels. Moreover, when defining the strategy, particular attention is given to short and medium–term risk impact in order to maintain business sustainability over time.

When monitoring and assessing risks the Company and Group use a proactive approach thus assessing the potential impact of each individual risk. The Company and Group consider risk management to be a key factor of differentiation among competitors. Risk management aims at creating sustainable value, thus offering reliability and security to numerous stakeholders.

The Audit Committee supports the Company in reviewing the effectiveness of Valamar's internal control and risk management systems, having oversight of the risk and control activities.

In support of this, the Audit Committee regularly reviews the principal risks and the operation of the risk management systems, seeking assurance that the principal risks are being identified, assessed, prioritized,

evaluated and appropriately managed and mitigated.

The Committee's review is supported by the Internal Audit (IA) annual plan, which is discussed in June each year. The Committee approves the nature and scope of the plan, and is responsible for reviewing and

monitoring the activities, in line with the agreed plan, but always leasing a necessary space for ad hoc audit requests throughout a year, including product price and cost benchmarking, exercised each year.

THERE ARE FIVE KEY STEPS IN A RISK MANAGEMENT PROCESS

THE DIFFERENT TYPES OF RISKS FACING VALAMAR RIVIERA CAN BE CLASSIFIED INTO THE FOLLOWING GROUPS

FINANCIAL RISKS

In their day-to-day business activities, the Company and Group face a number of financial threats, especially:

  • 1) Foreign exchange risk
  • 2) Interest rate risk
  • 3) Credit risk
  • 4) Price risk
  • 5) Liquidity risk
  • 6) Share-related risks.

The Company and Group have a proactive approach in mitigating interest rate and foreign exchange risks, by employing available market instruments.

Internal risk management goals and policies aim at protecting foreign currency inflows during seasonal activity and partial interest hedging of the principal loan amount.

1) FOREIGN EXCHANGE RISK

The Company and Group conduct their business operations across national borders and are exposed to foreign exchange risks.

They mainly result from changes in the euro/ kuna exchange rate.

Foreign exchange risk arises from future commercial transactions and recognized assets and liabilities. Most of our sales revenue generated abroad and long-term debt is denominated in euros. Hence, for the most part the Company and Group are naturally hedged from exchange rate risks. Since some liabilities are denominated in kunas, the Company and Group

actively manage risks by using derivative instruments available on the financial market.

The instruments are used according to operating assessments and expected market trends. In this way the assets, liabilities and cash flow are protected from the risk impact.

2) INTEREST RATE RISK

Variable rate loans expose the Company and Group to cash flow interest rate risk.

Periodically, the Company and Group resort to derivative instruments in order to hedge cash flow and fair value interest rate by applying interest rate swaps.

The economic effect of such swaps is the conversion of variable interest rate loans into fixed interest rate loans for a pre-committed hedged part of the loan principal. The Company and Group have interest-bearing assets (cash assets and deposits) so their revenue and cash flow depend on

changes in market interest rates. This becomes evident especially during the season when the Company and Group have significant cash surpluses at their disposal.

3) CREDIT RISK

Credit risk arises from cash assets, time deposits and receivables.

In accordance with the Company and Group sales policy, business transactions are conducted only with customers with suitable credit history, i.e. by agreeing advances, bank securities and (for individual customers) payments made through major credit card companies.

The Company and Group continuously strive to monitor their exposure towards other parties and their credit rating as well as obtain security instruments (bills of exchange, promissory notes) in order to reduce bad debt risks related to services provided.

4) PRICE RISK

The Company and Group hold equity and debt securities and are exposed to equity price risk due to security price volatility.

The Company and Group are not an active participant in the market trade in terms of investing in equity and debt securities. However, with the HRK 285 million invested in buying a stake in Imperial d.d. Rab, the company is exposed to the said risk to a certain extent.

5) LIQUIDITY RISK

The Company and Group have a sound liquidity risk management: sufficient cash assets are made available at any given moment in order to meet their liabilities through monthly, annual and longterm cash flow forecasts. The Company and Group aims at maintaining flexible financing by making the arranged lines of credit constantly available.

Liquidity risk is managed by generating strong positive net operating cash flows, while capital investments are financed by credit lines. All the credit lines in 2017 have already been arranged with financial institutions. The repayment of the major credit lines coincides with periods of strong cash inflows from operations.

The Company and Group monitor the level of available funds through daily cash and debt reports. Long-term cash flow forecasts as well as annual (monthly) forecasts are based on the set budget.

After meeting the needs of working capital management, the surplus is deposited in the treasury of the Company and Group. From there the funds are invested in interest-bearing current accounts, time deposits, money market deposit accounts and marketable securities. Only instruments with suitable maturities and sufficient liquidity are selected, according to the forecast needs for liquid funds.

6) SHARE-RELATED RISKS

The market value of shares is the riskiest asset class due to its volatility resulting from the volatile nature of the whole capital market, macroeconomic trends on markets where the Company and Group operate and discrepancies between the expectations of financial analysts and the actual results.

Furthermore, other contributing factors are also changes in the dividend policy, various activities in the segment of consolidations, mergers, acquisitions and forming of strategic partnership, the instability of the business model of the Company and Group as well as the fluctuations in the financial results for the Company and Group. In case any negative implications happen to be associated with these factors there is a considerable risk of market value drop that will in turn prevent investors from selling their shares at a fair market price.

BUSINESS RISKS

The Company and Group are constantly exposed to risks threatening its competitiveness and future stability.

Since the Company and Group own real estate, this business model requires a large amount of capital in order to maintain high product and service standards. Various large capital investments in the upgrade of products and services can surpass budget expectations, thus delaying the end of construction works. In the meantime, town-planning regulations and fiscal policy may be changed. These risks can increase costs for the Company and Group, and have a negative impact on the cash flow and revenues. In the previous period, the company and Group's business decisions improved their results and operating efficiency in the demanding Mediterranean market. These positive trends are expected to continue in the future through a prudent long-term strategic management.

Over 95% of Valamar Riviera's guests come from other countries and they are very careful when choosing their vacation destination in the competitive Mediterranean environment. Stable country macroeconomic indicators are important decision-making factors especially those relating to exchange rates and the price of goods and services because they directly affect the guests' purchasing power. However small, the share of domestic guests is also important; it is a segment directly influenced by various

other macroeconomic indicators: employment/ unemployment rate, GNP rise/fall, industrial production and others. They all have a direct impact not only on the purchasing power of Croatian residents but they also determine whether they will choose to spend their vacation on the Adriatic.

When considering risks related to the tourism and hospitality industry, in previous years, the Croatian economy has been afflicted by the consequences of a global financial crisis and economic standstill. In this period, the tourism and hospitality industry has been among the rare growing industries in Croatia. Moreover, the marked seasonality of this industry leads to insufficient use of the Company and Group's resources. After joining the European Union, the Croatian market became part of a large European market, while safety risks decreased after joining the NATO. The Croatian Tourism Development strategy until 2020 (a government document published in the Official Gazette no. 55/13) defines the kind of tourism Croatia wants and needs to develop using the country's comparative advantages and expertise in order to improve the competitiveness of Croatian tourism. Maintaining the current tourism growth rates in the following years is of vital importance. It can be achieved by

strategically developing tourism products and investing in the creation of additional values, which will help distinguish Croatian tourism from its competitors by emphasizing its uniqueness, appeal and quality.

Good management of human resources is vital for the future growth of the Company and Group. Risks related to shortages of specific skills, expertise and jobs are connected with the opening and expansion of the labor market. Valamar Riviera is one of the largest and most desirable employers in tourism. The active approach towards HR management develops key talents and supports investments in training opportunities (over HRK 3 million invested in training and professional development in 2016). We determine the needs for new skills and expertise by following emerging global trends in tourism. In this way, we are able to respond to challenges effectively. Through a continual dialogue with our social partners, we have ensured a high level of workers' rights in terms of competitive salaries, reward systems, career development, employees' wellbeing and cooperation with training institutions from all parts of Croatia.

OPERATIONAL RISKS GLOBAL RISKS

Operational risks are risks connected with direct or indirect losses that arise form inadequate or wrong internal or external processes within the Company and the Group. They include the creation, analysis and insufficient or inadequate internal and external information exchange.

When implementing the system of operational risk management, the Company and Group focused on its continuity and complexity due to the size of the organization. The benefits of the system include i) defining and identifying the Company and Group risk profile in relation to the operating risk ii) identifying and managing the known risk occurrences in order to decrease the Company and Group costs and iii) data analysis which indicates the business trends for the Company and Group and trends in the domestic economy

The Company and Group are aware of the reliability of IT business solutions and safety in the cyber world. Hence, they continually upgrade, develop and implement new technologies in everyday business operations. A special focus is given to providing sufficient resources for the development and implementation of new technologies related to ICT, data protection, and upgrade of the current business systems and implementation of new ones.

Despite improved security and political conditions, which have encouraged to a certain extent investments into tourism and hospitality, there are challenges that the Croatian tourism has to face, such as:

  • → Periods of global financial crisis which reduce the purchasing power of the travelling-prone population
  • → Security issues related to globally escalating terrorism threats
  • → Security and political instability in the immediate environment of the neighboring countries.

Environmental risks can also have an adverse effect on the Company and Group's business results, primarily in terms of customer satisfaction with the whole experience while staying at one of Valamar's properties and this can affect the number of arrivals.

The possible risks can include: sea pollution (caused by oil or chemical spillage), but also long-term water quality reduction and coast pollution due to inadequate waste disposal and waste water treatment as well as extensive use of agricultural fertilizers. Other environmental conditions typical for climate changes such as long drought periods or long rainy periods can directly influence the guests' length of stay in the hotels and campsites as well as increasing the operating costs.

A number of other natural disasters and calamities (earthquakes, fires, floods and rainstorms), air pollution caused by toxic gas emissions from industrial plants and vehicles, as well excessive urbanization and the introduction of invasive species should also be taken into consideration.

Changes in tax laws and other regulations pose a very serious threat and represent a demanding segment in risk management because in this particular situation the possibilities for the Company and Group are limited.

In previous years, there has been a number of important changes in tax and non-tax charging regulations, which have adversely affected the Company and Group profitability:

  • → In March 2012 the standard VAT rate grew from 23% to 25%, in January 2013 a new 10% VAT rate was introduced only to be replaced within a year by a 13% VAT rate applicable to the tourism and hospitality industry, while in January 2017 a new 25% VAT rate was introduced for F&B services in catering establishments.
  • → In May 2012 the health insurance employer contribution rate fell from 15% to 13% and then in April 2014 it grew back to 15%
  • → Frequent increases in various fees and charges regarding water distribution and the like.

Such frequent changes in laws regulating taxes and parafiscal charges often take place only after the business policy and budget for the next financial year have been approved and commercial terms and conditions with partners agreed. All this jeopardizes the Company and Group financial position and future investment plans as well as credibility towards shareholders. The Company and Group are also threatened by changes in regulations governing concession fees for maritime domain and tourism land use, the latter still presenting unresolved legal issues.

Given the nature of the Company and Group's business, the right to use parts of the maritime domain as well as land for tourism purposes is of vital importance for future growth, especially for campsite-related operations.

COMPLIANCE RISKS PRECAUTIONARY PRINCIPLE

In order to maximally reduce risks related to the environment, the local community and society, Valamar Riviera actively manages risks in all business segments. This represents a precondition for a responsible development of tourism and its destinations.

Pursuant to the precautionary principle, Valamar Riviera meets the highest standards devised to protect the environment, local community and society at large. These standards are applied in all business segments, and the company continually monitors and manages risks that influence the business and corporate social responsibility strategies.

Ethics and integrity

Integrity and ethics are a part of the corporate culture and the fundamental characteristic of everyday work and business management.

Creating a transparent environment for business management is the company's highest priority. The fundamental approach in Valamar Riviera's business operations refers to protecting human rights, and promoting fair employment conditions, safe work conditions, responsible environmental management and high ethical standards.

Valamar Riviera has adopted a Code of Ethics, which regulates issues related to corruption prevention, and adheres to the Zagreb Stock Exchange Corporate Governance Code. It also fills out the annual Zagreb Stock Exchange corporate governance survey.

The fundamental principles of Valamar Riviera's business operations include doing business ethically, providing equal opportunities and conditions for all its employees, ensuring equality and protection of human rights, and nurturing of the culture of diversity. In all our business activities we are committed to implementing the United Nations' principles for business and human rights as well as the International Labor Organization's fundamental conventions. We are also determined to act in a way that will never have misuse of human rights as its consequence.

Basic human rights and their protection, including the protection of life, health, dignity and privacy, as well as prevention of discrimination, have all been built into the positive, legal employment regulations of the Republic of Croatia, which Valamar Riviera adheres to and implements. They have also been integrated into the collective agreement that Valamar has concluded with the trade unions in the company.

Valamar Riviera's basic values include responsibility and credibility towards business partners, caring for employees, support for the social community, and commitment to environmental preservation.

RESPONSIBILITY FOR MAKING DECISIONS ON VALAMAR RIVIERA'S ECONOMIC, ENVIRONMENTAL AND SOCIAL IMPACT

Members of the Management Board of Valamar Riviera and division vice presidents are responsible for making decisions on Valamar Riviera's economic, environmental and social impact. The Business Development and Corporate Affairs Division is tasked with the coordination of the umbrella CSR programs and their reporting.

2016 BUSINESS RESULTS 9

This chapter contains the summary of 2016 consolidated financial results, as reported in our consolidated audited Annual Report for 2016 that was published this year in February.

The Group balance sheet for the reviewed period contains Imperial d.d. Rab's data as of 31 December 2016. Please note that the 2016 data cannot be entirely compared to the same period last year, as the latter did not include Imperial.

The Group's income statement for the reported period includes the data for the following companies: Puntižela d.o.o., Bastion upravljanje d.o.o., Elafiti Babin kuk d.o.o., Magične stijene d.o.o., Palme turizam d.o.o., Pogača Babin Kuk d.o.o., Bugenvilia d.o.o., and Hoteli Baška d.d. (merged on 31 March 2016), while the data for the companies Mirta Bašćanska d.o.o., Vala Bašćanska d.o.o., and Baškaturist d.o.o. are included until the day of their merger to the company Hoteli Baška d.d. (until 13 January 2016). Thus, the data for 2016 are not fully comparable to the data for

the previous period, as the latter do not include, until the date of consolidation (i.e. 1 July 2015) the data for the following companies: Hoteli Baška d.d., Mirta Bašćanska d.o.o., Vala Bašćanska d.o.o., and Baškaturist d.o.o.

Please note that Imperial's revenues and expenses were not included in the Group's income statement, because they were not deemed materially significant in the period between the acquisition of control (12 December 2016) to the end of the business year (31 December 2016).

Results of the Group

2016 was marked by strong results, high operating efficiency and increased profitability. A number of factors contributed to this: i) continual investments in raising the competitive edge and the quality of services and products, ii) focus on the guest and operational excellence in sales, marketing and revenue management, iii) the strategic acquisition of the Baška hotel group and iv) continual efforts in developing destinations, products and added-value services.

In responding to the increased demand for hospitality products and services, Valamar Riviera was guided by adopted strategic initiatives and the best practices of business excellence. In 2016 the Group reported a 15.0% increase in operating revenues totaling HRK 1,488.6 million by optimizing distribution, sales channels and marketing segments, the average daily rate increased by 4.6% to HRK 516, while the total number of units sold was 2,227,815 (or 162,394 over prior year results).

Despite the increased business volume and the year-round consolidation of the Baška hotel group, operating costs were actively managed and remained under control, thus reporting a 13.3% growth. Excluding costs generated by destination Baška during the first six months of 2016, operating costs reported an 11% growth.

KEY FINANCIAL INDICATORS OF VALAMAR RIVIERA GROUP1 (in HRK)

2015 2016 2016/2015
Total revenues 1,333,493,479 1,579,499,901 18.4%
Sales revenues 1,268,724,937 1,454,867,739 14.7%
Board revenues (accommodation and board revenues)2 1,043,250,301 1,174,716,569 12.6%
Operating costs3 838,362,755 949,930,753 13.3%
EBITDA4 423,364,870 512,583,688 21.1%
Extraordinary operations result and one-off items5 -15,106,588 -6,376,909 57.8%
Adjusted EBITDA6 438,471,458 518,960,597 18.4%
EBIT 171,792,373 246,704,521 43.6%
Adjusted EBIT6 186,898,961 253,081,430 35.4%
EBT 132,926,778 271,909,189 104.6%
Net profit 105,461,478 342,313,778 224.6%
EBT margin 10.3% 18.3% 800 bp
EBITDA margin 32.7% 34.4% 170 bp
Adjusted EBITDA margin6 33.9% 34.9%6 100 bp
31/12/2015 31/12/2016 2016/2015
Net debt7 1,082,520,078 1,398,102,734 29.2%
Net debt / EBITDA 2.56 2.73 6.5%
Net debt / Adjusted EBITDA 2.47 2.69 9.1%
Cash and cash equivalents 318,755,282 274,650,648 -13.8%
Capital investments 310,477,293 428,440,048 38.0%
ROE8 5.5% 14.4% 890 bp
Adjusted ROCE9 6.3% 6.7% 40 bp
Market capitalization10 2,970,629,728 4,295,057,872 44.6%
EV11 4,053,149,806 5,693,160,606 40.5%
EPS12 0.84 2.76 228.6%
DPS13 0.55 0.60 9.1%

Marketing and sales activities and the upgraded products and services reported excellent market feedback. The increased business volume and higher operating efficiency resulted in a marked profitability growth. EBITDA grew by 21.1% (or: HRK 89.2 million) totaling HRK 512.6 million. Adjusted EBITDA17 grew by 18.4% totaling HRK 519.0 million. The increase in operational efficiency as seen through the adjusted EBITDA margin growth from 33.9% in 2015 to 34.9% in 2016 also includes the negative effect of the consolidation costs of the Baška destination during the first six months of this year. Without this negative effect, the comparable adjusted EBITDA margin would be 36.1% thus representing an actual increase in operational efficiency by 220 basis points. Operating profit grew by 104.6% and totaled HRK 271.9 million. In 2016 the Group's net profit grew by HRK 236.9 million and totaled HRK 342.3 million. This is mainly due to i) increased operating profit, ii) positive extraordinary financial result, and iii) one-time recognized deferred tax assets which will burden the gross profit in the forthcoming years of utilization18. Following these trends, the EBT margin grew by 800 basis points and was 18.3%.

KEY BUSINESS INDICATORS OF VALAMAR RIVIERA GROUP14

2015 2016 2016/2015
Number of accommodation units 17,783 18,072 1.6%
Full occupancy days 119 126 6.0%
Annual occupancy (%) 33% 34% 100 bp
Accommodation units sold 2,115,421 2,277,815 7.7%
Overnights 4,750,823 5,144,328 8.3%
ADR15 (in HRK) 493 516 4.6%
RevPAR16 (in HRK) 58,665 65,002 10.8%

7 Net debt: non-current and current liabilities to banks and other financial institutions + liabilities for loans, deposits and other– cash and cash equivalents – long-term and short-term investments in securities – current loans given, deposits, etc.

  • 9 Adjusted ROCE refers to return on capital employed; calculated as: adjusted EBIT / (capital and reserves at the end of the period + non-current and current liabilities to banks and other financial institutions - cash and cash equivalents - long-term and short-term investments in securities - loans given, deposits, etc.).
  • 10 The number of shares as at 31 December 2016 net of treasury shares amounts to 124,170,508, while per 31 December 2015 amounts to 124,190,206.
  • 11 EV refers to enterprise value; calculated as market capitalization + net debt.
  • 12 EPS refers to earnings per share calculated on the basis of net profit.
  • Weighted average number of shares as at 31 December 2016: 124,235,079.
  • Weighted average number of shares as at 31 December 2015: 124,784,807.

  • 15 Average daily rate is recorded on the basis of board revenues (accommodation and board's food and beverage revenues).

  • 16 Revenue per accommodation unit is recorded on the basis of cumulative board revenues (accommodation and board's food and beverage revenues).

1 Classified accordiong to the Annual Business Financial Statement (GFI POD-RDG). EBIT, EBITDA and their adjusted values and respective margins are recorded on the basis of operating income.

2 In compliance with the classification under the USALI international standard for reporting in hotel industry (Uniform System of Accounts for the Lodging Industry).

3 Operating costs include material costs, staff costs, other costs, and other operating costs reduced by extraordinary expenses and one-off items.

4 EBITDA (eng. earnings before interest, taxes, depreciation and amortization) is calculated as: operating income - total operating costs + depreciation and amortisation + value adjustments.

5 The adjustment includes (+) extraordinary income and (-) expenses in accordance with the USALI standard classification and (-) one-off termination benefit costs and (-) administrative costs related to the process of merger and business reorganisation.

6 Adjusted by the result of extraordinary operations and one-off items which does not include negative effect of the consolidation costs of the Baška destination during the first six months of this year . Without this negative effect, the comparable adjusted EBITDA margin would be 36.1%.

8 ROE refers to return on equity; calculated as: profit for the period / (capital and reserves).

13 DPS refers to dividends per share.

14 Key business indicators of Valamar Riviera Group do not include data of Imperial's d.d. The total capacity with Imperial is 20,852 accomodation units.

17 Adjustments were made for (i) extraordinary income (in the amount of HRK 21.5 million in 2016, and HRK 34.2 million in 2015), (ii) extraordinary expenses (in the amount of HRK 23.6 million in 2016, and HRK 33.9 million in 2015), and (iii) termination benefit costs (in the amount of HRK 4.3 million in 2016, and HRK 15.4 million in 2015). Extraordinary operations result and one-off items amounted to HRK - 6.4 million in 2016, and HRK -15.1 million in 2015.

18 Net tax revenue totaled HRK 70.4 million and largely resulted from the recognized deferred tax assets due to tax incentives (prescribed by the Act on Investment Promotion and Investment Improvement).

M.I.C.E.19 events in the pre-season period contributed to increased operating efficiency. Firstminute sales created a better basis for the management of sales channels and boosted start bookings in May and June. Optimal management of the group channel boosted the individual channel in May. In June, southern destinations reported a decrease in groups (due to an unfavorable public holiday spread) which was compensated by the M.I.C.E. segment and supported by growth in other sales channels. Peak season saw an improvement in distribution and price management, sales channels and sales activities. Active optimization of allotment occupancy and prices resulted in a 16% growth in the individual segment, which usually carries higher average rates. In the shoulder season the focus was on group and allotment placements, while targeting individual placements in the Christmas/New Year period.

In 2016, board revenues grew by HRK 131.5 million and totaled HRK 1,174.7 million. Sales revenues (outside the Group) grew by HRK 186.1 million and totaled HRK 1,454.9 million. This resulted from i) a 12.6% increase in board revenues, ii) a 26% increase in non-board outlet revenues and iii) a 57% increase in the revenue of other operating departments (laundry, travel agency, equipment-rental services, etc.). Domestic sales revenues totaled HRK 119.0 million and represented 7.5% of total revenues (7.9% in 2015). They reported a 12.3% increase over prior comparable period results. International sales revenues totaled HRK 1,335.8 million and represented 84.6% of total revenues (87.2% in 2015). They grew by HRK 173.1 million over prior comparable period results. Other operating (outside the Group) and financial income represented 7.9% of total revenues (4.9% in 2015). The 33.3% increase in other operating revenues resulted mainly from the one-off income received from cancelling provisions related to legal disputes. Financial income reported a HRK 51.4 million growth, which is mainly due to the share portfolio sales and exchange rate gains. As a result, total revenues grew by HRK 246.0 million and totaled HRK 1,579.5 million.

VALUATION OF VALAMAR RIVIERA GROUP

31/12/2015 31/12/2016 2016/2015
Average share price per 23.92 34.59 44.6%
Market capitalization (in HRK) 2,970,629,728 4,295,057,872 44.6%
EV (in HRK) 4,053,149,806 5,693,160,606 40.5%
EPS 0.84 2.76 228.6%
DPS 0.55 0.6 9.1%
EV / Sales revenues 3.2x 3.9x 22.3%
EV / EBITDA 9.6x 11.1x 15.7%
EV / Adjusted EBITDA 9.2x 11.0x 19.2%
EV / EBIT 23.6x 23.1x -2.2%
EV / Adjusted EBIT 21.7x 22.5x 3.7%

PROFITABILITY INDICATORS OF VALAMAR RIVIERA GROUP

2015 2016 2016/2015
EBITDA margin 32.7% 34.4% 170 bp
Adjusted EBITDA margin 33.9% 34.9% 100 bp
EBIT margin 13.3% 16.6% 330 bp
Adjusted EBIT margin 14.4% 17.0% 260 bp
EBT margin 10.3% 18.3% 800 bp
Net profit margin 8.1% 23.0% 1,490 bp
ROA 3.0% 7.7% 470 bp
ROE 5.5% 14.4% 890 bp
Adjusted ROCE 6.3% 6.7% 40 bp

160

19 Meetings, incentives, conferencing, exhibitions.

In 2016 total operating expenses grew by 10.7% due to increased business volume and this year consolidation of the Baška hotel group from 1 January 2016. Excluding costs generated by destination Baška during the first six months of 2016 for comparability's sake, operating expenses reported a low 6.7% growth. This confirmed continual positive trends in operating efficiency, management consolidation and restructuring at all levels, as well as Valamar Riviera's strategic goals.

Material costs grew by 13.1% and totaled HRK 450.4 million, representing 36.3% of total operating expenses (35.5% in 2015), which was largely due to increased business volume which caused higher costs of raw material and maintenance. Staff costs totaled HRK 371.3 million, representing 29.9% of total operating expenses (29.2% in 2015). The 13.2% increase in staff costs was due to several factors: i) longer full occupancy days, ii) takeover of the Baška hotel group staff, and iii) salary increase (a 2% salary increase in June 2016, a 1.5% salary increase and 0.5% salary increment for years of service in June 2015). Amortization and depreciation totaled HRK 265.2 million (HRK 232.9 million in 2015), and represented 21.4% of total operating expenses (20.8% in 2015). Their 13.9% growth was due to a wider consolidation scope and the previously realized large investments. Other operating expenses were HRK 24.0 million, and their 65.9% growth resulted from the operating expenses of previous years and the undepreciated assets due to investments. Value adjustments and provisions were HRK 2.5 million and decreased by HRK 21.5 million mainly due to the 2015 claim write-off in relation to Glavice d.o.o and lower provisions per legal disputes. Other costs grew by 3.0% or HRK 3.7 million primarily due to this year's Baška operations.

In 2016 financial income grew by HRK 51.4 million over prior comparable period results and totaled HRK 90.9 million. Other financial income reported the strongest growth, and rose by HRK 36.5 million, which was mostly due to the Group share portfolio sales totaling HRK 35.2 million. Interest income, foreign exchange differences, dividend and similar third-party related income grew by HRK 11.4 million. Exchange rate gains from settled unrealized balance sheet items and loan payments reported the strongest growth of HRK 23.6 million because of a 1% stronger HRK in relation to the EUR in 2016. This contributed to the decrease in balance sheet liabilities denominated in EUR and disclosed in HRK. Revenues form time deposits, a vista accounts and placements totaled HRK 4.2 million. The lower value is mostly

TOTAL OPERATING EXPENSES OF VALAMAR RIVIERA GROUP20 (in HRK)

2015 2016 2016/2015
Operating costs3 838,362,755 949,930,753 13.3%
Total operating expenses 1,122,244,561 1,241,906,080 10.7%
Material costs 398,167,101 450,374,430 13.1%
Staff costs 327,901,582 371,316,789 13.2%
Depreciation and amortisation 232,922,484 265,188,188 13.9%
Other costs 124,793,680 128,500,052 3.0%
Provisions and value adjustments 24,003,901 2,545,384 -89.4%
Other operating expenses 14,455,813 23,981,236 65.9%

due to a smaller amount of free cash funds during 2016 compared to the same period last year as well as a significant reduction in market interest. Unrealized income (gains) from financial assets grew by HRK 3.6 million, largely due to the valuation of derivative financial instruments contracted for 2017 as FX and interest hedge .

Financial expenses decreased by HRK 12.6 million compared to the same period a year ago and totaled HRK 65.7 million, representing 6.5% of total expenses (5.0% in 2015). Interest, foreign exchange differences, and similar expenses from third parties decreased by HRK 18.8 million. Other financial expenses grew by HRK 2.7 million, out of which HRK 0.9 million refers to the Group share portfolio sales, and HRK 1.7 million refers to interest rate swap early termination payment. The most significant change compared to the same period a year ago is related to exchange rate losses from settling unrealized balance sheet items, which fell by HRK 26.2 million due to the said stronger HRK in relation to EUR. A HRK 8.5 million increase in interest expenses in 2016 was related to the increase of debt resulting from loans contracted for financing investments and the consolidation of the Baška hotel group (from 1 January 2016).

20 Classified according to the Quarterly Business Financial Statement GFI POD-RDG.

Please note that as of 31 Decemeber 2016 the Group balance sheet included Imperial d.d. data which were not included in the comparable period (31 December 2015). As of 31 December 2016 the total value of the Group's assets was 25.2% higher compared to 31 December 2015. The total share capital and reserves grew by HRK 471.9 million, totaling HRK 2,373.6 million. This was mainly due to a HRK 236.9 million increase in generated net profit and the stated minority interest due to the consolidation of Imperial (HRK 235.7 million increase).

The total long-term liabilities were 16.8% higher and as of 31 December 2016 totaled HRK 1,556.1 million due to i) arranged loans for financing investments and ii) the consolidation of Imperial which brought an increase of HRK 210.3 million increase.

The total short-term liabilities were 71.6% higher compared to 31 December 2015 and totaled HRK 394.1 million. This resulted from i) current repayment of long-term debt (HRK 21.0 million increase), ii) trade payables (increased by HRK 103.1 million) due to large investments and iii) the consolidation of Imperial (HRK 27.6 total increase).

Cash and cash equivalents as of 31 December 2016 totaled HRK 274.7 million. This 14% decrease is mainly due to i) investments in Imperial's shares and ii) large investments. The reported cash and cash equivalents indicate a strong further potential from business activities and external borrowings, able to ensure a smooth continuation of future investments and potential acquisitions.

ASSETS AND LIABILITIES

Total
HOTELS AND RESORTS
Premium Upscale Midscale Economy
2015 2016 2016/
2015
2015 2016 2016/
2015
2015 2016 2016/
2015
2015 2016 2016/
2015
2015 2016 2016/
2015
Number of accommodation units 7,855 7,927 0.9% 1,037 1,037 0.0% 1,422 1,422 0.0% 3,047 3,112 2.1% 2,349 2,356 0.3%
Full occupancy days 147 158 7.6% 166 194 16.5% 157 159 1.5% 148 159 7.9% 130 139 6.7%
Annual occupancy rate (%) 40% 43% 7.3% 46% 53% 16.1% 43% 43% 1.2% 40% 44% 7.6% 36% 38% 6.4%
Accommodation units sold 1,151,809 1,250,795 8.6% 172,599 201,003 16.5% 222,829 226,086 1.5% 449,981 495,689 10.2% 306,400 328,017 7.1%
Overnights 2,503,172 2,668,550 6.6% 343,961 386,163 12.3% 487,576 500,925 2.7% 970,673 1,056,601 8.9% 700,962 724,861 3.4%
ADR15 (in HRK) 718 735 2.4% 1,070 1,118 4.4% 928 984 6.0% 678 682 0.6% 424 410 -3.3%
Board revenues (in HRK) 826,767,088 919,726,790 11.2% 184,764,002 224,678,769 21.6% 206,882,926 222,521,004 7.6% 305,133,485 338,024,283 10.8% 129,986,675 134,502,733 3.5%
RevPAR16 (in HRK) 105,257 116,025 10.2% 178,172 216,662 21.6% 145,487 156,485 7.6% 100,142 108,620 8.5% 55,343 57,089 3.2%
Adjusted EBITDA22 (in HRK) 476,130,680 560,211,649 17.7% 107,849,926 144,730,691 34.2% 122,950,922 138,900,914 13.0% 170,816,094 195,987,797 14.7% 74,513,737 80,592,247 8.2%

Hotels and resorts reported HRK 919.7 million in board revenues. The Premium and Midscale segments were major drivers for the strong HRK 93.0 million increase. These results were largely due to a sales mix optimization, investments in the upgrade of products and services, and the successful realization of a number of business and entertainment events in Dubrovnik and Poreč. It should be noted that this growth was partly influenced by the results of destination Baška. Excluding them, the total board revenues for hotels and resorts reported a 10% growth.

The Premium segment reported the strongest growth in board revenues (HRK 39.9 million) and totaled HRK 224.7 million. This was mainly due to an increase in accommodation units sold (i.e. 28,404 more, or 201,003 total) and the 4.4% increase in the average daily rate. The Valamar Isabella Island Resort 4* & 5* was the main revenue driver. By focusing on direct sales channel, a longer operating period and M.I.C.E events it reported a strong growth of over HRK 17 million. Daimler AG-Mercedes-Benz organized the M.I.C.E. event "Global Training Experience" at the Valamar Dubrovnik President 5* and the Valamar Lacroma 4* in the February-mid April period and contributed to the prolongation of the operating period and high occupancy rates. The high-season growth of the Dubrovnik Premium segment was mainly due to the excellent positioning of the Valamar Dubrovnik President 5* in the individual channel. The adequate distribution of marketing segments ensured the significant growth of the Valamar Lacroma 4*, mainly through allotment and M.I.C.E. placements.

21 According to the classification under the USALI international standard for reporting in hotel industry (Uniform System of Accounts for the Lodging Industry). Business operations of Baška properties are included for the period January – December 2016, while in the comparable period of 2015 are included in the period July - December 2015. Destination Pula - Puntižela business is included in destination Poreč.

22 When calculating adjusted EBITDA, internal allocation of revenues and expenses as well as inter-segment revenues and expenses are excluded from the calculation. Adjusted EBITDA of other segments amounts to HRK -229.6 million in 2016, i.e. HRK -189.9 million in 2015. Other segments include business of central operations, laundry, sport, central kitchen, strategic rentals, etc.

The Upscale segment reported a HRK 15.6 million board revenue growth. The increased average daily rate (+HRK 56) contributed to the HRK 222.5 million in board revenues. The Valamar Club Tamaris 4* owed its strong results to a successful firstminute allotment distribution and a stronger individual sales channel which was responsible for over two thirds of the total growth. The increase in the individual segment and occupancy contributed to a significant growth of Hotel & Casa Sanfior 4*. The management of the marketing segments and prices received a good market feedback and boosted the individual segment of the Valamar Zagreb 4*. Similarly, the Valamar Riviera 4* hotel owed its robust growth and high occupancy primarily to an increase in capacity (10 new accommodation units) which resulted in higher occupancy.

The Midscale segment of hotels and resorts reported a growth of HRK 32.9 million and contributed to a large extent to the total board revenue growth. The HRK 338.0 million board revenues were partially influenced by the business done in destination Baška during the first half-year of 2016. Excluding Baška, the Midscale board revenue growth exceeded HRK 15 million. The main revenue drivers were the Valamar Diamant 4* and the Valamar Club Dubrovnik 3*. The prolonged operating period, high occupancy rates, the new multifunctional hall which was an important feature for the M.I.C.E. channel as well as an improved realization of the group channel during the season resulted in a significant increase in the business volume and strong growth of the Valamar Diamant 4* board revenue. On the other hand, the Valamar Club Dubrovnik 3* grew in all its marketing segments due to an adequate placement of allotments and group. The Valamar Crystal 4* grew further mainly because of a strategic shift towards long-term charter partners which ensured additional occupancy through flights to Istria during the shoulder season and a longer operating period. The competitive price policy in defined periods that was focused mainly on occupancy resulted in increased board revenues in the Valamar Rubin 3*. The Allegro and the Miramar 3* in destination Rabac reported strong growth mainly due to a significant increase of the individual channel and adequate group and allotment placement in the pre-season period.

The Economy segment of hotels and resorts reported HRK 134.5 million in board revenues, representing a 3.5% increase. The Pical 3* board revenue increase was the result of a stronger individual sales channel, and an active price management, both contributing to a higher average daily rate. The Tirena 3* results grew due to the performance of the individual sales channel and optimal allotment placement. An increased group volume and pre-season events led to the Lanterna's 2* increased board revenue. Fewer operating days reduced the Girandella Tourist Village 2* occupancy, although board revenues remained the same due to increased average daily rates.

Total
CAMPING RESORTS
Premium Upscale Midscale Economy
2015 2016 2016/
2015
2015 2016 2016/
2015
2015 2016 2016/
2015
2015 2016 2016/
2015
2015 2016 2016/
2015
Number of accommodation units 9,929 10,145 2.2% 475 511 7.6% 4,449 4,437 -0.3% 3,378 3,387 0.3% 1,626 1,810 11.3%
Full occupancy days 97 101 4.3% 137 132 -3.3% 101 106 5.0% 91 98 7.8% 87 87 -1.0%
Annual occupancy rate (%) 27% 28% 4.0% 38% 36% -3.5% 28% 29% 4.7% 25% 27% 7.5% 24% 24% -1.3%
Accommodation units sold 963,612 1,027,020 6.6% 65,054 67,694 4.1% 447,846 469,121 4.8% 308,523 333,531 8.1% 142,189 156,674 10.2%
Overnights 2,247,651 2,475,778 10.1% 186,363 197,491 6.0% 1,071,940 1,198,905 11.8% 668,609 721,187 7.9% 320,739 358,195 11.7%
ADR15 (in HRK) 225 248 10.5% 288 361 25.4% 243 280 15.0% 203 209 2.9% 184 189 2.7%
Board revenues (in HRK) 216,483,213 254,989,779 17.8% 18,741,250 24,448,224 30.5% 108,877,309 131,206,913 20.5% 62,667,820 69,686,153 11.2% 26,196,835 29,648,489 13.2%
RevPAR16 (in HRK) 21,804 25,134 15.3% 39,449 47,844 21.3% 24,472 29,571 20.8% 18,549 20,575 10.9% 16,111 16,380 1.7%
Adjusted EBITDA22 (in HRK) 152,259,096 188,350,077 23.7% 13,718,824 17,245,497 25.7% 80,851,341 102,671,633 27.0% 38,672,507 46,834,312 21.1% 19,016,424 21,598,635 13.6%

KEY OPERATING INDICATORS OF VALAMAR RIVIERA GROUP PER SEGMENTS (CONTINUED)

Camping resorts reported HRK 255.0 million in total board revenue. The HRK 38.5 million increase was due to the strong positive market feedback that the newly invested properties received and to a lesser extent, to the results of the Baška camping resort operations in the first half of 2016. Excluding the Baška operations results, the total camping resort board revenues reported a solid 15% growth.

The Premium segment of camping resorts includes the Krk 5* campsite, which reported a strong 30.5% board revenue growth totaling HRK 24.5 million. This growth resulted from a HRK 73 increase in the average daily rate due to this years' investment in new mobile homes, improved quality and service as well as intensive promotional activities.

A 15.0% increase of the average daily rate in the Upscale segment of camping resorts resulted in a HRK 22.3 million increase in board revenues. The Lanterna 4* campsite contributed most to the reported board revenues total of HRK 131.2 million. The leading Istrian camping resort owed its 24% growth in board revenues to investments in new mobile homes, quality and service upgrades and promotional activities. The campsites Marina 4* and Ježevac 4*, owed their increased board revenues to a higher average rate. This years' Bunculuka 4* performance contributed to stronger Upscale results totaling HRK 3.6 million in additional board revenues.

The camping resort Midscale segment reported a HRK 69.7 million in board revenues. The Zablaće 3* campsite year-round consolidation is mainly the result of the 11.2% increase in board revenues. This is because early Easter holidays do not benefit camping operations and cause fewer operating days and lower board revenues.

The Economy segment reported HRK 29.7 million in board revenues. The HRK 3.5 million increase is mainly due to investments in the Brioni 2* campsite and the new Tunarica 2* campsite operations.

KEY OPERATING INDICATORS OF VALAMAR RIVIERA GROUP PER DESTINATIONS20

DESTINATION Poreč Rabac Island of Krk Dubrovnik
2015 2016 2016/
2015
2015 2016 2016/
2015
2015 2016 2016/
2015
2015 2016 2016/
2015
Number of accommodation units 10,592 10,632 0.4% 1,913 2,065 7.9% 3,318 3,414 2.9% 1,961 1,961 0.0%
Full occupancy days 113 116 2.9% 138 136 -0.8% 107 128 18.7% 153 166 8.6%
Annual occupancy rate (%) 31% 32% 2.6% 38% 37% -1.1% 29% 35% 18.4% 42% 45% 8.3%
Accommodation units sold 1,195,798 1,234,697 3.3% 263,064 281,750 7.1% 356,269 435,348 22.2% 300,290 326,020 8.6%
Overnights 2,716,812 2,881,737 6.1% 598,486 642,552 7.4% 863,065 1,010,914 17.1% 572,460 609,125 6.4%
ADR15 (in HRK) 430 465 8.1% 546 538 -1.5% 376 384 2.3% 838 864 3.2%
Board revenues (in HRK) 514,060,909 574,077,286 11.7% 143,606,002 151,518,687 5.5% 134,035,119 167,341,883 24.8% 251,548,271 281,778,713 12.0%
RevPAR16 (in HRK) 48,534 53,995 11.3% 75,068 73,375 -2.3% 40,402 49,016 21.3% 128,276 143,691 12.0%
Adjusted EBITDA22 (in HRK) 303,823,058 368,687,622 21.3% 79,821,108 85,462,089 7.1% 88,965,226 109,627,842 23.2% 155,780,384 184,784,174 18.6%

Destination Poreč reported HRK 574.1 million in board revenues. The average daily rate growth of HRK 35 and the 3.3% increase in the number of accommodation units sold resulted in a HRK 60.0 million increase in board revenues. The most significant contribution to the board revenue growth in this destination was attributed to the excellent performance of the Valamar Isabella Island Resort 4* & 5*, the Lanterna 4* campsite and the Valamar Diamant 4* hotel. A solid occupancy was mainly due to group and allotment placements in the shoulder season, and individual placements in the Christmas/ New Year period.

Destination Rabac owed its HRK 7.9 million increase in board revenue to an increase in accommodation units sold (+18,686). The reported HRK 151.5 million in board revenues was mostly attributed to the strong performance of the Hotel & Casa Valamar Sanfior 4*, the Allegro hotel 3* and the Miramar hotel 3*, as well as the Marina campsite 4*.

Destination Krk reported board revenues amounting to HRK 167.3 million (+24.8%), mainly due to the destination Baška 2016 yearlong consolidation. Excluding the performance of hotels, resorts and camping resorts in destination Baška, board revenues rose by 10.5%, while the rest of the growth is mainly due to the strong performance of the Krk 5* campsite.

Destination Dubrovnik reported a growth in the average daily rate (+HRK 26) and an 8.6% rise in accommodation units sold. This resulted in a robust HRK 30.2 million increase in board revenues, totaling HRK 281.8 million, mostly due to the excellent performance of two hotels: the Valamar Dubrovnik President 5* and the Valamar Lacroma 4* (which stayed open the whole year round ) and good group and allotment placements in the shoulder season.

Opinion of the Management Board Committee of the Croatian Business Council for Sustainable Development on the 2016 Sustainability Report of Valamar Riviera

The independent Management Board Committee of the Croatian Business Council for Sustainable Development assessed the new 2016 Sustainability report of Valamar Riviera. This is Valamar's second integrated report that encompasses the most relevant facts on business operations as well as the most important non-financial impacts reported using the GRI G4 guidelines. We hereby confirm that the said report was produced in accordance with the core option requirements.

The report gives a very detailed and articulate presentation of business results, non-financial impacts, numerous improvements made in the course of the year such as investments, innovations, better organization and management of non-financial impacts. The report includes an overview of community investments made to enhance the quality of life in the local community, better environment management and destination development as an important factor for Valamar's business.

Valamar Riviera sets definite strategic business and sustainability goals for the forthcoming reporting periods. They include long-term profitability, investments in the development of human resources, sustainable development of destinations and support to the local community. The company especially focuses on environmental protection, saving energy and using renewable sources. What stands out from the large amount of data reported are the 400 million

kunas invested in 2016 that confirm Valamar's commitment to maintaining the company's long –term competitiveness and developing its assets. The report shows that Valamar understands its risks and recognizes changes in the structure of guests and strives to adapt and respond to the demands of new generations of guests. The introduction of an EV charger for guest use is a good example of this. Valamar included a sustainable and socially responsible development of its destinations among its strategic goals for the period up to 2020. Other strategic goals also include caring for employees, innovation and digitalization, destination development and responsibility to the community, commitment to environmental sustainability and others.

The analysis of stakeholders shows that the company fully understands its key impacts and uses this knowledge to identify its key stakeholders who materialize these impacts.

Appropriate communication has been established with each stakeholder group in order to receive feedback about Valamar Riviera. Similarly, Valamar defined its material aspects and strives to manage them actively. The report does not provide a clear explanation of the link between these two processes: it is not clear how the key stakeholders participated in the definition of material aspects and consequently the contents of this report's non-financial part. However, Valamar chose to report on impacts related to a large number of material aspects, which makes this report very comprehensive.

Valamar especially focuses on the guest as the most important stakeholder and, consequently, guest satisfaction is very important as can be seen in the continual measuring of guest satisfaction and on- line reputation that both show high satisfaction levels. This validates the quality and efficiency of the company's strategy. Apart from guests, the

second most important stakeholders are Valamar's employees. The company offers additional benefits, continual salary increase, and permanent employment and invests in staff lodging, training and similar to improve employee satisfaction and retain the best of them. The company is aware that excellent service can only be based on excellent staff and that both components are necessary for a successful hospitality operation. Finally, Valamar devotes special attention to establishing long-term relationships with suppliers in order to guarantee quality.

The report also presents a very detailed overview of the key management teams and an in-depth explanation of their responsibilities and areas of management that are performed through Committees. A clear definition of the responsibilities in the management of non-financial impacts would additionally prove that sustainable development is Valamar Riviera's strategic orientation.

The area of risks and risks management is explained in detail. In line with the perception of global risks published by WEF (World Economic Forum), Valamar also included the risks of climate change.

Our proposal for the report is to make a more visible distinction between corporate social responsibility (activities related to the management of the company's own impacts on the environment and society) and the company's philanthropy activities (programs related to destination management and community investment). Valamar shows significant results in both area and with their distinction and separation, the company would offer a better presentation of these two impact groups. Besides, the structure of information related to the environment would comply with the structure defined by GRI guidelines that would contribute to the clarity of information and give a better assessment overview of Valamar's environmental impact.

Although there is still room for improvement, Valamar's report is very clear, articulate and comprehensive and renders a clear presentation of the impacts, main activities, business strategy and performance in the past year.

The data is presented in a clear manner so we can conclude that this report shows significant improvement in relation to the report published the year before.

We congratulate Valamar on the remarkable effort put in creating this report and on the numerous successful activities undertaken, that substantiated this report with interesting and positive information.

Management Board Committee of the Croatian Business Council for Sustainable Development

GRI Index

Aspect GRI description Page no.
G4-1 Statement from the CEO 6, 7
G4-2 Key impacts, risks and opportunities
37, 38, 39, 72, 73, 74, 75, 90, 91,
92, 93, 125, 144, 145, 147, 148, 149, 150, 151, 152, 153
G4-3 Name of the organization 13
G4-4 Primary brands, products and/or services 13, 14, 15, 76
G4-5 Location of the organization's headquarters 14
G4-6 Number of countries where the organization operates 13, 14, 15
G4-7 Nature of ownership and legal form 133
G4-8 Markets served 13, 15
G4-9 Scale of the organization 14, 15
G4-10 Total number of employees by employment type, employment contract and region 54, 58
G4-11 Percentage of total employees covered by collective bargaining agreements 62
G4-12 The organization's supply chain 78, 79, 81
G4-13 Significant changes during the reporting period 82, 83, 121
G4-14 Whether and how the precautionary approach or principle is addressed by the organization 153
G4-15 Externally developed economic, environmental and social charters, principles, or
other initiatives to which the organization subscribes or which it endorses
50, 131
G4-16 Memberships of associations 85
Aspect GRI description Page no.
Identified Material Aspects and Boundaries
G4-17 Entities included in the organization's financial statements 11
G4-18 Process for defining the report content 11
G4-19 List of all the material Aspects 34
G4-20 Material Aspects within the organization 34, 35
Stakeholder Engagement
G4-24 List of stakeholder groups engaged by the organization 29, 30, 31
G4-25 Identification and selection of stakeholders with whom to engage 29, 30, 31
G4-26 Approach to stakeholder engagement 29, 30, 31
Report Profile
G4-28 Reporting period 11
G4-29 Date of most recent previous report 11
G4-30 Reporting cycle 11
G4-31 Contact point for questions regarding the report 11
G4-32 GRI Content Index 170, 171
G4-33 External assurance for the report 11, 168, 169
Governance Structure and Composition
G4-34 Governance structure of the organization 68, 134, 135, 136
Ethics and Integrity
G4-56 Values, principles, standards and norms of behavior 37, 38, 39, 133, 146, 154
Aspect GRI description Page no.
CATEGORY: ECONOMIC
Economic Performance
G4-EC1 Direct value generated and distributed 31, 32, 33
G4-EC2 Financial implications and other risks and opportunities for the
organization's activities due to climate change
152
G4-EC9 Proportion of spending on local suppliers at significant locations of operation 31
CATEGORY: ENVIRONMENTAL
INDICATORS OF ENVIRONMENTAL IMPACT
Energy
G4-EN3 Energy consumption within the organization 116, 118, 119
G4-EN5 Energy intensity 118, 119
Emissions
G4-EN19 Reduction of greenhouse gas (GHG) emissions 108, 115, 117
Effluents and Waste
G4-EN22 Total water discharge by quality and destination 120
G4-EN23 Total weight of waste by type and disposal method 120
Overall
G4-EN31 Total environmental protection expenditures and investments by type 115, 116
Aspect GRI description Page no.
CATEGORY: SOCIAL
LABOR PRACTICES AND DECENT WORK
Employment
G4-LA1 Total number and rates of new employee hires and employee turnover
by age group, gender and region
55
G4-LA2 Benefits provided to full-time employees that are not provided to temporary
or part-time employees, by significant locations of operation
56
Labor/Management Relations
G4-LA4 Minimum notice periods regarding operational changes,
including whether these are specified in collective agreements
64
Training and Education
G4-LA10 Programs for skills management and lifelong learning that
support the continued employability of employees
56, 66, 67, 70, 71, 102
G4-LA11 Percentage of employees receiving regular performance and career development reviews 63, 69
G4-LA12 Composition of governance bodies and breakdown of employees per employee category
according to gender, age group, minority group
membership, and other indicators of diversity
136, 137, 138, 139, 140, 141, 142, 143
Equal Remuneration for Women and Men
G4-LA13 Ratio of basic salary and remuneration of women and men by
employee category, by significant locations of operation
62
SOCIETY
Local Communities
G4-SO1 Percentage of operations with implemented local community
engagement, impact assessments, and development programs
102, 108, 111, 112
PRODUCT RESPONSIBILITY
Customer Health and Safety
G4-PR1 Percentage of significant product and service categories for which
health and safety impacts are assessed for improvement
51, 115, 116, 131
Product and Service Labeling
G4-PR5 Results of surveys measuring customer satisfaction 47, 48, 49
Marketing Communications
G4-PR7 Total number of incidents of non-compliance with regulations and voluntary codes concerning
marketing communications, including advertising, promotion and sponsorship, by type of outcomes
50

D ISCLA IMER

The strategic goals presented in this report represent the intention of the Management Board and are based on currently available information, current assumptions, and forward-looking expectations and projections. Strategic goals are not a guarantee of future results and are subject to future events, risks and uncertainties, many of which are beyond the control of, or currently unknown to Valamar Riviera, as well as to potentially incorrect assumptions that could cause the actual results to materially differ from the strategic goals. In addition, the level of capital investments in any given year is subject to specific proposals of the Management Board to the Supervisory board, each board may elect to deviate from this policy if appropriate under the prevailing circumstances.

Risks and uncertainties include, but are not limited to the ones described in the part "Company and Group Risks". Materially significant deviations from the strategic goals may arise from changes in circumstances, assumptions not being realized, as well as other risks, uncertainties, and factors, including:

  • → Macro-economic developments in the Republic of Croatia and in the source markets, including currency exchange rates fluctuations and prices of goods and services, deflation and inflation, unemployment, developments of the gross domestic product and industrial production, as well as other developments having a direct or indirect impact on the purchasing power of Valamar Riviera's guests;
  • → Economic conditions, security and political conditions, developments and events in the capital markets of the Republic of Croatia and in the source markets of Valamar Riviera;
  • → Spending and disposable income of guests, as well as guests' preferences, trust in and satisfaction with Valamar Riviera's products and services;
  • → Trends in the number of overnights, bookings, and average daily rates of accommodation in Valamar Riviera's properties;
  • → Trends of the Croatian kuna exchange rate in relation to world currencies (primarily euro and Swiss franc), changes in market interest rates and the price of equity securities, and other financial risks to which Valamar Riviera is exposed;

  • → Labor force availability, mobility and costs, transport, energy, and utilities costs, selling prices of fuel and other goods and services, as well as supply chain disruptions;

  • → Changes in accounting policies and findings of financial report audits, as well as findings of tax and other business controls;
  • → Outcomes and costs of judicial proceedings to which Valamar Riviera is a party;
  • → Loss of competitive strength and reduced demand for products and services of Croatian tourism and Valamar Riviera under the impact of weather conditions and seasonal movements;
  • → Development of new technologies, reliability of IT business solutions and cyber security of Valamar Riviera's business operations, as well as related costs;
  • → Issues with construction companies, subcontractors, permits and permissions, weather, prices of goods and services in the course of realizing investments in Valamar's portfolio;
  • → Changes of tax and other regulations and laws, trade restrictions, and rates of customs duty;
  • → Adverse climatic events and environmental risks.

The strategic goals presented herein are not an outright recommendation to buy, hold or sell Valamar Riviera's shares.

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