Forecast of Costs

90

91

attributed to senior officers within the group. Hence, we infer that the lion’s share, approximately 96% of the cost item is related to the operation of leased hotels. From the common-size analysis we observe a constant development of the item as measured as a percentage of sales while we can see a slightly increasing trend based on the indexing analysis.

However, as we will not increase the number of leased hotels, we consider it being a fair assumption that personnel cost and contract labour will remain constant.

Other operating expenses: This item includes expenses such as “royalty fees to Carlson Group”,

“energy and supply costs”, “marketing expenses”, “administrative costs”, “laundry & dry cleaning”, “operating equipment” and “property operating expenses”. Since the item contains a bulk of expenses, which in addition are very different from one another, it makes it difficult for us to make an exact assessment of how the items relate to Rezidor’s different contracts types.

For instance, marketing expenses are expenses incurred by all contract types.

However, based on Rezidor’s (2015a) breakdown of the specific sub items that form other operating expenses, we have estimated that 20% stem from Rezidor’s leased hotels. These sub items include predominantly “energy costs” and “laundry & dry cleaning”, and will according to Rezidor (2015a) be subject to measures for additional cost saving. Moreover, as a result of cost initiatives associated with Rezidor’s Route 2015 program, rent reductions were realised which implies that there could be further cost reductions achieved in this cost item. Looking at the historical level as a percentage of sales, we can identify a highly consistent pattern. Thus, we consider it fair to assume that other operating expenses will continue to follow the historical pattern, constituting 24% of sales, in our base case whilst being slightly decreasing in our upside scenario.

Insurance of properties and property tax: Similar to the costs of goods sold for food & drinks, this item relates entirely to Rezidor’s leased hotels. We will therefore consider this item to remain constant in our base case, while we forecast a minor decrease in our upside case.

Rental expense: Primarily, this item relates from Rezidor’s leased hotels where it constitutes a substantial part of the operating costs of the hotels. However, the item also includes management guarantee payments to hotel owners, which is an expense associated with Rezidor’s managed hotels. Due to the insignificant size of these management guarantee payments, making up for 0.7% of the total rental expenses in 2015, we regard it being too small for having a materialising impact on our projection of rental expenses. Judging by the historical development, we can see that rental expenses have barely changed in years between 2011 and

92

2015. Therefore, we assume that we in our base case are able to maintain constant levels of rental expenses, whereas we estimate a marginal decline in our upside scenario.

Depreciation and amortisation (D&A): D&A relates to all contract types and is therefore a mixture of both fixed and variable costs. A breakdown in the 2015 annual report indicates that amortisations account for 11%, while depreciations stand for the remaining 89% of this item.

(Rezidor, 2015a) Amortisations relate to the intangible assets and licenses & related rights associated with the master franchise agreement with Carlson Group. Depreciations are on the other hand driven by the depreciation of Rezidor’s tangible assets, such as fixed installations and machinery & equipment. Observing Rezidor’s historical level of depreciation and amortisation in relation to sales, we see a rather unchanged development and we find no reason to assume otherwise in our forecast. Future depreciation is also to a high extent driven by the current level of capex, in other words, investments that are made today will be depreciated in the years to come. Since it is part of our business plan to keep capex at low levels, we believe that this will contribute to maintaining the unchanged development of D&A. Consequently, we will assume depreciation and amortisation expense at the historical average level of 3.5% in relation to sales for both our forecast scenarios.

Write-downs and reversal of write-downs: This cost item refers to impairment testing which is carried out by Rezidor on a yearly basis. During such a testing, Rezidor’s tangible assets, intangible assets and hotel contracts are assessed in order to detect potential impairments. This is conducted through a discounted cash flow (DCF) analysis where each of Rezidor’s hotel contracts is evaluated independently based on factors such as the remaining contractual and financial terms. If the net present value from the DCF is lower than the net carrying value on the balance sheet, Rezidor will report a write-down. Most of the write-downs have historically been associated with Rezidor’s leased hotels and due to the declining trend of the leased share of the hotel portfolio, write downs have remained at rather low levels as well. Thus, given the estimated future business model and the declining share of leased hotels, it is fair to assume that costs related to write-downs will decrease going forward. More specifically, with reference to the historical pattern where write-downs as a percentage of sales have decreased consistently, we will anticipate a similar development in our forecast. From the base level of 0.6% of sales in 2015 we forecast an annual decrease of 0.2%, levelling off to zero in the year of 2019 for both forecast scenarios. (Rezidor, 2015a)

Costs due to termination/restructuring of contracts: As this item is part of our strategy of rebalancing Rezidor’s business model, we are expecting to increase the level of this expense

93

going forward. Given that the historical level as percentage of sales has been rather volatile, being 1% of sales in 2012 at the launch of Route 2015 while accounting for 0.1% of sales in 2015, we will use the average level of 0.3% between 2011 and 2015 as a starting point for our forecast. Thereafter, we calculate with an annual increase averaging 0.05% in both forecast scenarios. (Rezidor, 2015a)

Loss on sale of shares and tangible fixed assets: Given the inconsistent pattern and low historical level of this item, we will assume it to be zero in both our forecast scenarios.

In exhibit 42 we display a summary of the base case forecast scenario.¹⁶ The table shows us all projections of revenues and costs, in turn generating EBITDA and EBIT. In the following section, these estimates of EBITDA and EBIT will come handy as we are going to use them for computing net debt at the time of exit.

Exhibit 42. Forecast of EBITDA and EBIT

Source: Own creation