Millennium & Copthorne Hotels Regulatory News (MLC)

For Immediate Release 4 April 2018

MILLENNIUM AND COPTHORNE HOTELS PLC ("THE COMPANY")

LEI: 2138003EQ104LZ1JNH19

Publication of 2017 Annual Report and Notice of 2018 Annual General Meeting

The following documents have today been posted or otherwise made available to shareholders:

· Annual Report and Accounts for the year ended 31 December 2017 (2017 Annual Report); and

· Notice of the 2018 Annual General Meeting (AGM) to be held at the Millennium Hotel London Knightsbridge, 17 Sloane Street, London, SW1X 9NU at 10.00am on 4 May 2018;and

· Form of Proxy for the 2018 AGM.

In accordance with Listing Rule 9.6.1R, a copy of each of these documents has been uploaded to the National Storage Mechanism and will be available for viewing shortly at www.hemscott.com/nsm.do.

The documents are also available in the 'Investors' section of the Company's website at https://investors.millenniumhotels.com/financial/annual-reports (for the 2017 Annual Report) https://investors.millenniumhotels.com/shareholder-centre/annual-general-meeting (for the Notice of Meeting and Form of Proxy for the 2018 AGM). 

A condensed set of the Company's financial statements and information on important events that have occurred during the financial year and their impact on the financial statements were included in our preliminary results announcement released on 8 February 2018. That results announcement should be read in conjunction with the information set out below, which is extracted from the 2017 Annual Report, and together such information constitutes the material required by Disclosure Guidance and Transparency Rule 6.3.5R to be communicated to the media in full unedited text through a Regulatory Information Service. This announcement is not a substitute for reading the full 2017 Annual Report. Page and note references below refer to page numbers in the 2017 Annual Report. To view the full preliminary results announcement, please visit https://investors.millenniumhotels.com/financial/results-and-presentations/2017.

Principal Risks and Uncertainties

The following has been extracted from pages 23-30 of the 2017 Annual Report. Certain elements, such as the viability statement and description of the activities of the Risk Committee in 2017, have been excluded from this announcement, but are included in the 2017 Annual Report.

Our Risks

Like any other business, we are subject to a number of risks and uncertainties, which are influenced by both internal and external factors. In this section, we describe the principal risks that could affect the Group's ability to deliver against its strategy together with the controls and activities in place to mitigate such risks.

Risk factors

Below we provide information on the nature of each of the Group's principal risks as identified by the Board. Not all potential risks are Listed; some risks that we are managing and monitoring in the business are excluded because the Board considers that they are not material to the Group's Long term strategy, performance or viability.

In general, the diversity and geographical spread of the Group's assets provides a natural hedge against many of the principal risks identified on the following pages. However, as with any business, the Board accepts that risks are inherent in conducting a global business and that our processes aim to provide reasonable, not absolute, assurance that the risks significant to our business have been identified and addressed. Additionally, there may be risks that are not reasonably foreseeable at the date of this report such that the Group can assess fully their potential impact on the business.

The order in which risks are presented below is not indicative of the relative potential impact on the Group.

Management of risk

The Board is accountable for carrying out a robust assessment of the principal risks facing the Company, including those threatening its customers, people , values, reputation, business model, diverse brand portfolio, future performance, solvency or Liquidity. To assist the Board in this task, the Board formed a separate Board Risk Committee in April 2016, which is tasked with reviewing the effectiveness of the Group's risk management framework and overseeing the Group's principal risks. These principal risks are referred to as "Level 1" risks. Below the Board Risk Committee sits the Group Management Risk Committee, which is chaired by the Group Chief Executive Officer, and is comprised of key executive personnel and supported by the head of Internal Audit. The Committee provides input on, and oversight over, this risk management framework, including the identification, assessment and monitoring of the Group's Level 1 risks as well as any emerging or escalated risks.

Each business function and regional operations head, in turn, is responsible for formally identifying and assessing the risks within his or her remit and measuring them against a defined set of criteria, while considering the Likelihood of occurrence and potential impact to the Group. These regional and functional risk profiles are the Group's "Level 2" risks.

The Group's risk management function, supported by an outsourced team from Barnett Waddingham, assists the Group Management Risk Committee, and ultimately the Board Risk Committee, in coordinating the risk management processes and producing a consolidated view. The risk management process uses a standardised approach to assess risks, including regular risk reviews and the updating of risk registers, to enable the highest risks to be escalated. The process also clarifies Board expectations through risk appetite and is designed to focus on key risks, encourage accountability, holistic thinking, the use of management information in risk management discussions and informed decisions to deliver improvement and actions where necessary.

Risks at the individual hotel and project Level, "Level 3" risks, are identified and managed by hotel general managers and financial controllers and the project owners, with support from the regional management teams.

Principal Risks and Uncertainties

Quality of service delivery and product

Potential Impact

Consistent delivery of service and product quality is vitally important to creating and maintaining brand loyalty and value perception and influencing consumer preference. This is enhanced by the growing influence of customer ratings, reviews and the power of social media. Lack of investment in the Group's assets or the removal of a significant number of rooms from inventory in order to complete needed refurbishment programmes could have a significant impact on those factors and therefore on the revenues that hotels are able to achieve. As supply increases, particularly in our key gateway cities, business may be lost to newer hotels and/or rates may have to be reduced to remain competitive.

In addition, management of third-party owned hotels under management agreements, particularly in the Middle East and China regions, and the use of joint ventures in certain markets gives rise to the risk of non-performance on the part of the hotel owners and joint venture partners, affecting the ability of the relevant hotels to deliver service and product quality consistent with the Group brand and operating standards, especially when the strategic objectives of those parties are not always aligned with those of the Group.

Mitigating Activities

· Generally the Group operates properties which it owns, and therefore is able to exercise control over the service and product quality of those hotels.

· For those hotels we own but do not operate, such as the Novotel New York Times Square and Grand Hyatt Taipei, the Group asset manages those properties to ensure compliance with its service levels and contractual requirements.

· The Group continues to develop property specific asset management plans which focus on the capital requirements of each property in terms of regular maintenance and product enhancement to help ensure the products remain competitive. Refurbishments are phased appropriately in order to minimise the impact of those programmes on operations, to the extent possible.

· The Group currently endeavours to reinvest one-third of its EBITDA into its hotel estate.

· The Group has in place brand and operating standards, and regularly refreshes those, to provide for consistent service delivery and product quality among its hotels, even if they are owned by third parties and/or operated through joint ventures.

· Management representatives are assigned to manage the relationships with joint venture partners and third party hotel owners.

Risk Trend: Level

Intellectual property rights and brands

Potential Impact

Future growth and pricing power and the image and reputation of the Group in general will, in part, be dependent on the recognition of the Group's brands and perception of the values inherent in those brands. The ability of the group to protect its intellectual property rights in those brands is instrumental in preventing them from deteriorating in value.

In addition, the proliferation of e-commerce and online sales channels, whether through affiliates, online travel agencies, meta search websites or otherwise, can give rise to brand confusion and further dilution if the Group's intellectual property is not used appropriately and in accordance with the Group's brand and marketing standards.

Mitigating Activities

· In 2017 a formal launch of the latest brand offering, M Collection, took place with the promotion of the opening of M Social Auckland.

· Substantial investment continues to be made in protecting the Group's brands from misuse and infringement, by way of trade mark registration, enforcement of intellectual property rights and domain name protection. The Group utilises third party online brand monitoring and protection agencies to assist with the Group's enforcement activities.

Risk Trend: Level

Increasing Competition

Potential Impact

The hotel industry operates within an inherently cyclical marketplace where competition, both online and offline, is increasing. An increase in market room supply, without corresponding increases in demand, may lead to downward pressure on rates, which in turn could negatively impact the Group's performance. The sector is also seeing a degree of consolidation in pursuit of scale benefits.

With regard to online competition, the Group's hotel rooms are booked through a number of distribution channels, one of which is the online travel agency ("OTA"). OTAs tend to have higher commission rates than more traditional distribution channels and are taking an increasing share of bookings across the sector. Over time, consumers may develop loyalties to the OTAs rather than to our brands. These trends may impact our profitability. In addition, sharing economy platforms, such as Airbnb, may expand their market share and compete with more traditional business and leisure accommodations.

Mitigating Activities

· The Group's asset management teams help to ensure hotels are appropriately maintained and refreshed to remain competitive

· The Group continues to refresh its digital marketing strategy and invest in its e-commerce, customer relationship management, revenue management and reservations systems in order to help increase rates, retain existing customers and generate new business.

· Since 2014, a new advanced central reservations system has been in place providing a platform for future enhancements. Additionally, the Group's website and loyalty programme are regularly reviewed and upgraded as necessary to help improve brand recognition and drive more bookings through the Group's own, less costly distribution channels.

· The Group's robust financial control and flexible revenue management systems help it to control costs and achieve better yields in volatile trading conditions.

Risk Trend: Increasing

Talent management and succession

Potential Impact

Delivery of consistent service quality and execution of the Group's strategy depends on its ability to attract, develop and retain employees with the appropriate skills, experience and aptitude. This becomes more difficult as world travel becomes more prevalent and competition in the hospitality industry increases.

Failure of the Group to properly plan for the succession of key management roles may impact service quality, consistency or delay the execution of the Group's strategies and increase costs and inefficiencies.

The results of the UK referendum and ongoing negotiations around the UK's departure from the European Union may affect the availability of EU nationals, which is a key source of talent for frontline roles particularly in London.

Mitigating Activities

· The Group has a strong service culture supported by performance management and recognition systems, compensation and benefits arrangements, and training and development programmes. Labour relations are actively managed on a regional and local basis.

· During 2017 the Group implemented key changes to its senior management structure and team and several of its compensation programmes, particularly the incentive scheme utilised for the global sales team, to enhance employee engagement and performance.

· We have conducted a risk assessment around the impact of 'Brexit' and continue to refine the scenario, contingency and staffing plans whilst monitoring the on-going developments of the governmental negotiations

Risk Trend: Increasing

Financial risk management and financial controls

Potential Impact

The Group operates in numerous jurisdictions and trades in various international currencies, but reports its financial results in pounds sterling. Fluctuations in currency exchange rates and interest rates may either be accretive or dilutive to the Group's reported trading results and net asset value. The 2016 referendum in the UK to leave the European Union resulted in a sustained devaluation of the pound sterling.

Unhedged interest rate exposures pose a risk to the Group when interest rates rise, resulting in increased costs of funding and an impact on overall financial performance.

Financial control and accounting is a fundamental expectation impacting shareholder trust and reputation of the Group. This ranges from property level to consolidated and statutory reports.

Mitigating Activities

· The Group's internal Treasury Management Committee monitors and addresses treasury matters, including investment and counterparty risks, in accordance with the Group's treasury policy. The Board and Audit Committee receive regular updates on treasury matters.

· Foreign exchange exposure is primarily managed through the funding of purchases and repayment of borrowings from income generated in the same currency.

· Interest rate hedges are only used to manage interest rate risk to the extent the perceived costs are considered to outweigh the benefits of having flexible, variable-rate debt.

· Each hotel has an accountable financial controller who reports into the regional finance team and ultimately the Group's Chief Financial Officer. A cyclical programme of hotel audits is in place to ensure a proper control environment is being maintained.

· In 2017, the Group's Chief Financial Officer, with the support of the Audit Committee, reviewed the Company's financial controls and commenced a project to enhance the Group's financial control measures.

Risk Trend: Level

Legal and regulatory compliance

Potential Impact

The Group operates in many jurisdictions and is exposed to the risk of non-compliance with increasingly complex and rigorous statutory and regulatory requirements, including competition law, anti-bribery and corruption and data privacy compliance regimes. Non-compliance with such regulations, which differ by jurisdiction and are an area of increasing focus by regulators, could result in fines and/or other damages, including reputational damage, being incurred, particularly in the event a data breach should occur. A particular area of focus in 2017 was in respect of the Group's preparation for the commencement of EU General Data Protection Regulation (GDPR), which comes into force in May 2018.

In addition, the Group may be at risk of litigation from various parties with which it interacts, either through direct contractual arrangements or as a result of providing services to customers. Significant costs could be incurred where claims are not insured or are not fully insured, and litigation could give rise to reputational damage being suffered and management distraction.

In certain countries where the Group operates, particularly in emerging markets, local practices and the legal environment may be such that enforcement of the Group's legal rights is challenging.

Mitigating Activities

· The Group continues to monitor changes in the regulatory environments in which it operates, identify its compliance obligations and implement appropriate compliance and training programmes. The Group has comprehensive global and, where applicable, regional policies and procedures in place to address competition law, data privacy, ethical business conduct, whistle-blowing, anti-corruption and bribery, gifts and hospitality and charitable donations, among others.

· In response to the GDPR coming into effect, the Group has created a task force comprising legal, information technology, operations and other representatives to develop and implement plans to achieve substantial compliance by May 2018.

· The Group has controls in place to manage and help mitigate the risks associated with its various contractual relationships, from execution through to termination, insured and uninsured litigation and other disputes. Regular litigation reports are provided to the Board.

· The Group maintains in place industry standard insurance cover to mitigate many potential litigation risks, such as employment practices liability, workers compensation and general liability policies.

Risk Trend: Increasing

Health, safety and social responsibility

Potential Impact

Health and safety of guests, visitors and employees is a fundamental expectation. The Group is further exposed to a wide range of regulatory requirements and obligations concerning health and safety.

As a significant property owner and operator of hotels in multiple jurisdictions, the Group must do more than simply comply with local regulations. We must act in a responsible way towards our stakeholders and the communities in which our hotels operate.

Failure to implement and maintain sufficient controls regarding health and safety issues could result in serious injury or loss of life and expose the Group to significant sanctions, both civil and criminal, financial penalties and reputational damage.

Mitigating Activities

· The Group has established and maintains health and safety and environmental management systems including policies, procedures, drills and tests, self and third party audits, training, governance, and reporting which, where possible, it seeks to align with the requirements of ISO 14001 and OHSAS 18001. By using these standards the Group is committed to working to the highest standards of health and safety and to an internationally accredited system.

· Following the tragic fire at the Grenfell Tower in London in June 2017, management completed an assessment of cladding used on the Group's hotel estate to help ensure the safety of hotels guests, visitors and employees.

· The Group has adopted various corporate responsibility initiatives in relation to its employees, guests and the environment. The Group's operating regions have flexibility to tailor such initiatives and adopt new ones to better conform to local and regional customs and practices.

· The Group maintains in place industry standard insurance cover to mitigate many risks and liabilities, such as workers compensation and general liability policies.

Risk Trend: Level

Information Security, vulnerability to cyber-attacks and PCI-DSS compliance

Potential Impact

Increasing reliance on online distribution channels, transactions over the internet, the aggregation and storage of guest and other information electronically, both on company-controlled servers and networks and in cloud-based environments present heightened risks of failures, breaches and attacks affecting the operation of those systems and networks and/or a potential loss or misuse of confidential or proprietary information. The occurrence of cyber risks could disrupt business, the ability of the Group to take or fulfil bookings or lead to reputational and monetary damages, litigation or regulatory fines.

In addition, various aspects of the Group's operations are required to achieve compliance with the payment card industry security standards ("PCI-DSS"), and failure to do so could result in penalties and/or withdrawal of credit card payment facilities.

Mitigating Activities

· A new Group IT governance committee was formed in 2017 comprising the Chief Technology Solutions Officer, The Chief Financial Officer and SVP General Counsel and Company Secretary to enhance IT oversight and focus.

· The Group have in place information technology policies and procedures that have been updated to reflect implementation of the latest PCI-DSS compliance standards

· Periodically, the Group engages external consultancy firms to conduct security and penetration testing services in relation to the Group's websites and systems and implements enhancements where necessary.

· Software systems are regularly updated to allow for the latest security updates and patches to be installed.

· Where the Group outsources critical information technology systems, including its point of sale and property management systems, the Group utilises reputable suppliers that have industry-standard or best-in-class data security protocols. The Group's hotels utilise Oracle's MICROS property management system, for example.

· The regional information technology teams have developed disaster recovery plans and guides with regard to their high-priority systems, and tests are conducted on select mission-critical systems annually to verify their recoverability offsite.

· The Company has in place, and regularly reviews, cyber insurance coverage to protect against certain cyber risks.

Risk Trend: Increasing

Response to natural, geopolitical and economic events

Potential Impact

The Group is exposed to various external events that may reduce travel, impact on operations or increase the Group's operating costs. Such events are beyond the control of management, may be localised to a particular community, city or country or they may have a wider international impact. Examples of such events include severe weather conditions and natural disasters, acts of terrorism, war or perceived risk of armed conflict, epidemics, nationalisation of assets or restrictions on the repatriation of funds, increased travel costs, industrial action and political and/or social unrest.

Notably, with regard to the UK referendum on EU membership, while we have not seen any immediate or material impacts from that decision aside from significant exchange rate fluctuations, we recognise that the coming years will be challenging in the UK as uncertainty remains and we are monitoring political and macro-economic developments closely.

With regard to these risks, appropriate insurance coverage may not be available in the market in some instances or coverage may not be available on commercially viable terms.

Mitigating Activities

· The wide geographic spread of the Group's properties is a natural hedge against the impact of natural, geopolitical and economic events.

· The Group's flexible financial and revenue management systems help it to control costs and achieve better yields in volatile trading conditions.

· The Group has in place disaster recovery, crisis response and business continuity plans and often has working relationships with local law enforcement bodies to enable it to respond to major incidents or emergencies.

· Management pro-actively monitors geopolitical developments and seeks to identify emerging risks at the earliest opportunity to ensure clear roles and responsibilities, internal controls and other steps to minimise these exposures to the greatest extent possible.

· The Group's insurance requirements are regularly reviewed by management to ensure that the coverages obtained are appropriate to the company's risk profile relative to the cost of cover available in the relevant markets.

Risk Trend: Level

Related party transactions

The following has been extracted from pages 137 and 138 of the 2017 Annual Report (Note 33 to the Consolidated Financial Statements).

Related parties

Identity of related parties

Transactions between the Company and its subsidiaries have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. All transactions with related parties were entered into in the normal course of business and at arm's length.

The Group has a related party relationship with its joint ventures, associates and with its Directors and executive officers.

Transactions with ultimate holding company and other related companies

The Group has a related party relationship with certain subsidiaries of Hong Leong Investment Holdings Pte. Ltd ("Hong Leong")‌‌ which is the ultimate holding and controlling company of Millennium & Copthorne Hotels plc and holds 65.2% (2016: 64.9%)‌‌ of the Company's shares via CDL‌‌, the intermediate holding company of the Group. During the year ended 31 December 2017, the Group had the following transactions with those subsidiaries.

The Group deposited certain surplus cash with Hong Leong Finance Limited, a subsidiary of Hong Leong, on normal commercial terms. As at 31 December 2017, £4m (2016: £4m)‌‌ of cash was deposited with Hong Leong Finance Limited.

Fees paid/payable by the Group to CDL and its other subsidiaries were £3m (2016: £2m)‌‌ which included rentals paid for the Grand Shanghai restaurant and Kings Centre; property management fees for Tanglin Shopping Centre; charges for car parking, leasing commission and professional services.

Transactions with key management personnel

The beneficial interest of the Directors and their connected persons in the ordinary shares of the Company was 0.16% (2016: 0.16%)‌‌.

In addition to their salaries, the Group also provides non-cash benefits to Directors and executive officers and contributes to a post-employment defined contribution plan depending on the date of commencement of employment. The defined contribution plan does not have a specified pension payable on retirement and benefits are determined by the extent to which the individual's fund can buy an annuity in the market at retirement.

Executive officers also participate in the Group's share option programme, Long-Term Incentive Plan and the Group's Sharesave schemes. The key management personnel compensation is as follows:

Statement of Directors' Responsibilities

The following responsibility statement is repeated here solely for the purposes of complying with DTR 6.3.5R. The statement relates to and is extracted from page 71 of the 2017 Annual Report.

The statement is for the 2017 Annual Report and is not the extracted information presented in the announcement or otherwise.

Responsibility statement

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, Liabilities, financial position and profit or Loss of the company and the undertakings included in the consolidation taken as a whole; and

· the strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy.

On behalf of the Board

Kwek Leng Beng

Chairman

28 March 2018

For further information please contact:

Millennium & Copthorne Hotels plc +44 (0)20 7872 2444

Jonathon Grech, Group General Counsel and Company Secretary

Peter Krijgsman, Financial Communications (Media)