System-ID: s_2

Letter from the President of the Management Board

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Dear shareholders,

In last year's jubilee sixtieth year of its operation, Gorenje improved its operations and attained good business results despite the continuing difficult situation in markets. We grew at a faster rate than the European household appliance market, which is still recovering, increased our market shares and, following the losses recorded in 2009, once again recorded a profit in the amount of EUR 20 million.

The business environment in our key markets was still under the impact of high unemployment rates, as well as currency and payment risks. In this year we also lost two major customers that ended up in bankruptcy - the German business system Quelle, our largest customer in recent years, and the Croatian company Pevec, our largest partner in the western Balkans. Merkur, the largest Slovenian technical products dealer, has substantially reduced its scope of operations following the initiation of a compulsory composition procedure. However, despite grim external operating circumstances, we managed, through the good work of our entire team within the country and abroad, to increase the sales revenue of the Gorenje Group by 16.5 percent to EUR 1.38 billion in comparison with the previous year, which is a record achievement. Excluding the effect of the Scandinavian producer of top-quality household appliances, Asko, our sales revenue increased by 11 percent.

The quantity of white goods sold in the European market in the past year fell short of the amount attained in 2006 by more than ten percent, and according to the estimates of the European Committee of Domestic Equipment Manufacturers (CECED), it will take approximately seven years for our industry to attain the level reached five years ago. Our company's growth in the past year was nevertheless higher than the average market growth. The European household appliance market, which is our most important market, attained a two percent growth, while Gorenje managed to increase the sale of household appliances, excluding the acquisition of Asko, by 4.8 percent. Considering the impact of the Asko Company, we attained 12.5 percent higher sales than in 2009. Our most successful operations in Western Europe were in the Netherlands and Germany, whereas in Eastern Europe the markets of Russia and the Ukraine were in the forefront. Serbia continues to be our leading market in the western Balkans. Gorenje has also increased sales in the countries of the Middle and Far East, where we are intentionally broadening our presence in past years, as well as in the United States, where our products are sold under the Asko brand name.

Alongside the Home Appliances Division, good business results were also recorded by the Ecology, Energy and Services Division. We cannot be satisfied, however, with the operations of the Home Interior Division, which, due to the unfavourable economic situation and difficulties encountered by our major customers, repeatedly registered a decline in sales in the past year. Although the cost efficiency of this division has substantially increased, this is still insufficient for attaining the profitability threshold, which is why we have begun preparations for its long-term restructuring.

We have significantly improved the profitability of the Group's business activities, not only by increasing our scope of operations, but also by raising productivity, optimising costs, and improving the sales structure according to products and markets. With an operating profit (EBIT) of EUR 56.4 million, we surpassed last year's EBIT by 4.6 times, or comparably by 3.4 times. The margin on the EBIT level grew from one percent to 4.1 percent (or comparably to 3.1 percent). We improved our net profitability by EUR 32.3 million. The Company generated a net cash flow of EUR 72.3 million, while the free cash flow, in the amount of EUR 13.4 million, fell short of the amount attained in 2009 due to the growth of business activities, higher scope of investments, and movements in working capital. It was allocated to reduce the Group's indebtedness.

On the 60th anniversary of our operations, we have set a great many milestones that have strengthened our position in 70 world markets and guaranteed the Group's stable growth. We acquired the Swedish producer of top-quality household appliances, Asko. This step has allowed us to expand the range of products from our own factories, particularly dishwashers, and to strengthen our presence in North American and Australian markets as well as in Scandinavia.

Almost 90 percent of all our products were sold under our own brand names, which is the highest percentage ever attained. This year we are adding Gorenje+ to our portfolio of brand names, which belongs to the higher middle price class developed especially for kitchen studios, where we have not been present so far. With the intention of increasing the percentage of sales under our own brand names in the future, we are continuing to develop innovative, energy-efficient and superiorly designed home appliances, such as the iChef oven with advanced touch control module, for which we received the resounding Red Dot design award. By developing new products with higher added value, which customers are prepared to pay more, we managed to raise the average price of our products by four percent in the past year.

The entry of a new owner, the International Finance Corporation (IFC), a member of the World Bank, within the scope of our summer capital increase procedure has increased the financial stability of the Group. Our intention was to provide all our existing shareholders and other interested investors with the option of participating in our capital increase, and for this purpose conducted another phase of capital increase in the fall. Owing to the illiquidity of the Slovenian capital market and the weakened economic and financial situation, this phase did not attain the profitability threshold. Nevertheless, we have assessed that the summer capital increase procedure is in itself an exceptional achievement for Gorenje, which in such demanding economic conditions has managed to win the trust of such a distinguished investor as IFC. Our current ownership structure reflects our international orientation, and we shall continue to create added value for both our large and small shareholders in the future.

Gorenje has entered the year 2011 with financially more stable and improved business operations, but this will also be a year of hard work for all. We are continuing to optimise business processes, organisational structures and costs, to disinvest unneeded property, and to develop production locations, a portfolio of brand names and new products for the home in line with the business plan and our strategy up to the year 2013. The main threats facing all manufacturers of household appliances this year are the growing prices of raw materials and materials, which began to rise in the last quarter of the previous year. We shall attempt to partially neutralise their growth by raising the prices of products, which, given the exceptional competition in a branch where the offer strongly surpasses the demand, will not be easy.

This year our efforts will also be focused on the development of corporate governance and the organisational structure of the Gorenje Group, which in past years has not only developed into the largest Slovenian industrial business system, but also into a leading international corporation in the home products branch. Assisting us in this area will be a supervisory board of experts from both Slovenian and international environments, who commenced their term in office last year.

In guiding the Company towards its set goals, the Management Board was joined on the 3rd of March by a new member, Marko Mrzel, who shall be responsible for the areas of finance and economics. Mr. Mrzel has succeeded former member of the Management Board, Mirjana Dimc Perko, whose term in office was consensually terminated on the 1st of January 2011.

This year, Gorenje is embarking on its 61st year. The credit for this goes to the entire team of former and current employees who knew how and managed to transform a craftsman's workshop into an international corporation. Our thanks also goes to you, dear shareholders, who have been following and supporting us in the realisation of our goals since the company's transformation into a stock company. Together we have built solid foundations on which we shall continue to develop and grow in the future.

Franjo Bobinac, MBA
President of the Management Board