Company 5: Financial risk management

In respect of financial risk management, the internal financial policies comprising the bases for efficient and systematic risk management were observed in 2011. The objectives of financial risk management are: 

• to achieve stability of operations and to reduce risk exposure to an acceptable level,
• to increase the value of companies and the impact on their financial standing,
• to increase financial income and/or to decrease financial expenses, and
• to nullify and/or decrease the effects of exceptionally damaging events.

In the Company, the following key financial risks have been defined:

• Credit risk
• Currency risk
• Interest rate risk
• Liquidity risk

The exposure to each of the above risks and the hedge measures to be applied are judged and implemented on the basis of their effects on the cash flows. To hedge against financial risks in the course of ordinary business activities, relevant hedging activities have been conducted in the area of operating, investing and financing activities.

In the light of the strained macroeconomic situation, more attention was paid in 2011 to the credit risk which includes all risks where the failure of a party (a buyer) to discharge contractual obligations results in a decrease in economic benefits of the Company. The credit risk was managed by application of the following sets of measures:

• insurance of a major portion of operating receivables against credit risk with Slovenska izvozna družba – Prva kreditna zavarovalnica d.d.;
• additional collateralisation of more risky trade receivables by bank guarantees and other security instruments;
• regular monitoring of operation and financial standing of new and existing business partners, and limitation of exposure to certain business partners;
• implementation of mutual and chain compensation with buyers;
• systematic and active control of credit limits and collection of receivables.

Due to the macroeconomic situation, the Company's management estimates that the exposure to credit risk has significantly increased. It is, however, adequately reduced by the applied hedge measures. 

In 2010, currency risk was transferred by the holding company to its subsidiaries. Consequently, the Company is no longer exposed to currency risk, which is the risk that the economic benefits of the Company may be decreased due to changes in foreign exchange rates. The same business policy was continued in 2011. In 2011, the currency risk mainly originated from the performance of business activities in the US dollar markets, while the exposure to other currencies was lower than in the previous years. When managing currency risk, particularly in the US dollar markets, a greater attention was paid to natural hedging of currency risk and harmonisation of business operations to ensure long-term decrease in currency fluctuation exposure by matching or netting sales and purchases.  

Additional short-term hedging is carried out by currency future contracts and short-term borrowings in currencies, to which the Company is exposed.

In the light of the expected changes in variable interest rates in the markets, the share of loans with fixed interest rates was increased in the beginning of 2011, both in the form of loans with fixed interest rates and the derivative financial instruments, in order to increase hedging against interest rate risk in 2011. The share of loans with fixed interest rates amounted to 49.3 % at the end of 2011. The Company's management estimates that the exposure to interest rate risk is moderate.  

Liquidity risk is the risk that the Company will fail to meet commitments in stipulated period of time due to the lack of available funds.

Credit lines in the amount of TEUR 92,250 mature in 2012. The refinancing of the existing financial liabilities has been negotiated with the banks in order to reduce the risk of refinancing. The liquidity reserve as at 31 December 2011 in the amount of TEUR 102,795, consisting of unused revolving credit lines, short-term deposits with banks, and cash in banks, is used to secure adequate short-term control of cash flows and to decrease short-term liquidity risk.

Short-term liquidity risk is estimated to be moderate due to efficient cash management, adequate available credit lines for short-term control of cash flows, a high degree of financial flexibility, and a good access to financial markets and funds.

Long-term liquidity risk is estimated as moderate due to effective performance of the Company, effective cash management, sustainable ability to generate cash flows from operating activities, and an adequate capital structure. Gorenje, d.d. and the Gorenje Group update at least annually the long-term debt service plant, with a special emphasis on the activities required to implement the refinancing within a period of one year. 

The Company's management estimates that the exposure to liquidity risk is moderate.

Capital management

The Company's policy is to maintain a strong capital base so as to maintain confidence of all stakeholders and to sustain future development of Gorenje. As one of the strategic ratios, the Company defined the return on equity as profit attributable to majority shareholders divided by the average value of equity attributable to majority shareholders. The Company seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position.

The dividend policy is based on the investment plans, optimum capital structure policy, and shareholders' expectations and interests. The amount of dividend per share is proposed by the Management Board and the Supervisory Board of the controlling company. Dividends are paid from the accumulated profit of the controlling company determined in accordance with the relevant current regulations in Slovenia. The resolution on the appropriation of accumulated profit is adopted by the Shareholders' Meeting.

The Company has no employee share-owning scheme and no share option programme. There were no changes in the approach to capital management in 2011. Neither the controlling company nor its subsidiaries were subject to capital requirements determined by the regulatory authorities.

There are no provisions in the Articles of Incorporation that would invalidate the proportionality of rights arising from shares, such as the rights of minority shareholders or the limitation of voting rights, and there are no resolutions adopted on conditionally increased capital.