Group 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 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 Gorenje Group, the following key financial risks have been defined:

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 Group. 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., and other insurance companies;
• 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 Group's management estimates that the exposure to credit risk has  increased.  

With regard to the geographic diversification of its operations, the Gorenje Group is strongly exposed to currency risk, which is the risk that the economic benefits of an entity may be decreased due to changes in foreign exchange rates. When assessing currency risk, the statement of financial position exposure was taken into consideration. The currency risk results mainly from the performance of business activities in the markets of Serbia, Great Britain, Czech Republic, Poland, Hungary, Croatia, Turkey and all US dollar markets. Therefore, a great attention was paid to natural hedging of currency risks 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 local currencies. Irrespective of measures taken to hedge against currency risk, the Gorenje Group’s management estimates that, due to significant macroeconomic changes and oscillations particularly in the East European countries, the exposure to currency risk has increased.

The share of loans with fixed interest rate in the Gorenje Group was 46% at end of 2011. In the light of the expected changes in variable interest rates in the markets, bases and starting points were prepared at the start of 2011 for an increase in the share of loans with fixed interest rates, both in the form of loans with fixed interest rates and in the form of derivative financial instruments, in order to increase hedging against interest rate risk. The Group’s management estimates that the exposure to interest rate risk is moderate.

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

Borrowings in the amount of TEUR 168,602 mature in 2012. For this reason, debt refinancing has been negotiated with banks in order to decrease refinancing risk. The liquidity reserve as at 31 December 2011 in the amount of TEUR 206,318, which consists of unused revolving credit lines, long-term credit lines, short-term deposits with banks, and cash in banks, is used to assure adequate short-term control of cash flows and to decrease short-term liquidity risk.

Short-term liquidity risk is estimated as 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 sources.

Long-term liquidity risk is estimated as moderate due to effective performance of the Group, effective cash management, sustainable ability to generate cash flows from operating activities, improved maturity structure of financial liabilities, and an adequate capital structure. Gorenje Group updates 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 Gorenje Group's management estimates that the exposure to liquidity risk is moderate.

Capital management

The Management Board decided to maintain a strong capital base in order to secure confidence of all stakeholders and to sustain future development of the Gorenje Group. As one of the strategic ratios, the Group defined the return on equity as profit for the period attributable to owners of the parent company divided by the average value of equity attributable to owners. The Group seeks to maintain a balance between the higher returns, which are rendered possible by a higher level of borrowings, and the advantages and security assured by a strong capital structure.

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 Gorenje Group 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.