Profitability of Operations of EES Division

With the sale of the main company Istrabenz Gorenje in July 2011, the entire Energy segment was eliminated from the Division. The nature of the company's operations (commissions earned in trading with electricity) caused relatively low profitability, but higher yield from invested capital than that achieved in the Home Appliances Division. As a result, the total EBIT margin of this division was also lower than in the Home Appliances Division and it thus reduced the total gross margin of the Gorenje Group.

Profitability of the Division at the level of contribution margin (gross margin) relating to the difference between revenue and costs of goods and material decreased by EUR 18.0 mio or by 20.7 percent (to EUR 69.1 mio) at a 3.0 percent reduction of the gross margin's level (to 20.7 percent). This resulted in impairment of the margin by EUR 9.8 mio and its decline due to lower sales volume amounting to 8.2 mio EUR.

The impairment of the gross margin at an observed level in the Energy segment results from the general situation in markets of electricity, whose common characteristic in 2011 was a significant reduction of sales commissions over the year 2010. Due to the transition from the period of the high price increase for secondary raw materials to the period of modest growth in comparison to 2010, the Ecology segment achieved margins at the same level or at a lower level of up to 4 percentage points. As for the services segment and from the view of the Division, the movement of margins in the production of tools and machine and tools manufacture had the strongest negative impact, where lower profitability of transactions was the result of a very low potential of investing in technical and technological equipment of industrial producers.

At a comparable level the Division's gross margin dropped by EUR 13.0 mio or 15.8 percent (from EUR 82.0 mio to EUR 69.1 mio), its quality reduction amounted to EUR 30.8 mio (at a 9.2 percent margin reduction) and its growth due to higher sales amounted to EUR 17.8 mio.

In 2011, the division increased the added value per employee from EUR 33,856 to EUR 34,052 ,or by 0.6 percent, in spite of a significant reduction in gross margin which had an impact on the total amount of added value. As employee benefits expense growth exceeded the added value growth, the economic labour productivity (change in the ratio of added value to labour cost per employee) dropped by 3.3 percent. The share of employee benefits expense within added value increased from 71.8 percent to 74.3 percent.

At a comparable level, the Division reduced added value per employee from EUR 35,883 to EUR 34,052 or by 5.1 percent. The elimination of the Energy segment in the second half-year of 2010 (for the sake of comparison of information) significantly reduced the number of employees in the year 2010, and thus increased the economic labour productivity per employee. Due to this fact and due to additional employment in the Ecology segment as a result of increasing the volume of operations in 2011, the productivity decreased by 4.9 percent, increasing the share of employee benefits expense in added value from 70.6 percent to 74.3 percent.

A decrease in costs of services amounting to EUR 9.3 mio, or by 22.6 percent, is related to the reduction in sales of medical equipment where a part of related sales costs in the comparable period of 2010 was accounted for within costs of other operating services.

At a comparable level costs of services were by EUR 6.1 mio or 16.1 percent lower than in the previous year.

Other operating income increased by EUR 5.2 mio (at a comparable level by EUR 5.4 mio), other operating expenses decreased by EUR 0.2 mio (they increased at a comparable level by EUR 0.4 mio). The increase in other operating revenue mostly refers to compensation for damages received in connection with the Patria project.

The movement of other categories of operating and finance income or expenses over the year 2010 had no material impact on the reduction in profitability at the level of EBIT and profit of the Division. The Division generated a profit amounting to EUR 2.9 mio (ROS of 0.9 percent), which indicates a decrease over the previous year in the amount of EUR 0.9 mio or 23.9 percent, or at a comparable level is lower by EUR 1.8 mio if compared to 2010.