Profitability of Operations of HI Division

Contribution margin (gross margin) at the level of costs of goods and material declined by 2.8 percentage points (from 38.6 percent to 35.8 percent), or amounted to EUR 0.9 mio if compared to 2010.

Due to the lower sales volume (activity variance), the Division recorded a lower gross margin by EUR 0.6 mio. Under consideration of both effects – in terms of quality and activity - the resulting effect amounted to EUR 1.5 mio.

The impairment of the gross margin is mainly a result of (1) relocation of the production and its structural changes, (2) changes in the product sales structure, and (3) the movement of costs for material and raw materials and its negative impact.

Costs of services (EUR 4.0 mio) were maintained at the level of 2010, in spite of lower volume of business activities; this mostly resulted from additional costs of moving part of the production to Serbia and the integrated restructuring of business activities. In the last three years, the division's operations incurred loss which was impossible to neutralise irrespective of cost optimisation and a significant reduction in the sales volume. Consequently, the second half of 2010 saw the start of restructuring preparations, whereas the Division's actual restructuring process started at the beginning of 2012 and shall – according to first estimates – be completed in the first quarter of 2013.

Added value per employee in the amount of EUR 10,178 has not changed significantly over the previous year (2010: EUR 10,247). As employee benefits expense growth exceeded added value growth, the economic labour productivity (change in the ratio of added value to labour cost per employee) dropped by 6.5 percent in view of total generated lower added value in the amount of EUR 1.9 mio (to EUR 7.6 mio). Such added value was no longer sufficient for covering employee benefits expense since their share in added value amounted to 163.4 percent (2010: 152.7 percent).

Amortisation and depreciation expense exceeded last year's figures by EUR 0.2 mio or 8.9 percent as a result of urgent investments made in the production plant's technical equipment, as they are considered a precondition to successful comprehensive operational restructuring that the Division has engaged in since 2011.

The effects of movement of items of other operating income and expenses have a low impact on the movement of profitability, whereas the fall of the result from financing activities (from EUR 0.4 mio to EUR -0.2 mio) is mostly attributable to the positive effect of the sale of securities in 2010 in spite of the negative effect of creating allowances for receivables due from the company Merkur, d.d., in the process of compulsory composition in the same year. Without the effect mentioned, the Division would achieve a similar result from financing activities as in 2011.

Loss for the period incurred in the amount of EUR 6.9 mio is by EUR 0.6 mio or 9.9 percent higher than the loss of the comparable period last year. The primary reasons for increasing the loss is the impaired gross margin, as well as keeping costs of services at the level of 2010 and the increase in amortisation and depreciation expense.