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Letter from the President of the Management Board

|In 2011 despite difficult market conditions we increased our sales by#2.1%|and decreased debt by#4.7%

Pismo predsednika upraveDear shareholders,
The Gorenje Group concluded the previous year in better financial condition than at its beginning, which is a very good achievement considering the unfavourable circumstances that are still dominating in financial markets. We have surpassed three key goals in financial operation: our free cash flow in the amount of EUR 35.8 mio was 23 percent above the plan, the Group's debt was reduced by 4.7 percent through successful disinvestments, and we also achieved better results than planned in restructuring the maturity of financial liabilities, where we increased the share of non-current borrowings to 62.5 percent in comparison with 53.9 percent in 2010.

Sales growth in very challenging market conditions

The home appliances industry was under even greater pressure last year than in 2010. The European market, where we still generate the majority of our revenue, shrunk by 1.3 percent after having risen 2.1 percent in 2010. We nevertheless managed to increase our sales by almost 2.9 percent to EUR 1.4 billion. The most challenging operating circumstances were in the markets of Eastern and South-Eastern Europe, which are most important from the aspect of strengthening our profitability. We neutralised the smaller volume and change in the product structure of sales in these markets through higher sales in other markets. With the acquisition of the Asko company, we improved our sales opportunities in the USA and Australia, and further strengthened our market shares in Scandinavia.

The profitability of our industry was under the extreme pressures of growing prices of raw materials and materials. Although the raw material shock began to stabilise in the autumn months, the prices of raw materials and materials, which represent the highest expense within the home appliance production, remained high and could not be transferred to product sales prices due to excess capacities in the industry.

The operating profit (EBIT) in the amount of EUR 36.5 mio was consequently 35 percent lower over the previous period, but the greater part of the decrease may be attributed to the effects of the Asko acquisition and the sale of the Company's share in Istrabenz Gorenje. Considering the exclusion of these effects, EBIT lies at EUR 41.4 mio and is on the level attained in 2010.

Strong trademarks, development and identification are generators of stable development

This year is not going to get any easier for home appliance manufacturers. We are facing pressures on sales prices, unpredictable movements in raw material prices, increasing payment indiscipline, declining purchasing power in Europe, and currency fluctuations in non-euro countries. We are witnessing the further consolidation of the industry. Therefore, strong trademarks, the development of new products that are designed to very high quality and offer innovative functions and technical solutions, represent key competences that shall contribute to our uniqueness and trends in the line of business. With the development of the HomeChef oven featuring innovative slide control as can be found in the most popular consumer electronics, we have set a milestone in the advanced control of home appliances. This year, we are launching a new generation of washers and dryers as the result of the work and know-how of our developers and designers in Velenje. It is distinguished by innovative solutions that improve energy efficiency, programmes and management that adapt to the needs of the modern consumer, as well as by superior design. This year these products received one of the most prestigious international awards in the field of design – the Red Dot award. We are also beginning to manufacture an induction cooking hob featuring Gorenje IQcook sensor control of cooking, for which we also received the Red Dot Award. The majority of our investments this year will again be directed towards development and design.

Distinguishability, growth opportunity and higher profitability

2012 was the first year in which we implemented the strategic plan prepared last year in response to the radically changed operating conditions in past years and the internal growth of the Gorenje Group. One of the key changes implemented in our operations and organisation is greater focus on the basic activities of home products that shall be the principal generator for increasing the profitability of our operations. We are keen to increase the sale of products that are below the designer and higher price class, from the present ten to more than 25 percent within the sales structure. This will be achieved by distinguishability and uniqueness and by strengthening sales in prospective international markets, primarily in metropolises, where the purchasing power of consumers is higher. The first successful sales results in the Middle East and in Hong Kong have already been attained after only a few years in these markets. We are continuing with the optimisation of our production locations, which significantly increase Gorenje's competitiveness in a branch where excess capacities are predominant.

We are also creating conditions for improving the implementation of our strategy through the reorganisation and renovation of corporate governance, within the scope of which our Management Board has been functioning as a changed model since 1st January of this year. We have come to the decision that our goals shall be more easily implemented based on the shift from the divisional to the functional organisation of the Management Board, and have for this purpose reassigned the competences of Management Board members accordingly.

I thank all of our stakeholders for their trust and support given to the Management Board in its activities focused on the long-term development and growth of the Gorenje Group. I assure you that again this year I shall, together with the members of the Management Board and more than 10,600 employees in numerous countries across the globe, strive to create permanent value for you, our shareholders, our customers and partners, and, of course, for all the employees of the Gorenje Group.

Franjo Bobinac
President of the Management Board