Monday, 25th March 2019, Velenje

The year 2018 was defined by the search for a strategic partner, integration into the Hisense Group, and Gorenje Group's financial stabilization

The year 2018 was defined by the search for a strategic partner, integration into the Hisense Group, and Gorenje Group's financial stabilization
Last year was a watershed year for Gorenje, as we got a new 100-percent owner, the Chinese corporation Hisense. Thus, we became a part of a global, financially very stable corporate group, which affords us significant potential for Gorenje's future growth and development, access to new markets, new technologies and procurement sources, and many other synergies. In 2018, we thus invested immense effort into the strategic project, both in the first part of the year until the completion of the takeover, and in the remaining part when we worked with the new strategic owner on the challenging and extensive process of integration with the Hisense group. The very search for a strategic partner and the ensuing integration activities, however, resulted in considerable fluctuation in our downstream and upstream markets.

The strategic process was carried out swiftly and efficiently, and both the shareholders and other stakeholders were pleased upon its completion. However, the process also involved uncertainty; first with regard to the outcome of the strategic process, and later with respect to Gorenje's future role in the great Hisense family. This uncertainty left our partners, customers, and suppliers in a reserved stance, and our competition was quick to take advantage of the situation. As a result, we were forced to increase our commercial investments to maintain our market position and presence in the distribution channels, and to offer additional incentives to our partners, which in turn had a profoundly negative effect on Gorenje Group's performance last year. We saw a similar situation regarding material and component sourcing.

Growth in Eastern Europe, drop in OEM business

In 2018, our sales revenue amounted to EUR 1.184 billion, of which EUR 1.074 billion, or 91 percent, was generated in our core activity of domestic appliances. Our revenue increased in particular in the markets of Eastern Europe (with the highest growth rates in Hungary, Ukraine, Bulgaria, and the Czech Republic) and in the markets where we are marketing products under the Asko brand.

We continued to invest into development, earmarking 2.5 percent of our total revenue (EUR 30 million) for this purpose, in order to support growth and improve the structure of sales; the same amount was invested last year into marketing.

Sales of premium products accounted for 27.8 percent of total revenue, while the share of innovative appliances in total revenue increased to 22.7 percent. Key new developments in 2018 included the new generations of premium washing machines and dryers, premium dishwashers, gas cooking hobs and built-in refrigerators, and new versions of dishwashers for industrial customers. We also introduced our ConnectLife platform that is the foundation of the future smart home for all appliances and devices offered by our Group.

In the first half of the year, performance was consistent with the budgeted dynamics; in the second half, however, it was very adversely affected by uncertainty among our partners with regard to the outcome of the strategic process, and it worsened as a result. The largest decline was seen in industrial (OEM) deals, as customers trod very warily when doing business with Gorenje, for reasons referred to above. Without the decline of OEM deals, revenue in our core activity would have grown relative to the year before.

Revenue was lower than a year earlier in Western Europe where we felt the effect of strong competition, particularly in the Benelux countries, and labour costs pressures. As sales decreased, results from operations were negatively impacted by the unchanged amount of fixed costs that were impossible to adjust to the lower-than-planned sales in such a short period of time.

Hence, our bottom line for 2018 was a net loss of EUR 37.3 million. In this amount the net profit of the companies with discontinued operations is included (EUR 2.9 million). Considering the negative impact of the one-off and extraordinary events (EUR 74.4 million) and the positive effect of coal trade business (EUR 0.5 million), the net loss in 2018 is EUR 111.2 million.

Non-recurring and extraordinary events had the most pronounced effect on Gorenje Group's performance

In the process of integration into the Hisense Group and adjusting to its business strategies, modes of operation, assumptions, and estimation methodologies, we also changed some accounting estimates that now differ from those effective before the takeover. As a result, assumptions and methodologies of accounting estimates changed considerably. Their adjustment upon integration in to the Hisense Group had many one-off and extraordinary effects on Gorenje Group's results, which, in total, amounted to a loss of EUR 74.4 million in 2018.

With Hisense's support, considerable financial stabilization of Gorenje Group's financial structure

After a successfully completed acquisition and entry of the strategic owner, Gorenje withdrew its shares from the Ljubljana and Warsaw Stock Exchange last year, and Gorenje's transformation into a limited liability company in 2019 completes the strategic process.

Consolidation of Gorenje ownership within the powerful and financially highly stable Hisense Group brings many benefits to Gorenje Group's future operations, and facilitates further development and growth in the fiercely competitive white goods industry.

With the support by the strategic owner, we conducted important refinancing of our Group at the end of 2018. Thus, average interest rate margin will be lower by approximately a quarter in 2019 than it was in 2018, which will have a considerable effect on the Group's profitability. In the refinancing process, Hisense Home Appliance Holding offered the required financial support in the amount of over EUR 100 million to Gorenje Group and thus ensured its long-term financial stability and solvency. The owner will maintain at least EUR 100 million of internal financing as long as the net financial liabilities to EBITDA ratio is above 3.0.

Consistently with our strategic policy of focusing on our core activity, we continued to divest our non-core businesses last year. This involved the divestment of Gorenje Surovina, complete with its subsidiaries, and our stake in Gorenje Projekt and GGE Netherlands B.V.

Major potential for development and growth of Gorenje's and Hisense's own brands

Hisense Group's scope of operations, advantages in the global upstream and downstream channels, and high technological and development competences in smart and digital white goods are an excellent match for Gorenje's range of products and manufacturing capacity in Europe. Both groups' distribution channels in Europe are mutually complementing: Gorenje has a strong position in Eastern Europe, while Hisense has a solid standing in Western Europe. This is a source of significant potential for further development of both groups' own brands in their existing and new markets, and for increase of Gorenje Group's scope of operations, efficiency, and profitability, while also contributing to the expansion of Hisense Group's operations.