Gorenje Group 2018 Annual Report Annual Report 2018 Velenje, Slovenia, March 2019 Gorenje, d. o. o. 1 Gorenje Group 2018 Annual Report CONTENTS Annual Report ....................................................................................................................................... 1 1. Gorenje Group .......................................................................................... 4 1.1. Introduction ................................................................................................................................ 4 1.2. Key events in 2018 ...................................................................................................................... 5 1.3. Gorenje Group Presentation ...................................................................................................... 9 1.3.1. Gorenje Group is a part of the Hisense Group ........................................................................ 9 1.3.2. Gorenje Group corporate profile .......................................................................................... 11 1.3.3. Brands .................................................................................................................................... 11 1.3.4. Gorenje Group History ......................................................................................................... 12 1.3.5. Vision, mission, values ........................................................................................................... 13 1.3.6. Key stakeholders ................................................................................................................... 13 1.3.7. Gorenje Group Other Businesses .......................................................................................... 14 1.3.8. Corporate Governance Statement ........................................................................................ 16 2. Business Report ...................................................................................... 35 2.1 Business Excellence ................................................................................................................... 35 2.1.1 Creating value for the shareholders .................................................................................. 35 2.1.2 Development of key segments .......................................................................................... 38 2.1.2.1 Brands ................................................................................................................................ 38 2.1.2.2 Programs ........................................................................................................................... 44 2.1.3 Business performance ....................................................................................................... 48 2.1.3.1 Gorenje Group performance highlights ............................................................................ 48 2.1.3.2 Sales and markets .............................................................................................................. 50 2.1.3.3 Development and investment ........................................................................................... 52 2.1.3.4 Gorenje Group operating performance analysis ............................................................... 53 2.1.3.5 Financial performance ....................................................................................................... 55 2.2 Environmental sustainability ..................................................................................................... 59 2.2.1 Gorenje's Eco Cycle ........................................................................................................... 59 2.2.2 Environmental management quality assurance policy ..................................................... 60 2.2.3 Environmental aspects of our operations ......................................................................... 61 2.2.4 Efficient resource management ........................................................................................ 63 2.2.5 Carbon footprint ................................................................................................................ 64 2.2.6 Pursuit of environmental responsibility – our goals ......................................................... 65 2.3 Social sustainability ................................................................................................................... 66 2.3.1 Relations with employees ...................................................................................................... 66 2 Gorenje Group 2018 Annual Report 2.3.2 Quality for our users ............................................................................................................... 70 2.3.3 Cooperation with local communities ..................................................................................... 71 2.4 Risk management ...................................................................................................................... 72 2.4.1 Risk management process, methodology and organization .................................................. 74 2.4.2 Key changes affecting risk management in 2018 ................................................................... 74 2.4.3 Risk catalogue ......................................................................................................................... 75 2.4.4 Insurance of our assets, liability and employees, and protection from cyber threats .......... 82 2.4.5 Targets for 2019 ..................................................................................................................... 83 3. Accounting Report pursuant to IFRS as adopted by the EU ...................... 84 1.1 Independent Auditor's Report................................................................................................... 84 3.1.1 Independent Auditor's Report for Gorenje Group ................................................................. 84 3.1.2 Independent Auditor's Report for the company Gorenje, d.o.o. ........................................... 88 1.2 Accounting Report of the Gorenje Group and the company Gorenje, d.o.o. ........................... 92 3.2.1 Financial Statements of the Gorenje Group and the company Gorenje, d.o.o. .................... 92 3.2.2 Notes to the Financial Statements ....................................................................................... 101 3.2.3 Disclosures of the Gorenje Group and the company Gorenje, d.o.o. to the individual items in the financial statements ................................................................................................................... 120 3 Gorenje Group 2018 Annual Report 1. Gorenje Group 1.1. Introduction Solid foundations for further development The year 2018 was a watershed year for Gorenje Group, as well as a year of transition, defined to a large extent by the strategic process of forging a new strategic partnership. This process was carried out swiftly and efficiently, which pleased both the shareholders and the management. Thus, Gorenje Group has become a part of a global, financially very stable Hisense Group, which gives us significant potential for Gorenje's future growth and development, and access to new markets, new technologies, procurement sources, and many other synergies. In 2018, we invested immense effort into this strategic project, both in the period leading up to the completion of the takeover, and in the remainder of the year when we worked with the new strategic owner to actively approach the 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. Uncertainty regarding the outcome of the strategic process and Gorenje's future role in the great Hisense family was reflected in a reserved stance of our partners, customers, and suppliers, and our competition was quick to take advantage of the situation. As a result, we were forced to offer additional incentives to our partners in order to retain stable market shares, 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. Integration activities with the Hisense Group, taking place at all levels of Gorenje Group operations, require adjustment of business strategies and modes of operation, which also changes the assumptions and methodologies of accounting estimates. Revised accounting estimates following Hisense's acquisition of the Gorenje Group were reflected in numerous non-recurring and extraordinary effects on Gorenje Group's performance. Hence, Gorenje Group reported a net loss of EUR 74.4 million in 2018. Consolidation of Gorenje ownership within the Hisense Group brings many benefits to Gorenje Group's future operations and facilitates further development and growth in the fiercely competitive white goods industry. 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