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Letter of the President of the Management Board

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Dear shareholders,

The year 2009, marked by a global financial and economic crisis, was an extremely challenging year for the Gorenje Group. The trend of declining orders that began in the last quarter of 2008 continued into 2009. The Western European household appliance market registered a nine-percent decline, while in Eastern Europe, an extremely important market for the Gorenje Group owing to its high profitability, the two-digit market growth recorded in previous years turned into a thirty-percent decline. At the same time, a significant shift occurred in the demand structure, with consumers showing a preference for lower priced appliances in a time of precarious economic conditions. Increased payment indiscipline, fluctuating values of non-euro currencies, and rising prices of raw materials and materials further aggravated the business operations of the Gorenje Group and other European manufacturers of household appliances.

The changed economic environment forced us to adapt quickly and effectively to the new operating circumstances. We intensified the implementation of measures aimed at optimising business processes and stocks, reducing costs of materials, services and labour, and accelerating sales. To neutralise the negative effects of the global crisis, we focused our activities on the attainment of three goals: ensuring free cash flow, strengthening market shares, and preserving productive jobs.

Last year, the household appliances market split into two parts - expensive and less expensive appliances. The Gorenje Group responded to these changes by covering various segments and all price grades of appliances, and by offering new product lines. One of these is the line of technologically advanced, yet reasonably priced Gorenje Simplicity appliances offering easy operation combined with trendy design. For more demanding customers we have created, in cooperation with the renowned New York designer, Karim Rashid, a collection of exclusive appliances labelled »Gorenje designed by Karim Rashid«.

Strategic policies that were observed in previous years: the strengthening of the Gorenje brand by introducing designer lines and niche appliances, the internationalisation of production (takeover of the Czech producer of cooking appliances Mora Moravia, building a new factory for fridge and freezing appliances in Valjevo and introducing a programme of water heaters in Stara Pazova in Serbia), as well as the takeover of the Dutch company Atag proved as correct also in 2009 as they significantly contributed to the implementation of goals in this difficult year.

The home appliances branch has its place among mature markets with a relatively low growth. That is why innovativeness, difference, and a reputable trademark are of key importance for our Group. By developing new, technologically perfected and design-led products with innovative functions, we have managed to strengthen our brand name in a crisis year, as confirmed by the independent Eurobrand Institute in Vienna, which assessed that our brand value increased to EUR 458 million in 2009.

By the introduction of novelties and a flexible response to customers' orders, we have justified our reputation as a reliable business partner, retained our existing customers and acquired new ones. In doing so we have preserved or increased our shares in the majority of markets. As for our traditional markets in Europe, most operations were recorded with Germany and Austria, whereas Serbia proved the best in the West Balkan area. By signing an agreement with the largest distribution company for home appliances and consumer electronics in the Middle East, we have set up a base for breakthrough into this prospective region.

With the use of soft methods, we managed to reduce the average number of employees in the Gorenje Group by 525 persons, thus adequately adapting costs to the decline in sales in this segment as well. Instead of dismissals, we introduced shortened working hours and implemented the government measure of temporary layoffs, which also meant slightly lower salaries for employees. In September, social distress and nonacceptance of the endless quick responses and adjustments to crisis situations in the market led to a work stoppage in production. During negotiations with social partners, we ensured the resumption of work within two days. We managed to balance and protect the interests of various participants and thus prevent any further operating loss affecting all stakeholders.

Despite the difficult circumstances, we managed in 2009 to duly fulfil our obligations towards banks and, by adopting adequate measures, reduced the Group's indebtedness by EUR 37.2 million. At the same time, we improved the structure of borrowings in terms of maturity, with long-term borrowings accounting for 54.4 percent at the end of 2009 as opposed to 46 percent at the end of 2008.

Sales in the amount of almost EUR 1.2 billion were almost 11 percent below the 2008 figure. This decline would have been even greater without the acquisition of the Dutch company Atag in 2008.

It was indeed a very challenging year, but thanks to a clear anti-crisis strategy, we managed to attain the set goals and conclude the year in better condition than was expected after the initial months of the year. In the second half of the year, we brought the operating profit or loss (EBIT) back into the positive sphere. Alongside restructuring and optimisation of sales, such development of ROI was largely due to economy measures in the areas of materials, services and improved productivity. In the first half of the year, the operating profit or loss before depreciation and amortisation (EBITDA) declined substantially over the previous year, approaching the 2008 level in the third quarter and even surpassing it in the last quarter.

The attainment of positive free cash flow was in the forefront in 2009 as one of the most important building blocks in restructuring the sources of financing the business activities of the Gorenje Group. By focusing our investments exclusively on development projects and efficiently managing our net current assets, we generated more than EUR 33 million of free cash flow despite the negative net profitability, and considerably surpassed the estimates made at the beginning of the year.

The market conditions in 2010 are gradually stabilising. This is also evident in the slight growth of orders in comparison with the first months of 2009, though one cannot speak of real recovery as yet. The growing unemployment rate in European countries is preserving a low volume of orders, and budget problems in some countries of Eastern and Southeastern Europe are nourishing the fear of further declines in the value of currencies.

Gorenje's plans for 2010 include increasing the volume of sales by conquering new, emerging markets and other development activities. Our four-year strategic plan lays down guidelines for the long-term stability of business operations of the Gorenje Group in a globalised business environment. Our goal is to create, by the year 2013, an operating margin on the level of 5-6 percent, increase added value per employee to at least EUR 40 thousand, and exceed the basic financial indicators on the average level of competitors.

Dear shareholders, I thank you for the trust you have shown us in spite of the strained economic conditions. I firmly believe that, together with co-workers, we shall meet all your expectations in the upcoming period, and continue to regularly and proactively inform you of our further steps and achievements on this path.

Franjo Bobinac, MBA,

President of the Management Board