Letter from the President of the Management Board6

Rudolf Skobe

Dear shareholders, investors, business partners and co-workers,

The year 2014 was very dynamic for the Telekom Slovenije Group. Worthy of note is the fact that we achieved all established strategic objectives during the period. The year was characterised by one-off events and additional activities that affected the results of the Telekom Slovenije Group, but otherwise represent sound foundations for future operations.

Despite a decrease in revenues from mobile voice services due to the migration to new, more affordable packages for subscribers, the Telekom Slovenije Group generated a total of EUR 756.5 million in net sales revenue. We generated EBITDA of EUR 170 million or 22.5% of net sales revenue. Due to one-off events, we recorded a net profit of EUR 1.6 million. Excluding the aforementioned one-off events, the Group would have generated EBITDA of EUR 215 million and a net profit of EUR 64 million. We earmarked EUR 176 million for investments in the network, the purchase of radio frequencies, IT and service platforms. Natural disasters (sleet and floods) caused EUR 6.2 million in damage to Telekom Slovenije’ cable network, while shareholders were paid dividends of EUR 65.1 million.

One-off events that affected the results of the Telekom Slovenije Group were necessary to maintain our competitive and stable position in the future. We therefore created new impairments in the amount of EUR 43.6 million. As part of the consolidation of operations in Macedonia, we concluded an agreement with the Telekom Austria Group on the merger of operators. The completion of activities was planned for 2014. However, activities were postponed to 2015 due to the complex procedures involved and the time required to obtain the consent of the Macedonian regulatory body. Planned consolidation in Bosnia and Herzegovina was also postponed until 2015. Telekom Slovenije and Simobil signed an agreement in 2014 on mutual relations by which the two companies set in order open issues regarding mutual relations and laid down the conditions for future business cooperation. The agreement represents an important step aimed at mitigating risks associated with lawsuits, which further enhances the Company’s value for owners. The Group sold its 50% participating interest in Gibtelecom during the year. We assess that the investment was sold v the best possible time as further regulatory changes at the EU level and the necessary flow of continuous investment in the telecommunications infrastructure will also impact Gibtelecom’s future operations. With the aforementioned changes, we have taken an important step towards achieving established objectives on the markets where the Telekom Slovenije Group is present, while all activities were in line with the Strategic Business Plan of the Telekom Slovenije Group for the period 2014 to 2018.

The Telekom Slovenije Group’s strategy is to be the leader in Slovenia and a profitable alternative operator in terms of market share on markets outside of Slovenia. Ipko in Kosovo increased its share of the mobile telephony market to 36.4%, while the company enjoys a share of the digital TV and broadband access markets of around 50%. The Telekom Slovenije Group increased the number of mobile telephony users by 4.8%, the number of fixed broadband connections by 2.1% and the number of TV connections by 6.6%. With the most advanced services for business and leisure time, we are blurring the boundaries of time and space. The ability to adapt quickly, our flexibility and the recognition of trends allow us to be the best possible partner, even to business customers with the most demanding requirements and expectations. For them, we are changing once complex systems into simple and comprehensible services, and thus consolidating our position on the market of integrated, high-quality and reliable IT services, as well.

The Group has geared many activities to cost optimisation and the rationalisation of operations. By further standardising the range of Telekom Slovenije services, we have cut the number of contractual terms and conditions by more than half. We have also optimised labour costs, which were cut by 3%. We have achieved financial stability at the Telekom Slovenije Group level through a comprehensive approach that includes ensuring a long-term sustainable structure of sources of financing, the fulfilment of financial commitments in loan agreements, the effective management of working capital, investing cash in line with risk criteria for investments, and maintaining an appropriate level of liquidity reserves.

Telekom Slovenije shares were one of the most heavily traded shares on the prime market of the Ljubljana Stock Exchange, and ranked second in terms of market capitalisation. At the same time, activities to sell the government’s stake in Telekom Slovenije were carried out throughout the entire year.

In accordance with the Group’s established strategy, we continued to migrate from individual quality systems to an integrated quality management system and business excellence. We thus introduced a system for the comprehensive monitoring of energy consumption with the aim of responsibly managing the Group’s impacts on the environment, resulting in a 2% reduction in energy consumption in 2014. The ISO 50001 energy management system and the ISO 14001 environmental management system were recertified, while the Group received the ISO 27001 certificate for its information security management system. All previously received certificates were maintained at subsidiaries.

The Telekom Slovenije Group actively identifies opportunities where it can contribute to the development of the social and economic environment in which it operates with its expertise, and financial resources and other resources. We build the principle of sustainable development into our operations, products, services and content, while it is our responsibility and commitment to contribute to sustainable improvement in the economic, social and natural environment. To that end, we support sport, culture, humanitarian activities and education, and strive for equal opportunities for anyone who is part of our common story.

The Telekom Slovenije Group is planning a net profit of EUR 66 million, EBITDA of up to EUR 198 million and investments of EUR 107 million in 2015.

Established objectives in South-Eastern Europe will be achieved by increasing the number of users and consolidating individual markets. In Slovenia we will maintain our position as the leading, comprehensive provider of communication services. This will be achieved through cross-sales of services, the development of new services and new subscriber models, through differentiation and a range of exclusive content, by further improving the user experience and by providing standardised cloud computing services. The superior quality of its services will continue to be the Telekom Slovenije Group’s competitive advantage in the future. The Group’s development will continue to be based on high standards of social responsibility and sustainable development.

Rudolf Skobe, MSc
President of the Management Board

6 GRI G4-1, G4-DMA